How to Make Sure All Your Investments Are Secure

November 21st, 2010

Martin D. Weiss, Ph.D.

In it, I give you a very simple method to help greatly improve the probability that ALL the specific investments that you own — or are about to buy — are among the safest choices you can make.

I want you to make safer profits in stocks, mutual funds or ETFs … find the safest banks for your CDs, money markets and checking accounts … and buy strictly the safest life insurance, annuities and health insurance. Plus I want to help you …

Avoid the Deceptions, Cover-Ups and
Lies Still Common on Wall Street

Let’s say you put a big chunk of your nest egg in a life insurance policy with an A+ company.

You invest another sizable amount in a portfolio of high-rated corporate bonds and tax-free municipal bonds.

Then, feeling safe and secure with most of your funds, you take a flyer on a few stocks that a dozen separate research analysts have unanimously rated as a “buy” or at least a “hold.”

You assume you’ve made informed decisions based on the best research the world has to offer.

The reality: Even in the absence of bubbles, busts, recessions or dollar collapses, you could suffer wipeout losses.

Hard to believe this could actually happen? Actually, it already has happened; and I want to make absolutely certain you don’t get caught in Wall Street deceptions like these in the future. So this morning, let me tell you what they are.

Their primary source: Legalized payola and massive conflicts of interest.

The primary result: Distorted research and inflated ratings on hundreds of thousands of companies, bonds, stocks, and investments of all kinds.

The threat to you: Far bigger losses in your investments than you would have anticipated otherwise.

Today, I’ll tell you about deceptions in the insurance industry. Next time, we can talk about equally egregious deceptions in other financial sectors.

“Weiss Had Better Shut the
@!%# Up or Get a Bodyguard.”

The year was 1988, and I had been rating the financial strength of the nation’s banks and S&Ls for over a decade.

My father, J. Irving Weiss, already an octogenarian, was helping me with the analysis. And one afternoon I told him that my ratings firm, Weiss Ratings was going to start rating insurance companies.

I can never forget his first words: “Check out First Executive [the parent of Executive Life Insurance],” he said. “Fred Carr’s running it. He’s trouble, and he’s knee deep in junk bonds. Follow the junk and you will find your answers.”

I did, and I found quite a few life insurance companies that were loaded with junk bonds, one of which was First Capital Life, to which we gave a financial strength rating of D-.

I was generous. The company should have gotten an F.

But within days of my widely-publicized warnings on First Capital Life, a gaggle of the company’s lawyers and top executives flew down to our office. They ranted. They raved. They swore they’d slap me with a massive lawsuit and put me out of business if I didn’t give them a better rating. “All the Wall Street ratings agencies give us high grades,” they said. “Who the hell do you think you are?”

I politely explained that we never let personal threats affect our ratings. And unlike other rating agencies, Weiss Ratings never accepts a dime from the companies we rate. “We work for individuals,” I said, “not big corporations. Besides,” I continued, opening up the company’s most recent quarterly report, “your own financial statements prove your company is in trouble.”

That’s when one of them delivered the ultimate threat: “Weiss better shut the @!%# up,” he whispered to my associate, “or get a bodyguard.”

We did neither. To the contrary, we intensified our warnings. And within weeks, the company went belly-up, just as Weiss Ratings had warned — still boasting high ratings from major Wall Street firms on the very day they failed.

In fact, the leading insurance rating agency, A.M. Best, didn’t downgrade First Capital Life to a warning level until five days after it failed. Needless to say, it was too late for policyholders.

It was a grisly sight — not just for policyholders, but for shareholders as well: The company’s stock crashed 99 percent, crucifying millions of unwitting investors. Then the stock died, wiped off the face of the Earth. Three of the company’s closest competitors also bit the dust. Unwitting investors — who did not have access to my ratings — lost $4 billion, $4.5 billion, and $13 billion, respectively.

Fortunately, those who had seen our ratings were ready. Weiss Ratings warned them long before these companies went bust. Nobody who heeded our warning lost a cent.

In fact, the contrast between anyone who relied on Weiss Ratings and anyone who didn’t was so stark, even the U.S. Congress couldn’t help but notice.

Congress asked: How was it possible for Weiss — a small firm in Florida — to identify companies that were about to fail, when Wall Street told us they were still “superior” or “excellent” right up to the day they failed?

To find an answer, Congress called all the rating agencies — Standard & Poor’s (S&P), Moody’s, A.M. Best, Duff & Phelps, and Weiss — to testify. But we were the only ones among them who showed up.

So Congress asked its auditing arm, the U.S. Government Accountability Office (GAO), to conduct a detailed study on the Weiss ratings in comparison to the ratings of the other major rating agencies.

Three years later, after extensive research and review, the GAO published its conclusion: Weiss beat its leading competitor, A.M. Best, by a factor of three to one in forecasting future financial troubles. The three other Wall Street firms weren’t even competition.

But the GAO never answered the original question — why?

I can assure you it wasn’t because of better access to information than our competitors. Nor were we smarter than they were. The real answer was contained in one four-letter word: Bias.

To this day, the other rating agencies are paid huge fees by the issuers of bonds, insurance policies and other investments that you buy. In other words, their ratings are literally bought and paid for by the same companies they rate.

These conflicts and bias in the ratings business are no trivial matter.

How Deceptive Ratings Entrapped
Nearly Two Million Americans in Failed
Insurance — and Why It Could
Happen to You!

If you have insurance, don’t blindly assume it’s safe. In a moment, I’ll show you how two million others once made that mistake and lived to regret it. And to help you avoid repeating their error, it’s vital that you understand their story from start to finish.

The problems began in the early 1980s when insurance companies had guaranteed to pay high yields to investors of 10 percent or more, but the best they could earn on safe bonds was 8, 7, or 6 percent. They had to do something to bridge that gap — and quickly.

So how do you deliver high guaranteed yields when interest rates are going down? Their solution: Buy the bonds of financially weaker companies.

Consider, for a moment, what bonds are and you’ll understand the situation. When you buy a bond, all you’re doing, in essence, is making a loan. If you make the loan to a strong, secure borrower, like the U.S. government or a financially robust corporation, you won’t be able to collect a very high rate of interest.

If you want a truly high interest rate, you need to take the risk of lending your money to a less secure borrower — maybe a start-up company or perhaps a company that’s had some ups and downs in recent years. And you can earn even more interest from companies that have been having “a bit of trouble” paying their bills lately. (Whether you’ll actually be able to collect that interest or get back your principal is another matter entirely.)

What’s secure and what’s risky? In the corporate bond world, everyone agreed to use the standard rating scales originally established by the two leading bond rating agencies — Moody’s and S&P. The two agencies use slightly different letters, but their scale is basically the same: Triple-A, double-A, single-A; triple-B, double-B, single-B; and so on.

If a bond is triple-B or better, it’s investment grade. That’s considered relatively secure. If the bond is double-B or lower, it’s speculative grade, or simply “junk.” It’s not garbage you’d necessarily throw into the trashcan, but in the parlance of Wall Street, it’s officially known as junk.

And that’s what insurance companies started to buy: Junk. They bought double-B bonds. They bought single-B bonds. They even bought unrated bonds that, if rated, would have been classified as junk.

The key to their success was to keep the junk bond aspect hush-hush, while exploiting the faith people still had in the inherent safety of insurance. To make the scheme work, they needed two more elements: The blessing of the Wall Street ratings agencies and the cooperation of the state insurance commissioners, many of whom had worked for — or would later join — those same insurance companies.

The blessing of the rating agencies was relatively easy. Indeed, for years, the standard operating procedure of the leading insurance company rating agency, A.M. Best & Co., was to “work closely” with the insurers.

If you ran an insurance company and wanted a rating, the deal that Best offered you was very favorable indeed. Best said, in effect: “We give you a rating. If you don’t like it, we won’t publish it. If you like it, you pay us to print up thousands of rating cards and reports that your salespeople can use to sell insurance. It’s a win-win.”

The ratings process was stacked in favor of the companies from start to finish. They were empowered to decide when and if they wanted to be rated. They got a “sneak preview” of their rating before it was revealed to the public. They could appeal the rating if they didn’t like it. And if they still didn’t get a rating they agreed with, they could take it out of circulation by suppressing its publication.

