5 Chinese Stocks with Unlimited Potential

September 22nd, 2010

5 Chinese Stocks with Unlimited Potential

Investing in China has not been for the faint of heart. Shares of major companies have surged and fallen in repeating cycles during the past few years. But take a step back and note that China's economic growth has only been going one way — up. China has had a remarkable run and years of robust economic growth have enabled it to move into the top tier of global economies in terms of GDP.

Thanks to the laws of bigness, China's future economic growth is unlikely to be as impressive. But thanks to very heavy investments in infrastructure, China is now well-equipped to handle a sustained period of solid economic growth — perhaps in the +4% to +5% range. That's a rate that we here in the United States can only envy.

The key then is to not simply focus on Chinese stocks that are doing great right now, but instead look for Chinese companies that stand to do well over time — that means companies focused on China's emerging middle class. As the ranks of the Chinese middle class swell, look for growing spending on health care, retail goods and tourism, along with sustained advances in agricultural yields and energy efficiency.

Ctrip.com (Nasdaq: CTRP)
With rising disposable income comes the urge to travel, and Chinese citizens are increasingly venturing out, either elsewhere in China or throughout Asia. And they're increasingly using the Internet to research and book flights and hotels. But this is not yet a mature business. Less than 30% of the Chinese population is currently online, compared to more than 70% in countries such as Korea, Japan and Singapore, according to global communications firm Fleishmann-Hillard.

How large is the potential travel market? During the late September/early October holidays, roughly 200 million Chinese are expected to hit the road (mostly to go back to their home region). That's nearly the entire population of the United States. And according to analysts at Brean Murray, 10% of Chinese travelers now use the Internet to arrange travel plans — roughly 20 million people. That figure is expected to rise to 60 million in 10 years.

Ctrip.com is seen as the best pure play in the online booking space (along the lines of Expedia (Nasdaq: EXPE)), and has considerable brand recognition in this fast-growing area. Web portal Taobao.com has vowed to overtake Ctrip.com eventually, but there's ample room for both of these firms to flourish.

As for major hotel chains, Home Inns & Hotels (Nasdaq: HMIN) has established a national network of lodgings, along the lines of Holiday Inn or Best Western. China Lodging (Nasdaq: HTHT) has similarly built an impressive national footprint. However, both of these stocks are awfully expensive based on trailing and current earnings. This is a case where it may be wise to wait for a pullback, so you may want to put these names on your watch list.

The ad market builds
Chinese consumers are bombarded with advertising pitches at every turn. But companies are realizing that the scatter-shot approach isn't helping to truly establish brands in consumers' minds, so they are turning to specialized agencies that have more targeted ad campaigns tied in across several types of media. Sina.com (Nasdaq: SINA) has emerged as a leader in the space. The company's range of tools, both offline and offline, are considered to be very innovative, which has enabled Sina.com to quickly build a large base of Chinese and foreign clients that are looking to get a foothold in China.

The market for Sina.com's services slowed earlier this year, and sales growth is expected to cool to about +10% in 2010. But recent results have been much more encouraging, leading analysts to expect a +20% rebound in sales next year. Over the long haul, investors should expect solid +10% top-line growth and more impressive bottom-line results.

Deer Consumer Products (Nasdaq: DEER)
I've written about this company several times before, noting that it is morphing from a supplier of global kitchen appliance firms into a solid brand in its own right in China. Growth has ranged from steady to spectacular: sales are likely to double this year and grow another +25% in 2011. Longer-term, sales growth is likely to moderate in step with China's decelerating GDP growth.

Shares of Deer hit almost $18 last fall and can now be had for less than $10, even as earnings per share (EPS) estimates have steadily risen during that time frame. The company's balance sheet is helping to support shares, as management has recently announced a series of stock buybacks. This is a solid, unsexy play on the Chinese consumer.

Cars, cars and more cars
Chinese consumers have quickly grown to love their cars. And the nascent Chinese auto industry aims to capitalize on that demand and also eventually export to other markets — if quality standards can be boosted. It's hard to find U.S.-traded shares of any Chinese auto makers, but Wonder Auto Group (Nasdaq: WATG) is a backdoor play, providing a wide range of auto parts to the big auto makers. The company makes everything from alternators to seat belts to airbags. And as is the case with Deer Consumer Products, exports are also part of the picture, which explains why the auto parts sector has been growing even faster than the auto sector itself.

Water treatment
China's water woes have been widely chronicled. The country's pro-industrial policies led to epidemic levels of pollutants being dumped into the country's major waterways. Regulatory efforts are finally starting to take root, but it will be many years before the water from major rivers is truly potable. But China is aggressively building filtration plants to at least clean up the dirty water so it is fit for consumption. The Chinese government is increasingly turning to companies like Duoyuan Global Water (NYSE: DGW). This company makes a range of filtration products, water softeners and ultra-violet sterilization equipment.

Shares plunged more than -40% on September 13 when Duoyuan Printing (NYSE: DYP) owned up to some accounting problems. The two companies are unrelated except that they have the same Chairman. As of now, Duoyuan Global Water simply looks guilty by association. If the company can avoid accounting troubles in coming months and auditors continue to give it a clean bill of health, shares should move back up off current lows. More importantly, the company's products should see considerable demand for the foreseeable future.

Action to Take –> These are just a few of the stocks that investors looking at China should be researching. In many respects, the theme is even more important than specific stock selection. China's economy has become too large to ignore, and many China-focused companies will see a very long period of sales and profit growth.


– 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
5 Chinese Stocks with Unlimited Potential

Read more here:
5 Chinese Stocks with Unlimited Potential

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5 Chinese Stocks with Unlimited Potential

September 22nd, 2010

5 Chinese Stocks with Unlimited Potential

Investing in China has not been for the faint of heart. Shares of major companies have surged and fallen in repeating cycles during the past few years. But take a step back and note that China's economic growth has only been going one way — up. China has had a remarkable run and years of robust economic growth have enabled it to move into the top tier of global economies in terms of GDP.

Thanks to the laws of bigness, China's future economic growth is unlikely to be as impressive. But thanks to very heavy investments in infrastructure, China is now well-equipped to handle a sustained period of solid economic growth — perhaps in the +4% to +5% range. That's a rate that we here in the United States can only envy.

The key then is to not simply focus on Chinese stocks that are doing great right now, but instead look for Chinese companies that stand to do well over time — that means companies focused on China's emerging middle class. As the ranks of the Chinese middle class swell, look for growing spending on health care, retail goods and tourism, along with sustained advances in agricultural yields and energy efficiency.

Ctrip.com (Nasdaq: CTRP)
With rising disposable income comes the urge to travel, and Chinese citizens are increasingly venturing out, either elsewhere in China or throughout Asia. And they're increasingly using the Internet to research and book flights and hotels. But this is not yet a mature business. Less than 30% of the Chinese population is currently online, compared to more than 70% in countries such as Korea, Japan and Singapore, according to global communications firm Fleishmann-Hillard.

How large is the potential travel market? During the late September/early October holidays, roughly 200 million Chinese are expected to hit the road (mostly to go back to their home region). That's nearly the entire population of the United States. And according to analysts at Brean Murray, 10% of Chinese travelers now use the Internet to arrange travel plans — roughly 20 million people. That figure is expected to rise to 60 million in 10 years.

