Why Bernanke’s Money Printing Promises Spell Disaster

October 14th, 2010

Today, we’re headed up to the ranch… Which means we’re going to take a few days off from these daily reckonings.

Instead of reckoning with gold, fed policy, stocks and interest rates…we’re going to reckon with things that are easier to understand but harder to actually do anything about. Cattle. Water. Grapes. Capers.

Capers? Yes, apparently, the high, dry valleys are good for growing capers.

“Why bother,” asked a friend in Paris. “Aren’t you supposed to be enjoying that place? You don’t want to work when you go there.”

Au contraire. We like working. Especially on things we know nothing about.

Truth is, we barely knew what capers were. Those little salty things that they put in with fish, olives, pickles. We don’t really know what they do with them. But we’re going to plant some anyway to see how they do…

It helps keep the people up there busy. Otherwise, they have no jobs. We feel the heavy weight of a landowner’s responsibility…to make the farm more than just a place to relax. We have to try to make it pay!

Meanwhile, stocks, commodities, practically everything is slobbering…breathing hard…hot and bothered. Probably capers too. Why? Because everything points to more easy money from the Fed. And everyone knows what easy money does. It causes prices to bubble up. Asset prices, that is. It doesn’t do much for the economy – not when the economy is de-leveraging. But it can really cause havoc in the financial markets.

The Dow went up another 75 points yesterday. Oil is up to $83. Gold is headed to $1,400 – and after that, the moon.

Whee! What fun it is to think about all that new, Fed-created money bubbling into the markets…pushing up everything in its path…

Ben Bernanke gave the Japanese some advice about 10 years ago. He said that if their economy was stuck in the doldrums it was their own damned fault. He didn’t put it that way. He said their problems were largely “self-induced.” Which is a polite way of saying it was their owned damned fault.

He made it clear that he wouldn’t let that happen to him. He’d use the tools at his disposal to light a fire under the economy. Anyway, that’s what he told them.

And now, here he is. In Tokyo. Well, not literally in Tokyo. You know what we mean. He’s faced with almost the same set of problems that faced the Japanese – a sluggish, de-leveraging, funky kind of economy.

“Across the US, long recovery looks like recession,” says The New York Times.

So far, Bernanke has done about the same things they Japanese did. And so far, he’s gotten about the same results.

But investors are betting that he won’t stop there. They’re betting that they can take him at his word…that he’ll pull the trigger on enough quantitative easing to light up the whole world. Or blow it up.

Yes, the markets seem to be jumping for joy at the prospect. Ben Bernanke is supposed to announce a program of easy money…not just a little easy money…but a lot of it. Analysts are talking about the Fed buying between $100 billion and $1.5 trillion in bonds.

Of course, investors have probably already priced that kind of QE into the price structure. So, what are they gonna do if Bernanke does the expected thing?

Ben Bernanke’s momma didn’t raise no moron. He knows the whole world is watching. If his gesture falls short of what investors expect, they’ll sell. And if he doesn’t do something dramatic, they’ll accuse him of being a coward…and they’ll sell too. Only if he surpasses their expectations will asset prices really take off. And, of course, the dollar will fall. Which is what he’s hoping for.

It will be a disaster for the economy. Printing press money always is. But it should be fun to watch.

Bill Bonner
for The Daily Reckoning

Why Bernanke’s Money Printing Promises Spell Disaster 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:
Why Bernanke’s Money Printing Promises Spell Disaster




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

Dollar Negativity Soars on Pending QE2

October 14th, 2010

The negativity toward the FOMC’s pending quantitative easing (QE) and the dollar just continues to mount… I’ll tell you this now, so you can listen to me later… This negativity is stronger right now than at any time in the past 8 years of this weak dollar trend… The euro (EUR) traded over 1.41 overnight, the Canadian dollar/loonie (CAD) traded parity to the US dollar, the Chinese renminbi (CNY) posted another 5-year high fixing level, and the Monetary Authority of Singapore gave the green light to traders to continue to move the Sing dollar (SGD) stronger!

It’s all about the QE folks… QE 24/7, all day, all night… So, here’s the problem as I see it with these strong moves all at once… It’s probably going to be a “buy the rumor, sell the fact” with all the run-up in currencies and precious metals coming before the FOMC implements QE, and then comes the profit taking once the QE gets implemented.

I could be wrong there, but that’s how I see it… But, it doesn’t mean that the dollar weakness will be over… It will just mean that it was time to take a pause for the cause… The dollar weakness will continue on and on, like the Energizer Bunny, because… The dollar has no yield to back it up… It has deficit financing problems out the wazoo… And it’s the only way the government can pay back the debts they’ve built up!

OK… So… I was doing some reading last night, and saw that the Monetary Authority of Singapore (MAS) issued their bi-annual report on the currency last night. This from Bloomberg:

Singapore will seek a faster appreciation of its currency to curb inflation even as the local economy grows at a slower and more sustainable pace, its central bank said.

The island will steepen and widen the band on the local dollar as the pace of consumer-price gains accelerates to 4% by the end of the year from 3.3% in August, the Monetary Authority of Singapore said in a statement following a semi-annual policy review. The center of the policy band remains unchanged, the bank said.

Singapore’s economy did “moderate” in the third quarter to 10.3%, but the forecast for the year 2010 was raised to 12.3%… So, it’s all good in Singapore these days… And to think that it was our “highlighted currency” in the Review & Focus this month!

And the precious metals… WOW! As I told you yesterday, dollar weakness is the main driver of gold and silver these days, and with all this dollar weakness, you can bet your sweet bippie that gold and silver are pushing higher… And it’s not just against the dollar… Gold is so strong that it’s been gaining on the euro too! But, for our purposes, we only really care about gold versus the dollar… And to that… Gold is $1,380! And silver is $24.50… And those levels were higher briefly overnight, but the precious metals and currencies have taken a breather this morning… Let’s see what the NY boys and girls have up their sleeves when they arrive this morning.

As I said above, China allowed the second largest fixing amount since July 2005, when they dropped the peg to the dollar and allowed a 2% overnight appreciation… On Tuesday night they allowed almost 1% appreciation, and last night they allowed over 1.3% appreciation… The speculators are going wild over these moves, and driving the price of the forwards in renminbi to unbelievable levels!

For those of you new to class, the renminbi is traded as an NDF (non-deliverable forward), which means there’s no delivery of the currency, and it can only be settled in dollars… The Chinese governmen4t “fixes” the currency level supposedly to a basket of currencies. So the markets can’t really “move spot prices of renminbi”… But, they can mess with the forward prices… So, they drive the forward prices higher on expectations that the Chinese will keep up this appreciation pace, or… Allow the renminbi to float…

OK… Hope I didn’t muddy that up for you!

Today, the US data cupboard has the monthly visit with the trade deficit on the docket… With oil prices rising recently, I would expect the trade deficit to have widened in August… We’ll also see the color of the latest PPI (wholesale inflation), and with it being a Tub Thumpin’ Thursday, we’ll also get the Weekly Initial Jobless Claims, which really remain a bug-a-boo for the economy, given that close to 450,000 jobless claims are filed each and every week!

Then there was this from Reuters

The US Treasury Department might have created a conflict of interest and compromised its oversight duties by signing big contracts with Fannie Mae and Freddie Mac, the Congressional Oversight Panel said. “Treasury may be less likely to expedite meaningful reforms of Fannie Mae and Freddie Mac when it has employed them for combined arrangements of $240.5 million and when these firms agreed to provide their services at cost, receiving no profit from the deals,” according to a report from the panel.

Wouldn’t you really like to know the truth about what went on at the US Treasury before, during and after the financial meltdown? I know I would!

To recap… The currencies and precious metals are on the rampage against the dollar this morning, as the negativity toward the FOMC’s pending QE just weighs very heavily on the dollar. The Monetary Authority of Singapore gave the green light to traders to take the Sing dollar higher to fight inflation. (At least these guys understand the importance a strong dollar plays.) And China allowed the second highest overnight appreciation of the renminbi since the dollar peg was dropped in July of 2005!

