3 Ways to Invest for Rapidly Approaching Inflation

October 4th, 2010

3 Ways to Invest for Rapidly Approaching Inflation

There are plenty of good reasons to believe inflation is coming.

U.S. government debt has surpassed $9 trillion, nearly tripling from $3.4 trillion in 2000.
And things are getting worse.

The government ran a deficit of $1.42 trillion in 2009 alone. Even as the economy has recovered, the current administration estimates the deficit for 2010 will be $1.5 trillion. [See Nathan Slaughter's "Shocking Facts About the U.S. Debt Problem..."]

How is the government going to pay all that debt? One way is inflation. The Federal Reserve has every incentive to boost inflation because it would in effect reduce the debt, as it would be paid with devalued dollars.

Meanwhile, the government is injecting money into the system by basically giving it away. The current discount rate (the rate charged to commercial banks to borrow money from the Fed) is a microscopic 0.75%. To add perspective, the discount rate was 5.25% in 2006 and 19% in 1980.

A massive flood of dollars into the financial system typically leads to inflation. Since the flood of dollars has been so large, it could lead to a large amount of inflation, possibly in the double-digits. But there's no sign of inflation yet. In fact, the consumer price index (CPI) increased a mere 0.3% in August. The current 1.2% annualized CPI rate is the lowest in decades.

The Fed recently expressed concern that the risk of deflation was greater than the risk of inflation at this point and said it was prepared to take action to increase inflation to a level to support economic recovery. If The Fed actually wants more inflation, it will probably get it.

The long term dynamics are already in place. Now, the Fed has announced it will likely flood the financial system with still more money and hasten its arrival.

Investments to own for inflation
A great way to hedge against inflation is by investing in hard assets that tend to maintain value in times of inflation. Commodities such as minerals, grains, metals, sugar, cotton, livestock and oil typically rise in price along with inflation. In fact, when the consumer price index (CPI) increased from 3% in May of 1972 to 11% in December of 1974, the S&P Goldman Sachs Commodity Index rose +222%, averaging +55% annually.

Three investments should not only thrive in times of inflation, but also have solid growth prospects even without it.

BHP Billiton, Ltd (NYSE: BHP) is the world's largest publically traded mining company. The Australia-based conglomerate sells a variety of natural resources (including aluminum, coal, copper, iron ore, mineral sands, oil, gas, nickel, diamonds, uranium and silver) for industrial production throughout the world.

Not only should the price of natural resources increase with inflation, but worldwide demand should also continue to increase. The emergence of China and other emerging markets has exponentially and permanently increased industrial production across the globe.

Rising industrial production during the past several years had led to an average earnings increase of more than +100% per year for the past five years. BHP's stock returned an amazing average annual return of more than +24% a year in the past 10 years, while the S&P 500 has been negative during the same period.

The company sells industrial raw materials all over the world, but its primary markets are the fastest growing — China and the rest of Asia. BHP also pays a dividend, which currently translates to a 2.3% yield and has grown at an average annual rate of +25% per year since 2002.

ExxonMobil (NYSE: XOM) is the world's largest public oil and gas company. The energy giant does business with most of the world's countries and explores for oil and gas on six continents. In 2009, the company produced 2.4 million barrels of oil and 9.3 billion cubic feet of natural gas a day and currently has about 15 billion barrels of oil equivalent (BOE) in reserves, 62% of which is crude oil. The company is also the world's largest refiner.

The oil story is similar to the overall natural resource story, in that growth in worldwide demand and consumption should lead to higher prices. Prior to the financial crisis and worldwide recession, oil prices had benefited mightily from growing global demand. Oil prices rose from about $10 per barrel in 1998 to $147 in 2008. The price has retreated to about $73 per barrel, but the same dynamics that drove oil to $147 still exist. But, there's another major factor that should buoy oil prices going forward — scarcity.

The planet has an estimated 1.3 trillion barrels of proven reserves — only enough for 40 years at current consumption rates, and far less if the uptrend in the world's appetite continues. The combination of rocketing demand and dwindling supply should lead to significantly higher oil prices in the future, even without inflation. ExxonMobil also pays a quarterly dividend that has doubled in the past decade and currently yields 2.8%.

Monsanto (NYSE: MON) is a St. Louis-based agricultural products maker and the world's leading producer of seeds for corn, soybean, cotton, fruits, vegetables and other crops. The company genetically engineers seeds that produce more bountiful crops and produces herbicides that protect crops against bugs and weeds. The firm's seed segment generated about two thirds of the company's profits in 2009, while the herbicide segment contributed the rest.

Helping the world to produce more and better food is obviously a practical business plan. A rising world population will demand more food, and emerging market populations with increasing wealth are demanding higher quality foods. While profit and revenue ($11.7 billion in 2009) continued to rise throughout the financial crisis and recession, the company has been struggling of late.

Monsanto is facing increased competition for its flagship herbicide — Round-up. The struggles with this product have led the company to warn that 2010 profits (fiscal year ended 8/31) will be at the low end of guidance. The stock has lost -40% so far this year.

But despite recent struggles, the company continues to offer cutting edge products in a defensive and growing industry and invests about 10% of sales in R&D. Monsanto still has excellent longer term prospects and the stock is cheap, selling at a P/E ratio about -31% below the five-year average.

Action to Take –> Metals, oil and food are all commodities that should hold up well in times of inflation. While there are many other ways to invest in these commodities, these companies are some of the biggest and the best. Their size and diversity makes them less likely to encounter company-specific problems and peculiarities that negate the overall trend in their businesses.

In addition to providing a strong hedge against inflation, BHP, ExxonMobil and Monsanto should prosper from strong trends even if inflation is somehow avoided. While inflation hasn't emerged yet, by the time it does, the prices of these stocks will likely be much higher. They all sell at reasonable valuations and are good buys at current levels.


– Tom Hutchinson

P.S. Nathan Slaughter, the editor of StreetAuthority Market Advisor, is recommending some inflation-crushing investments for his $100,000 real money portfolio. Discover which investments ideas are best-positioned to SOAR in the coming inflation boom.

Tom has a 15-year history as a financial advisor with UBS constructing investment portfolios. Tom's background includes a NASD Series 7 and 63 certifications.

Commodities, Uncategorized

3 Ways to Invest for Rapidly Approaching Inflation

October 4th, 2010

3 Ways to Invest for Rapidly Approaching Inflation

There are plenty of good reasons to believe inflation is coming.

U.S. government debt has surpassed $9 trillion, nearly tripling from $3.4 trillion in 2000.
And things are getting worse.

The government ran a deficit of $1.42 trillion in 2009 alone. Even as the economy has recovered, the current administration estimates the deficit for 2010 will be $1.5 trillion. [See Nathan Slaughter's "Shocking Facts About the U.S. Debt Problem..."]

How is the government going to pay all that debt? One way is inflation. The Federal Reserve has every incentive to boost inflation because it would in effect reduce the debt, as it would be paid with devalued dollars.

Meanwhile, the government is injecting money into the system by basically giving it away. The current discount rate (the rate charged to commercial banks to borrow money from the Fed) is a microscopic 0.75%. To add perspective, the discount rate was 5.25% in 2006 and 19% in 1980.

A massive flood of dollars into the financial system typically leads to inflation. Since the flood of dollars has been so large, it could lead to a large amount of inflation, possibly in the double-digits. But there's no sign of inflation yet. In fact, the consumer price index (CPI) increased a mere 0.3% in August. The current 1.2% annualized CPI rate is the lowest in decades.

The Fed recently expressed concern that the risk of deflation was greater than the risk of inflation at this point and said it was prepared to take action to increase inflation to a level to support economic recovery. If The Fed actually wants more inflation, it will probably get it.

The long term dynamics are already in place. Now, the Fed has announced it will likely flood the financial system with still more money and hasten its arrival.

Investments to own for inflation
A great way to hedge against inflation is by investing in hard assets that tend to maintain value in times of inflation. Commodities such as minerals, grains, metals, sugar, cotton, livestock and oil typically rise in price along with inflation. In fact, when the consumer price index (CPI) increased from 3% in May of 1972 to 11% in December of 1974, the S&P Goldman Sachs Commodity Index rose +222%, averaging +55% annually.

Three investments should not only thrive in times of inflation, but also have solid growth prospects even without it.