Ctrip.com is seen as the best pure play in the online booking space (along the lines of Expedia (Nasdaq: EXPE)), and has considerable brand recognition in this fast-growing area. Web portal Taobao.com has vowed to overtake Ctrip.com eventually, but there's ample room for both of these firms to flourish.

As for major hotel chains, Home Inns & Hotels (Nasdaq: HMIN) has established a national network of lodgings, along the lines of Holiday Inn or Best Western. China Lodging (Nasdaq: HTHT) has similarly built an impressive national footprint. However, both of these stocks are awfully expensive based on trailing and current earnings. This is a case where it may be wise to wait for a pullback, so you may want to put these names on your watch list.

The ad market builds
Chinese consumers are bombarded with advertising pitches at every turn. But companies are realizing that the scatter-shot approach isn't helping to truly establish brands in consumers' minds, so they are turning to specialized agencies that have more targeted ad campaigns tied in across several types of media. Sina.com (Nasdaq: SINA) has emerged as a leader in the space. The company's range of tools, both offline and offline, are considered to be very innovative, which has enabled Sina.com to quickly build a large base of Chinese and foreign clients that are looking to get a foothold in China.

The market for Sina.com's services slowed earlier this year, and sales growth is expected to cool to about +10% in 2010. But recent results have been much more encouraging, leading analysts to expect a +20% rebound in sales next year. Over the long haul, investors should expect solid +10% top-line growth and more impressive bottom-line results.

Deer Consumer Products (Nasdaq: DEER)
I've written about this company several times before, noting that it is morphing from a supplier of global kitchen appliance firms into a solid brand in its own right in China. Growth has ranged from steady to spectacular: sales are likely to double this year and grow another +25% in 2011. Longer-term, sales growth is likely to moderate in step with China's decelerating GDP growth.

Shares of Deer hit almost $18 last fall and can now be had for less than $10, even as earnings per share (EPS) estimates have steadily risen during that time frame. The company's balance sheet is helping to support shares, as management has recently announced a series of stock buybacks. This is a solid, unsexy play on the Chinese consumer.

Cars, cars and more cars
Chinese consumers have quickly grown to love their cars. And the nascent Chinese auto industry aims to capitalize on that demand and also eventually export to other markets — if quality standards can be boosted. It's hard to find U.S.-traded shares of any Chinese auto makers, but Wonder Auto Group (Nasdaq: WATG) is a backdoor play, providing a wide range of auto parts to the big auto makers. The company makes everything from alternators to seat belts to airbags. And as is the case with Deer Consumer Products, exports are also part of the picture, which explains why the auto parts sector has been growing even faster than the auto sector itself.

Water treatment
China's water woes have been widely chronicled. The country's pro-industrial policies led to epidemic levels of pollutants being dumped into the country's major waterways. Regulatory efforts are finally starting to take root, but it will be many years before the water from major rivers is truly potable. But China is aggressively building filtration plants to at least clean up the dirty water so it is fit for consumption. The Chinese government is increasingly turning to companies like Duoyuan Global Water (NYSE: DGW). This company makes a range of filtration products, water softeners and ultra-violet sterilization equipment.

Shares plunged more than -40% on September 13 when Duoyuan Printing (NYSE: DYP) owned up to some accounting problems. The two companies are unrelated except that they have the same Chairman. As of now, Duoyuan Global Water simply looks guilty by association. If the company can avoid accounting troubles in coming months and auditors continue to give it a clean bill of health, shares should move back up off current lows. More importantly, the company's products should see considerable demand for the foreseeable future.

Action to Take –> These are just a few of the stocks that investors looking at China should be researching. In many respects, the theme is even more important than specific stock selection. China's economy has become too large to ignore, and many China-focused companies will see a very long period of sales and profit growth.


– 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
5 Chinese Stocks with Unlimited Potential

Read more here:
5 Chinese Stocks with Unlimited Potential

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This Dow Stock is Overvalued by at Least 25%

September 22nd, 2010

This Dow Stock is Overvalued by at Least 25%

Cyclical stocks have always been tricky for investors. At the bottom of an economic cycle, they can appear to have fairly high price-to-earnings (P/E) ratios as investors look ahead to better times. When the cycle improves and approaches a peak, the P/E multiple then tends to shrink as investors brace for an earnings downdraft. That's why a company like U.S. Steel (NYSE: X) can trade for 30 or 40 times profits during bad times, but end up trading for only six or seven times profits when earnings growth has maxed out.

In that light, it's a bit curious that shares of Boeing (NYSE: BA) trade for 13 times next year's earnings. Because by my math, 2011 could wind up being a peak year for Boeing, and profits look set to slump in subsequent years. Don't blame the economy. For the broader economy — and many cyclical stocks — the economic cycle has only just begun to turn and we may not see a peak until the middle of the decade. Boeing is peaking for an entirely different reason. One of its core markets is about to flatten out and then shrink. And the other market is about to see a sharp spike in competition.

A sea change at the Dept. of Defense
In recent weeks, Defense Secretary Robert Gates has made it increasingly clear that his department will have to tighten its belt along with everyone else. For now, that means the never-ending budget increases in defense spending will need to come to a halt. And after the war in Afghanistan concludes, defense spending could start to fall at a steady clip. During the past 10 years, spending at the Department of Defense has gone up an average of +6.4% every year. That works out to an +86% increase in the past 10 years. That looks set to reverse course, unless we enter into another war. In the 1990s, defense spending reductions were called a “peace dividend.” This time, those spending cuts could be known as “budget saviors.”

Boeing's defense business, which represents half of company sales, focuses on weapons and aircraft capabilities, intelligence and surveillance systems, communications architectures and extensive large-scale integration expertise. Demand will always remain for these types of items, but Boeing is already seeing certain potentially lucrative programs get cut from the budget. And the process is just getting started. “Based on our reading of the 2010 Quadrennial Defense Review (QDR), we believe long-term major development programs will come under more scrutiny, and therefore we expect to see more disciplined spending on these programs in the future,” note analysts at Imperial Capital. In addition, Boeing is the fourth-largest vendor to the Department of Homeland Security (DHS), with $2.3 billion in sales last year. The DHS budget is also at risk of a pullback in spending as industry analysts increasingly agree that the DHS has become bloated and unwieldy.

Commercial airline competition heats up
For many years Boeing and Airbus enjoyed a virtual stranglehold in the commercial aerospace market. But in the last decade, Canada's Bombardier and Brazil's Embraer (NYSE: ERJ) developed impressive new planes, cannibalizing market share in the regional jet category.
[Read: This Unknown Brazilian Stock Could Unseat Two Global Powerhouses]

Boeing and Airbus' grip on the jumbo jet market has been untouched and is likely to remain that way. But the market for smaller planes is about to get a lot more crowded, creating real competition for the Boeing 737 and the Airbus 320. Industry publication AirInsight recently noted that: “New entrants for the 150-seat market segment in China, Russia and potentially Japan will have an impact on Airbus and Boeing. While we don't expect these programs to be particularly successful outside the home markets, these domestic sales will significantly eat into the market shares of Airbus and Boeing.”

Action to Take –> Boeing can still count on a fairly hefty backlog in each of these divisions. So sales and profits are unlikely to plummet once a peak has been reached. Instead, look for orders in both divisions start to slump, beginning in 2011. That should lead to a steady downdraft in backlog, which is the key metric that most investors focus upon. As noted, Boeing is entering the peak phase of its cycle, and this business should be worth no more than 10 times peak earnings — implying nearly -25% downside.


