Spotlight on the VIX and Bollinger Bands

April 25th, 2011

As we sit in the pre-FOMC doldrums contemplating how Ben Bernanke will handle his historic post-meeting press conference and wondering whether we can properly label the next VIX move to 17 or 18 a ‘spike,’ this seems like a good time to review some of the elements of VIX spikes and other measures of VIX extremes.

Better yet, point your browser to the My Simple Quant blog and more specifically to a post from last Thursday, More on VIX and Bollinger Bands, in which the resident author Chris has presented the results of his analysis of what happens to the VIX and SPY in the week following those instance in which the VIX closes below its lower Bollinger band two days in a row.

A couple of comments are in order on the analysis at My Simple Quant. First, the results should not surprise long-time readers here, but for those who are prone to not click through, there is always something to be learned in the details. I have discussed at some length how one can use simple and exponential averages, moving average envelopes, Bollinger bands and other similar mechanisms to measure how far the VIX has strayed from various assessments of a historical range.

An important point to consider – and one not stressed by My Simple Quant – is that the VIX is generally a better market timing mechanism when it spikes up than when it prints extreme lows. Perhaps a better way of thinking of this phenomenon is that while an extremely high VIX can rarely cause investors to rethink where an appropriate range should be for volatility, an extremely low VIX can sometimes be a self-reinforcing mechanism and signal a move to a new lower volatility regime.

Related posts:

Disclosure(s): neutral position in VIX via options at time of writing



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Spotlight on the VIX and Bollinger Bands

OPTIONS, Uncategorized

China Makes Plans to Diversify Its Dollar Reserves

April 25th, 2011

The storms are building for the dollar, and the US economy, folks… There are a couple of things happening this week that could give us a clear indication as to which road we’re going to take… the Big Events Week! But first, while we were pounding down our Easter feasts, the Chinese were making plans to diversify their $3 trillion in reserves, and reduce their dollar holdings… Here’s the skinny…

OK… Remember last week when I told you that China’s Central Bank head, Zhou, had said that China had too much in reserves? (Read dollars, folks)… Well, this past weekend, a member of the monetary policy at the central bank, Bin, said, “$1 trillion dollars in reserve would be sufficient”… So, in case you’re searching for a calculator right now, (I know I did! HA) that would be a “skimming off the top” of $2 trillion dollars! It just so happens that $2 trillion is about the same amount that the Fed Reserve has printed with their QE1 and QE2!

Now, the question would be, just what are they going to do to get rid of $2 trillion dollars? Ahhh, grasshopper… We all know what they are going to do… They’re going to buy resources for their economy… They’ll spread a little to the problem children of the Eurozone, and they’ll invest in their infrastructure… The sleeping giant that my dad used to warn me about when I was a kid, has awakened, eh?

OK… So with that news spreading throughout the world last night, gold and silver, as they should, took off for new levels… Gold $1,517.20, and silver $49.10… It’s just crazy out there, folks! Investors are running for the cover of these metals, for they are the True Store of Wealth… Or, as I always call them, the “uncertainty hedges”… And brother are we walking in uncertain times right now!

Oh… And I guess it would be fair to say that this news from China has caused some widespread dollar selling… Even with most of Europe, Australia, and Hong Kong on holiday last night and today, the fear in the markets is that of “don’t get left holding dollars”…

Now… The Fed Reserve will meet this week, and here’s where I think the circuit breaker that I talked about last week will get turned on… So be careful this week, folks… The Fed could pull a rabbit out of its hat, ala-Bullwinkle, and come to save the day… (Yes, I’m laughing hysterically right now) Or… Top Fed Head Big Ben Bernanke, will simply repeat what he, and his fellow, quantitative easing-loving Fed Heads have had to say recently, which is that “it’s too early to pull the stimulus away”… And they are going to go the distance with QE2, which is the end of June…

A few weeks ago, I talked to you about what happens at the end of June when QE2 officially ends… I was concerned that with QE2 ending the markets would take that as a signal that the Fed believes all is OK in the US and a flight back into dollars could take place… For Treasury yields will certainly go higher with the Fed removed as the major buyer of them. When the Fed removes their stimulus – or “financial cocaine” as I call it – stocks are going to get hit with a hammer… and all the flow will be into Treasuries…

But, that only lasts as long as it takes for the economy to fall on its face, after going cold turkey, and then the Fed will be back with QE3, and QE4, etc. This shouldn’t be anything new to your eyes to read, for I’ve talked about this for some time now…

My friend, old colleague, and writer extraordinaire, David Galland, talked extensively about this in his letter last Friday, of which I have a snippet of here:

The politicians and their friends down at the Fed can pretend, as they do, that the overhang on the economy of some $14 trillion in debt, and another $50 trillion or so in longer-term entitlements, is much ado about nothing. This view of theirs is confirmed by the current budget discussions that talk of slashing $4 trillion out of federal spending over the next 12 years – but ignore that this slashing still anticipates annual deficits on the order of $1 trillion. There are facts and fictions in this universe of ours, and it’s a fact that the notion of spending our way to better days is a fiction.

And so, in my mind, there is no question that the Fed will ultimately be forced to unleash QE3 and, as Marc Faber [has] so eloquently stated…that will be followed by QE4, QE5 and so on through QE26 – or whatever number is in force at the time of the dollar’s collapse.

You can read David’s excellent piece titled “Forlorn Hope” by clicking here.

OK… So, it’s all gloom and doom this morning, I apologize for that… But, this is the kind of stuff you won’t get from your cable or local news, or Katie Couric on the national news! So, with all the gloom and doom, I’ll try to soften it up a bit, with some thoughts of other things…

Silver is up $1.91 this morning… That’s almost 2 bucks! WOW! I remember when you would be happy with a $2 move in a month! But gold and silver aren’t the only anti-dollar assets moving higher this morning… The euro (EUR) is knocking on the 1.46 door once again, and the Aussie dollar (AUD) hit, yet another post-float all-time record high overnight of $1.0777… (The Aussie dollar has backed off that a bit since hitting the new high). The Canadian dollar/loonie (CAD) is back above $1.05…

Speaking of the loonie… Last week, I said something about how the Canadian government didn’t care for the loonie above $1 because it hurt tourism… And a Canadian reader reminded me that it’s not just tourism, but manufacturing that suffers when the loonie is so strong… Correct-o-moon-do! But, right now, with energy prices soaring, and pushing inflation higher, the Canadian Central Bank (Bank of Canada) would be wise to allow the loonie to help with the heavy lifting with regards to fighting inflation.

The Economist had a good story this past week, regarding Singapore… Yes, even The Economist is jumping on our Singapore bandwagon these days… Shoot Rudy, I saw right here in The Daily Reckoning where they were talking about the Singapore dollar the other day! Here’s a snippet…

During the past several years, Singapore has emerged as one of the leading financial centers of the world, partially thanks to its ability to take advantage of upheaval, according to The Economist. While some financial hubs, such as Switzerland and London, have tried to balance attracting bankers and punishing them for some activities, Singapore has welcomed them with open arms. Thousands of financial-services companies have registered with the city-state’s monetary authority, and derivatives and other ancillary operations have thrived.

Remember what I told you a week or so ago about how China had chosen the Singapore Central Bank as a clearing bank for renminbi (CNY)… All of this noticing of Singapore is going to carry over to the Sing dollar…and that’s a good thing!

Another country that’s beginning to get a lot of recognition is Russia… And with the price of oil trading near a 30-month high at $112.64, it only makes sense that the ruble (RUB) has reached a 27-month high! Let me say that as long as you have protection like our BRIC MarketSafe CD did with 100% principal protection, owning rubles is OK… Otherwise, without protection, I wouldn’t touch them with your 10-foot pole!

