Consumer Deleveraging to Topple the Commercial Real Estate Market

October 8th, 2010

The US is in a state of consumer deleveraging — given unsustainable levels of personal debt and a weak job market – and as a result retailers are likely to continue facing hard times. The highly leveraged ones in particular are poised to watch their fortunes disintegrate. As a guest contributor to Naked Capitalism, Jim Quinn of The Burning Platform offers new insight on how the collapse will unfold in the commercial real estate (CRE) market.

According to Quinn:

“To give some perspective on our consumer society, here are a few facts:

* There are 105,000 shopping centers in the U.S. In comparison, all of Europe has only 5,700 shopping centers.

* There are 1.2 million retail establishments in the U.S. per the Census Bureau.

* There is 14.2 BILLION square feet of retail space in the U.S. This is 46 square feet per person in the U.S., compared to 2 square feet per capita in India, 1.5 square feet per capita in Mexico, 23 square feet per capita in the United Kingdom, 13 square feet per capita in Canada, and 6.5 square feet per capita in Australia…

“…Let’s look at some facts about the commercial real estate market and then assess the future:

* The value of all commercial real estate in the U.S. was approximately $6 trillion in 2007 (book value, not market value).

* There is approximately $3.5 trillion of debt financing these commercial properties.

* Approximately $1.4 trillion of this debt comes due between now and 2014.

* The delinquency rate for all commercial backed securities exceeded 9% for the 1st time in history last month and has more than doubled in the last 12 months.

* Non-performing loans are close to 16%, up from below 1% in 2007.

“Do these facts lead you to believe that the commercial real estate sector has bottomed, as stated in the Wall Street Journal? The Federal Reserve realized the danger of a commercial real estate collapse to the banking system over a year ago. They have encouraged banks to extend and pretend.”

Quinn goes on to describe his concerns about the “shadow monetization” of CRE debt. He points out that banks are forgoing overdue debt repayments because they see no point in either chasing after money they know isn’t being generated by ghost shopping malls or foreclosing because it isn’t a viable option.  Even if banks repossess CRE, they would be unable to find any buyers for the inventory in the current market. So, rather than admit the failure, banks are sweeping the mess under the rug, following the “extend and pretend” model described above, and hoping for an unlikely CRE market rebound.

You can read more details in the Jim Quinn piece on how consumer deleveraging equals commercial real estate collapse, appearing at Naked Capitalism.

Best,

Rocky Vega,
The Daily Reckoning

Consumer Deleveraging to Topple the Commercial Real Estate Market originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Consumer Deleveraging to Topple the Commercial Real Estate Market




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Real Estate, Uncategorized

Dollar Vs. Gold Ratio Putting Pressure On The Fed

October 7th, 2010

In Advance Decline Suggests Stimulus Hasn’t Worked I wrote about how the Federal Reserve and Washington DC will do anything possible to save the markets from a bear market before the November election. Unemployment is high, defaults on homes and credit cards are rising, and record amounts of taxpayers’ money have gone to bail out failed banks. The last thing Washington wanted was another bear market before a November election. An emergency job bill was passed and the Fed started pumping money into the system. Now we’re beginning to see the outcome of the Fed’s actions as the world looks at a deteriorating dollar and the tension that surfaces with volatile exchange rates. Recent job bills and quantitative easing may help tomorrow’s job report, which could put some hawkish pressure on the Fed to change its stance.

I believe over the next few weeks volatility could increase as a major shift in Washington may occur. Although the equity markets are up, the dollar and the economy haven’t shown improvement. The Tea Party movement and politicians who push tax cuts and less government spending are gaining recognition. I wouldn’t be surprised if there’s a shift in power, which may be bullish for the dollar, or another intervention from overseas to continue purchasing the dollar. Tomorrow’s job report could provide relief to the oversold dollar as additional government jobs were created through recent legislation and massive cash infusion from the Fed. The dollar could have a dead cat bounce.

Japan and China are facing pressure on growth from a devalued dollar. A cheap dollar is hard on businesses exporting to the United States. Japan is especially in a precarious situation where it has had to intervene to prop up the dollar in order to support growth. It was short-lived as the yen dropped only to rally to new highs a few days later. This may lead to further easing by the Japanese and purchases of the dollar. Japan hasn’t needed to do this since 2004.

The Fed needed to ease this past summer as equity markets were on the brink of double dipping. Central banks had no problem to devalue as well since the European Debt Crisis led a rush to the US Dollar and at that time the euro was collapsing and the dollar was high. The threat of deflation after the May flash crash was very high and markets were on the brink of heading into new lows before an election. The Fed injected a lot of money into the system causing a dollar collapse, a rise in US equities, and a major breakout in precious metals.

Bullish sentiment in gold is reaching very high levels and if this deterioration of the dollar continues we could see more sovereign debt and liquidity issues. This could be bullish for the dollar. The weakness in the dollar will also put hawkish pressures on the Fed. Many are expecting more quantitative easing but the market may have a surprise if the Fed changes its language to support the dollar and curb the speculation into gold and silver. The jobs report tomorrow will prove to be a key figure on which the Fed will base its decision. Just remember, in every bull market there are two steps forward followed by a step back. We may be entering that step back in precious metals.

Read more here:
Dollar Vs. Gold Ratio Putting Pressure On The Fed

Commodities

The Four Pillars of Successful Real Estate Investing

October 7th, 2010

When sizing up a potential real estate location, I always look for one of four strategies that indicate a potential rise in property values:

  • A new, emerging middle class
  • The Path of Progress
  • An influx of foreign buyers
  • Distressed or crisis opportunities

One of my hottest locations for real estate opportunities right now is Fortaleza, on Brazil’s northeast coast. I identified two strategies at play when I first scouted this city more than two years ago, and they still hold true today.

A new, emerging middle class means new consumers. These new consumers buy cappuccinos, refrigerators, cars, vacations, new homes and second homes. This started happening in the US in the 1950s.

We can profit by owning the condo this new middle class lives or vacations in, or the building that houses the coffee shop where they sip coffee.

Brazil has become a middle-class country. Car sales were up 17.9% for the first quarter of this year. Domestic budget airlines are growing exponentially, as this new middle class takes flight to various business and vacation destinations. In the first eight months of this year, 1.95 million new jobs were created – double the figure for the same period last year. The latest forecast for GDP growth this year is 7.3%.

Fortaleza is Brazil’s biggest domestic tourism destination. Brazilians come here to relax, sip cocktails by the beach, enjoy an evening meal and some entertainment. Passenger traffic at Fortaleza airport increased 23% year-on-year to the end of August 2010, and cargo traffic rose by 40% in the same period.

Anything that improves the accessibility of a piece of real estate increases its value. Infrastructure like roads, bridges, airports, and rail routes. Anything that improves amenities in an area will also increase real estate values…like resorts, golf courses, theme parks and conference centers.

We can profit by positioning ourselves ahead of this Path of Progress…

Fortaleza is enjoying a Path of Progress story today. Soccer’s Confederations Cup comes here in 2013 followed by the World Cup the following year. 9.8 billion reais ($5.7 billion) will be spent improving infrastructure and tourism amenities in the run up to 2014. Airport capacity will be increased from five million to thirteen million passengers annually. A new metro system will provide modern and reliable public transport. The first of the routes are already operational. The new stadium will be world class, the new conference center will be the second biggest in Brazil and the city will be home to South America’s largest aquarium.

Outside of all this tourism-related development, Fortaleza is also seeing development associated with a new industrial center at Pecem port. Earlier this year, the government announced a duty-free zone, alongside Pecem and forty minutes west of Fortaleza. The scale is massive: the zone is more than 10,500 acres in total. Businesses located within this area will pay practically no taxes on inputs purchased and finished goods exported. There will be less bureaucracy and customs procedures for its exporters.

