Guess What’s Coming to Dinner: Inflation! (Part One of Two)

October 31st, 2010

The US Bureau of Labor Statistics (BLS) recently reported that consumer price inflation (CPI) declined in September to a 59-year low of just 1.1% y/y. Excluding more volatile food and energy prices, the so-called core CPI rose only 0.8% y/y. This is not good news for the US Federal Reserve, which considers this a dangerously low rate of CPI. While the Fed lacks a formal CPI target–unlike many other central banks–it nevertheless seeks to keep inflation sufficiently above zero so that, should the economy weaken further, low inflation is unlikely to turn into outright deflation, something the Fed considers it necessary to avoid at all costs.

With a range of economic indicators now suggesting that the rate of US economic growth has moderated of late, the Fed is preparing to add additional monetary stimulus to the economy, most probably in the form of expanded US Treasury purchases. This, the Fed appears to believe, will lower borrowing costs and perhaps further weaken the dollar somewhat. That in turn should stimulate economic activity such that the risks of consumer price deflation diminish.

Now the Fed is not necessarily highly confident at this point that this is going to work. Indeed, there is an unusually large amount of dissent at the Fed at present. A number of senior Fed officials–most notably Thomas Hoenig, President of the Kansas City Fed–are skeptical that additional monetary stimulus will have the desired effect on the economy and, in fact, might be counterproductive.

Why might additional stimulus be ineffective? After all, the Fed has a long track record of injecting monetary stimulus into the economy from time to time, supporting growth and preventing deflation. Indeed, as observed above, there has been no consumer price deflation in the US for two full generations, and no severe, prolonged deflation since 1934.

Well there are signs that Fed stimulus to date is not having much effect. Notwithstanding near zero policy rates and a doubling of the monetary base, the economy is clearly struggling and CPI has continued to trend lower amidst spare capacity in many business sectors. With broad un- and underemployment currently at 17%, most US workers are not in a position to demand higher wages as firms seek ways to maintain profit margins amidst weak final demand. (Real final sales, which subtracts changes in inventories from GDP and thus is a more stable measure of economic activity, has grown at a mere 1% over the past two quarters.) The employment cost index (ECI), which measures the rate of growth of total compensation–wages and benefits–has risen a mere 1.8% over the past year, far below the 3-4% average of the past decade and barely above the 1.1% rate of CPI y/y. Until un- and under-employment declines substantially, additional money flooding into the financial system is unlikely to have much if any impact on wages and, hence, is unlikely to contribute, at least not directly, to a rise in CPI.

But what about growth? Won’t additional money creation stimulate business investment, eventually supporting the job market, wages and consumption, thereby pushing up CPI? Well that is certainly what the Fed would like to see, but with both business and consumer confidence extremely weak, it is far from clear that any additional money created will do anything other than push up banks’ so-called “excess reserves”, that is, money which the Fed has made available to the banks but which they have chosen not to lend out in some form.

Many refer to this sort of situation as a Keynesian “liquidity trap”. You can lead the horse to water (liquidity) but you can’t make it drink (borrow/invest/spend). Keynes’ solution to this problem was for fiscal policy to go where monetary cannot, which is to force additional spending, either indirectly, via a debt-financed tax cut or, directly, through increased government spending. The former can be considered “supply-side” and the latter “demand-side” forms of stimulus but from a broad macroeconomic perspective they amount to much the same thing: Both are, in effect, attempts to spend one’s way out of an economic downturn brought about by excessive debt and financial leverage. The effects of such policies might look nice on the aggregate income statement for a time–in that economic activity remains artificially elevated–but the aggregate balance sheet is going to deteriorate as a result. And as any good financial analyst knows: The income statement is the past. The balance sheet is the future.

A deteriorating balance sheet, or expectations thereof, normally would lead financial markets to demand a higher risk premium to hold a company’s stock, which implies a lower price-to-earnings (P/E) ratio. This can come about, however, either through a decline in the price of the stock, an increase in the earnings yield, or some combination thereof. In the event of sovereign balance sheet deterioration, however, as described above, there is no “stock” per se, but there is a yield on a government bond. If global investors observe a deteriorating sovereign “balance sheet”, they will demand a higher yield premium to hold that bond relative to some other asset. As the yield rises, the price of the bond declines, in effect devaluing the debt and reducing the “P/E ratio”. But then what happens when the central bank resists a rise (or facilitates a decline) in bond yields by lowering policy rates or buys up bonds directly in permanent open market operations (POMOs), as the Fed is now doing?

In this case, the required adjustment cannot fully take place via a higher bond yield, so instead, the price of the bond must decline in real rather than nominal terms. For this to happen, the currency must decline. It is no coincidence that, as the Fed has made it increasingly clear to financial markets that it is prepared, in principle, to expand the POMO program indefinitely until inflation (or expectations thereof) rises by a desired amount, the dollar has declined sharply versus nearly all other currencies.

Regards,

John Butler,
for The Daily Reckoning

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

Guess What’s Coming to Dinner: Inflation! (Part One of Two) 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:
Guess What’s Coming to Dinner: Inflation! (Part One of Two)




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

Guess What’s Coming to Dinner: Inflation! (Part One of Two)

October 31st, 2010

The US Bureau of Labor Statistics (BLS) recently reported that consumer price inflation (CPI) declined in September to a 59-year low of just 1.1% y/y. Excluding more volatile food and energy prices, the so-called core CPI rose only 0.8% y/y. This is not good news for the US Federal Reserve, which considers this a dangerously low rate of CPI. While the Fed lacks a formal CPI target–unlike many other central banks–it nevertheless seeks to keep inflation sufficiently above zero so that, should the economy weaken further, low inflation is unlikely to turn into outright deflation, something the Fed considers it necessary to avoid at all costs.

With a range of economic indicators now suggesting that the rate of US economic growth has moderated of late, the Fed is preparing to add additional monetary stimulus to the economy, most probably in the form of expanded US Treasury purchases. This, the Fed appears to believe, will lower borrowing costs and perhaps further weaken the dollar somewhat. That in turn should stimulate economic activity such that the risks of consumer price deflation diminish.

Now the Fed is not necessarily highly confident at this point that this is going to work. Indeed, there is an unusually large amount of dissent at the Fed at present. A number of senior Fed officials–most notably Thomas Hoenig, President of the Kansas City Fed–are skeptical that additional monetary stimulus will have the desired effect on the economy and, in fact, might be counterproductive.

Why might additional stimulus be ineffective? After all, the Fed has a long track record of injecting monetary stimulus into the economy from time to time, supporting growth and preventing deflation. Indeed, as observed above, there has been no consumer price deflation in the US for two full generations, and no severe, prolonged deflation since 1934.