Chuck Butler
for The Daily Reckoning

Dollar Negativity Soars on Pending QE2 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:
Dollar Negativity Soars on Pending QE2




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

Dollar Negativity Soars on Pending QE2

October 14th, 2010

The negativity toward the FOMC’s pending quantitative easing (QE) and the dollar just continues to mount… I’ll tell you this now, so you can listen to me later… This negativity is stronger right now than at any time in the past 8 years of this weak dollar trend… The euro (EUR) traded over 1.41 overnight, the Canadian dollar/loonie (CAD) traded parity to the US dollar, the Chinese renminbi (CNY) posted another 5-year high fixing level, and the Monetary Authority of Singapore gave the green light to traders to continue to move the Sing dollar (SGD) stronger!

It’s all about the QE folks… QE 24/7, all day, all night… So, here’s the problem as I see it with these strong moves all at once… It’s probably going to be a “buy the rumor, sell the fact” with all the run-up in currencies and precious metals coming before the FOMC implements QE, and then comes the profit taking once the QE gets implemented.

I could be wrong there, but that’s how I see it… But, it doesn’t mean that the dollar weakness will be over… It will just mean that it was time to take a pause for the cause… The dollar weakness will continue on and on, like the Energizer Bunny, because… The dollar has no yield to back it up… It has deficit financing problems out the wazoo… And it’s the only way the government can pay back the debts they’ve built up!

OK… So… I was doing some reading last night, and saw that the Monetary Authority of Singapore (MAS) issued their bi-annual report on the currency last night. This from Bloomberg:

Singapore will seek a faster appreciation of its currency to curb inflation even as the local economy grows at a slower and more sustainable pace, its central bank said.

The island will steepen and widen the band on the local dollar as the pace of consumer-price gains accelerates to 4% by the end of the year from 3.3% in August, the Monetary Authority of Singapore said in a statement following a semi-annual policy review. The center of the policy band remains unchanged, the bank said.

Singapore’s economy did “moderate” in the third quarter to 10.3%, but the forecast for the year 2010 was raised to 12.3%… So, it’s all good in Singapore these days… And to think that it was our “highlighted currency” in the Review & Focus this month!

And the precious metals… WOW! As I told you yesterday, dollar weakness is the main driver of gold and silver these days, and with all this dollar weakness, you can bet your sweet bippie that gold and silver are pushing higher… And it’s not just against the dollar… Gold is so strong that it’s been gaining on the euro too! But, for our purposes, we only really care about gold versus the dollar… And to that… Gold is $1,380! And silver is $24.50… And those levels were higher briefly overnight, but the precious metals and currencies have taken a breather this morning… Let’s see what the NY boys and girls have up their sleeves when they arrive this morning.

As I said above, China allowed the second largest fixing amount since July 2005, when they dropped the peg to the dollar and allowed a 2% overnight appreciation… On Tuesday night they allowed almost 1% appreciation, and last night they allowed over 1.3% appreciation… The speculators are going wild over these moves, and driving the price of the forwards in renminbi to unbelievable levels!

For those of you new to class, the renminbi is traded as an NDF (non-deliverable forward), which means there’s no delivery of the currency, and it can only be settled in dollars… The Chinese governmen4t “fixes” the currency level supposedly to a basket of currencies. So the markets can’t really “move spot prices of renminbi”… But, they can mess with the forward prices… So, they drive the forward prices higher on expectations that the Chinese will keep up this appreciation pace, or… Allow the renminbi to float…

OK… Hope I didn’t muddy that up for you!

Today, the US data cupboard has the monthly visit with the trade deficit on the docket… With oil prices rising recently, I would expect the trade deficit to have widened in August… We’ll also see the color of the latest PPI (wholesale inflation), and with it being a Tub Thumpin’ Thursday, we’ll also get the Weekly Initial Jobless Claims, which really remain a bug-a-boo for the economy, given that close to 450,000 jobless claims are filed each and every week!

Then there was this from Reuters

The US Treasury Department might have created a conflict of interest and compromised its oversight duties by signing big contracts with Fannie Mae and Freddie Mac, the Congressional Oversight Panel said. “Treasury may be less likely to expedite meaningful reforms of Fannie Mae and Freddie Mac when it has employed them for combined arrangements of $240.5 million and when these firms agreed to provide their services at cost, receiving no profit from the deals,” according to a report from the panel.

Wouldn’t you really like to know the truth about what went on at the US Treasury before, during and after the financial meltdown? I know I would!

To recap… The currencies and precious metals are on the rampage against the dollar this morning, as the negativity toward the FOMC’s pending QE just weighs very heavily on the dollar. The Monetary Authority of Singapore gave the green light to traders to take the Sing dollar higher to fight inflation. (At least these guys understand the importance a strong dollar plays.) And China allowed the second highest overnight appreciation of the renminbi since the dollar peg was dropped in July of 2005!

Chuck Butler
for The Daily Reckoning

Dollar Negativity Soars on Pending QE2 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:
Dollar Negativity Soars on Pending QE2




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

4 Signs That the Rally Could End

October 14th, 2010

4 Signs That the Rally Could End

As we headed into Labor Day, stocks could muster little enthusiasm. A creeping sense that the economy was slowing led to fresh concerns of the dreaded “double-dip” recession.

The Federal Reserve was also seeing signs of a slowdown. As a remedy, The Fed began to speak of a tool in its arsenal to help jolt the economy to life. That tool, known as Quantitative Easing (QE), changed the entire perception of the stock market. Investors came to see that the Fed's move had a real chance of getting the economic ball rolling, which was enough to fuel a heady rally in September that has continued into October. The Dow Jones Industrial Average now sits near its 52-week high.

But it's fair to wonder if this steady gain has already accounted for benefits that may be derived from the Fed's much-discussed QE plans. And it's also fair to mistrust these kinds of rallies. The Dow surged more than +10% last February and March only to give back all those gains — and more — in the next few months. Here are four signs to watch that may signal a time for profit-taking.

1. The reaction to news. Earnings season is getting going and investors need to clearly monitor how stocks trade on strong or weak results. Alcoa (NYSE: AA) has tacked on steady gains since reporting solid results last week. But Intel's (Nasdaq: INTC) solid quarterly report is being met with a shrug on Wednesday, and investors are pushing the stock into the red after a positive open. That means investors were seeing the cup as half full for Alcoa, but half empty for Intel a week later. If shares prices fail to rally in the face of good news, that's a sign investors are looking for excuses to take profits. You'll have to track earnings reactions almost every day this month — as sentiment can turn at any minute.

2. Trading volume slumps. If a rally is accompanied by rising stock market volume, then investors are becoming increasingly bullish. Yet success begets success, and markets can still power higher even as enthusiasm starts to wane. It pays to watch the S&P 500's daily trading volume for signs of fatigue. Daily trading volume appears to have peaked at around 4.5 billion shares in mid-September, and after a lull, spiked back up to 4.2 billion shares at the end of the month. We haven't seen those levels since, and if daily trading volume slumps back to the 3.5 billion mark as we wind through earnings season, that would be a bearish sign.

3. Fund inflow. The Investment Company Institute (ICI) tracks the amount of money flowing into equity mutual funds on a weekly basis. And since the value of stocks is simply a function of supply and demand, then it figures that the amount of money going into funds affects the direction of the market. A mutual fund manager can opt to keep some of that money in the form of cash, but for the most part, funds need to be put to work to keep up with benchmarks.

In that context, the ICI's recent readings are awfully curious.

Throughout September, individual investors had been taking money out equity funds, which historically speaking, has pushed averages down. This is a clear negative for the market, and may still come home to roost. Then again, I recently opined that individual investors would be heartened by the recent rally and re-enter the market in force. [See "10 Bold Predictions for the Next 12 Months"]

Let's hope that individual investors don't pour in just as the market peters out. Individual investors have a lousy track record in terms of market timing, and they've already been burned too many times.

4. Reaction to “Buy on the rumor sell on the news.” As noted above, the Fed's QE program has not yet gotten underway. Some suspect that recent gains already anticipate any benefits and predict that investors will head to the exits once the QE program is actually put into action. If the market fails to rally on such an announcement, that's a sure sign that this rally is out of breath and the next move may be to take profits or even go short.

