2 Stocks to Cash in on the Buyback Frenzy

November 23rd, 2010

 2 Stocks to Cash in on the Buyback Frenzy

When Cisco Systems (Nasdaq: CSCO) announced last week that business trends had slowed, its shares quickly moved toward a 52-week low. Management could at least take solace in the company's bulletproof balance sheet, sporting $39 billion in cash. So, management's announcement on Thursday that the company would buy back yet another $10 billion in stock should have come as no surprise. ($67.5 billion in stock has already been re-absorbed through previous buybacks, prior to accounting for any new option-related shares.)

And Cisco is not alone. A whole slew of companies have been announcing buyback plans, which is likely due to the fact that companies have been generating so much cash in recent quarters. Of course, not all buybacks can be viewed in a promising light. Defense contractor Lockheed Martin (NYSE: LMT) plans to buy back up to $3 billion in stock simply because growth opportunities in the defense sector are fast disappearing and Lockheed has no compelling areas to invest in right now.

And other companies issue buyback announcements simply as a P.R. move. Potash (NYSE: POT) announced plans to buy back billions in stock after a takeover bid by BHP Billiton (NYSE: BHP) failed to come to fruition. But Potash's shares have nearly tripled in the last two years, and for a cyclical play, are quite pricey at more than 20 times projected 2010 profits. Management would be foolish to follow through with the buyback plan right now.

Cypress Semiconductor (NYSE: CY) is a clear example of a “just in case” buyback. The company is firing on all cylinders as sales and profits rise at a fast pace, and shares are at a multi-year high. Cypress has announced a hefty $600 million stock buyback, but would likely only follow through with it if shares fell back toward the $10 mark in a weakening broader stock market.

To find compelling stocks based on the buyback angle, I looked at all companies that have announced buybacks in the past 30 days that represent at least 10% of shares outstanding.

In the table below, you'll find price-to-earnings (P/E) ratios based on projected profits. Yet most analysts don't factor buybacks into their earnings models. So if the buybacks are completed, the share counts should shrink, the EPS forecasts should rise, and the projected P/E multiples would move even lower.

Here are the best-looking ideas in the group:

Rent-A-Center (Nasdaq: RCII)
As a rule of thumb, it's best to do a buyback when shares are near multi-year lows. This furniture rental company may be the exception. Rent-A-Center has announced a series of growth initiatives, that if successful, would make the company's impressively low P/E multiple stand out.

First, the company is rolling out mini-stores inside other retailers' stores (a win-win, since some retailers are now operating stores that are too large for the slow levels of traffic). There are currently 200 of these store-in-a-store branches, and management hopes to ramp that to 800 by 2013. In addition, Rent-A-Center is aiming to expand into Mexico and Canada, which could expand its total retail footprint by +25% in the next four years. The Mexican opportunity is quite large, with a potential for 400 stores, according to management.

But the real opportunity comes from an eventually improving employment picture, which tends to lead to a spike in new household formation (of both renters and owners). This business model really took off in the 1990s, when twentysomethings were starting families but couldn't yet afford to buy a house full of furniture.

Without these initiatives, Rent-A-Center would likely be a very low-growth business model — at least until the economy turns up (which explains why shares trade for less than 10 times profits). Noting that low multiple, management has already bought back more than $500 million in stock, (shares outstanding has already shrunk by -30% in the past decade) with plans to buy back another $300 million under the current authorization. That could reduce shares outstanding by another -15%.
Aeropostale (NYSE: ARO)
This teen-focused retailer has already bought back more than $1 billion in stock in the past five years (taking shares outstanding lower in each of the last six years), and just announced plans to remove another $300 million from the share count. The time is right. Shares are off their highs, sport very low P/E multiples, and analysts think the company could see a very strong holiday season.

Brean Murray thinks you shouldn't just buy this stock based on the buyback: They see Aeropostale “as the key winner in the teen segment,” and they predict the retailer will show a high degree of earnings power when the economy rebounds. Indeed, if the share count keeps dropping, then Aeropostale's earnings forecasts will prove to be even more conservative.

Action to Take –>The real test is whether a company buys back more shares than it issues in stock options. Companies like Aeropostale and Rent-A-Center have a proven track record of shrinking the share count. Their low multiples and further share count shrinkage sets the stage for a higher stock price down the road and are good portfolio candidates.

OPTIONS, Uncategorized

2 Stocks to Cash in on the Buyback Frenzy

November 23rd, 2010

 2 Stocks to Cash in on the Buyback Frenzy

When Cisco Systems (Nasdaq: CSCO) announced last week that business trends had slowed, its shares quickly moved toward a 52-week low. Management could at least take solace in the company's bulletproof balance sheet, sporting $39 billion in cash. So, management's announcement on Thursday that the company would buy back yet another $10 billion in stock should have come as no surprise. ($67.5 billion in stock has already been re-absorbed through previous buybacks, prior to accounting for any new option-related shares.)

And Cisco is not alone. A whole slew of companies have been announcing buyback plans, which is likely due to the fact that companies have been generating so much cash in recent quarters. Of course, not all buybacks can be viewed in a promising light. Defense contractor Lockheed Martin (NYSE: LMT) plans to buy back up to $3 billion in stock simply because growth opportunities in the defense sector are fast disappearing and Lockheed has no compelling areas to invest in right now.

And other companies issue buyback announcements simply as a P.R. move. Potash (NYSE: POT) announced plans to buy back billions in stock after a takeover bid by BHP Billiton (NYSE: BHP) failed to come to fruition. But Potash's shares have nearly tripled in the last two years, and for a cyclical play, are quite pricey at more than 20 times projected 2010 profits. Management would be foolish to follow through with the buyback plan right now.

Cypress Semiconductor (NYSE: CY) is a clear example of a “just in case” buyback. The company is firing on all cylinders as sales and profits rise at a fast pace, and shares are at a multi-year high. Cypress has announced a hefty $600 million stock buyback, but would likely only follow through with it if shares fell back toward the $10 mark in a weakening broader stock market.

To find compelling stocks based on the buyback angle, I looked at all companies that have announced buybacks in the past 30 days that represent at least 10% of shares outstanding.

In the table below, you'll find price-to-earnings (P/E) ratios based on projected profits. Yet most analysts don't factor buybacks into their earnings models. So if the buybacks are completed, the share counts should shrink, the EPS forecasts should rise, and the projected P/E multiples would move even lower.

Here are the best-looking ideas in the group:

Rent-A-Center (Nasdaq: RCII)
As a rule of thumb, it's best to do a buyback when shares are near multi-year lows. This furniture rental company may be the exception. Rent-A-Center has announced a series of growth initiatives, that if successful, would make the company's impressively low P/E multiple stand out.

First, the company is rolling out mini-stores inside other retailers' stores (a win-win, since some retailers are now operating stores that are too large for the slow levels of traffic). There are currently 200 of these store-in-a-store branches, and management hopes to ramp that to 800 by 2013. In addition, Rent-A-Center is aiming to expand into Mexico and Canada, which could expand its total retail footprint by +25% in the next four years. The Mexican opportunity is quite large, with a potential for 400 stores, according to management.