Remember, last Monday? The big news was that S&P had downgraded the US rating to a negative outlook… One would have thought that this news would be the tipping point for Treasury values to plummet… but NOOOOOOOO! For some strange reason the markets are taking the S&P downgrade and thinking that this is a warning to the president, and that something will be done about it… OK… Will someone please come to help me off the floor; I fell there laughing so hysterically! But not just because the president won’t do anything… The lawmakers won’t either! Oh, I know, they’re trying, but in reality, folks, unless you’re talking about something more than $4 trillion over 10-years, that’s like removing a bucket of sand from the beach… Who’s going to notice?

And of all of you who live and trade based on the “Big Mac Index”… The Chinese renminbi (like we needed the Big Mac Index to tell us this), is among the most undervalued currencies along with The Hong Kong dollar (Honkers)… I’ll try to remember to look at this again in about 6 months, and then in a year, to see how much it has narrowed… Right now, a Big Mac costs the equivalent of $2.18 in China, and $3.71 here in the US.

Then there was this… A couple of weeks ago I told you how a very smart friend of mine said that silver had “gone parabolic” which is chartist talk… Well, if it had gone parabolic two weeks ago, I don’t know what the chartists are saying about it now, for it is $9 higher than it was two weeks ago! I have to tell you that last week, I received a note from a “source” that said the CFTC had given the Big Banks that had major short positions in silver, notice to begin to close them out… If that’s true, then it certainly explains the $9 two-week move, eh? Now, I don’t know that it’s true… But, it certainly makes sense for it to be true, and would explain why the chartists are still saying “sell at these levels” for they don’t know about the rumor…

To recap… China throws a cat among the pigeons with members of their monetary policy calling for a reduction of their dollar reserves, which would be about equal ($2 trillion) to what the Fed has printed during QE1 and QE2. This has sent investors running to gold and silver. Gold has set a new record level, and silver has a $49 handle this morning! The FOMC meeting this week will tell us a lot about the direction of the dollar… You know, I just thought of this… When it eventually comes down to the cheese that binds, the FOMC will have to decide whether they want to save the dollar, or the stock market…

Chuck Butler
for The Daily Reckoning

China Makes Plans to Diversify Its Dollar Reserves originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

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China Makes Plans to Diversify Its Dollar Reserves




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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Could These Stocks be the Next Apple, Cisco or Amgen?

April 25th, 2011

Could These Stocks be the Next Apple, Cisco or Amgen?

Companies rightly see research and development (R&D) spending as a key measure of whether a product line is fresh and capable of capturing impressive pricing and margins. When that figure is low, it's a sure sign a company is relying on older, possibly antiquated products to carry the day. And when this happens, the company often needs to cut prices to stay competitive.

Of course, a heavy reliance on newly-released products can only come through old-fashioned R&D spending. Companies such as Cisco Systems (Nasdaq: CSCO), Amgen (Nasdaq: AMGN) and even mighty Apple (Nasdaq: AAPL) have their massive R&D spending efforts to thank for their eventual success.

Heavy spending on R&D takes guts. It means that you're overspending in the near-term to build a better future. And high current expenses scare off many investors focused on short-term profits. If you've got a long-term view, you should always see how a company views R&D. Heavy spending now can deliver robust growth in the years to come.

With that in mind, I screened for companies that spend at least 35% of their revenue on R&D, focusing on companies that are expected to boost sales by at least 15% in 2012. If their R&D moves pay off, growth can stay elevated well beyond 2012. To narrow down the list, I also excluded companies with a market value below $350 million and insisted on 2010 sales of at least $50 million.

Here's what I found…

Biotech has no choice
If you operate in the pharmaceutical industry, R&D is a fact of life. More than half of the companies on the table above are making big R&D bets on new drugs. As an example, I recently profiled Human Genome Sciences (Nasdaq: HGSI), which is finally seeing a big payoff after earlier heavy R&D investments. Since my profile, Human Genome secured Food and Drug Administration (FDA) approval for a key drug that treats Lupus. The company can afford to keep stepping on the gas with other new products as well, with nearly $1 billion in the bank. Shares have risen only modestly on the FDA approval, but analysts have been increasingly warming up to the stock.

Timing is everything
A123 Systems (Nasdaq: AONE) highlights the risk of heavy R&D spending without the accompaniment of revenue. This maker of advanced batteries went public in 2009 and has already needed to raise more money on two more occasions. That really punished shares, though I as I note in this article, shares may finally be poised for a rebound.

Unlike A123 Systems, Codexis (Nasdaq: CDXS) has met or exceeded all of its anticipated milestones since coming public one year ago. Codexis provides enzymes that can catalyze biofuel production. [Andy Obermueller, editor of Game-Changing Stocks, first turned me on to the stock.]

The company's technology is also being applied to the manufacture of pharmaceuticals. Codexis still has more than $70 million in the bank. Also unlike A123, it has not needed to raise more money and may just make it to profitability without the need for any capital raising.

Codexis' revenue has been rising, moving past $100 million last year, but that's a bit deceiving. Most of that revenue has come from payments from key partners such as Shell (NYSE: RDS). To really impress investors, the company will need to show rising product sales, a process that has already begun: sales rose from $11 million in 2007 to $33 million in 2010.

Right now, Codexis is emerging as a pharmaceutical play. Drug makers are increasingly using the company's enzymes to help alter or expedite biological processes, in effect letting naturally occurring organisms more quickly digest feedstock into more productive molecules. The enzymes have been used especially in the production of anti-viral drugs.

But it's the biofuels market that holds the promise of generating major revenue by the middle of the decade. Shell worked with many young biofuel start-ups before deciding to work closely with Codexis. The two companies signed a collaborative research agreement in 2006, which has netted Codexis ongoing milestone payments. Yet it's another deal struck with Shell last August (in conjunction with Brazil's Cosan (NYSE: CZZ), a major producer of sugar-based ethanol) that has caught my eye. Shell and Cosan now jointly hold a 14% stake in Codexis and plan to use its technology to ramp up output of biofuels that can be made from other raw materials such as wheat grass or sugar cane fiber. Codexis shares rallied on the news but have since pulled back and are now below the April 2010 IPO price of $13.26.

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New Lows for Gold Silver Relationship and Monthly Views

April 25th, 2011

A lot of traders have been correctly focusing on the skyrocketing rise in Silver prices, but let’s look at the chart from a different angle.

The Gold to Silver relationship (a relative strength measure) just hit new lows this week and that’s a very big deal.

Let’s take a look at the last 30 years and go from there:

The chart below is a “Relative Strength” relationship chart that divides the price of gold (roughly $1,500) by the price of silver (just under $50 right now).

The chart tracks this difference over time.  The line over time shows which of the two precious metals was out-performing (or under-performing) the other.

Another way to see this chart is to ask “How many ounces of silver would buy one ounce of gold?” and right now, the answer is about 30 ounces of silver buys one ounce of gold.

In 2009, it took 80 ounces of silver to buy one ounce of gold and at the relationship peak in 1991, it took 97 ounces of silver to buy one ounce of gold.

Ok – that’s interesting, but what does it mean?

Generally, relative strength relationships ‘revert to normal’ or at least move towards equilibrium over time.

You can draw a horizontal line about the 70 area or perhaps 65 and call that the rough midpoint or ‘average’ price in the gold to silver relationship.

One might make an assumption that the relationship will soon try to come back into balance from this historical low of 30 (not seen since 1983).

If that assumption proves correct, then for the relative strength relationship to make a move up towards the mean or middle area, then we would expect a strengthening of gold relative to silver in the near future.

That can occur a few ways, some of which are the following:

1.  Silver prices fall dramatically while gold prices either stabilize or fall ‘less dramatically’ (the negative scenario)

2.  Gold prices begin to surge to ‘play catch up’ with the recent surge in silver while silver trades sideways or otherwise rises “less quickly” (the positive scenario)

In relative strength charting, the line rises or falls depending on the movement of one market relative to the other.

While both markets could rise together, the relative strength line (in this case) rises if gold increases “faster” or at a greater percentage than silver, and of course declines if silver rises faster than gold.

Of course, the opposite is true if price began to fall – should gold “hold its own” and stabilize or “fall less fast” than silver, the relative strength line above would rise.

