An Easy Trade for Rising Commodity Prices

October 26th, 2010

An Easy Trade for Rising Commodity Prices

Commodity prices are surging. But rather than recommending a pure commodity play for this week's trade, I'm intrigued by a stock that not only benefits from strong commodity prices, but also more profits for farmers.

And with farmers seeing fatter profits from their crops, many are taking the money and putting it into new farm equipment.

According to the Association of Equipment Manufacturers, September sales of row-crop tractors increased by +46.9% from August, while four-wheel drive tractor sales rose +20.5%.

Because of this, shares of Deere (NYSE: DE) — the world's largest manufacturer of lawn and farm equipment — are surging.

Deere estimates that total farm income in the United States will increase by at least +15% in 2010 to $81.5 billion, compared to $70.9 billion last year.

This revenue growth has been — and will likely continue — to drive shares of Big Green higher.

In the October 18th trading week, the stock hit a new two-year high at $77.72. A small shelf of resistance has been established at this level. DE is approaching its upper Bollinger band, which intersects at $78.75, and the stock appears ready to challenge resistance and move higher.

If this resistance is broken, DE could be on target to reach its 2008 peak of $89.75.

DE has been in a major uptrend since hitting a low of $23.55 in March 2009. Since July 2009, the rising 40-week moving average has mirrored the uptrend line.

In June 2010, an accelerated uptrend line formed off the stock's $53.47 low. DE is currently well above this accelerated uptrend and rising. The rising 10-week moving average has mirrored the accelerated uptrend since July, when it crossed above the 30-week moving average.

Key support lies just below $67, around the intersection of the 30-week moving average and a support level tested several times in July and August of this year.

The indicators are bullish. MACD is on a buy signal. The MACD histogram is in positive territory.

Relative strength index (RSI) is in a strong uptrend and rising. At 70, it has just become overbought, but strong stocks can stay overbought for long periods.

Stochastics, although overbought, is on a buy signal.

Fundamentally, the iconic maker of green and yellow farm tractors shows solid revenue and earnings growth.

In August, Deere reported upbeat third-quarter results, for the period ending July 31st, 2010. Because of strong North American equipment sales, revenue rose +16% to $6.84 billion, from $5.3 billion in the year-ago quarter.

For the upcoming fourth-quarter, to be reported November 24th, analysts expect Deere's revenue to increase +31% to $6.2 billion, from $4.7 billion in the year-ago period.

Based on rising commodity prices, the farm equipment maker projects full-year 2010 revenue to increase +12.2% to $23.3 billion, compared with $20.8 billion in 2009. By 2011, analysts project revenue will increase another +9.6% to $25.5 billion.

The earnings outlook is equally upbeat.

With increased demand for farm equipment, Deere reported a strong third-quarter. Earnings rose +45.5% to $1.44 from $0.99 in the year-ago period.

For the upcoming fourth-quarter, the company expects higher R&D and raw material costs to impact earnings. However, analysts believe results will still be incredibly strong, with earnings quadrupling to $0.92 from $0.23 in the year-ago quarter.

For the fiscal 2010 year, analysts project earnings will nearly double from $2.81 last year, to $4.48 this year. Latin American and North American demand for large farm machinery is expected to drive demand. This demand is expected to continue into fiscal 2011, where analysts expect earnings to increase another +14.1% to $5.11.

Action to Take –> Based on Deere's solid growth outlook and current technical strength, I recommend going long on the stock.

My target is $89.74, just below the stock's 2008 high. My stop-loss is $66.44, just below support and the current intersection of the 30-week moving average.

Based on Friday's closing price of $77.25, this trade would stand to make as much as +16.2%.

[To find out how to get a free trade recommendation delivered to your inbox before the market opens each week, go here.]


– Dr. Melvin Pasternak

Dr. Melvin Pasternak is one of the most experienced market technicians in the nation and Chief Trading Expert behind Double-Digit Trading.

Uncategorized

The One Brazil Stock Everyone Should Own

October 26th, 2010

The One Brazil Stock Everyone Should Own

Investing would be so much easier with a time machine. A person could simply go back in time and buy today's industry behemoths while they were still just up and coming regular companies.

Too bad there's no such thing as a time machine.

However, in today's fast-changing world, investors might not need one. Certain companies and countries are in a similar stage of development that the United States was many years ago. Companies are emerging as dominant players in proven lucrative industries in large and fast-growing economies throughout the world.

One of the world's fastest growing economies is Brazil. The country has the world's fifth-largest population, and strong economic growth during the past several years has set the country on a trajectory of rapidly increasing wealth. The country's middle class and disposable income is rising at a break-neck pace.

According to Brazil's census bureau, the middle class population soared by 20 million people, or +24%, since 2005, and now represents 46% of the population (as of 2009), compared to 34% in 2005. The middle class in Brazil is now almost 90 million strong, and these higher incomes mean rising consumption.

While the country does have strong exports, domestic consumption accounted for 60% of GDP in the fourth quarter of 2009. The Chief Economist at Brazil Bank, Illan Goldfajn, recently categorized the Brazilian population as one that loves to spend. As an example of the country's propensity for spending, high-end jeweler Tiffany & Co (NYSE: TIF) has more stores in Sao Paulo (Brazil's largest and wealthiest city) than any other city in the world.

While most of Brazil's middle class can't afford high-end jewelry, they can afford something else — beer.

Companhia de Bebidas Das Americas, or AmBev (NYSE: ABV), is a Brazilian company that sells beer, soft drinks and non-carbonated beverages in 14 countries throughout the Americas. AmBev is the largest retail company in Brazil and the largest beer company in Latin America. In fact, AmBev the world's fifth largest brewer and the third largest Pepsi (NYSE: PEP) bottler.

How dominant is this company in Brazil?

AmBev has an astounding 69% share of the country's beer market. And that market is large and growing. Brazil is already the third-largest beer consuming nation (next to the United States and China). But consumption is increasing at one of the fastest rates in the world (a +5.5% five-year compound annual volume growth). In addition to rising income, the country has a strong demographic for beer consumption, as the median age of the population is just 28.3 years.

Selling beer and soft drinks to an ever-rising and thirsty Brazilian consumer class has been a good business. Even the worldwide financial crisis and recession didn't interrupt the company's sales growth. Revenue continued to rise +18% between 2007 and 2009, to BRL (Brazilian Real) 23.2 billion ($13.3 billion), and the bottom line, net income, rose +20% over the same tumultuous period.

The earnings pace has picked up recently. In the first half of 2010, organic revenue (without currency effects) soared +11.5% compared with last year's first half, and sales volume grew +8.3% during the same period. AmBev is also one of the most profitable companies in the beverage industry, with a net profit margin of 25.7%, compared with the industry average of 5.9%.

That said, AmBev's stock price is up more than +40% since early July and near its 52-week high. However, there are still good reasons to believe the stock will continue to perform well from here even in the short-term.

For one, while the stock sells for a relatively high 23.8 times trailing earnings, compared to the S&P 500's average of 14.7, it is still selling slightly below its five year average price-to-earnings ratio (P/E). And the company has returned investors an amazing +35% a year during those five years, compared to just +2.2% for the S&P 500. In addition, the company pays several dividends a year, which have totaled $4.25 per ADR in the past twelve months. This translates to about a 3.0% yield at current prices. That payout should increase as AmBev's sales increase over time.