But the real opportunity comes from an eventually improving employment picture, which tends to lead to a spike in new household formation (of both renters and owners). This business model really took off in the 1990s, when twentysomethings were starting families but couldn't yet afford to buy a house full of furniture.

Without these initiatives, Rent-A-Center would likely be a very low-growth business model — at least until the economy turns up (which explains why shares trade for less than 10 times profits). Noting that low multiple, management has already bought back more than $500 million in stock, (shares outstanding has already shrunk by -30% in the past decade) with plans to buy back another $300 million under the current authorization. That could reduce shares outstanding by another -15%.
Aeropostale (NYSE: ARO)
This teen-focused retailer has already bought back more than $1 billion in stock in the past five years (taking shares outstanding lower in each of the last six years), and just announced plans to remove another $300 million from the share count. The time is right. Shares are off their highs, sport very low P/E multiples, and analysts think the company could see a very strong holiday season.

Brean Murray thinks you shouldn't just buy this stock based on the buyback: They see Aeropostale “as the key winner in the teen segment,” and they predict the retailer will show a high degree of earnings power when the economy rebounds. Indeed, if the share count keeps dropping, then Aeropostale's earnings forecasts will prove to be even more conservative.

Action to Take –>The real test is whether a company buys back more shares than it issues in stock options. Companies like Aeropostale and Rent-A-Center have a proven track record of shrinking the share count. Their low multiples and further share count shrinkage sets the stage for a higher stock price down the road and are good portfolio candidates.

OPTIONS, Uncategorized

What Buffett Would Say About Harvard’s Portfolio

November 23rd, 2010

What Buffett Would Say About Harvard's Portfolio

Investing guru Warren Buffett doesn't think much of diversification. In his view, it's for investors who don't really know what they're doing. Those who do can actually lessen risk by betting big on a few investments they thoroughly understand, Buffett asserts, and will earn the greatest returns in the long run.

Harvard Management, which oversees Harvard University's $27 billion endowment, has apparently taken that advice to heart. Based on its latest disclosure of U.S.-listed equity holdings to the SEC, Harvard prefers to invest internationally and allocates about 90% of its stock purchases to foreign countries, mainly emerging markets.

Of course, the disclosure filing only reveals investments worth 5% of the endowment's total value, about $1.5 billion as of September 30th. So we're just getting a small taste of Harvard's overall investment strategy. But if the filing's any indication, Harvard thinks emerging markets are the way to go. [Click here to have a look]

The top five holdings in the disclosure filing make up more than half the $1.5 billion portfolio, and all are large bets on emerging markets, as the table below shows. The top 10 account for 67%, and all but two — Pebblebrook Hotel Trust (NYSE: PEB) and NewAlliance Bancshares (NYSE: NAL) — are in emerging markets.

Such a strategy is easy to justify. Developing countries like the ones in Harvard's top-10 list have much faster-growing economies than the United States and other developed nations — a trend that's likely to continue.

Next year, for example, economists expect GDP growth in China, South Africa, Brazil, South Korea and Mexico of +9%, +7%, +4.6%, +3.9%, and +3.6%, respectively, compared with +2.8% for the United States and +1.3% for Western Europe. Plus, many developing countries are in much better financial shape than the United States and Europe right now, making their superior economic growth more apt to persist well into the future.

Such growth has translated to mouth-watering long-term investment returns. Harvard's top two holdings — IShares MSCI Brazil (NYSE: EWZ) and IShares FTSE/Xinhua China (NYSE: FXI) – provide excellent examples of that.

The former is an exchange-traded fund (ETF) that closely tracks Brazil's benchmark Bovespa Index, which is tilted heavily toward commodities. As of October 31st, the fund's three largest sector weightings were materials (27%), energy (27%) and financials (19%). Its top holdings at that time included names like Petroleo Brasileiro (NYSE: PBR), Itau Unibanco (NYSE: ITUB) and OGX Petroleo (OTC: OGXPF). The fund is up +4% this year compared with more than +9% for the S&P 500. But its five and 10-year average annual returns are +22% and +21%, compared with only +1% and 0% for the S&P.

The China ETF in Harvard's portfolio, up +7% year-to-date, has also handily beaten the S&P over time, posting an average return of +19% a year for the past five years. The fund's only been around since 2005, so it doesn't have a 10-year record.

It outperformed by mirroring the FTSE/Xinhua China 25 index of the 25 largest Chinese stocks. Like the index, the fund had half its assets in financials as of October 31st. At that time, its two other biggest sector weightings were telecoms (20%) and energy (14%), and its top holdings included China Mobile (NYSE: CHL), Bank of China (OTC: BACHF) and PetroChina (NYSE: PTR).

The two domestic stocks in Harvard's top 10 are odd selections. Pebblebrook, a new small-cap real estate investment trust (REIT) that acquires upscale coastal hotels, only has an 11-month trading history, 10 employees and no analyst coverage. Small-cap banking firm NewAlliance is a more fathomable pick. It has at least some analyst coverage and a five-year trading history. But I can't find anything to suggest that either company is a candidate for overweighting.

Action to Take –> I applaud Harvard for having the conviction to bet big like Buffett, but I wouldn't rush to replicate the investment strategy in this portion of its endowment. Though gusty, the strategy pretty much ignores another Buffett mantra: “Believe in America.”

That mantra is especially relevant now. There are currently many high-quality, attractively valued domestic stocks every bit as capable as emerging markets of generating high-powered returns. And they can do it with substantially less currency, political and other types of risk associated with emerging markets.

For the emerging markets fanatic, I'd therefore suggest allocating more like 40% to 60% of equities to emerging markets funds and reserving at least 40% for individual U.S. stocks. That way, you can make bold, profitable bets both here and abroad.


– Tim Begany

P.S. –

Commodities, ETF, Real Estate, Uncategorized

What Buffett Would Say About Harvard’s Portfolio

November 23rd, 2010

What Buffett Would Say About Harvard's Portfolio

Investing guru Warren Buffett doesn't think much of diversification. In his view, it's for investors who don't really know what they're doing. Those who do can actually lessen risk by betting big on a few investments they thoroughly understand, Buffett asserts, and will earn the greatest returns in the long run.

Harvard Management, which oversees Harvard University's $27 billion endowment, has apparently taken that advice to heart. Based on its latest disclosure of U.S.-listed equity holdings to the SEC, Harvard prefers to invest internationally and allocates about 90% of its stock purchases to foreign countries, mainly emerging markets.

Of course, the disclosure filing only reveals investments worth 5% of the endowment's total value, about $1.5 billion as of September 30th. So we're just getting a small taste of Harvard's overall investment strategy. But if the filing's any indication, Harvard thinks emerging markets are the way to go. [Click here to have a look]

The top five holdings in the disclosure filing make up more than half the $1.5 billion portfolio, and all are large bets on emerging markets, as the table below shows. The top 10 account for 67%, and all but two — Pebblebrook Hotel Trust (NYSE: PEB) and NewAlliance Bancshares (NYSE: NAL) — are in emerging markets.

Such a strategy is easy to justify. Developing countries like the ones in Harvard's top-10 list have much faster-growing economies than the United States and other developed nations — a trend that's likely to continue.