Buying in Fortaleza could position you ahead of the Path of Progress. There is currently a lack of both short-term rentals or office space in the city. You could do well if you buy here with a view to filling that gap in the market, particularly if you buy close to the new convention center or the metro line.

And now for the two strategies that don’t apply to Fortaleza…

In countries like Nicaragua and Panama, large numbers of foreign buyers (mainly North American) pushed property prices rapidly upwards in a relatively short timeframe. These buyers used equity in their properties back home to finance their overseas property purchases. With the global slowdown, those buyers have gone…and the markets that relied on them have suffered.

Brazil’s real estate market is driven by the local middle classes. Less than two percent of property sales in the country’s northeast are to foreign buyers. Thanks to the growing Brazilian middle classes, the real estate market in Fortaleza is still buoyant.

Crisis investing means buying when everyone wants (or needs) out. There are no buyers on the ground…and the few that remain are afraid. You get to name your price. This happened in Argentina during its financial crisis in 2001. Today, you’ll see distressed deals, mainly in Europe and the US. Banks are fire-selling units at prices as low as 30 cents on the dollar. You need to be careful if you are considering this play. You need to focus on quality, and finished units.

The market in Fortaleza however is strong. Prices are rising and there are a lot of buyers. This isn’t the type of market where we see distressed or crisis sales.

These four strategies don’t just apply to Fortaleza. You can (and should) use them when investigating any real estate purchase overseas, especially when you are buying for investment.

Ronan McMahon,
for The Daily Reckoning

The Four Pillars of Successful Real Estate Investing originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Four Pillars of Successful Real Estate Investing




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Real Estate, Uncategorized

The REZ Paradox

October 7th, 2010

I had a brief exchange with Andrew Butter on Seeking Alpha that I thought might warrant a broader audience here.

Specifically, Andrew asked about the FTSE NAREIT Residential Plus Capped Index Fund (REZ) and wondered if apartments were behind the relative outperformance of this real estate ETF.
My reply noted that the three largest components of REZ are:

  1. Apartments – 47%
  2. Health care – 37%
  3. Self storage – 13%

It comes as no surprise to anyone that recent economic forces have driven a number of strong housing market trends, including a decrease in home ownership and an increase in the demand for apartments. A story by Dawn Wotapka of the Wall Street Journal yesterday confirmed that the apartment market continues to rally.
Of course, as homeowners migrate to apartments, they are typically downsizing in terms of square feet of living space, which is also increasing the demand for self-storage facilities. When you add together the 47% of REZ that is accounted for by apartments and 13% that is attributed to self storage, the result of the move from homes to apartments is a paradox of sorts in which the REZ ETF as currently structured should perform particularly well in a deteriorating residential real estate market.

Seen in this light, there is little wonder that REZ has outperformed its counterparts, RTL and FIO, which are focused primarily on shopping centers and offices, respectively.

Finally, on a housekeeping note, I am making a concerted effort to keep up with my Seeking Alpha private mailbox and comments, just as I do with private emails and comments on the blog. At the moment I am a little behind, but if you have some outstanding questions and comments, I expect to get caught up in the next day or two.

Related posts:

Disclosure(s): none



Read more here:
The REZ Paradox

ETF, Real Estate, Uncategorized

A Few Reasons to Anticipate a Stock Market Downturn

October 7th, 2010

US stocks didn’t do much of anything yesterday. They spent the entire trading session dancing around the unchanged level like Victorian schoolgirls around a Maypole. The Dow Jones Industrial Average gained a smidgen, while the S&P 500 Index slipped a skosh.

The commodity markets danced a little more purposefully – perhaps like a couple of junior high kids “grinding” at a school dance. The RJ/CRB Index of Commodity Prices advanced to a new 9-month high, while gold jumped to a new all-time high. The now-and-again precious metal tacked on $8.00 to $1,348.70 an ounce. Nothing new there…Gold is going up because the world is full of well-meaning central bankers who mean well to debase their national currencies in the pursuit of economic vitality. Sounds wacky, we know; but that’s what the top universities are teaching these days. The top universities are also teaching that a few highly educated men in nice suits can turn enough dials and pull enough levers to cure recessions and create non-inflationary recoveries.

The men in nice suits are busily turning nobs and pulling levers, but the economy still flounders and gold still soars. Apparently, gold didn’t go to college.

Turning our attention back to the stock market, yesterday’s subdued trading action might soon yield to something a bit more raucous. At least that’s the informed opinion of two guys who monitor this kind of thing. First up, Jay Shartsis, a seasoned options trader from R.F. Lafferty in New York, has identified a few “cracks in the wall” of the recent stock market rally.

Shartsis, who has been expecting an intermediate-term market top for more than a week now, is finding more evidence in support of his caution. He observes that many of the high-profile stocks that have been leading the market higher suffered big sell-offs yesterday. Netflix (NASDAQ:NFLX) slumped 4%, Salesforce.com (NYSE:CRM) dropped 8%, VMware, Inc. (NYSE:VMW) fell 9% and Citrix Systems (NASDAQ:CTXS) tumbled 14%. “These are leading stocks and have market-wide implications,” Shartsis warns.

“I was also surprised to see only 272 new highs on the NYSE Tuesday,” Shartsis continues, “versus 674 last April 26 and 306 recorded on Sept 20. That’s a non-confirmation of importance. Further, as the S&P 500 has continued higher, the VIX Index – aka, ‘Fear Gauge’ – has not continued lower, as would be expected. In fact, the VIX bottomed at $20.93 on Sep 13 and has not made new lows as the S&P has made new highs. This non-confirmation suggests the VIX will soon rise and stocks will fall.”

Picking up on this same bearish theme, Dan Amoss, editor of The Strategic Short Report, remarks, “The September rally looks tired… The market is at risk of another sharp move lower. The S&P 500 is encountering strong ‘resistance’ at 1,150. One can easily imagine a return back to 1050 – the starting point of the latest sprint.”

Amoss believes the recent rally has less to do with underlying economic trends than it has to do with the Fed’s easy money tactics – both actual and anticipated. He suspects the stock market has already priced in the Fed’s next round of quantitative easing – the process by which the Fed conjures money out of thin air.

“Because the markets have already anticipated ‘quantitative easing 2’ by pushing up stocks and Treasury bond prices,” says Amoss, “the actual implementation of ‘QE2’ is less likely to be imminent.

“Here’s another ominous sign for stock market bulls,” he continues, “the darling momentum stocks are looking weaker. Ridiculously overvalued stocks (but good businesses) including Priceline, Amazon, Netflix, and Salesforce.com are weakening. Perhaps traders don’t want to own these stocks at triple-digit P/E multiples heading into earnings season…

“There’s plenty of room for 2011 earnings estimates to come down,” Amoss concludes. “This market is not cheap. I’m evaluating several short ideas…”

So there you have it; the stock market will fall very soon…unless it doesn’t.

Eric Fry
for The Daily Reckoning

A Few Reasons to Anticipate a Stock Market Downturn originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
A Few Reasons to Anticipate a Stock Market Downturn




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

ETF, OPTIONS, Uncategorized

Central Bankers: The REAL Rogue Traders

October 7th, 2010

Frankie looked up at the judge
Judge, what will be my fine?
And the judge looked down at Frankie…
Girl, you got 99

– Frankie and Johnny

We feel sorry for . Such a good-looking young man. With such a promising future. He was the trader with Société Générale who lost 4.9 billion euros in unauthorized trading.

Now, the poor fellow has faced the music. Trouble was, it wasn’t a tune he wanted to hear. And it seemed a little inappropriate to the occasion to us too. More below…

The news yesterday was mixed. Unemployment increased in September. The dollar and US bond yields hit new lows. And China said that trying to force it to revalue its currency would be a “disaster for the world.”

Hmmm…

Stocks rose 22 points on the Dow. Gold went up another $7.

