Month: May 2012

Article by Investment U

Below I’ll show you a more affordable way to play Apple’s expected growth, but first let me show you why I’m so confident in the stock…

Apple (Nasdaq: AAPL) let us know last Tuesday that once again the company knocked it out the park.

It had an unbelievable second quarter in 2012, largely due to strong iPhone sales – again.

Analysts last month tried to read between the lines on earnings reports from Verizon (NYSE: VZ) and AT&T (NYSE: T), and figured there would be lower iPhones unit sales. The stock got pretty beat up for week. However, Apple showed that iPhone distribution isn’t a two-trick pony.

I’m certainly bullish on Apple, but I also don’t want to tie up all the money it takes to acquire shares in the $600-range. Below I’ll show you a more affordable way to play Apple’s expected growth, but first let me show you why I’m so confident in the stock…

$1,000 By 2014?

Let’s start with earnings. Expectations were $10.07 per share, and Apple went above and beyond with $12.30 in earnings on $39.2 billion in revenue. And if you haven’t heard, the second quarter is usually Apple’s worst. Yet, Apple delivered its second-best quarter in history – with last quarter being the best.

Apple’s first quarter this year raised the bar on results both in terms of revenue levels and gross margin. According to Forbes’ Darcy Travlos, this year’s first quarter was the highest gross margin quarter at 44.7%, only to be bested this quarter by a gross margin of 47.4%.

She goes on to say, “Apple can continue to deliver these beats on expectations by putting a major emphasis on its supply chain and, for the last couple of product releases, by keeping its form factors consistent so that it can continue to improve manufacturing efficiencies.”

In early April, some analysts projected the stock could surge to $1,000 by 2014.

Think about it. Who doesn’t want a stock forecasted to get to a $1,000 a share that right now is trading in the $590 range?

In fact, there are a lot of “sexy” equities in the market like Apple, MasterCard (NYSE: MA), Priceline (Nasdaq: PCLN) and Google (Nasdaq: GOOG) that are priced in the hundreds. You want to get in on the growth, but the average investor is priced out, regardless of attractive fundamentals.

The Bull Call Spread

Options strategies can allow you to get in the game without leveraging the farm. Sometimes the mere mention of options trading can put the fear of God into the average investor – and to be fair, there is a ton of risk if you don’t know what you’re doing.

But I think this specific strategy, and an example, can show how this can be done fairly easily. It’s called a “bull call spread.”

The bull call spread, or vertical call spread, is when you buy call options at a specific strike price while also selling the same number of calls of the same asset and expiration date at a higher strike.

As the name implies, a bull call spread is used when you believe a security is going up. The most you can gain is the difference between the strike prices of the long and short options, less the net cost of options.

In the March 26 issue of Barron’s, Striking Price columnist Steven M. Sears gives a pretty good example of how this works:

With Apple at $601.31, investors can buy Apple’s January $600 call that expires in 2013, and sell Apple’s January $700 call that also expires in 2013. The position costs $37.50, and lets investors benefit if Apple’s stock hits $700 by next January.

If Apple’s stock advances as expected, investors who used the Apple call-spread strategy buying the January $600 call and selling the January $700 call-will make a 168% return on their investment.

Of course you get limited return if the stock goes above $700 because you don’t own it.

But keep in mind that one of the great things about this spread trade is that the expense you incur by purchasing the at-the-money call option is offset by the income you receive from writing the out-of-the-money call option – and this why your net expense for the trade is much smaller.

Good Investing,

Jason Jenkins

Article by Investment U

Video courtesy of ForexCT – A leading Australian forex broker, liscensed by the Australian Securities & Investments Commission, offers the MetaTrader4 and PROfit Platform to retail traders. Other services include Segregated Accounts, Trading workshops, Tutorials, and Commodities trading.

Source: ForexYard

The euro continued to tumble vs. its main currency rivals yesterday, as traders remained cautious about investing in riskier assets due to political uncertainty in the euro-zone. The EUR/USD fell to a fresh three-month low during the afternoon session at 1.2929. Turning to today, traders should be prepared for market volatility, as significant indicators from the UK and US are scheduled to be released. Attention should be given to the UK MPC Rate Statement, followed by the US Trade Balance figure and a speech from Fed Chairman Bernanke. Should any of the news lead to additional pessimism in the global economic recovery, riskier currencies like the euro may fall further.