Three newer entrants to the business of rating insurance companies — Moody’s, S&P, and Duff & Phelps (now Fitch) — offered essentially the same deal.

But instead of earning their money from reprints of ratings reports, they simply charged the insurance companies a fat flat fee for each rating — anywhere from $10,000 to $50,000 per insurance company subsidiary, per year. Later, Best decided to change its price structure to match the other three, charging the rated companies similar up-front fees.

Not surprisingly, the rating agencies gave out good grades like candy. At A.M. Best, the grade inflation got so far out of hand that no industry insider would be caught alive buying insurance from a company rated “good” by Best. Nearly everyone (except the customers) knew that Best’s “good” was actually bad.

Getting the insurance regulators to cooperate was not quite as easy. In fact, the state insurance commissioners around the country were getting so concerned about the industry’s bulging investments in junk and unrated bonds, they decided to set up a special office in New York — the Securities Valuation Office — to monitor the situation.

What’s a junk bond? The answer, as I’ve explained, was undisputed: any bond with a rating from S&P or Moody’s of double-B or lower. But the insurance companies didn’t like that definition. “You can’t do that to us,” they told the insurance commissioners. “If you use that definition, everybody will see how much junk we have.” The commissioners struggled with this request, but amazingly, they obliged. It was like rewriting history to suit the new king.

This went on for several years. Finally, however, after a few of us screamed and hollered about this sham, the insurance commissioners finally realized they simply could not be a party to the junk bond cover-up any longer. They decided to bite the bullet. They adopted the standard double-B definition, and reclassified over $30 billion in “secure” bonds as junk bonds. It was the beginning of the final act for the giant junk bond insurance companies.

The New York Times was one of the first to pick up the story. Newspapers all over the country soon followed. That’s when the large life and health insurance companies began to fall like dominoes — Executive Life of California, Executive Life of New York, Fidelity Bankers Life, First Capital Life — each and every one dragged down by large junk bond holdings.

And this was just the prelude to the biggest failure of all — Mutual Benefit Life of New Jersey, which fell under the weight of losses in speculative real estate.

How many people were affected? I checked the records of each failed company:

In total, they had exactly 5,950,422 policyholders.

And among these, 1.9 million were fixed annuities and other policies with cash value. If you were one of the 1.9 million, your money was frozen. The authorities wouldn’t let you cash out your policy. They wouldn’t even let you borrow on your policy.

What about the legal mandate for the guarantee funds to reimburse policyholders in failed companies? The authorities put their heads together and came up with a “creative” solution:

To avoid invoking the guarantee system, they simply decided to change the definition of when a failed company fails. Instead of declaring that the bankrupt companies were bankrupt, they decided to call them “financially impaired,” or “in rehabilitation.”

Then, after many months, the authorities created new companies with new, reformed annuities yielding far less than the original policies. They gave policyholders two choices. Either:

  • “Opt in” to the new company and accept a loss of yield for years to come, or …
  • “Opt out” and accept their share of whatever cash was available, often as little as 50 cents on the dollar.

It was the greatest disaster in the history of insurance!

So You’d Think That the Insurance
Industry Would Have Learned Its Lessons.

Not So!

Like the failed insurers of the 1990s, several large U.S. insurance companies, on the prowl for high yields, invested again in high-risk instruments. Junk bonds were still stigmatized, but a handy substitute for junk was readily available: Subprime mortgages.

And to make things even more exciting, some insurers added a whole new layer of risk: A special kind of bet known as a credit default swap (CDS) — a bet placed on the probability of another company’s failure.

Remember, in the prior episode, the rating agencies collected large fees from the companies for each grade. That, in turn, introduced serious conflicts of interest into the process and often biased the ratings in favor of the companies.

This time around, they did precisely the same thing: They collected the same kind of big fees. They gave out the same kind of top-notch ratings. And they covered up the same kind of massive risks.

In addition, S&P, Moody’s, and Fitch created a whole new layer of conflicts and bias: They hired themselves out as consultants to help create newfangled debt-backed securities, giving them a true lock on the industry: They created the securities.

They rated the securities. And then they rated the companies that bought the securities, collecting fat fees at each stage of the process.

Not only did that pad the bottom line of the rating agencies, it also gave them stronger reasons to inflate the ratings, ignore warning signs, postpone downgrades, and avoid anything that might bring down the debt pyramid they had helped to create.

The repercussions of this disaster were at the heart of the debt crisis, and as a part of the Regulatory Reform Act of 2010, Congress sought to address them. But …

The Fundamental Business
Model of the Big Four Rating
Agencies Has Not Changed.

To this day, the insurance companies are still rated by the same rating agencies, in the same way with the same conflicts of interest.

This is also how the Wall Street rating agencies rate every issuer of corporate bonds, municipal bonds, mortgage-backed securities, and more.

ALL of the Big Four rating agencies — Moody’s, Standard & Poor’s, Fitch, and A.M. Best — continue to collect large fees from the companies they rate.

And the obvious conflict of interest that naturally flows from that financial relationship persists, leaving the danger of more ratings fiascos to come.

Good luck and God bless!

Martin

Read more here:
How to Make Sure All Your Investments Are Secure

Commodities, ETF, Mutual Fund, Real Estate, Uncategorized

Congress Takes Vigorous Steps to Look Like it’s Planning to Reduce Deficit

November 20th, 2010

Erskine Bowles, President of UNC, and former Wyoming Senator, Alan Simpson, the co-chairmen of President Obama’s National Commission on Fiscal Responsibility and Reform, are getting political leaders caught up with the obvious reality of the US’ precarious financial state… that the budget deficit is quickly hurtling the nation toward a debt crisis not unlike Greece, but on a much larger scale.

Yet, even with annual interest payments alone already totaling roughly $200 billion, there is little political will to make the kind of cuts necessary to have an impact on the deficit. Policy makers and citizens alike want action to be taken, but the required sense of taking personal responsibility — with fewer public services, higher taxes, or reduced welfare — is still lacking.

This cartoon came to our attention via The Mess That Greenspan Made’s post on the appearance of getting something done.

Congress Takes Vigorous Steps to Look Like it’s Planning to Reduce Deficit 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:
Congress Takes Vigorous Steps to Look Like it’s Planning to Reduce Deficit




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

Congress Takes Vigorous Steps to Look Like it’s Planning to Reduce Deficit

November 20th, 2010

Erskine Bowles, President of UNC, and former Wyoming Senator, Alan Simpson, the co-chairmen of President Obama’s National Commission on Fiscal Responsibility and Reform, are getting political leaders caught up with the obvious reality of the US’ precarious financial state… that the budget deficit is quickly hurtling the nation toward a debt crisis not unlike Greece, but on a much larger scale.

Yet, even with annual interest payments alone already totaling roughly $200 billion, there is little political will to make the kind of cuts necessary to have an impact on the deficit. Policy makers and citizens alike want action to be taken, but the required sense of taking personal responsibility — with fewer public services, higher taxes, or reduced welfare — is still lacking.

This cartoon came to our attention via The Mess That Greenspan Made’s post on the appearance of getting something done.

Congress Takes Vigorous Steps to Look Like it’s Planning to Reduce Deficit 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:
Congress Takes Vigorous Steps to Look Like it’s Planning to Reduce Deficit




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

Councilman Takes the Cake

November 20th, 2010

Earlier this week, we came across the story of young Andrew DeMarchis and Kevin Graff, a couple of 13-year old students who were caught selling cupcakes and baked goods at their local market. The two hoodlums were discovered peddling a range of treats, from cookies to brownies…even Rice Krispies.

As is often the case with aspiring criminals, this was not the first time the boys had flouted the law. Readers may be shocked to learn that this was actually the second time these would-be ruffians had conducted their illicit activities in public. On the first occasion, another bake sale, the boys managed to net a cool $120 in profit. And, like greedy capitalists the world over, the team invested half the loot to buy a cart from Target and even expanded their operations to include the sale of water and Gatorade.

Who knows how many treats the boys might have sold or how large their empire of dough-sponsored delinquency might have grown if left unchecked by the authorities. They had, according to one report, told a few members of their trusted inner circle (their Moms and Dads) of their intentions to one day open their own restaurant.

Clearly, something had to be done.