Well there are signs that Fed stimulus to date is not having much effect. Notwithstanding near zero policy rates and a doubling of the monetary base, the economy is clearly struggling and CPI has continued to trend lower amidst spare capacity in many business sectors. With broad un- and underemployment currently at 17%, most US workers are not in a position to demand higher wages as firms seek ways to maintain profit margins amidst weak final demand. (Real final sales, which subtracts changes in inventories from GDP and thus is a more stable measure of economic activity, has grown at a mere 1% over the past two quarters.) The employment cost index (ECI), which measures the rate of growth of total compensation–wages and benefits–has risen a mere 1.8% over the past year, far below the 3-4% average of the past decade and barely above the 1.1% rate of CPI y/y. Until un- and under-employment declines substantially, additional money flooding into the financial system is unlikely to have much if any impact on wages and, hence, is unlikely to contribute, at least not directly, to a rise in CPI.

But what about growth? Won’t additional money creation stimulate business investment, eventually supporting the job market, wages and consumption, thereby pushing up CPI? Well that is certainly what the Fed would like to see, but with both business and consumer confidence extremely weak, it is far from clear that any additional money created will do anything other than push up banks’ so-called “excess reserves”, that is, money which the Fed has made available to the banks but which they have chosen not to lend out in some form.

Many refer to this sort of situation as a Keynesian “liquidity trap”. You can lead the horse to water (liquidity) but you can’t make it drink (borrow/invest/spend). Keynes’ solution to this problem was for fiscal policy to go where monetary cannot, which is to force additional spending, either indirectly, via a debt-financed tax cut or, directly, through increased government spending. The former can be considered “supply-side” and the latter “demand-side” forms of stimulus but from a broad macroeconomic perspective they amount to much the same thing: Both are, in effect, attempts to spend one’s way out of an economic downturn brought about by excessive debt and financial leverage. The effects of such policies might look nice on the aggregate income statement for a time–in that economic activity remains artificially elevated–but the aggregate balance sheet is going to deteriorate as a result. And as any good financial analyst knows: The income statement is the past. The balance sheet is the future.

A deteriorating balance sheet, or expectations thereof, normally would lead financial markets to demand a higher risk premium to hold a company’s stock, which implies a lower price-to-earnings (P/E) ratio. This can come about, however, either through a decline in the price of the stock, an increase in the earnings yield, or some combination thereof. In the event of sovereign balance sheet deterioration, however, as described above, there is no “stock” per se, but there is a yield on a government bond. If global investors observe a deteriorating sovereign “balance sheet”, they will demand a higher yield premium to hold that bond relative to some other asset. As the yield rises, the price of the bond declines, in effect devaluing the debt and reducing the “P/E ratio”. But then what happens when the central bank resists a rise (or facilitates a decline) in bond yields by lowering policy rates or buys up bonds directly in permanent open market operations (POMOs), as the Fed is now doing?

In this case, the required adjustment cannot fully take place via a higher bond yield, so instead, the price of the bond must decline in real rather than nominal terms. For this to happen, the currency must decline. It is no coincidence that, as the Fed has made it increasingly clear to financial markets that it is prepared, in principle, to expand the POMO program indefinitely until inflation (or expectations thereof) rises by a desired amount, the dollar has declined sharply versus nearly all other currencies.

Regards,

John Butler,
for The Daily Reckoning

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

Guess What’s Coming to Dinner: Inflation! (Part One of Two) 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:
Guess What’s Coming to Dinner: Inflation! (Part One of Two)




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

Fed President: Bernanke Making “A PACT WITH THE DEVIL”

October 31st, 2010


play video

When Fed President Hoenig declared last week that Bernanke is making “a pact with the devil,” he wasn’t kidding.

Nor was he talking about a little side deal that would someday be forgiven in money heaven.

Rather, he was referring to an unprecedented decision by Bernanke and Company — coming THIS week — that could change the course of history: A new round of Fed money printing with immediate impacts on markets and unforeseeable consequences for the dollar.

Meanwhile, just 48 hours from now, we will also be smack in the middle of another major event — the most important midterm election of our lifetime.

Each of these events represents potentially
revolutionary changes for our country,
our economy and YOUR money.

Each is going happen THIS week!

And each opens the door to unique, unprecedented profit opportunities, which I describe in my last and most important pre-election presentation, now available online.

Look. Five weeks ago, when we first presented the findings of our internal Weiss poll, we already had a pretty good feel for these revolutionary changes on the way.

Then, three weeks ago, when we shared with you the results of our national Weiss-Zogby poll, we had an even clearer vision.

And now, as the hours tick by, and the events are nearly upon us, it’s time to bring you up to date …

Revolutionary Change #1
Shift to Fiscal Conservatism

We’ve known that, regardless of which party gained control of the House or the Senate, there would be a major shift toward fiscal conservatism in Congress, making it almost impossible for Washington to pass major new spending or stimulus legislation.

Our polls showed us that, in a hypothetical three-way race, a maverick, anti-spending outsider would beat both a Republican and Democratic opponents hands down.

Moreover, voters were opposed to bank bailouts by an overwhelming margin of 12 to one.

And now, within about 48 hours, those voters are going to make themselves heard!

Likely impact: As we have stressed repeatedly, this shift to conservatism is fundamentally NEGATIVE for the U.S. economy and the U.S. stock market. Both have relied heavily on government stimulus for support.

But it could be also be temporarily negative for gold, foreign currencies, commodities and other alternative investments that have been so popular lately.

Revolutionary Change #2
MORE Mass Money Printing

This revolution started months ago. And now it’s about to resume!

Indeed, we have strongly suspected all along that the Federal Open Market Committee (FOMC) was getting ready to announce a second major new round of mass money printing, or “quantitative easing” (QE2).

The problem:

Yes, the Fed CAN print the money and inject it into the system. But it CANNOT control where that money goes. So if lenders and investors have concerns about the U.S. or see more promising opportunities elsewhere, most of that money is diverted to other, alternative markets.

This is why it’s a pact with the devil. And this is why it’s bound to backfire.

Likely impact: QE2 is fundamentally neutral — or, at best, only mildly and temporarily positive — for the U.S. economy. But it is strongly POSITIVE for a wide range of alternative investments, including precious metals, key foreign currencies and certain commodities.

Key Short-Term Factors That Are Now
More Evident Than Just Days Ago

As we stand at the precipice of the week in which these revolutionary changes are going to strike, several short-term factors have also come into clearer focus:

First, regarding the election, the market is now more vividly aware of the likely shift toward fiscal conservatism that we first alerted you to weeks ago. More national polls have been released. These polls have added more weight and confidence to the results of our own polls. And based on all the new poll data, analysts from all three sides — Democrat, Republican and Tea Party — are now in agreement that …

(a) The House will almost definitely be controlled by Republicans.

(b) The Republican side of the aisle will almost definitely include a strong and vocal Tea Party caucus. And …

(c) Even if Democrats retain a slim majority in the Senate, they will most probably heed the will of the majority of their constituents and oppose major spending or stimulus legislation.

In short, the market now knows what we knew weeks ago!

Second, regarding the Fed decision, the market has also zeroed in more closely on the range of likely possibilities, as follows:

(a) Based on the Fed’s own pronouncements, it’s now widely expected that the FOMC WILL announce QE2 on November 3rd. If there is no QE2 announcement, a lot of people are going to be VERY surprised.