– David Sterman

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

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

This article originally appeared on StreetAuthority
Author: David Sterman
This Dow Stock is Overvalued by at Least 25%

Read more here:
This Dow Stock is Overvalued by at Least 25%

Uncategorized

This Dow Stock is Overvalued by at Least 25%

September 22nd, 2010

This Dow Stock is Overvalued by at Least 25%

Cyclical stocks have always been tricky for investors. At the bottom of an economic cycle, they can appear to have fairly high price-to-earnings (P/E) ratios as investors look ahead to better times. When the cycle improves and approaches a peak, the P/E multiple then tends to shrink as investors brace for an earnings downdraft. That's why a company like U.S. Steel (NYSE: X) can trade for 30 or 40 times profits during bad times, but end up trading for only six or seven times profits when earnings growth has maxed out.

In that light, it's a bit curious that shares of Boeing (NYSE: BA) trade for 13 times next year's earnings. Because by my math, 2011 could wind up being a peak year for Boeing, and profits look set to slump in subsequent years. Don't blame the economy. For the broader economy — and many cyclical stocks — the economic cycle has only just begun to turn and we may not see a peak until the middle of the decade. Boeing is peaking for an entirely different reason. One of its core markets is about to flatten out and then shrink. And the other market is about to see a sharp spike in competition.

A sea change at the Dept. of Defense
In recent weeks, Defense Secretary Robert Gates has made it increasingly clear that his department will have to tighten its belt along with everyone else. For now, that means the never-ending budget increases in defense spending will need to come to a halt. And after the war in Afghanistan concludes, defense spending could start to fall at a steady clip. During the past 10 years, spending at the Department of Defense has gone up an average of +6.4% every year. That works out to an +86% increase in the past 10 years. That looks set to reverse course, unless we enter into another war. In the 1990s, defense spending reductions were called a “peace dividend.” This time, those spending cuts could be known as “budget saviors.”

Boeing's defense business, which represents half of company sales, focuses on weapons and aircraft capabilities, intelligence and surveillance systems, communications architectures and extensive large-scale integration expertise. Demand will always remain for these types of items, but Boeing is already seeing certain potentially lucrative programs get cut from the budget. And the process is just getting started. “Based on our reading of the 2010 Quadrennial Defense Review (QDR), we believe long-term major development programs will come under more scrutiny, and therefore we expect to see more disciplined spending on these programs in the future,” note analysts at Imperial Capital. In addition, Boeing is the fourth-largest vendor to the Department of Homeland Security (DHS), with $2.3 billion in sales last year. The DHS budget is also at risk of a pullback in spending as industry analysts increasingly agree that the DHS has become bloated and unwieldy.

Commercial airline competition heats up
For many years Boeing and Airbus enjoyed a virtual stranglehold in the commercial aerospace market. But in the last decade, Canada's Bombardier and Brazil's Embraer (NYSE: ERJ) developed impressive new planes, cannibalizing market share in the regional jet category.
[Read: This Unknown Brazilian Stock Could Unseat Two Global Powerhouses]

Boeing and Airbus' grip on the jumbo jet market has been untouched and is likely to remain that way. But the market for smaller planes is about to get a lot more crowded, creating real competition for the Boeing 737 and the Airbus 320. Industry publication AirInsight recently noted that: “New entrants for the 150-seat market segment in China, Russia and potentially Japan will have an impact on Airbus and Boeing. While we don't expect these programs to be particularly successful outside the home markets, these domestic sales will significantly eat into the market shares of Airbus and Boeing.”

Action to Take –> Boeing can still count on a fairly hefty backlog in each of these divisions. So sales and profits are unlikely to plummet once a peak has been reached. Instead, look for orders in both divisions start to slump, beginning in 2011. That should lead to a steady downdraft in backlog, which is the key metric that most investors focus upon. As noted, Boeing is entering the peak phase of its cycle, and this business should be worth no more than 10 times peak earnings — implying nearly -25% downside.


– David Sterman

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

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

This article originally appeared on StreetAuthority
Author: David Sterman
This Dow Stock is Overvalued by at Least 25%

Read more here:
This Dow Stock is Overvalued by at Least 25%

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Homebuilder ETFs Likely To Fall

September 22nd, 2010

The Commerce Department recently announced that housing starts rose 10.5% last month to an adjusted annual rate of 598,000, giving positive price support to the SPDR S&P Homebuilders ETF (XHB), the iShares Dow Jones Home Construction (ITB) and the PowerShares Dynamic Building/Construction ETF (PKB).  

In general, housing starts are an important indicator of activity in the real estate markets and as starts increase, future construction generally remains healthy.  However, the opposite in this recent surge in new home construction is likely to prevail due to supply and demand imbalances and eventually hinder the real estate markets. 

An excess of supply is likely to be seen in the coming months as the massive number of home foreclosures, repossessions and properties sitting on bank’s balance sheets are expected to hit the market.  This imminent surge in supply is anticipated to push inventories of existing homes close to 12 months, if not even higher. 

Furthermore, demand for residential real estate is not likely to see a significant uptick any time soon.  Although the Federal Reserve has pushed lending rates to near record lows, many are unable or unwilling to take advantage of these low interest rates.  Additionally, companies still remain reluctant to increase headcount even though many are posting increased profits and have an abundance of cash.   At the end of the day, it appears that the underlying demand in the housing market is much weaker than expected, and the only way to fix this is through the stabilizing of the labor markets.  It’s awfully difficult to obtain a mortgage — or better yet, keep paying a current mortgage — without a job.

As a result, the supply and demand imbalance in the housing markets is likely to cause the recent big swing seen in housing starts to be reversed in the coming months, resulting in negative price support for homebuilders. 

As mentioned above, ETFs that are likely to be influenced by microeconomic forces in the real estate markets include:

  • SPDR S&P Homebuilders (XHB), which includes numerous holdings that are directly correlated to the performance of the residential real estate sector such as Williams-Sonoma Inc () and flooring company Armstrong World Industries (AWI)
  • iShares Dow Jones Home Construction (ITB), which includes homebuilders like D.R. Horton Inc. (DHI), Pulte Group (PHM) and Lennar Corp. (LEN) in its top holdings.
  • PowerShares Dynamic Building/Construction ETF (PKB), which includes DR Horton, Home Depot (HD) and Lowe’s (LOW) in its top holdings.

Disclosure: No Positions

Read more here:
Homebuilder ETFs Likely To Fall




HERE IS YOUR FOOTER

ETF, Real Estate, Uncategorized

Homebuilder ETFs Likely To Fall

September 22nd, 2010

The Commerce Department recently announced that housing starts rose 10.5% last month to an adjusted annual rate of 598,000, giving positive price support to the SPDR S&P Homebuilders ETF (XHB), the iShares Dow Jones Home Construction (ITB) and the PowerShares Dynamic Building/Construction ETF (PKB).  

In general, housing starts are an important indicator of activity in the real estate markets and as starts increase, future construction generally remains healthy.  However, the opposite in this recent surge in new home construction is likely to prevail due to supply and demand imbalances and eventually hinder the real estate markets. 