Enter our hero, local Councilman Michael Wolfensohn. Upon hearing of the boys vast and expanding operation down at the local market, Cr. Wolfensohn, his superhero cape sewn with the very threads of truth and justice, decided to act. Doing what any unquestioning citizen living in a police state would do after learning that two boys had decided to sell cupcakes, Wolfensohn called the cops.

On Saturday, October 19, after about an hour of business – during which the perpetrators had raised around $30 (in cash) – police arrived on the scene. The store – and the seed of a crime syndicate that may one day have rivaled all the government agencies of the world combined – was shut down.

Justice: 1; Kids trying to sell brownies: 0.

“All vendors selling on town property have to have a license, whether it’s boys selling baked goods or a hot dog vendor,” explained Wolfensohn.

When asked by the boys’ parents whether he might have just informed them that they needed a license rather than calling the police, Wolfensohn laid out his watertight case.

“In hindsight, maybe I should have done that, but I wasn’t sure if I was allowed to do that,” he said, demonstrating an admirable incapacity to think for himself. “The police are trained to deal with these sorts of issues,” he added.

We can only hope their brush with the law sets these two lads back on the right path, one that excludes entrepreneurial ambition and fosters a healthy fear of the state. As for Wolfensohn, this editor would like to formally recommend him for a senior position with the TSA, where no incident is too small to completely blow out of proportion and no threat, imagined or actual, is too big to miss altogether.

Enjoy your weekend.

Cheers,

Joel Bowman
for The Daily Reckoning

Councilman Takes the Cake 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:
Councilman Takes the Cake




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

Councilman Takes the Cake

November 20th, 2010

Earlier this week, we came across the story of young Andrew DeMarchis and Kevin Graff, a couple of 13-year old students who were caught selling cupcakes and baked goods at their local market. The two hoodlums were discovered peddling a range of treats, from cookies to brownies…even Rice Krispies.

As is often the case with aspiring criminals, this was not the first time the boys had flouted the law. Readers may be shocked to learn that this was actually the second time these would-be ruffians had conducted their illicit activities in public. On the first occasion, another bake sale, the boys managed to net a cool $120 in profit. And, like greedy capitalists the world over, the team invested half the loot to buy a cart from Target and even expanded their operations to include the sale of water and Gatorade.

Who knows how many treats the boys might have sold or how large their empire of dough-sponsored delinquency might have grown if left unchecked by the authorities. They had, according to one report, told a few members of their trusted inner circle (their Moms and Dads) of their intentions to one day open their own restaurant.

Clearly, something had to be done.

Enter our hero, local Councilman Michael Wolfensohn. Upon hearing of the boys vast and expanding operation down at the local market, Cr. Wolfensohn, his superhero cape sewn with the very threads of truth and justice, decided to act. Doing what any unquestioning citizen living in a police state would do after learning that two boys had decided to sell cupcakes, Wolfensohn called the cops.

On Saturday, October 19, after about an hour of business – during which the perpetrators had raised around $30 (in cash) – police arrived on the scene. The store – and the seed of a crime syndicate that may one day have rivaled all the government agencies of the world combined – was shut down.

Justice: 1; Kids trying to sell brownies: 0.

“All vendors selling on town property have to have a license, whether it’s boys selling baked goods or a hot dog vendor,” explained Wolfensohn.

When asked by the boys’ parents whether he might have just informed them that they needed a license rather than calling the police, Wolfensohn laid out his watertight case.

“In hindsight, maybe I should have done that, but I wasn’t sure if I was allowed to do that,” he said, demonstrating an admirable incapacity to think for himself. “The police are trained to deal with these sorts of issues,” he added.

We can only hope their brush with the law sets these two lads back on the right path, one that excludes entrepreneurial ambition and fosters a healthy fear of the state. As for Wolfensohn, this editor would like to formally recommend him for a senior position with the TSA, where no incident is too small to completely blow out of proportion and no threat, imagined or actual, is too big to miss altogether.

Enjoy your weekend.

Cheers,

Joel Bowman
for The Daily Reckoning

Councilman Takes the Cake 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:
Councilman Takes the Cake




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

Band-Aid Solutions

November 20th, 2010

Let’s face it, governments always try to ‘kick the can down the road’. Rather than deal with economic issues in the here and now, they prefer to postpone the pain. Unfortunately, in their attempt to avoid painful economic recessions, the policymakers sacrifice the purchasing power of their currencies and they end up creating even bigger troubles for the future.

Look. The ‘Great Recession’ in the developed world was brought about by excessive debt and consumption. In the boom years, millions of Americans borrowed copious amounts of money to buy real-estate; they used their homes as a source of funding (home equity withdrawals) and spent way beyond their means. In those heady days, everyone was convinced that real-estate prices could not decline on a country wide basis. Unsurprisingly, the bankers gladly supported this misconception by providing cheap fuel to the raging speculative fire. The end result was that unworthy debtors were able to purchase several properties and real-estate prices appreciated considerably.

Unfortunately, when interest-rates went up and credit became scarce, the house of cards collapsed. When boom turned to bust, millions of American homeowners were left with negative equity (see chart below) and the entire banking system came to its knees. When that happened, the American policymakers embarked on a fear-mongering campaign and they misled the public into believing that it was essential to save the banks. During the depth of the financial crisis, we were repeatedly told that the ‘too big to fail’ banks had to be saved, or else the consequences would be dire.

Homeowners/Mortgage Debt in Negative Equity

After the establishment succeeded in its scare tactics, it unleashed its ‘stimulus’ and used tax payers’ money to bail out the insolvent financial institutions. In the name of national interest, the Federal Reserve created trillions of dollars out of thin air and it purchased toxic mortgage-backed-securities from the commercial banks. Furthermore, instead of marking down the value of these securities, the American central bank bought the dubious assets at face value! Thus, the American taxpayers bailed out the banks and the risk was transferred from the private-sector to the state.

In addition to nationalising the bank’s losses, the Federal Reserve dropped the short term interest rate to near-zero and it started buying US Treasury securities. Supposedly, these Band-Aid solutions were necessary to prevent an economic depression and somehow they would revive the world’s largest economy.

By dropping the Fed Funds Rate to almost zero, the American central bank hoped to achieve the following benefits:

a. Reduce the borrowing cost of the banks (so they paid next to nothing for deposits)
b. Stimulate private-sector credit growth

In hindsight, the Federal Reserve succeeded in lowering the banks’ borrowing cost but it failed in reviving private-sector credit growth. After all, American households were already leveraged to the hilt and they refused to go even deeper in debt.

In our view, these drastic policy measures were unnecessary and they failed to get to the root of the problem – too much debt. Instead of nationalising the banks’ losses by using tax payers’ money, the American government should have restructured debt in an orderly manner. Insolvent institutions should have been allowed to fail, bondholders should have received a hair cut on their bad loans, and the total outstanding debt should have been reduced. If anything, in order to help the masses, the American establishment should have guaranteed all the bank deposits and taken steps to assist the distressed homeowners.

Instead, the American policymakers focused on helping the banks, and in the process, they increased the public’s debt burden! Furthermore, by transferring private sector risk on to the public’s balance-sheet, the American establishment has seriously undermined the quality of the nation’s balance-sheet.

It is noteworthy that over the past decade, America’s federal debt has more than doubled! Today, it stands at US$13.64 trillion and has morphed to 93.5% of GDP! The fact that this surge in debt has produced pathetic economic growth and done very little to bring down unemployment, is proof that Keynesianism does not work.

Unfortunately, the American establishment has not learnt from past mistakes and it continues to follow disastrous economic policies.

By now, it should be clear to everyone that the first round of quantitative easing failed to stimulate the world’s largest economy. So, if the initial ‘stimulus’ did not work, what are the odds that additional quantitative easing will do the trick?

The truth is that quantitative easing has never worked and this time around, the end result will be no different. In fact, we are prepared to bet our bottom dollar that quantitative easing will fail miserably in reviving economic growth in America. To make matters worse, if the Federal Reserve continues to create money like there is no tomorrow, the stage will be set for an inflationary inferno.

As an investor, it is crucial for you to understand that although monetary inflation causes asset prices to rise in nominal terms, it does not impact them uniformly. For instance, when inflationary expectations are low and confidence in the government is high, monetary inflation benefits financial assets (stocks and bonds). Conversely, when inflationary fears are elevated and investors have lost faith in the government, monetary inflation tends to benefit hard assets (precious metals, energy and soft commodities).