BHP Billiton, Ltd (NYSE: BHP) is the world's largest publically traded mining company. The Australia-based conglomerate sells a variety of natural resources (including aluminum, coal, copper, iron ore, mineral sands, oil, gas, nickel, diamonds, uranium and silver) for industrial production throughout the world.

Not only should the price of natural resources increase with inflation, but worldwide demand should also continue to increase. The emergence of China and other emerging markets has exponentially and permanently increased industrial production across the globe.

Rising industrial production during the past several years had led to an average earnings increase of more than +100% per year for the past five years. BHP's stock returned an amazing average annual return of more than +24% a year in the past 10 years, while the S&P 500 has been negative during the same period.

The company sells industrial raw materials all over the world, but its primary markets are the fastest growing — China and the rest of Asia. BHP also pays a dividend, which currently translates to a 2.3% yield and has grown at an average annual rate of +25% per year since 2002.

ExxonMobil (NYSE: XOM) is the world's largest public oil and gas company. The energy giant does business with most of the world's countries and explores for oil and gas on six continents. In 2009, the company produced 2.4 million barrels of oil and 9.3 billion cubic feet of natural gas a day and currently has about 15 billion barrels of oil equivalent (BOE) in reserves, 62% of which is crude oil. The company is also the world's largest refiner.

The oil story is similar to the overall natural resource story, in that growth in worldwide demand and consumption should lead to higher prices. Prior to the financial crisis and worldwide recession, oil prices had benefited mightily from growing global demand. Oil prices rose from about $10 per barrel in 1998 to $147 in 2008. The price has retreated to about $73 per barrel, but the same dynamics that drove oil to $147 still exist. But, there's another major factor that should buoy oil prices going forward — scarcity.

The planet has an estimated 1.3 trillion barrels of proven reserves — only enough for 40 years at current consumption rates, and far less if the uptrend in the world's appetite continues. The combination of rocketing demand and dwindling supply should lead to significantly higher oil prices in the future, even without inflation. ExxonMobil also pays a quarterly dividend that has doubled in the past decade and currently yields 2.8%.

Monsanto (NYSE: MON) is a St. Louis-based agricultural products maker and the world's leading producer of seeds for corn, soybean, cotton, fruits, vegetables and other crops. The company genetically engineers seeds that produce more bountiful crops and produces herbicides that protect crops against bugs and weeds. The firm's seed segment generated about two thirds of the company's profits in 2009, while the herbicide segment contributed the rest.

Helping the world to produce more and better food is obviously a practical business plan. A rising world population will demand more food, and emerging market populations with increasing wealth are demanding higher quality foods. While profit and revenue ($11.7 billion in 2009) continued to rise throughout the financial crisis and recession, the company has been struggling of late.

Monsanto is facing increased competition for its flagship herbicide — Round-up. The struggles with this product have led the company to warn that 2010 profits (fiscal year ended 8/31) will be at the low end of guidance. The stock has lost -40% so far this year.

But despite recent struggles, the company continues to offer cutting edge products in a defensive and growing industry and invests about 10% of sales in R&D. Monsanto still has excellent longer term prospects and the stock is cheap, selling at a P/E ratio about -31% below the five-year average.

Action to Take –> Metals, oil and food are all commodities that should hold up well in times of inflation. While there are many other ways to invest in these commodities, these companies are some of the biggest and the best. Their size and diversity makes them less likely to encounter company-specific problems and peculiarities that negate the overall trend in their businesses.

In addition to providing a strong hedge against inflation, BHP, ExxonMobil and Monsanto should prosper from strong trends even if inflation is somehow avoided. While inflation hasn't emerged yet, by the time it does, the prices of these stocks will likely be much higher. They all sell at reasonable valuations and are good buys at current levels.


– Tom Hutchinson

P.S. Nathan Slaughter, the editor of StreetAuthority Market Advisor, is recommending some inflation-crushing investments for his $100,000 real money portfolio. Discover which investments ideas are best-positioned to SOAR in the coming inflation boom.

Tom has a 15-year history as a financial advisor with UBS constructing investment portfolios. Tom's background includes a NASD Series 7 and 63 certifications.

Commodities, Uncategorized

These Insiders are Making Seven-Figure Bets — Should You Tag Along?

October 4th, 2010

These Insiders are Making Seven-Figure Bets -- Should You Tag Along?

It's important to keep track of the moves by insiders, as they can point you in the direction of undervalued (or overvalued) stocks. I like to scan the recent buying and selling lists from insiders either daily or weekly, but a monthly look is also helpful, as it lets you see a steady accumulation of shares over a period of time.

As the end of September has come and October begins, I decided to take a look at the most significant purchases. I focused on the 26 companies that saw at least $1 million in insider buying this past month. Looking at the list, no real theme emerged as these companies tend to operate in a wide range of industries. Let's take a closer look at a few of the names.

Hain Celestial (Nasdaq: HAIN)
As we've seen before with the case of Motorola (NYSE: MOT), hedge fund investor Carl Icahn never makes a small bet. [Carl Icahn's Favorite Stock]

I noted that Motorola was Carl Icahn's favorite stock, but Hain Celestial may be a close second. Icahn has been steadily buying shares of this health food and tea maker on the open market, and just bought another $30 million worth in September. Curiously, he's been buying shares even as they have been steadily rising. (Insider buying is more often associated with beaten-down stocks).

This is an unusual growth story. The company has a long history of acquisition, helping to boost sales +10% to +20% most years. But in the absence of acquisitions, organic growth has been very small. And investors tend to avoid growth-though acquisition strategies because they don't always boost the bottom line. Indeed, Hain Celestial's EPS has hovered between $0.50 and $1 for most of the last eight years.

Recent trends have become a bit more favorable. Per share profits are likely to rise more than +25% to around $1.30 this year, but in the absence of more deals , profit growth is expected to slink back to single-digits next year.

From Mr. Icahn's perspective, near-term profits may not be the litmus test. Instead, he likely sees an asset that is being built that would ultimately make a nice fit for a larger food maker such as Kraft (NYSE: KFT), Nestle or Conagra (NYSE: CAG). But that's a risky strategy. Who knows if such a deal will materialize? Hain Celestial looks only modestly undervalued by traditional investment metrics, so anyone looking to ride along with Mr. Icahn may be counting on him to do some cage-rattling to unlock shareholder value, as he has done with Motorola.

Exar (Nasdaq: EXAR)
In a similar vein, legendary investor George Soros is placing a rising pile of bets on chip maker Exar. He bought another $10 million in stock in September, pushing his total holdings above $25 million, or roughly one-tenth of the entire company. Unlike Carl Icahn, George Soros doesn't apply pressure to the companies in which he invests, and instead typically takes a passive role.

Exar, which makes a range of chips used in telecom, data storage and power management environments, has been a decent growth story in recent years. Sales for fiscal (March) 2011 are on track to rise at a double-digit pace for the fourth straight year.

Yet even as sales have been rising, bottom line results have not followed suit. Exar has not been profitable since fiscal 2007. Shares had rebounded in the last year on hopes that the company would finally generate high enough gross margins to push profits to the bottom line. Recent weak quarterly results dashed those hopes, pushing shares down from $7.50 to under $6 in the past six months. They're not likely to fall too much further than that — Exar has almost $5 in cash, and shares trade slightly below book value of $6 per share.

Those kind of metrics enable Mr. Soros to keep from worrying about the position, even as the company is not expected to finally move back into profitability until the fiscal year that beings next April. Jonathan Moreland, who runs insiderinsights.com thinks investors won't need too much patience: “Management's cost-cutting moves should help Exar to start posting even more quarters in the black in the coming year.”

This looks like a safe value play with moderate upside, unless Mr. Soros suspects that Exar might find a home at a larger tech firm and be bought out at a nice premium.

Medivation (Nasdaq: MDVN)
Investment firm QVT Associates is backing this former highflying biotech. Medivation was a rising star in 2009 on the heels of a promising drug that appeared to effectively treat prostate cancer. Shares soared last fall as investors anticipated and then received word of a lucrative marketing deal that pushed shares to nearly $40.

But in early March, the company released Phase III clinical data that proved disappointing, sending shares down -70% in just one day.

At this point, analysts are divided as to where the stock goes from here. Medivation has a few more clinical trials underway that are still showing promise in the treatment of Huntington's disease and Alzheimer's disease. But analysts at Brean Murray predict that Medivation will stumble in these trials as well and shares will eventually fall to $6. Analysts at Global Hunter think the pipeline still holds a great deal of promise, and that shares are worth $16. Clearly the recent heavy insider buying from QVT, which owns more than 10% of the company, implies that upside could be far higher.