Failure of these outcomes to happen – or for the relationships to change anytime soon – means the relationship line will continue extending in silver’s favor.

For reference, let’s look at the long-term monthly pure price charts of both gold and silver:

Silver Monthly:

From a simple math perspective, gold’s low in 2001 was roughly $300 and the current price of gold is $1,500 for a 500% increase.

For silver, price was under the $5 area in 2001, and the current price fell just shy of $50 per ounce for a 1,000% gain.

The bulk of the ‘instant’ gains – and main reason for the new low in the Gold to Silver relationship – was the meteoric rise in Silver with the breakout above $20 per ounce in September 2010 (just after Chairman Bernanke announced that new round of quantitative easing would begin in November).

From September 2010 to present, gold rallied from the $1,250 area to the current $1,500 area – a 20% rise.

In contrast over the same 8 month period, silver more than doubled from $20 per ounce to the present’s near-touch of $50 per ounce – a 150% increase.

And for fun, charting from the 2009 lows, gold traded at $700 per ounce and now has rallied 115% from the low.

Silver, on the other hand, rallied 500% up from $10 to the current $50 per ounce level.

Watch these markets together – and their relative strength relationship – for any signs of reversal or “mean reversion” in this long-term relationship.

The status quo remains if silver continues to outperform gold… but the mean reversion scenario suggests other outcomes such as a dramatic ‘catch-up’ rally in gold, or a ‘blow-off top’ correction down in silver.

Corey Rosenbloom, CMT
Afraid to Trade.com

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

Corey’s new book The Complete Trading Course (Wiley Finance) is now available!

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New Lows for Gold Silver Relationship and Monthly Views

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Trade This Canadian Stock for a Potential 35% Gain

April 25th, 2011

Trade This Canadian Stock for a Potential 35% Gain

If you follow the foreign exchange markets, you are probably aware of the Canadian dollar's rise against its U.S. counterpart. Canada's currency has now eclipsed the value of the U.S. dollar — it now takes roughly $1.05 U.S. dollar to buy one Canadian “loonie.”

The rising Canadian dollar is symptomatic of Canada's strength and fiscal stability. The country has remained economically robust, even during tough times for much of the rest of the world.

What is the best way for U.S. investors to participate in the economic strength of “the great white north?”

While you may be tempted to buy a solid Canadian bank or an oil and gas play, I've found a Canadian trade that not only offers an attractive dividend, but also shows strong technical and fundamental growth potential.

This company — which is a hallmark of the Canadian landscape — is the largest publicly-traded quick service restaurant chain in Canada and the fourth-largest fast-food chain in North America, based on market capitalization.

Specializing in fresh brewed coffee, donuts and baked goods, you can bet your loonie nearly every Canadian has been a patron of Tim Horton's (NYSE: THI).
To its core, Tim Horton's is a Canadian icon. The restaurant was co-founded by ice hockey star Tim Horton, who as a Toronto Maple Leaf ruled the classic Canadian sport from the 1950s through the 1970s.

Today in Canada, 80% of all purchased coffee is from Tim Horton's. And per capita, Canadians consume the most donuts in the world. Fittingly, Canada also has the most donut stores per capita on the planet — a majority of which are Tim Horton's.

At the beginning of 2011, there were more than 3,100 Tim Horton's locations in Canada. The company plans to open an additional 160-180 Canadian stores in the coming year.

The restaurant chain has edged its way into the States, battling against privately-held Dunkin Donuts as well as Starbucks (Nasdaq: SBUX). There are currently more than 600 Tim Horton's locations in the United States, with plans to add another 70-90 stores this year.

Tim Horton's is also expanding outside North America, with plans to open 120 restaurants in the United Arab Emirates and surrounding countries.

Such explosive growth should boost the company's future revenue and earnings potential.

Technically, THI appears strong.

The stock has been on Major uptrend for nearly two years and is currently trading at an all-time high around $48.

Tim Horton's shows no signs of slowing down. The stock briefly encountered minor resistance around $47.50 during March this year, but in April it broke through resistance, completing a bullish ascending triangle pattern. As such, the trend from here should be up.

The measuring principle for a triangle — taken by adding the height of the triangle to the breakout level — projects a price target of $64.77 ($48.01 – $31.25 = $16.76; $16.76 + $48.01 = $64.77).

Tim Horton's is also appealing from a fundamental standpoint.

The company reported fiscal fourth-quarter and full-year 2010 results in late February 2011. Although revenue for the quarter dropped 3.5% to $643.5 million (Canadian, CDN) from $667 million in the year-ago period, same-store-sales (revenue from stores open at least a year) increased 3.9% in Canada and 6.3% in the United States, showing important overall growth.

For the full 2010 year, revenue increased 4.1% to $2.5 billion (CDN), from $2.4 billion (CDN) in 2009, due in part to the sale of the company's 50% joint-venture interest in Maidstone Bakeries.

This year, the company expects same-store sales to rise a further 3-5%, resulting in 6.8% sales growth, or revenue of $2.7 billion (CDN). By 2012, analysts' project revenue will increase a further 6.7%, to $2.9 billion (CDN).

The earnings outlook is equally strong.

Due to the one-time sale of the company's 50% joint-venture in Maidstone Bakeries, fourth-quarter earnings surged 329.4% to $2.19 (CDN) per share, from $0.51 (CDN) in the year-ago period.

By this same token, full 2010 earnings soared 118.3% to $3.58 (CDN), from $1.64 (CDN) in 2009. Excluding the one-time bakery sale, earnings were $2.15 (CDN), representing a 31% increase from the previous year. This earnings gain was driven largely by higher profit margins, due to a shift in donut production from donuts made in-store to using pre-frozen batter.

For full-year 2011, Tim Horton's projects earnings will be in the range of $2.30-$2.40 (CDN) per share, representing at least a 7% increase as it expands its presence internationally.

By 2012, analysts' project earnings will rise a further 17% to $2.81. Even with rising coffee prices — which recently hit a 30-year high — Tim Horton's should maintain strong future profit margins, since it uses forward currency contracts to lock-in fixed coffee prices half a year to a year in advance. The company also passes on the higher costs to restaurant owners so customers don't have to pay more for their Cup of Joe.

In addition to growth potential, Tim Horton's is attractively valued, with a trailing price-to-earnings (P/E) ratio around 13.

Based on this P/E, the company has a solid PEG ratio (P/E divided by estimated growth rate) of about 0.74 (15/17.5). A PEG ratio under one usually shows solid value.
In the most recent quarter, the company announced plans to buy-back up to $445 million (CDN) of shares.

A bonus for traders, the company also announced plans to increase its quarterly dividend by an attractive 31%, to $0.17 per share (CDN). Traders interested in purchasing THI will likely see future dividend increases, as the company has consistently increased its quarterly dividend since 2006.

Given that THI is attractively valued, shows growth potential and appears technically solid, I plan to go long on the Canadian icon. I will enter a position at the opening of trading on Monday, April 25. I am setting a stop-loss of $34.57, just below historical support. Based on the measuring principle my target is $64.77.
The risk/reward ratio is approximately: 3.34:1.

Action to Take –>

Uncategorized

A Financial Atom Bomb

April 25th, 2011

Martin D. Weiss, Ph.D.

Nearly a year ago, I publicly challenged S&P, Moody’s and Fitch to downgrade the long-term debt of the United States government — to help protect investors and prod Washington to fix its finances. (Go to this page for the challenge, and here for the press release.)

In a moment, I’ll show you why their failure to respond is ripping off investors, how it’s exposing millions to a financial atom bomb, and what you can do for immediate fallout protection.

But first, this question: Did S&P finally respond to my challenge last week when it “downgraded” U.S. debt to “negative”?

To the casual observer, that might appear to be the case. But in reality, their action — much like recent steps by Washington to “fix” the deficit — was little more than smoke and mirrors.

Here are the facts:

S&P did NOT change, even by one tiny notch, its “AAA” rating for U.S. government debt. It merely changed its future “outlook” for the rating.