Action to Take –> This is an awfully tricky time. The market has staged an impressive rally, volatility-inducing earnings season is upon us, economic data points still reflect sluggishness, and last-minute mid-term election campaigning could still throw a monkey wrench into the tenor of the market's mood. So it's no time for complacency, unless you view your investments as long-term holdings. Be prepared to lock in gains if these warning signs emerge.


– 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
4 Signs That the Rally Could End

Read more here:
4 Signs That the Rally Could End

Mutual Fund, Uncategorized

Buy This Shipper Before it Doubles

October 14th, 2010

Buy This Shipper Before it Doubles

One of the most interesting indicators used in the financial markets is the Baltic Dry Index (BDI). The index, created and maintained by the London-based Baltic Exchange, measures the price of shipping raw materials such as iron ore, coal and grains around the world.

Like in any other vibrant market, the price of shipping is set by supply and demand. In this case, it is the supply and demand of shipping vessels — with an abundance of such vessels leading to falling prices and a dearth of vessels leading to rising prices.

While the BDI directly measures the supply and demand of shipping vessels, some believe that it also indirectly measures the demand for raw materials. And although the Baltic Dry Index sounds like a promising economic indicator in theory, the reality has been much different, with the index acting like a coincident indicator in the best of times, while offering false indications at other times. (This is an important lesson for investors: always do your own due diligence; never take something as a given when it comes to the markets.)

But even though the BDI is a poor leading economic indicator, it is still good at its primary purpose, which is to measure the price of shipping raw materials around the globe. In that respect, the index has presented a very volatile portrait of shipping prices, with a peak level of 11,800 in 2008, a trough level of 660 in 2009, and current levels near 2,700. As a matter of fact, shipping prices have displayed a pattern quite similar to the prices of raw materials themselves — which makes sense. After all, shipping itself is in many ways a commodity business.

That's not necessarily a bad thing, as the picture for commodities remains bright. Aside from the one gigantic hiccup from the Great Recession experienced just a little over a year ago, the bigger picture remains one of rapid global economic growth spurred by the industrialization of China, India, Brazil and other emerging markets. As billions of people within these and other countries join the modern economy, the demand for raw materials will soar. In turn, those raw materials need to be shipped across the globe, and that’s where the shipping industry comes in.

The good news for investors is that shares of many companies in the dry bulk shipping industry are selling at extremely low levels. Take DryShips (NYSE: DRYS), for instance. Shares of the company were trading as high as $131 during the market peak of late 2007. Today, those same shares could be had at a -95% discount to those levels. And while there is nothing unusual about a stock being significantly down from its all-time highs — the S&P 500 is down -25% from its peak — the decline in shipping stocks has been especially brutal, in large part due to the enormous amount of debt that the industry took on during the boom.

As one can imagine, being overleveraged during one of the worst credit crises in history is a recipe for a disaster. DryShips was actually found to be in violation of several of its loan covenants — a situation that could have led to bankruptcy. That worst-case scenario was averted, however, when the company reached covenant waiver agreements with lenders.

Today DryShips finds itself still burdened with a massive debt load, but the risk of bankruptcy has diminished now that the worst of the credit crisis has passed. The company’s net debt stands at nearly $1.9 billion, or $7.28 per share — a substantial figure, considering the stock's is fluctuating between $4 and $5.

But that isn't the only thing interesting about DryShips' stock price. The consensus expectation for earnings in 2011 is $1.02 per share, while the expectation for 2012 is $1.29. Using those figures, we arrive at a price-to-earnings ratio (P/E) of 4.5 and 3.6 for 2011 and 2012 respectively. By giving Dryships’ stock such a low valuation, the market is acknowledging the risks associated with the company’s massive debt load — but it is also giving investors a chance to scoop up the shares for cheap.

Another risk the market may be looking at is the company’s increasing reliance on its relatively new deepwater drilling segment, which following the oil spill in the Gulf of Mexico, has acted as drag on shares. But the Obama administration announced Tuesday that it will lift the moratorium on drilling in the Gulf of Mexico, and shares have spiked on the news. Tougher regulations are likely in the offing, but if one believes that offshore drilling still has a future, the current uncertainty presents an opportunity. Incidentally, DryShips has long been planning an IPO for its drilling segment, with the only obstacle being the poor market environment. An announcement by the company to go ahead with such a spinoff may end up being a significant catalyst for the shares. [Read more about Catalyst Investing Secrets]

Action to Take –> Risk-tolerant investors should consider buying DryShips to bolster their portfolio. It's the proverbial high-risk, high-reward investment. While the upside is significant, there is also the potential for significant losses as well. A pronounced downturn in the economy, the shipping industry, or the offshore drilling industry could make it difficult for the company to service its debt, and thus continue as a going concern.

Commodities, Uncategorized

How to Capture 6.5% "Retiree" Yields

October 14th, 2010

How to Capture 6.5%

Right now a little fewer than 40 million Americans — that's almost 15% of the country — has reached retirement age. But that's the tip of the iceberg. Every day, almost 8,000 Americans turn 65. In just a decade, seniors in the United States will number 55 million. That's a +39% increase in 10 years.

Without a doubt, that means more healthcare spending. At age 65, the average senior spends around $11,000 a year on healthcare — by age 85, that spending more than doubles to nearly $26,000.

And keep in mind, we're also living longer — much longer. The 85 and older age group is the fastest-growing segment of the population in the U.S. Their numbers will double by 2030.

If that growth sounds like an opportunity, you're right. There's a group of stocks paying out heady yields thanks to the boom in the retirement age population: healthcare real estate investment trusts (REITs).

More spending on healthcare is great news for healthcare real estate. It means more demand for hospitals, assisted-living communities and medical offices — and healthcare REITs own all these types of property. They simply take in rent from tenants in the medical field and spit out cash to investors.

No investment is recession-proof, but healthcare REITs come close — spending on health care rose even during the recession. And while healthcare reform affects other medical businesses, it shouldn't have much impact these REITs. That's because the REITs don't operate healthcare businesses. Instead, they simply act as landlords.

But what about stability? After all, real estate has been a rough place to be in the past few years. There's good news on that front, too.

Lease terms of 12 to 15 years are common and many leases are on a “triple-net” basis. Triple net is an industry term meaning the tenant pays operating costs, including property taxes, insurance and maintenance costs. The long-term, low-expense nature of the leases means high and stable cash flow for the REITs. [Read about my colleague Nathan Slaughter's favorite REIT play.]

As a result, some healthcare REITs were even able to boost dividends during the recession. Omega Healthcare Investors (NYSE: OHI), for example, yields about 6.5% and has grown its dividend +38% since the start of 2007.

As with any high-yield play, it's important to make sure the company can afford the distributions it pays. For REITs, it's best to compare funds from operations (FFO) to distributions paid. Funds from operations provide a more accurate look at how much a REIT is earning, as net income is hit by non-cash items like depreciation.

Action to Take –> So let's review. Healthcare REITS will benefit from the soaring number of aged people… they sign long-term leases… and they pay minimal amounts when it comes to taxes, insurance and maintenance. What's not to like?

But there's one more bullish factor.

I'm sure you've heard about the potential for a rise in dividend taxes. I actually think rising taxes would be good for healthcare REITs. Currently, like all REITs, healthcare REITs don't qualify for the reduced dividend tax rate. If dividend taxes rise, then healthcare REITs won't be hurt. In fact, they may look more attractive to investors, which could fuel share price gains. [How to Hide From the Dividend Tax Increase]

That does bring up one negative for these REITs, however. Dividends are taxed as ordinary income, so it's best to hold these securities in a tax-deferred account.

Remember the golden rule of investing in any REIT: property type is key. If you're looking for properties offering stability with increasing demand for decades to come, it doesn't get much better than high-yield healthcare REITs.


– Carla Pasternak

P.S. — If you're interested in healthcare REITs, you'll love my October issue of High-Yield Investing. There, I nailed down two of my favorite plays in the sector. One pays nearly $3 per share each year.