Economic News

USD – Safe Haven Dollar Extends Gains amid Euro-Zone Worries

A lack of news events yesterday helped the dollar extend its recent bullish trend, as the political uncertainty in the euro-zone following recent elections in France and Greece caused investors to keep their funds with safe haven assets. The AUD/USD dropped close to 70 pips over the course of the day, reaching as low as 1.0031. The GBP/USD fell close to 90 pips, reaching as low as 1.6066 before rebounding slightly to 1.6090. That being said, the news was not all positive for the dollar. The USD/JPY continued to fall throughout the day, reaching as low 79.42.

Turning to today, dollar traders will want to pay attention to a batch of US news scheduled to be released over the course of the day. At 12:30 GMT, the latest Trade Balance and Unemployment Claims figures will be announced. With both forecasted to come in worse than their previous readings, the dollar may continue to slide against the JPY. At 13:30, all eyes will be on a speech from Fed Chairman Bernanke. Any indications in the speech that the Fed will initiate a new round of quantitative easing in the near future could lead to additional losses for the dollar against other safe-haven currencies.

EUR – Risk Aversion Leads to Additional Euro Losses

The euro extended its downward trend yesterday, as fears of additional turmoil in the euro-zone prevented investors from shifting their funds to riskier assets. In addition to the EUR/USD, which dropped to a fresh three-month low during the European session, the common currency also tumbled against the JPY and GBP. The EUR/JPY fell close to 100 pips, reaching as low as 102.89 during afternoon trading. After seeing moderate gains earlier in the day, the EUR/GBP once again turned bearish during the afternoon and fell below the 0.8030 level.

Turning to today, euro traders will want to pay attention to the French Industrial Production figure, scheduled for 06:45 GMT, followed by the ECB Monthly Bulletin at 08:00. Analysts are forecasting a steep drop in the French production figure over last month. If true, it could result in further risk aversion in the marketplace which may lead to additional euro losses during mid-day trading. Later in the day, a speech from Fed Chairman Bernanke may generate volatility for the EUR/USD pair. Any signs that the Fed may initiate a new round of quantitative easing could help the euro recover some of its recent losses against the greenback.

Gold – Weakened Demand Leads to Drop in Price of Gold

The price of gold fell throughout the day yesterday, as risk aversion in the marketplace caused investors to turn bearish toward the precious metal. Additionally, a weak euro made gold more expensive for international buyers which in turn led to a drop in price. Gold declined over $15 an ounce, reaching as low as 1580.20 during European trading.

Today, analysts are warning that gold still has more room to fall as long as investors remain worried regarding euro-zone economic growth prospects. That being said traders will want to pay attention to several US indicators set to be released during the afternoon session. Should any of them cause the USD to reverse its current bullish trend, gold may be able to recoup some of its recent losses.

Crude Oil – Oil Remains Bearish Due to High US Inventories

The price of crude oil extended its bearish run yesterday, as near record high stockpiles of the commodity in the US signaled weakened demand in the world’s largest oil consuming country. The price of crude dropped close to $2 a barrel over the course of European trading, reaching as low as $95.16.

Turning to today, traders will want to pay attention to a batch of US news. Should any of it come in below expectations, the dollar could reverse its current bullish trend, in which case the price of oil may be able to rebound during the afternoon session. That being said, with investors preoccupied with the political situation in Europe, any impact the US news has may be limited.

Technical News

EUR/USD

A bullish cross on the daily chart’s Slow Stochastic indicates that this pair could see upward movement in the near future. This theory is supported by the Williams Percent Range on the same chart, which has dropped into oversold territory. Going long may be a wise choice for this pair going into the rest of the week.

GBP/USD

The daily chart’s Bollinger Bands are beginning to narrow, indicating that this pair could see a price shift in the near future. Furthermore, a bearish cross on the weekly chart’s Slow Stochastic indicates that this pair could see downward movement in the coming days. This may be a good time to open short positions ahead of a possible downward breach.

USD/JPY

Long term technical indicators are providing mixed signals for this pair. While the daily chart’s Williams Percent Range is in oversold territory, meaning that upward movement could occur, the weekly chart’s MACD/OsMA has formed a bearish cross. Taking a wait and see approach may be the wise choice for this pair.