The nearby chart captures this inverse correlation between financial assets and gold. As you can see, between 1980 and 2000, monetary inflation benefited the Dow Jones Industrial Average (Dow) and during that period, gold performed poorly. However, since the turn of the millennium, monetary inflation has benefited hard assets and American stocks have underperformed relative to gold. At present, the Dow to gold ratio is at 8.4 and if history is any guide, over the following years, gold should continue to appreciate more than American stocks.

DJI Average/Gold Ration

In our view, the ongoing bull market in hard assets will carry on for as long as the Federal Reserve and its counterparts continue to engage in quantitative easing. Now, it is conceivable that over the following months, several central banks in the developed world will announce further stimulus and this should turbo charge the commodities boom.

It is our contention that as long as the bond vigilantes are asleep at the wheel, the ‘risk trade’ will continue to flourish. However, no boom lasts forever and at some point, when the bond vigilantes get spooked, sharply higher interest rates will end up killing the commodities bull. When that happens is anybody’s guess, but we suspect that the good times will continue for another 2-3 years.

Despite the fact that quantitative easing will not succeed in the developed nations, we remain optimistic about hard assets and continue to favour the stock markets of the developing economies in Asia.

Regards,

Puru Saxena
for The Daily Reckoning

Band-Aid Solutions 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:
Band-Aid Solutions




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.

Commodities, Uncategorized

Band-Aid Solutions

November 20th, 2010

Let’s face it, governments always try to ‘kick the can down the road’. Rather than deal with economic issues in the here and now, they prefer to postpone the pain. Unfortunately, in their attempt to avoid painful economic recessions, the policymakers sacrifice the purchasing power of their currencies and they end up creating even bigger troubles for the future.

Look. The ‘Great Recession’ in the developed world was brought about by excessive debt and consumption. In the boom years, millions of Americans borrowed copious amounts of money to buy real-estate; they used their homes as a source of funding (home equity withdrawals) and spent way beyond their means. In those heady days, everyone was convinced that real-estate prices could not decline on a country wide basis. Unsurprisingly, the bankers gladly supported this misconception by providing cheap fuel to the raging speculative fire. The end result was that unworthy debtors were able to purchase several properties and real-estate prices appreciated considerably.

Unfortunately, when interest-rates went up and credit became scarce, the house of cards collapsed. When boom turned to bust, millions of American homeowners were left with negative equity (see chart below) and the entire banking system came to its knees. When that happened, the American policymakers embarked on a fear-mongering campaign and they misled the public into believing that it was essential to save the banks. During the depth of the financial crisis, we were repeatedly told that the ‘too big to fail’ banks had to be saved, or else the consequences would be dire.

Homeowners/Mortgage Debt in Negative Equity

After the establishment succeeded in its scare tactics, it unleashed its ‘stimulus’ and used tax payers’ money to bail out the insolvent financial institutions. In the name of national interest, the Federal Reserve created trillions of dollars out of thin air and it purchased toxic mortgage-backed-securities from the commercial banks. Furthermore, instead of marking down the value of these securities, the American central bank bought the dubious assets at face value! Thus, the American taxpayers bailed out the banks and the risk was transferred from the private-sector to the state.

In addition to nationalising the bank’s losses, the Federal Reserve dropped the short term interest rate to near-zero and it started buying US Treasury securities. Supposedly, these Band-Aid solutions were necessary to prevent an economic depression and somehow they would revive the world’s largest economy.

By dropping the Fed Funds Rate to almost zero, the American central bank hoped to achieve the following benefits:

a. Reduce the borrowing cost of the banks (so they paid next to nothing for deposits)
b. Stimulate private-sector credit growth

In hindsight, the Federal Reserve succeeded in lowering the banks’ borrowing cost but it failed in reviving private-sector credit growth. After all, American households were already leveraged to the hilt and they refused to go even deeper in debt.

In our view, these drastic policy measures were unnecessary and they failed to get to the root of the problem – too much debt. Instead of nationalising the banks’ losses by using tax payers’ money, the American government should have restructured debt in an orderly manner. Insolvent institutions should have been allowed to fail, bondholders should have received a hair cut on their bad loans, and the total outstanding debt should have been reduced. If anything, in order to help the masses, the American establishment should have guaranteed all the bank deposits and taken steps to assist the distressed homeowners.

Instead, the American policymakers focused on helping the banks, and in the process, they increased the public’s debt burden! Furthermore, by transferring private sector risk on to the public’s balance-sheet, the American establishment has seriously undermined the quality of the nation’s balance-sheet.

It is noteworthy that over the past decade, America’s federal debt has more than doubled! Today, it stands at US$13.64 trillion and has morphed to 93.5% of GDP! The fact that this surge in debt has produced pathetic economic growth and done very little to bring down unemployment, is proof that Keynesianism does not work.

Unfortunately, the American establishment has not learnt from past mistakes and it continues to follow disastrous economic policies.

By now, it should be clear to everyone that the first round of quantitative easing failed to stimulate the world’s largest economy. So, if the initial ‘stimulus’ did not work, what are the odds that additional quantitative easing will do the trick?

The truth is that quantitative easing has never worked and this time around, the end result will be no different. In fact, we are prepared to bet our bottom dollar that quantitative easing will fail miserably in reviving economic growth in America. To make matters worse, if the Federal Reserve continues to create money like there is no tomorrow, the stage will be set for an inflationary inferno.

As an investor, it is crucial for you to understand that although monetary inflation causes asset prices to rise in nominal terms, it does not impact them uniformly. For instance, when inflationary expectations are low and confidence in the government is high, monetary inflation benefits financial assets (stocks and bonds). Conversely, when inflationary fears are elevated and investors have lost faith in the government, monetary inflation tends to benefit hard assets (precious metals, energy and soft commodities).

The nearby chart captures this inverse correlation between financial assets and gold. As you can see, between 1980 and 2000, monetary inflation benefited the Dow Jones Industrial Average (Dow) and during that period, gold performed poorly. However, since the turn of the millennium, monetary inflation has benefited hard assets and American stocks have underperformed relative to gold. At present, the Dow to gold ratio is at 8.4 and if history is any guide, over the following years, gold should continue to appreciate more than American stocks.

DJI Average/Gold Ration

In our view, the ongoing bull market in hard assets will carry on for as long as the Federal Reserve and its counterparts continue to engage in quantitative easing. Now, it is conceivable that over the following months, several central banks in the developed world will announce further stimulus and this should turbo charge the commodities boom.

It is our contention that as long as the bond vigilantes are asleep at the wheel, the ‘risk trade’ will continue to flourish. However, no boom lasts forever and at some point, when the bond vigilantes get spooked, sharply higher interest rates will end up killing the commodities bull. When that happens is anybody’s guess, but we suspect that the good times will continue for another 2-3 years.

Despite the fact that quantitative easing will not succeed in the developed nations, we remain optimistic about hard assets and continue to favour the stock markets of the developing economies in Asia.

Regards,

Puru Saxena
for The Daily Reckoning

Band-Aid Solutions 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.”

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Band-Aid Solutions




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.

Commodities, Uncategorized

A World Awash in Government Intervention, Delays the Inevitable

November 20th, 2010

Bryan Rich

The past three years have been dominated by government intervention …

The U.S. propped up the banks with TARP money, and then gave banks ultra-easy money terms to recapitalize. And to unfreeze the global credit markets, the U.S. provided unlimited dollar swap lines with global central banks.

China rolled out the biggest fiscal stimulus package in the world as well as ultra-easy loan programs (relative to GDP). This gushed money into asset markets around the world. And despite mounting pressure to revalue its currency, China has continued to tamp down the yuan to keep exports flowing and its economic engine humming.

Europe stepped in as a buyer of last resort to keep souring European economies alive to see another day. And despite their efforts to stabilize the region, they’re now working up a plan to plug another leak in the dam … this time in Ireland.

Japan fired off fiscal stimulus one after another … and QE one after another. Plus, acting alone, it directly intervened to weaken the yen.

Meanwhile, Brazil, Korea, Singapore, Thailand, Malaysia, and Indonesia have all intervened in an attempt to weaken their currencies through outright currency market intervention and/or capital controls.

Yet all this government intervention has done nothing but postpone a day of reckoning for the global economy.

Still, the Fed is back at it with another round of QE!