Office Depot (NYSE: ODP)
This stock caught my eye, even as it sat at the bottom of this list, as a cluster of insiders stepped up to the plate. I profiled this office supply chain a few weeks ago and even though shares are up more than +10% since then, they still look to have some pretty significant upside. Please re-visit that column for a fuller look at why I'm a bull on Office Depot. [Read: "Insiders are Scooping Up These 3 Retails Stocks"]

Action to Take –> Following stocks with heavy insider buying takes a good bit of follow-up work. The motivations behind those purchases aren't always clear, so it pays to listen to recent conference calls to glean hints of positive developments that most investors may be missing. Of these stocks profiled here, I remain an especially strong fan of Office Depot as it is quite cheap and highly-leveraged to an eventual increase in employment. Medivation remains a stock to heavily research before making any commitments and is only suitable for risk-tolerant investors, while Exar looks to have the best combination of value and upside.


– 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
These Insiders are Making Seven-Figure Bets — Should You Tag Along?

Read more here:
These Insiders are Making Seven-Figure Bets — Should You Tag Along?

Uncategorized

These Insiders are Making Seven-Figure Bets — Should You Tag Along?

October 4th, 2010

These Insiders are Making Seven-Figure Bets -- Should You Tag Along?

It's important to keep track of the moves by insiders, as they can point you in the direction of undervalued (or overvalued) stocks. I like to scan the recent buying and selling lists from insiders either daily or weekly, but a monthly look is also helpful, as it lets you see a steady accumulation of shares over a period of time.

As the end of September has come and October begins, I decided to take a look at the most significant purchases. I focused on the 26 companies that saw at least $1 million in insider buying this past month. Looking at the list, no real theme emerged as these companies tend to operate in a wide range of industries. Let's take a closer look at a few of the names.

Hain Celestial (Nasdaq: HAIN)
As we've seen before with the case of Motorola (NYSE: MOT), hedge fund investor Carl Icahn never makes a small bet. [Carl Icahn's Favorite Stock]

I noted that Motorola was Carl Icahn's favorite stock, but Hain Celestial may be a close second. Icahn has been steadily buying shares of this health food and tea maker on the open market, and just bought another $30 million worth in September. Curiously, he's been buying shares even as they have been steadily rising. (Insider buying is more often associated with beaten-down stocks).

This is an unusual growth story. The company has a long history of acquisition, helping to boost sales +10% to +20% most years. But in the absence of acquisitions, organic growth has been very small. And investors tend to avoid growth-though acquisition strategies because they don't always boost the bottom line. Indeed, Hain Celestial's EPS has hovered between $0.50 and $1 for most of the last eight years.

Recent trends have become a bit more favorable. Per share profits are likely to rise more than +25% to around $1.30 this year, but in the absence of more deals , profit growth is expected to slink back to single-digits next year.

From Mr. Icahn's perspective, near-term profits may not be the litmus test. Instead, he likely sees an asset that is being built that would ultimately make a nice fit for a larger food maker such as Kraft (NYSE: KFT), Nestle or Conagra (NYSE: CAG). But that's a risky strategy. Who knows if such a deal will materialize? Hain Celestial looks only modestly undervalued by traditional investment metrics, so anyone looking to ride along with Mr. Icahn may be counting on him to do some cage-rattling to unlock shareholder value, as he has done with Motorola.

Exar (Nasdaq: EXAR)
In a similar vein, legendary investor George Soros is placing a rising pile of bets on chip maker Exar. He bought another $10 million in stock in September, pushing his total holdings above $25 million, or roughly one-tenth of the entire company. Unlike Carl Icahn, George Soros doesn't apply pressure to the companies in which he invests, and instead typically takes a passive role.

Exar, which makes a range of chips used in telecom, data storage and power management environments, has been a decent growth story in recent years. Sales for fiscal (March) 2011 are on track to rise at a double-digit pace for the fourth straight year.

Yet even as sales have been rising, bottom line results have not followed suit. Exar has not been profitable since fiscal 2007. Shares had rebounded in the last year on hopes that the company would finally generate high enough gross margins to push profits to the bottom line. Recent weak quarterly results dashed those hopes, pushing shares down from $7.50 to under $6 in the past six months. They're not likely to fall too much further than that — Exar has almost $5 in cash, and shares trade slightly below book value of $6 per share.

Those kind of metrics enable Mr. Soros to keep from worrying about the position, even as the company is not expected to finally move back into profitability until the fiscal year that beings next April. Jonathan Moreland, who runs insiderinsights.com thinks investors won't need too much patience: “Management's cost-cutting moves should help Exar to start posting even more quarters in the black in the coming year.”

This looks like a safe value play with moderate upside, unless Mr. Soros suspects that Exar might find a home at a larger tech firm and be bought out at a nice premium.

Medivation (Nasdaq: MDVN)
Investment firm QVT Associates is backing this former highflying biotech. Medivation was a rising star in 2009 on the heels of a promising drug that appeared to effectively treat prostate cancer. Shares soared last fall as investors anticipated and then received word of a lucrative marketing deal that pushed shares to nearly $40.

But in early March, the company released Phase III clinical data that proved disappointing, sending shares down -70% in just one day.

At this point, analysts are divided as to where the stock goes from here. Medivation has a few more clinical trials underway that are still showing promise in the treatment of Huntington's disease and Alzheimer's disease. But analysts at Brean Murray predict that Medivation will stumble in these trials as well and shares will eventually fall to $6. Analysts at Global Hunter think the pipeline still holds a great deal of promise, and that shares are worth $16. Clearly the recent heavy insider buying from QVT, which owns more than 10% of the company, implies that upside could be far higher.

Office Depot (NYSE: ODP)
This stock caught my eye, even as it sat at the bottom of this list, as a cluster of insiders stepped up to the plate. I profiled this office supply chain a few weeks ago and even though shares are up more than +10% since then, they still look to have some pretty significant upside. Please re-visit that column for a fuller look at why I'm a bull on Office Depot. [Read: "Insiders are Scooping Up These 3 Retails Stocks"]

Action to Take –> Following stocks with heavy insider buying takes a good bit of follow-up work. The motivations behind those purchases aren't always clear, so it pays to listen to recent conference calls to glean hints of positive developments that most investors may be missing. Of these stocks profiled here, I remain an especially strong fan of Office Depot as it is quite cheap and highly-leveraged to an eventual increase in employment. Medivation remains a stock to heavily research before making any commitments and is only suitable for risk-tolerant investors, while Exar looks to have the best combination of value and upside.


– 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
These Insiders are Making Seven-Figure Bets — Should You Tag Along?

Read more here:
These Insiders are Making Seven-Figure Bets — Should You Tag Along?

Uncategorized

The Most Profitable Play in Telecom

October 4th, 2010

The Most Profitable Play in Telecom

The Telecommunications Act of 1996 mandated the need for disparate telecom networks to be able to communicate with each other. It also prescribed the need for number portability, which allowed consumers and businesses to keep their phone numbers even if they switched to another telecom provider or network.

The designers of the act could not have imagined how popular it has become for an individual to keep his or her phone number or that communications networks would transcend the wired and wireless spectrums to include the World Wide Web.

Neustar (NYSE: NSR) was specifically founded in 1998 to address the new industry needs that stemmed from the 1996 telecom act. The business was originally owned by defense giant Lockheed Martin (NYSE: LMT), but was acquired and developed until a public offering was made in June of 2005.

Neustar is effectively the industry's clearinghouse, in that its networks help ensure interoperability across wire line and wireless networks. This even includes online communication through the Internet. The company also operates and maintains a directory for all area codes and seven-digit phone numbers in North America to facilitate portability. Other services include facilitating calls between competing provider networks and managing domain names including the “.biz” and “.us” suffixes on the Web, which explains its homepage address of neustar.biz.

The way the company explains it, Neustar is the reason that providers can create new phone numbers, a caller from a Sprint (NYSE: S) network can seamlessly connect with a friend on the Verizon (NYSE: VZ) network. It also helps ensure that domain names are secure on the Internet and provides other online security verification measures.