Next year, for example, economists expect GDP growth in China, South Africa, Brazil, South Korea and Mexico of +9%, +7%, +4.6%, +3.9%, and +3.6%, respectively, compared with +2.8% for the United States and +1.3% for Western Europe. Plus, many developing countries are in much better financial shape than the United States and Europe right now, making their superior economic growth more apt to persist well into the future.

Such growth has translated to mouth-watering long-term investment returns. Harvard's top two holdings — IShares MSCI Brazil (NYSE: EWZ) and IShares FTSE/Xinhua China (NYSE: FXI) – provide excellent examples of that.

The former is an exchange-traded fund (ETF) that closely tracks Brazil's benchmark Bovespa Index, which is tilted heavily toward commodities. As of October 31st, the fund's three largest sector weightings were materials (27%), energy (27%) and financials (19%). Its top holdings at that time included names like Petroleo Brasileiro (NYSE: PBR), Itau Unibanco (NYSE: ITUB) and OGX Petroleo (OTC: OGXPF). The fund is up +4% this year compared with more than +9% for the S&P 500. But its five and 10-year average annual returns are +22% and +21%, compared with only +1% and 0% for the S&P.

The China ETF in Harvard's portfolio, up +7% year-to-date, has also handily beaten the S&P over time, posting an average return of +19% a year for the past five years. The fund's only been around since 2005, so it doesn't have a 10-year record.

It outperformed by mirroring the FTSE/Xinhua China 25 index of the 25 largest Chinese stocks. Like the index, the fund had half its assets in financials as of October 31st. At that time, its two other biggest sector weightings were telecoms (20%) and energy (14%), and its top holdings included China Mobile (NYSE: CHL), Bank of China (OTC: BACHF) and PetroChina (NYSE: PTR).

The two domestic stocks in Harvard's top 10 are odd selections. Pebblebrook, a new small-cap real estate investment trust (REIT) that acquires upscale coastal hotels, only has an 11-month trading history, 10 employees and no analyst coverage. Small-cap banking firm NewAlliance is a more fathomable pick. It has at least some analyst coverage and a five-year trading history. But I can't find anything to suggest that either company is a candidate for overweighting.

Action to Take –> I applaud Harvard for having the conviction to bet big like Buffett, but I wouldn't rush to replicate the investment strategy in this portion of its endowment. Though gusty, the strategy pretty much ignores another Buffett mantra: “Believe in America.”

That mantra is especially relevant now. There are currently many high-quality, attractively valued domestic stocks every bit as capable as emerging markets of generating high-powered returns. And they can do it with substantially less currency, political and other types of risk associated with emerging markets.

For the emerging markets fanatic, I'd therefore suggest allocating more like 40% to 60% of equities to emerging markets funds and reserving at least 40% for individual U.S. stocks. That way, you can make bold, profitable bets both here and abroad.


– Tim Begany

P.S. –

Commodities, ETF, Real Estate, Uncategorized

The Robert Zoellick-Gold Standard Affair

November 22nd, 2010

It was with regret that I read in Reuters that “World Bank President Robert Zoellick said on Wednesday he was not advocating a return to a gold standard for exchange rates, but described the metal as ‘the elephant in the room’ that policymakers needed to acknowledge.”

What a wimpy attitude! Now I can go back to regarding Mr. Zoellick as just another neo-Keynesian pencil-necked geek moron with a dorky haircut and an ill-fitting suit who thinks he understands equations but knows little about economics.

I, on the other hand, say that any economist who knows what he is talking about would LOVE to see a return to a gold standard, and thus take control of the money supply out of the hands of evil men, each with their nasty secret agendas, conspiracies and cabals forming and dissolving in a swirling cauldron of corruption, and thus return the country to a blissful “golden age” where prices stayed the same, or gently fell, while quality and quantity improved, handing the whole cornucopia of blessings and benefits of free enterprise in a capitalist system to the economy and to the grateful, prosperous, happy people.

This is where I wrote in my notes to, “Wait for the thunderous applause from the crowd, giddy with excitement at your Fabulous Mogambo Profundity (FMP).”

I didn’t have to wait long, as there was no applause. No bouquet of roses. No placing of a tiara upon my head. No nothing.

Instead, I got Mr. Zoellick saying to the Foreign Correspondents Association, “I don’t believe you can return to a fixed exchange rate system and that is the gold standard,” and later saying, “I’m not advocating a return to the 19th century when money supply was linked to gold.”

Naturally, I consider this to be so idiotically wrong that I advocate that we, meaning you, go en masse to the World Bank, arrest everybody, tear the building to the ground, burn the rubble and scatter the ashes, which shows you how dreadfully wrong he is, and makes you wonder why (“Hmmm! I wonder why!”) anyone would pay attention to this idiot who advocates for an expanding fiat currency which will increase the suffering of the poor and indigent by deliberately causing high inflation in prices, which is not to mention the impoverishment of everybody and every asset as a result of the dollar being devalued!

Feeling a particular ugliness come over me, I leap to my feet and shout, “What an inhuman bastard! And just like all the rest of his banker trash ilk, not to sugar-coat it any more than necessary to keep my head from exploding in a fit of Wild Mogambo Outrage (WMO)!”

Well, my head did not explode, even though the inflation in prices that comes from such irresponsible expansions of the money supply, that jerks like Robert Zoellick and Ben Bernanke embarrass themselves over, must already be showing up to the extent that even idiot bond buyers (as idiots are the only ones buying bonds at such high prices that they yield almost nothing) are selling bonds, and suddenly the US Treasury yield curve got seriously-unbent recently, as the price of the 5-year note went down enough to bring up the middle of the yield curve by an entire percent! One percent increase in yield in one week! And even the 30-year bond went up in yield as their prices fell.

This means that the decline in the prices of 5-year and 1-year debt handed huge unrealized losses to an entire world full of idiots stupid enough to own massive amounts of US government debt paying historically-low, abnormally low, insanely-low yields, all thanks to the foul Federal Reserve insanely creating the money to buy them, flooding the system with money, making your greedy “dark side” scream out to, “Short bonds, you moron! It’s one of those ‘once-in-a-lifetime’ can’t-miss, sure-fire deals, especially since bonds are already so overpriced that they are yielding less than half the rate of inflation Right Freaking Now (RFN)!”

You try to ignore that inner voice because you are too chicken for that kind of gamble since you’ve seen the foul, corrupt Federal Reserve simply create the money to buy bonds to make their prices stay up, and even go up, handing lots of losses to the shorts.

So you stick conservatively with buying gold, silver and oil when the desperate and clueless Federal Reserve is creating So, So Much, Much Money (SSMMM), a move that is so obvious and so simple that even complete morons like me can do it, and shout, “Whee! This investing stuff is easy!” when we do it!

The Mogambo Guru
for The Daily Reckoning

The Robert Zoellick-Gold Standard Affair originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Robert Zoellick-Gold Standard Affair




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 Robert Zoellick-Gold Standard Affair

November 22nd, 2010

It was with regret that I read in Reuters that “World Bank President Robert Zoellick said on Wednesday he was not advocating a return to a gold standard for exchange rates, but described the metal as ‘the elephant in the room’ that policymakers needed to acknowledge.”

What a wimpy attitude! Now I can go back to regarding Mr. Zoellick as just another neo-Keynesian pencil-necked geek moron with a dorky haircut and an ill-fitting suit who thinks he understands equations but knows little about economics.