S&P did NOT have the courage to do what’s right for investors and for the country today. It merely said it might do something a couple of years from now.

Worst of all, S&P has done nothing to change its practices that have caused so much pain for investors in recent years. As before, it’s typically quick to upgrade its best-paying clients, but often delays meaningful downgrades until it’s far too late.

Advertisement

It’s the Greatest Financial Scandal of Our
Time, and the U.S. Government’s Triple-A
Rating Is the Most Scandalous of All.

In proportion to the size of its economy, the U.S. government has bigger deficits, more debt, plus bigger future liabilities to Medicare and Social Security than many countries receiving far lower ratings from S&P, Moody’s and Fitch.

Compared to lower rated countries, the U.S. also has a greater reliance on foreign financing, a weaker currency, and far smaller international reserves.

The U.S. government is exposed to trillions of dollars in contingent liabilities from its intervention on behalf of financial institutions during the 2008-2009 debt crisis.

The U.S. Federal Reserve, as part of its response to the financial crisis, may be exposed to significant credit risk.

The U.S. economy is heavily indebted at all levels, despite recent deleveraging.

U.S. states and municipalities are experiencing severe economic distress and may require intervention from the federal government.

The U.S government’s finances could be adversely impacted by a rise in interest rates.

The U.S. dollar may not continue to enjoy reserve currency status and may continue to decline.

Improper payments by the federal government continue to increase despite the Improper Payments Information Act of 2002.

The U.S. government had failed its official audit by the Government Accountability Office (GAO) for 14 years in a row, with 31 material weaknesses found in 24 government departments and agencies.

This is no secret. Nor am I citing original facts.

They are the same facts that have been written about extensively by Jim Grant, editor of the Interest Rate Observer, brought to light by the U.S. Government Accountability Office and widely publicized by its former chief, David Walker.

They are similar to the points made in recent warnings by the International Monetary Fund, the Congressional Budget Office, the European Central Bank, the president’s deficit commission, and even the Big Three Rating agencies themselves.

And yet, the U.S. government STILL gets a AAA rating from all three?

And all the while, other countries, which do NOT have these problems, get far lower grades?

This Doesn’t Even Pass a Simple Smell Test.
It Reeks of Egregious Conflicts of Interest.

We know that the Big Three rating agencies failed to warn investors about giant insurers that went bankrupt in the early 1990s.

We also know how they bungled their ratings of Enron in 2001 and gave stellar grades to big Wall Street firms that failed in 2008.

So it’s fair to suspect that similar problems afflict their sovereign debt ratings. Indeed …

If the Big Three rating agencies downgraded the debt of the United States government, they would come under tremendous pressure to ALSO downgrade big borrowers that count on the U.S. government for sponsorship, financing or bailouts.

But those big borrowers PAY the rating agencies huge yearly fees for their ratings and would be less willing — or even less able — to continue those payments if their debts are downgraded.

Why You’re Getting Ripped Off (and Worse!)

If you think this fundamental dishonesty doesn’t impact you directly, think again.

Even if there are no further consequences, you’ve already paid a high price for it:

The rating agencies are understating the risk of your investments, and consequently, those investments are paying your LESS yield than you deserve to compensate you for the real risk you’re taking.

This is true not only for U.S. Treasury securities, but also for virtually every bond ever issued.

If the U.S. Treasury itself were graded at its appropriate level, thousands of other securities, traditionally assumed to be of lower quality than Treasuries, would need to be seriously reviewed for parallel downgrades. But until that review takes place, many get away with paying you less interest than you deserve.

You’re also not getting a fair interest rate on bank CDs or insurance policies.

Nor is this impact limited to fixed instruments. If bonds are downgraded and must pay higher yields, nearly every other investment in the world would be pressured to do the same.

That’s why this is a financial atom bomb. And that’s why it’s shameless. If the rating agencies had rated U.S. debt honestly years ago, we might not be in this predicament.

What’s worse is that …

  • Treasury note and bond investors are exposed to far greater risks than they’re being told about. Even assuming the U.S. government never defaults, you can lose a lot of money from declining market values of notes and bonds, from the declining purchasing power of your dollars, or both …
  • Citizens and residents of the U.S. are exposed to far greater risk of rising taxes and slashed benefits payments than is implied in the triple-A ratings, and, alas …
  • Our entire country and way of life is in far greater danger than Washington or Wall Street would have you believe.

The outlook: With each day that passes, investors in the U.S. and overseas will gain greater clarity of vision, smell the dangers, and begin to recognize that the emperor has no clothes.

They will respond by taking action, driving U.S. bond prices and the U.S. dollar sharply lower.

You need to take protective steps AHEAD of time.

First and foremost, sell any Treasury notes and bonds that you may still be holding — either directly or via a fund. Bonds (defined as 10 to 30 years) are the riskiest. Notes (one to 10 years) are also subject to declines, especially in the longer maturities. And bills (under one year) are the least risky.

Second, for protection against falling bond prices, Weiss Research’s Mike Larson recommends inverse Treasury ETFs like TBT — a fund that’s designed to go up 2% when Treasury bond prices fall by 1%.

Third, for protection against a falling dollar, consider ETFs that buy exclusively the strongest foreign currencies like the Australian dollar and Brazilian ETF.

Fourth, to hedge against inflation, gold ETFs like GLD are among the simplest solutions.

And above all, stay SAFE!

Good luck and God bless!

Martin

Read more here:
A Financial Atom Bomb

Commodities, ETF, Mutual Fund, Uncategorized

Three Words That Could Help Fix the US Monetary System

April 24th, 2011

Choppy week in the markets, wouldn’t you say? Gap down one day, gap up the next. That’s what you get when the tub is full of Fed-faked funny-money. Bigger waves…more tumult…less predictability. And a whole lotta motion sickness along the way.

Markets are always and forever in a process of price discovery, torn between demand for lower prices from buyers on one side, and the profit motive from sellers on the other. Somewhere in the middle, the two parties will come together to exchange their goods and services. In other words, they “discover” an agreeable price at which everyone finds value. This is what the free market does naturally. Low prices invite demand…driving prices higher. High prices invite competition (supply)…driving prices lower.

Obviously, therefore, you expect a bit of movement, a bit of price fluctuation as buyers and sellers jostle for position. What you don’t expect is multi-hundred point daily swings in the stock markets. You don’t expect gold to jump $20, $30 or more in a 24-hour period. (Remember, before FDR confiscated all the gold in the land back in 1933, an ounce of gold was only “worth” $20. More correctly, a dollar was worth 1/20th an ounce of gold. Then, in one fell swoop, the original New Dealer “revalued” the metal to $35 an ounce, thereby devaluing the dollar to 1/35th an ounce of gold.)

The point is, a $20 or $30 movement in the price of gold back then would have been unthinkable (but for political strong-arming). Today, with the dollar having been beaten, bludgeoned and fisticuffed down to less than 1/1,500th an ounce of gold, twenty bucks here or there is hardly worth mentioning, such is the woeful state of the world’s leading fiat money.

Of course, markets don’t demand fiat currencies. Free individuals don’t wake up one day and say to themselves, “Gee… Wouldn’t it be nice if we had an unquestionable, unaccountable, centrally controlled monopoly on counterfeiting to help debase our medium of exchange, saddle the populace with that most insidious of all taxes – inflation – and to sell our kiddies future down the drain? I know, let’s create a Federal Reserve!”

Such institutions don’t come about “naturally.” They require political pull and the gun-for-rent that is the government. They take cover behind rooking legalese, as is found in “The Federal Reserve Act of 1913,” and the absurd prevarications of its “dual mandate,” which is, at present, sold to the terminally credulous public under the noble-sounding, though entirely erroneous mission statement of “price stability and maximum employment.”

Anyone with a basic, non-Ivy League-approved understanding of economics knows this to be a ridiculous goal in the first place. For one, gold takes care of price stability itself. Has done for thousands of years. Price instability is the direct result of fiat monies and manipulation of the money supply by self-serving central banking cartels. From tulipmania to techmania, one can find, at the rotten heart of every inflationary crisis, a central banker with an equally rotten brain and/or heart.