Also, the Brazilian economy is absolutely booming. GDP grew at a Chinese-like +8.9% clip in the first half of 2010, compared with less than +3.0% in the U.S. Stronger growth in Brazil should also lead to a stronger real versus the dollar, resulting in higher prices and dividends for American ADR holders. The real has already appreciated +35% against the dollar since March of 2009. Zacks consensus estimates are for AmBev to earn $6.61 per ADR this year (a +27% increase from 2009) and $7.46 per ADR in 2011.

Action to Take –> Aside from all the numbers, there is just plain common sense as to why this is a great stock to own. Do you think that a young population with rising disposable income that has shown a propensity to spend is likely to drink more beer or less beer in the years ahead?

AmBev already generated $13.3 billion in revenue in 2009. But every signal indicates that the company is nowhere near finished growing. This highly profitable company should continue to emerge into one of the world's blue chip companies in the years ahead.

Despite the recent run up in price, AmBev's shares still sell near their average historical valuation. Exposure to the Brazilian economy and diversification away from the dollar make this a particularly timely investment that can be purchased at current levels.


– Tom Hutchinson

P.S. –

Uncategorized

The One Brazil Stock Everyone Should Own

October 26th, 2010

The One Brazil Stock Everyone Should Own

Investing would be so much easier with a time machine. A person could simply go back in time and buy today's industry behemoths while they were still just up and coming regular companies.

Too bad there's no such thing as a time machine.

However, in today's fast-changing world, investors might not need one. Certain companies and countries are in a similar stage of development that the United States was many years ago. Companies are emerging as dominant players in proven lucrative industries in large and fast-growing economies throughout the world.

One of the world's fastest growing economies is Brazil. The country has the world's fifth-largest population, and strong economic growth during the past several years has set the country on a trajectory of rapidly increasing wealth. The country's middle class and disposable income is rising at a break-neck pace.

According to Brazil's census bureau, the middle class population soared by 20 million people, or +24%, since 2005, and now represents 46% of the population (as of 2009), compared to 34% in 2005. The middle class in Brazil is now almost 90 million strong, and these higher incomes mean rising consumption.

While the country does have strong exports, domestic consumption accounted for 60% of GDP in the fourth quarter of 2009. The Chief Economist at Brazil Bank, Illan Goldfajn, recently categorized the Brazilian population as one that loves to spend. As an example of the country's propensity for spending, high-end jeweler Tiffany & Co (NYSE: TIF) has more stores in Sao Paulo (Brazil's largest and wealthiest city) than any other city in the world.

While most of Brazil's middle class can't afford high-end jewelry, they can afford something else — beer.

Companhia de Bebidas Das Americas, or AmBev (NYSE: ABV), is a Brazilian company that sells beer, soft drinks and non-carbonated beverages in 14 countries throughout the Americas. AmBev is the largest retail company in Brazil and the largest beer company in Latin America. In fact, AmBev the world's fifth largest brewer and the third largest Pepsi (NYSE: PEP) bottler.

How dominant is this company in Brazil?

AmBev has an astounding 69% share of the country's beer market. And that market is large and growing. Brazil is already the third-largest beer consuming nation (next to the United States and China). But consumption is increasing at one of the fastest rates in the world (a +5.5% five-year compound annual volume growth). In addition to rising income, the country has a strong demographic for beer consumption, as the median age of the population is just 28.3 years.

Selling beer and soft drinks to an ever-rising and thirsty Brazilian consumer class has been a good business. Even the worldwide financial crisis and recession didn't interrupt the company's sales growth. Revenue continued to rise +18% between 2007 and 2009, to BRL (Brazilian Real) 23.2 billion ($13.3 billion), and the bottom line, net income, rose +20% over the same tumultuous period.

The earnings pace has picked up recently. In the first half of 2010, organic revenue (without currency effects) soared +11.5% compared with last year's first half, and sales volume grew +8.3% during the same period. AmBev is also one of the most profitable companies in the beverage industry, with a net profit margin of 25.7%, compared with the industry average of 5.9%.

That said, AmBev's stock price is up more than +40% since early July and near its 52-week high. However, there are still good reasons to believe the stock will continue to perform well from here even in the short-term.

For one, while the stock sells for a relatively high 23.8 times trailing earnings, compared to the S&P 500's average of 14.7, it is still selling slightly below its five year average price-to-earnings ratio (P/E). And the company has returned investors an amazing +35% a year during those five years, compared to just +2.2% for the S&P 500. In addition, the company pays several dividends a year, which have totaled $4.25 per ADR in the past twelve months. This translates to about a 3.0% yield at current prices. That payout should increase as AmBev's sales increase over time.

Also, the Brazilian economy is absolutely booming. GDP grew at a Chinese-like +8.9% clip in the first half of 2010, compared with less than +3.0% in the U.S. Stronger growth in Brazil should also lead to a stronger real versus the dollar, resulting in higher prices and dividends for American ADR holders. The real has already appreciated +35% against the dollar since March of 2009. Zacks consensus estimates are for AmBev to earn $6.61 per ADR this year (a +27% increase from 2009) and $7.46 per ADR in 2011.

Action to Take –> Aside from all the numbers, there is just plain common sense as to why this is a great stock to own. Do you think that a young population with rising disposable income that has shown a propensity to spend is likely to drink more beer or less beer in the years ahead?

AmBev already generated $13.3 billion in revenue in 2009. But every signal indicates that the company is nowhere near finished growing. This highly profitable company should continue to emerge into one of the world's blue chip companies in the years ahead.

Despite the recent run up in price, AmBev's shares still sell near their average historical valuation. Exposure to the Brazilian economy and diversification away from the dollar make this a particularly timely investment that can be purchased at current levels.


– Tom Hutchinson

P.S. –

Uncategorized

Buffett’s $3.8 Billion "Missing" Paycheck

October 26th, 2010

Buffett's $3.8 Billion

To say Warren Buffett has done well for himself would be an understatement. That's why from time to time, I like to check in on what the “Oracle of Omaha” is doing with Berkshire Hathaway's (NYSE: BRK-B) portfolio.

I came across a neat resource if you also like to keep tabs on Buffett. CNBC.com has a page that tracks the common stocks in Berkshire's portfolio in real-time. You can visit it here.

Looking at that page, it's very evident Warren and I invest a little differently. He's the most famous value investor in the world. I'm more than happy to let the dividends roll in month after month — even if the checks aren't in the billions or millions.

So while I understand he isn't on the prowl for high-income securities, the holdings still left me a little astonished. Poring over the names, I recognized every stock — Berkshire owns some of the most well-known companies in the world.

But I also recognized that it doesn't own many stocks I would even look at twice for income. The closest one is GlaxoSmithKline (NYSE: GSK), which yields 4.9%.

To its credit, Berkshire does own some securities throwing off nice income. The company acquired some Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE) preferreds in late 2008 that pay a nice yield of 10%. However, that was a special deal not available to retail investors.

Digging a little deeper into Berkshire's holdings, I found the roughly 40 common stock holdings yield an average of only about 2.0%. Even so, thanks to the massive size of its portfolio, Berkshire will rake in an astonishing $1.2 billion from dividends alone in the next year if you project the annual payments of the current holdings forward. Certainly $1.2 billion is nothing to sneeze at.

But Buffett's disinterest in income is costing Berkshire.