Neustar's traditional telecom businesses are slower growing, but highly profitable. Better yet, contracts bind customers to Neustar, which provides a pretty high level of sales visibility. The Internet-related operations will be the main sales drivers going forward and have appeal, given online traffic is growing at about +40% per year and shows few signs of slowing down.

Growth has been impressive since Neustar's IPO. Annual sales have expanded nearly +24% in the past five years, while net income has grown at more than +17% each year during this period. Profitability has grown steadily as operating margins have reached almost 35% during the past year. Net margins now exceed 20%, which means that $0.20 of every dollar in sales falls directly to the bottom line.

Other financial metrics are equally impressive. Returns on invested capital have exceeded 20% during the past couple of years. More than $342 million in cash on hand eclipses the $10 million in debt on the balance sheet, and leads to a net cash position of about $4.35 per diluted share.

Action to Take —> A highly profitable and growing business makes Neustar stand out in an industry that must spend billions of dollars maintaining and constantly upgrading telecom networks to keep up with ever-increasing wireless and Internet data needs. This lessens the investment appeal of other telecom constituents, such as those mentioned above and AT&T (NYSE: T), but makes Neustar's model even more appealing.

Neustar generated about $2 in free cash flow last year. This excess capital has been building up as cash on the balance sheet and could be returned to shareholders in the form of a potential dividend a some point. Management did announce a $300 million share repurchase program that will serve to lower shares outstanding and boost per share earnings.

The firm's price-to-free-cash-flow multiple of just over 12 is also appealing from a valuation perspective, as are the prospects for future growth along with the rapidly growing need for communications bandwidth. Management has targeted annual revenue growth of +10% and similar profit growth levels. A share price in the low $20 range would represent a potentially appealing entry point for the stock.

– Ryan Fuhrmann

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

Uncategorized

The Most Profitable Play in Telecom

October 4th, 2010

The Most Profitable Play in Telecom

The Telecommunications Act of 1996 mandated the need for disparate telecom networks to be able to communicate with each other. It also prescribed the need for number portability, which allowed consumers and businesses to keep their phone numbers even if they switched to another telecom provider or network.

The designers of the act could not have imagined how popular it has become for an individual to keep his or her phone number or that communications networks would transcend the wired and wireless spectrums to include the World Wide Web.

Neustar (NYSE: NSR) was specifically founded in 1998 to address the new industry needs that stemmed from the 1996 telecom act. The business was originally owned by defense giant Lockheed Martin (NYSE: LMT), but was acquired and developed until a public offering was made in June of 2005.

Neustar is effectively the industry's clearinghouse, in that its networks help ensure interoperability across wire line and wireless networks. This even includes online communication through the Internet. The company also operates and maintains a directory for all area codes and seven-digit phone numbers in North America to facilitate portability. Other services include facilitating calls between competing provider networks and managing domain names including the “.biz” and “.us” suffixes on the Web, which explains its homepage address of neustar.biz.

The way the company explains it, Neustar is the reason that providers can create new phone numbers, a caller from a Sprint (NYSE: S) network can seamlessly connect with a friend on the Verizon (NYSE: VZ) network. It also helps ensure that domain names are secure on the Internet and provides other online security verification measures.

Neustar's traditional telecom businesses are slower growing, but highly profitable. Better yet, contracts bind customers to Neustar, which provides a pretty high level of sales visibility. The Internet-related operations will be the main sales drivers going forward and have appeal, given online traffic is growing at about +40% per year and shows few signs of slowing down.

Growth has been impressive since Neustar's IPO. Annual sales have expanded nearly +24% in the past five years, while net income has grown at more than +17% each year during this period. Profitability has grown steadily as operating margins have reached almost 35% during the past year. Net margins now exceed 20%, which means that $0.20 of every dollar in sales falls directly to the bottom line.

Other financial metrics are equally impressive. Returns on invested capital have exceeded 20% during the past couple of years. More than $342 million in cash on hand eclipses the $10 million in debt on the balance sheet, and leads to a net cash position of about $4.35 per diluted share.

Action to Take —> A highly profitable and growing business makes Neustar stand out in an industry that must spend billions of dollars maintaining and constantly upgrading telecom networks to keep up with ever-increasing wireless and Internet data needs. This lessens the investment appeal of other telecom constituents, such as those mentioned above and AT&T (NYSE: T), but makes Neustar's model even more appealing.

Neustar generated about $2 in free cash flow last year. This excess capital has been building up as cash on the balance sheet and could be returned to shareholders in the form of a potential dividend a some point. Management did announce a $300 million share repurchase program that will serve to lower shares outstanding and boost per share earnings.

The firm's price-to-free-cash-flow multiple of just over 12 is also appealing from a valuation perspective, as are the prospects for future growth along with the rapidly growing need for communications bandwidth. Management has targeted annual revenue growth of +10% and similar profit growth levels. A share price in the low $20 range would represent a potentially appealing entry point for the stock.

– Ryan Fuhrmann

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

Uncategorized

These Stocks Were September’s Biggest Gainers

October 4th, 2010

These Stocks Were September's Biggest Gainers

Of the 2,000 stocks that comprise the Russell 2000 Index, 10 of them rose by at least +50% in September. And half of those are the beneficiary of very generous buyout offers (while a sixth name rebuffed an offer). That M&A trend has been in place throughout the summer and shows no signs of slowing down. That's because large companies have ample cash to spend and need to find ways to keep sales rising while the economy sputters.

Company (Ticker) Recent Price September Gain 52-Week High 52-Week Low Catalyst
Keithley
(NYSE: KEI)
$21.45 +119% $21.52 $3.20 To be acquired by Danaher
Hyperco
(NYSE: HYC)
$6.27 +90% $6.51 $2.77 Spurned $5.25 a share offer from Verifone
Virnet
(NYSE: VHC)
$14.90 +90% $15.00 $1.85 Signing more patent licensees
ZymoGenetics (Nasdaq: ZYMO) $9.74 +89% $9.79 $3.70 To be acquired by
Bristol-Myers Squibb
Occam Networks
(Nasdaq: OCNW)
$7.87 +66% $7.90 $2.91 To be acquired by Calix
Nanosphere
(Nasdaq: NSPH)
$5.13 +65% $7.85 $2.91 Increased interest in nanotech stocks
Molycorp
(NYSE: MCP)
$28.38 +60% $30.00 $12.10 Rising interest in rare earth metals
Airtran
(NYSE: AAI)
$7.35 +58% $7.41 $4.05 To be acquired by Southwest
Motricity
(Nasdaq: MOTR)
$12.3 +57% $13.42 $6.55 Increased need of mobile device software

In particular industries, one deal sets off a fire drill, leaving other major players to follow suit. Delta (NYSE: DAL) acquired Northwest in October 2008, and word quickly spread that Continental and United (NYSE: UAL) may need to join forces to keep up with Delta's massive new industry-leading position. Sure enough, a deal soon came together and recently closed. The ink wasn't even dry on that closing when Southwest (NYSE: LUV) announced plans this week to acquire AirTran (NYSE: AAI). And of course, that deal is already triggering rumors of further deals, pushing up shares of JetBlue (Nasdaq: JBLU) and Alaska Air (NYSE: ALK).

What gives? When an entire industry is growing at very low rates, companies start to focus on market share. And once one player builds share, others fear that newly-strengthened competitors will steal yet more share so they have to parry back.

Biotech sees lots of deal-making for an entirely different reason. Small firms pursue often-promising new drugs but lack the resources to effectively market them once they are approved. Big drug firms have all kinds of marketing muscle, but they often lack products in development to deepen their presence in hot biotech areas. Bristol-Myers Squibb's (NYSE: BMY) acquisition of ZymoGenetics (Nasdaq: ZYMO) is one of a long line in this sector, and you can expect to see dozens more just like it during the next few years.

Outside of M&A
Yet not all of the strong gainers are tied to deals. As the market rallied in September, investors moved out on the risk curve and bought stocks in more speculative and risky industries. For example, Nanosphere Inc. (Nasdaq: NSPH) has risen more than +50% since I profiled the nanotechnology group in mid-September. [Read: This Once-Hot Sector Could Heat up Again]

Yet it's important to remember that speculative stocks generally only do well when markets are rising. So it's not clear that September's gains can be extended unless the company delivers any promising news for its technology under development.