An excess of supply is likely to be seen in the coming months as the massive number of home foreclosures, repossessions and properties sitting on bank’s balance sheets are expected to hit the market.  This imminent surge in supply is anticipated to push inventories of existing homes close to 12 months, if not even higher. 

Furthermore, demand for residential real estate is not likely to see a significant uptick any time soon.  Although the Federal Reserve has pushed lending rates to near record lows, many are unable or unwilling to take advantage of these low interest rates.  Additionally, companies still remain reluctant to increase headcount even though many are posting increased profits and have an abundance of cash.   At the end of the day, it appears that the underlying demand in the housing market is much weaker than expected, and the only way to fix this is through the stabilizing of the labor markets.  It’s awfully difficult to obtain a mortgage — or better yet, keep paying a current mortgage — without a job.

As a result, the supply and demand imbalance in the housing markets is likely to cause the recent big swing seen in housing starts to be reversed in the coming months, resulting in negative price support for homebuilders. 

As mentioned above, ETFs that are likely to be influenced by microeconomic forces in the real estate markets include:

  • SPDR S&P Homebuilders (XHB), which includes numerous holdings that are directly correlated to the performance of the residential real estate sector such as Williams-Sonoma Inc (WSM) and flooring company Armstrong World Industries (AWI)
  • iShares Dow Jones Home Construction (ITB), which includes homebuilders like D.R. Horton Inc. (DHI), Pulte Group (PHM) and Lennar Corp. (LEN) in its top holdings.
  • PowerShares Dynamic Building/Construction ETF (PKB), which includes DR Horton, Home Depot (HD) and Lowe’s (LOW) in its top holdings.

Disclosure: No Positions

Read more here:
Homebuilder ETFs Likely To Fall




HERE IS YOUR FOOTER

ETF, Real Estate, Uncategorized

Which Way for Stocks? Bonds Give a Clue

September 21st, 2010

Sherlock Holmes sometimes solved great problems just by lolling around in his smoking jacket and puffing at his pipe for hours. In “The Man With the Twisted Lip,” Holmes solves the case with ease without leaving his flat.

An incredulous Mr. Bradstreet asks, “I wish I knew how you reach your results.”

Holmes replies: “I reached this one by sitting upon five pillows and consuming an ounce of shag.”

In that spirit – sans pillows and tobacco – it seems I’ve spent a lot of time this week sitting around reading odd stuff and mulling over clues. I did find some clues in the bond market that tell us where the stock market may go next.

You’ll be surprised at what these clues say.

They come from a look back at history. One analyst found that when the beauty contest between stocks and bonds sets up as it does today, bonds get destroyed. “For the third time since the 1850s,” he writes, “30-year rolling real bond returns are near equity returns, and on both previous occasions, multi-decade bond bear markets followed.”

And for stocks? Well, this same fellow deduces from the same history that stocks could rise 30% or more as inflationary expectations rise.

Before you scoff at this outbreak of optimism, consider that this is from one of the great students of bear markets. He knows their ways and histories. Heck, he wrote a book about them, The Anatomy of the Bear. And he thinks we’re in a secular bear market for stocks now. (“Secular” being a cherished Wall Street fancy dan word. It means “long-term.”)

So who is this guy and what gives?

Let me preface this discussion by saying that I don’t usually like to guess about where the stock market may go next. We simply play the ball where it lies, like an honest golfer. Besides, in my investment letter, Capital & Crisis, we don’t buy the stock market. We buy specific stocks. I think it is infinitely more useful to spend my time looking at specific stocks and to just be picky about what we buy.

Still, I sometimes like to think about the great ebb and flow of market movements. Today is one of those days.

Anyway, the analyst quoted up top is Russell Napier, the global macro strategist for CLSA, an investment firm. He lays out his case in a report titled “It’s Not the Economy, Stupid.” Napier shows that relative to bonds, US stocks are cheaper now than at any time in the past 50 years. He speculates that this is probably due to widespread fears of a “double-dip” recession. “But unless that double dip produces a 60%-plus decline in earnings,” Napier writes, “equities are cheap.”

Of course, we can’t rule anything out, and Napier doesn’t. But Napier writes that “at these relative valuations, investors have consistently made material positive returns in every period since the late 1950s. Yield compression alone could push US equities up more than 30%, and if inflation concerns increase, gains could well exceed this.”

Now, before you declare the man insane, I think there is some merit to what he is saying. And it comes with a powerful qualifying comment, which I’ll get to below.

But here is the key…

Napier compares bond yields with stock dividend yields. Dividend yields on stocks are very close to those of 10-year Treasuries. This situation last existed from December 2008 to May 2009. Investors who bought stocks then did well. You otherwise have to go back to June 1962 to find such a narrow gap. Again, investors who bought then cashed in as stocks rose 26% over the next 12 months. There are other historical examples.

As Napier writes, “Investors have consistently made good profits at the current yield gaps and ratios since 1958.”

In any event, this is where we are.

Napier’s qualifier is that he’s making a relatively short-term call. Longer term, he says stock valuations ought to decline as bond yields rise. In the early going, though, stocks often rise. As he writes, “This is likely to be the beginning of a very long bear market in bonds, but there is much in the historical record to show that equity prices can continue to rise in the early stages of a bond bear market.”

I won’t tackle that historical record. I will add that valuations can come down without stock prices dropping. Earnings can rise and stock prices can rise more slowly. This is what we’ve seen this year, as the market overall showed much-improved earnings, but the stock market is pretty much where it began the year.

Long term, Napier is not fond of stocks. He simply recognizes the ability to make large gains even in the context of a downward-sloping market. As he points out, the 1970s were an awful time to buy and hold stocks. Yet the 1970s also produced some of the best one-year holding periods for stocks. “Another such great opportunity now presents itself for the nimble and the bold,” Napier writes.

In short, bonds look sunk; but as for stocks, there is room to run. We’ll see if this clue-deducing is as good as Sherlock Holmes’.

Chris Mayer
for The Daily Reckoning

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

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Which Way for Stocks? Bonds Give a Clue




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Which Way for Stocks? Bonds Give a Clue

September 21st, 2010

Sherlock Holmes sometimes solved great problems just by lolling around in his smoking jacket and puffing at his pipe for hours. In “The Man With the Twisted Lip,” Holmes solves the case with ease without leaving his flat.

An incredulous Mr. Bradstreet asks, “I wish I knew how you reach your results.”

Holmes replies: “I reached this one by sitting upon five pillows and consuming an ounce of shag.”

In that spirit – sans pillows and tobacco – it seems I’ve spent a lot of time this week sitting around reading odd stuff and mulling over clues. I did find some clues in the bond market that tell us where the stock market may go next.

You’ll be surprised at what these clues say.

They come from a look back at history. One analyst found that when the beauty contest between stocks and bonds sets up as it does today, bonds get destroyed. “For the third time since the 1850s,” he writes, “30-year rolling real bond returns are near equity returns, and on both previous occasions, multi-decade bond bear markets followed.”

And for stocks? Well, this same fellow deduces from the same history that stocks could rise 30% or more as inflationary expectations rise.

Before you scoff at this outbreak of optimism, consider that this is from one of the great students of bear markets. He knows their ways and histories. Heck, he wrote a book about them, The Anatomy of the Bear. And he thinks we’re in a secular bear market for stocks now. (“Secular” being a cherished Wall Street fancy dan word. It means “long-term.”)