On a whim, I calculated the average yield of the 27 holdings in my High-Yield Investing portfolios (I like to be able to watch my holdings like a hawk — that's why my portfolio isn't larger than it is). It comes out to 7.4% — more than five full points above Berkshire's 2.0% average yield.

In actual dividends paid, the difference between the yield on my portfolio and Berkshire's would be staggering. Berkshire's portfolio totals $50.9 billion (which is more than the GDP of Panama, Iceland and Bulgaria, among others). If the entire portfolio earned 7.4% in dividends annually, payments would total $3.8 billion — over $2.6 billion more than it does right now, and enough to purchase nearly twenty Boeing 747s.

Action to Take –> Of course, we don't all have the portfolio of Berkshire Hathaway, and I think Warren Buffett has done OK for himself with his value focus. But the same principles that are leaving billions on the table for Berkshire could be leaving thousands on the table for your portfolio if you aren't making dividends a priority


– Carla Pasternak

P.S. — My High-Yield Investing newsletter is one of the most popular advisories devoted to income investing. In my just-published November issue, I highlight a little known asset class that is paying some big yields. In fact, my favorite find yields 9.7%! To learn more about High-Yield Investing, including how to subscribe with zero risk (thanks to a money-back guarantee) and receive my November issue, simply click here.

Carla Pasternak

Uncategorized

Buffett’s $3.8 Billion "Missing" Paycheck

October 26th, 2010

Buffett's $3.8 Billion

To say Warren Buffett has done well for himself would be an understatement. That's why from time to time, I like to check in on what the “Oracle of Omaha” is doing with Berkshire Hathaway's (NYSE: BRK-B) portfolio.

I came across a neat resource if you also like to keep tabs on Buffett. CNBC.com has a page that tracks the common stocks in Berkshire's portfolio in real-time. You can visit it here.

Looking at that page, it's very evident Warren and I invest a little differently. He's the most famous value investor in the world. I'm more than happy to let the dividends roll in month after month — even if the checks aren't in the billions or millions.

So while I understand he isn't on the prowl for high-income securities, the holdings still left me a little astonished. Poring over the names, I recognized every stock — Berkshire owns some of the most well-known companies in the world.

But I also recognized that it doesn't own many stocks I would even look at twice for income. The closest one is GlaxoSmithKline (NYSE: GSK), which yields 4.9%.

To its credit, Berkshire does own some securities throwing off nice income. The company acquired some Goldman Sachs (NYSE: GS) and General Electric (NYSE: GE) preferreds in late 2008 that pay a nice yield of 10%. However, that was a special deal not available to retail investors.

Digging a little deeper into Berkshire's holdings, I found the roughly 40 common stock holdings yield an average of only about 2.0%. Even so, thanks to the massive size of its portfolio, Berkshire will rake in an astonishing $1.2 billion from dividends alone in the next year if you project the annual payments of the current holdings forward. Certainly $1.2 billion is nothing to sneeze at.

But Buffett's disinterest in income is costing Berkshire.

On a whim, I calculated the average yield of the 27 holdings in my High-Yield Investing portfolios (I like to be able to watch my holdings like a hawk — that's why my portfolio isn't larger than it is). It comes out to 7.4% — more than five full points above Berkshire's 2.0% average yield.

In actual dividends paid, the difference between the yield on my portfolio and Berkshire's would be staggering. Berkshire's portfolio totals $50.9 billion (which is more than the GDP of Panama, Iceland and Bulgaria, among others). If the entire portfolio earned 7.4% in dividends annually, payments would total $3.8 billion — over $2.6 billion more than it does right now, and enough to purchase nearly twenty Boeing 747s.

Action to Take –> Of course, we don't all have the portfolio of Berkshire Hathaway, and I think Warren Buffett has done OK for himself with his value focus. But the same principles that are leaving billions on the table for Berkshire could be leaving thousands on the table for your portfolio if you aren't making dividends a priority


– Carla Pasternak

P.S. — My High-Yield Investing newsletter is one of the most popular advisories devoted to income investing. In my just-published November issue, I highlight a little known asset class that is paying some big yields. In fact, my favorite find yields 9.7%! To learn more about High-Yield Investing, including how to subscribe with zero risk (thanks to a money-back guarantee) and receive my November issue, simply click here.

Carla Pasternak

Uncategorized

When Gamblers Drive the Markets

October 26th, 2010

At least someone is making money from this foreclosure racket. Bloomberg has the report, below.

But let’s not get distracted by envy. We need to keep our eyes on the ball. And right now, the ball is bouncing around in a room full of spikes. There’s the prickly point of China; it could puncture the US stock market any day. There are huge banks and whole foreign governments sticking out like nails. Anyone of them could flatten this ball in a matter of hours. And what about that cactus thorn…the dollar itself? What if investors finally got tired of worrying about the greenback going down? What if they decided to get out en masse? Or, imagine what would happen if Bernanke decided to defend the dollar!

But investors aren’t worried. They anticipate more loose money…and more bouncy prices in stocks and commodities.

So, when the G-20 meeting ended without an agreement, they took it as an “all clear” for further gambling.

Bloomberg’s headline: “US Stocks Gain as G-20 Fuels Fed Easing Speculation.”

In other words, this market is not driven by real economic growth. It’s driven by the hope of fast, easy money. Pure gambling, in other words.

Not that we have anything against gambling. But when you gamble you have to realize that you’re going to lose sooner or later. A coin only comes up heads so often…there are only so many aces in the deck…and the “fool” in the game is sooner or later going to be you.

Investors believe the Fed will provide the fast, easy money. And they believe they will be able to get some of it by staying with stocks and commodities. Maybe they’re right. But don’t bet your life savings on it.

The promise of the stock market is fundamentally as fraudulent as the promise of the welfare state. The welfare state pretends to give citizens back more, in services and benefits, than they pay in taxes. Wall Street offers gain with no pain.

But the stock market – in total, over time – cannot really grow any faster than the economy itself. “Stocks for the long run” is a scam. Because you can only get from the stock market what you would have gotten from just about any other investment. As the economy grows, so does the value of the productive assets in it. Companies don’t grow faster – unless they are selling to other markets in other economies…or taking market share from companies. Overall, on average, you’re only going to get from stocks what the economy allows you to get – about what you would have gotten from having your money in real estate, collectibles, or other investments.

Sometimes you’ll get a bit more from stocks – even a lot more – as the stock market booms. Then, you MUST expect to get a lot less…so that the long-term performance of the stock market comes back in line with the underlying economy.

We can see this just by looking at the US stock market over the last three decades. It grew some 14 times from ’82 to ’07 – far outstripping the economy. But then, it needed to slow down…and even reverse. Over the last ten years, stock prices have gone nowhere. It wouldn’t be surprising if they dropped 30% to 50% from here… And it wouldn’t be surprising if they went nowhere over the next 10 years too.

Remember… Japan is the cutting edge market model. Japanese stocks hit a high in ’90. They’ve been going down ever since. Twenty years of correction…in order to bring it back into line with the economy.

The US stock market will do the same thing. More or less.

That ball is going to hit a spike…it’s just a matter of time.