Carla Pasternak

Uncategorized

Think Twice About Owning This Well-Known Stock

October 14th, 2010

Think Twice About Owning This Well-Known Stock

You have to hand it to the executives at Anheuser-Busch InBev (NYSE: BUD). They struggled to raise the $52 billion necessary to buy out the Busch family and all other shareholders and were pilloried in the press for vastly overpaying for the venerable brewer.

Management made lofty promises in terms of cost-cutting synergies, and they have surely delivered. Shares debuted in the summer of 2009 below $40 and have steadily marched upward to a recent $64. That's a solid +60% gain in 15 months for a company that was seen as a no-growth play.

Recent quarterly results show that AB Inbev still can move the top-line. The volume of beer sold rose +2.1% in the June quarter when compared to a year ago, which management notes came from heavy beer consumption around World Cup soccer events. And the company is benefiting from still-rising beer consumption in places like Brazil, China and Russia. But it is also saddled with negative growth in the all-important European and American markets. The stock's rise seems to ignore the fact that the U.S. market in particular, which still accounts for more than 40% of company EBITDA, is unlikely to post a strong rebound even when the economy turns up.

AB Inbev's new management has focused so heavily on cost-cutting and emerging market sales opportunities that they have seemingly ignored the very strengths that delivered industry dominance in the United States. The company has slashed more than 1,500 jobs, many of them in sales and marketing, and is ceding industry buzz to the rising tide of craft brewers that continue to build U.S. market share. ["These Bad Boy Investments are Perfect for This Market"] As a result, U.S. beer volumes slumped -4.8% in the first half of 2010, the worst performance of any major brewer. This business is all about marketing spending (in the absence of beers having flavor) and AB Inbev is reaping what it has sown.

Analysts at Stifel Nicolaus recently raised their rating on AB Inbev's shares, citing an expectation of rising U.S. beer volume. That sentiment has been echoed by others, which explains why shares have been on such a tear lately. But the rising volume needs to be understood in the context of easy comparisons to a year ago, when volume started to fall. Few expect AB Inbev to become a real growth story in the U.S. any time soon.

As noted earlier, management has done an impressive job on the cost-cutting front. Those efforts have saved several billion dollars, though they are likely to be completed within the next 12-18 months. After that the company will need to generate profit growth the old-fashioned way: through sales leverage. And without the U.S. and Europe pitching in, this will never be a high-growth story. Lastly, cost-cutting efforts may be partially blunted by rising wheat and barley prices, which are major expense components for brewers.

Action to Take –> On balance, AB Inbev has some real positives and negatives. That alone should make you nervous about holding onto this stock if you own it.

In 2010, cost cuts can be considered to be the biggest positive. But those are short-term gains — investors are bidding up shares as if AB Inbev was a high-growth stock. Profit growth is likely to slow sharply after 2011, as this is a mature player in a mature industry. Another key negative: the company still carries more than $40 billion in long-term debt and will need to generate massive amounts of cash flow to whittle that down. Further economic weakness or market share losses in the U.S. would imperil that plan.

After a recent surge, shares now trade for about 20 times projected 2010 profits and about 17 times projected 2011 profits. Shares deserve to trade at a notably lower forward multiple. Assuming investors start to look past the near-term profit drivers and eventually determine that 12 to 14 times forward earnings is a more suitable multiple, then shares are likely to fall from a recent $64 back to the low $50s or into the $40s, making them a compelling short candidate with only moderate risk.


– 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
Think Twice About Owning This Well-Known Stock

Read more here:
Think Twice About Owning This Well-Known Stock

Uncategorized

Diversify Out Of U.S. Dollars With ETFs

October 14th, 2010

Ron Rowland

Do you pay attention to the currency markets? You’d better, if you want to survive and thrive in these crazy times.

I have to tell you I am NOT a currency expert. For deeper analysis I refer you to my Money and Markets colleague Bryan Rich. I do, however, know a trend when I see one — and right now the trend in the U.S. dollar is down against every major currency.

The U.S. Dollar Index measures the greenback’s change against a basket of other currencies. From its most recent peak on June 7, 2010 through October 12, the index fell 12.8 percent. Wow!

Investors have many ways to play the foreign exchange markets, including futures contracts. But I think exchange traded funds (ETFs) are ideal for most people. So today I’ll tell you about some that are capturing the dollar’s downturn.

First, let’s look at the big picture …

Obama and Bernanke
Want a Cheaper Dollar!

If you’re a logical thinker, you might wonder what possible advantage could there be in wanting your own currency to lose value. Financial markets aren’t always logical. So let me give you a quick explanation on how foreign exchange rates work.

The key is trade. All international transactions have to be settled somehow. For instance, when you buy a Japanese car your dollars somehow must find their way back to Japan and converted into yen.

The U.S. imports more than it exports.
The U.S. imports more than it exports.

This wouldn’t be a problem if nations always imported and exported the same amounts. They don’t. We here in the United States buy more stuff from overseas than they buy from us. This is good in some ways, but it’s also a political problem. Why? The resulting domestic unemployment makes people want to vote against whoever is in power at the time.

Consequently, presidents from both parties have long wanted to cheapen the dollar. Ditto for the economists those same presidents appoint to the Federal Reserve Board. The reason for this is because a cheaper dollar makes U.S. goods more affordable to foreign buyers and increases our exports, thereby creating jobs and keeping voters happy.

Neither the president nor the Fed determines how much a dollar is worth. They can, however, do things that make a short-term difference. That’s what is happening right now:

  • Congress and the Obama Administration are racking up huge deficit spending, while …
  • Ben Bernanke’s Federal Reserve is planning a second round of “quantitative easing” to create more dollars out of thin air.

Both of these policies are negative for the greenback — and my guess is they aren’t going to change any time soon.

The Fed is driving the dollar down.
The Fed is driving the dollar down.

Meanwhile, other governments and central banks — in China, Japan, Europe and elsewhere — are doing the same things! To protect their home economies, they’re trying to devalue their own currencies against the dollar.

Who is most likely to get their way? For now, the U.S. is in the driver’s seat. Bottom line: The greenback could have a lot farther to go on the downside.

Ride the Dollar Down
With Currency ETFs

The good news is you don’t have to just sit back and take the punishment as your dollars lose purchasing power. You can defend yourself — and maybe even turn a profit — by using ETFs to bet on the falling dollar.

More than thirty currency ETFs are now available to individual U.S. investors. With these you can implement strategies that were once available only to large, sophisticated institutions.

Of course, you have to know which ETFs to buy … you can’t just throw darts and expect to survive in today’s markets. But to give you an idea of what’s available here are a few ETFs that seem to have found some mojo lately:

  • ProShares Ultra Euro (ULE) is a leveraged fund that tries to deliver twice the change in the dollar/euro exchange rate. It has been flying the last few months.
  • CurrencyShares Swiss Franc (FXF), CurrencyShares Swedish Krona (FXS), and CurrencyShares Australian Dollar (FXA) each focus on a single foreign currency, and all three have posted double-digit returns since June. So has WisdomTree Dreyfus South African Rand (SZR).
  • PowerShares DB U.S. Dollar Bear (UDN) is a basket of foreign currencies in an ETF that tracks the inverse of U.S. Dollar Index I mentioned above. UDN is a less aggressive bet against the dollar because it reflects the performance of several different currencies instead of just one. This diversification is a good idea if you aren’t sure exactly which currencies will perform best against the dollar.

And here are the returns for the above from June 7, 2010 through Oct 12:

chart Diversify Out Of U.S. Dollars With ETFs

Take care if you buy any of these ETFs. They can be volatile from day to day, despite the dollar’s long-term trend. Check the trading volume and use a limit order.

Best wishes,

Ron

Related posts:

  1. Greece, Europe and ETFs
  2. Five Tips for Trading ETFs
  3. ETFs for the Gold Bull Market

Read more here:
Diversify Out Of U.S. Dollars With ETFs

Commodities, ETF, Mutual Fund, Uncategorized

“NAV-based trading essential for Active ETFs” – Gary Gastineau

October 14th, 2010

ActiveETFs | InFocus spoke with Gary Gastineau, who is the principal of ETF Consultants which provides specialized ETF consulting services. Gary is a recognized expert on ETFs and also author of a book titled The Exchange-Traded Funds Manual, (a new edition of the book was published in July of this year). He has also authored other books and written papers on various topics concerning ETFs. Gary chats with us about problems resulting from transparency in Active ETFs, how NAV-based trading will significantly improve the effectiveness of Active ETFs and why he doesn’t see mutual fund conversions into Active ETFs until a better model for actively managed ETFs is developed.