Gold must be ready for a correction. Or else we really have reached the final stage…the runaway stage in the great bull market.

Back to Kerviel…

Kerviel drew a five-year sentence (two years suspended.) Plus, he’s supposed to repay 4.9 billion euros…

“By his deliberate actions, he put in peril the existence of the bank that employed 140,000 people, of which he was a part and whose future was threatened,” said the judge.

Well, we’re sure he didn’t do it intentionally. We mean, he didn’t intend to bring down the bank.

Besides, a lot of other people made authorized trades that were much bigger…which also put their banks in jeopardy. In fact, some of the CEOs of the world’s largest banks also put their institutions in harm’s way. And then, when the banks ran into the ditch, these guys didn’t get five years and a $7 billion fine. Instead, they got a $50 million bonus!

Kerviel recalled a card trick at a corporate party:

“Ladies and gentlemen, it’s up to you and our clients to find the margin. It has disappeared. Where’s it gone? Not here. Not there. Aha! Here it is, in my pocket!”

It didn’t go into Kerviel’s pocket. He’s penniless. The fine is about $6.7 billion. The man is said to earn about $3,000 a month. Talk about debt repayment! Let’s see, if he saves half his money each month. And he puts it all to paying off his debt to Société Générale… that’s $36,000 per year.

Hmm… If the poor man lives for 200,000 years…he’ll still be paying.

But wait. Suppose this quantitative easing thing takes off….

Yes, dear reader, central bankers are probably the biggest rogue traders of all. Remember Alan Greenspan? He has an opinion in The Financial Times today. We read it twice. Neither time did we discover anything new. He says the problem is fear. Until the fear diminishes…don’t expect businesses to start many new projects or hire many new employees. Thanks a lot for that insight, Alan.

Alan Greenspan is probably more to blame than any other human being for today’s financial crisis. He made a huge bet and put the whole world economy at risk. He bet that he knew better than the market. He put the Fed’s key lending rate below the rate of consumer price inflation…and left it there for four years. Over $12 trillion was lost – in America alone. Where’s the jail cell waiting for him? Where’s the $12 trillion fine?

And now central bankers are betting big again…BIG…and they risk not only putting the 140,000 employees of Société Générale out of work…but hundreds of millions of other people all over the world.

Central bankers are betting that they can add billions in QE money to the world’s money supply, without causing a calamity. Maybe they can. Maybe they can’t. It’s never been done before.

But every previous experiment with paper money has ended in disaster. Paper money never survived an entire credit cycle. When credit was expanding, people were happy to take the paper. When it shrank, they became fearful of the paper and wanted something more substantial. Paper money always ends up worthless.

Kerviel’s bets went well as long as credit was expanding. He was up more than $1 billion at one point. Then, when the markets began going down, so did his gambles.

Will it be any different for the central banks? Will their bets go bad too – perhaps in a spectacular blow-off in which the dollar itself becomes almost worthless. Remember, if the dollar loses just the equivalent of 5% of its 1900 value – there’s nothing left. It will be completely worthless.

Could it happen? Central bankers risk a full-blown currency calamity, worldwide, with full knowledge aforethought… This is premeditated currency assassination, in other words.

Where’s the jail cell waiting for Bernanke? Who’s going to fine him $10 trillion? How’s he going to pay?

So cheer up, Jerome. You might be able to pay your debt to society with a postage stamp… We have in our wallet a 10 trillion dollar note from Zimbabwe. Why not a 10 trillion dollar note from the US? We’re not predicting it…we’re just trying to keep the young man’s hopes up. And you never know…

Bill Bonner
for The Daily Reckoning

Central Bankers: The REAL Rogue Traders originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Central Bankers: The REAL Rogue Traders




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

What This Key Stock’s Move Today Means for the Retail Sector

October 7th, 2010

What This Key Stock's Move Today Means for the Retail Sector

As we've been discussing throughout the past six months, a range-bound market means you're likely better off moving in and out of certain stocks and sectors as they prove timely. Buy-and-hold appears dead for now, although few have the ability to profit from very short-term trades either.

Costco (Nasdaq: COST) highlights the value of a “mid-term trade.” In just six weeks, investors have made about +25% from this investment. Yet Wednesday's quarterly report from this retailer tells us it's time to “sell on the news.”

Whenever you see a stock make a solid move as Costco has, it leads you to wonder if business is trending well ahead of expectations. That's why it makes sense to hang on and see how quarterly results fare. I've noticed solid upward moves in four other retail pays I track; Best Buy (NYSE: BBY), Leapfrog Enterprises (NYSE: LF), Office Depot (NYSE: ODP) and Casual Male (Nasdaq: CMRG). Is business improving for these firms, or is the recent spike in Costco and these other companies' shares simply due to a re-rotation back into retail?

Wednesday's dismal ADP jobs report, which is a precursor to Friday's monthly employment report from the Labor Department, should give pause. So the retail trade may be premature and it may be time to book profits in recent retail gainers. That's what investors are doing with Costco, which is pulling back -1.5% today after running from $60 to $65 in the second half of September.

Costco's quarterly sales slightly lagged estimates (when you back out the impact of gas price changes), although per share profits were slightly better than analysts had expected. And judging by the numbers, the recent rally makes this stock now look fully valued. Thanks to the tepid economy, Costco's sales are likely to only rise +6% to +7% in the fiscal year that began last month. Profits are likely to grow at low double-digits. Yet shares trade for about 20 times projected fiscal 2011 profits and are really no bargain.

Action to Take –> Whether it's the broader stock market or an individual stock, I'm always on the lookout for a sideways chart. When a stock is rising, buyers outnumber sellers. When a stock starts to move sideways, that's a sign that either sellers are stepping in or buyers are petering out. Either way, it often results in the next move being a downward one, as sellers eventually overwhelm buyers. I'm not predicting that for Costco specifically, but you may want to use this as a signal to take profits if you have secured a solid run in an investment.

As noted above, select retail stocks have had a nice run, though it is unlikely they are reflecting improving consumer spending. On Wednesday and Thursday, a wide range of retailers will weigh in on how they fared in the back-to-school season. How the sector trades in response will be telling. If Costco is any indication, investor sentiment may be cooling and it may be wise to book any profits you've had on “mid-term trades” like this one.


– David Sterman

P.S. –

Uncategorized

What This Key Stock’s Move Today Means for the Retail Sector

October 7th, 2010

What This Key Stock's Move Today Means for the Retail Sector

As we've been discussing throughout the past six months, a range-bound market means you're likely better off moving in and out of certain stocks and sectors as they prove timely. Buy-and-hold appears dead for now, although few have the ability to profit from very short-term trades either.

Costco (Nasdaq: COST) highlights the value of a “mid-term trade.” In just six weeks, investors have made about +25% from this investment. Yet Wednesday's quarterly report from this retailer tells us it's time to “sell on the news.”

Whenever you see a stock make a solid move as Costco has, it leads you to wonder if business is trending well ahead of expectations. That's why it makes sense to hang on and see how quarterly results fare. I've noticed solid upward moves in four other retail pays I track; Best Buy (NYSE: BBY), Leapfrog Enterprises (NYSE: LF), Office Depot (NYSE: ODP) and Casual Male (Nasdaq: CMRG). Is business improving for these firms, or is the recent spike in Costco and these other companies' shares simply due to a re-rotation back into retail?

Wednesday's dismal ADP jobs report, which is a precursor to Friday's monthly employment report from the Labor Department, should give pause. So the retail trade may be premature and it may be time to book profits in recent retail gainers. That's what investors are doing with Costco, which is pulling back -1.5% today after running from $60 to $65 in the second half of September.

Costco's quarterly sales slightly lagged estimates (when you back out the impact of gas price changes), although per share profits were slightly better than analysts had expected. And judging by the numbers, the recent rally makes this stock now look fully valued. Thanks to the tepid economy, Costco's sales are likely to only rise +6% to +7% in the fiscal year that began last month. Profits are likely to grow at low double-digits. Yet shares trade for about 20 times projected fiscal 2011 profits and are really no bargain.