Bill Bonner
for The Daily Reckoning

When Gamblers Drive the Markets 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:
When Gamblers Drive the Markets




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, Real Estate, Uncategorized

A Healthy Pullback In Gold And Silver, Will Produce Next Buy Signal

October 26th, 2010

Treasury Secretary Timothy Geithner is trying to give support to the currency as tensions have grown on a devalued dollar. This past week he stressed the importance of a sound currency. The US definitely wants to devalue the dollar in a slow and steady way. The plunge in the US dollar, which is still the world’s reserve currency, created a lot of international tension and speculation into gold and silver. The Fed wants to slowly devalue the dollar, not create a panic. If it’s collapsing too far, too fast then the Fed or Geithner will come in and make comments to support the dollar. The November election and next week’s Fed meeting could make a significant impact on the bullish dollar trade. I believe the fiscally conservative candidates will gain a lot of support. This could have a bullish impact on the dollar as an expectation of less spending and printing will provide some support for the dollar.

The collapse of the dollar has caused other countries such as Japan to intervene in the markets to support the US currency as a weak dollar curbs demand for Japanese exports.

Although I’ve called for a dollar bounce over the past week I want to reiterate that I don’t believe the move will be long-lasting. The currency crisis is in early stages and quite often there are violent corrections that provide long-term holders a great buying opportunity. Investors should be aware of the massive buying in the dollar ETF (UUP). This signals a major move going into the dollar as it tests all-time lows. It could signal a bottom.

This bounce in the dollar and correction in gold is to shake out weak hands from the long-term trend. It also hurts investors who have been buying in at very overbought levels. Throughout this 10-year bull market in gold it has been a series of two steps ahead with one back. Now we’re in the retrenching stage, which is what I warned about exactly two weeks ago. Major moves when sentiment levels reach extremes is accompanied by powerful reversals, which we’ve observed this past week in the dollar and gold. This past week we saw a major gap down and a break of the 20-day moving average. I do believe this short-term downtrend could continue for a few weeks to work off overbought conditions and to shake out late comers and investors who are over leveraged.

Look for gold and silver to move to support and create a new buy signal. Patience is key to buying gold and there continue to be times along this bull run where gold is oversold and out of favor. I’m looking for those key areas.

Read more here:
A Healthy Pullback In Gold And Silver, Will Produce Next Buy Signal

Commodities, ETF

A Healthy Pullback In Gold And Silver, Will Produce Next Buy Signal

October 26th, 2010

Treasury Secretary Timothy Geithner is trying to give support to the currency as tensions have grown on a devalued dollar. This past week he stressed the importance of a sound currency. The US definitely wants to devalue the dollar in a slow and steady way. The plunge in the US dollar, which is still the world’s reserve currency, created a lot of international tension and speculation into gold and silver. The Fed wants to slowly devalue the dollar, not create a panic. If it’s collapsing too far, too fast then the Fed or Geithner will come in and make comments to support the dollar. The November election and next week’s Fed meeting could make a significant impact on the bullish dollar trade. I believe the fiscally conservative candidates will gain a lot of support. This could have a bullish impact on the dollar as an expectation of less spending and printing will provide some support for the dollar.

The collapse of the dollar has caused other countries such as Japan to intervene in the markets to support the US currency as a weak dollar curbs demand for Japanese exports.

Although I’ve called for a dollar bounce over the past week I want to reiterate that I don’t believe the move will be long-lasting. The currency crisis is in early stages and quite often there are violent corrections that provide long-term holders a great buying opportunity. Investors should be aware of the massive buying in the dollar ETF (UUP). This signals a major move going into the dollar as it tests all-time lows. It could signal a bottom.

This bounce in the dollar and correction in gold is to shake out weak hands from the long-term trend. It also hurts investors who have been buying in at very overbought levels. Throughout this 10-year bull market in gold it has been a series of two steps ahead with one back. Now we’re in the retrenching stage, which is what I warned about exactly two weeks ago. Major moves when sentiment levels reach extremes is accompanied by powerful reversals, which we’ve observed this past week in the dollar and gold. This past week we saw a major gap down and a break of the 20-day moving average. I do believe this short-term downtrend could continue for a few weeks to work off overbought conditions and to shake out late comers and investors who are over leveraged.

Look for gold and silver to move to support and create a new buy signal. Patience is key to buying gold and there continue to be times along this bull run where gold is oversold and out of favor. I’m looking for those key areas.

Read more here:
A Healthy Pullback In Gold And Silver, Will Produce Next Buy Signal

Commodities, ETF

Five strategies I’m using to help dad beat the stock market

October 26th, 2010

Nilus Mattive

You might remember that back in June my 63-year-old dad decided to let me begin managing his $100,000 retirement account at Vanguard. The goal was to help him get better returns than he was earning with a money market fund. And while I’ve been talking about retirement matters, CDs, and other topics lately, the big unanswered question in the room has been: “So how are things actually going in that new portfolio?”

The short answer: In just three months, dad is already up many multiples of what he would have gotten from his money market fund for an entire year.

Today I’m going to talk about five of the strategies I’ve been using to help his portfolio outperform … and show you how to benefit from them, too.

But before I do, I want you to see the first four investments dad bought and how they’ve worked out so far …

chart1 Five strategies Im using to help dad beat the stock market

As you can see, every single position is up so far. And what’s especially important is that each individual holding is beating the S&P 500 index — with one stock more than doubling its benchmark’s performance, and another nearly tripling it.

I should also mention that dividends are not even factored into the performance numbers above. And if you look at the column on the far right you’ll notice that each one of our holdings carries a significant annual yield. Heck, one should hand dad another 7 percent return over the next year just from dividends!

Mind you, the returns above are not hypothetical. They are the actual results my dad has gotten through real orders placed in his Vanguard account. And while all these positions are still open and anything can happen from here on out, I’m confident we’re going to continue increasing his nest egg safely and efficiently.

Why do I think so? How are we consistently beating our benchmark like this?

Internal Sponsorship

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This is it: All the forces we’ve been warning you about over the past several weeks are now converging in one time and place. We cannot wait any longer.

Monty Agarwal will be taking action ahead of these events this week and issuing an advance alert with specific instructions TOMORROW. So YOUR DEADLINE IS TODAY!

Click here to learn how you can access his recommendations before it’s too late.

Here Are Five Strategies I’m Using in Dad’s Portfolio …

First off, it should be pretty obvious that I’m favoring dividend stocks right now. That’s because:

  1. They have the best relative yields at the moment — meaning they’re paying more than CDs, money market funds, and most bonds right now.
  2. I believe they are actually less risky than other income-producing investments, especially longer-term Treasury bonds.
  3. Over time, these companies should continue raising their dividends, which means dad’s effective yields can go even higher the longer he holds his positions.
  4. Plus, there are still plenty of values to be found in the stock market because most investors remain shell-shocked from the beating they took over the last few years.

Of course, these are all things I’ve been saying here in Money and Markets for a long time now so they should come as no surprise to you. Still, you might be wondering how I’m picking the individual positions.

Well, let’s start with …

Strategy #1. I’m looking for companies that others are ignoring.

If you refer back to that performance table, you’ll see that one of the positions has already risen more than 26 percent in two months.

What’s interesting about that stock is that I recommended it right around the time that nearly everyone else was writing it off. The company had posted a couple quarters of lackluster results and people were assuming it would just keep dragging along the bottom. After all, the stock hadn’t moved much even as the market rallied substantially.

I thought differently. In fact, all my indicators were telling me things were actually going much better than people thought. I liked that the company had just boosted its dividend substantially, too. The fact that its stock had been lagging was a good thing!

So I told dad to buy it. And when the firm came out with its latest quarterly results a few weeks ago, it blew away estimates … with the shares rising more than 12 percent that day alone.