=========================

Shishir Nigam, ActiveETFs | InFocus: What are some of the challenges you see which are confronting actively-managed ETFs?

Gary Gastineau, ETF Consultants:  There are a number of problems; some of them can be resolved fairly easily and some of them are going to be difficult. The biggest problem is that the current actively managed ETFs do not trade in any quantity.  That can be a real problem and it is due to the fact that the degree of transparency in these portfolios is slightly less than the transparency of the index funds. The press has gotten the investing public and advisors overly sensitive to the importance of transparency. As a consequence, no one is particularly comfortable with these funds. Because they don’t trade very much and the liquidity is spread throughout the day, the spreads are very wide.

You had a very interesting piece that you put out today, showing the trading spreads on the actively-managed ETFs. I would say that I thought the spread that you used as your base case, which was a full percentage point from bid to offer was a spread that no ETF user will tolerate. You’re not going to find very many people who will sign on with a product that trades that way. I think the major problem is that there is liquidity at a reasonable level in these funds, but it’s not liquidity that can be spread out through the trading day, if you’re trying to trade at intraday prices. One of the things that’s going to solve this problem is the introduction of NAV-based trading.

Shishir: Do you believe that the daily transparency required by Active ETFs has deterred investors as well as ETF manufacturers from taking advantage of these products?

Gary:  I think any investor who understands how portfolios are managed and any manager of portfolios who understands what he’s doing, is going to be very reluctant to have only one day to trade in the portfolio before the change is disclosed. That model can work if you have a portfolio that consists entirely of large-cap stocks and if the size of the portfolio is somehow constrained; that is, if the fund cannot get very large. If you’re trading in large-cap stocks and you have a portfolio that’s much more than a billion dollars, there are going to be occasions when you’re not going to be able to complete the trades you want to make in a single day. Now, if you get into mid-cap and small-cap stocks, or if you get into other kinds of securities, particularly bonds which have their own special problems; if you’re dealing with this kind of situation you can have a lot of obstacles to getting the portfolio management job done because some of your trading is going to be done in a fishbowl where everyone can see. There will be all kinds of people trying to front-run you, and take advantage of the trading that you’re committed to doing. That’s the problem that benchmark index ETFs have today with the transparency they face, in terms of their index composition changes.

Shishir: You’ve written extensively about “NAV-based trading” as something that could help actively-managed ETFs. Could you briefly explain, in layman terms if possible, what “NAV-based trading” means?

Gary:  Ok, the basic idea is that trading will take place throughout the trading day, around a proxy price. The proxy price will represent the net asset value that will be calculated at 4pm today. That calculation will be the center-point of the trading. So people who are trading any time during the day will trade relative to this proxy. Let’s say the proxy is 100.00. If you have an execution that is at 100.01, that will be at net asset value (NAV) plus a penny. If the trade is executed at 99.99, it will be net asset value minus a penny. In other words, the 100 is not a dollar figure and not a percentage figure, it’s simply the mid-point around which you’re trading and each 1/100th of a point is a penny, regardless of what the price of the ETF is. Once the NAV is calculated, there’ll be a calculation of what the transaction was in a particular case. Let’s say the NAV is $20, the execution price on a trade at 100.01 will be $20.01 and so forth. I can’t guess what the regulatory process will be but sometime, probably early next year, we’ll probably see net asset value based trading introduced in the U.S.

Shishir: What kind of instruments will we see NAV-based trading introduced for?

Gary:  I think it will be most of the more popular ETFs. It would include equity ETFs, hopefully both domestic and foreign. It will include sovereign debt and investment-grade corporate debt. And it will include exchange-traded notes and grantor trusts that are based on easily discernible commodity prices or commodity future prices or something of that nature. There will be a few things that will not be introduced right away, but eventually I would think that most ETFs will trade this way. I’m not suggesting that for something like the Spider (SPY), that this is going to replace intraday trading. But for something like the actively-managed ETFs that you are looking at today, it should concentrate their liquidity around a price and it would bring down the spreads very sharply.

Shishir: Aside from bringing in spreads, how else would NAV-based trading be beneficial to actively-managed ETFs?

Gary:  Well, for one thing, the reason we developed this is that the SEC, for very understandable reasons, is reluctant to permit a non-transparent fund to trade at an intraday price. If there is no information on the composition of the portfolio out there – there will be no information on intraday values. If you were to give out intraday values on a portfolio that has a 100 stocks in it (that’s a little more than the average number of positions that the typical actively-managed fund has) every 15 seconds, in fairly short order a lot of people would figure out exactly what is going on in that portfolio almost hour by hour. That simply doesn’t work. There have been a number of proposals made to deal with the situation; but  the best approach is to step back and think about where ETFs came from and why they trade the way they do today.

ETFs were developed to provide something to trade on the floors of the Toronto and American Stock Exchanges. They were traded and they were popular and they were successful because they provided exposure to a securities basket product that tracked some of the popular market indexes. In each case, there were a lot of other products like futures contracts and options and today you would add swaps, that were also linked to the index. You have kind of an “arbitrage complex”. In a product like this, you can get very tight spreads and it’s no accident that, for example, the SPY which is the oldest and largest of these products, will trade at a spread of a penny and in many parts of the day you’ll have locked and crossed markets because volume is so high. Intraday trading was the natural way to trade these funds as long as they were index funds. The public liked it, the exchanges liked it and the volume took off. I don’t have to tell you about the volume for ETF shares. They have been an enormous product for the exchanges. While people were developing this great index trading product, they also happened to create – and I think the regulators get a certain amount of credit for this – a product that was a much better vehicle for fund investors, whether they’re actively-managed funds or index funds. ETFs provided a much higher degree of shareholder protection from the cost of flow from investors going in and out of the fund. The person who buys a share in an ETF pays the cost of his entry and eventually his exit from the fund. Now, the creation-redemption process with the authorized participant and the in-kind creation/redemption – that cost is borne initially by the authorized participant. But the authorized participant counts on recovering his costs in the secondary market when the shares are bought and sold by investors who are going to hold them for a period of time. That cost is not huge, it’s not even very large in most of these ETFs, although in some of the ones you were looking at in your publication today, it was pretty high. In most of the larger actively-traded funds, the trading cost is really very modest. But if you can protect investors from the cost of everybody else’s trading, what you have is a situation where the product that was designed to be traded is a much better product to hold. A trader, if you let him, would much rather trade an open-end mutual fund because the open-end mutual fund provides him with free liquidity at the 4pm net asset value. Focus back in 1992 and ‘93, when these were introduced in Toronto and on the AMEX and the emphasis was on getting something to trade on the floor. Today’s focus is on getting the best investment product. Sure you can trade it throughout the day, but why focus on intraday values. Why not focus on the net asset value which is a way of concentrating the liquidity throughout the day on a single value.

There are a lot of ways of dealing with the fact that you have to buy and sell whole shares on the market today. There will be an infrastructure developed that will permit people to buy and sell shares of ETFs very much like they trade mutual fund shares. An advisor won’t have to worry about whether he’s a good trader or not, he’ll be able to go to a service provider and he’ll be able to get an execution in dollars or in whole and fractional shares of ETFs. The ETFs on the exchanges will still trade in whole shares, they’ll clear and settle through DTCC in full shares, but you’ll be able to buy and sell fractional shares and you’ll be able to buy and sell dollar amounts.

Shishir: You also wrote a paper on converting actively-managed mutual funds into ETFs. We have already seen a couple of firms announce plans for such conversions into Active ETFs. Do you think this could become a primary avenue through which mutual fund firms enter the Active ETF space?