I, on the other hand, say that any economist who knows what he is talking about would LOVE to see a return to a gold standard, and thus take control of the money supply out of the hands of evil men, each with their nasty secret agendas, conspiracies and cabals forming and dissolving in a swirling cauldron of corruption, and thus return the country to a blissful “golden age” where prices stayed the same, or gently fell, while quality and quantity improved, handing the whole cornucopia of blessings and benefits of free enterprise in a capitalist system to the economy and to the grateful, prosperous, happy people.

This is where I wrote in my notes to, “Wait for the thunderous applause from the crowd, giddy with excitement at your Fabulous Mogambo Profundity (FMP).”

I didn’t have to wait long, as there was no applause. No bouquet of roses. No placing of a tiara upon my head. No nothing.

Instead, I got Mr. Zoellick saying to the Foreign Correspondents Association, “I don’t believe you can return to a fixed exchange rate system and that is the gold standard,” and later saying, “I’m not advocating a return to the 19th century when money supply was linked to gold.”

Naturally, I consider this to be so idiotically wrong that I advocate that we, meaning you, go en masse to the World Bank, arrest everybody, tear the building to the ground, burn the rubble and scatter the ashes, which shows you how dreadfully wrong he is, and makes you wonder why (“Hmmm! I wonder why!”) anyone would pay attention to this idiot who advocates for an expanding fiat currency which will increase the suffering of the poor and indigent by deliberately causing high inflation in prices, which is not to mention the impoverishment of everybody and every asset as a result of the dollar being devalued!

Feeling a particular ugliness come over me, I leap to my feet and shout, “What an inhuman bastard! And just like all the rest of his banker trash ilk, not to sugar-coat it any more than necessary to keep my head from exploding in a fit of Wild Mogambo Outrage (WMO)!”

Well, my head did not explode, even though the inflation in prices that comes from such irresponsible expansions of the money supply, that jerks like Robert Zoellick and Ben Bernanke embarrass themselves over, must already be showing up to the extent that even idiot bond buyers (as idiots are the only ones buying bonds at such high prices that they yield almost nothing) are selling bonds, and suddenly the US Treasury yield curve got seriously-unbent recently, as the price of the 5-year note went down enough to bring up the middle of the yield curve by an entire percent! One percent increase in yield in one week! And even the 30-year bond went up in yield as their prices fell.

This means that the decline in the prices of 5-year and 1-year debt handed huge unrealized losses to an entire world full of idiots stupid enough to own massive amounts of US government debt paying historically-low, abnormally low, insanely-low yields, all thanks to the foul Federal Reserve insanely creating the money to buy them, flooding the system with money, making your greedy “dark side” scream out to, “Short bonds, you moron! It’s one of those ‘once-in-a-lifetime’ can’t-miss, sure-fire deals, especially since bonds are already so overpriced that they are yielding less than half the rate of inflation Right Freaking Now (RFN)!”

You try to ignore that inner voice because you are too chicken for that kind of gamble since you’ve seen the foul, corrupt Federal Reserve simply create the money to buy bonds to make their prices stay up, and even go up, handing lots of losses to the shorts.

So you stick conservatively with buying gold, silver and oil when the desperate and clueless Federal Reserve is creating So, So Much, Much Money (SSMMM), a move that is so obvious and so simple that even complete morons like me can do it, and shout, “Whee! This investing stuff is easy!” when we do it!

The Mogambo Guru
for The Daily Reckoning

The Robert Zoellick-Gold Standard Affair originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Robert Zoellick-Gold Standard Affair




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 It Time to Buy Chinese Yuan?

November 22nd, 2010

On November 19, the People’s Bank of China ordered the country’s banks to increase their reserves by an additional 0.50%. It’s the second time in two week the Bank has boosted reserve requirements as it tries to keep the value of the yuan down.

But it won’t be enough. The yuan will continue surging despite these latest efforts, creating a tremendous opportunity for anyone who missed out the last time around — even if you’re not a global currency investor.

For one thing, China’s decision to increase reserve requirements it nothing new. Chinese policymakers have used this tool in the past to keep the supply of currency under control. But it hasn’t been very effective. Despite the regulations, the yuan is now 17% stronger against the U.S. dollar. And measures like this are becoming more difficult to implement as the Chinese economy continues to expand.

China’s gross domestic product jumped almost 10% in the third quarter of 2010 — matching the 30-year average. Although dipping slightly from previous years, the current pace of Chinese expansion is 4 times that of the United States.

And the trend is going to continue as long as China maintains its strong exporting relationships. Both the United States and Germany make up about a quarter China’s trade, with South Korea, Hong Kong and Japan comprising another 25%. These countries not only rely on China’s low-cost food processing and manufacturing, they also rely on China’s raw material excavation and energy production. China is ranked third in global energy production and first in wind power.

Domestic demand in China is also going to push the yuan higher. Roughly 200 million individuals are now considered the middle class in China. That figure is expected to more than triple in the next five years as wage growth increases the country’s standard of living.

As it is, consumption of food and electronics has already grown by an average of roughly 30% over the last five years. And the number of Chinese people using the Internet has more than doubled in the past seven. With more and more people joining China’s middle class every day, you can bet that their consumption will continue rising, too.

But you can’t have rapidly accelerating growth without having consumer price increases.

The People’s Bank of China knows this, so it keeps a close eye on the economy’s underlying inflation rate. As the economy keeps booming, China’s central bankers will keep monetary policy restrictive. Simply put, this means interest rates will keep going higher. And higher rates naturally support demand for the currency.

In fact, even though China’s one-year bank deposit rate (currently at 2.25%) doesn’t match the central bank’s national rate of 5.56%, it’s still a bigger draw than the  U.S. savings deposit rates of barely 0.50% The higher interest rate will continue to attract foreign investments and support further appreciation in the exchange rate — no matter how much China tries to control it.

But you don’t need to be a foreign currency trader to participate in the yuan’s unstoppable rise. You can just invest in the WisdomTree Dreyfus Chinese Yuan (CYB) ETF.

CYB aims for returns similar to money market investments available to foreign investors while tracking fluctuations in the Chinese yuan. For everyday investors, it’s a great conduit for slow, stable appreciation in China’s currency. At the same time, it helps diversify domestically focused portfolios without a lot of volatility.

The ETF should do quite well in the months ahead. China’s economy will continue to expand. Central bankers will keep raising interest rates and increasing reserve requirements on national banks. The yuan will continue to appreciate. Ultimately, it’s  an opportunity that’s almost impossible to pass up. And CYP offers a great way to play it.

Richard Lee
for The Daily Reckoning

Is It Time to Buy Chinese Yuan? 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 It Time to Buy Chinese Yuan?




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

ETF, Uncategorized

Is It Time to Buy Chinese Yuan?

November 22nd, 2010

On November 19, the People’s Bank of China ordered the country’s banks to increase their reserves by an additional 0.50%. It’s the second time in two week the Bank has boosted reserve requirements as it tries to keep the value of the yuan down.

But it won’t be enough. The yuan will continue surging despite these latest efforts, creating a tremendous opportunity for anyone who missed out the last time around — even if you’re not a global currency investor.