Since then, a bunch of analysts and experts have come out praising the stock. Go figure!

That leads me to another point …

Strategy #2. I’m using charts to help find entry and exit points.

Let’s stick with the same stock for a minute. In addition to the fundamental picture, which I thought everyone was getting wrong, I also saw that it was nearing a point on the charts that represented a long-term point of support. In other words, when the stock had hit that level in the past, it had bounced higher again.

More importantly, I also saw that there was another level a bit higher that had presented a strong ceiling plenty of times in the recent past.

Take a look at this chart and you’ll see what I mean:

chart2 Five strategies Im using to help dad beat the stock market

The green line represents a previous bottom. The red line represents an area that had repeatedly presented strong resistance. The green arrow is where I told dad to buy. And the red arrow shows the stock breaking through resistance and then surging higher on the strong earnings release.

Now, do things always work out this perfectly? No way! Nor am I some huge fan of using complicated technical analysis.

At the same time, I recognize that charts do give me another way to evaluate positions, especially in the tricky markets we have today.

Speaking of which …

Strategy #3: I’m generally telling dad to use limit orders. These instructions tell your broker to buy or sell your shares within specific price ranges.

So in the case of buy orders, I’m almost always telling dad to “place a good-till-cancelled order to buy at such and such a price or better.”

Why bother, especially in a longer-term income portfolio?

Because I believe it’s good to be disciplined and to name your price for something before you buy it. It’s the difference between going to the grocery story with a shopping list and coupons in hand or stuffing your shopping cart full of items that catch your attention as you browse.

In short, placing orders this way forces you to wait for the stock to come to you at a price you’re truly happy with. And every extra bit you shave off your entry adds to your bottom line on the exit.

By the way, in one case, a stock I recommended started rising before dad ever had a chance to get in. And rather than having him chase it, I told him to cancel the order!

Strategy #4. I’m staying aware of currency movements. While I’m not looking to recommend specific currency investments to dad, I am always considering how movements in the currency markets can help or hurt his portfolio.

So it’s no coincidence that two of dad’s positions are benefitting from the recent weakness in the U.S. dollar.

The first is our oil and gas play — that’s because as the greenback moves lower, oil usually trends higher.

The second is a foreign utility company. Because it’s a foreign stock trading on a U.S. exchange, dad benefits whenever the company’s home currency strengthens against ours. Better yet, since his dividend payments are also originally denominated in the company’s home currency, he can get fatter checks when those dividends are converted into dollars, too.

Strategy #5. I’m keeping an open mind. Sure, right now we’re having some success with dividend stocks. But that doesn’t mean I won’t recommend bonds when the time is right. Or use plenty of other investments and strategies I’ve got in my playbook.

Same thing with our timeframe for holding investments — while I generally believe in keeping solid companies for long periods of time, I’m not opposed to taking profits when a position runs up in a short period of time.

The name of the game is going where others aren’t and always balancing the risk with the reward.

That’s what I’m going to keep doing for dad … and I hope you try and do the same!

Best wishes,

Nilus

P.S. I just sent out another new recommendation and dad will be acting on it tomorrow. If you’d like to get the name of this new “buy” immediately … along with complete details on all the positions he currently owns, just click here. Heck, I’ll even let you look at his brokerage statements if you decide to invest alongside us!

Related posts:

  1. The Economy Is Not Always the Stock Market Driver
  2. The Stock Market Is Starting to Look Toppy
  3. Another Warning Bell Rings for the Stock Market

Read more here:
Five strategies I’m using to help dad beat the stock market

Commodities, ETF, Mutual Fund, Uncategorized

Five strategies I’m using to help dad beat the stock market

October 26th, 2010

Nilus Mattive

You might remember that back in June my 63-year-old dad decided to let me begin managing his $100,000 retirement account at Vanguard. The goal was to help him get better returns than he was earning with a money market fund. And while I’ve been talking about retirement matters, CDs, and other topics lately, the big unanswered question in the room has been: “So how are things actually going in that new portfolio?”

The short answer: In just three months, dad is already up many multiples of what he would have gotten from his money market fund for an entire year.

Today I’m going to talk about five of the strategies I’ve been using to help his portfolio outperform … and show you how to benefit from them, too.

But before I do, I want you to see the first four investments dad bought and how they’ve worked out so far …

chart1 Five strategies Im using to help dad beat the stock market

As you can see, every single position is up so far. And what’s especially important is that each individual holding is beating the S&P 500 index — with one stock more than doubling its benchmark’s performance, and another nearly tripling it.

I should also mention that dividends are not even factored into the performance numbers above. And if you look at the column on the far right you’ll notice that each one of our holdings carries a significant annual yield. Heck, one should hand dad another 7 percent return over the next year just from dividends!

Mind you, the returns above are not hypothetical. They are the actual results my dad has gotten through real orders placed in his Vanguard account. And while all these positions are still open and anything can happen from here on out, I’m confident we’re going to continue increasing his nest egg safely and efficiently.

Why do I think so? How are we consistently beating our benchmark like this?

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Click here to learn how you can access his recommendations before it’s too late.

Here Are Five Strategies I’m Using in Dad’s Portfolio …

First off, it should be pretty obvious that I’m favoring dividend stocks right now. That’s because:

  1. They have the best relative yields at the moment — meaning they’re paying more than CDs, money market funds, and most bonds right now.
  2. I believe they are actually less risky than other income-producing investments, especially longer-term Treasury bonds.
  3. Over time, these companies should continue raising their dividends, which means dad’s effective yields can go even higher the longer he holds his positions.
  4. Plus, there are still plenty of values to be found in the stock market because most investors remain shell-shocked from the beating they took over the last few years.

Of course, these are all things I’ve been saying here in Money and Markets for a long time now so they should come as no surprise to you. Still, you might be wondering how I’m picking the individual positions.

Well, let’s start with …

Strategy #1. I’m looking for companies that others are ignoring.

If you refer back to that performance table, you’ll see that one of the positions has already risen more than 26 percent in two months.

What’s interesting about that stock is that I recommended it right around the time that nearly everyone else was writing it off. The company had posted a couple quarters of lackluster results and people were assuming it would just keep dragging along the bottom. After all, the stock hadn’t moved much even as the market rallied substantially.

I thought differently. In fact, all my indicators were telling me things were actually going much better than people thought. I liked that the company had just boosted its dividend substantially, too. The fact that its stock had been lagging was a good thing!

So I told dad to buy it. And when the firm came out with its latest quarterly results a few weeks ago, it blew away estimates … with the shares rising more than 12 percent that day alone.

Since then, a bunch of analysts and experts have come out praising the stock. Go figure!

That leads me to another point …

Strategy #2. I’m using charts to help find entry and exit points.

Let’s stick with the same stock for a minute. In addition to the fundamental picture, which I thought everyone was getting wrong, I also saw that it was nearing a point on the charts that represented a long-term point of support. In other words, when the stock had hit that level in the past, it had bounced higher again.

More importantly, I also saw that there was another level a bit higher that had presented a strong ceiling plenty of times in the recent past.

Take a look at this chart and you’ll see what I mean:

chart2 Five strategies Im using to help dad beat the stock market

The green line represents a previous bottom. The red line represents an area that had repeatedly presented strong resistance. The green arrow is where I told dad to buy. And the red arrow shows the stock breaking through resistance and then surging higher on the strong earnings release.