Gary:   I think I wrote a couple of papers on that. Over the past few years I have changed my mind several times, so I’m not even sure which paper you’re looking at. The way I see it now is that I’m not sure that I would be particularly interested in a mutual fund that was in existence today that decided to convert from a mutual fund structure into an actively-managed ETF given the “1-day to trade” rule that’s in effect at this point. Down the road, you’re going to have a much different structure. There’s a limit to how much I can talk about that, but I’ll give you a general idea. Ultimately, you’ll be able to trade actively-managed ETFs every day, at or relative to a net asset value. In most funds, you’ll probably have adequate liquidity. I can’t predict that with any assurance, but you will be able to trade these and people will be comfortable with the fact that you do not necessarily have any more revelation of the portfolio composition than you have required of all mutual funds today. Today, the requirement is that a fund reveal the contents of its portfolio quarterly with a 60-day lag. Most funds reveal it more frequently. Some funds do it monthly with a 60-day lag, some do it monthly with a 30-day lag. It varies over the industry. The key is that you have to protect your shareholders from traders front-running your transactions. You can’t reveal anything about your portfolio that will enable traders to determine what your ongoing transaction program is. There are ways of dealing with that. You will need to provide some information to market makers so that they can create and redeem in much the same way that they do today. They will have a little bit of additional information but this information will be available to the entire market. This is not something that will be available just to market makers.

Shishir: Given the potential introduction of NAV-based trading, what kind of a timeframe do you see in which Active ETFs could gain more traction and really take off?

Gary:  We’ve had conversations with the SEC in the context of actively-managed ETFs. I think they made it pretty clear to us that in order for them to approve what I call a full function actively-managed ETF they need to see a demonstration of NAV-based trading. I think it will take a little while for that to happen. It’s not going to happen overnight because this trading mechanism is sufficiently different from what people are used to. It’s going to take a little time to get it established. It’s certainly not necessary for trading in the SPDR, but I suspect that the SPDR will be the most actively traded ETF in the NAV-based market simply because it is already the most actively traded ETF, period. I certainly don’t think that NAV-based trading will rival the SPY volume in the intraday market, but I think we’ll have respectable NAV trading volume in the existing ETFs and it will be essential for a lot of the less actively traded ETFs and any useable, actively-managed ETF.

Shishir: That’s fantastic, Gary. Thanks a lot for speaking with us today.

Gary: Ok, it has been a pleasure.

ETF, Mutual Fund, OPTIONS

The Mystery of Rising Commodity Prices

October 14th, 2010

In recent months, commodity prices have risen dramatically. From a low point reached in June, various broad commodity indices are up from 15-20%. Few components have not participated in this rally to at least some extent.

While commodity prices are individually quite volatile, when placed in a broad, diversified, basket, their volatility is comparable to the stock market. So this recent rally is significant. Moreover, it is occurring alongside signs that the global economy is beginning to slow, which is the opposite of what one would normally expect. Leading indicators in the United States and Japan have turned decisively lower, while those for Europe are moderating. Economic policymakers in all of these areas have expressed concern that the risk of a double-dip is rising and in several instances they have backed up rhetoric with action:

* The US Fed has openly discussed plans to add additional stimulus to the economy, most probably in the form of increased US Treasury purchases;

* Japan intervened aggressively in the foreign exchange market in September to weaken the yen

* Euro-area officials, including Eurogroup Chairman Jean-Claude Juncker, have expressed concern that euro strength is now excessive and threatens the recovery

And it is not just the developed economies that are concerned. Emerging economies, including the largest ones known as the BRICs (Brazil, Russia, India, China), have moved toward a united front in resisting further dollar weakness versus their currencies, concerned about the negative impact that this would have on growth. Last month, Brazil’s Finance Minister Mantega went so far as to declare that a currency “war” had begun, with the developed economies seeking to devalue versus the developing.

So this presents a bit of a puzzle: If growth is weakening, why are commodity prices rising sharply? After all, demand should be weakening. Stockpiles should be increasing. Producers should be cutting, not raising prices, correct? What is the explanation? Well up to now we have only concerned ourselves with the demand side. What about the supply side? Are their factors constraining supply? Let’s consider a handful of the more widely traded commodities.

First, the largest of them all, crude oil. Crude oil and distillates thereof comprise 65% of the Goldman Sachs commodity index (GSCI), reflecting their huge relative volume in the global commodities trade.  Have there been supply issues with crude oil recently? No, there haven’t. (The BP Gulf of Mexico oil spill disaster may have dominated the oil headlines for a few months but as it did not involve a producing well, the spill had no impact on global crude production, distribution or refining.)And in fact, the price of crude oil has not risen by much over the past few months.

From a low of around $75/bbl in June it has risen to $85/bbl, a 12% rise, which given the normal volatility of crude is not notable. As the most important industrial commodity, used in all manner of production across the globe, the fact that crude oil prices are not up by much suggests that global economic growth is no longer accelerating.

Second, let’s turn to the next most important industrial commodities, the base metals, of which aluminum and copper are amongst the most widely traded and are used in a broad range of industrial applications. Since June, both have risen about 20%, somewhat more than the modest rise in crude oil prices. Have their been base metals supply issues? No, there haven’t. So this price behavior is at odds with crude oil and requires further explanation.

Now let’s turn to agricultural commodities. The prices of grains began to rise sharply in July, when it became clear that the Russian wheat crop was suffering severe damage from widespread wildfires. This past week, grain prices soared again when the US Department of Agriculture (USDA) issued a report indicating the US grain production would disappoint this year. These are clearly supply issues which could be considered mostly if not completely responsible for the rise in grain prices.

Sugar, coffee, cocoa and cotton are also widely traded agricultural commodities. In recent months, none of these has been directly affected by supply issues to the extent that grains have. However, of these four, only cocoa has not risen significantly in price. Livestock prices have been mixed, with hogs prices flat and cattle prices rising a modest 5% since June.

To summarize, nearly all commodity prices are up, at least slightly. Some are up sharply, in particular grains and precious metals. Hardly any are down, which is unusual. Supply issues certainly have affected certain commodities but not others. As such, we must conclude that, at the margin, demand for commodities generally has been rising. Once again we must ask ourselves the question, if the global economy is beginning to slow down, why are commodity prices rising?

This discussion has yet to discuss the denominator of these prices, namely, the dollar. Could it be that commodity prices are rising primarily because the dollar is falling? After all, the dollar has declined versus most currencies during the past few months and, relative to certain currencies, such as the Swiss franc, Canadian and Australian dollars, is at or near record lows. Looked at in trade weighted terms, that is, relative to other major economies with which the US trades, the dollar has weakened by about 5% since June. So does the weaker dollar explain the broad rise in commodity prices?

No, because broad indices of commodity prices are up by 15-20% over the period. And they have risen slightly even relative to even the strongest currencies in the world, including the Swiss franc and Australian dollar, by 2-3% in both cases. Dollar weakness may be a partial but certainly not complete explanation for the recent, sharp rise in commodity prices.

Having determined that industrial demand, various supply issues and the weaker dollar as providing, separately or together, a full explanation for the strong rise in commodity prices of late, is there anything left? Where might we look for clues to help us solve this mystery?

As with all prices, we can understand much more about why they are rising and falling when we place such moves in context of other, related prices. Relative prices, after all, are those that ultimately determine whether we are going to trade one thing for another. So let’s take a look at what has been happening in commodity prices relative to those for financial assets, namely stocks and bonds.

Commodities have strongly outperformed since June (% return)

DJ-UBS broad commodities index; S&P 500 equity index; US Treasury total return index; Source: Bloomberg LP

What we find is that commodity prices have been rising relative to both stocks and bonds over the past few months, which is unusual. This is because, when investors are optimistic for growth, stocks tend to perform best and, when investors become more pessimistic, bonds outperform. A broad basket of commodities is normally caught somewhere between the two (although naturally one or two commodities might do much better, or much worse, for specific supply or demand reasons).

Let’s now consider our findings. First, we have eliminated industrial demand, supply issues and the weaker dollar as potentially full explanations separately or together, for the sharp rise in broad commodity prices in recent months. Second, we have demonstrated that broad commodity prices are rising relative to both stocks and bonds, an unusual development. The only conclusion that can be drawn is that demand for commodities is rising for some reason other than industrial demand.