Shares of Virnet Holdings (NYSE :VHC) continue their remarkable ascent. The stock had risen more than +200% this year before we profiled it in mid-August. [3 Stocks that Could See a Windfall of Cash from Patents]

Since then, it's tacked on another +130% as the company moves onto more investors' radars. Further gains from here will solely be a function of new licensing agreements with major tech firms. As I noted in that column, “VirNextX is gearing up to secure other licensing agreements for its technology. (In August), the company filed fresh lawsuits against Apple (Nasdaq: AAPL), Cisco Systems (Nasdaq: CSCO), Japan's NEC, and others.” Who knows how that will play out, but it looks as if this stock has even more room to run.

Motricity (Nasdaq: MOTR) is a clear example of why it pays to watch recently-issued IPOs. Sometimes they can drift lower as they fail to gain traction among money managers. As I noted back in August, “At first glance, this should have been a hot IPO. Motricity was an early pioneer in the field of mobile phone data services.” [Read: 7 Beaten-Down IPOs that Could Stage a Comeback]

Uncategorized

These Stocks Were September’s Biggest Gainers

October 4th, 2010

These Stocks Were September's Biggest Gainers

Of the 2,000 stocks that comprise the Russell 2000 Index, 10 of them rose by at least +50% in September. And half of those are the beneficiary of very generous buyout offers (while a sixth name rebuffed an offer). That M&A trend has been in place throughout the summer and shows no signs of slowing down. That's because large companies have ample cash to spend and need to find ways to keep sales rising while the economy sputters.

Company (Ticker) Recent Price September Gain 52-Week High 52-Week Low Catalyst
Keithley
(NYSE: KEI)
$21.45 +119% $21.52 $3.20 To be acquired by Danaher
Hyperco
(NYSE: HYC)
$6.27 +90% $6.51 $2.77 Spurned $5.25 a share offer from Verifone
Virnet
(NYSE: VHC)
$14.90 +90% $15.00 $1.85 Signing more patent licensees
ZymoGenetics (Nasdaq: ZYMO) $9.74 +89% $9.79 $3.70 To be acquired by
Bristol-Myers Squibb
Occam Networks
(Nasdaq: OCNW)
$7.87 +66% $7.90 $2.91 To be acquired by Calix
Nanosphere
(Nasdaq: NSPH)
$5.13 +65% $7.85 $2.91 Increased interest in nanotech stocks
Molycorp
(NYSE: MCP)
$28.38 +60% $30.00 $12.10 Rising interest in rare earth metals
Airtran
(NYSE: AAI)
$7.35 +58% $7.41 $4.05 To be acquired by Southwest
Motricity
(Nasdaq: MOTR)
$12.3 +57% $13.42 $6.55 Increased need of mobile device software

In particular industries, one deal sets off a fire drill, leaving other major players to follow suit. Delta (NYSE: DAL) acquired Northwest in October 2008, and word quickly spread that Continental and United (NYSE: UAL) may need to join forces to keep up with Delta's massive new industry-leading position. Sure enough, a deal soon came together and recently closed. The ink wasn't even dry on that closing when Southwest (NYSE: LUV) announced plans this week to acquire AirTran (NYSE: AAI). And of course, that deal is already triggering rumors of further deals, pushing up shares of JetBlue (Nasdaq: JBLU) and Alaska Air (NYSE: ALK).

What gives? When an entire industry is growing at very low rates, companies start to focus on market share. And once one player builds share, others fear that newly-strengthened competitors will steal yet more share so they have to parry back.

Biotech sees lots of deal-making for an entirely different reason. Small firms pursue often-promising new drugs but lack the resources to effectively market them once they are approved. Big drug firms have all kinds of marketing muscle, but they often lack products in development to deepen their presence in hot biotech areas. Bristol-Myers Squibb's (NYSE: BMY) acquisition of ZymoGenetics (Nasdaq: ZYMO) is one of a long line in this sector, and you can expect to see dozens more just like it during the next few years.

Outside of M&A
Yet not all of the strong gainers are tied to deals. As the market rallied in September, investors moved out on the risk curve and bought stocks in more speculative and risky industries. For example, Nanosphere Inc. (Nasdaq: NSPH) has risen more than +50% since I profiled the nanotechnology group in mid-September. [Read: This Once-Hot Sector Could Heat up Again]

Yet it's important to remember that speculative stocks generally only do well when markets are rising. So it's not clear that September's gains can be extended unless the company delivers any promising news for its technology under development.

Shares of Virnet Holdings (NYSE :VHC) continue their remarkable ascent. The stock had risen more than +200% this year before we profiled it in mid-August. [3 Stocks that Could See a Windfall of Cash from Patents]

Since then, it's tacked on another +130% as the company moves onto more investors' radars. Further gains from here will solely be a function of new licensing agreements with major tech firms. As I noted in that column, “VirNextX is gearing up to secure other licensing agreements for its technology. (In August), the company filed fresh lawsuits against Apple (Nasdaq: AAPL), Cisco Systems (Nasdaq: CSCO), Japan's NEC, and others.” Who knows how that will play out, but it looks as if this stock has even more room to run.

Motricity (Nasdaq: MOTR) is a clear example of why it pays to watch recently-issued IPOs. Sometimes they can drift lower as they fail to gain traction among money managers. As I noted back in August, “At first glance, this should have been a hot IPO. Motricity was an early pioneer in the field of mobile phone data services.” [Read: 7 Beaten-Down IPOs that Could Stage a Comeback]

Uncategorized

Gold Stocks, SP500 & the Dollar – What’s Next?

October 3rd, 2010

Investors around the globe are concerned with the economic outlook, not only with the United States but with virtually every country. This has caused not only investors but banks and countries to start buying gold & silver in order to be protected incase of a currency melt down in the coming years.

While the majority is concerned about the eroding economy, we have seen the opposite in the financial market. Gold and equities have risen… That being said the volume in the market remains light simply because the average investor is no longer putting money into the market for long term growth. Instead individuals are now focusing on saving and paying down debt.

That being said we all know light volume market conditions allow Wall Street powerhouses to bid the market up. Not to mention with quantitative easing taking place I’m sure that has also helped the market of late. While we don’t know for sure that QE is taking place as we speak, the sharp drop in the dollar and strong move up in gold are pricing this into the market.

Let’s take a look at some charts…

HUI – Gold Stock Index

This long term monthly chart of the HUI index provides valuable trading signals for both gold stocks and gold bullion. As you can see below this index is trading at a key resistance level after forming a bullish 3 year Cup & Handle pattern. The next 1-2 months for the precious metals sector will be interesting as it tries to break above key resistance. I would really like to see the HUI:GLD ratio break to the upside to confirm if the breakout occurs.

SPY – Daily Long Term Trend

The broad market looks to be forming a short term topping wedge. If this is to occurI expect it to take several weeks to play out. Looking at the chart if we use Fibonacci retracements along with trend line support we can get a feel for where this pullback should correct to.

That being said the broad market breadth and internals seem to be holding up indicating higher prices over the long run. While the short term price action is overbought and I expect a pullback to form, my analysis is pointing to higher prices as we go into year end.

UUP – US Dollar Daily Price Action

Although the majority of investors have a bearish outlook on the economy, we have seen a large price appreciation in equities and precious metals. This is largely due to the fact that the US dollar is quickly getting devalued. Simply put, as the dollar drops, it helps boost commodities and stock prices.

While a rising stock market is great to see, at some point the dollar will become so cheap that it will start to have a very negative affect on the US economy, commodities and stocks. Being from Canada it has always been more expensive to take holidays in the United States, and I remember paying $1.50-$1.70 for every $1 green back. But now the dollar is almost at par making holidays very affordable. The big question/concern is when will they ease off on the printing? At the rate which they are printing the greenback will be at par with peso… well not that extreme but you get the point Eh!

Weekend Market Conclusion:

As we all know the market has a way of making sure the majority of traders miss major turning points. The saying is, “If the market doesn’t shake you out, it will wear you out” and it seems we are getting the later…

The never ending grind higher in precious metals has not had any big shakeouts, rather its wearing out any short positions before rolling over to take a breather. As for the stock market, we are getting much of the same thing as the market grinds higher day after wearing out the shorts before rolling over.

That being said, there is more at work here than just regular market movements. With the light volume in the market we know there is price manipulation and QE (quantitative Easing) which is helping to boost prices and exaggerate market movements.

I’d like you to have my ETF Trade Alerts for Low Risk Setups! Get them here: http://www.thegoldandoilguy.com/specialoffer/signup.html

I also wanted to point out two very powerful trading tools provided by a couple well known traders which you should take a look at.