The goal of all of this intervention has been simple: Numb the pain until the global economy can heal — i.e. find its way back to sustainable growth.

But it hasn’t worked.

And it hasn’t worked because the economic model the world has been operating on is flawed. It all boils down to lopsided trade — or imbalances. If you’ve followed the G-20 events of the past two years, you know that global leaders have vowed, as their number one goal, to repair global imbalances.

It's tough to rebuild a global economy when all the players want to be exporters.
It’s tough to rebuild a global economy when all the players want to be exporters.

But those vows have proven to be nothing more than words. The fact is this fundamental problem is a giant to tackle. And it’s especially difficult given an environment where everyone wants to export their way to recovery.

So how should we expect this to play out?

Booms and Busts

The band-aid approach taken by the world only sets the stage for more booms and busts ahead. And given the magnitude of intervention, the booms could be even more dangerous than the original excesses that set off this economic crisis.

For an economy that’s setting up for this cycle to play out, let’s take a look at Australia …

Australia is charging ahead with marveled growth. And while the advanced economies of the world are still trying to create easier money conditions, the Reserve Bank of Australia has been tightening — ratcheting up interest rates aggressively for the better part of the past year.

The key fuel for its economic performance: The worldwide intervention phenomena listed above.

Will Australia's housing bubble blow up like the U.S.'s did?
Will Australia’s housing bubble blow up like the U.S.’s did?

The fact is Australia rode the same wave of credit as the rest of the world. But when big economies sank and started cranking up the printing presses, that money spilled over into Australia, making its wave just bigger and bigger.

Consider this: In Australia home prices have doubled in value in eight years and quadrupled in 21. The average buyer in Sydney now pays at least 7.5 times annual income for the average home. For a perspective, that means an average Aussie household with a AUD$50,000 income is paying AUD$375,000.

Sound familiar?

And at current mortgage rates of 7.5 percent, the average buyer uses 56 percent of total income. That’s twice the 28 percent maximum personal finance experts recommend.

Take a look at these charts from an Australian economist.

The two lines to pay particular attention to are the royal blue line that’s bursting through the top corner of the chart (Australia) and the red line moving sideways (the U.S.). You can see that while America’s massive housing bubble peaked in 2006, the Australian housing market was still on the rise and just kept on climbing.

This data shows that, relative to the U.S. housing bubble, Aussie housing is in an much bigger bubble — over 50 percent bigger.

In fact, The Economist magazine says Australia’s property market is overvalued by a whopping 63 percent!

Need more proof? Look at the wild disparity between the price of a owning a home versus renting in the chart below.

As you can see, the ratio of price to rent has been surging over the past decade. And in the past year, it’s exploded higher!

This is a clear example of a bubble made even more dangerous by the interventionist policies pervading the world.

What’s more, it’s a good warning for those who have been chasing hot returns around the globe. Those returns come with substantial risk — especially currency risk.

The point here: We’re in a market of extremes. It’s quite possible that the deleveraging phase being felt in the advanced economies of the world has yet to reach other parts of the world. When it does, watch out.

And that’s why I’m working on a new service to help readers protect and profit from the growing currency crisis and rapid changes taking place to the value of money. Keep an eye out for the details coming soon.

Regards,

Bryan

P.S. This week on Money and Markets TV, we looked ahead to the holiday shopping season. Our panel of experts explained why it’s so important for the retail industry, as well as the overall economy, and how you can profit with ETFs.

If you missed Thursday night’s episode of Money and Markets TV — or would like to see it again at your convenience — it’s now available at www.weissmoneynetwork.com.

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A World Awash in Government Intervention, Delays the Inevitable

Commodities, ETF, Mutual Fund, Uncategorized

Investors are Piling Into the Market — Here are the Stocks That Will Benefit the Most

November 20th, 2010

Investors are Piling Into the Market -- Here are the Stocks That Will Benefit the Most

Here's a fairly simple investment premise: if the stock market rises +10% or 15% in the next six months, one sector will rise +30% or even +50%. That's because a rising stock market tends to bring out increased interest from individual investors. And they bring lots more business to online brokers. Indeed, I just wrote how individual investor sentiment is now at its highest level in nearly four years, and these folks are getting bullish simply because the market has been on the rebound since late August.

Need more proof? The major online brokers just reported an impressive sequential spike in trading volume, as measured by Daily Average Revenue Trading (DART). E*Trade (Nasdaq: EFTC) and TD Ameritrade (Nasdaq: AMTD) just saw +14% to +15% sequential spikes in October, while Charles Schwab (Nasdaq: SCHW), Interactive Brokers (Nasdaq: IBKR) and TradeStation (Nasdaq: TRAD) saw mid single-digit sequential increases.

Then and now
Two major changes have taken place in the decade since individual investors were a major force in the market. On the one hand, DARTs are well below previous levels, despite the recent monthly uptick. But all of the firms have many more accounts then they once did — in fact, all of the online brokers have at least +30% more clients than they did at the end of 2007. So, if individual investors start to become more active (though still below the levels of the dot-com boom), then DARTs would soar, and so would sales and profits for these firms.

It's too soon to call October's DARTs the start of a trend. The metric surged in the spring but had been on the wane thanks to the market swoon this summer. And though October trading activity was higher than September's, it's still well down from the spring peak.

But if the recent bullish individual investor sentiment continues to stay aloft (which you can track here), then DARTs are likely to rebound in tandem, perhaps back to levels seen last May. Yet the analysts that follow the industry are unlikely to report on such bullishness until the data come out. That's why you should track the investor sentiment by the week instead of waiting until the middle of the month to find out how the previous month fared.

And you need to ignore industry analysts completely if you are really to see the big picture, which as noted earlier, is all about a bulked-up client base at each of these firms. Let's take Charles Schwab as an example. The company picked up roughly 350,000 net new client accounts in 2008 and another 300,000 in 2009. Yet Schwab's revenue is barely growing thanks to a combination of relatively light trading volume this year and smaller interest spreads on its fixed income products. But if you assume that Schwab's revenue per customer will rebound in 2011 to 2008 levels, then Schwab's sales would spike roughly +30%, and per share profits would likely rise a lot more than that.

The forecasts don't incorporate such an outlook just yet. Schwab is expected to generate $4.7 billion in revenue next year, roughly -7% below 2008 levels, even though Schwab's client base is now roughly +20% to +25% larger. Looked at another way, analysts think Schwab can earn roughly $0.80 a share this year, but if DARTs rebound in 2011 and interest rates rise in 2012 (which boosts Schwab's profit margins), then you're probably looking at EPS much closer to $2.

For long-term investors, it pays to see how Schwab's shares have responded to previous upturns in trading. Shares fell -45% in 2001 and another -30% in 2002 before the company saw a rebound in operating trends. At the time, Schwab saw net income, which had surpassed $700 million in 2000, fall to around $100 million in 2002. By 2007, net income had surged all the way to $2.4 billion. Although it took a while for shares to respond, they finally rose more than +20% in 2005, more than +30% in 2006 and more than +40% in 2007.

A similarly bullish long-term case can be made for E*Trade. Right now, E*Trade is barely profitable, expected to eke out a few pennies in profit this year. Per share profit should exceed $0.50 next year simply because the company's ill-fated move into mortgages will no longer be a drag on the company by next year. The company has also seen a solid rebound in the size of its client base. And by math, if those clients boost their trading levels by +15% to +20% next year — not inconceivable in light of rising investor sentiment — then E*Trade's earnings per share (EPS) could come in closer to $1. The outlook for 2012 and 2013 would be brighter still if the bull market continues.

Action to Take –> If individual investors get off the sidelines and back into the market, these companies could become profit powerhouses. If weekly investor sentiment stays high in coming weeks, you may want to get in on these names before the analysts start to upgrade their ratings.


– 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
Investors are Piling Into the Market — Here are the Stocks That Will Benefit the Most

Read more here:
Investors are Piling Into the Market — Here are the Stocks That Will Benefit the Most

Uncategorized

Investors are Piling Into the Market — Here are the Stocks That Will Benefit the Most

November 20th, 2010

Investors are Piling Into the Market -- Here are the Stocks That Will Benefit the Most

Here's a fairly simple investment premise: if the stock market rises +10% or 15% in the next six months, one sector will rise +30% or even +50%. That's because a rising stock market tends to bring out increased interest from individual investors. And they bring lots more business to online brokers. Indeed, I just wrote how individual investor sentiment is now at its highest level in nearly four years, and these folks are getting bullish simply because the market has been on the rebound since late August.