Action to Take –> Whether it's the broader stock market or an individual stock, I'm always on the lookout for a sideways chart. When a stock is rising, buyers outnumber sellers. When a stock starts to move sideways, that's a sign that either sellers are stepping in or buyers are petering out. Either way, it often results in the next move being a downward one, as sellers eventually overwhelm buyers. I'm not predicting that for Costco specifically, but you may want to use this as a signal to take profits if you have secured a solid run in an investment.

As noted above, select retail stocks have had a nice run, though it is unlikely they are reflecting improving consumer spending. On Wednesday and Thursday, a wide range of retailers will weigh in on how they fared in the back-to-school season. How the sector trades in response will be telling. If Costco is any indication, investor sentiment may be cooling and it may be wise to book any profits you've had on “mid-term trades” like this one.


– David Sterman

P.S. –

Uncategorized

This Stock is Locked in a Battle — Here’s How You Can Play Both Sides…

October 7th, 2010

This Stock is Locked in a Battle -- Here's How You Can Play Both Sides...

It is the job of every Wall Street analyst (known as a “sell-sider”) to convince clients to buy stocks on their buy list. Those clients — hedge funds and mutual funds also known as “buy-siders” — give the ideas a listen, but often form differing opinions on those very same stocks.

And right now, the two camps are clearly divided on one of the strongest tech stocks of the past 10 years. That stock is Equinix (Nasdaq: EQIX), which operates massive data centers that host major companies' websites and enterprise servers. Right now the company's detractors, largely on the buy-side, are showing the winning hand: shares fell an eye-popping -33% on Wednesday after the company reduced quarterly guidance.

At first glance, that sell-off may seem unwarranted as management simply shaved guidance by a very small amount. And the damage appears largely confined to just two customers, both of which asked for some price concessions on a new contract. Management was quick to note that business is otherwise trending well.

Sell-side analysts, which have always been very supportive of this stock, were quick to come to its defense. Even though shares fell from $105 to $72, Deutsche Bank still expects shares to move back to $100, Piper Jaffray's price target was lowered from $124 to $110. Merrill Lynch? Standing by its $130 price target, despite Wednesday's news.

To understand why analysts remain so bullish about this stock's future, you need to look to the past. Equinix developed a brilliant business strategy where major web servers from different companies sat right next to each other and are also plugged right into global Internet traffic points, known as co-location. The whole move to data centers has been an obvious one for IT managers, as it saves money and headaches, and Equinix's co-location services made the offer all the more compelling.

As Equinix's selling proposition lured customers in droves, the company's sales took off and EBITDA margins soared, steadily rising from 12% in 2005 to 40% in 2009. Not that Equinix has much to show for those impressive operating metrics — the company has continually poured all of its cash flow back into the business, and as a result, has generated negative free cash flow for each of the last four years.

Sell-side analysts have never had much problem with that, as they have assumed that once investments are complete, free cash flow would be bounteous. And in the next year or two, that is indeed expected to finally be the case. But the company's detractors hold a much more dim view of the long-term. They note that this is still a price-sensitive business, and they think that this week's modest shortfall — highlighted by some price concessions — is a harbinger of things to come.

In addition, bears say that major global phone companies such as AT&T (NYSE: T) hold the strongest long-term hand, since they actually operate the Internet's backbone and can set the pace on pricing. As of yet, that scenario hasn't played out, as Equinix's sales power ever higher.

To keep sales rising, Equinix has been making some fairly hefty acquisitions and is rumored to be planning another, this time for a European company known as Interxion in the coming weeks.
Not everyone on the sell-side is convinced that Equinix can keep pulling away from the competition. Citigroup just lowered its rating from “Buy” to “Hold,” citing concerns about stagnant growth at a recently acquired division and rising customer turnover. It thinks this week's modest pre-announcement is “an early sign-post that revenue growth for its core demographic in the U.S. may be slowing sooner than we anticipated.”

Kaufman Brothers believes that digital content companies such as major media firms may actually look to move away from the use of data centers and start hosting more servers on their own corporate sites. That would be a real blow to the data center industry. But most sell-side analysts remain quite bullish, and will probably keep pounding the table for the stock in the days ahead.

Action to Take –> Equinix is scheduled to meet with the investment community on November 11th. Ahead of that event, shares are likely to rebound from here as the sell-side talks up the big disparity between the current price and their price targets. So despite this news, shares may now be a short-term buy, but they increasingly look like a long-term sell. Shorts made a killing on this week's plunge, and many have likely covered their short positions. But as shares rebound, they are bound to attract fresh short interest. You can look to go long on this name now, and perhaps reverse course if shares move back into the $80s or $90s.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
This Stock is Locked in a Battle — Here's How You Can Play Both Sides…

Read more here:
This Stock is Locked in a Battle — Here’s How You Can Play Both Sides…

Mutual Fund, Uncategorized

This Stock is Locked in a Battle — Here’s How You Can Play Both Sides…

October 7th, 2010

This Stock is Locked in a Battle -- Here's How You Can Play Both Sides...

It is the job of every Wall Street analyst (known as a “sell-sider”) to convince clients to buy stocks on their buy list. Those clients — hedge funds and mutual funds also known as “buy-siders” — give the ideas a listen, but often form differing opinions on those very same stocks.

And right now, the two camps are clearly divided on one of the strongest tech stocks of the past 10 years. That stock is Equinix (Nasdaq: EQIX), which operates massive data centers that host major companies' websites and enterprise servers. Right now the company's detractors, largely on the buy-side, are showing the winning hand: shares fell an eye-popping -33% on Wednesday after the company reduced quarterly guidance.

At first glance, that sell-off may seem unwarranted as management simply shaved guidance by a very small amount. And the damage appears largely confined to just two customers, both of which asked for some price concessions on a new contract. Management was quick to note that business is otherwise trending well.

Sell-side analysts, which have always been very supportive of this stock, were quick to come to its defense. Even though shares fell from $105 to $72, Deutsche Bank still expects shares to move back to $100, Piper Jaffray's price target was lowered from $124 to $110. Merrill Lynch? Standing by its $130 price target, despite Wednesday's news.

To understand why analysts remain so bullish about this stock's future, you need to look to the past. Equinix developed a brilliant business strategy where major web servers from different companies sat right next to each other and are also plugged right into global Internet traffic points, known as co-location. The whole move to data centers has been an obvious one for IT managers, as it saves money and headaches, and Equinix's co-location services made the offer all the more compelling.

As Equinix's selling proposition lured customers in droves, the company's sales took off and EBITDA margins soared, steadily rising from 12% in 2005 to 40% in 2009. Not that Equinix has much to show for those impressive operating metrics — the company has continually poured all of its cash flow back into the business, and as a result, has generated negative free cash flow for each of the last four years.

Sell-side analysts have never had much problem with that, as they have assumed that once investments are complete, free cash flow would be bounteous. And in the next year or two, that is indeed expected to finally be the case. But the company's detractors hold a much more dim view of the long-term. They note that this is still a price-sensitive business, and they think that this week's modest shortfall — highlighted by some price concessions — is a harbinger of things to come.

In addition, bears say that major global phone companies such as AT&T (NYSE: T) hold the strongest long-term hand, since they actually operate the Internet's backbone and can set the pace on pricing. As of yet, that scenario hasn't played out, as Equinix's sales power ever higher.

To keep sales rising, Equinix has been making some fairly hefty acquisitions and is rumored to be planning another, this time for a European company known as Interxion in the coming weeks.
Not everyone on the sell-side is convinced that Equinix can keep pulling away from the competition. Citigroup just lowered its rating from “Buy” to “Hold,” citing concerns about stagnant growth at a recently acquired division and rising customer turnover. It thinks this week's modest pre-announcement is “an early sign-post that revenue growth for its core demographic in the U.S. may be slowing sooner than we anticipated.”