As for the “fetish of full employment,” as Henry Hazlitt so eloquently explains in his classic, Economics in One Lesson:

“The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it [financially] unnecessary for millions of women to take jobs.

“The real question,” continued Hazlitt, writing in 1946, “is not how many millions of jobs there will be in America ten years from now, but how much shall we produce, and what, in consequence, will be our standard of living?”

The Fed is the work of Woodrow…a creature of Congress. As George F. Will, writing in The Post, once put it, mission creep is part of the “metabolic urge” of government agencies. The Fed is no different. It is an Ouroboros running out of tail on which to feed. There’s nothing free market about this beast, Fellow Reckoner…and nothing free market about the economy that stands on its sunken shoulders.

Without space for competing currencies, the invisible hand is bound and cuffed, unable to feel around in the dark, to set reliable prices. Value is distorted, malinvestment promoted.

In the end, you get unpredictable stock market volatility and a dollar shaved to within 1/1,500th of its life. Exactly what you’d expect, in other words.

The solution? Here, a modest suggestion:

End…The…Fed.

Instead, allow competing banks to issue competing currencies. Allow the fundamental underpinning of an economy – it’s medium of exchange – to discover its own “fair value.” Witness competition weed out banks that lend imprudently and that rip off customers, to the favor of those operating with prudence and fiscal integrity. Watch institutions that choose to issue baseless, paper money go bust without federal bailout funds and those that adhere – freely, without let or hindrance – to a gold standard garner the public trust their thrift and judiciousness earns them.

Wishful thinking, you say? Well, until such a time comes to pass, here’s another suggestion, courtesy of our Reckoner-in-Chief, Bill Bonner:

“Buy gold. Be happy.”

Cheers,

Joel Bowman
for The Daily Reckoning

Three Words That Could Help Fix the US Monetary System originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Three Words That Could Help Fix the US Monetary System




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

Expatriate Your Wallet

April 22nd, 2011

If everything you own is held in your own name in your own country, then you are not merely exposed, you are vulnerable absolutely, to whatever decisions the government might make about how you should behave and who gets the wealth you’ve earned. Tomorrow’s new government measure, which might land out of the blue, could be a law that affects everyone, or it could be a rule devised to deal with people like you. Or, it could be an administrative action aimed at you alone. In any case, with all your assets at home, you’d find out how the lobster feels when his trap is being hauled out of the water. Nothing he can do about it.

The only way to protect yourself against the risk of being boiled in a government pot is to keep some of your assets in another country. Depending on how you go about it, the specific benefits you might achieve are:

  • Protection from currency exchange controls
  • Protection from the confiscation of precious metals
  • A lower profile as a lawsuit target
  • Income tax planning advantages
  • Estate planning advantages
  • Easier access to investments in other countries
  • A measure of financial privacy
  • Practical readiness to move additional assets quickly
  • Psychological readiness to think and act internationally when you need to

There are many ways to go about getting those benefits. None is right for everyone, and they all come with some element of cost or inconvenience. Here’s the main menu.

Small bank account. A small account at a foreign bank gives you a ready and private landing spot if you ever decide you want to move a large amount of money in a hurry. If you’re a US person, the account is non-reportable, so long as the balance (together with any other foreign financial accounts you own) never reaches $10,000.

Large bank account. A large account at a foreign bank also provides a landing spot for anything you want to send later. If foreign exchange controls are ever imposed, the new rules may require you to repatriate the money – or they may not. Depending on the specifics of the new rules, your account may be grandfathered. In that case, the overseas funds would enable you to travel outside your own country while others are forced to stay at home.

A foreign bank account also slows things down if you’re ever under attack. It’s safe from an instant seizure by functionaries of your own government or by the unassisted order of a court in your own country.

The disadvantage of a large bank account vs. a small bank account is the loss of privacy. If you’re a US person, you are required to report your foreign financial accounts if their aggregate value reaches $10,000.

Physical gold. Gold stored in a safe deposit box in a foreign bank is not a foreign financial account, nor is physical gold in segregated storage with a non-bank safe-keeping facility. So a US person can store an unlimited amount of metal that way without triggering any reporting requirements. Avoiding a need for annual reporting is a plus, but don’t rely too heavily on the privacy you get with a safe deposit box, since the steps the gold takes to get there may create records of their own.

Foreign variable deferred annuity. As with an annuity issued by a US insurance company, a variable annuity issued by a foreign company is tax-deferred for a US investor until he withdraws the earnings. The annuity can be invested in major currencies or in portfolios of international stocks and bonds. If the annuity is big enough (a minimum of $1 million or more, depending on the insurance company), it can be invested in real estate, a private business, or just about anything else.

It’s only conjecture, but if foreign exchange controls are imposed, they are unlikely to disturb any foreign annuity that’s already in place, which is a big plus for an annuity vs. a foreign bank account.

A foreign variable deferred annuity isn’t private for a US investor. When you buy one, you generally must file an excise tax return and pay a 1% tax, and you must report the annuity as a foreign financial account.

Swiss immediate lifetime annuity. A Swiss annuity that begins paying you an annual income when you buy it isn’t a foreign financial account, which may save you a reporting burden. And under a tax treaty with the US, Swiss annuities are exempt from the 1% excise tax. There’s nothing private about it, however, since part of each annual payment you receive will be taxable income.

You can make it difficult for a creditor (such as someone who won a lawsuit against you) to get his hands on a Swiss immediate lifetime annuity by electing not to have the option to cash it in. A forced assignment to a creditor generally would not be valid under Swiss law.

Offshore mutual funds. The array of mutual funds available internationally is even broader and more varied than what’s available in the US. And, like a foreign bank account, your share account with an offshore fund is safe from a lightning seizure by your own government. But for a US investor, an investment in a foreign mutual fund comes with certain tax disadvantages. They are tolerable if you handle the investment properly or truly ugly if you don’t. And your shareholder account would be a foreign financial account and so would be reportable.

Offshore LLC. You can use a limited liability company formed outside your home country as an international holding company. It, not you personally, would buy and hold the overseas investments you want.

An offshore LLC can be designed to be very unfriendly to your potential future lawsuit creditors, even more so than an LLC formed in the US. An additional plus is that while many banks, mutual funds, insurance companies, and other financial institutions shun business from individual Americans, many of the shunners will welcome business from a non-US LLC even if it is American-owned.

An offshore LLC owned by a single US person (or by husband and wife) can elect to be treated as a disregarded entity for US income tax purposes, which makes it absolutely income-tax neutral. Or it can elect to be treated as a partnership, which makes it almost income-tax neutral. The LLC also can be used for estate-planning in the same way as a US LLC.

By the ratio of benefits to cost and complexity, an offshore LLC rates especially high. But it does not eliminate your reporting burden. If the LLC owns a large foreign bank account, you will be required to report it. And there will be annual reports for you to file about the LLC itself.

Foreign real estate. A direct investment in foreign real estate is free of any special US tax or reporting rules. It’s just like buying a farm in Kansas. It would also present added difficulties for a lawsuit creditor looking for ways to collect. And it is unlikely that any regime of foreign exchange controls would touch existing foreign real estate investments.

Foreign real estate can also pay you a psychological dividend. Knowing you have a place to go to, should you ever want or need to go, provides a sense of security. That apartment in Buenos Aires or the acreage in New Zealand means you’ll never be a lobster.

Foreign real estate partnership. By investing in a private foreign partnership or LLC that owns foreign real estate, you can achieve all the advantages of a direct investment. In addition, you increase your protection against foreign exchange controls and lawsuit creditors because there is no ready resale market for your partnership interest.

International IRA. An IRA or a solo 401(k) is permitted to own anything other than life insurance and so-called “collectibles.” Anything.

Some IRAs and solo 401(k) plans own a domestic limited liability company and use it as a vehicle to buy and hold other investments. Such an LLC can own an offshore LLC that does the real investing. As with your direct ownership of an offshore LLC, this does nothing to reduce your reporting duties; in fact, it adds to them.