Need more proof? The major online brokers just reported an impressive sequential spike in trading volume, as measured by Daily Average Revenue Trading (DART). E*Trade (Nasdaq: EFTC) and TD Ameritrade (Nasdaq: AMTD) just saw +14% to +15% sequential spikes in October, while Charles Schwab (Nasdaq: SCHW), Interactive Brokers (Nasdaq: IBKR) and TradeStation (Nasdaq: TRAD) saw mid single-digit sequential increases.

Then and now
Two major changes have taken place in the decade since individual investors were a major force in the market. On the one hand, DARTs are well below previous levels, despite the recent monthly uptick. But all of the firms have many more accounts then they once did — in fact, all of the online brokers have at least +30% more clients than they did at the end of 2007. So, if individual investors start to become more active (though still below the levels of the dot-com boom), then DARTs would soar, and so would sales and profits for these firms.

It's too soon to call October's DARTs the start of a trend. The metric surged in the spring but had been on the wane thanks to the market swoon this summer. And though October trading activity was higher than September's, it's still well down from the spring peak.

But if the recent bullish individual investor sentiment continues to stay aloft (which you can track here), then DARTs are likely to rebound in tandem, perhaps back to levels seen last May. Yet the analysts that follow the industry are unlikely to report on such bullishness until the data come out. That's why you should track the investor sentiment by the week instead of waiting until the middle of the month to find out how the previous month fared.

And you need to ignore industry analysts completely if you are really to see the big picture, which as noted earlier, is all about a bulked-up client base at each of these firms. Let's take Charles Schwab as an example. The company picked up roughly 350,000 net new client accounts in 2008 and another 300,000 in 2009. Yet Schwab's revenue is barely growing thanks to a combination of relatively light trading volume this year and smaller interest spreads on its fixed income products. But if you assume that Schwab's revenue per customer will rebound in 2011 to 2008 levels, then Schwab's sales would spike roughly +30%, and per share profits would likely rise a lot more than that.

The forecasts don't incorporate such an outlook just yet. Schwab is expected to generate $4.7 billion in revenue next year, roughly -7% below 2008 levels, even though Schwab's client base is now roughly +20% to +25% larger. Looked at another way, analysts think Schwab can earn roughly $0.80 a share this year, but if DARTs rebound in 2011 and interest rates rise in 2012 (which boosts Schwab's profit margins), then you're probably looking at EPS much closer to $2.

For long-term investors, it pays to see how Schwab's shares have responded to previous upturns in trading. Shares fell -45% in 2001 and another -30% in 2002 before the company saw a rebound in operating trends. At the time, Schwab saw net income, which had surpassed $700 million in 2000, fall to around $100 million in 2002. By 2007, net income had surged all the way to $2.4 billion. Although it took a while for shares to respond, they finally rose more than +20% in 2005, more than +30% in 2006 and more than +40% in 2007.

A similarly bullish long-term case can be made for E*Trade. Right now, E*Trade is barely profitable, expected to eke out a few pennies in profit this year. Per share profit should exceed $0.50 next year simply because the company's ill-fated move into mortgages will no longer be a drag on the company by next year. The company has also seen a solid rebound in the size of its client base. And by math, if those clients boost their trading levels by +15% to +20% next year — not inconceivable in light of rising investor sentiment — then E*Trade's earnings per share (EPS) could come in closer to $1. The outlook for 2012 and 2013 would be brighter still if the bull market continues.

Action to Take –> If individual investors get off the sidelines and back into the market, these companies could become profit powerhouses. If weekly investor sentiment stays high in coming weeks, you may want to get in on these names before the analysts start to upgrade their ratings.


– 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
Investors are Piling Into the Market — Here are the Stocks That Will Benefit the Most

Read more here:
Investors are Piling Into the Market — Here are the Stocks That Will Benefit the Most

Uncategorized

The 3 Best Brazilian Stocks to Own

November 20th, 2010

The 3 Best Brazilian Stocks to Own

When it comes to investing in emerging markets, Brazil is often mentioned as one of the most appealing countries. This is for good reason — its population of more than 200 million represents one of the world's largest markets. Better yet, years of economic growth under the rule of president Luiz Inacio Lula da Silva have brought an estimated 20 million citizens out of poverty and millions more into a middle class.

Economic growth is driving an emerging class of consumers that buy goods and open bank accounts. Brazil is also rich in natural resources and many of its companies have grown into global leadership positions as they export oil and precious metals to other fast-growing emerging markets.

Given these themes, here are three stocks that offer a compelling mixture of operational savvy and reasonable valuations for investors to profit.

1. Petrobras (NYSE: PBR)
Business: Integrated Energy Giant

Energy behemoth Petrobras is arguably Brazil's preeminent blue chip company. Petrobras is effectively controlled by the government, as it is the largest shareholder. This relationship has provided Petrobras with an essentially limitless capital capacity that allows it to fund oil exploration activities and the construction of large oil production and refinery facilities. Its existing four-year plan calls for almost $175 billion in infrastructure investment.

Petrobras has an ambition to grow into one of the top five integrated oil companies in the world. It already produces nearly two million barrels per day and boasts more than 11 billion barrels of reserves after making some of the largest finds in the world off the Brazilian coast. The government has also granted the company exploration rights in regions that could have billions more in reserves.

An investment in Petrobras looks compelling right now. Global uncertainty and volatile oil prices have pushed the shares toward their lows for the year. At current levels, the forward price-to-earnings (P/E) ratio is only about eight and is well below the low double-digit levels of the past couple years. This is a very reasonable entry point for investors, given the ambitious growth targets. It's also worth noting that Petrobras is the largest firm in Brazil, and as such it drives much of the value of Brazilian stock indexes. This makes it a must-own in the country — at the right price.

2. Vale S.A. (Nasdaq: VALE)
Business: Basic Metals Mining

Vale is another national champion and bills itself as the second-largest mining firm and largest iron ore miner in the world. Growth in emerging markets, which includes its Brazilian home as well as rapidly-growing countries such as China, is the main driver of Vale's fortunes and means extremely ample profit opportunities.

Vale is one of the 30 largest public companies in the world. The company operates primarily in Brazil but also has sizable operations in Canada. It has long-life and low cost assets in the ground that it exports across the globe — 50% of sales stem from Asia, while about 20% of the top line stems from Europe and South America. International diversification helps stabilize operations, though demand for its products does fluctuate with global construction activity.

Shares of Vale are bumping up against their highs for the year but still trade for a reasonable forward P/E below 11. The current dividend yield is respectable at 1.4%, but investors should be interested in Vale's ability to grow along with emerging markets for many years to come.

3. Banco Itau (NYSE: ITUB)
Business: Bank

The final pick is a play on domestic Brazilian demand. Banco Itau, along with Banco Bradesco (NYSE: BBD), are the two largest banks in Brazil. After years of dealing with hyperinflation in the economy before the country found a path to stable growth, Brazilian banks have developed some of the most sophisticated technology systems on the planet. This coupled with a growing consumer market for bank loans, checking accounts, and related financial services activities makes the industry very compelling overall.

Headquartered in Sao Paulo, Banco Itau provides commercial and corporate banking services to individuals and businesses throughout Brazil. Recent returns on equity (ROE), an important measure of banking efficiency and profitability, have been stellar at around 20%. This qualifies it as one of the country's most profitable banks. Size matters in banking as well, and this favors Banco Itau, as it can transact business at lower price points to keep earnings coming in.

Again, Banco Itau's forward P/E is reasonable at below 14. This may be higher than U.S.-based investors may be accustomed to paying for banks, but they don't have to worry about things like the U.S. housing bust in Brazil. Banco Itau is also growing rapidly — during the past three years sales have grown more than +30% annually, while earnings have grown nearly +20% in each of these years. This growth is worth paying up for, especially if it continues at a similar pace.

Action to Take —> Emerging markets are safest when focusing on the largest players in the space. As with Petrobras, Vale and Banco Itau, size has its advantages. In the first two cases, the firms have been able to leverage dominant Brazilian positions into global leadership roles in their respective industries. Banco Itau will continue to benefit from domestic growth as more Brazilians are lifted up out of poverty and into the middle class. Shares of any of these companies should be considered a compelling buy.