Kaufman Brothers believes that digital content companies such as major media firms may actually look to move away from the use of data centers and start hosting more servers on their own corporate sites. That would be a real blow to the data center industry. But most sell-side analysts remain quite bullish, and will probably keep pounding the table for the stock in the days ahead.

Action to Take –> Equinix is scheduled to meet with the investment community on November 11th. Ahead of that event, shares are likely to rebound from here as the sell-side talks up the big disparity between the current price and their price targets. So despite this news, shares may now be a short-term buy, but they increasingly look like a long-term sell. Shorts made a killing on this week's plunge, and many have likely covered their short positions. But as shares rebound, they are bound to attract fresh short interest. You can look to go long on this name now, and perhaps reverse course if shares move back into the $80s or $90s.


– David Sterman

David Sterman started his career in equity research at Smith Barney, culminating in a position as Senior Analyst covering European banks. David has also served as Director of Research at Individual Investor and a Managing Editor at TheStreet.com. Read More…

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
This Stock is Locked in a Battle — Here's How You Can Play Both Sides…

Read more here:
This Stock is Locked in a Battle — Here’s How You Can Play Both Sides…

Mutual Fund, Uncategorized

The Man Selling the Fed’s Secrets

October 7th, 2010

The Man Selling the Fed's Secrets

I'd be surprised if you've heard of Larry Meyer, but in the past few days, he's created quite a buzz.

Larry Meyer is a former Federal Reserve Governor. He holds a B.A. from Yale; a Ph.D. from MIT. His pedigree is top-notch. So are his connections.

Meyer is still buddies with the folks on the Federal Open Market Committee, the policy-making body of the U.S. Federal Reserve. And his friends tell him what goes on at their meetings weeks before the general public gets to read about it.

You would think sharing that information with anyone outside the current Fed members would be illegal. You would also think the fact that Meyer charges well-heeled clients $75,000 each for access to what he has heard — well ahead of the investing public — would be unlawful. Amazingly, neither action is illegal, according to a Reuters investigation.

One of the Federal Reserve's main tools is setting target interest rates, and profits can be made or lost based on what the Fed says at its meetings. It makes me mad (and likely you too) that some have inside access. But there is a way to fight back.

I think we'll be much better off finding a few good income investments that are simply less sensitive to interest rates.

Why interest rates matter to income investors
When interest rates rise, the price of some fixed-income securities, like bonds, tend to fall. For an extreme example, you wouldn't want to hold a risky corporate bond paying a 7% yield if you could now get a safer 10-year Treasury bond paying 7%.

So when the interest rates of Treasuries rise, investors tend to shed their riskier assets. This causes the price to drop — and the yields to rise — ultimately making riskier fixed-income securities more competitive when compared with safer investments.

It's the number one reason why income investors are obsessed with what the U.S. Federal Reserve is likely to do with interest rates. And why some pay $75,000 for Larry Meyer's analysis.

The two primary reasons the Federal Reserve raises target rates is to slow the economy and/or to prevent out-of-control inflation. But last I looked, the economy wasn't overheating. In fact, the U.S. economic recovery is plodding along.

The U.S. economy grew by only +1.7% in the second quarter of this year. Economists are forecasting a possible +2.1% growth rate for the remainder of the year. Unemployment continues to remain high. And until people are back to work, personal consumption — a primary engine of the U.S. economy — will be constrained.

Meanwhile, inflation is running below 1.2% — well below the level where the Federal Reserve starts breaking a sweat.

But this will eventually change. Interest rates are at historically low levels and in all practicality can't go much lower. When the economy finds more solid footing, you can rest assured that the Fed will be moving rates north.

You don't have to pay someone $75,000 to figure this out.

Two interest rate-friendly strategies with above-average yields
Knowing that rates will eventually rise, I am picking up income investments for my Daily Paycheck portfolio that provide more protection in a rising rate environment. And I'm not sacrificing yield to do it.

Action to Take –> Here are a couple of spots I'm looking:

Bonds with the Potential for Credit Upgrades: In my bond selection, I've tried to pick issues that have a good chance of achieving a rating upgrade. When the credit rating (and thus the perceived safety) of a bond improves, its price rises — while its yield drops in line with other similarly safe bonds. This will give these investments more of a price buffer when interest rates rise.

For instance, I bought shares of Ford Motor Credit 7.60% Notes (NYSE: FCJ) in April for my real-money portfolio. In the worst of the financial crisis, the credit rating on this issue was an ugly “Caa1.” When I purchased the notes, they had already been upgraded to “B1″ — still highly speculative. They have subsequently been upgraded to “Ba3.” Based on Ford's current numbers, I think future upgrades are likely.

Floating Interest Rate Securities: When it starts looking as if a rise in interest rates is imminent, I plan to rotate out of some of my more interest rate-sensitive investments and into investments with more appreciation potential, like floating-rate preferred stocks and bonds. These securities automatically pay higher distribution rates when interest rates rise. While it's hard to purchase individual floating-rate securities, there are a number of closed-end funds that specialize in these stocks and bonds.

In my October issue of The Daily Paycheck, I even picked a floating-rate bond fund as my “Security of the Month.” The fund currently has a yield of 7.6% and pays monthly distributions. I'm adding 335 shares to my $200,000 portfolio. (Sorry, in fairness to Daily Paycheck subscribers, I can't give its name. But if you'd like to join me, you can read all the details in this month's issue. Click here for more information.)

So you can go ahead and pay $75,000 to Larry Meyers. Or you could invest your money in two income strategies that are less sensitive to rising interest rates. I know which I'll be doing.

Uncategorized

The Man Selling the Fed’s Secrets

October 7th, 2010

The Man Selling the Fed's Secrets

I'd be surprised if you've heard of Larry Meyer, but in the past few days, he's created quite a buzz.

Larry Meyer is a former Federal Reserve Governor. He holds a B.A. from Yale; a Ph.D. from MIT. His pedigree is top-notch. So are his connections.

Meyer is still buddies with the folks on the Federal Open Market Committee, the policy-making body of the U.S. Federal Reserve. And his friends tell him what goes on at their meetings weeks before the general public gets to read about it.

You would think sharing that information with anyone outside the current Fed members would be illegal. You would also think the fact that Meyer charges well-heeled clients $75,000 each for access to what he has heard — well ahead of the investing public — would be unlawful. Amazingly, neither action is illegal, according to a Reuters investigation.

One of the Federal Reserve's main tools is setting target interest rates, and profits can be made or lost based on what the Fed says at its meetings. It makes me mad (and likely you too) that some have inside access. But there is a way to fight back.

I think we'll be much better off finding a few good income investments that are simply less sensitive to interest rates.

Why interest rates matter to income investors
When interest rates rise, the price of some fixed-income securities, like bonds, tend to fall. For an extreme example, you wouldn't want to hold a risky corporate bond paying a 7% yield if you could now get a safer 10-year Treasury bond paying 7%.

So when the interest rates of Treasuries rise, investors tend to shed their riskier assets. This causes the price to drop — and the yields to rise — ultimately making riskier fixed-income securities more competitive when compared with safer investments.

It's the number one reason why income investors are obsessed with what the U.S. Federal Reserve is likely to do with interest rates. And why some pay $75,000 for Larry Meyer's analysis.

The two primary reasons the Federal Reserve raises target rates is to slow the economy and/or to prevent out-of-control inflation. But last I looked, the economy wasn't overheating. In fact, the U.S. economic recovery is plodding along.

The U.S. economy grew by only +1.7% in the second quarter of this year. Economists are forecasting a possible +2.1% growth rate for the remainder of the year. Unemployment continues to remain high. And until people are back to work, personal consumption — a primary engine of the U.S. economy — will be constrained.