So who is this guy and what gives?

Let me preface this discussion by saying that I don’t usually like to guess about where the stock market may go next. We simply play the ball where it lies, like an honest golfer. Besides, in my investment letter, Capital & Crisis, we don’t buy the stock market. We buy specific stocks. I think it is infinitely more useful to spend my time looking at specific stocks and to just be picky about what we buy.

Still, I sometimes like to think about the great ebb and flow of market movements. Today is one of those days.

Anyway, the analyst quoted up top is Russell Napier, the global macro strategist for CLSA, an investment firm. He lays out his case in a report titled “It’s Not the Economy, Stupid.” Napier shows that relative to bonds, US stocks are cheaper now than at any time in the past 50 years. He speculates that this is probably due to widespread fears of a “double-dip” recession. “But unless that double dip produces a 60%-plus decline in earnings,” Napier writes, “equities are cheap.”

Of course, we can’t rule anything out, and Napier doesn’t. But Napier writes that “at these relative valuations, investors have consistently made material positive returns in every period since the late 1950s. Yield compression alone could push US equities up more than 30%, and if inflation concerns increase, gains could well exceed this.”

Now, before you declare the man insane, I think there is some merit to what he is saying. And it comes with a powerful qualifying comment, which I’ll get to below.

But here is the key…

Napier compares bond yields with stock dividend yields. Dividend yields on stocks are very close to those of 10-year Treasuries. This situation last existed from December 2008 to May 2009. Investors who bought stocks then did well. You otherwise have to go back to June 1962 to find such a narrow gap. Again, investors who bought then cashed in as stocks rose 26% over the next 12 months. There are other historical examples.

As Napier writes, “Investors have consistently made good profits at the current yield gaps and ratios since 1958.”

In any event, this is where we are.

Napier’s qualifier is that he’s making a relatively short-term call. Longer term, he says stock valuations ought to decline as bond yields rise. In the early going, though, stocks often rise. As he writes, “This is likely to be the beginning of a very long bear market in bonds, but there is much in the historical record to show that equity prices can continue to rise in the early stages of a bond bear market.”

I won’t tackle that historical record. I will add that valuations can come down without stock prices dropping. Earnings can rise and stock prices can rise more slowly. This is what we’ve seen this year, as the market overall showed much-improved earnings, but the stock market is pretty much where it began the year.

Long term, Napier is not fond of stocks. He simply recognizes the ability to make large gains even in the context of a downward-sloping market. As he points out, the 1970s were an awful time to buy and hold stocks. Yet the 1970s also produced some of the best one-year holding periods for stocks. “Another such great opportunity now presents itself for the nimble and the bold,” Napier writes.

In short, bonds look sunk; but as for stocks, there is room to run. We’ll see if this clue-deducing is as good as Sherlock Holmes’.

Chris Mayer
for The Daily Reckoning

Which Way for Stocks? Bonds Give a Clue 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:
Which Way for Stocks? Bonds Give a Clue




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

P.R.I.N.T. Money, That’s how Ben’s Gonna fix the Economy

September 21st, 2010

The FreeCreditReport.com commercials are always hilarious. The nation’s fiscal mess… not so much. But, sometimes a little laughter helps to ease the pain.

Appropriately, this parody of the “New Car” ad stars several of America’s biggest credit-wreckers-in-chief: Fed head Ben Bernanke alongside Treasury Secretaries Hank Paulson and Tim Geithner. Times may change, but their money-printing solutions stay the same… at least inconsistency is one of few skills this team ain’t lacking.

This clip was originally written and produced at Flinch Studio for the Blog Maverick website, but came to our attention via a recent post on The Big Picture.

P.R.I.N.T. Money, That’s how Ben’s Gonna fix the Economy 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:
P.R.I.N.T. Money, That’s how Ben’s Gonna fix the Economy




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

Is the Recession Really Over? The NBER Seems to Think So…

September 21st, 2010

Unless you’ve been buried under a pile of stock market profits over the past 24 hours unable to breathe or reach your TV set, you know the National Bureau of Economic Research (NBER) – the nonprofit body based in Cambridge, Mass., that has been assigning dates to recessions since…1929 – declared the Great Recession over and done with in June 2009.

GDP Change from Start of Recession

Total duration of the Great Recession: 18 months, eclipsing the previous postwar record of 16 months set in 1973-75, and again in 1981-82.

Although, “economic activity is typically below normal in the early stages of an expansion,” navel gazers at the NBER reluctantly admit, “it sometimes remains so well into the expansion.”

How did the ‘recovery’ such as it is come about? Let’s take a look at the nittys:

  • Government spending grew from 20.6% of GDP at the start of the recession to 25.4% in the second quarter of this year, according to the Commerce Department’s Bureau of Economic Analysis
  • Increasing transfer payments – 99-week unemployment benefits, etc. – account for 73% of that growth. At least with the New Deal we got some bridges and dams to show for it. Now Uncle Sam just pays people to sit at home, eat Cheetos and watch Jersey Shore
  • In contrast, gross domestic private investment has shrunk from 17.3% of GDP at the start of the recession to 11.3% last year.

And a good portion of that last figure goes just for repair and maintenance of the existing capital stock. Investment in new factories and equipment – i.e., real growth – represented 40% of gross domestic private investment in 2006.

Last year, capital investment was a mere 3.5%.

“Thus,” concludes Independent Institute scholar Robert Higgs, “net private investment did not simply fall during the recession; it virtually disappeared.”

So much for a productive recovery and worthwhile use of stimulus money. No chance of a double-dip recession after all that paper cash flushed down the toilet.

Addison Wiggin
for The Daily Reckoning

Is the Recession Really Over? The NBER Seems to Think So… 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:
Is the Recession Really Over? The NBER Seems to Think So…




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

Is the Recession Really Over? The NBER Seems to Think So…

September 21st, 2010

Unless you’ve been buried under a pile of stock market profits over the past 24 hours unable to breathe or reach your TV set, you know the National Bureau of Economic Research (NBER) – the nonprofit body based in Cambridge, Mass., that has been assigning dates to recessions since…1929 – declared the Great Recession over and done with in June 2009.

GDP Change from Start of Recession

Total duration of the Great Recession: 18 months, eclipsing the previous postwar record of 16 months set in 1973-75, and again in 1981-82.

Although, “economic activity is typically below normal in the early stages of an expansion,” navel gazers at the NBER reluctantly admit, “it sometimes remains so well into the expansion.”

How did the ‘recovery’ such as it is come about? Let’s take a look at the nittys:

  • Government spending grew from 20.6% of GDP at the start of the recession to 25.4% in the second quarter of this year, according to the Commerce Department’s Bureau of Economic Analysis
  • Increasing transfer payments – 99-week unemployment benefits, etc. – account for 73% of that growth. At least with the New Deal we got some bridges and dams to show for it. Now Uncle Sam just pays people to sit at home, eat Cheetos and watch Jersey Shore
  • In contrast, gross domestic private investment has shrunk from 17.3% of GDP at the start of the recession to 11.3% last year.

And a good portion of that last figure goes just for repair and maintenance of the existing capital stock. Investment in new factories and equipment – i.e., real growth – represented 40% of gross domestic private investment in 2006.

Last year, capital investment was a mere 3.5%.