1. Todd Mitchell is giving away his “Volume Breakout Strategy” at no cost whatsoever! – Get the FreeVolueme Breakout Course – Click Here

2. Mark Skousen has a very interesting video on a unique opportunity in the market. The video is a little long but really interesting. -  Just click here to get all the details

Let the volatility and volume return!

Chris Vermeulen

Read more here:
Gold Stocks, SP500 & the Dollar – What’s Next?




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

Commodities, ETF

Interview: Warren Buffet and Jay-Z on Investing Success

October 3rd, 2010

Steve Forbes has a knack for bringing together interesting people in sometimes unexpected combinations. For the Forbes 400 Summit, he sat down with Warren Buffet and Jay-Z at a Hollywood Diner in Omaha, Nebraska for a personal discussion about their different backgrounds, how they have generated wealth, and the responsibilities they see as coming with it.

Here are two highlights from the question and answer session:

Steve Forbes: Jay, a lot of people fade away after one or two albums. That hasn’t happened to you.

Jay-Z: I think it goes back to a bit of what Warren was saying. It’s the discipline not to get caught up in the moment. You know, music is like stocks, too. There’s the hot thing of the moment. There’s this hot, electro sound, or the hot auto-tune voice, or the hot whatever’s new and exciting. People tend to make emotional decisions based on that. They don’t stick with what they know, you know, this is who I am. This is what I do. They jump on this next hot thing. And it’s not for you.

***

Steve Forbes: There is that element of luck you can’t quantify. Warren, you’ve thought about luck.

Warren Buffet: There’s lots of luck. Just being born in the United States in 1930 the odds were 30-to-1 against me. I didn’t have anything to do with picking the United States as I emerged. And having decent genes for certain things. I was sort of wired for capital allocation, and being wired for capital allocation two hundred years ago in Nebraska wouldn’t have meant a thing. But here I was in this soon-to-be-very-rich capitalistic system, and what I did paid off enormously in a market system like we have. If I’d had a talent in some other area that was way less commercial, I would’ve had a good time doing it, but it wouldn’t have paid off like this.

Jay said it perfectly when he talked about how he’s in there recording for himself, and the money comes afterwards. I got to do what I love, and it doesn’t get any luckier than that. I would be doing what I do now and I would’ve done it in the past if the payoff had been in seashells, or sharks’ teeth, or anything else. I’ve had all kinds of luck. I had the luck of getting turned down by Harvard, which meant I got to study under Ben Graham at Columbia, which changed my life. All kinds of things have worked out. So I just hope I stay lucky. I’ve been lucky for 80 years.

The two seemingly-different personalities share at least a few beliefs… they see sticking with what you’re good at — and having the confidence to follow through on your own ideas — as being essential ingredients for success. You can read the entire discussion at Forbes’ interview transcript of Jay-Z, Buffett, and Forbes on success and giving back.

Best,

Rocky Vega,
The Daily Reckoning

Interview: Warren Buffet and Jay-Z on Investing Success 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:
Interview: Warren Buffet and Jay-Z on Investing Success




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

3 ETFs To Play Brazilian Bonds

October 2nd, 2010

As talks of a bubble forming in the US bond market continue to prevail, many investors have turned to the Brazilian bond market and for good reason.

According to investment data firm, EPFR Global, international bond fund managers have infiltrated the Brazilian bond markets to the tune of $5.2 billion of assets as of September 22, 2010, more than double that seen in 2009.  Furthermore inflows into Brazilian bonds account for more than 10% of all inflows into emerging market bonds.  Lastly, local Brazilian government

Currently, local Brazilian government bonds are yielding more than 11 percent on one-year bonds and are expected to continue to do so as demand is expected to remain strong, especially from countries with low interest rates, suggests Kenneth Rapoza of Barrons. 

In addition to double digit yields, Brazilian bonds are likely to remain appealing due to the nation’s strong financial position, its investment grade debt and its excess cash reserves which exceed the interest that the Latin American nation owes on its debt to foreign countries.  Lastly, Brazil is expected to witness a stable local economy, growing at a rate of 7% annually in the upcoming years. 

At the end of the day, Brazil is a financially healthy nation, which carries little credit risk, and is expected to witness sustainable GDP growth over the next few years making the nation’s debt appealing to investors. 

Some easy ways to gain access to Brazilian bonds include:

  • Market Vectors Emerging Markets Local Currency Bond ETF (EMLC), which allocates nearly 10% of its assets to Brazilian bonds.
  • iShares JPMorgan USD Emerging Market Bond Fund (EMB), which allocates 8.87% of its assets to Brazilian bonds.
  • PowerShares Emerging Market Sovereign Debt Portfolio (PCY), which allocates nearly 4.51% of its assets to Brazilian bonds.

Although an opportunity appears to exist in Brazilian bonds, it is important to keep in mind the risks that could be detrimental to yields such as unmanageable spikes in inflation and a major decline of foreign investment in Brazilian projects.  To help protect against these risks, the use of an exit strategy which helps in preserving returns is important.  Such a strategy can be found at www.SmartStops.net.

Disclosure: No Positions

Read more here:
3 ETFs To Play Brazilian Bonds




HERE IS YOUR FOOTER

ETF, Uncategorized

3 ETFs To Play Brazilian Bonds

October 2nd, 2010

As talks of a bubble forming in the US bond market continue to prevail, many investors have turned to the Brazilian bond market and for good reason.

According to investment data firm, EPFR Global, international bond fund managers have infiltrated the Brazilian bond markets to the tune of $5.2 billion of assets as of September 22, 2010, more than double that seen in 2009.  Furthermore inflows into Brazilian bonds account for more than 10% of all inflows into emerging market bonds.  Lastly, local Brazilian government

Currently, local Brazilian government bonds are yielding more than 11 percent on one-year bonds and are expected to continue to do so as demand is expected to remain strong, especially from countries with low interest rates, suggests Kenneth Rapoza of Barrons. 

In addition to double digit yields, Brazilian bonds are likely to remain appealing due to the nation’s strong financial position, its investment grade debt and its excess cash reserves which exceed the interest that the Latin American nation owes on its debt to foreign countries.  Lastly, Brazil is expected to witness a stable local economy, growing at a rate of 7% annually in the upcoming years. 

At the end of the day, Brazil is a financially healthy nation, which carries little credit risk, and is expected to witness sustainable GDP growth over the next few years making the nation’s debt appealing to investors. 

Some easy ways to gain access to Brazilian bonds include:

  • Market Vectors Emerging Markets Local Currency Bond ETF (EMLC), which allocates nearly 10% of its assets to Brazilian bonds.
  • iShares JPMorgan USD Emerging Market Bond Fund (EMB), which allocates 8.87% of its assets to Brazilian bonds.
  • PowerShares Emerging Market Sovereign Debt Portfolio (PCY), which allocates nearly 4.51% of its assets to Brazilian bonds.

Although an opportunity appears to exist in Brazilian bonds, it is important to keep in mind the risks that could be detrimental to yields such as unmanageable spikes in inflation and a major decline of foreign investment in Brazilian projects.  To help protect against these risks, the use of an exit strategy which helps in preserving returns is important.  Such a strategy can be found at www.SmartStops.net.

Disclosure: No Positions

Read more here:
3 ETFs To Play Brazilian Bonds




HERE IS YOUR FOOTER

ETF, Uncategorized

Deflation: Reality or Urban Myth?

October 2nd, 2010

The inflation/deflation debate is now the ‘topic du jour’ and although we have discussed this issue in the past, we want to throw more light on this very important subject.

Today, many prominent economists (Nouriel Roubini, David Rosenberg and Paul Krugman) and fund managers (Bill Gross and Jeremy Grantham) are forecasting deflation and according to these folks, a deflationary contraction is now ‘baked in the cake’. In fact, these deflationists are extremely worried about the ongoing private-sector debt-deleveraging in the developed world and they are also concerned about the lack of aggregate demand in the industrialised nations. Bearing in mind these two factors, these prominent people believe that deflation is now almost guaranteed and inflation is out of the question.

On the other end of the spectrum, and in stark contrast to the deflationist camp, many prominent market participants (Paul Tudor Jones, John Paulson, Jim Rogers, Marc Faber and Peter Schiff) are now warning about high inflation or even hyperinflation. According to these people, the large fiscal deficits and massive debt overhang almost guarantee runaway inflation.