Meanwhile, inflation is running below 1.2% — well below the level where the Federal Reserve starts breaking a sweat.

But this will eventually change. Interest rates are at historically low levels and in all practicality can't go much lower. When the economy finds more solid footing, you can rest assured that the Fed will be moving rates north.

You don't have to pay someone $75,000 to figure this out.

Two interest rate-friendly strategies with above-average yields
Knowing that rates will eventually rise, I am picking up income investments for my Daily Paycheck portfolio that provide more protection in a rising rate environment. And I'm not sacrificing yield to do it.

Action to Take –> Here are a couple of spots I'm looking:

Bonds with the Potential for Credit Upgrades: In my bond selection, I've tried to pick issues that have a good chance of achieving a rating upgrade. When the credit rating (and thus the perceived safety) of a bond improves, its price rises — while its yield drops in line with other similarly safe bonds. This will give these investments more of a price buffer when interest rates rise.

For instance, I bought shares of Ford Motor Credit 7.60% Notes (NYSE: FCJ) in April for my real-money portfolio. In the worst of the financial crisis, the credit rating on this issue was an ugly “Caa1.” When I purchased the notes, they had already been upgraded to “B1″ — still highly speculative. They have subsequently been upgraded to “Ba3.” Based on Ford's current numbers, I think future upgrades are likely.

Floating Interest Rate Securities: When it starts looking as if a rise in interest rates is imminent, I plan to rotate out of some of my more interest rate-sensitive investments and into investments with more appreciation potential, like floating-rate preferred stocks and bonds. These securities automatically pay higher distribution rates when interest rates rise. While it's hard to purchase individual floating-rate securities, there are a number of closed-end funds that specialize in these stocks and bonds.

In my October issue of The Daily Paycheck, I even picked a floating-rate bond fund as my “Security of the Month.” The fund currently has a yield of 7.6% and pays monthly distributions. I'm adding 335 shares to my $200,000 portfolio. (Sorry, in fairness to Daily Paycheck subscribers, I can't give its name. But if you'd like to join me, you can read all the details in this month's issue. Click here for more information.)

So you can go ahead and pay $75,000 to Larry Meyers. Or you could invest your money in two income strategies that are less sensitive to rising interest rates. I know which I'll be doing.

Uncategorized

Currency Wars?

October 7th, 2010

Yesterday, we watched the currencies and precious metals rise all day long, in small increments. But the overnight markets have taken the currencies even higher! For instance, the Aussie dollar (AUD) is near 99-cents, and a new all-time record high! And gold is up another $9 this morning to $1,358!

What’s the muscle behind this push of the dollar to levels we’ve not seen before? Well, I personally think that the main muscle is what’s being termed as a “currency war”… And then there are other items that are helping push the dollar lower, like the German Industrial Production report that printed this morning, and showed an increase of more than three times pace the “experts” forecast! German Industrial Production surged 1.7% in August!

But let’s get back to this so-called “currency war” (I keep hearing the theme to Star Wars in my head!)… US Treasury Secretary Tim Geithner said Japan didn’t fuel international tensions when it intervened in the foreign-exchange market last month.

The Treasury chief said today that there’s a “damaging dynamic” at work in currency markets as countries race to limit appreciation. When asked whether he thought Japan had “set the fire” for this dynamic, Geithner responded, “I don’t, no” in remarks at the Brookings Institution.

Instead, Geithner kept up his calls for China to let the renminbi (CNY) rise against the dollar. He said the “main problem” facing foreign-exchange markets is “a set of emerging-market economies that both remain undervalued and are leaning heavily against the pressures for appreciation.”

In other words… He’s talking about China… And maybe even throwing India under the bus too…

Geithner then stepped up the pressure on China, effectively blaming the world’s number-two economy for the emergence of what some are calling a “currency war” ahead of a G-7 meeting.

And China’s Premier immediately answered saying that the demands to appreciate the renminbi would be disaster for his country…

Why can’t we leave the Chinese out of this? They have their country to run, and we have ours… If we had taken better care of our country’s finances, we wouldn’t be in this mess. I think we would be better off taking care of our own house, and leaving China to take care of theirs. If you rile them up too much, you risk the chance of them telling you to finance your own deficit!

OK… Enough on that… But I can tell you that at no time in the past weak dollar trend, has the negativity been so strong against the dollar as it is at this time. I get all caught up in thoughts on this kind of move, and the thought that keeps coming to me from the back of my brain is that “a star burns the brightest right before it burns out”…

So… What are your thoughts? Is this the end of the run for the currencies? Or… Is there still more weakness for the dollar in store? I truly believe there’s more weakness, but… That’s in the long run… For now, I’ve got to think that we’ve come so far, so fast, that there has to be a pause for the cause. A “filling in of the gaps” and all that! Nothing in the markets is a one-way street…

I yelled out across the desk yesterday that after all the intervention, quantitative easing, and interest rate cutting, the Japanese yen (JPY) is right back to pre-intervention levels of 82.50! So, once again, it is proven that intervention is just wasted money… And that also brings up a point that I think the government of this country, and that probably all countries miss… And that is that the government doesn’t have money! The only money they have is taken from taxpayers… So… When a government says something like, “we’re going to give you money” all they’re doing is letting you keep more of what you had!

Whoa there, partner! I really went astray there! Let’s see… Currencies… Oh yeah! I was writing for a publication yesterday, and made the point that in March of 2009, the Fed/Cartel implemented quantitative easing (QE) and the dollar spent the next eight months in the dumps, much like the move we’re seeing this week. The only thing that saved the dollar, which was teetering on the cliff’s edge in November, was the “discovery” of the Eurozone GIIPS deficit problems… But once those Eurozone countries announced austerity measures, the focus came back to the dollar’s problems.

Now, I’m not here to say that those austerity measures are the cure to all that ails the GIIPS problems… Which is why I continue to say that the euro is not out of the woods… And the media could whip the markets into a frenzy on this subject in a heartbeat.

Getting back to yen for a second… Japanese PM, Kan, said that his “government will take decisive steps when necessary in dealing with a strong yen”…  And then showing that everyone in Japan is not singing from the same song sheet, Vice Finance Minister, Igarashi, said, “Japan won’t weaken yen to become more competitive with other countries in trade and any currency intervention would be at restraining excessive moves. It’s not our intention to engage in a currency devaluation race for the sake of national interest.”

So… Gold is kicking sand in the dollar’s face again this morning, along with gold’s trusty sidekick, silver! I saw my friend David Galland refer to comment by the “Godfather” of newsletter writers, Richard Russell, who was speaking at the Casey Summit held last weekend, and who had this to say about gold… (This is good, so you’ll want to remember this line…)

“Some people refer derisively to gold owners as ‘gold bugs.’ Turning that idea around, legendary investor Richard Russell, in a rare public appearance at the summit, used the term ‘dollar bug’ to describe those who would foolishly prefer holding paper currency over gold. I think that’s a very good way of looking at the gold versus dollar argument.”

So… I’m taking that one to heart… From now on, I’m going to refer to dollar buyers and “dollar bugs”…

OK… Let’s get back to the Aussie dollar, for it was the best performer last night, and is now at an all-time record level versus the dollar. The Aussie dollar got a boost from yet another spike in employment. Full-Time Employment in Australia was 55,800 in September, which was the most workers taken on in eight months… I would have to think that the Reserve Bank of Australia (RBA) members are kicking themselves right now, for not hiking rates earlier this week when they had the chance. Now they’ll have to wait for their November meeting, and that could put them behind the inflation 8-ball… But I doubt it… The RBA has done a good job of being proactive with their rate hikes that go back to last year. Oh, by the way, the Aussie dollar did trade to 9915-cents overnight, slipping back just a bit on profit taking.