But what possible source is there for commodity demand that is not in some way related to industrial production or consumption? Is there a solution to this mystery? Yes there is. All we need to do is look at relative commodity prices to see which have led in the outperformance. What we find is that, notwithstanding the supply issues with grains, precious metals have been leading the way.

Precious metals outperforming, even amidst grain supply shocks (% return)

DJ-UBS broad commodities index; Gold ETF; Silver ETF Source: Bloomberg LP

Demand for precious metals is not primarily industrial, although silver does have a broad and growing range of industrial uses. Historically, gold demand has been dominated by the jewelery market, although the World Gold Council reports that, over the past year, demand for bullion has risen sharply relative to that for bling. This, we believe, is key to solving the mystery of outperforming commodity prices generally: With supply issues confined to gains, rising demand must be the factor driving prices higher. But with industrial demand not increasing and possibly slowing, as demonstrated both by the weakness in leading indicators and the relative underperformance of the stock market, rising commodity demand must be due to stockpiling-hoarding–not for production or consumption.

What possible reason would investors have for hoarding not just precious metals but commodities generally? Well, consider the topic of the “Currency Wars”, discussed at length in the last edition of the Amphora Report, vol. 1/10: If, in the face of a weaker dollar, other countries are unwilling to allow their currencies to rise, and currency and trade wars thus ensue, wreaking global economic havoc, then there is no way for investors to protect their wealth other than to hoard precious metals and other commodities. These cannot be printed, devalued or defaulted on and, as such, should prove a superior store of value relative to cash, stocks and bonds, that is, financial assets generally. Commodity prices are rising because investors no longer trust the economic and monetary authorities around the world to protect the purchasing power of their currencies of issue. With the US Fed embarking on a reckless policy of quantitative easing, the Bank of Japan intervening to weaken the yen, the Chairman of the Eurogroup complaining that the euro is too strong and the BRIC countries closing ranks against the developed economies generally, who can blame them?

So where does it stop? At what point will investors have hoarded enough precious metals and other commodities to protect themselves? It is impossible to know. However, we doubt that the hoarding will cease until at least one major economy and most probably several commit to maintaining strong and stable currencies. But with sovereign debt burdens rapidly on the rise and policymakers seeking new and ever more creative ways to artificially stimulate their economies rather than to step back and allow them to restructure and grow naturally, it might be some time before investors choose to move out of commodities and return to unbacked, fiat currency cash, if ever.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Mystery of Rising Commodity Prices 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 Mystery of Rising Commodity Prices




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, ETF, Uncategorized

Capitulation in Back Month VIX Futures

October 14th, 2010

Yesterday, in VIX Sets Two New Records, I suggested that it was coming, but I never expected it to happen in such dramatic fashion.

In what I believe is an unprecedented move, the VIX futures collapsed today without any movement in the front month VIX futures.

For those who are fixated on the cash VIX and the first two months of VIX futures, the movement in the November through May VIX futures chronicled below probably looks unremarkable, as proportional as it is, but that is exactly the point: the VIX term structure almost never moves in uniform proportions. Typically the front month moves the most, the second month may move half as month as the front month, the third month half as much as the second month and so on. See the links at the bottom for some examples.

Today the cash VIX gained 0.14 points (to close at 19.07) and the front month VIX futures held steady at 20.65, indicating that market participants see the likely October settlement for the VIX one week from tomorrow at about 1.58 points above the current level.

The really interesting part is that at the same time the consensus of opinion is calling for a short-term rise in the VIX, there was an almost audible sigh of, “Oops, we have this one wrong…” when it comes to the longer-term outlook for the VIX.

Yesterday I thought I was going out on a limb when I repeated what has been a consistent position for the last few months:

“I do believe that when estimates of near-term and long-term volatility show a record degree of divergence, some considerable opportunities are presented. As I have spelled out in a number of instances lately, my thinking has been that the back month volatility will likely collapse in order to bring the present and the future back into line. There has been some evidence of that happening during the past two days, but I anticipate that long-term volatility expectations will continue to decline.”

Today it looks as if I picked up quite a few converts. Now the question becomes one of how low the distant month volatility in the VIX futures will fall. Back in April it went as low as the 23s. Today the distant month VIX futures dipped below the 30 level for the first time since June. The May 2011 futures are already down 2.85 points (8.7%) this month and if they are to match April’s levels, there are still another 6 points left to fall.

When back month VIX futures move more than front month futures, I pay attention. Perhaps I should have more company…

Related posts:

Disclosure(s): neutral position in VIX via options at time of writing



Read more here:
Capitulation in Back Month VIX Futures

OPTIONS, Uncategorized

Mid-Week Market Report on Equities and Metals

October 14th, 2010

Oct 14th
Its been an interesting week with stocks, commodities and currencies having a knee jerk reaction to the FOMC minutes released Tuesday afternoon. In short the Fed clearly said there must be more quantitative easing before things will get better. It was this news which triggered a rally in both stocks and commodities.

Quantitative easing is a fast way to devalue the dollar and the Fed is doing a great job at that. As long as the dollar continues to decline the stock market will keep rising.

This week kicked off earning season with INTC and JPM beating analyst estimates. We usually see the market trade up the first week of earnings and then start to sell off by the end of earnings season. Both INTC and JPM sold off on strong volume today despite the good earnings and today’s broad market rally. This just goes to show the market has not forgot about buy on rumor sell on news… The big/smart money sold into the morning gaps exiting at a premium price. Is this foreshadowing for what is to come?

Take a look at the chart below which shows the falling dollar and how its helping to boost stocks and commodities.

While earnings season is trying to steal the spot light in the market, the fact is everything for the past 2 months has been about the US Dollar. If you put a chart of the dollar and the SP500 together they trade almost tick for tick in reverse directions. The amount of money getting pumped into the market cannot last and it will lead to a huge volume reversal day in due time. Until this happens the market will trade higher.

Taking a look at the SPY daily chart the 5, 10, and 14 simple moving averages tend to act as buy zones. The market was choppy from April until about 2 months ago. Now we are seeing the market smooth out and traders are switching to more of a trend trading strategy and not so much looking for extreme sentiment levels which typically signal short term tops and bottoms. Focusing on buying at these moving averages has been providing good support thus far. Stops should be set on a closing basis, meaning if the market is to close below the moving average then exiting the position is a safe play. It’s always best to layer your stops (scale out) in trending market. So stops below the 5, 10, 14 and even the 20ma will provide you with enough wiggle room to riding a trend.

Mid-Week Trading Conclusion:

In short, we are in a strong uptrend and until we get a major reversal day, buying the market is the way to go. The market as we all know is way over bought so if you decide to take a position on your own, be sure to keep it small. I would also like to note that financial stocks were the worst performing on the day so that could be telling us there could be some profit taking in the next day or two.

Chris Vermeulen
www.TheGoldAndOilGuy.com

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Read more here:
Mid-Week Market Report on Equities and Metals




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF

Mid-Week Market Report on Equities and Metals

October 14th, 2010

Oct 14th
Its been an interesting week with stocks, commodities and currencies having a knee jerk reaction to the FOMC minutes released Tuesday afternoon. In short the Fed clearly said there must be more quantitative easing before things will get better. It was this news which triggered a rally in both stocks and commodities.

Quantitative easing is a fast way to devalue the dollar and the Fed is doing a great job at that. As long as the dollar continues to decline the stock market will keep rising.

This week kicked off earning season with INTC and JPM beating analyst estimates. We usually see the market trade up the first week of earnings and then start to sell off by the end of earnings season. Both INTC and JPM sold off on strong volume today despite the good earnings and today’s broad market rally. This just goes to show the market has not forgot about buy on rumor sell on news… The big/smart money sold into the morning gaps exiting at a premium price. Is this foreshadowing for what is to come?

Take a look at the chart below which shows the falling dollar and how its helping to boost stocks and commodities.