– Ryan Fuhrmann

A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies…

Uncategorized

The 3 Best Brazilian Stocks to Own

November 20th, 2010

The 3 Best Brazilian Stocks to Own

When it comes to investing in emerging markets, Brazil is often mentioned as one of the most appealing countries. This is for good reason — its population of more than 200 million represents one of the world's largest markets. Better yet, years of economic growth under the rule of president Luiz Inacio Lula da Silva have brought an estimated 20 million citizens out of poverty and millions more into a middle class.

Economic growth is driving an emerging class of consumers that buy goods and open bank accounts. Brazil is also rich in natural resources and many of its companies have grown into global leadership positions as they export oil and precious metals to other fast-growing emerging markets.

Given these themes, here are three stocks that offer a compelling mixture of operational savvy and reasonable valuations for investors to profit.

1. Petrobras (NYSE: PBR)
Business: Integrated Energy Giant

Energy behemoth Petrobras is arguably Brazil's preeminent blue chip company. Petrobras is effectively controlled by the government, as it is the largest shareholder. This relationship has provided Petrobras with an essentially limitless capital capacity that allows it to fund oil exploration activities and the construction of large oil production and refinery facilities. Its existing four-year plan calls for almost $175 billion in infrastructure investment.

Petrobras has an ambition to grow into one of the top five integrated oil companies in the world. It already produces nearly two million barrels per day and boasts more than 11 billion barrels of reserves after making some of the largest finds in the world off the Brazilian coast. The government has also granted the company exploration rights in regions that could have billions more in reserves.

An investment in Petrobras looks compelling right now. Global uncertainty and volatile oil prices have pushed the shares toward their lows for the year. At current levels, the forward price-to-earnings (P/E) ratio is only about eight and is well below the low double-digit levels of the past couple years. This is a very reasonable entry point for investors, given the ambitious growth targets. It's also worth noting that Petrobras is the largest firm in Brazil, and as such it drives much of the value of Brazilian stock indexes. This makes it a must-own in the country — at the right price.

2. Vale S.A. (Nasdaq: VALE)
Business: Basic Metals Mining

Vale is another national champion and bills itself as the second-largest mining firm and largest iron ore miner in the world. Growth in emerging markets, which includes its Brazilian home as well as rapidly-growing countries such as China, is the main driver of Vale's fortunes and means extremely ample profit opportunities.

Vale is one of the 30 largest public companies in the world. The company operates primarily in Brazil but also has sizable operations in Canada. It has long-life and low cost assets in the ground that it exports across the globe — 50% of sales stem from Asia, while about 20% of the top line stems from Europe and South America. International diversification helps stabilize operations, though demand for its products does fluctuate with global construction activity.

Shares of Vale are bumping up against their highs for the year but still trade for a reasonable forward P/E below 11. The current dividend yield is respectable at 1.4%, but investors should be interested in Vale's ability to grow along with emerging markets for many years to come.

3. Banco Itau (NYSE: ITUB)
Business: Bank

The final pick is a play on domestic Brazilian demand. Banco Itau, along with Banco Bradesco (NYSE: BBD), are the two largest banks in Brazil. After years of dealing with hyperinflation in the economy before the country found a path to stable growth, Brazilian banks have developed some of the most sophisticated technology systems on the planet. This coupled with a growing consumer market for bank loans, checking accounts, and related financial services activities makes the industry very compelling overall.

Headquartered in Sao Paulo, Banco Itau provides commercial and corporate banking services to individuals and businesses throughout Brazil. Recent returns on equity (ROE), an important measure of banking efficiency and profitability, have been stellar at around 20%. This qualifies it as one of the country's most profitable banks. Size matters in banking as well, and this favors Banco Itau, as it can transact business at lower price points to keep earnings coming in.

Again, Banco Itau's forward P/E is reasonable at below 14. This may be higher than U.S.-based investors may be accustomed to paying for banks, but they don't have to worry about things like the U.S. housing bust in Brazil. Banco Itau is also growing rapidly — during the past three years sales have grown more than +30% annually, while earnings have grown nearly +20% in each of these years. This growth is worth paying up for, especially if it continues at a similar pace.

Action to Take —> Emerging markets are safest when focusing on the largest players in the space. As with Petrobras, Vale and Banco Itau, size has its advantages. In the first two cases, the firms have been able to leverage dominant Brazilian positions into global leadership roles in their respective industries. Banco Itau will continue to benefit from domestic growth as more Brazilians are lifted up out of poverty and into the middle class. Shares of any of these companies should be considered a compelling buy.

– Ryan Fuhrmann

A graduate of the University of Wisconsin and the University of Texas, Ryan Fuhrmann, CFA, adheres to a value-based investing viewpoint that successful companies…

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The Chinese IPO Nobody is Talking About

November 20th, 2010

The Chinese IPO Nobody is Talking About

Just a year after going bust, GM (NYSE: GM) showed it can get its groove back. Its IPO was impressive, with a large increase in the price range as well as the number of shares issued. [Read: "GM's Back -- And So Are These Key Suppliers".]

While GM has the advantage of a streamlined operating structure, the company is also getting a nice lift from growth in China. But in light of the competition, there are some lingering concerns that the company will fall back on bad habits.

The good news is that investors have some other ways to participate in the growth of the Chinese auto market. For example, there are several online operators that will likely post substantial growth for some time. In fact, in the midst of all the attention on GM's IPO this week, one of them went public this week.

But first, let's take a look at the key auto trends in China. All in all, the growth in Internet usage continues at a rapid pace. There are currently 384 million Internet users, up from 110 million in 2005. By 2013, the number is projected to reach a staggering 664 million (according to iResearch).

What's more, China is the world's largest auto market, as the country sees gains in income and economic growth. It also helps that there have been significant investments in roadway infrastructure. For 2010, China is expected to post 17.0 million auto sales. But this is forecasted to reach 21.3 million by 2013 (from a report by J.D. Power).

Finally, the Internet is the primary way for Chinese people to research a purchase decision for a car. Just last year, Chinese auto sites attracted 140 million unique users, up from 29 million in 2005. [These three factors make up what Market Advisor editor Nathan Slaughter calls "catalysts " -- overriding trends that power stocks to huge gains.]

OK, so who is the top online operator? It's a company called Bitauto (Nasdaq: BITA). The company issued 10.6 million shares on the Nasdaq exchange for $12 a piece on Wednesday.

Bitauto operates two main sites, bitauto.com and ucar.cn. They provide extensive details, specifications and consumer reviews on new and used cars. There are also content distribution agreements with 63 third-party sites like Tencent, Yahoo China and Tom Online.

As for making money, Bitauto relies on a variety of revenue streams. These include subscriptions from auto dealers, advertising fees and listing fees. There are also high-end digital marketing services and public relations.

And yes, Bitauto has been growing at a torrid rate. For the past nine months, the company posted $44.7 million in revenue, up +53% compared with the past year. While the company generated a $5.1 million operating profit during this period, there was still an overall loss because of the change in value of its convertible bond. Yet this is more of a technical matter, and besides, the IPO proceeds will help provide a more stable base of financing.

Action to Take –> Bitauto definitely has some risk factors. Looking at the prospectus, the company has 41 million shares outstanding at about $12 each. That puts the market cap at $492 million. Assuming the company generates $6 million in operating income this year (which seems reasonable), the forward multiple would be 82. Then again, this is typical for a Chinese IPO.

At the same time, there are signs that the Chinese economy is slowing down. The prime reason is that the government is taking actions to reduce inflation. In other words, the result could be a slowdown in auto sales.

But for investors looking to capitalize on the Chinese auto market, Bitauto is definitely an attractive play. The company should continue to grow at a strong rate and remain the dominant player in the space. And as seen with other Chinese dot-com players like Baidu (Nasdaq: BIDU), the category leaders often continue to bolster their positions over time as well as their valuations. Thus, a +20% to +30% move should be reasonable target for Bitauto's stock price in the next six months.


– Tom Taulli

P.S. — Any analyst can tell you they like a stock. But how many are willing to put their money where their mouth is? StreetAuthority Market Advisor is so confident in Nathan Slaughter's picks that we gave him $100,000 in cash to put into his recommendations. Learn how you can join in and profit along with him.