(b) The likely QUANTITY is still being hotly debated, but my surveys and research tell me the market is expecting somewhere between $50 and $100 billion in Fed bond purchases per month.

Likely impact: The low end of the range could be a disappointment; the high end will be greeted as a pleasant surprise.

(c) More important than the quantity, however, could be the specificity of the announcement. In other words, will the FOMC specify ahead of time the total amount of QE2? Or will it be vague and keep the market guessing as to how long the money printing will continue?

Likely impact: A vague announcement will be a disappointment. A more specific pre-announcement will be greeted positively.

That’s the market’s perception of the near-term outlook. Now let me give you mine:

It’s the bulls who have been in the catbird seat in recent weeks. It’s the bulls who’ve been riding this wave and leveraging the expectations for QE2.

So right now, the burden is on THEM to get confirmation regarding their expectations for QE2. To stay on track, the bulls now NEED the Fed to pre-announce a very substantial QE2. If they get what they need, gold, currencies and commodities should be off to the races again. But if the number is on the low end, or if the Fed’s announcement is vague, we could see intermediate corrections in many of these markets.

Bottom line: The long-term fundamental outlook is very clear to us. The short-term outlook is potentially tricky and volatile, and, accordingly, I want to ensure that you have the facts you need to protect yourself and profit.

My new presentation on this opportunity is Two New Megatrends, Two Mega Windfalls and it’s online right now.

In it, I show you the investment strategies I’m using in Dr. Weiss’ $1,000,000 “Rapid Growth” account to grab huge profit potential beginning NEXT WEEK.

I show you how the approach I’m using could have handed you a 2,478% return — enough to turn $10,000 into $257,800 … or $100,000 into more than $2.5 million.

And I show you how you can track every move I make — in ADVANCE!

So now, with just 48 hours to go before election day, I recommend that you take two, critical steps immediately:

Step #1: Click this link now to view our new pre-election presentation … how we’re going to harness the money-making power of these two watershed events … and how you can, too.

Step #2: After watching the presentation, see for yourself the benefits of tracking Martin’s $1,000,000 portfolio and save $1,313.

Two warnings:
This is my LAST pre-election presentation. It goes offline when the polls close on the West Coast.

This is also your LAST chance to save $1,313. After election night, our introductory offer ends.

Regards,

Monty Agarwal

Related posts:

  1. Flash update: Market turn in the making!
  2. Bernanke Hallucinating
  3. Bernanke Running Amuck

Read more here:
Fed President: Bernanke Making “A PACT WITH THE DEVIL”

Commodities, ETF, Mutual Fund, Uncategorized

Fed President: Bernanke Making “A PACT WITH THE DEVIL”

October 31st, 2010


play video

When Fed President Hoenig declared last week that Bernanke is making “a pact with the devil,” he wasn’t kidding.

Nor was he talking about a little side deal that would someday be forgiven in money heaven.

Rather, he was referring to an unprecedented decision by Bernanke and Company — coming THIS week — that could change the course of history: A new round of Fed money printing with immediate impacts on markets and unforeseeable consequences for the dollar.

Meanwhile, just 48 hours from now, we will also be smack in the middle of another major event — the most important midterm election of our lifetime.

Each of these events represents potentially
revolutionary changes for our country,
our economy and YOUR money.

Each is going happen THIS week!

And each opens the door to unique, unprecedented profit opportunities, which I describe in my last and most important pre-election presentation, now available online.

Look. Five weeks ago, when we first presented the findings of our internal Weiss poll, we already had a pretty good feel for these revolutionary changes on the way.

Then, three weeks ago, when we shared with you the results of our national Weiss-Zogby poll, we had an even clearer vision.

And now, as the hours tick by, and the events are nearly upon us, it’s time to bring you up to date …

Revolutionary Change #1
Shift to Fiscal Conservatism

We’ve known that, regardless of which party gained control of the House or the Senate, there would be a major shift toward fiscal conservatism in Congress, making it almost impossible for Washington to pass major new spending or stimulus legislation.

Our polls showed us that, in a hypothetical three-way race, a maverick, anti-spending outsider would beat both a Republican and Democratic opponents hands down.

Moreover, voters were opposed to bank bailouts by an overwhelming margin of 12 to one.

And now, within about 48 hours, those voters are going to make themselves heard!

Likely impact: As we have stressed repeatedly, this shift to conservatism is fundamentally NEGATIVE for the U.S. economy and the U.S. stock market. Both have relied heavily on government stimulus for support.

But it could be also be temporarily negative for gold, foreign currencies, commodities and other alternative investments that have been so popular lately.

Revolutionary Change #2
MORE Mass Money Printing

This revolution started months ago. And now it’s about to resume!

Indeed, we have strongly suspected all along that the Federal Open Market Committee (FOMC) was getting ready to announce a second major new round of mass money printing, or “quantitative easing” (QE2).

The problem:

Yes, the Fed CAN print the money and inject it into the system. But it CANNOT control where that money goes. So if lenders and investors have concerns about the U.S. or see more promising opportunities elsewhere, most of that money is diverted to other, alternative markets.

This is why it’s a pact with the devil. And this is why it’s bound to backfire.

Likely impact: QE2 is fundamentally neutral — or, at best, only mildly and temporarily positive — for the U.S. economy. But it is strongly POSITIVE for a wide range of alternative investments, including precious metals, key foreign currencies and certain commodities.

Key Short-Term Factors That Are Now
More Evident Than Just Days Ago

As we stand at the precipice of the week in which these revolutionary changes are going to strike, several short-term factors have also come into clearer focus:

First, regarding the election, the market is now more vividly aware of the likely shift toward fiscal conservatism that we first alerted you to weeks ago. More national polls have been released. These polls have added more weight and confidence to the results of our own polls. And based on all the new poll data, analysts from all three sides — Democrat, Republican and Tea Party — are now in agreement that …

(a) The House will almost definitely be controlled by Republicans.

(b) The Republican side of the aisle will almost definitely include a strong and vocal Tea Party caucus. And …

(c) Even if Democrats retain a slim majority in the Senate, they will most probably heed the will of the majority of their constituents and oppose major spending or stimulus legislation.

In short, the market now knows what we knew weeks ago!

Second, regarding the Fed decision, the market has also zeroed in more closely on the range of likely possibilities, as follows:

(a) Based on the Fed’s own pronouncements, it’s now widely expected that the FOMC WILL announce QE2 on November 3rd. If there is no QE2 announcement, a lot of people are going to be VERY surprised.

(b) The likely QUANTITY is still being hotly debated, but my surveys and research tell me the market is expecting somewhere between $50 and $100 billion in Fed bond purchases per month.

Likely impact: The low end of the range could be a disappointment; the high end will be greeted as a pleasant surprise.

(c) More important than the quantity, however, could be the specificity of the announcement. In other words, will the FOMC specify ahead of time the total amount of QE2? Or will it be vague and keep the market guessing as to how long the money printing will continue?

Likely impact: A vague announcement will be a disappointment. A more specific pre-announcement will be greeted positively.