The advantage of such an arrangement is that it allows you to internationalize your retirement plan. Anything international you might do with your personal investments, you can do with your IRA’s investments. And it’s the ideal structure if you want to invest in offshore mutual funds. The IRA short-circuits the special tax rules that apply to investments in offshore funds, and the offshore LLC’s shareholder account application is likely to get a warmer reception from the fund than would your own American hand knocking on the door.

Private international investment contract. Depending on your circumstances, it may be possible to structure an investment contract between you and an international financial institution that is tax-deferred, non-reportable, and protected from future exchange controls or prohibitions on owning gold. This is custom work, so, of course, it’s only practical for large chunks of capital.

International asset protection trust. A properly structured international asset protection trust provides the maximum level of protection from anything that happens in your own country. It does so by leaving you with a measure of influence, but not control, over the trustee. The trustee is outside of your home country and thus is not subject to its laws. And you don’t possess the authority to compel the trustee to invest or distribute the trust fund in any particular way. Thus there is no direct means for your own government to impose any regime of exchange controls or investment restrictions on the trust fund.

An international asset protection trust is far and away the most powerful of all financial planning devices. Handled properly, it is virtually impenetrable to future creditors and is especially helpful in estate planning. It is also the most complex device and hence the one most likely to be handled ineptly. And of all the tools mentioned in this article, it comes with the heaviest reporting burden if it is funded by a US person.

Of course, this is the briefest of overviews of a complex topic. For specific guidance on each of the menu items listed, and pros and cons related to your own circumstances, you’ll need to seek qualified counsel.

Regards,

Terry Coxon
for The Daily Reckoning

Expatriate Your Wallet originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Expatriate Your Wallet




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.

Mutual Fund, Real Estate, Uncategorized

Where to Find the “Anti-Dollar” (Hint: It’s Not Gold)

April 22nd, 2011

There’s a currency I think of as the “anti-dollar” that continues to appreciate against the US dollar.

Unlike gold, the “anti dollar” can be used to maximize other investments. I’ll reveal this currency in a moment.

But first, why would you want an “anti-dollar” in the first place?

The US has a multi-decade history of borrow and spend. Worse than that, it’s more extreme today than ever before. The government has to borrow about half of what it spends. And policy makers are printing money like crazy to “stimulate” the economy (even if they do give it fancy names like “quantitative easing”).

If there is more money but the same amount of things to buy with it, prices of the things go up, measured in money. This is inflation, and it shows up in different places at different times. Whether its food, gasoline or house prices.

This might sound a bit weird at first, but money has a price like everything else. Looked at in reverse, inflation means the “price” of money has gone down, when measured in “things.” Money has lost value. It buys less.

One way to protect yourself from inflation is to have investments in stronger currencies. These can be held as cash, bonds, stocks, or real estate. Where I live in Argentina, the locals keep their savings in dollars, because they keep their value better than Argentine pesos. Everything’s relative. But there are much stronger currencies than the US dollar.

One such strong currency is the Singapore dollar (SGD).

A hedge fund trader who is a friend of mine recently described it to me as an “Asian version of the Swiss Franc”. This is a big compliment. Switzerland’s currency has been strong for decades, and is well known as a safe haven in times of trouble.

The reason that Switzerland, and now Singapore, have strong currencies is that these countries live within their means. While the US borrows and spends, these countries earn and save. This is how people get rich, and it’s the same for countries. No one got rich by spending money faster than they earned it.

In 2009, Singapore’s current account balance – the net money coming into or going out of the country – was a surplus of $26 billion. That was just behind Saudi Arabia, the world’s biggest oil exporter. By comparison, the US had a deficit of $420 billion!

Singapore has very low external debt. That means it owes very little to people overseas. Again this is the opposite of the US, which owes trillions to places like China, Japan and Saudi Arabia.

And foreign exchange reserves – the country’s rainy day piggy bank – work out at $40,000 for every man, woman and child.

In the future, Singapore has a crucial advantage over Switzerland. Switzerland sits in the middle of the “old continent” of Europe, which looks set for a decade of slow growth and stagnation.

But Singapore sits in the middle of Asia – in fact right on some of the busiest shipping lanes in the world. And Asia is home to 60% of the world’s population, and with many decades of fast economic growth ahead of it.

This means that over time the Singaporean dollar is likely to gain value against the US dollar. In fact over the past five years it’s gained over 23% in value, measured in US dollars.

That’s a really useful kicker to any type of investment. So I’m on the hunt for ways to profit from the Singaporean “anti-dollar”. You should be, too.

Regards,

Rob Marstrand
for The Daily Reckoning

Where to Find the “Anti-Dollar” (Hint: It’s Not Gold) originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Where to Find the “Anti-Dollar” (Hint: It’s Not Gold)




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.

Real Estate, Uncategorized

Emerging Market Growth and Prosperity from Brazil to China

April 22nd, 2011

We’re a bit foggy-headed this morning, Fellow Reckoner. We blame the locals. Unlike their Argentine cousins who, despite growing some of the best wine in the world, barely drink, the Brazilians really know how to party. Not that they don’t have good cause to…

Brazil is on top of the world these days. And the whole world is coming to its cities to catch the view. They’ll host the soccer World Cup here in a few years, and the Olympics a couple of years after that. Head down to Ipanema Beach on any given afternoon and you’ll quickly discover that the whole country has taken to the running tracks and the volleyball courts. Everybody is in training. They must think hosting the Olympics means everyone gets to compete in it! Well, at least they’ll all look good in the grandstands…something the impossibly beautiful people here don’t have too much trouble doing.

Oh yes, and their economy is booming too. Their currency, the real (BRL), goes from strength to strength. Offshore oil discoveries are coming online thick and fast. And, on the world stage, the Brazilians are carving out a larger slice of the geopolitical pie, pressing hard for more favorable trade deals alongside their “BRIC” brothers and sisters. Just this week the four emerging juggernauts – along with newly christened member, South Africa – agreed to begin transacting more in their own currencies, shunning the once mighty dollar.

“If China buys up Brazilian soybeans,” explained Addison in The 5 a couple of days ago, “or Brazil buys finished goods from Russia, such as they are…the countries have unilaterally agreed to transact their deals in real, yuan, or rubles…and now rand…bypassing the greenbacks you have stuffed in your wallet.”

Addison’s takeaway from the deal? “Get used to it.”

Yes, Fellow Reckoner, the world is turning. The “mighty” are fast becoming the “once mighty”…and the “once fallen” nations are registering growth figures the developed world can only dream about.

That’s one of the reasons we love to travel. There’s something about being in a country with real growth, with real economic expansion and activity that you just can’t read about in the pages of a magazine or see on TV. It’s real…and it’s exciting. You can feel it in the air and hear it in the people’s voices. They know that better days are to come, that every sunrise brings with it a new opportunity, a new day to seize. That’s not to say there aren’t bumps and hurdles along the way, of course. But they are the kinds of bumps and hurdles that one scales on the road to a bigger and better future…not the kind that precede a fall from great heights…to even greater depths.

The world economy today is a tale in two parts. One is the story of the weakening, faltering developed world. It is a tale familiar to readers of these pages, one mottled with debts and deficits and all that goes along with political chicanery and bumbling bureaucracy. It is a story, increasingly, of frustration and despair. The other gives cause for hope and optimism. This is a tale of graduating middle classes, rising wages and living standards and opportunities for the tens of millions who are daily striving to capitalize on them.

Thanks to the age we live in – where one can be in Buenos Aires for breakfast and New York for dinner…where individuals can transact with others anywhere in the world with the click of a mouse – we have an opportunity, largely, to choose which story we wish to take part in. You can invest your money – and your time, your life – playing a part in a “first world” tragedy…or a “third world” rags to riches story.