Tom has been a stock commentator for 15 years. He has written a best-selling book, “Investing in IPOs,” and become a frequent guest on shows like CNBC and CNN. Tom has also appeared in the New York Times, BusinessWeek Online and Forbes.com. Read more…

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

This article originally appeared on StreetAuthority
Author: Tom Taulli
The Chinese IPO Nobody is Talking About

Read more here:
The Chinese IPO Nobody is Talking About

Uncategorized

The Chinese IPO Nobody is Talking About

November 20th, 2010

The Chinese IPO Nobody is Talking About

Just a year after going bust, GM (NYSE: GM) showed it can get its groove back. Its IPO was impressive, with a large increase in the price range as well as the number of shares issued. [Read: "GM's Back -- And So Are These Key Suppliers".]

While GM has the advantage of a streamlined operating structure, the company is also getting a nice lift from growth in China. But in light of the competition, there are some lingering concerns that the company will fall back on bad habits.

The good news is that investors have some other ways to participate in the growth of the Chinese auto market. For example, there are several online operators that will likely post substantial growth for some time. In fact, in the midst of all the attention on GM's IPO this week, one of them went public this week.

But first, let's take a look at the key auto trends in China. All in all, the growth in Internet usage continues at a rapid pace. There are currently 384 million Internet users, up from 110 million in 2005. By 2013, the number is projected to reach a staggering 664 million (according to iResearch).

What's more, China is the world's largest auto market, as the country sees gains in income and economic growth. It also helps that there have been significant investments in roadway infrastructure. For 2010, China is expected to post 17.0 million auto sales. But this is forecasted to reach 21.3 million by 2013 (from a report by J.D. Power).

Finally, the Internet is the primary way for Chinese people to research a purchase decision for a car. Just last year, Chinese auto sites attracted 140 million unique users, up from 29 million in 2005. [These three factors make up what Market Advisor editor Nathan Slaughter calls "catalysts " -- overriding trends that power stocks to huge gains.]

OK, so who is the top online operator? It's a company called Bitauto (Nasdaq: BITA). The company issued 10.6 million shares on the Nasdaq exchange for $12 a piece on Wednesday.

Bitauto operates two main sites, bitauto.com and ucar.cn. They provide extensive details, specifications and consumer reviews on new and used cars. There are also content distribution agreements with 63 third-party sites like Tencent, Yahoo China and Tom Online.

As for making money, Bitauto relies on a variety of revenue streams. These include subscriptions from auto dealers, advertising fees and listing fees. There are also high-end digital marketing services and public relations.

And yes, Bitauto has been growing at a torrid rate. For the past nine months, the company posted $44.7 million in revenue, up +53% compared with the past year. While the company generated a $5.1 million operating profit during this period, there was still an overall loss because of the change in value of its convertible bond. Yet this is more of a technical matter, and besides, the IPO proceeds will help provide a more stable base of financing.

Action to Take –> Bitauto definitely has some risk factors. Looking at the prospectus, the company has 41 million shares outstanding at about $12 each. That puts the market cap at $492 million. Assuming the company generates $6 million in operating income this year (which seems reasonable), the forward multiple would be 82. Then again, this is typical for a Chinese IPO.

At the same time, there are signs that the Chinese economy is slowing down. The prime reason is that the government is taking actions to reduce inflation. In other words, the result could be a slowdown in auto sales.

But for investors looking to capitalize on the Chinese auto market, Bitauto is definitely an attractive play. The company should continue to grow at a strong rate and remain the dominant player in the space. And as seen with other Chinese dot-com players like Baidu (Nasdaq: BIDU), the category leaders often continue to bolster their positions over time as well as their valuations. Thus, a +20% to +30% move should be reasonable target for Bitauto's stock price in the next six months.


– Tom Taulli

P.S. — Any analyst can tell you they like a stock. But how many are willing to put their money where their mouth is? StreetAuthority Market Advisor is so confident in Nathan Slaughter's picks that we gave him $100,000 in cash to put into his recommendations. Learn how you can join in and profit along with him.

Tom has been a stock commentator for 15 years. He has written a best-selling book, “Investing in IPOs,” and become a frequent guest on shows like CNBC and CNN. Tom has also appeared in the New York Times, BusinessWeek Online and Forbes.com. Read more…

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

This article originally appeared on StreetAuthority
Author: Tom Taulli
The Chinese IPO Nobody is Talking About

Read more here:
The Chinese IPO Nobody is Talking About

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Debt Delenda Est

November 19th, 2010

The subject is debt; it needs to go away.

Debt was the market’s bête noire, this week and last. In Europe, it snatched up the Irish and carried them off. Then it attacked the Portuguese. Everyone knew the periphery states were going broke. Their cost of borrowing soared. Then, when the search parties reached them, the Irish turned them away. Debt has it usefulness, the Irish figured. They held out until Wednesday, apparently negotiating terms of their own rescue.

In America, municipal debt collapsed by nearly 10% over the last two weeks. It became more and more obvious that state and local governments were headed for default too. California might get a bailout…but California, like Ireland, is a sovereign state. It could refuse. Borrowers worried that Californians and the Irish might prefer to default like honest incompetents rather than submit to the rescuers’ demands.

Debt is underrated. For one thing, it is more reliable than asset values. The crisis of ’07-’09 wiped out about a third of the world’s equity and property wealth. And it disappeared 7 million jobs in America alone. But debt survived intact. In terms of the cash flow needed to support it, debt actually grew larger.

Central planners can make a recession appear to go away. With enough hot money, they might warm up asset prices or soothe the swelling unemployment rate. But debt doesn’t cooperate. Neither monetary policy nor fiscal policy will make it go away. Debt demands honesty. The debtor has to fess up, admitting that he is a fool or a knave. Either he owns up to his mistake and defaults…or he cheats.

“With all due respect, US policy is clueless,” said German Finance Minister Wolfgang Schauble. “It’s not that the Americans haven’t pumped enough liquidity into the market. Now to say let’s pump more into the market is not going to solve their problem.”

The English speakers conveniently misunderstand the debt problem. The authorities worked hard not to see the debt crisis coming. They made their careers and reputations by not understanding it. Thousands of them work for governments and central banks…if they caught on to the problem now, they’d probably have to resign.

They pretend that the problem is a lack of “liquidity.” Or a failure of capitalism. Or that the regulators dropped the ball. It is none of those things. Each of those problems can be “solved.” Short liquidity? The feds can add some; as much as you want. Did capitalism lose its way? No problem again, the authorities will apply more central planning. Not enough regulation? Are you kidding; adding regulation is what they do best.

The real problem is debt. In Ireland, for example, investors, householders and bankers all lost their heads in the bubble era. Your editor bought a house in Ireland in 2006. He knew perfectly well it was overpriced. He had walked the streets of Dublin. He had seen storefronts offering property, not just in Dublin…but in Dubrovnik. He had heard people say that “property never goes down.”

Now his house is worth about half what he paid for it – if he could find a buyer. There is no reason to expect that house to ever recover – at least in real terms – to the level it was 3 years ago. That wealth has disappeared. Along with it went the banks’ collateral and the value of the debt it backed. It is all dead. It is no more. It has ceased to be. It is past tense. But, rather than let the banks’ bondholders take the losses they deserved – in rushed the financial authorities with guarantees and more credit. Ireland’s deficit rose to a staggering 30% of GDP. Its national debt will rise from 100% of GDP to 120%.

Meanwhile, California is moving closer to bankruptcy – and borrowing more too. The state is $25 billion in the hole, with no plausible plan to get out. The Milken Institute says unfunded pension liabilities will rise to $10,000 per capita by 2013 – the equivalent of an extra $40,000 mortgage for every household. Like Ireland, California cannot pay the debts it has incurred. The federal government will offer a bailout…but with strings attached.

And soon, the bailers will be in trouble too. According to The Wall Street Journal, a combination of 15 major national governments will have to borrow a total of more than $10 trillion next year, to finance deficits and repay maturing bonds. That’s 27% of their total economic output. It also is equal to about twice the entire world’s annual savings.

The authorities warn about the risk of “contagion.” They sweat to “calm” the markets. But why bother? Debt of this magnitude cannot be repaid. It has gone bad. At least give it a decent burial.

Bill Bonner
for The Daily Reckoning

Debt Delenda Est 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:
Debt Delenda Est




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.

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