The “QE is coming soon to a central bank near you” campers, like me, will probably have to think about it more after today, as Fed Head Fisher (from Dallas) is scheduled to speak, and is a non-believer in the usefulness of QE… And then the lone hawk on the Cartel, Fed Head Hoenig will also be speaking. You can always count on Hoenig to deliver some good sound bites that differ from the rhetoric heard from the Cartel.

I had a nice talk with a reporter yesterday regarding Brazil… We talked about the prospects for a stronger real (BRL), and so on… The real, after getting caught up in the currency rally, had ignored the latest measure the government had undertaken to stem the real’s weakness, but it all caught up with the real yesterday… But today… I’m waiting for the Brazilian market to open, because… Given the price action in currencies versus the dollar overnight, I would suspect that real opens strong!

With the other emerging market currencies rising versus the dollar overnight, I would think that real join that move. But we’ll have to wait-n-see, eh?

And oil continues to show price increases… With black gold (Texas tea), now regaining $83 per barrel, the Canadian dollar/loonie (CAD) is nearing parity to the green/peach back (US dollar).

And here I am ready to go to the Big Finish, but just remembered that there are two Central Bank meetings going on as I type… The Bank of England (BOE) and the European Central Bank (ECB) are meeting this morning… I guess the most important thing to come from these two meetings will be the ECB statement at the press conference following the meeting. The ECB seems to be champing at the bit to remove stimulus, but just can’t pull the trigger.

If the ECB is seriously concerned about the strength of the euro – remember they were elated for manufacturing and exports to see the euro drop to 1.20 – then they could trip the euro up with a statement about removing stimulus… Otherwise, there won’t be any mention…

And a currency that I don’t talk much about, but I’m always thinking about, the Singapore dollar (SGD), has gained over 3% in the past month! And why not? Japanese yen is at a 15-year high versus the dollar, and the Chinese renminbi has gained 1.5%… Gotta keep up with the Joneses!

I’ve explained this before, but for all the new readers… The Monetary Authority of Singapore (MAS) is the gatekeeper for the Singapore dollar. The MAS meets twice a year, and issues a statement about their wishes for the Singapore dollar… Five months ago, the MAS issued a statement that called for a gradual strengthening of the Singapore dollar… I’m thinking that the MAS will retain that policy at their next meeting, which takes place next week.

Then there was this from The Economist

The US doesn’t have to rely on negotiations or a trade war to overpower the harmful effect of China’s currency policy on the US labor market and trade, according to The Economist. The most powerful tool the US can bring is to pursue adequate monetary and fiscal stimulus at home. “At the present nominal exchange rate, expansionary monetary policy in America would prove highly inflationary in China, which is a darn good reason for everyone in China (including those pesky exporters) to favor appreciation,” the magazine notes.

Yes, that’s all good, but it’s easier said than done!

To recap… The currencies and precious metals have taken their assault on the dollar to new heights overnight with both the Aussie dollar and loonie nearing parity to the dollar, and the euro moving toward 1.40. Gold is $1,360 this morning, and doesn’t appear to be looking in its rearview mirror for profit takers. The so-called “currency war” is a key driver to all this dollar weakness… And after all the money spent on weakening the Japanese yen, the yen is back to pre-intervention levels!

Chuck Butler
for The Daily Reckoning

Currency Wars? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Currency Wars?




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Currency Wars?

October 7th, 2010

Yesterday, we watched the currencies and precious metals rise all day long, in small increments. But the overnight markets have taken the currencies even higher! For instance, the Aussie dollar (AUD) is near 99-cents, and a new all-time record high! And gold is up another $9 this morning to $1,358!

What’s the muscle behind this push of the dollar to levels we’ve not seen before? Well, I personally think that the main muscle is what’s being termed as a “currency war”… And then there are other items that are helping push the dollar lower, like the German Industrial Production report that printed this morning, and showed an increase of more than three times pace the “experts” forecast! German Industrial Production surged 1.7% in August!

But let’s get back to this so-called “currency war” (I keep hearing the theme to Star Wars in my head!)… US Treasury Secretary Tim Geithner said Japan didn’t fuel international tensions when it intervened in the foreign-exchange market last month.

The Treasury chief said today that there’s a “damaging dynamic” at work in currency markets as countries race to limit appreciation. When asked whether he thought Japan had “set the fire” for this dynamic, Geithner responded, “I don’t, no” in remarks at the Brookings Institution.

Instead, Geithner kept up his calls for China to let the renminbi (CNY) rise against the dollar. He said the “main problem” facing foreign-exchange markets is “a set of emerging-market economies that both remain undervalued and are leaning heavily against the pressures for appreciation.”

In other words… He’s talking about China… And maybe even throwing India under the bus too…

Geithner then stepped up the pressure on China, effectively blaming the world’s number-two economy for the emergence of what some are calling a “currency war” ahead of a G-7 meeting.

And China’s Premier immediately answered saying that the demands to appreciate the renminbi would be disaster for his country…

Why can’t we leave the Chinese out of this? They have their country to run, and we have ours… If we had taken better care of our country’s finances, we wouldn’t be in this mess. I think we would be better off taking care of our own house, and leaving China to take care of theirs. If you rile them up too much, you risk the chance of them telling you to finance your own deficit!

OK… Enough on that… But I can tell you that at no time in the past weak dollar trend, has the negativity been so strong against the dollar as it is at this time. I get all caught up in thoughts on this kind of move, and the thought that keeps coming to me from the back of my brain is that “a star burns the brightest right before it burns out”…

So… What are your thoughts? Is this the end of the run for the currencies? Or… Is there still more weakness for the dollar in store? I truly believe there’s more weakness, but… That’s in the long run… For now, I’ve got to think that we’ve come so far, so fast, that there has to be a pause for the cause. A “filling in of the gaps” and all that! Nothing in the markets is a one-way street…

I yelled out across the desk yesterday that after all the intervention, quantitative easing, and interest rate cutting, the Japanese yen (JPY) is right back to pre-intervention levels of 82.50! So, once again, it is proven that intervention is just wasted money… And that also brings up a point that I think the government of this country, and that probably all countries miss… And that is that the government doesn’t have money! The only money they have is taken from taxpayers… So… When a government says something like, “we’re going to give you money” all they’re doing is letting you keep more of what you had!

Whoa there, partner! I really went astray there! Let’s see… Currencies… Oh yeah! I was writing for a publication yesterday, and made the point that in March of 2009, the Fed/Cartel implemented quantitative easing (QE) and the dollar spent the next eight months in the dumps, much like the move we’re seeing this week. The only thing that saved the dollar, which was teetering on the cliff’s edge in November, was the “discovery” of the Eurozone GIIPS deficit problems… But once those Eurozone countries announced austerity measures, the focus came back to the dollar’s problems.

Now, I’m not here to say that those austerity measures are the cure to all that ails the GIIPS problems… Which is why I continue to say that the euro is not out of the woods… And the media could whip the markets into a frenzy on this subject in a heartbeat.

Getting back to yen for a second… Japanese PM, Kan, said that his “government will take decisive steps when necessary in dealing with a strong yen”…  And then showing that everyone in Japan is not singing from the same song sheet, Vice Finance Minister, Igarashi, said, “Japan won’t weaken yen to become more competitive with other countries in trade and any currency intervention would be at restraining excessive moves. It’s not our intention to engage in a currency devaluation race for the sake of national interest.”

So… Gold is kicking sand in the dollar’s face again this morning, along with gold’s trusty sidekick, silver! I saw my friend David Galland refer to comment by the “Godfather” of newsletter writers, Richard Russell, who was speaking at the Casey Summit held last weekend, and who had this to say about gold… (This is good, so you’ll want to remember this line…)

“Some people refer derisively to gold owners as ‘gold bugs.’ Turning that idea around, legendary investor Richard Russell, in a rare public appearance at the summit, used the term ‘dollar bug’ to describe those who would foolishly prefer holding paper currency over gold. I think that’s a very good way of looking at the gold versus dollar argument.”