Now, do things always work out this perfectly? No way! Nor am I some huge fan of using complicated technical analysis.

At the same time, I recognize that charts do give me another way to evaluate positions, especially in the tricky markets we have today.

Speaking of which …

Strategy #3: I’m generally telling dad to use limit orders. These instructions tell your broker to buy or sell your shares within specific price ranges.

So in the case of buy orders, I’m almost always telling dad to “place a good-till-cancelled order to buy at such and such a price or better.”

Why bother, especially in a longer-term income portfolio?

Because I believe it’s good to be disciplined and to name your price for something before you buy it. It’s the difference between going to the grocery story with a shopping list and coupons in hand or stuffing your shopping cart full of items that catch your attention as you browse.

In short, placing orders this way forces you to wait for the stock to come to you at a price you’re truly happy with. And every extra bit you shave off your entry adds to your bottom line on the exit.

By the way, in one case, a stock I recommended started rising before dad ever had a chance to get in. And rather than having him chase it, I told him to cancel the order!

Strategy #4. I’m staying aware of currency movements. While I’m not looking to recommend specific currency investments to dad, I am always considering how movements in the currency markets can help or hurt his portfolio.

So it’s no coincidence that two of dad’s positions are benefitting from the recent weakness in the U.S. dollar.

The first is our oil and gas play — that’s because as the greenback moves lower, oil usually trends higher.

The second is a foreign utility company. Because it’s a foreign stock trading on a U.S. exchange, dad benefits whenever the company’s home currency strengthens against ours. Better yet, since his dividend payments are also originally denominated in the company’s home currency, he can get fatter checks when those dividends are converted into dollars, too.

Strategy #5. I’m keeping an open mind. Sure, right now we’re having some success with dividend stocks. But that doesn’t mean I won’t recommend bonds when the time is right. Or use plenty of other investments and strategies I’ve got in my playbook.

Same thing with our timeframe for holding investments — while I generally believe in keeping solid companies for long periods of time, I’m not opposed to taking profits when a position runs up in a short period of time.

The name of the game is going where others aren’t and always balancing the risk with the reward.

That’s what I’m going to keep doing for dad … and I hope you try and do the same!

Best wishes,

Nilus

P.S. I just sent out another new recommendation and dad will be acting on it tomorrow. If you’d like to get the name of this new “buy” immediately … along with complete details on all the positions he currently owns, just click here. Heck, I’ll even let you look at his brokerage statements if you decide to invest alongside us!

Related posts:

  1. The Economy Is Not Always the Stock Market Driver
  2. The Stock Market Is Starting to Look Toppy
  3. Another Warning Bell Rings for the Stock Market

Read more here:
Five strategies I’m using to help dad beat the stock market

Commodities, ETF, Mutual Fund, Uncategorized

Cambria Global Tactical ETF (GTAA) Opens Doors To Investors

October 26th, 2010

AdvisorShares launches the Cambria Global Tactical ETF (GTAA: 0.00 N/A) today, trading under the ticker name GTAA on the NYSE. This is AdvisorShares’ fourth actively-managed ETF product launch with its most successful being the recently launched Mars Hill Global Relative Value ETF (GRV: 24.55 0.00%) – a long/short fund that has garnered more than $40 million in assets in quick time.

Fund Mandate/Strategy

AdvisorShares filed for the Cambria Global Tactical ETF back in June of this year. GTAA will attempt to grow capital by investing across every major asset class – US equity, foreign equity, fixed-income, real estate, commodities and currency markets. There are only 2 existing Active ETFs on the market that provide a multi-asset class exposure – the iShares Diversified Alternatives Trust (ALT: 51.05 0.00%) and the AdvisorShares’ own Dent Tactical ETF (DENT: 20.40 0.00%). The managers will implement their strategy by investing in other ETFs that provide the desired exposures. The fund is looking to achieve absolute returns – ie. it will attempt to achieve a positive return regardless of the general market direction.

Essentially, GTAA will utilize a trend-following strategy that is based on a quantitative model to actively manage the portfolio and no effort will be made to forecast future market direction or conditions. Instead, the managers will look to capture these trends as and when they appear. Such a philosophy is the crux of many trend-following strategies because the managers do not believe they can forecast future markets accurately, so they instead focus efforts on spotting a change in trends and capitalizing on them. The fund’s portfolio manager, Mebane Faber, confirms their strategy in a press release from AdvisorShares, saying that, “Investors will appreciate the fact that we make no effort to forecast future market trends or direction, but rather attempt to capture profits in these trends when and where they develop”. As with all actively-managed ETFs in the US, the fund will disclose the portfolio holdings on its website every day after close of trading.

Sub-Advisors

GTAA will be sub-advised by Cambria Investment Management and the two portfolio managers of the fund will be Mebane Faber, CIO of Cambria and Eric Richardson, CEO of Cambria. Mebane Faber is the author of the book “The Ivy Portfolio” and also writes on a well-frequented blog called World Beta at http://www.mebanefaber.com/.

Noah Hamman, CEO and Founder of AdvisorShares added, “Cambria has done an outstanding job developing research and education related to a GTAA strategy via their popular white paper, ‘A Quantitative Approach to Tactical Asset Allocation,’ and their recent book, ‘The Ivy Portfolio.’ We are very excited to be able to offer this risk-managing strategy to investors in an actively managed ETF.”

Cambria is based out of California and was set up in 2006. As of June 2010, it managed $26 million in assets. The prospectus provides some details on the historical track record of the Global Tactical Asset Allocation composite which has largely similar strategies and objectives. The composite, with an inception date of March 1, 2007 has outperformed its “blended benchmark” since inception by an impressive 6.69% and outperformed the S&P500 by 7.34%, on an annualized basis. In the last 1 year though, the Global Tactical Asset Allocation composite returned 11.24% where the S&P500 returned 47.28%, which gives an indication that this portfolio might be a good holding in down markets, but could underperform in upward trending markets.

Fee Structure

The fund will charge investors a total expense ratio of 1.35%, including a base management fee of 0.90%. Both the fund manager, AdvisorShares, and the fund sub-advisor, Cambria, have a tiered fee structure established that will depend on level of assets in the fund. The total expenses include “Acquired Fund Fees” of 0.30% to account for the expense ratios of all the underlying ETFs that the fund will invest in. AdvisorShares is providing a fee reduction of 0.16% to bring the expenses down from 1.51% to 1.35%.

Commodities, ETF, Real Estate

Cambria Global Tactical ETF (GTAA) Opens Doors To Investors

October 26th, 2010

AdvisorShares launches the Cambria Global Tactical ETF (GTAA: 0.00 N/A) today, trading under the ticker name GTAA on the NYSE. This is AdvisorShares’ fourth actively-managed ETF product launch with its most successful being the recently launched Mars Hill Global Relative Value ETF (GRV: 24.55 0.00%) – a long/short fund that has garnered more than $40 million in assets in quick time.

Fund Mandate/Strategy

AdvisorShares filed for the Cambria Global Tactical ETF back in June of this year. GTAA will attempt to grow capital by investing across every major asset class – US equity, foreign equity, fixed-income, real estate, commodities and currency markets. There are only 2 existing Active ETFs on the market that provide a multi-asset class exposure – the iShares Diversified Alternatives Trust (ALT: 51.05 0.00%) and the AdvisorShares’ own Dent Tactical ETF (DENT: 20.40 0.00%). The managers will implement their strategy by investing in other ETFs that provide the desired exposures. The fund is looking to achieve absolute returns – ie. it will attempt to achieve a positive return regardless of the general market direction.