For one thing, China’s decision to increase reserve requirements it nothing new. Chinese policymakers have used this tool in the past to keep the supply of currency under control. But it hasn’t been very effective. Despite the regulations, the yuan is now 17% stronger against the U.S. dollar. And measures like this are becoming more difficult to implement as the Chinese economy continues to expand.

China’s gross domestic product jumped almost 10% in the third quarter of 2010 — matching the 30-year average. Although dipping slightly from previous years, the current pace of Chinese expansion is 4 times that of the United States.

And the trend is going to continue as long as China maintains its strong exporting relationships. Both the United States and Germany make up about a quarter China’s trade, with South Korea, Hong Kong and Japan comprising another 25%. These countries not only rely on China’s low-cost food processing and manufacturing, they also rely on China’s raw material excavation and energy production. China is ranked third in global energy production and first in wind power.

Domestic demand in China is also going to push the yuan higher. Roughly 200 million individuals are now considered the middle class in China. That figure is expected to more than triple in the next five years as wage growth increases the country’s standard of living.

As it is, consumption of food and electronics has already grown by an average of roughly 30% over the last five years. And the number of Chinese people using the Internet has more than doubled in the past seven. With more and more people joining China’s middle class every day, you can bet that their consumption will continue rising, too.

But you can’t have rapidly accelerating growth without having consumer price increases.

The People’s Bank of China knows this, so it keeps a close eye on the economy’s underlying inflation rate. As the economy keeps booming, China’s central bankers will keep monetary policy restrictive. Simply put, this means interest rates will keep going higher. And higher rates naturally support demand for the currency.

In fact, even though China’s one-year bank deposit rate (currently at 2.25%) doesn’t match the central bank’s national rate of 5.56%, it’s still a bigger draw than the  U.S. savings deposit rates of barely 0.50% The higher interest rate will continue to attract foreign investments and support further appreciation in the exchange rate — no matter how much China tries to control it.

But you don’t need to be a foreign currency trader to participate in the yuan’s unstoppable rise. You can just invest in the WisdomTree Dreyfus Chinese Yuan (CYB) ETF.

CYB aims for returns similar to money market investments available to foreign investors while tracking fluctuations in the Chinese yuan. For everyday investors, it’s a great conduit for slow, stable appreciation in China’s currency. At the same time, it helps diversify domestically focused portfolios without a lot of volatility.

The ETF should do quite well in the months ahead. China’s economy will continue to expand. Central bankers will keep raising interest rates and increasing reserve requirements on national banks. The yuan will continue to appreciate. Ultimately, it’s  an opportunity that’s almost impossible to pass up. And CYP offers a great way to play it.

Richard Lee
for The Daily Reckoning

Is It Time to Buy Chinese Yuan? 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 It Time to Buy Chinese Yuan?




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

ETF, Uncategorized

Take a Look Inside the Federal “Credit Card Machine”

November 22nd, 2010

A few days ago, CBS Evening News aired a special report on the $1.5 trillion federal budget deficit, which is currently the largest in US history. It features senior business correspondent Anthony Mason’s look inside the US Treasury’s Auction Room, where the nation’s delicately-balanced finances manage to stave off fiscal disaster just one day at a time.

According to Mason:

“’That room is essentially the American credit card machine. It’s basically selling treasury bills, basically IOUs that we use to pay off the money that we are borrowing,’ Mason says. ‘I found that room kind of spooky. If we can’t issue those IOU’s – which keeps the government running on a day-to-day basis – then we can’t run the country anymore. We don’t have the money.’”

You can watch the clip below from CBS Evening News on where the $14 trillion national debt goes for love, which came to our attention via The Daily Bail.

Take a Look Inside the Federal “Credit Card Machine” 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:
Take a Look Inside the Federal “Credit Card Machine”




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

Gold vs. The Fed: The Record Is Clear

November 22nd, 2010

There were no worldwide financial crises of major magnitude during the Bretton Woods era from 1947 to 1971. Lesson: Gold is a more efficient governor of monetary policy that the Federal Reserve.

When it last met, the Federal Open Market Committee (FOMC) signaled its desire to increase the rate of inflation by providing additional monetary stimulus. This policy is based on a false – and dangerous – premise: that manipulating the dollar’s buying power will lead to higher employment and economic growth. But the experience of the past 40 years points to the opposite conclusion: that guaranteeing a stable value for the dollar by restoring dollar-gold convertibility would be the surest way for the Federal Reserve to achieve its dual mandate of maximum employment and price stability.

From 1947 through 1967, the year before the US began to weasel out of its commitment to dollar-gold convertibility, unemployment averaged only 4.7% and never rose above 7%. Real growth averaged 4% a year. Low unemployment and high growth coincided with low inflation. During the 21 years ending in 1967, consumer-price inflation averaged just 1.9% a year. Interest rates, too, were low and stable – the yield on triple-A corporate bonds averaged less than 4% and never rose above 6%.

What’s happened since 1971, when President Nixon formally broke the link between the dollar and gold? Higher average unemployment, slower growth, greater instability and a decline in the economy’s resilience. For the period 1971 through 2009, unemployment averaged 6.2%, a full 1.5 percentage points above the 1947-67 average, and real growth rates averaged less than 3%. We have since experienced the three worst recessions since the end of World War II, with the unemployment rate averaging 8.5% in 1975, 9.7% in 1982, and above 9.5% for the past 14 months. During these 39 years in which the Fed was free to manipulate the value of the dollar, the consumer-price index rose, on average, 4.4% a year. That means that a dollar today buys only about one-sixth of the consumer goods it purchased in 1971.

Interest rates, too, have been high and highly volatile, with the yield on triple-A corporate bonds averaging more than 8% and, until 2003, never falling below 6%. High and highly volatile interest rates are symptomatic of the monetary uncertainty that has reduced the economy’s ability to recover from external shocks and led directly to one financial crisis after another. During these four decades of discretionary monetary policies, the world suffered no fewer than 10 major financial crises, beginning with the oil crisis of 1973 and culminating in the financial crisis of 2008-09, and now the sovereign debt crisis and potential currency war of 2010. There were no world-wide financial crises of similar magnitude between 1947 and 1971.

At the center of each of these crises were gyrating currency values – either on foreign-exchange markets or in terms of real goods and services. As the dollar’s value gyrates it produces windfall profits and losses, feeding speculation and poor judgment. The housing bubble was fed in part by 40 years of experience with a dollar that lost purchasing power every year. Today, individual investors are piling into gold and other commodities in hopes of finding a safe haven from the FOMC’s intention to decrease the buying power of the dollar and reduce the value of our savings.

And what of the seductive promise that a floating dollar would make American labor more competitive and improve the nation’s trade balance? In 1967, one dollar could buy the equivalent of approximately 2.4 euros (based on the pre-euro German mark) and 362 yen. Over the succeeding 42 years, the dollar has been devalued by 72% against the euro and 75% against the yen. Yet net exports have fallen from a modest surplus in 1967 to a $390 billion deficit equivalent to 2.7% of GDP today.

The members of the FOMC, like their predecessors, are trying to do the best they can, but they are not really sure what it is that needs to be done. They have kept the federal-funds rate near zero for almost two years, but small businesses find it difficult to get loans and savers suffer from the lost income brought by artificially low interest rates. Now they’re about to advocate higher inflation – i.e., less price stability – in hopes of spurring economic growth.