That’s the market’s perception of the near-term outlook. Now let me give you mine:

It’s the bulls who have been in the catbird seat in recent weeks. It’s the bulls who’ve been riding this wave and leveraging the expectations for QE2.

So right now, the burden is on THEM to get confirmation regarding their expectations for QE2. To stay on track, the bulls now NEED the Fed to pre-announce a very substantial QE2. If they get what they need, gold, currencies and commodities should be off to the races again. But if the number is on the low end, or if the Fed’s announcement is vague, we could see intermediate corrections in many of these markets.

Bottom line: The long-term fundamental outlook is very clear to us. The short-term outlook is potentially tricky and volatile, and, accordingly, I want to ensure that you have the facts you need to protect yourself and profit.

My new presentation on this opportunity is Two New Megatrends, Two Mega Windfalls and it’s online right now.

In it, I show you the investment strategies I’m using in Dr. Weiss’ $1,000,000 “Rapid Growth” account to grab huge profit potential beginning NEXT WEEK.

I show you how the approach I’m using could have handed you a 2,478% return — enough to turn $10,000 into $257,800 … or $100,000 into more than $2.5 million.

And I show you how you can track every move I make — in ADVANCE!

So now, with just 48 hours to go before election day, I recommend that you take two, critical steps immediately:

Step #1: Click this link now to view our new pre-election presentation … how we’re going to harness the money-making power of these two watershed events … and how you can, too.

Step #2: After watching the presentation, see for yourself the benefits of tracking Martin’s $1,000,000 portfolio and save $1,313.

Two warnings:
This is my LAST pre-election presentation. It goes offline when the polls close on the West Coast.

This is also your LAST chance to save $1,313. After election night, our introductory offer ends.

Regards,

Monty Agarwal

Related posts:

  1. Flash update: Market turn in the making!
  2. Bernanke Hallucinating
  3. Bernanke Running Amuck

Read more here:
Fed President: Bernanke Making “A PACT WITH THE DEVIL”

Commodities, ETF, Mutual Fund, Uncategorized

The Simple but Critical Level to Watch on SPX Weekly

October 30th, 2010

We all try to make charting complex, but sometimes it’s the simplest facts and realities that give us clues to the most important turns or inflections in a major market.

We’re at one of those points right now in the S&P 500 – as seen on the Weekly chart below in simplest terms:

I’m only showing the 200 week Simple Moving Average and the three times it’s been effective in forming a short/intermediate term peak in the S&P 500.

It happened initially in August 2008, then recently at the April 2010 peak, and it’s happening again at the 1,200 level as we end October 2010.

I know it sounds stupidly simple, but one of two things are going to happen:

1.  History will repeat, and thus the market has peaked and will be heading lower next week and beyond,

2.  History will change (“This time it’s different”) and the market will break solidly above the 200w SMA (1,200 level) and will be the confirmation or beginning of a new bullish breakout that could send price up to 1,400 or higher.

Start your analysis with that type of thinking:  Either it’s going to hold or it isn’t.  And then develop strategies for both contingencies, depending on your activity level as a trader or investor.

The 2010 high – and thus ‘new recovery’ high is 1,220, so it’s best to wait to see if the index can go ahead and shatter that resistance level. For extra proof, the 61.8% Fibonacci ‘big-scale’ retracement is 1,228.

If so, realize that there will be a lot of investors and traders who will be forced to do one of these major actions at such a critical juncture:

1.  Sidelined/Doubting Bulls – holding cash – may decide “Enough’s enough” and jump in the market with big buy orders,

2.  Frustrated/Losing Bears – holding short – may also decide “Enough’s enough” and jump OUT of the market initially (short-squeeze) and then may ‘flip/reverse’ and position long.

Of course, next week brings us three major market-changing events – that of the Congressional Elections, Federal Reserve Announcement, and (typical) Jobs Report.

How these events unfold – and the market’s reaction to them – will likely determine which of the two scenarios above will occur.

Either we break out or we don’t, and thus reverse here.  And what happens here could determine the market direction for months.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Read more here:
The Simple but Critical Level to Watch on SPX Weekly

Uncategorized

Which of These Small Caps Will Rebound in November?

October 30th, 2010

Which of These Small Caps Will Rebound in November?

At the end of every quarter, I like to look back over recent market laggards. Most of the stocks that took a recent deep hit are likely to stay depressed, but some are the victim of investor over-reaction and poised for a rebound.

With that in mind, let's looks at the five worst-performing small caps during the past month. All of these stocks are in the Russell 2000 Index of small caps, and each sport a market value of at least $300 million.

Savient Pharmaceuticals (Nasdaq: SVNT)
This biotech soared +83% in the third quarter. Roughly a third of that gain came on just one day in September when it received FDA approval for Krystexxa, a gout drug which targets patients for which other gout treatments have proven ineffective. Some analysts think Krystexxa represents $200-250 million in annual sales, while others peg it as a $750 million annual revenue opportunity. Global Hunter Securities figures the market niche is roughly $400 million. Savient announced back in May that it would put itself up for sale, and the FDA nod in September made it that much more attractive.

But earlier this week the company announced that a few potential buyers had decided to pass on an acquisition, and the company took itself off the block. Analysts believe the company's stock had simply become too expensive, sporting a market value of $1.4 billion. That figure now stands at $800 million. All of the sudden, this stock is now more reasonably priced for a deal. So those potential bidders could well return to the table with an offer of around $18 — roughly +50% above the current price, but -20% lower than where the stock traded just last week. With FDA approval already in hand, and the gout treatment market increasing in size, shares now look quite attractive — with or without a deal.

But a word of caution: If a buyer doesn't emerge in the next six months, Savient may need to raise more cash to launch Krystexxa commercially. And that's never a good thing for shares.

Coldwater Creek (Nasdaq: CWTR)
Retailers generally report that same store sales rose or fell by a few percentage points compared to a year earlier. But when this retailer of women's apparel and jewelry announced that same stores fell a whopping -20% in its fiscal third quarter ended October, investors ditched the stock, sending shares down more than -30% on October 19.

You can't pin all the sales weakness on the company. Women's apparel sales are apparently slumping at other retailers as well. Yet Coldwater Creek's shortfall is likely to yield collateral damage. The retailer needs to sharply discount now-bloated inventories while figuring out a way to regain its merchandising touch. And the timing is lousy, heading into the all-important holiday shopping season. This stock is now quite cheap, trading at less than 0.3 times trailing sales, but is unlikely to rebound anytime soon.

Infinera (Nasdaq: INFN)
This maker of optical networking chips reported very robust third-quarter results in the middle of October, but management said fourth quarter results would not be nearly as impressive.

Suddenly, a stock that had risen from $8 to $12 over the summer was once again an $8 stock. The reason for the downbeat view: major customers have finished recent network upgrades and wouldn't need many more of Infinera's chips in the near-term. Of further concern, the company had been signing up an average of four new major customers from the third quarter of 2008 to the first quarter of 2010, according to Goldman Sachs. Yet in the past two quarters, that figure has slumped to one and two, respectively. And that means sales will likely be pressured for at least a few more quarters until the company can secure more new customer wins.