Essentially, GTAA will utilize a trend-following strategy that is based on a quantitative model to actively manage the portfolio and no effort will be made to forecast future market direction or conditions. Instead, the managers will look to capture these trends as and when they appear. Such a philosophy is the crux of many trend-following strategies because the managers do not believe they can forecast future markets accurately, so they instead focus efforts on spotting a change in trends and capitalizing on them. The fund’s portfolio manager, Mebane Faber, confirms their strategy in a press release from AdvisorShares, saying that, “Investors will appreciate the fact that we make no effort to forecast future market trends or direction, but rather attempt to capture profits in these trends when and where they develop”. As with all actively-managed ETFs in the US, the fund will disclose the portfolio holdings on its website every day after close of trading.

Sub-Advisors

GTAA will be sub-advised by Cambria Investment Management and the two portfolio managers of the fund will be Mebane Faber, CIO of Cambria and Eric Richardson, CEO of Cambria. Mebane Faber is the author of the book “The Ivy Portfolio” and also writes on a well-frequented blog called World Beta at http://www.mebanefaber.com/.

Noah Hamman, CEO and Founder of AdvisorShares added, “Cambria has done an outstanding job developing research and education related to a GTAA strategy via their popular white paper, ‘A Quantitative Approach to Tactical Asset Allocation,’ and their recent book, ‘The Ivy Portfolio.’ We are very excited to be able to offer this risk-managing strategy to investors in an actively managed ETF.”

Cambria is based out of California and was set up in 2006. As of June 2010, it managed $26 million in assets. The prospectus provides some details on the historical track record of the Global Tactical Asset Allocation composite which has largely similar strategies and objectives. The composite, with an inception date of March 1, 2007 has outperformed its “blended benchmark” since inception by an impressive 6.69% and outperformed the S&P500 by 7.34%, on an annualized basis. In the last 1 year though, the Global Tactical Asset Allocation composite returned 11.24% where the S&P500 returned 47.28%, which gives an indication that this portfolio might be a good holding in down markets, but could underperform in upward trending markets.

Fee Structure

The fund will charge investors a total expense ratio of 1.35%, including a base management fee of 0.90%. Both the fund manager, AdvisorShares, and the fund sub-advisor, Cambria, have a tiered fee structure established that will depend on level of assets in the fund. The total expenses include “Acquired Fund Fees” of 0.30% to account for the expense ratios of all the underlying ETFs that the fund will invest in. AdvisorShares is providing a fee reduction of 0.16% to bring the expenses down from 1.51% to 1.35%.

Commodities, ETF, Real Estate

VIX and VXX: In the Beginning…

October 26th, 2010

ucationalLast week in What Do You Want to Know About VXX? I asked readers for their thoughts on what to cover in what I anticipated would be a big kitchen sink post about the iPath S&P 500 VIX Short-Term Futures ETN (VXX.)

After reflecting upon the many thoughtful emails and comments I received, I realized that the scope of interest in and confusion about this product is sufficient to warrant a multi-part series. The more I thought about the broad spectrum of knowledge and lack of knowledge pertaining to VXX, the more I realized that it makes sense to start at the beginning to give investors of all experience levels as well as recent additions to the blog readership an opportunity to approach the subject with the same foundation of knowledge and context.

So…for the first time since launching this blog four years ago, I will start with the most basic question of all: what is the VIX?

The VIX, whose formal name is the CBOE Volatility Index, is a calculation made by the CBOE of market expectations of 30-day implied volatility for S&P 500 index options. The CBOE calculates and disseminates VIX values every 15 seconds during the index trading day, which runs from 9:30 a.m. to 4:15 p.m. Eastern Time. In other words, the VIX is calculated during the normal NYSE trading day, plus 15 minutes after the close of normal trading.

With any luck, the graphic I created below simplifies the explanation of how the VIX is calculated.

The intent of the graphic is to demonstrate that out of the universe of all traded stocks, the VIX is concerned only with the stocks which comprise the S&P 500 index, also known by its ticker symbol, SPX. The S&P 500 index is maintained by an index committee (more details here), with periodic changes to the index constituents. The VIX is calculated using near term SPX options (typically the first two months) and a wide range of strikes (see the CBOE’s VIX white paper for details on the calculation methodology) and essentially reflects the implied volatility of those options used in the calculations.

The result is the market’s estimate of implied volatility for the S&P 500 index for the next 30 days, stated in annualized terms. See Rule of 16 and VIX of 40 for a better sense of how standard deviations are factored into the VIX and how to interpret the VIX in terms of standard deviations.

In the next installment, I will make the jump from the VIX to VXX, but in order to do so, we will have to become familiar with VIX futures as well.

For those who are interested in some additional reading, the links below are an excellent place to start, as are all the VIX and More posts tagged with the “educational” label.

Related posts:

Disclosure(s): short VXX at time of writing



Read more here:
VIX and VXX: In the Beginning…

OPTIONS, Uncategorized

Tiny Tim’s Big Fantasy

October 25th, 2010

Markets were mostly flat on Friday.

Then, this weekend, US Treasury Secretary Geithner proposed to the world’s finance ministers that they cap their current account surpluses at a fixed percentage of GDP.

How would that work? Why do it at all?

What’s the point?

Oh…we were going to answer those questions. But then, we said to ourself,
‘why bother?’

The whole thing is a fantasy. A hallucination. And a scam. It doesn’t deserve a serious discussion.

Geithner is the secretary of the treasury of the world’s largest economy. There is no evidence — none — that he has ever actually understood what is going on. If he had understood he certainly never bothered to say anything…

…that is, about the credit crisis…about de-leveraging…about the threat of too much debt…and everything else that has happened over the last three years.

Instead, all he has done is REACT to the crisis as it developed…always in the same way, by attempting to avoid any big change or any big losses to the people who most deserve them. Of course, the markets were clearly signaling the need for a major change of direction. The biggest, and formerly most profitable, financial corporations in America were faced with bankruptcy…and millions and millions individuals were in big trouble too….

…but Geithner didn’t understand any of this…

Still, he’s the guy who’s now suggesting HUGE new rules that the whole world will have to live by. Countries capping their surpluses? It is equivalent to individuals putting a limit on how much they save.

What’s the point of it? It would force the savers to spend…and thereby, presumably, reduce the value of whatever currency they spend (by increasing the demand side of the equation). What currency will they be spending? Easy, they’ll spend the currency they are saving — dollars!

Oh that Tim Geithner! What a clever guy. Put a cap on savings and you force people to spend dollars…driving down the value of the dollar and thereby simultaneously decreasing the real value of US external debt…and making US products and services more attractive to foreign buyers.

Well, our hat’s off to Mr. Geithner. The man has come up with an unworkable plan that no foreign nation will actually implement in any serious way. Actually, it is a nutty plan. Forcing people to spend money? Are you kidding? It just shows how little he really understands. A real economy cannot be ordered around or organized in such a heavy handed way. Price controls, central planning, government management of business and investment — they all always fail.

Still, he’s … at least he’s trying, right? Give the man credit for that…the numbskull.

And more thoughts…

“The French are crazy. What do they think they are doing?”

The comment and question came up at a cocktail party. Our youngest son is in the French school in Washington. Occasionally, we are invited to meet other parents.