Economists and pundits may disagree on why the gold standard delivered such superior results compared to the recurrent crises, instability and overall inferior economic performance delivered by the current system. But the data are clear: A gold-based system delivers higher employment and more price stability. The time has come to begin the serious work of building a 21st-century gold standard for the benefit of American workers, investors and businesses.

Regards,

Charles W. Kadlek,
for The Daily Reckoning

Gold vs. The Fed: The Record Is Clear 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:
Gold vs. The Fed: The Record Is Clear




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

Commodities, Uncategorized

Quantitative Easing and the Importance of Job Growth

November 22nd, 2010

As the US stock market gyrates, Ben Bernanke’s pet project, Quantitative Easing (QE), remains the topic of the day. Most of the creditors to the US scorn QE as a reckless dalliance with currency debasement. On the other side, most of the debtors in the US applaud QE as a miracle elixir that’s “good for what ails thee.”

Both sides have a point. When you debase a currency, creditors lose and debtors win. And last we checked, the US government owed a lot of money to a lot of people. Lucky for it, minting a dollar bill requires only about two cents worth of paper and ink. So a little bit of extracurricular money-printing really lightens the debt load.

Obviously, to the extent that creditors are amenable, printing the money with which to repay them is a terrific idea. The problem is; creditors don’t usually tolerate such shenanigans for very long.

Chairman Bernanke insists that his QE project has nothing to do with subtly defrauding creditors. He says he is merely pursuing the Fed’s dual mandate: stable inflation and maximum employment. But QE seems to be all about maximum inflation in the pursuit of stable unemployment. At a minimum, QE reduces the Fed’s dual mandate to a solo mandate: job growth. Chairman Bernanke admits as much.

In a speech last week Bernanke remarked, “On its current economic trajectory the United State’s runs the risk of seeing millions of workers unemployed or underemployed for years… As a society, we should find that outcome unacceptable.”

Bernanke is clearly favoring the employment mandate over the “stable inflation” one. As such, he insists his QE tactics can grease the gears of economic rejuvenation. Unfortunately, the evidence-to-date contradicts this assertion.

“Since November 25, 2008, when the Fed announced that it would begin purchasing debt and mortgage-backed securities by Fannie and Freddie,” observes Evan Lorenz of Grant’s Interest Rate Observer, “the rate for new, conforming 30-year mortgages has declined by 1.6 percentage points to 4.32%, according to Bankrate.com. Yet, new-home sales have fallen. They dropped 26%…[since] the start of the mortgage buying.

“Over the same span,” Lorenz continues, “sales of previously lived-in, or ‘existing,’ homes fell 9%…One might argue that the Fed, its pure motives notwithstanding, is making things worse by preventing the market from clearing.”

But the housing market is not the only portion of the economy that would provide damning evidence against quantitative easing. Even after two years of mega-billion-dollar meddling by the Federal Reserve, signs of economic recovery remain scant.

“The New York Fed’s Empire Index of manufacturing activity took a dive in the current reporting month,” observes David Rosenberg, The Daily Reckoning’s favorite economist, “swinging from +15.73 in October to -11.14 in November, the largest swing ever recorded in a single month and the worst showing since the depths of the recession in April 2009.”

Numbers like these are indisputably bad, but maybe they would have been worse if Bernanke hadn’t intervened. Maybe Ben’s intervention in the private sector prevented the arrival of the Great Depression II.

Maybe…but probably not.

“Some intriguing research in the contrary vein is worth considering,” writes James Grant, taking the baton from his colleague. “‘A Decade Lost and Found: Mexico and Chile in the 1980s,’ by Raphael Bergoeing, Patrick J. Kehoe et al., published in 2002, might serve as a parable for these interventionist times. The paper contrasts the response of Mexico and Chile to the seemingly intractable difficulties each faced in the 1980s.

“Despite a similar starting point, the authors write, ‘Chile returned to trend in about a decade and since then has grown even faster than trend. In contrast, output in Mexico has never fully recovered, and even two decades later is still 30% below trend.’

“The difference? Chile let companies fail and markets clear. Mexico, anticipating certain features of the contemporary United States, allowed its archaic bankruptcy system to perpetuate the lives of money-losing businesses and allocated credit by government directive.

“The sharp recession that Chile suffered in consequence of its seemingly harsh policies,” Grant continues, “merely proved the preface to a superb recovery. In comparative terms, Mexico stagnated. Washington, DC, please copy.”

Here’s an idea: offer Ben Bernanke a generous retirement package, dismantle the Fed, re-establish the dollar’s link to gold…and let the market’s sort it out.

Eric Fry
for The Daily Reckoning

Quantitative Easing and the Importance of Job Growth 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:
Quantitative Easing and the Importance of Job Growth




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

Holiday SPX Short Term Key Levels to Watch

November 22nd, 2010

With Monday’s decline taking some investors and traders by surprise, let’s pull the perspective back and take a look at the current Daily Chart and then Hourly Chart structure, levels to watch, and “IF/THEN” Logic setting up right now.

First, the Daily S&P 500:

Stripping the chart to its most basic simplicity, there are two key price levels to watch.

Immediately overhead, we have the 1,200 which held this morning as resistance – and this big failure (so far) here could be telling.  As such, keep a close eye on 1,200.

ANY resurgence in price above 1,200 triggers a “Popped Stops” play to 1,230 – simple expectation (especially now, since bears are rushing in and placing fresh stops above 1,200).

So that’s resistance, but what’s support?

Initially, we have the rising 50d EMA at 1,171 and then the lower Bollinger Band at 1,167.  Perhaps more importantly, price formed a short-term swing low last week at 1,174.

Take a look at my prior “Playing EMA Breaks” lesson post for how trends and EMAs work in terms of setting quick plays and targets.

That forms a triple confluence about the 1,170 area to watch.  And of course, IF price falls under 1,170, THEN expect lower prices – perhaps to 1,150 or lower.

Ok – so that may be as far as some you need to go in terms of setting up your expectations and potential trades for this holiday week.

Those that want a bit more information from the Hourly Chart, read on:

We see the initial resistance at the 1,195 level going into November and the massive 20 point “Popped Stops” play that was expected on a breakout above 1,200 – 1,228 was the likely upside target, being the 61.8% “Large Scale” Fibonacci area – which successfully held back the buyers.

Now that an initial downswing formed to test the 1,170 area, what’s the short-term levels to watch?

I drew a simple Fibonacci Retracement grid from the recent 1,228 high to the 1,174 low to arrive at the following levels to watch.  In fact, only one level comes into play in a major way.

It’s the 50% Retracement at exactly 1,200.  Not coincidence, but confluence – and so far the buyers have been unable to break the confluence.

Friday’s push up to the (now) “Double Top” (see lower timeframe charts) occurred on a clear negative momentum divergence that – at least from the chart odds – forecast better odds of a downward move than a breakthrough.

Today’s action is that downward fall from the 1,200 level.

The key short-term support level to watch again is the 1,174 level from the prior swing low – a price takedown here sets up even lower targets ahead.