It goes without saying that such conflicting views are extremely strange when you consider that all these highly experienced and successful people are reviewing the same economic data! Well, everyone is entitled to their opinion, but as far as we are concerned, deflation is an urban myth and the global economy will have to contend with very high inflation.

It is our conjecture that inflation is always a monetary phenomenon and willing policymakers have the ability to create inflation. Now, before we delve any further, we want to make it clear that inflation is an increase in the supply of money and debt. Conversely, deflation is a decrease in the supply of money and debt. Furthermore, it is critical to understand that an increase in the general price level is a consequence of inflation and a decrease in the general price level is a consequence of deflation. Most importantly, despite what you may hear elsewhere, you should keep in mind that a booming economy (operating at maximum capacity) is not a pre-requisite for inflation.

Now, if you reside in the deflation camp and believe that inflation cannot occur in a weak economic environment, you need to visit Zimbabwe and meet Mr. Mugabe who will explain how you can create hyper-inflation at a time when a nation is facing an economic depression! Whether you like it or not, Zimbabwe’s hyper-inflationary saga clearly shows that despite a huge output gap, surging unemployment and a bankrupt economy, reckless policymakers can succeed in creating massive inflation.

Look. We do acknowledge the fact that the economies of the developed world are struggling and they will probably remain weak for several years. We also accept the fact that the aggregate demand in these troubled economies will stay well below the available capacity (output gap). However, contrary to the deflation camp, we totally respect the money-creation abilities of the central banks. Accordingly, we firmly believe that in order to avoid sovereign defaults in the near-term, the Federal Reserve and the European Central Bank will create unprecedented inflation.

Already, short-term interest-rates in the US and in Europe are at extremely low levels and real short-term interest-rates are negative. If such a loose monetary policy fails to create inflation, you can bet your bottom dollar that these central-banks will unleash even more rounds of ‘Quantitative Easing’. Needless to say, such reckless monetary-inflation will dilute the existing money-stock even further and reduce the purchasing power of money. Okay, enough about the inflationary bias of the public-sector, let us now move on to the private-sector.

As far as the private-sector is concerned, you may recall that after the credit-bubble burst two years ago, commercial-bank credit in the US started to contract. After all, this debt repayment by the private-sector was a logical response to the crisis and for 17 months, commercial-bank credit declined by roughly US$700 billion. In fact, it was this private-sector debt contraction, which prompted many economists and investor to enter the deflation camp.

Whilst it is true that the private-sector in the US did experience deflation (contraction in debt) for a brief period of time, it is notable that this ‘austerity’ did not last very long! Figure 1 shows that US commercial-bank credit bottomed out earlier this year and since then, it has risen by roughly US$400 billion. So, it should be clear to all observers that the private-sector in the US is no longer de-leveraging and this is inflationary.

US Bank Credit

Furthermore, we would like to point out that even though commercial-bank credit in the US contracted between October 2008 and March 2010, during that period, America’s federal debt went through the roof! Ironically, during the time-frame when American households and corporations were tightening their belts, the US-Treasury borrowed almost US$2 trillion; thereby stopping deflation in its track. The truth is that at no point during the recession did total debt (private-sector plus federal) in the US contract, so deflation did not occur. Now, it is conceivable that the private-sector in the US may abruptly start repaying its debt again. However, if such a debt-contraction occurs, Mr. Bernanke will create money like there is no tomorrow.

Today, America’s total liabilities (including social security, Medicare and Medicaid) are around 800% of GDP and federal debt has climbed above 90% of GDP (Figure 2). Given the fact that deflation will increase the real value of this debt, you do not have to be a brain surgeon to figure out that before the US government declares bankruptcy, it will desperately try and inflate its way out of trouble. By unleashing another ‘stimulus’, Mr. Obama’s administration will try and maintain nominal GDP growth, so that nominal incomes and tax receipts are sufficient to service the outstanding debt.

US Federal Debt

It is interesting to observe that in order to fund its spending binge, so far the US administration has succeeded in borrowing huge amounts of money at low interest-rates. It is notable that up until now, demand for US-Treasuries has been strong and the US administration has not had much trouble raising money. Perversely, in today’s volatile economic environment, US government debt is still viewed as a safe haven. However, every good thing comes to an end and investors’ perception could change at short-notice. When that happens and the bond market starts to focus on America’s ballooning deficits, demand for government-debt will dive. At that point, the Federal Reserve will have no option but to create new money so that it can lend it to the US Treasury. In fact, the Federal Reserve has already announced that it will use the proceeds from the sale of its mortgage-backed securities to buy US Treasuries. In our view, this is only the beginning and outright asset-monetisation will intensify over the following years.

Throughout history, periods of massive money-creation have always been inflationary and this time should be no different. Over the following months, if the economies of the developed world take a turn for the worse, you can be sure that the respective policymakers will respond by creating copious amounts of paper money.

If you still believe that deflation will prevail, perhaps you should review the table below, which highlights the inflation rates in various countries. It is noteworthy that the inflation rate depicted here for each nation is in fact the Consumer Price Index (CPI), which significantly understates the price increases within an economy. Let there be no doubt that the majority of government agencies make seasonal and hedonistic adjustments to bring down the level of the CPI. Regardless, you can see that despite such ‘feel good’ adjustments to bring down the reported ‘inflation’ rate, every nation (except Japan) is currently experiencing ‘inflation.’

Global GDP Growth

Bearing in mind this compelling data, we are left wondering how anybody can get hoodwinked by the deflation hype!? Perhaps, the deflationists know something the rest of us do not, but at this point, hard data does not support the deflation thesis.

Given the inflationary environment we find ourselves in, we do not like cash or fixed-income securities. In our view, both cash and bonds will lose considerable real value over the following years and the ongoing strength in the government bond-market may turn out to be an exceptional selling opportunity. Conversely, we maintain our view that precious metals, energy and the stock markets of the fast growing developing markets in Asia will provide stellar returns in this inflationary environment.

Regards,

Puru Saxena
for The Daily Reckoning

Deflation: Reality or Urban Myth? 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:
Deflation: Reality or Urban Myth?




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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Deflation: Reality or Urban Myth?

October 2nd, 2010

The inflation/deflation debate is now the ‘topic du jour’ and although we have discussed this issue in the past, we want to throw more light on this very important subject.

Today, many prominent economists (Nouriel Roubini, David Rosenberg and Paul Krugman) and fund managers (Bill Gross and Jeremy Grantham) are forecasting deflation and according to these folks, a deflationary contraction is now ‘baked in the cake’. In fact, these deflationists are extremely worried about the ongoing private-sector debt-deleveraging in the developed world and they are also concerned about the lack of aggregate demand in the industrialised nations. Bearing in mind these two factors, these prominent people believe that deflation is now almost guaranteed and inflation is out of the question.

On the other end of the spectrum, and in stark contrast to the deflationist camp, many prominent market participants (Paul Tudor Jones, John Paulson, Jim Rogers, Marc Faber and Peter Schiff) are now warning about high inflation or even hyperinflation. According to these people, the large fiscal deficits and massive debt overhang almost guarantee runaway inflation.

It goes without saying that such conflicting views are extremely strange when you consider that all these highly experienced and successful people are reviewing the same economic data! Well, everyone is entitled to their opinion, but as far as we are concerned, deflation is an urban myth and the global economy will have to contend with very high inflation.

It is our conjecture that inflation is always a monetary phenomenon and willing policymakers have the ability to create inflation. Now, before we delve any further, we want to make it clear that inflation is an increase in the supply of money and debt. Conversely, deflation is a decrease in the supply of money and debt. Furthermore, it is critical to understand that an increase in the general price level is a consequence of inflation and a decrease in the general price level is a consequence of deflation. Most importantly, despite what you may hear elsewhere, you should keep in mind that a booming economy (operating at maximum capacity) is not a pre-requisite for inflation.

Now, if you reside in the deflation camp and believe that inflation cannot occur in a weak economic environment, you need to visit Zimbabwe and meet Mr. Mugabe who will explain how you can create hyper-inflation at a time when a nation is facing an economic depression! Whether you like it or not, Zimbabwe’s hyper-inflationary saga clearly shows that despite a huge output gap, surging unemployment and a bankrupt economy, reckless policymakers can succeed in creating massive inflation.