So… I’m taking that one to heart… From now on, I’m going to refer to dollar buyers and “dollar bugs”…

OK… Let’s get back to the Aussie dollar, for it was the best performer last night, and is now at an all-time record level versus the dollar. The Aussie dollar got a boost from yet another spike in employment. Full-Time Employment in Australia was 55,800 in September, which was the most workers taken on in eight months… I would have to think that the Reserve Bank of Australia (RBA) members are kicking themselves right now, for not hiking rates earlier this week when they had the chance. Now they’ll have to wait for their November meeting, and that could put them behind the inflation 8-ball… But I doubt it… The RBA has done a good job of being proactive with their rate hikes that go back to last year. Oh, by the way, the Aussie dollar did trade to 9915-cents overnight, slipping back just a bit on profit taking.

The “QE is coming soon to a central bank near you” campers, like me, will probably have to think about it more after today, as Fed Head Fisher (from Dallas) is scheduled to speak, and is a non-believer in the usefulness of QE… And then the lone hawk on the Cartel, Fed Head Hoenig will also be speaking. You can always count on Hoenig to deliver some good sound bites that differ from the rhetoric heard from the Cartel.

I had a nice talk with a reporter yesterday regarding Brazil… We talked about the prospects for a stronger real (BRL), and so on… The real, after getting caught up in the currency rally, had ignored the latest measure the government had undertaken to stem the real’s weakness, but it all caught up with the real yesterday… But today… I’m waiting for the Brazilian market to open, because… Given the price action in currencies versus the dollar overnight, I would suspect that real opens strong!

With the other emerging market currencies rising versus the dollar overnight, I would think that real join that move. But we’ll have to wait-n-see, eh?

And oil continues to show price increases… With black gold (Texas tea), now regaining $83 per barrel, the Canadian dollar/loonie (CAD) is nearing parity to the green/peach back (US dollar).

And here I am ready to go to the Big Finish, but just remembered that there are two Central Bank meetings going on as I type… The Bank of England (BOE) and the European Central Bank (ECB) are meeting this morning… I guess the most important thing to come from these two meetings will be the ECB statement at the press conference following the meeting. The ECB seems to be champing at the bit to remove stimulus, but just can’t pull the trigger.

If the ECB is seriously concerned about the strength of the euro – remember they were elated for manufacturing and exports to see the euro drop to 1.20 – then they could trip the euro up with a statement about removing stimulus… Otherwise, there won’t be any mention…

And a currency that I don’t talk much about, but I’m always thinking about, the Singapore dollar (SGD), has gained over 3% in the past month! And why not? Japanese yen is at a 15-year high versus the dollar, and the Chinese renminbi has gained 1.5%… Gotta keep up with the Joneses!

I’ve explained this before, but for all the new readers… The Monetary Authority of Singapore (MAS) is the gatekeeper for the Singapore dollar. The MAS meets twice a year, and issues a statement about their wishes for the Singapore dollar… Five months ago, the MAS issued a statement that called for a gradual strengthening of the Singapore dollar… I’m thinking that the MAS will retain that policy at their next meeting, which takes place next week.

Then there was this from The Economist

The US doesn’t have to rely on negotiations or a trade war to overpower the harmful effect of China’s currency policy on the US labor market and trade, according to The Economist. The most powerful tool the US can bring is to pursue adequate monetary and fiscal stimulus at home. “At the present nominal exchange rate, expansionary monetary policy in America would prove highly inflationary in China, which is a darn good reason for everyone in China (including those pesky exporters) to favor appreciation,” the magazine notes.

Yes, that’s all good, but it’s easier said than done!

To recap… The currencies and precious metals have taken their assault on the dollar to new heights overnight with both the Aussie dollar and loonie nearing parity to the dollar, and the euro moving toward 1.40. Gold is $1,360 this morning, and doesn’t appear to be looking in its rearview mirror for profit takers. The so-called “currency war” is a key driver to all this dollar weakness… And after all the money spent on weakening the Japanese yen, the yen is back to pre-intervention levels!

Chuck Butler
for The Daily Reckoning

Currency Wars? originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
Currency Wars?




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

How to Own Gold in an IRA – But Should You?

October 7th, 2010

With pundits and investors alike touting gold as the hedge against the falling dollar, inflation, and the Apocalypse, a natural question investors are starting to ask is what are the various ways they can invest in gold, and for longer term investment horizons, how to hold gold in an IRA. 

How to Own Gold in an IRA

There are a few options for investors seeking to hold gold in their IRA:

  • ETFs – The most popular gold ETF is (GLD) which tracks the underlying price of gold bullion, but you can also own miners via (GDX), speculate a big with Gold Miner Juniors via (GDXJ), or if not having access to your gold keeps you up at night, the Sprott Gold (PHYS) option allows investors access to their gold which some prefer over (GLD) since they don’t trust that the custodian could deliver if called upon.  Note that the Sprott fund trades at a premium to NAV and opens itself up to arbitrage via gold pairs trades when that premium spikes.
  • Physical Gold Bullion – For the very wealthy and those who are distrustful of the claims of the ETF custodians, there is an option to pay a private custodian to hold gold for you in your name.  You’d need to set up a self directed IRA with a custodian who in turn will procure gold from their network of dealers.  You can then transfer money to that custodian up to the max for the year or even from an existing IRA account.  Once you buy the gold in the desired format of gold, coins, or otherwise, the new IRA custodian will ship the gold to a holding depository to be held on behalf.  You should anticipate transaction costs and management fees along the way of course.
  • Other Precious Metals ETFs – While gold gets all the headlines, gold may not even be the precious metal that gives you the best performance!  As outlined in this article on ETFs beating gold, some of the other metals are outperforming; just watch those leveraged ETFs for the long-term, as they all go to zero in the end.

SHOULD You Invest in Gold in an IRA?

I was once told by a very wise man on a completely unrelated topic, “Just because you CAN do something, it doesn’t mean you SHOULD do it”.  Well, this may very well be one of those cases.  The advent of ETFs, metals custodians and middle-men peddling their services on late night television has opened up opportunities for retirement accounts that didn’t exist previously.  Before jumping head first into investing in gold at all, let alone, for the long-term, let’s think about some of the risks involved:

  • Gold doesn’t pay a dividend or coupon – Stocks and bonds do.  In fact, dividends are almost half the return of stocks over 20 years!  Even if they decline in value, often times the market will set an artificial floor and buoy declines since the future cash flows have an intrinsic value to investors.  Held long enough, vehicles with steady payouts like some of the few remaining AAA companies paying dividends and bonds will return to parity and dividend growers will give you capital appreciation as well!  Gold will never grow because it’s not paying or increasing a dividend.  It will only continue to go up in value in terms of your local currency as investors doubt the value of that currency, which may only be a 2010s phenomena.  We just don’t know.
  • This May Be a Bubble – It is completely plausible that you buy into gold now at $1350/oz and end up selling it 20 years from now at $1000/oz.  Gold travels in very long secular trends and we may be at a peak or we may just be getting started.  It’s tough to say, but it’s possible the market has gotten ahead of itself.
  • Gold has Carrying Costs – Regardless of whether you’re holding bullion, paying a custodian to hold it, or you’re buying it through an ETF, it’s expensive to transport, store, protect and monitor significant stores of gold.  Over decades, the additional fees associated with the storage and protection of gold could really add up, very much negating any benefits.

So, there you have it.  If you’re insistent on owning gold in an IRA, there are some options for you.  You can always buy gold in a traditional taxable manner, but make sure you understand the various gold tax rule since they vary depending on your investment vehicle.

Disclosure: Author holds GLD in a traditional trading account.

ETF, OPTIONS

Copyright 2009-2013 MarketDailyNews.COM

LOG