Citigroup's Kevin Dennean remains as a lonely bull on the stock, sticking by his “Buy” rating. His recently lowered target price of $13.50 represents more than +50% upside from current levels. But even Dennean concedes that there are few positive catalysts in the near-term. This is a stock to re-visit this winter when fourth quarter results are announced and 2011 guidance is issued.

Earlier this week's Infinera's rival, Oclaro (Nasdaq: OCLR) issued similarly tepid fourth quarter guidance, and shares also look like dead money in the near-term.

Dex One (Nasdaq: DEXO)
A large debt load continues to scare off investors at this publisher. I noted back in August that caution was warranted, and that notion still applies.[Read: "4 Rebound Stocks Worth a Closer Look"] But it's still worth listening to the company's November 9 conference call. If cash flow is holding up better than some investors fear, then this stock would start to look like a deep value play.

Action to Take –> Of the stocks profiled here, Savient Pharma looks to be the most appealing, regardless of whether or not a suitor re-emerges.

Dex One's recent fall indicates that recent quarterly trends are weak. But if management can point to robust cash flow on the upcoming conference call, then shares, which have fallen nearly -80% this year, could see new life. But before jumping in, listen for management commentary about any near-term debt obligations.


– 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
Which of These Small Caps Will Rebound in November?

Read more here:
Which of These Small Caps Will Rebound in November?

Uncategorized

Which of These Small Caps Will Rebound in November?

October 30th, 2010

Which of These Small Caps Will Rebound in November?

At the end of every quarter, I like to look back over recent market laggards. Most of the stocks that took a recent deep hit are likely to stay depressed, but some are the victim of investor over-reaction and poised for a rebound.

With that in mind, let's looks at the five worst-performing small caps during the past month. All of these stocks are in the Russell 2000 Index of small caps, and each sport a market value of at least $300 million.

Savient Pharmaceuticals (Nasdaq: SVNT)
This biotech soared +83% in the third quarter. Roughly a third of that gain came on just one day in September when it received FDA approval for Krystexxa, a gout drug which targets patients for which other gout treatments have proven ineffective. Some analysts think Krystexxa represents $200-250 million in annual sales, while others peg it as a $750 million annual revenue opportunity. Global Hunter Securities figures the market niche is roughly $400 million. Savient announced back in May that it would put itself up for sale, and the FDA nod in September made it that much more attractive.

But earlier this week the company announced that a few potential buyers had decided to pass on an acquisition, and the company took itself off the block. Analysts believe the company's stock had simply become too expensive, sporting a market value of $1.4 billion. That figure now stands at $800 million. All of the sudden, this stock is now more reasonably priced for a deal. So those potential bidders could well return to the table with an offer of around $18 — roughly +50% above the current price, but -20% lower than where the stock traded just last week. With FDA approval already in hand, and the gout treatment market increasing in size, shares now look quite attractive — with or without a deal.

But a word of caution: If a buyer doesn't emerge in the next six months, Savient may need to raise more cash to launch Krystexxa commercially. And that's never a good thing for shares.

Coldwater Creek (Nasdaq: CWTR)
Retailers generally report that same store sales rose or fell by a few percentage points compared to a year earlier. But when this retailer of women's apparel and jewelry announced that same stores fell a whopping -20% in its fiscal third quarter ended October, investors ditched the stock, sending shares down more than -30% on October 19.

You can't pin all the sales weakness on the company. Women's apparel sales are apparently slumping at other retailers as well. Yet Coldwater Creek's shortfall is likely to yield collateral damage. The retailer needs to sharply discount now-bloated inventories while figuring out a way to regain its merchandising touch. And the timing is lousy, heading into the all-important holiday shopping season. This stock is now quite cheap, trading at less than 0.3 times trailing sales, but is unlikely to rebound anytime soon.

Infinera (Nasdaq: INFN)
This maker of optical networking chips reported very robust third-quarter results in the middle of October, but management said fourth quarter results would not be nearly as impressive.

Suddenly, a stock that had risen from $8 to $12 over the summer was once again an $8 stock. The reason for the downbeat view: major customers have finished recent network upgrades and wouldn't need many more of Infinera's chips in the near-term. Of further concern, the company had been signing up an average of four new major customers from the third quarter of 2008 to the first quarter of 2010, according to Goldman Sachs. Yet in the past two quarters, that figure has slumped to one and two, respectively. And that means sales will likely be pressured for at least a few more quarters until the company can secure more new customer wins.

Citigroup's Kevin Dennean remains as a lonely bull on the stock, sticking by his “Buy” rating. His recently lowered target price of $13.50 represents more than +50% upside from current levels. But even Dennean concedes that there are few positive catalysts in the near-term. This is a stock to re-visit this winter when fourth quarter results are announced and 2011 guidance is issued.

Earlier this week's Infinera's rival, Oclaro (Nasdaq: OCLR) issued similarly tepid fourth quarter guidance, and shares also look like dead money in the near-term.

Dex One (Nasdaq: DEXO)
A large debt load continues to scare off investors at this publisher. I noted back in August that caution was warranted, and that notion still applies.[Read: "4 Rebound Stocks Worth a Closer Look"] But it's still worth listening to the company's November 9 conference call. If cash flow is holding up better than some investors fear, then this stock would start to look like a deep value play.

Action to Take –> Of the stocks profiled here, Savient Pharma looks to be the most appealing, regardless of whether or not a suitor re-emerges.

Dex One's recent fall indicates that recent quarterly trends are weak. But if management can point to robust cash flow on the upcoming conference call, then shares, which have fallen nearly -80% this year, could see new life. But before jumping in, listen for management commentary about any near-term debt obligations.


– 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
Which of These Small Caps Will Rebound in November?

Read more here:
Which of These Small Caps Will Rebound in November?

Uncategorized

A Cheap Chinese Stock Posting +300% Earnings Growth

October 30th, 2010

A Cheap Chinese Stock Posting +300% Earnings Growth

It's pretty simple really.

You sell products, you bring in revenue. Subtract whatever cash was spent on those products (cost of goods sold) and you have gross profit. The larger the gross profit, the more earnings are left over once all the other day-to-day expenses are paid.

For many companies, the cost of goods sold can really eat into the bottom line. Think of the mountains of grains and sugar that cereal maker Kellogg's (NYSE: K) has to procure. The company took in $12.6 billion in revenue last year, but spent more than $7.2 billion (57%) on raw ingredients that went into all those boxes of Rice Krispies and Frosted Flakes.

Even firms with smaller budgets have to cope with volatile price fluctuations or shipment delays that can create havoc on production schedules.

But one upstart Chinese company has decided to cut out the middleman almost entirely.

Yongye International (Nasdaq: YONG) is an up-and-coming player in the green agriculture movement. The firm sells organic crop nutrients and animal feed supplements derived from lignite coal. Lignite coal is the most expensive input in the firm's business model, accounting for about 50% of its production costs.