USD/CHF

A bearish cross on the daily chart’s Slow Stochastic indicates that this pair could see downward movement in the near future. This theory is supported by the Williams Percent Range on the weekly chart, which has just crossed over into overbought territory. Going short may be the wise choice for this pair.

The Wild Card

CAD/JPY

The Williams Percent Range on the daily chart has dropped into oversold territory, indicating that this pair may see an upward correction. Additionally, the Relative Strength Index (RSI) on the same chart is very close to dropping below the 30 level. Forex traders will want to monitor the RSI. If it drops any further, it may be a good time to open long positions.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

Source: ForexYard

The euro remained near a three-month low against the US dollar and JPY in overnight trading as investors await news regarding a possible new Greek election in the next few weeks.

Main News for Today

UK Manufacturing Production- 08:30 GMT
• Forecasted to come in at 0.5%, well above last month’s -1.0%
• If true, the GBP may see gains vs. safe-haven currencies

UK Official Bank Rate/MPC Rate Statement- 11:00 GMT
• MPC isn’t expected to adjust British interest rates
• The MPC Statement could offer clues as to a possible new round of quantitative easing
• Any mention of quantitative easing could turn the pound bearish

US Trade Balance- 12:30 GMT
• Analysts are predicting the US trade deficit grew to -49.8B
• If true, the dollar may see additional losses against the JPY

US Unemployment Claims
• Unemployment Claims forecasted to have increased to 371K
• Anything above 371K could result in dollar losses during afternoon trading

US Fed Chairman Bernanke Speaks- 13:30 GMT
• Following last week’s disappointing Non-Farm Payrolls figure, investors will be closely watching today’s speech
• Any mention of a new round of quantitative easing in the US could result in heavy dollar losses against the yen

Read more forex news on our forex blog

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

By MoneyMorning.com.au

In a week where commodity prices have hit the skids, it seems crazy to ask if a commodity is safer than cash.

In just over a week…

Oil has fallen 8%.

Copper is down 5.6%.

And gold priced in US dollars is down 3.9%.

Yet those falls are nothing compared to the 10.5% cut many savers have suffered over the past six months. And odds are that, if you’re not careful, the news is about to get worse…

Savers Take a Pay Cut

Let us explain. Eight months ago, we took out a six-month term deposit using spare cash from our retirement fund. The interest rate was 6%.

Two months ago, we rolled it over for another six months. This time we only got 5.8%. Today, if we wanted to take out a six-month term deposit with the same institution, we’d only get 5.5%.

That’s an 8.3% ‘pay cut’ for savers.

And goodness only knows what rate we’ll get when we roll the cash over again in four months. Our guess is 5.2%…if we’re lucky.

It’s even worse in our online savings account. Last September we earned 4.75% on our savings. Today, it’s only 4.25%.

And no doubt that rate’s heading lower too.

That’s a 10.5% ‘pay cut’ for savers.

Anyway, you probably don’t care what interest rate we get. The only reason we’re telling you this is to show you a real-life example of how governments and central banks are robbing savers blind.

Look at your own savings accounts and you’ll see a similar story.

And the sad truth is it’s set to get worse.

Lowest Rates in 60 Years

As The Age reported yesterday:

‘Even as stresses swept through Europe’s credit markets overnight, Australian 10-year bond yields fell to record lows. They were last quoted at $120.43, implying a yield of 3.36 per cent, down five basis points overnight, to levels not seen since the 1950s.’

This morning the yield is even lower. It’s just 3.33%. And as the chart below shows, yields almost across the entire line from short-term to long-term bonds have slumped since 2009…

That’s great news if you bought bonds three years ago (bond prices rise as yields fall).

But it’s not so great if you’re an ordinary investor who doesn’t buy bonds. Most ordinary investors have cash in the bank. And thanks to the manipulation of interest rates, savers are seeing their returns fall…and that’s forcing you to take more risks with your money.

Or is it?

In a way, yes.

But in another way, is it possible that investing in something that mainstream analysts claim is a risky asset could actually be safer than money in the bank? We’ll let you decide. But get this…

Gold Beats Cash

On 27 April last year our old sparring partner Michael Pascoe at The Age wrote:

‘A quick check of a gold chart site will show the yellow metal trading around 1,400 Australian dollars an ounce – which is what it was worth in the middle of last May and well off the $A1,546 peak of early 2009.’