Joel Bowman
for The Daily Reckoning

Emerging Market Growth and Prosperity from Brazil to China originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Emerging Market Growth and Prosperity from Brazil to China




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

UK Memos Reveal Iraq Invasion, Oil Industry Ties

April 22nd, 2011

Open acknowledgment has yet to surface quite the same way in the US, but the UK has now readily exposed — in over 1,000 Freedom of Information documents — that, at a minimum, five meetings between UK public officials and BP and Shell representatives took place in 2002. In a series of post-invasion contracts, 50 percent of Iraq’s 120 billion barrels of oil reserves were snapped up by industry participants including China National Petroleum Company and BP.

According to The Independent:

“Five months before the March 2003 invasion, Baroness Symons, then the Trade Minister, told BP that the Government believed British energy firms should be given a share of Iraq’s enormous oil and gas reserves as a reward for Tony Blair’s military commitment to US plans for regime change. The papers show that Lady Symons agreed to lobby the Bush administration on BP’s behalf because the oil giant feared it was being ‘locked out’ of deals that Washington was quietly striking with US, French and Russian governments and their energy firms.

“Minutes of a meeting with BP, Shell and BG (formerly British Gas) on 31 October 2002 read: ‘Baroness Symons agreed that it would be difficult to justify British companies losing out in Iraq in that way if the UK had itself been a conspicuous supporter of the US government throughout the crisis.’ The minister then promised to ‘report back to the companies before Christmas’ on her lobbying efforts. The Foreign Office invited BP in on 6 November 2002 to talk about opportunities in Iraq ‘post regime change’. Its minutes state: ‘Iraq is the big oil prospect. BP is desperate to get in there and anxious that political deals should not deny them the opportunity.’

“After another meeting, this one in October 2002, the Foreign Office’s Middle East director at the time, Edward Chaplin, noted: ‘Shell and BP could not afford not to have a stake in [Iraq] for the sake of their long-term future… We were determined to get a fair slice of the action for UK companies in a post-Saddam Iraq.’ Whereas BP was insisting in public that it had ‘no strategic interest’ in Iraq, in private it told the Foreign Office that Iraq was ‘more important than anything we’ve seen for a long time’.”

Despite indications to the contrary throughout the build up to the Iraq war, the UK was clearly making a concerted effort “to get a fair slice of the action for UK companies in a post-Saddam Iraq.” That the reality of the situation differs so fully from the party line comes as no surprise, but the indifference for the truth reminds us of another not-so-convincing set of press briefings…

You can read more details in The Independent’s coverage of how secret memos have exposed a link between oil firms and invasion of Iraq.

Best,

Rocky Vega,
The Daily Reckoning

UK Memos Reveal Iraq Invasion, Oil Industry Ties originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
UK Memos Reveal Iraq Invasion, Oil Industry Ties




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

Warning: Investors Still Confident in the US Bond Market

April 22nd, 2011

First let us catch up with a news report from earlier this week. Bloomberg:

April 18 (Bloomberg) – Standard & Poor’s put a “negative” outlook on the AAA credit rating of the US, citing a “material risk” the nation’s leaders will fail to deal with rising budget deficits and debt.

“We believe there is a material risk that US policy makers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013,” New York-based S&P said today in a report. “If an agreement is not reached and meaningful implementation does not begin by then, this would in our view render the US fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

Well, the press described the news as a “warning shot” or a “wake-up call.” Both of those descriptions are fairly positive. You get a warning shot…and you can turn around. You get a wake-up call and you wake up.

But what do you do when you’re running the world’s biggest Ponzi scheme? Do you stop? Do you “wake up”?

No, you deny it! “Don’t worry,” you tell investors.

The New York Times:

…Treasury secretary, Timothy F. Geithner…said on Fox Business Network there was “no risk” that the United States would lose its AAA credit rating, disagreeing with Standard & Poor’s negative assessment, and said that investors were still confident in government bonds.

Well, yes. Investors are still confident in US bonds. Then again, investors were still confident in US houses in 2007…and still confident in US tech stocks in 1999.

It is only because they are confident that bond yields are so low. But what would bond yields do if investors began to be less confident? Imagine where the price of gold would go!

Well, it turns out that confidence goeth before a fall. Especially in the bond market. Bond market cycles move so slowly that a whole generation of investors is led into great confidence…and then another generation mistrusts them forever. The proof comes to us from a report from Credit Suisse, by way of our Family Office strategist, Rob Marstrand. Rob is looking for real returns over long stretches of time. Bonds work…but like everything else, only sometimes. And this is not one of those times.

If you go to an investment manager and tell him you want to invest some money for your children, safely, securely, most likely he’ll tell you to buy bonds. And he’ll be right – but only when the bond market is in one of its boom phases. When it goes into a bust phase, watch out. You could be looking at losses for 50 years. Or maybe even permanent losses.

Rob reports:

The [Credit Suisse] report highlights two major periods when US bonds were in bear markets in real terms. The first was between August 1915 and June 1920. Bond values declined 51% and then remained underwater until August 1927. The recovery period from start to finish was 12 years. Or about the same as the recovery periods for stocks.

But far worse was the second bear market. Between December 1940 and September 1981 bonds fell 67% in real terms. And they took until September 1991 to get back to even. In other words, the bond market recovery period was over 50 years!

And some countries have had negative real returns in their bond markets for the entire 111 years covered by the study – including Belgium, Finland, Germany, Italy, and Japan.

US bonds have been going generally up in the US ever since Paul Volcker tamed inflation in 1983. That’s a long period in which to form opinions. Not surprisingly, the opinion shaped by this upward stretch is that investors have nothing to fear from US bonds. Confidence is high. But so is the risk of disappointment.

Today, the feds are committed to EZ money. We look around. We don’t see a Fed putting on the brakes after a “warning shot.” Instead, we see America’s central bank going full speed ahead. We don’t see a “Tall Paul” Volcker raising rates. Instead, we see “Short Ben” Bernanke holding them down at zero. We don’t see an administration “waking up” to the need to cut spending; we see the Obama Team dead asleep on the job, dreaming of more income redistribution, more social programs, more tax-the-rich money raisers…with no real idea of what is going on.

What we see is a huge Ponzi Scheme…where old debts are serviced only by raising new ones. The schemers don’t know it, but they’re on the road to Hell.

Bill Bonner
for The Daily Reckoning

Warning: Investors Still Confident in the US Bond Market originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
Warning: Investors Still Confident in the US Bond Market




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

China Looks to Invest More in the Eurozone

April 22nd, 2011

Good day… And a Happy Friday to one and all! It’s Good Friday, to boot! That means the stock market is closed today, and the bond market will close at noon. Banks, however, are open… Most of Europe is closed today, and will be again on Easter Monday… But, the big thing to me, is simply that it’s Good Friday…

Well… The two consecutive nights of ambushing the dollar came to an end last night. In fact, the profit taking began yesterday during the day… Not a lot of profit taking, but some, which took the bloom off the rose for the currencies… Gold and silver on the other hand are still kicking sand in the dollar’s face… Yesterday, I said something about the gold/silver ratio… I misspoke when I said that the ratio had fallen below 20… No worries, it’ll get there in my opinion, in due time… In due time… But there’s no denying that the ratio has fallen, eh?

So… Speaking of gold and silver, how does $1,509.60 and $47.10 respectively sound, this morning? I thought you would like that very much, unless, of course, you’ve been waiting for a pull back to buy! Geo-political problems persist, money printing continues on, and near zero interest rates in the US and Japan continue to work in gold and silver’s favor… And, let’s not forget the deficits in the US and Japan, and that S&P fired a warning shot across the US’s bow this week…

Did you see this? Americans have turned more pessimistic about the outlook for the US economy, according to a New York Times/CBS News poll. The number of participants who said the economy is getting worse increased 13 percentage points in one month. Confidence that a recovery is under way has nearly disappeared, the poll found. Maybe, just maybe, those people that changed their minds, became realists… And quite frankly, I have to say that it’s a good thing… Because if you are a realist, you don’t sugarcoat things, you simply call them the way you see them.