Look. We do acknowledge the fact that the economies of the developed world are struggling and they will probably remain weak for several years. We also accept the fact that the aggregate demand in these troubled economies will stay well below the available capacity (output gap). However, contrary to the deflation camp, we totally respect the money-creation abilities of the central banks. Accordingly, we firmly believe that in order to avoid sovereign defaults in the near-term, the Federal Reserve and the European Central Bank will create unprecedented inflation.

Already, short-term interest-rates in the US and in Europe are at extremely low levels and real short-term interest-rates are negative. If such a loose monetary policy fails to create inflation, you can bet your bottom dollar that these central-banks will unleash even more rounds of ‘Quantitative Easing’. Needless to say, such reckless monetary-inflation will dilute the existing money-stock even further and reduce the purchasing power of money. Okay, enough about the inflationary bias of the public-sector, let us now move on to the private-sector.

As far as the private-sector is concerned, you may recall that after the credit-bubble burst two years ago, commercial-bank credit in the US started to contract. After all, this debt repayment by the private-sector was a logical response to the crisis and for 17 months, commercial-bank credit declined by roughly US$700 billion. In fact, it was this private-sector debt contraction, which prompted many economists and investor to enter the deflation camp.

Whilst it is true that the private-sector in the US did experience deflation (contraction in debt) for a brief period of time, it is notable that this ‘austerity’ did not last very long! Figure 1 shows that US commercial-bank credit bottomed out earlier this year and since then, it has risen by roughly US$400 billion. So, it should be clear to all observers that the private-sector in the US is no longer de-leveraging and this is inflationary.

US Bank Credit

Furthermore, we would like to point out that even though commercial-bank credit in the US contracted between October 2008 and March 2010, during that period, America’s federal debt went through the roof! Ironically, during the time-frame when American households and corporations were tightening their belts, the US-Treasury borrowed almost US$2 trillion; thereby stopping deflation in its track. The truth is that at no point during the recession did total debt (private-sector plus federal) in the US contract, so deflation did not occur. Now, it is conceivable that the private-sector in the US may abruptly start repaying its debt again. However, if such a debt-contraction occurs, Mr. Bernanke will create money like there is no tomorrow.

Today, America’s total liabilities (including social security, Medicare and Medicaid) are around 800% of GDP and federal debt has climbed above 90% of GDP (Figure 2). Given the fact that deflation will increase the real value of this debt, you do not have to be a brain surgeon to figure out that before the US government declares bankruptcy, it will desperately try and inflate its way out of trouble. By unleashing another ‘stimulus’, Mr. Obama’s administration will try and maintain nominal GDP growth, so that nominal incomes and tax receipts are sufficient to service the outstanding debt.

US Federal Debt

It is interesting to observe that in order to fund its spending binge, so far the US administration has succeeded in borrowing huge amounts of money at low interest-rates. It is notable that up until now, demand for US-Treasuries has been strong and the US administration has not had much trouble raising money. Perversely, in today’s volatile economic environment, US government debt is still viewed as a safe haven. However, every good thing comes to an end and investors’ perception could change at short-notice. When that happens and the bond market starts to focus on America’s ballooning deficits, demand for government-debt will dive. At that point, the Federal Reserve will have no option but to create new money so that it can lend it to the US Treasury. In fact, the Federal Reserve has already announced that it will use the proceeds from the sale of its mortgage-backed securities to buy US Treasuries. In our view, this is only the beginning and outright asset-monetisation will intensify over the following years.

Throughout history, periods of massive money-creation have always been inflationary and this time should be no different. Over the following months, if the economies of the developed world take a turn for the worse, you can be sure that the respective policymakers will respond by creating copious amounts of paper money.

If you still believe that deflation will prevail, perhaps you should review the table below, which highlights the inflation rates in various countries. It is noteworthy that the inflation rate depicted here for each nation is in fact the Consumer Price Index (CPI), which significantly understates the price increases within an economy. Let there be no doubt that the majority of government agencies make seasonal and hedonistic adjustments to bring down the level of the CPI. Regardless, you can see that despite such ‘feel good’ adjustments to bring down the reported ‘inflation’ rate, every nation (except Japan) is currently experiencing ‘inflation.’

Global GDP Growth

Bearing in mind this compelling data, we are left wondering how anybody can get hoodwinked by the deflation hype!? Perhaps, the deflationists know something the rest of us do not, but at this point, hard data does not support the deflation thesis.

Given the inflationary environment we find ourselves in, we do not like cash or fixed-income securities. In our view, both cash and bonds will lose considerable real value over the following years and the ongoing strength in the government bond-market may turn out to be an exceptional selling opportunity. Conversely, we maintain our view that precious metals, energy and the stock markets of the fast growing developing markets in Asia will provide stellar returns in this inflationary environment.

Regards,

Puru Saxena
for The Daily Reckoning

Deflation: Reality or Urban Myth? 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:
Deflation: Reality or Urban Myth?




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

QE2: This Time Is Different

October 2nd, 2010

Bryan Rich

Since the Fed’s most recent meeting, everyone seems to have an opinion about another round of extraordinary monetary stimulus and the economic and market reactions such a move could leave in its wake.

Many believe “this time is different” … words that tend to have a very poor track record of coming true.

With that, they think this go-around of QE will actually boost demand. More demand will lead to a pick up in the key components of economic growth for building a sustainable recovery — consumption and investment. And that will lead to a hyper-surge in inflation, debt-monetization and destruction of the dollar.

Meanwhile most of the world expects the mere hint of QE to jumpstart another runaway train of asset reflation — higher stocks, higher commodities, higher risk assets in general and a lower dollar …

I See It Differently

The result of another round of QE at the Fed and other central banks will likely have the same effect as last time: None.

Consumers who have had significant wealth destroyed, are unemployed or face the threat of extended periods of joblessness, and are digging their ways out of a mountain of debt don’t have the appetite to spend nor borrow, regardless of how “easy” the money is said to be.

As for the consequence another round of QE will have on markets, I think this time IS different …

First, another round of QE is no longer accompanied by massive fiscal stimulus from all corners of the world, including the 14 percent of GDP money printing rolled out by China — money that flooded asset markets around the world.

This time, central banks are out of fiscal bullets. Not only has the bond market attack on weak, euro-member governments taken the possibility of more fiscal stimulus off of the table for all major countries, it has also driven dangerously fragile economies into austerity.

Second, idealistic hopes about a sharp V-shaped recovery no longer exist. Therefore, the investor appetite for picking a bottom in a deep recession isn’t there. That card has already been played. And the potential aggressive recovery became a subpar policy-induced recovery, which has now turned into an outlook of years of economic malaise at best.

Third, in 2009 the above two points got the momentum going for the bounce in risk assets. And from there, perception fed perception. The higher the stock market went, the more confident people were about recovery. And the more confident they were about recovery, the higher the market went.

But confidence, perhaps the biggest factor in maintaining global stability — the pursuit of which has been the basis for most of the global emergency policies in the past two years — has been broken again. And it’s always harder to rebuild the second time around.

Lastly, the G-20’s pledge to battle the crisis as a team has slowly given way to protectionism and competitive currency devaluations — not a palatable environment for risk taking.

Consumers are more concerned with paying bills than borrowing more money.
Consumers are more concerned with paying bills than borrowing more money.

So I wouldn’t expect the same catalyst (more QE) to produce the same market opportunities we saw in 2009.

While the Fed’s recent statement on monetary policy has caused a stir, I would argue that it was a non-event. The event occurred in August when the Fed announced it would start reinvesting proceeds from its maturing assets — i.e. keep the current QE program going.

This was a clear confirmation that all of the world’s stimuli were powerless in bridging the gap between a beaten down economy and one that was fundamentally ready to recover.

That’s why I think this time IS different. It’s all about the absence of economic recovery and the hostile outlook for the global economy. History suggests we’ll see sovereign debt defaults and larger scale currency devaluations — of which the dollar won’t likely have the luxury to participate, despite all of the assertions that QE2 is all about the dollar.

So given the unsuccessful results from QE1, perhaps QE2 should be getting less attention and more attention should go to the outlook for more shocks and economic crisis.

Regards,

Bryan

P.S. For more news on what’s going on in the currency markets, be sure to check out my blog, Currencies Corner. You can follow me on Twitter, too, and get notified the moment I post a new message.

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QE2: This Time Is Different

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