“Thus,” concludes Independent Institute scholar Robert Higgs, “net private investment did not simply fall during the recession; it virtually disappeared.”

So much for a productive recovery and worthwhile use of stimulus money. No chance of a double-dip recession after all that paper cash flushed down the toilet.

Addison Wiggin
for The Daily Reckoning

Is the Recession Really Over? The NBER Seems to Think So… 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:
Is the Recession Really Over? The NBER Seems to Think So…




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

The Education of a Trader

September 21st, 2010

[The following first appeared in the May 2010 edition of Expiring Monthly: The Option Traders Journal, on the back page of the magazine, where the authors are encouraged to be tangential and irreverent. I thought I would share it because of the positive feedback I received from a number of readers and because I think this piece dovetails nicely with the collection of links below.]

Do you remember from your school days those students who, when confronted with a complex issue, would acquire a look on their faces somewhere between consternation and dread, immediately thrust a waving hand up into the air and blurt out in a worried voice, “Do we have to know this for the test?” I can be fairly sure that none of these people ended up as successful traders.

One only has to look at the history of hiring patterns at Wall Street firms to get a sense of the evolution of thinking about how to develop a successful trader. For many years, the model for aspiring traders was considered to be a genteel Ivy League education. Over time, Wall Street firms began to favor graduates with a more humble socioeconomic pedigree who were considered hungry, hard working and highly motivated to prove something to the world. In more recent years, we have seen Wall Street seek out physicists and those with exceptional quantitative skills. Lately, a desire for poker skills has also come into play.

As I see it, all traders are ultimately self-taught. There are no required classes, readings, homework assignments or even a syllabus with recommendations. Tests are administered on a daily basis, frequently with multiple tests on the same day. Worst of all, everyone is graded on an unfavorable curve in which there are more Fs than As.

Against this backdrop, education counts, but skill and experience count even more. An insatiable curiosity helps, as does a willingness to explore unfamiliar territory. Great trades, insights and strategies present themselves in somewhat random fashion and, as Louis Pasteur observed, “Chance favors the prepared mind.”

But what kind of preparation is ideal? Malcolm Gladwell asserts that 10,000 hours of experience is a prerequisite for greatness in almost any field. In a normal career, that level of commitment usually translates to five years, but on Wall Street, 10,000 hours of experience can be crammed into 3–4 years. Of course, all hours are not created equal. A trader’s capacity to distinguish between random events and meaningful patterns is important to establish a solid trajectory of growth and development.

For my personal education process, unlearning was more important than learning. My formal schooling consisted of an undergraduate degree in political science and a traditional MBA program. After two decades of business strategy consulting experience deeply rooted in fundamental analysis, I was ill-equipped to excel in a short-term trading time frame. In order to embrace technical analysis, I first had to jettison my fundamental perspective on investments and build a new foundation based on technical analysis and market sentiment.

In my opinion, the best way to approach trading is to consider the educational process to be a lifelong endeavor, crossing as many multi-disciplinary boundaries as can be digested. In a way, I like to think of the foundation of trading success as building a large idea stew and developing an eye for spotting high potential new ideas. The trick is to have the right breadth and depth of knowledge so that when one stumbles on the next great strategy, it can be easily identified, captured and developed. Call it opportunistic research and development, if you will.

As luck would have it, some of the most successful trading strategies I employ are based on areas in which I had limited knowledge when I first encountered them. No matter how well things are going, I take the approach that I never have the luxury of being satisfied with the status quo and need to embrace the idea of getting out of my comfort zone. In trading and in life, it pays to constantly refresh the pipeline of new ideas and continue to tinker with them, because you never know what will be on tomorrow’s test.

Related posts:

[source: Expiring Monthly, May 2010]

Disclosure(s): I am one of the founders and owners of Expiring Monthly



Read more here:
The Education of a Trader

OPTIONS, Uncategorized

The Education of a Trader

September 21st, 2010

[The following first appeared in the May 2010 edition of Expiring Monthly: The Option Traders Journal, on the back page of the magazine, where the authors are encouraged to be tangential and irreverent. I thought I would share it because of the positive feedback I received from a number of readers and because I think this piece dovetails nicely with the collection of links below.]

Do you remember from your school days those students who, when confronted with a complex issue, would acquire a look on their faces somewhere between consternation and dread, immediately thrust a waving hand up into the air and blurt out in a worried voice, “Do we have to know this for the test?” I can be fairly sure that none of these people ended up as successful traders.

One only has to look at the history of hiring patterns at Wall Street firms to get a sense of the evolution of thinking about how to develop a successful trader. For many years, the model for aspiring traders was considered to be a genteel Ivy League education. Over time, Wall Street firms began to favor graduates with a more humble socioeconomic pedigree who were considered hungry, hard working and highly motivated to prove something to the world. In more recent years, we have seen Wall Street seek out physicists and those with exceptional quantitative skills. Lately, a desire for poker skills has also come into play.

As I see it, all traders are ultimately self-taught. There are no required classes, readings, homework assignments or even a syllabus with recommendations. Tests are administered on a daily basis, frequently with multiple tests on the same day. Worst of all, everyone is graded on an unfavorable curve in which there are more Fs than As.

Against this backdrop, education counts, but skill and experience count even more. An insatiable curiosity helps, as does a willingness to explore unfamiliar territory. Great trades, insights and strategies present themselves in somewhat random fashion and, as Louis Pasteur observed, “Chance favors the prepared mind.”

But what kind of preparation is ideal? Malcolm Gladwell asserts that 10,000 hours of experience is a prerequisite for greatness in almost any field. In a normal career, that level of commitment usually translates to five years, but on Wall Street, 10,000 hours of experience can be crammed into 3–4 years. Of course, all hours are not created equal. A trader’s capacity to distinguish between random events and meaningful patterns is important to establish a solid trajectory of growth and development.

For my personal education process, unlearning was more important than learning. My formal schooling consisted of an undergraduate degree in political science and a traditional MBA program. After two decades of business strategy consulting experience deeply rooted in fundamental analysis, I was ill-equipped to excel in a short-term trading time frame. In order to embrace technical analysis, I first had to jettison my fundamental perspective on investments and build a new foundation based on technical analysis and market sentiment.

In my opinion, the best way to approach trading is to consider the educational process to be a lifelong endeavor, crossing as many multi-disciplinary boundaries as can be digested. In a way, I like to think of the foundation of trading success as building a large idea stew and developing an eye for spotting high potential new ideas. The trick is to have the right breadth and depth of knowledge so that when one stumbles on the next great strategy, it can be easily identified, captured and developed. Call it opportunistic research and development, if you will.

As luck would have it, some of the most successful trading strategies I employ are based on areas in which I had limited knowledge when I first encountered them. No matter how well things are going, I take the approach that I never have the luxury of being satisfied with the status quo and need to embrace the idea of getting out of my comfort zone. In trading and in life, it pays to constantly refresh the pipeline of new ideas and continue to tinker with them, because you never know what will be on tomorrow’s test.