“My wife is French,” continued a new friend, a former banker with the IMF. “We live there part of the year and have a house near the Swiss border. But I’m thinking of selling everything in France and moving all my assets out of the country.

“There is no way that this is going to end well. I mean, they’re shutting down the country because Sarkozy is proposing to increase the retirement age from 60 to 62. They must be dreaming. Sarkozy is not increasing the retirement age because he is a mean fellow. He’s doing it because he knows the country can’t afford not to do it.

“It’s such a modest little reform. They actually need to do much more. Like they’re doing in England. But the French are so funny. At the smallest provocation they take to the streets. They set cars afire. They think that if they are politically active and powerful enough, the money to finance these things will magically appear. But it won’t. And they’ll have to come to grips with reality sooner or later.

“The real problem is that the promises made by the welfare state are just too ambitious. As long as the economy is on the up and up people think they can afford to expand these benefits. Each generation thinks it deserves more than its parents, because it is richer. But the trouble is that the politicians can expand the claims on wealth faster than wealth itself can expand.

“And then, when it becomes clear that wealth is not expanding as fast as people had hoped, all the forecasts and the projections are shown to be nonsense. The people have been promised things that they can’t possibly afford. And sooner or later some government has to come to terms with it. Sarkozy is just the beginning of the story. He’s just barely tackling the real problem. He’ll have to make much more dramatic cuts in order to make the budget work.

“You know, Europe agreed to limit deficits to 3% of GDP. The idea was the countries would lose their voting rights in the European Union if they went over that limit. France is now at 8%. There is no question that they’re going to take away France’s votes. It just isn’t going to happen.

“But France is in trouble. And if it can’t deal with its problems in a reasonable way, the problems will just get worse and worse…until they finally explode. How? When? I certainly don’t know. But I do know that there is no way France can continue spending money the way it is now.

“And I also know that the US is not that different. It actually has more debt than France. The average Frenchman doesn’t have nearly as much debt as the average American. And at least the average Frenchman knows there is a problem. He just doesn’t understand it well enough to do anything serious or smart about it.

“But the average American doesn’t even know he has a problem. And while Sarkozy is at least beginning to trying to bring government spending into line with likely revenues, in America that conversation really has not even begun.

“In some ways, the US is much worse off than France. Neither its leaders nor its voters seem to have any idea of the problem that awaits them.

“Maybe I should sell all my assets in the US too.”

Regards,

Bill Bonner,
for The Daily Reckoning

Tiny Tim’s Big Fantasy 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:
Tiny Tim’s Big Fantasy




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

Tiny Tim’s Big Fantasy

October 25th, 2010

Markets were mostly flat on Friday.

Then, this weekend, US Treasury Secretary Geithner proposed to the world’s finance ministers that they cap their current account surpluses at a fixed percentage of GDP.

How would that work? Why do it at all?

What’s the point?

Oh…we were going to answer those questions. But then, we said to ourself,
‘why bother?’

The whole thing is a fantasy. A hallucination. And a scam. It doesn’t deserve a serious discussion.

Geithner is the secretary of the treasury of the world’s largest economy. There is no evidence — none — that he has ever actually understood what is going on. If he had understood he certainly never bothered to say anything…

…that is, about the credit crisis…about de-leveraging…about the threat of too much debt…and everything else that has happened over the last three years.

Instead, all he has done is REACT to the crisis as it developed…always in the same way, by attempting to avoid any big change or any big losses to the people who most deserve them. Of course, the markets were clearly signaling the need for a major change of direction. The biggest, and formerly most profitable, financial corporations in America were faced with bankruptcy…and millions and millions individuals were in big trouble too….

…but Geithner didn’t understand any of this…

Still, he’s the guy who’s now suggesting HUGE new rules that the whole world will have to live by. Countries capping their surpluses? It is equivalent to individuals putting a limit on how much they save.

What’s the point of it? It would force the savers to spend…and thereby, presumably, reduce the value of whatever currency they spend (by increasing the demand side of the equation). What currency will they be spending? Easy, they’ll spend the currency they are saving — dollars!

Oh that Tim Geithner! What a clever guy. Put a cap on savings and you force people to spend dollars…driving down the value of the dollar and thereby simultaneously decreasing the real value of US external debt…and making US products and services more attractive to foreign buyers.

Well, our hat’s off to Mr. Geithner. The man has come up with an unworkable plan that no foreign nation will actually implement in any serious way. Actually, it is a nutty plan. Forcing people to spend money? Are you kidding? It just shows how little he really understands. A real economy cannot be ordered around or organized in such a heavy handed way. Price controls, central planning, government management of business and investment — they all always fail.

Still, he’s … at least he’s trying, right? Give the man credit for that…the numbskull.

And more thoughts…

“The French are crazy. What do they think they are doing?”

The comment and question came up at a cocktail party. Our youngest son is in the French school in Washington. Occasionally, we are invited to meet other parents.

“My wife is French,” continued a new friend, a former banker with the IMF. “We live there part of the year and have a house near the Swiss border. But I’m thinking of selling everything in France and moving all my assets out of the country.

“There is no way that this is going to end well. I mean, they’re shutting down the country because Sarkozy is proposing to increase the retirement age from 60 to 62. They must be dreaming. Sarkozy is not increasing the retirement age because he is a mean fellow. He’s doing it because he knows the country can’t afford not to do it.

“It’s such a modest little reform. They actually need to do much more. Like they’re doing in England. But the French are so funny. At the smallest provocation they take to the streets. They set cars afire. They think that if they are politically active and powerful enough, the money to finance these things will magically appear. But it won’t. And they’ll have to come to grips with reality sooner or later.

“The real problem is that the promises made by the welfare state are just too ambitious. As long as the economy is on the up and up people think they can afford to expand these benefits. Each generation thinks it deserves more than its parents, because it is richer. But the trouble is that the politicians can expand the claims on wealth faster than wealth itself can expand.

“And then, when it becomes clear that wealth is not expanding as fast as people had hoped, all the forecasts and the projections are shown to be nonsense. The people have been promised things that they can’t possibly afford. And sooner or later some government has to come to terms with it. Sarkozy is just the beginning of the story. He’s just barely tackling the real problem. He’ll have to make much more dramatic cuts in order to make the budget work.

“You know, Europe agreed to limit deficits to 3% of GDP. The idea was the countries would lose their voting rights in the European Union if they went over that limit. France is now at 8%. There is no question that they’re going to take away France’s votes. It just isn’t going to happen.

“But France is in trouble. And if it can’t deal with its problems in a reasonable way, the problems will just get worse and worse…until they finally explode. How? When? I certainly don’t know. But I do know that there is no way France can continue spending money the way it is now.

“And I also know that the US is not that different. It actually has more debt than France. The average Frenchman doesn’t have nearly as much debt as the average American. And at least the average Frenchman knows there is a problem. He just doesn’t understand it well enough to do anything serious or smart about it.

“But the average American doesn’t even know he has a problem. And while Sarkozy is at least beginning to trying to bring government spending into line with likely revenues, in America that conversation really has not even begun.

“In some ways, the US is much worse off than France. Neither its leaders nor its voters seem to have any idea of the problem that awaits them.

“Maybe I should sell all my assets in the US too.”

Regards,

Bill Bonner,
for The Daily Reckoning

Tiny Tim’s Big Fantasy 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:
Tiny Tim’s Big Fantasy




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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