So rather than continue paying a fat mark-up to its suppliers, Yongye bypassed them entirely by buying its own lignite coal mine earlier this year. It also just cut the ribbon on a new manufacturing facility right next door to the mine, which will soon be rolling out 30,000 tons of plant and animal nutrient each year.

This vertical integration will have a dramatic impact on Yongye's profitability — much like a lemonade salesman planting a grove of lemon trees in his backyard.

Management doesn't give us any specifics, but a +15% to +20% expansion in gross margins is reasonable. With sales already soaring, earnings should soar even more in the near future. Not that the Yongye needs any help in that department. Revenue doubled from $46 million to nearly $90 million last quarter, which helped net income quadruple to $24 million, or $0.54 per share.

Of course, numbers are just numbers — it's the catalysts driving them that matter.

In a recent article about the wheat shortages in Russia, I mentioned that there will be an estimated 1.1 billion more mouths to feed by the end of the decade. That kind of population growth is what is partly fueling surging commodity prices. [Read the article here]

And in this case, Yongye is in an enviable position because many of those mouths will be in China.

The firm's Shengmingsu brand nutrients are proven to shorten harvest times and boost crop yields, enabling farmers to get the most productivity out of their land. Cucumber output, for example, can rise as much as +22% — and get to market nearly two weeks earlier.

Most of China's rural farmers rely heavily on local stores for supplies, and Yongye is making the most out of this distribution channel. The firm negotiates with these independently-owned stores to prominently display (and push) the Shengmingsu brand. By the end of 2010, Yongye will have converted 23,000 stores, a powerful +152% increase for the year. And the company is just now spreading its footprint outside its core territory in the Hebei region of northern China.

Action to Take –> Yongye's shares, at $8, are trading at just 15 times trailing earnings, fine for a slow-moving giant, but highly enticing for a young company that's delivering racy triple-digit earnings growth. The stock can be had for a PEG ratio of just 0.2 — one of the most discounted valuations you'll find.

Looking ahead, the company has several big-picture factors working in its favor, not the least of which is the fact that Chinese growers, which have just one-third as much arable land as other countries per-capita, must feed one-fifth of the world's population.

I see the shares climbing above the $10 mark in the next 12 months, which would represent gains of +25% or more from current levels — and even more in the long-run.


– Nathan Slaughter

Nathan Slaughter's previous experience includes

Uncategorized

A Cheap Chinese Stock Posting +300% Earnings Growth

October 30th, 2010

A Cheap Chinese Stock Posting +300% Earnings Growth

It's pretty simple really.

You sell products, you bring in revenue. Subtract whatever cash was spent on those products (cost of goods sold) and you have gross profit. The larger the gross profit, the more earnings are left over once all the other day-to-day expenses are paid.

For many companies, the cost of goods sold can really eat into the bottom line. Think of the mountains of grains and sugar that cereal maker Kellogg's (NYSE: K) has to procure. The company took in $12.6 billion in revenue last year, but spent more than $7.2 billion (57%) on raw ingredients that went into all those boxes of Rice Krispies and Frosted Flakes.

Even firms with smaller budgets have to cope with volatile price fluctuations or shipment delays that can create havoc on production schedules.

But one upstart Chinese company has decided to cut out the middleman almost entirely.

Yongye International (Nasdaq: YONG) is an up-and-coming player in the green agriculture movement. The firm sells organic crop nutrients and animal feed supplements derived from lignite coal. Lignite coal is the most expensive input in the firm's business model, accounting for about 50% of its production costs.

So rather than continue paying a fat mark-up to its suppliers, Yongye bypassed them entirely by buying its own lignite coal mine earlier this year. It also just cut the ribbon on a new manufacturing facility right next door to the mine, which will soon be rolling out 30,000 tons of plant and animal nutrient each year.

This vertical integration will have a dramatic impact on Yongye's profitability — much like a lemonade salesman planting a grove of lemon trees in his backyard.

Management doesn't give us any specifics, but a +15% to +20% expansion in gross margins is reasonable. With sales already soaring, earnings should soar even more in the near future. Not that the Yongye needs any help in that department. Revenue doubled from $46 million to nearly $90 million last quarter, which helped net income quadruple to $24 million, or $0.54 per share.

Of course, numbers are just numbers — it's the catalysts driving them that matter.

In a recent article about the wheat shortages in Russia, I mentioned that there will be an estimated 1.1 billion more mouths to feed by the end of the decade. That kind of population growth is what is partly fueling surging commodity prices. [Read the article here]

And in this case, Yongye is in an enviable position because many of those mouths will be in China.

The firm's Shengmingsu brand nutrients are proven to shorten harvest times and boost crop yields, enabling farmers to get the most productivity out of their land. Cucumber output, for example, can rise as much as +22% — and get to market nearly two weeks earlier.

Most of China's rural farmers rely heavily on local stores for supplies, and Yongye is making the most out of this distribution channel. The firm negotiates with these independently-owned stores to prominently display (and push) the Shengmingsu brand. By the end of 2010, Yongye will have converted 23,000 stores, a powerful +152% increase for the year. And the company is just now spreading its footprint outside its core territory in the Hebei region of northern China.

Action to Take –> Yongye's shares, at $8, are trading at just 15 times trailing earnings, fine for a slow-moving giant, but highly enticing for a young company that's delivering racy triple-digit earnings growth. The stock can be had for a PEG ratio of just 0.2 — one of the most discounted valuations you'll find.

Looking ahead, the company has several big-picture factors working in its favor, not the least of which is the fact that Chinese growers, which have just one-third as much arable land as other countries per-capita, must feed one-fifth of the world's population.

I see the shares climbing above the $10 mark in the next 12 months, which would represent gains of +25% or more from current levels — and even more in the long-run.


– Nathan Slaughter

Nathan Slaughter's previous experience includes

Uncategorized

Four ETFs To Play Microsoft’s Income Jump

October 30th, 2010

Core products pushed revenues and net income up at Microsoft (MSFT) in the third quarter, further extending out the exceptional earnings season witnessed by the technology giants and giving further support to the Software HOLDERs ETF (SWH), the iShares Dow Jones US Technology (IYW) and the Technology Select Sector SPDR (XLK) and the Vanguard Information Technology ETF (VGT).

According to Microsoft’s Chief Financial Officer, demand for both Windows and Office products have thrived as businesses of all sizes increased technology purchases.  Furthermore, a new version of Microsoft’s flagship software, Windows 7, has sold more than 240 million licenses since its debut a year ago, making it the fastest selling operating system in the company’s history.   Another factor that aided in Microsoft’s performance was sales of Office 2010 which generated $5.13 billion in the quarter and, similar to Windows 7, sold 20 percent more units since the product’s launch that it did of the previous version of Office during the same time period. 

As for the future of Microsoft, fundamentals remain strong in that the Redmond, Washington based company is sitting on a boat load of cash and demand for its software products remains insatiable.  Additionally, Microsoft is forming new partnerships and launching new products that could potentially give it another boost.  Most recently, Microsoft completed the transition of search advertisers from Yahoo (YHOO) to Microsoft’s online ad system, plans to start selling its Kinect device for its Xbox 360 game consoles and expects its Windows 7 operating system for mobile phones to go on sale next month. 