Related posts:

[source: Expiring Monthly, May 2010]

Disclosure(s): I am one of the founders and owners of Expiring Monthly



Read more here:
The Education of a Trader

OPTIONS, Uncategorized

A Ride on the Currency Roller Coaster

September 21st, 2010

The Ohio Players were singing their song “Roller Coaster” as I begin today’s letter. I thought the song played well with the action we’ve seen in the currencies lately… The Roller Coaster of Love, has turned into The Roller Coaster of Currencies…

What am I talking about? In each of the last four or five mornings, I’ve come in, turned on the currency screens and seen the euro (EUR) trading stronger versus the dollar; the last three days, it’s been above 1.31, only to see the single unit fall throughout the day in US trading…but then rally again overnight… Up, down, up, down, we need some new directions, eh?

Well, today is the day that the markets have been waiting for, with the FOMC meeting here in the US. It’s pretty confusing right now, as to which way the markets see the FOMC moving from here… Will they or won’t they, implement more quantitative easing?

I see one headline story on the Bloomie that says: “Franc advances on Speculation Federal Reserve May Hint At Asset Purchases”… And then there’s this one: “N.Z. Dollar declines on Speculation Fed to Refrain From Further Stimulus.”

What’s it gonna be, boy? And, oh… By the way… I love it when someone refers to the Cartel as the Federal Reserve… For there’s nothing “Federal” about them; nor are there any reserves…

So… You can see that the markets are a mixed can of nuts over what the FOMC will do this afternoon… Me? One day I think they’ll go the QE route, and then not… Like yesterday… The NBER, the unit that decides when we “officially go into and out of recessions” made a strange call, saying that the US recession officially ended in June of 2009… WHAT? Where the heck did that come from? You don’t think it has anything to do with the upcoming mid-term elections do you? I mean if it ended in June 2009, why did it take them 1 1/4 years to tell us? This is all very fishy to me…

Here’s what I think we’ll see… I don’t think the Cartel has it in them to come right out and say they will implement quantitative easing (QE)… They saw what happened the last time they did that in March of 2009, the dollar went into a 9-month slide that almost reversed the previous nine months of dollar strength that came from the financial meltdown and the flight to safety.

Instead… I think the FOMC will beat around the bush… They’ll hem and haw and talk about older, calmer days… They’ll hint about QE, which means they’ll do it, but in a stealth manner, in hopes that the markets don’t catch on… Hey! That’s your central bank at work there! It’s not my central bank; I disowned them years ago!

So… Here’s the skinny… If the FOMC announces QE, a selling of the dollar will take place… If they don’t, a rally in the dollar will take place, and if they do like I said… There will be a bit of a dollar rally in relief, but nothing to get all up in arms about.

OK… Enough of that! Back to what’s happening this morning… Well… Ireland and Spain have both completed successful auctions this morning, and the Eurozone’s rescue package has received two AAA ratings… Just shows to go you that the ratings agencies are NUTS! There’s no way the Eurozone rescue package, which created more debt, should be AAA-rated!

So the euro roller coaster is going up this morning… The Aussie dollar (AUD) roller coaster is on its way up too… The Aussie dollar seems to be very comfortable in the 0.9450 shoes it’s been wearing recently… We’ve seen the Aussie dollar climb to 0.9490, and then come back down to 0.9450… So the trading range has been tight, and that’s a good sign that there’s not going to be a pullback right now… It’s important that the Aussie dollar eventually moves to 95-cents and higher, or else traders will give up and move on to another currency.

I was reading a story last night that if the Aussie dollar can move past 95-cents and onto 96-cents then it has a very good shot of returning to its all-time high of 98.50… But that’s just one guy’s opinion… Me? I don’t see why not… But then, you never know what kind of a spanner can be thrown into the works… I mean, think back to July 2008… The Aussie dollar was 0.9850 and looking as if it would go to parity with the US dollar, when the rug was pulled out from under it. And it has been a long strenuous climb back that has taken two years…

Yesterday, I told you how the Reserve Bank of Australia (RBA) Governr Stevens was very upbeat about the Aussie economy. I also told you that the RBA would be on hold for another rate hike until 2011… But I’ve thought about this more, and with the RBA minutes laying out further groundwork for higher rates, there is a chance of an RBA rate hike before year-end. I don’t think the RBA is feeling any urgency to raise rates right now, for they have done the groundwork of rate hikes previously… But should we continue to see strong data, the RBA could wet their powder before year-end… And, that could be the harbinger to the Aussie dollar returning to July 2008 glory!

OK… We’ve had some time pass since the Bank of Japan received word from the Ministry of Finance (MOF) to intervene and weaken the yen… Their intervention worked, for now, but I believe the markets are just waiting to see if the MOF gives any more instructions to intervene, before they rush back to buy yen (JPY) and move it higher versus the dollar…

Recall last week, I talked about how the US continues to bang on China for their currency manipulation but allows Japan to go Ollie, Ollie, Oxen free? Well, former Japanese MOF, aka “Mr. Yen”, Sakakibara said last night that “intervention is ineffective unless it’s a joint effort, and it is ineffective in the medium and long term.” He also mentioned that he “believes that the US will begin to criticize Japan if they pursue more intervention.”

Smart man… But he gives the US Treasury too much credit, for they have their focus on China right now…

Well… The price of gold reached another new all-time record high yesterday of $1,283.70… Hmmm… The gold roller coaster has been more of one of those kiddie roller coasters with the gentle ups and downs. Gold was unable to maintain the $6 gain it had yesterday morning, falling $3, but gaining back those $3 of price this morning.

Brazil’s $1 billion dollars a day habit continues to push the real (BRL) weaker… For now, that is… As Mr. Yen said above… “Intervention is ineffective in the medium and long term”… So, unless the Brazilian Central Bank has $1 billion to spend every day until the markets give up, then OK… If not, I suggest they stop now, for in the end, they’ll have spent tens of billions and end up with a strong real any way… Maybe the Swiss National Bank Governor Roth should give Brazilian Central Bank Governor Meirelles a call, eh?

Intervention sure didn’t work for the Swiss, now did it?

Speaking of the Swiss franc (CHF)… It’s nearing parity to the dollar once again this morning, having traded above parity on two different days last week.

Then there was this… From Bloomberg… The US has fallen behind emerging markets in Brazil, China and India as the preferred place to invest, with the US having to accept their new position as highest rank among developed countries.

Here’s the part of the story that just got my feathers ruffled to no end, folks… The story says that “overall, investors give the central bank favorable marks, and that Fed Chairman Ben Bernanke is viewed favorably by 71% of respondents.”

Excuse me while I go to the bathroom; I think I’m going to be violently ill!

Before I go to the Big Finish… I said on the desk yesterday that it had been a long time since I’ve seen Swedish krona (SEK) trade below 7… And a quick look at the history shows that it was the height of the March to December 2009 rally in the currencies that held the krona below 7…

Oh, and one more thing… Apparently, I left a few zeroes off my deficit numbers yesterday… We were talking trillions in deficit just for those of your keeping score at home!

To recap… The currencies are riding the roller coaster for the past week, going up overnight, and coming back down in US trading. Last night was no different with the euro rising to trade over 1.31 again. The NBER said we came out of our recession in June of 2009!!! Amazing, simply amazing, folks… The RBA minutes were upbeat, following RBA Governor Stevens’ upbeat speech the other night, boosting the Aussie dollar higher this morning. And Brazil continues to spend $1 billion per day to keep the real from getting stronger. When will they run out of money?