And of course the alternate “IF/THEN” is in play, which is the “IF buyers can bust through all the resistance at 1,200, THEN the next play becomes a ‘Popped Stops’ move to 1,230.”

From the chart perspective, unless we get a solid break above 1,200 or under 1,170, we’re likely to see a ping-pong range move going into Thursday’s Thanksgiving Holiday.

Be safe and watch these levels objectively.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Holiday SPX Short Term Key Levels to Watch

Uncategorized

China: Bull Market or Bubble? The Story Continues…

November 22nd, 2010

The news last week followed the sun. It began with doubts about Ireland’s solvency…then moved to fears that California would default…and ended on Friday with doubts about China. Word on the street was that the Middle Kingdom wanted to dampen down inflation. They were going to raise rates and tighten credit.

The Chinese blame Ben Bernanke for increasing the supply of dollars and causing inflation in emerging markets and commodities. Bernanke points his finger at the Chinese. Replying to charges of reckless endangerment, “they made me do it,” he says. The Chinese wouldn’t raise the yuan…so he has to lower the dollar.

That’s what’s nice about paper currencies – you can manipulate them. Which is exactly what the US is doing…trying to manipulate its dollar downward…while simultaneously charging China with being a “currency manipulator.”

Which just goes to show how little honor there is among central bankers.

Maybe it was the China story. Maybe not. But for one reason or another there was no bullish follow-through on Friday. The Dow barely ended the day in positive territory. Gold stood stock still.

So, what is going on in China? We decided to get to the bottom of it.

Friday, we had a Chinese businessman in our office. He had come to see us about starting up a venture together in China.

“Nobody…nobody…knows for sure what it going on,” said he. “On the one hand, there are plenty of excesses and bad investments in China. There must be. We’ve been growing so fast. And there must be a lot of bad debt hidden in the banking system, for example.

“But on the other hand, China is booming. There have never, ever been so many people working so hard to make money. It’s a bit like the US probably was a hundred years ago. Only bigger. Faster. And with more government involvement.

“There might be plenty of problems…business failures…bankruptcies…and financial blow-ups. But I doubt that the China story will end any time soon.”

We don’t think the story will end. We think it will become more and more fascinating…and more exciting. You can’t grow at such a breakneck speed without breaking someone’s neck. And any time the government is heavily involved in planning an economy, you can be sure the plans will be bad ones. They will control too much…and then they will lose control.

Our friend Dylan Grice, analyst at Société Générale, has more on this story:

Is it possible they’ve…(sharp intake of breath) already lost control? And if so, who’s to say what will happen if the asset inflation goes into reverse? Maybe when the authorities engineer the slowdown they desire and tell investors it’s safe to buy again, those investors won’t want to buy. In which case a hard landing shouldn’t be beyond the realms of imagination.

Forget US de-leveraging, this represents the largest deflationary risk to the world economy

So long as China’s credit growth continues at its current pace, aided by the liquidity the Fed is flooding world markets with, and encouraged by artificially low interest rates, the primary risk Ems (Emerging Markets) face today remains that of a bubble.

This might sound a very bullish note on which to end. It isn’t. And let me be crystal clear about why: a bubble is not a bullish scenario. It’s not bullish for the EM economies themselves, their citizens or for the world as a whole. The fact is all bubbles end in tears.

Tears. Did you hear that, dear reader? Tears. Let’s be sure they’re not our own.

Bill Bonner
for The Daily Reckoning

China: Bull Market or Bubble? The Story Continues… 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:
China: Bull Market or Bubble? The Story Continues…




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

Commodities, Uncategorized

Ireland Becomes the 2nd Eurozone Country to Seek a Bailout

November 22nd, 2010

OK… The currencies and precious metals began healing on Friday too! The Sword of Damocles that hung over Ireland for the past two weeks was removed (for now, that is) and the focus shifted from a Eurozone problem back to the US. I know, you’re saying, these traders have very short attention spans… And you would be correct… But even more than the traders, I believe it has more with the focus and importance that the media puts on the “current problem”…

So… For now, the eyes of disgust have shifted to the US’s problems with debt, quantitative easing, and the question of how the bills will get paid. So… that means the Big Dog, euro (EUR) is back off of the porch, chasing the dollar down the street, and all the little dogs get to chase too! For those of you new to class, I use this to describe what’s going on with the currencies… The euro is the offset currency to the dollar, therefore it is called the “Big Dog”… All the other currencies are the “little dogs”… The little dogs can’t get off the porch to chase the dollar unless the Big Dog goes first… Once the Big Dog is off the porch, the little dogs, which can move faster, can outperform the Big Dog… But once again, they can’t get going unless the Big Dog goes first…

Sorry for the long explanation, but I thought to myself, “You haven’t explained all that in some time… And since I’m sitting here wondering what I’m going to write about this morning, I thought this would be a good time to do some explaining.

Ireland became the second Eurozone country to seek a rescue (Greece was the first)… A week ago, Ireland was saying that they didn’t need any aid… But what a difference a week makes, eh? But, the markets look at this and say, “Well, if they get the rescue package they need, then we’ll go back to the problems in the US”… Of course, over the past year, I’ve done my best to show you that the debt problems of the Eurozone states are very much like the problems of the US states… Unfortunately, for us, you take a state like California (the 8th largest economy in the world), and the problems are far greater here than there…

So… It’s what, as kids, we used to call an “ugly contest”… Or, as the Big Boss, Frank Trotter, shows in one of his old presentations… An auto salvage yard with nothing but Mercedes Benz cars… Then he would say, what you’re looking for here, is a car that will start every day and get you to work… It’ll be wrecked and ugly, but it does the job… And… isn’t that what we’re looking for? Something to offset the fall of the dollar’s value? To replace the lost purchasing power that the dollar has lost for years now?

That’s an interesting thing to talk about… Purchasing power… It is the number of goods/services that can be purchased with a unit of currency. For example, if you had taken one dollar to a store in the 1950s, you would have been able to buy a greater number of items than you would today, indicating that you would have had a greater purchasing power in the 1950s… Or even better, you would have had more purchasing power just eight years ago, when the dollar began this long ride on the slippery slope to its intrinsic value.

Of course if you were with me eight years ago, and diversified your investment portfolio, and stuck with it during the dollar’s brief rallies of 2005, 2008, and the first six months of 2010, you would have retained most of that purchasing power that was lost by holding just dollars…

And, of course, a “unit of currency” doesn’t have to be folding money (like dollars or euros) it can also be a precious metal, like gold or silver… Gold is up $5 this morning, adding to Friday’s $5 gain… Sure, gold will need to string together quite a few $5 gain days to catch up with the losses it suffered last week… But, I certainly do believe that it will… Of course, that’s just my opinion; I could be wrong…

You know… Silver has actually outperformed gold this year, right? In fact, silver has surged 62% this year, while gold has surged 24%… WOW! I recently did a long interview with NewsMax that will be in print the month of January, where I answer the question, “Is silver the next gold?” I don’t want to steal the thunder from the magazine… But I’ll just point to the fact that silver has outperformed gold this year… And now the mints are talking about silver… Perth Mint in Western Australia says that “global demand for silver will increase”… The Royal Canadian mint said that they believe “Silver coin sales will jump more than 50% this year.”