As mentioned above, ETFs influenced by Microsoft include:

  • Software HOLDRs (SWH), which allocates 17.43% of its assets to Microsoft
  • iShares Dow Jones US Technology (IYW), which allocates 9.87% of its assets to Microsoft
  • Technology Select Sector SPDR (XLK), which allocates 8.36% of its assets to Microsoft
  • Vanguard Information Technology ETF (VGT), which allocates 8.15% of its assets to Microsoft.

Disclosure: No Positions

Read more here:
Four ETFs To Play Microsoft’s Income Jump




HERE IS YOUR FOOTER

ETF, Uncategorized

Gold Never Has Been (and Never Will Be) in a Bubble

October 30th, 2010

Most serious gold investors follow a basic principle: that gold is stable in value. Changes in the “gold price” represent changes in the currency being compared to gold, while gold itself is essentially inert.

This is why gold was used as a monetary foundation for literally thousands of years. You want money to be stable in value. The simplest way to accomplish this was to link it to gold. Today, we summarize this quality by saying that “gold is money.”

From this we can see immediately, that if gold doesn’t change in value – at least not very much – then it can never be in a “bubble.” There may be a time when many people are desperate to trade their paper money for gold, but that is because their paper money is collapsing in value. It has nothing to do with gold.

Let’s take a look at some of the great gold bull markets of the last hundred years:

  • From 1920 to 1923, the price of gold in German marks rose from 160/oz. to 48 trillion/oz.
  • From 1945 to 1950, the price of gold in Japanese yen rose from 140/oz. to 12,600/oz.
  • From 1948 to 1967, the price of gold in Brazilian cruzeiros went from 648/oz. to 94,500/oz.
  • From 1970 to 1980, the price of gold in US dollars went from 35/oz. to 850/oz.
  • From 1982 to 1990, the price of gold in Mexican pesos went from 8,000/oz. to 1,025,000/oz.
  • From 1989 to 2000, the price of gold in Russian rubles went from 1,600/oz. to 8,120,000/oz.

Each of these situations was an episode of paper currency depreciation. Today is no different. The rising dollar/euro/yen gold price is simply a reflection of the Keynesian “easy money” policies popular around the world today.

We can also see that, if gold remains stable in value, then the supply/demand considerations that affect industrial commodities do not affect gold, which is a monetary commodity. This is why gold is used as money. If its value was affected by industrial supply/demand factors, we would not be able to use it as money.

Thus, “jewelry demand” or “peak gold,” or any other such factor, has little meaningful effect on gold’s value. Day-to-day money flows will affect the price at which currencies trade vs. gold, but this ultimately affects the currency in question, not gold.

None of these historical “gold bull markets” resulted from jewelry demand or mining supply.

Any attempt to attach a valuation to gold is mostly a waste of time. Concepts like the “inflation-adjusted gold price” or the “gold/oil ratio,” or a ratio of outstanding debt or currency to a quantity of gold bullion, are a distraction. An item that doesn’t change value is never cheap or dear. That’s what “gold is money” means.

The “price of gold” may reach five thousand, ten thousand, a hundred thousand, a million, or a billion dollars per ounce. The gold bubble-callers will be frothing at the mouth, until they finally have the realization that there was never a bubble in gold, but only a crash in paper money.

Gold is money. Always has been. Probably always will be. This time it’s different? I don’t think so.

Regards,

Nathan Lewis
for The Daily Reckoning

Gold Never Has Been (and Never Will Be) in a Bubble 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 Never Has Been (and Never Will Be) in a Bubble




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

All Eyes On the Fed: Awaiting Bernanke’s Decision

October 30th, 2010

The world waits…

Stocks barely budged this week. Gold bobbed around like an anchorless sailboat, adrift in a vast ocean of guesses, speculation and rumor. All eyes, meanwhile, are on US Fed Chairman Ben Bernanke, who is widely expected to announce his next round of systematic dollar debasement a few days from now – a strategy otherwise known as “quantitative easing,” or “QE” for short. Trepid investors, unsure of what the value of the world’s reserve currency will be a week from now, sit on the sidelines, awaiting their cue from the man with the magic chopper.

Fellow Reckoners will recall Bernanke’s statement that, should it become “necessary,” he could cure what ails the financial world by dropping money from helicopters. He’s not quite there yet. Readers are invited to have a little patience…

Of course, the battle between central bank-created fiat money and its arch nemesis, gold, is not a new tale. Money meddlers have been tussling with the precious metal since the coin clipping days of the Romans. You’d think the bozos would have learned their lesson by now. But, as Bill likes to say, what one generation learns, the next is quick to forget.

“Gold vs. the Fed: the Record is Clear,” reads a headline from The Wall Street Journal this week. The article goes on to highlight a few of the dollar’s lowlights during its ongoing battle with the Midas Metal.

“From 1947 through 1967, the year before the US began to weasel out of its commitment to dollar-gold convertibility,” the story begins, “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,” the article wonders aloud, “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.”

And that’s not all.

“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.”

And to think the Journal is referring only to official statistics! The real story, when adjusting for the number torture going on in the government’s chamber of statistics – what Orwell might call the Ministry for Truth – is far, far worse. But readers get the point. The evidence is in. The facts have been observed. The arguments made. The case against a fiat money system would seem as open and shut as they come.

So why continue down the path leading to the very same cliff every other fiat money leapt from? Ahh… As every liar worth his salt well knows, a mistruth must beget a fraud, which, in turn, must give rise to another lie.

The world is brimming with stories of people who blindly cling to crackpot ideas in the face of any and all rational argument to the contrary. In fact, research shows that, far from inspiring a level-headed change of opinion, a well constructed argument dismantling this or that hocus pocus theory often has the opposite effect, emboldening the purveyors of such falsehoods. Leon Festinger introduced the theory, known as “cognitive dissonance” in his well-known book When Prophecy Fails, co-written with Henry Riecken, and Stanley Schachter.

In it, Festinger and his colleagues infiltrate a cult whose leader, Dorothy Martin, convinces a bunch of fellow village idiots that an apocalyptic flood is going to ravage the earth and that their only hope rests with a group of strangely benevolent aliens who would swoop down at the hour of reckoning to save the believing souls form certain death. One might reasonably expect that, when the fated day came and went without a drop of rain (or alien appearance), the group, no doubt embarrassed but otherwise none the worse for wear, would simply disband and go home. Not so.

Ed Yong, an award-winning British science writer who addressed the subject in a recent article for Discover magazine, describes what happened next. “In a reversal of their earlier distaste for publicity, [the group] started to actively proselytize for their beliefs. Far from shattering their faith, the absent UFOs had turned them into zealous evangelists.”

What corners we humans allow our theories to paint us into!

Perhaps it is the same psychological disposition, a cerebral partitioning of sorts, giving rise to the popular belief that a man can grow prosperous by spending more than he earns. Or that problems caused by too much debt can be cured…with more debt. Or that leaving a central banker in charge of the value of money can end in anything other than currency destruction and eventual financial ruin.