Chuck Butler
for The Daily Reckoning

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

Read more here:
A Ride on the Currency Roller Coaster




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

A Ride on the Currency Roller Coaster

September 21st, 2010

The Ohio Players were singing their song “Roller Coaster” as I begin today’s letter. I thought the song played well with the action we’ve seen in the currencies lately… The Roller Coaster of Love, has turned into The Roller Coaster of Currencies…

What am I talking about? In each of the last four or five mornings, I’ve come in, turned on the currency screens and seen the euro (EUR) trading stronger versus the dollar; the last three days, it’s been above 1.31, only to see the single unit fall throughout the day in US trading…but then rally again overnight… Up, down, up, down, we need some new directions, eh?

Well, today is the day that the markets have been waiting for, with the FOMC meeting here in the US. It’s pretty confusing right now, as to which way the markets see the FOMC moving from here… Will they or won’t they, implement more quantitative easing?

I see one headline story on the Bloomie that says: “Franc advances on Speculation Federal Reserve May Hint At Asset Purchases”… And then there’s this one: “N.Z. Dollar declines on Speculation Fed to Refrain From Further Stimulus.”

What’s it gonna be, boy? And, oh… By the way… I love it when someone refers to the Cartel as the Federal Reserve… For there’s nothing “Federal” about them; nor are there any reserves…

So… You can see that the markets are a mixed can of nuts over what the FOMC will do this afternoon… Me? One day I think they’ll go the QE route, and then not… Like yesterday… The NBER, the unit that decides when we “officially go into and out of recessions” made a strange call, saying that the US recession officially ended in June of 2009… WHAT? Where the heck did that come from? You don’t think it has anything to do with the upcoming mid-term elections do you? I mean if it ended in June 2009, why did it take them 1 1/4 years to tell us? This is all very fishy to me…

Here’s what I think we’ll see… I don’t think the Cartel has it in them to come right out and say they will implement quantitative easing (QE)… They saw what happened the last time they did that in March of 2009, the dollar went into a 9-month slide that almost reversed the previous nine months of dollar strength that came from the financial meltdown and the flight to safety.

Instead… I think the FOMC will beat around the bush… They’ll hem and haw and talk about older, calmer days… They’ll hint about QE, which means they’ll do it, but in a stealth manner, in hopes that the markets don’t catch on… Hey! That’s your central bank at work there! It’s not my central bank; I disowned them years ago!

So… Here’s the skinny… If the FOMC announces QE, a selling of the dollar will take place… If they don’t, a rally in the dollar will take place, and if they do like I said… There will be a bit of a dollar rally in relief, but nothing to get all up in arms about.

OK… Enough of that! Back to what’s happening this morning… Well… Ireland and Spain have both completed successful auctions this morning, and the Eurozone’s rescue package has received two AAA ratings… Just shows to go you that the ratings agencies are NUTS! There’s no way the Eurozone rescue package, which created more debt, should be AAA-rated!

So the euro roller coaster is going up this morning… The Aussie dollar (AUD) roller coaster is on its way up too… The Aussie dollar seems to be very comfortable in the 0.9450 shoes it’s been wearing recently… We’ve seen the Aussie dollar climb to 0.9490, and then come back down to 0.9450… So the trading range has been tight, and that’s a good sign that there’s not going to be a pullback right now… It’s important that the Aussie dollar eventually moves to 95-cents and higher, or else traders will give up and move on to another currency.

I was reading a story last night that if the Aussie dollar can move past 95-cents and onto 96-cents then it has a very good shot of returning to its all-time high of 98.50… But that’s just one guy’s opinion… Me? I don’t see why not… But then, you never know what kind of a spanner can be thrown into the works… I mean, think back to July 2008… The Aussie dollar was 0.9850 and looking as if it would go to parity with the US dollar, when the rug was pulled out from under it. And it has been a long strenuous climb back that has taken two years…

Yesterday, I told you how the Reserve Bank of Australia (RBA) Governr Stevens was very upbeat about the Aussie economy. I also told you that the RBA would be on hold for another rate hike until 2011… But I’ve thought about this more, and with the RBA minutes laying out further groundwork for higher rates, there is a chance of an RBA rate hike before year-end. I don’t think the RBA is feeling any urgency to raise rates right now, for they have done the groundwork of rate hikes previously… But should we continue to see strong data, the RBA could wet their powder before year-end… And, that could be the harbinger to the Aussie dollar returning to July 2008 glory!

OK… We’ve had some time pass since the Bank of Japan received word from the Ministry of Finance (MOF) to intervene and weaken the yen… Their intervention worked, for now, but I believe the markets are just waiting to see if the MOF gives any more instructions to intervene, before they rush back to buy yen (JPY) and move it higher versus the dollar…

Recall last week, I talked about how the US continues to bang on China for their currency manipulation but allows Japan to go Ollie, Ollie, Oxen free? Well, former Japanese MOF, aka “Mr. Yen”, Sakakibara said last night that “intervention is ineffective unless it’s a joint effort, and it is ineffective in the medium and long term.” He also mentioned that he “believes that the US will begin to criticize Japan if they pursue more intervention.”

Smart man… But he gives the US Treasury too much credit, for they have their focus on China right now…

Well… The price of gold reached another new all-time record high yesterday of $1,283.70… Hmmm… The gold roller coaster has been more of one of those kiddie roller coasters with the gentle ups and downs. Gold was unable to maintain the $6 gain it had yesterday morning, falling $3, but gaining back those $3 of price this morning.

Brazil’s $1 billion dollars a day habit continues to push the real (BRL) weaker… For now, that is… As Mr. Yen said above… “Intervention is ineffective in the medium and long term”… So, unless the Brazilian Central Bank has $1 billion to spend every day until the markets give up, then OK… If not, I suggest they stop now, for in the end, they’ll have spent tens of billions and end up with a strong real any way… Maybe the Swiss National Bank Governor Roth should give Brazilian Central Bank Governor Meirelles a call, eh?

Intervention sure didn’t work for the Swiss, now did it?

Speaking of the Swiss franc (CHF)… It’s nearing parity to the dollar once again this morning, having traded above parity on two different days last week.

Then there was this… From Bloomberg… The US has fallen behind emerging markets in Brazil, China and India as the preferred place to invest, with the US having to accept their new position as highest rank among developed countries.

Here’s the part of the story that just got my feathers ruffled to no end, folks… The story says that “overall, investors give the central bank favorable marks, and that Fed Chairman Ben Bernanke is viewed favorably by 71% of respondents.”

Excuse me while I go to the bathroom; I think I’m going to be violently ill!

Before I go to the Big Finish… I said on the desk yesterday that it had been a long time since I’ve seen Swedish krona (SEK) trade below 7… And a quick look at the history shows that it was the height of the March to December 2009 rally in the currencies that held the krona below 7…

Oh, and one more thing… Apparently, I left a few zeroes off my deficit numbers yesterday… We were talking trillions in deficit just for those of your keeping score at home!

To recap… The currencies are riding the roller coaster for the past week, going up overnight, and coming back down in US trading. Last night was no different with the euro rising to trade over 1.31 again. The NBER said we came out of our recession in June of 2009!!! Amazing, simply amazing, folks… The RBA minutes were upbeat, following RBA Governor Stevens’ upbeat speech the other night, boosting the Aussie dollar higher this morning. And Brazil continues to spend $1 billion per day to keep the real from getting stronger. When will they run out of money?

Chuck Butler
for The Daily Reckoning

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

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A Ride on the Currency Roller Coaster




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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