The price of oil is up another buck ($1) this morning, at $112.29… This is the level it reached a couple of weeks ago, and then plummeted back down. So, it will be interesting to see where this goes now… My guess is that it bounces off that and goes back down again… But then on the third try, it soars past $112, and we all see what it’s like to pay $5 per gallon for gas! UGH!

Hey! Am I imagining this? Was it a dream, or do I truly remember about three years ago, when the price of oil soared to $140, that lawmakers were screaming bloody mercy, strapping themselves to gas tanks, and pointing the blame finger at those “awful” oil company executives? Hmmm… If that really happened, and I really don’t believe I was dreaming, where are they now? Why isn’t this as big a deal as it was three years ago?

So, as I said yesterday or the day before… Today is a tricky day, with not a lot of volume, with Europe closed, and the US stock market closed… We could be in for some really crazy wild swings today, and then again, maybe the Big Shot currency traders have already headed to the Hamptons, and left the book with the Junior people, with instructions to not take any positions… And if that’s the case, then today’s price action will be very muted.

As I look at the currency screens I see that for the most part, the currencies are trying to mount a charge on the dollar, but just don’t have the leg strength to make the push. Every time I see the currencies begin to gain, they fall back this morning… Which is a great indication that there’s no volume to carry these moves further. And, unfortunately…it indicates to me that by the end of the day, we could very well see the currency levels lower…

OK… Yesterday, Canada received some good news, when they printed February’s retail sales figure, which rebounded to +0.4%… Canada’s retail sales had printed negative numbers in December and January, so, it was important to see this turnaround. The Canadian dollar/loonie (CAD) is trading around $1.05, and we all know that the Canadian government – in the past, that is – doesn’t like the loonie above parity, as it hurts tourism… But, I think the Canadian government is looking past this now, as they see the carnage of an economy in the US and want to put 100 miles of desert between their hides and that of the US!

And remember, how I’ve told you that China wants the next reserve currency of the world to be their own renminbi (CNY)? There are a number of reasons I believe this, and you need to come hear me talk in Las Vegas in three weeks to hear those reasons! But, here’s a thought for you on this Good Friday… China has loaned the US more than you can shake a stick at… And now China is helping the Eurozone out… I mentioned this at some time before, but why not? If I were China, I would be unloading those dollars they have on reserve, and loaning them to Europe… Then China will have the US and Europe in their back pocket, right? OK.. Then I read this on Reuters last night…

China signaled on Thursday it was ready to buy more debt from the euro zone’s weaker states, in a move to help stabilize the bloc’s fragile finances and protect its business interests.

After investing billions of euros in Portuguese and Greek bonds to [diversify] its “huge” foreign exchange reserves away from the dollar, China was now considering buying more, Song Zhe, Beijing’s ambassador to the European Union, said.

This past week, I was reading about the BRICS meeting last week, and a lot of things were said at that meeting, and I’ve mentioned a few of them here… But something that Brazil’s Mantega (Finance Minister) said, kind of just flew right past me, until… I read this statement by Australia’s Finance Minister, Rudd…

First, Mantega claiming that the “Currency War was still on” didn’t register with me, for I’m not a believer of the currency war… But then Australia’s Foreign minister Rudd’s says: “Australia won’t manipulate its currency and countries that do will pay a price.” WOW! That’s right, Mr. Rudd! You tell ’em! I feel like singing the words from “The Wall”… We don’t need no intervention…. We don’t need no trade controlled… Nor dark closed back door deals… Hey, central bankers, leave those currencies alone!

OK… That was fun! What’s not fun, is seeing the Weekly Jobless Claims here in the US remain above 400,000 each week, like they did last week at 403,000… This unemployment problem here in the US remains in a dark hole, and there’s very little climbing out of the hole going on… Unemployment and housing are two HUGE hickeys for the US to deal with… And in the past, we would have taken those challenges and made them a positive… But that was before we were burdened with debt coming out of the country’s ears… All time and effort is steered toward dealing with the deficit, and how to finance it, etc.

I think that I’ll go to the Big Finish here, and make this somewhat short-n-sweet, as there’s just not a lot of new stuff to talk about, with Europe closed, and it already being the weekend down under…

Then there was this… There’s been lots of rhetoric lately about a “one-off revaluation” of the renminbi… Some people believe this will be a large revaluation for the renminbi… I’m just not on that train… The train I’ve boarded is the one that believes that if China does decide to revalue the renminbi it would be a small revalue if they do it at all! Instead, believing that China will just decide to open the dam a bit more, and allow more appreciation of the renminbi… I could be on the wrong train, but I don’t think so…

To recap… It’s Good Friday, so most markets are closed, or will be closing early. The nightly ambushes the dollar was experiencing this week ended last night, with a bit of profit taking, after the currencies had moved quite far and quite fast this week. Gold and silver continued to shine brightly versus the dollar, with gold reaching yet another all-time record high, and silver trading to $47!

Chuck Butler
for The Daily Reckoning

China Looks to Invest More in the Eurozone originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

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China Looks to Invest More in the Eurozone




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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2 Stocks With a New $1 Billion Opportunity

April 22nd, 2011

2 Stocks With a New $1 Billion Opportunity

Coffee chains like Starbucks (Nasdaq: SBUX) get the lion's share of press when it comes to the $7 billion fresh coffee market. And up until now, the company has focused primarily on the chain retail side of the coffee business. What investors haven't realized is that 86% of coffee drinkers consume coffee at home. That's $2 billion worth of business that has largely gone ignored. Until now, that is.

Firms formerly focused on the retail side of the coffee business, including Starbucks — the very company that brought coffee shops to the masses — is venturing into the all-important home coffee market and is combining forces with the market leader in the space. The combination represents a compelling investment opportunity.

The vast majority of the coffee market's growth potential lies with in-home product offerings. For investors, the profit potential lies in single cup serving home machines. Back in 2004 and 2005, the leading food players came out with single-serve coffee systems, whereby a single “pod” is placed in a coffee machine that combines the pod with hot water for a single-serving cup of coffee. Sara Lee's (NYSE: SLE) Senseo machine came out in 2004 and was followed by the Nespresso machine from Nestle and the Tassimo device from Kraft (NYSE: KFT) in late 2005.

These single-serve systems have seen modest success since being introduced, but they have been eclipsed by the popularity of Green Mountain Coffee Roaster's (Nasdaq: GMCR) Keurig brewing system. Green Mountain is currently the only pure-play firm in the space, and its incredible 458% gain in less than two years is illustrative of the fact that it now commands between 70% and 80% of the single-serve coffee market in the United States.

Uncategorized

2 Stocks With a New $1 Billion Opportunity

April 22nd, 2011

2 Stocks With a New $1 Billion Opportunity

Coffee chains like Starbucks (Nasdaq: SBUX) get the lion's share of press when it comes to the $7 billion fresh coffee market. And up until now, the company has focused primarily on the chain retail side of the coffee business. What investors haven't realized is that 86% of coffee drinkers consume coffee at home. That's $2 billion worth of business that has largely gone ignored. Until now, that is.

Firms formerly focused on the retail side of the coffee business, including Starbucks — the very company that brought coffee shops to the masses — is venturing into the all-important home coffee market and is combining forces with the market leader in the space. The combination represents a compelling investment opportunity.

The vast majority of the coffee market's growth potential lies with in-home product offerings. For investors, the profit potential lies in single cup serving home machines. Back in 2004 and 2005, the leading food players came out with single-serve coffee systems, whereby a single “pod” is placed in a coffee machine that combines the pod with hot water for a single-serving cup of coffee. Sara Lee's (NYSE: SLE) Senseo machine came out in 2004 and was followed by the Nespresso machine from Nestle and the Tassimo device from Kraft (NYSE: KFT) in late 2005.

These single-serve systems have seen modest success since being introduced, but they have been eclipsed by the popularity of Green Mountain Coffee Roaster's (Nasdaq: GMCR) Keurig brewing system. Green Mountain is currently the only pure-play firm in the space, and its incredible 458% gain in less than two years is illustrative of the fact that it now commands between 70% and 80% of the single-serve coffee market in the United States.

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