So, what does a central banker do when one round of money printing doesn’t bring about the desired effect? Does he revisit first principles and reexamine the evidence? Or does he double down on his bets, defending his actions with increasingly zealous evangelism? Bernanke gives the world his answer on Wednesday.

Joel Bowman
for The Daily Reckoning

All Eyes On the Fed: Awaiting Bernanke’s Decision 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:
All Eyes On the Fed: Awaiting Bernanke’s Decision




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

All Eyes On the Fed: Awaiting Bernanke’s Decision

October 30th, 2010

The world waits…

Stocks barely budged this week. Gold bobbed around like an anchorless sailboat, adrift in a vast ocean of guesses, speculation and rumor. All eyes, meanwhile, are on US Fed Chairman Ben Bernanke, who is widely expected to announce his next round of systematic dollar debasement a few days from now – a strategy otherwise known as “quantitative easing,” or “QE” for short. Trepid investors, unsure of what the value of the world’s reserve currency will be a week from now, sit on the sidelines, awaiting their cue from the man with the magic chopper.

Fellow Reckoners will recall Bernanke’s statement that, should it become “necessary,” he could cure what ails the financial world by dropping money from helicopters. He’s not quite there yet. Readers are invited to have a little patience…

Of course, the battle between central bank-created fiat money and its arch nemesis, gold, is not a new tale. Money meddlers have been tussling with the precious metal since the coin clipping days of the Romans. You’d think the bozos would have learned their lesson by now. But, as Bill likes to say, what one generation learns, the next is quick to forget.

“Gold vs. the Fed: the Record is Clear,” reads a headline from The Wall Street Journal this week. The article goes on to highlight a few of the dollar’s lowlights during its ongoing battle with the Midas Metal.

“From 1947 through 1967, the year before the US began to weasel out of its commitment to dollar-gold convertibility,” the story begins, “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,” the article wonders aloud, “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.”

And that’s not all.

“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.”

And to think the Journal is referring only to official statistics! The real story, when adjusting for the number torture going on in the government’s chamber of statistics – what Orwell might call the Ministry for Truth – is far, far worse. But readers get the point. The evidence is in. The facts have been observed. The arguments made. The case against a fiat money system would seem as open and shut as they come.

So why continue down the path leading to the very same cliff every other fiat money leapt from? Ahh… As every liar worth his salt well knows, a mistruth must beget a fraud, which, in turn, must give rise to another lie.

The world is brimming with stories of people who blindly cling to crackpot ideas in the face of any and all rational argument to the contrary. In fact, research shows that, far from inspiring a level-headed change of opinion, a well constructed argument dismantling this or that hocus pocus theory often has the opposite effect, emboldening the purveyors of such falsehoods. Leon Festinger introduced the theory, known as “cognitive dissonance” in his well-known book When Prophecy Fails, co-written with Henry Riecken, and Stanley Schachter.

In it, Festinger and his colleagues infiltrate a cult whose leader, Dorothy Martin, convinces a bunch of fellow village idiots that an apocalyptic flood is going to ravage the earth and that their only hope rests with a group of strangely benevolent aliens who would swoop down at the hour of reckoning to save the believing souls form certain death. One might reasonably expect that, when the fated day came and went without a drop of rain (or alien appearance), the group, no doubt embarrassed but otherwise none the worse for wear, would simply disband and go home. Not so.

Ed Yong, an award-winning British science writer who addressed the subject in a recent article for Discover magazine, describes what happened next. “In a reversal of their earlier distaste for publicity, [the group] started to actively proselytize for their beliefs. Far from shattering their faith, the absent UFOs had turned them into zealous evangelists.”

What corners we humans allow our theories to paint us into!

Perhaps it is the same psychological disposition, a cerebral partitioning of sorts, giving rise to the popular belief that a man can grow prosperous by spending more than he earns. Or that problems caused by too much debt can be cured…with more debt. Or that leaving a central banker in charge of the value of money can end in anything other than currency destruction and eventual financial ruin.

So, what does a central banker do when one round of money printing doesn’t bring about the desired effect? Does he revisit first principles and reexamine the evidence? Or does he double down on his bets, defending his actions with increasingly zealous evangelism? Bernanke gives the world his answer on Wednesday.

Joel Bowman
for The Daily Reckoning

All Eyes On the Fed: Awaiting Bernanke’s Decision 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:
All Eyes On the Fed: Awaiting Bernanke’s Decision




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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Currency War: “The Worst of Wars”

October 30th, 2010

Bryan Rich

Last week, here in Money and Markets, I suggested that the recent G-20 finance minister meetings could have a meaningful influence on the next trend in global currencies and other key markets. Therefore, we should pay very close attention to market activity.

I also suggested that this “influence” could be in the form of a coordinated intervention by G-4 economies (U.S., U.K., euro zone and Japan) to weaken the yen, a viable antidote to the bubbling and divisive currency tensions.

And given the context of the statement from the G-20 last weekend, that scenario looks quite plausible.

G-20: What They Said

The United States is the lead negotiator in trying to convince China to revalue its undervalued yuan. But U.S. officials are simultaneously operating under the growing perception that it may be seeking a weaker currency of its own — by planning for another round of quantitative easing — thereby threatening its credibility.

That’s why U.S. Treasury Secretary Tim Geithner made a strategic move to influence the G-20 agenda. He preceded the formal meetings last weekend with a letter to his G-20 counterparts, recommending a unified position and the language for G-20 opposition to the growing currency tensions in the world.

Geithner pushed for unity at the G-20 meeting.
Geithner pushed for unity at the G-20 meeting.

And for the most part, it worked.

Here’s the key take-away from the final G-20 communiqu

Commodities, ETF, Mutual Fund, Uncategorized

Currency War: “The Worst of Wars”

October 30th, 2010

Bryan Rich

Last week, here in Money and Markets, I suggested that the recent G-20 finance minister meetings could have a meaningful influence on the next trend in global currencies and other key markets. Therefore, we should pay very close attention to market activity.

I also suggested that this “influence” could be in the form of a coordinated intervention by G-4 economies (U.S., U.K., euro zone and Japan) to weaken the yen, a viable antidote to the bubbling and divisive currency tensions.

And given the context of the statement from the G-20 last weekend, that scenario looks quite plausible.

G-20: What They Said

The United States is the lead negotiator in trying to convince China to revalue its undervalued yuan. But U.S. officials are simultaneously operating under the growing perception that it may be seeking a weaker currency of its own — by planning for another round of quantitative easing — thereby threatening its credibility.

That’s why U.S. Treasury Secretary Tim Geithner made a strategic move to influence the G-20 agenda. He preceded the formal meetings last weekend with a letter to his G-20 counterparts, recommending a unified position and the language for G-20 opposition to the growing currency tensions in the world.

Geithner pushed for unity at the G-20 meeting.
Geithner pushed for unity at the G-20 meeting.

And for the most part, it worked.

Here’s the key take-away from the final G-20 communiqu

Commodities, ETF, Mutual Fund, Uncategorized

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