OK… I see that Brazil’s strong economy has created 2.4 million jobs in the first 10 months of this year… The Brazilian government had set a target of job creation for 2010 at 2.5 million jobs, which certainly looks to be achieved… And to think… The government is so concerned that the real’s value is too strong… The government believes the strength of the real (BRL) is hampering their economy… But apparently not! See what I mean when I get all lathered up and talk about government’s leaving their economies to the market forces? These government’s all believe that “they have to stick their hands in there and act like they know what they’re doing” and that’s just plain wrong!

The ratings agencies would do us all some good if they just went away… The latest problem I have with them is S&P, which sent out a negative outlook for New Zealand… OK… We know, the markets all know, and investors know already that New Zealand’s external debt is not good… But it’s nowhere near the levels that would demand that S&P would give New Zealand’s outlook a negative rating… Needless to say, this announcement knocked the stuffing out of the kiwi (NZD)… I would have to say that this knee-jerk reaction to the announcement has probably given kiwi a nice level to look to buy…

Speaking of “stuffing”… Thanksgiving is this week! It will be a shortened week for yours truly, and for the markets in general… The data cupboard’s data will be all “stuffed” into mostly two days – tomorrow and Wednesday… The stock market closes early on Friday… I guess all the stock jockeys want to get in on the Black Friday action! HA!

So… The data talk can be held until tomorrow…

Canada will hold onto its data until tomorrow too, with both retail sales and inflation due to print on Tuesday… These reports from Canada have all been soft lately, so tomorrow is a big day for the loonie (CAD)… at this point, I would think that since all of the data lately has been soft, that it’s time for a reversal in the soft data trend… That’s my story and I’m sticking to it!

Last week, before Chris took the conn on the Pfennig, I had told you about the rise in Treasury yields, and wondered out loud, if this was the beginning of the end for the Treasury Bubble… I thought it would be quite difficult with the cartel buying $600 billion of Treasuries in the coming months… Well, The Economist was questioning the affects of the quantitative easing, and came to the conclusion that if the one of the important objectives of that quantitative easing was to drive down medium-term Treasury yields (that are tied to mortgage rates), then, well… That’s not what’s happening!

Think about this for a minute, folks… QE isn’t driving down yields, and neither is the Irish debt problem that in the past would have sent quite a few investors toward Treasuries in a flight to safety… So, has the bloom been taken from the Treasury’s rose? It sure looks that way to me…

The Wall Street Journal had a good story on QE… They pointed out something that I’ve pointed out to you several times now, that QE hasn’t helped Japan… It’s been almost 10 years since Japan introduced QE to their economy… And inflation hasn’t been seen! So… if that’s the FOMC’s/Cartel’s plan… Then it hasn’t worked in Japan…

But here’s the difference, folks… Here in the US, consumers are spenders… In Japan they are savers… I’ve been telling you this for some time now… That’s the big difference…

OK… Here’s a pattern I’ve seen over and over again for months now… I come in, and the overnight markets have pushed the euro higher (it was 1.3740 when I came in), and then watch as the NY traders arrive and take it back down (1.3685 now)… I guess it’s time to go to the Big Finish!

Then there was this… The Irish government will now open formal talks with the EU/IMF on details of the package, including its amount (Goldman Sachs says it will have to be 95 billion euros) and also the policies Ireland will be expected to implement in exchange for aid. Both the ECB and the finance ministers stressed that the bailout package would have “strong” policy conditions attached. Ireland’s PM Cowen said he expected an agreement “within the next few weeks.” Ireland has already implemented a series of austerity measures over the past two years and said last month it planned further cuts in spending and tax changes to cut 15 billion euros from the budget by 2014 (6 Billion euros in 2011).

I hope it all works for Ireland… Just five years ago it was the cat’s meow of countries with growth, and business creation…

To recap… It’s Thanksgiving week and the data will be “stuffed” into two days this week – tomorrow and Wednesday. The currencies and precious metals saw some healing on Friday that had carried over to this morning. It looks like Ireland will get a rescue package from the European Union and IMF, and that has given risk traders a bit of room around the neck this morning.

Chuck Butler

for The Daily Reckoning

Ireland Becomes the 2nd Eurozone Country to Seek a Bailout 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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Ireland Becomes the 2nd Eurozone Country to Seek a Bailout




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Higher Interest Rates Forecast Market Correction

November 22nd, 2010

Every precious metals investor should be concerned about China, one of the world’s fastest growing economies, raising its rates and rising yields. Changes in the rates affect stock prices. China is leading the world and we can see the fears are profound as sell-offs this week were much stronger than any of the relief rallies. If China’s market corrects then the commodity market, which was fueling the equity market, could experience a severe correction. It’s a domino effect.

Despite the Fed’s enthusiastic plan to monetize debt and artificially keep interest rates low through bond purchases, yields have risen aggressively for the last 13 weeks. The QE2 program was designed to lower interest rates to improve borrowing and liquidity. Instead the opposite occurred, QE2 is initiating higher borrowing costs. I don’t believe it is coincidence that Ireland’s debt problems surfaced following QE2.  China is now on the verge of raising rates to combat imported cheap dollars to bid up Chinese assets, which is putting pressure on markets globally. Rising rates kills equity and commodity markets, which are heavily built on margin borrowing.  The Long Term Treasury ETF (TLT) broke through the trend it had from May until the end of August. This previous trend was largely a result of a deflationary crisis where investors ran from risky assets like the euro to the dollar, and long-term Treasuries were pushing yields to ridiculously low levels. As fear in the markets decreased, due to a temporary stabilization in Europe and the US, investors ran to equities and commodities.

International reaction to QE2 has not been positive. There is an increased risk of emerging markets combating inflation, which may slow down the global recovery. Fears of China and emerging markets raising rates make investors unsure where to turn.

Asset classes have reacted negatively to China’s expected move. Distribution is apparent through many sectors and many international markets. Rising interest rates have a direct influence on corporate profits and prices of commodities and equities.

When studying interest rates it’s not the level that is important, it’s the rate of change. Interest rates have had a dramatic increase these past two months and we may see that affecting the fundamentals in the economy shortly.

The recent downgrade on US debt from China, who is our largest creditor, signals demand for US debt has been waning. I’ve been highlighting the decline in long-term Treasuries since the end of August. This rise in interest rates puts further pressure on the recovery as the cost of borrowing increases. Economic conditions are worsening in Europe and emerging markets in reaction to quantitative easing and imported inflation. Concerns of sovereign debt issues are weighing in Europe. As yields rise so do defaults and margin calls.

If the 200-day is unable to hold the bond decline and we continue to collapse, then rising interest rates could negatively affect the economic recovery. Borrowing costs to insure government debt are reaching record levels internationally. Ireland is expected to take a bailout. Greece, Spain, and Portugal are in danger as well.

Commodities have significantly moved higher along with the equity market for September and October as investors left Treasuries to return to risky assets due to the fear of debt monetization through QE2. Global equity markets have been rising. But the question is, how long? This makes investors reluctant to take on debt, which is the exact opposite of what the Fed’s goals were. Rising yields could lead to a liquidity trap and deflationary pressures.

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Higher Interest Rates Forecast Market Correction

Commodities, ETF

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