While earnings season is trying to steal the spot light in the market, the fact is everything for the past 2 months has been about the US Dollar. If you put a chart of the dollar and the SP500 together they trade almost tick for tick in reverse directions. The amount of money getting pumped into the market cannot last and it will lead to a huge volume reversal day in due time. Until this happens the market will trade higher.

Taking a look at the SPY daily chart the 5, 10, and 14 simple moving averages tend to act as buy zones. The market was choppy from April until about 2 months ago. Now we are seeing the market smooth out and traders are switching to more of a trend trading strategy and not so much looking for extreme sentiment levels which typically signal short term tops and bottoms. Focusing on buying at these moving averages has been providing good support thus far. Stops should be set on a closing basis, meaning if the market is to close below the moving average then exiting the position is a safe play. It’s always best to layer your stops (scale out) in trending market. So stops below the 5, 10, 14 and even the 20ma will provide you with enough wiggle room to riding a trend.

Mid-Week Trading Conclusion:

In short, we are in a strong uptrend and until we get a major reversal day, buying the market is the way to go. The market as we all know is way over bought so if you decide to take a position on your own, be sure to keep it small. I would also like to note that financial stocks were the worst performing on the day so that could be telling us there could be some profit taking in the next day or two.

Chris Vermeulen
www.TheGoldAndOilGuy.com

Get More Free Reports and Trade Ideas Here for Free: FREE SIGN-UP

Read more here:
Mid-Week Market Report on Equities and Metals




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF

Four ETFs To Play Black Gold

October 14th, 2010

Global economic growth is expected to boost demand for crude oil in the near term future, paving the path to opportunity for the US Oil Fund (USO), the United States 12 Month Oil Fund (USL), the PowerShares DB Oil Fund (DBO), and the iPath S&P GSCI Crude Oil TR Index ETN (OIL).

According to the Energy Information Agency (EIA), global demand for black gold for the remainder of the year is expected to increase to 86.06 million barrels per day, a 2.1 percent increase from last year.  Furthermore, the EIA expects global consumption to jump to 87.44 million barrels per day in 2011, an increase of nearly 300,000 barrels per day from previous forecasts due to resurgent demand in the US, Germany and Japan over the past three months. 

On the supply side, inventories in industrialized nations are expected to decline due to increased demand.  Furthermore, production from non-OPEC nations is expected to slow down in 2011 and OPEC is expected to leave its production levels stable in the coming months with minor production increases to come in 2011.

At the end of the day, a supply and demand imbalance could form in crude oil leading to higher prices and providing positive price support for the aforementioned ETFs.

Although an opportunity may exist in crude oil, it is equally important to consider the inherent risks that are involved with investing in commodities.  Such risks can be mitigated through the use of an exit strategy which identifies when downward price pressure is likely to be seen.  Such a strategy can be found at www.SmartStops.net.

Disclosure: No Positions

Read more here:
Four ETFs To Play Black Gold




HERE IS YOUR FOOTER

Commodities, ETF, Uncategorized

How to Short Gold…If You Dare

October 13th, 2010

With the price of gold hitting new highs seemingly daily, one would have to be rather daring to swim against the tide.  But if you’re looking to take up a contrarian position against continued gold price increases, there are a few ways you could do so.  First, let’s look at what’s driving the current price action.

What’s Driving Gold Prices?

  • Inflation? Historically, people flocked to gold as an inflation hedge.  Since the value of a dollar (or whatever the local currency is) was losing value in the marketplace, gold was attractive as an anchor currency – a hard asset.  In times of inflation, hard assets like real estate and precious metals increase since their supply is viewed as finite while governments can manipulate currencies to either tame or stoke inflation (given enough time).  This time’s different though.  We are not in a period of inflation.  In fact, we may very well be looking at deflation (examples of deflation investments).
  • Fiat Currency Collapse – No, rather than the specter of hyperinflation driving gold this time around, many attribute the rise in price to a virtual race to the bottom in all currencies.  As governments around the world continue to print more currency to stimulate their economies, the fiat currency model is becoming suspect to the point that people are beginning to lose faith in the true value of their local currency.  Gold is now being viewed as a virtual currency replacement – something that the government can’t simply flip a switch and produce more of.
  • Bubble? – Humans find a good bubble too hard to resist.  From tulips to internet stocks to real estate propped up by liar loans, when it starts to look like easy money is being made and you’re left out, the urge to jump on board is often too much to resist.  For the first time in decades, late night infomercials, radio ads and even respected talk shows are now touting the benefits and safety of gold, with people even setting up Gold IRAs. This was unheard of when gold was at $300/ounce, but one cannot help but notice the current frenzy.  After all, it’s the only asset besides bonds (see how to short bonds too) that’s performed well over the prior decade.

Why Gold Prices Could Fall

  • Correction – Even during periods of bubble formation, assets do decline temporarily, and then they drop precipitously in the end.  Given the pause in the $1000-$1100 range previously and then the rapid ascent to $1370, it’s entirely plausible that gold prices have gotten ahead of themselves and could fall an easy 10% – 20% within a couple months.  After all, the financial system didn’t collapse and Europe didn’t implode.  In fact, the Euro is now rallying against the US dollar – which is good for commodity prices in terms of the USD, but also assures us the world is not coming to an end.
  • Politics – Not to get all political on you, but many view the current administration as somewhat loose with the budget and fear further massive entitlement programs and stimulus packages which would further weaken the US dollar and add to the $13.5 Trillion deficit.  If we get a reversal in momentum at the mid-term elections and Democrats lose their majority, there will be gridlock in Washington with a right-leaning Congress.  Gridlock is often good for stocks and may not be so good for spending programs which would require cooperation amongst the House, Senate and Obama.

How to Short Gold

  • Basic Approach: Short (GLD) – GLD is the most popular gold ETF with plenty of volume and a small bid/ask spread.  By shorting shares, you’d benefit from a downside move.  Note however that this opens you up to unlimited losses and if gold really spikes, this could be a dangerous trade.
  • Basic Approach #2: Long PowerShares DB Gold Short ETN (DGZ) – DGZ would be a means to limit your losses by buying the inverse and benefitting from a decline.  ETNs have some risks including issuer solvency risk and futures roll losses (see ETF 7 Deadly Sins for more on what to watch for).  There is no inverse ETF though, so this may be your only choice for a loss-capped 1X approach.
  • Buy Inverse ETF: Long (GLL) – This ETF seeks to replicate 2X the inverse return of gold daily.  This would amplify both your gains and losses.  Note however that leveeraged ETFs tend to lose value over time regardless of the underlying asset performance due to daily resets.
  • Naked Calls: Sell Out of Money Calls on GLD – This is also a risky strategy, but a means to capture some option premium on a rolling basis if you believe gold won’t breach the strike price you choose.  If GLD is at $134 and you sell a call for $140, as long as GLD doesn’t breach $140 by expiry, that option expires worthless and you keep the premium.  It’s risky though, as your losses are unlimited should GLD exceed the strike.
  • Naked Puts: Buy Out of Money Puts on GLD – This is an option to benefit from a drop in gold prices while limiting your loss.  With GLD at $134, you can buy a put option at 130 strike, Dec expiry for around $3 premium (at a cost of $300 for the contract of 100 shares).  Therefore, if GLD drops below $127 by expiry, it’s all profit from there and you’d have capped your loss at $300.
  • Pairs Trade: A nifty trend to watch for is when the premium on the Sprott Physical Gold ETF (PHYS) gets ahead of historical norms and you can simultaneously short PHYS while going long GLD.  See my recent gold pairs trade result, which was the best risk/return money I’ve made in a long time.

Bear in mind that most options expire worthless, leveraged ETFs lose value over time and opening yourself up to unlimited risk can be catastrophic.  Additionally, different methods have different tax liabilities (see gold taxes for differentiation).  But these are some avaialable tools nonethless.  I make no predictions on where gold is headed from here but I do own a small portion of my trading portfolio (full portfolio holdings/performance) due to the trend, hedging, and belief the we may see further currency devaluations for years to come.  Should you decide to go with the drain and go all-in on the gold trend, there are actually some ETFs beating gold worth a look – silver, platinum and others that have industrial utility as well.

Disclosure: Long GLD.

ETF, OPTIONS, Real Estate

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