Today, Aussie dollar gold is $1,590 an ounce.

So, in one year (from the Pascoe article) the price of Aussie dollar gold has gained 13.6% – that’s better than money in the bank.

Of course, you’re right if you say we’ve cherry-picked dates. Just four months after the Pascoe article, Aussie dollar gold hit $1,806.

So if you bought at that sky-high price then you’re well under water on your gold investment. But things were different back then. Many saw Australia as a miracle economy, China was booming and the Aussie dollar was soaring.

Today? The miracle is over, China is stuttering and the Aussie dollar is back on par with the U.S. dollar.

Hence, the Reserve Bank of Australia has cut interest rates to prevent an Aussie recession.

So expect lower interest rates for some time. And lower interest rates mean that you will need to take more risk with your savings. 5.5% on a term deposit looks good today, but don’t assume it will last long.

When Money Printing Makes a Comeback
Savers Can Suffer

You only have to look at the latest financial reports from the major banks. This morning National Australia Bank Ltd [ASX: NAB] reported a 15.5% drop in first half profit compared to last year.

And just as importantly, NAB’s interest margins (the difference between the interest it earns from borrowers and the interest it pays to savers) slipped too.

That tells you the banks have two choices: either raise interest rates for borrowers or cut interest rates to savers.

With the Aussie housing market falling off a cliff (two prime-position St Kilda apartments we walk past every day have been on the market over six months) banks won’t want to risk a complete collapse by jacking up mortgage rates…so the only option is to stick it to savers.

So, what’s a saver to do?

The important thing to remember is that the global economy is on the edge of an almighty cliff. Anything, at any point in time, could push it over the edge.

If (when) that happens, traditional safe investments such as cash may not be that safe. And the kind of investments you’ll have been forced into to chase higher returns will take a walloping (shares and bonds).

Even if shares recover on the back of more central bank intervention, the ride in between will be very volatile.

And according to Bloomberg, you may not have to wait long for central banks to act again:

‘Pacific Investment Management Co.’s Bill Gross and Jan Hatzius at Goldman Sachs Group Inc. say investors should prepare for additional bond purchases by the Federal Reserve to combat a slowing U.S. economy.’

More money printing should be good news for the gold price…but bad news for cash savers.

So in short, our long-term advice remains the same. Buy gold for security and wealth protection against central bank and government intervention.

Yes, the gold price can be just as volatile as shares (and bank interest rates), but at least it’s a tangible asset.

We’re not saying you should convert all your cash into gold, but we are saying is that cash in the bank isn’t as safe as it used to be.

Cheers,
Kris.

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By MoneyMorning.com.au

Greece is looking likely to leave the eurozone

The mood music is turning against Greece.

When the eurozone crisis first kicked off, the idea of letting Greece leave the eurozone (or ejecting it), was unthinkable.

European leaders weren’t allowed to speak of such things, for fear that those nasty speculators in the financial markets would get the wrong idea.

Now the gloves are off. The head of the left-wing party that came second in the weekend’s Greek election is declaring that the austerity programme needs to be ripped up.

In response, the European Central Bank has politely but firmly said: ‘drop dead’ (or words to that effect).

An exit for Greece is starting to look more likely than not. With the stock index at a 20-year low, investors certainly seem to be pricing in a return to the drachma. So what would it mean?

A Greek Exit From the Eurozone
is Probable, Rather Than Possible

Of all the British newspapers, it’s probably safe to say that the FT most accurately reflects the way of thinking in Europe. It’s certainly not a euro-sceptic paper, so it has no vested interest in presenting things in a more negative light than is warranted.

So it’s striking that an editorial in this paper warns Greece that it’s on its own.

‘The European Union (EU) has gone as far as it can in seeking to help Greece. If there is not the political will in Athens to do what is necessary to preserve membership of the euro, it is pointless to continue.

‘Europe must prepare for an exit from the eurozone that has become probable rather than possible.’

Here’s the situation. In February, Greece agreed a €174bn bail-out deal with the EU and the International Monetary Fund. Part of the deal was that the country would undertake various reforms. These reforms need to be passed by the end of next month before Greece can get at the money.

Of course, the problem is that there is no Greek parliament right now. It looks like no one will be able to put together a coalition. As a result, there’ll be a second election.

Will the result be any different? Possibly. Perhaps the hard-line stance being talked up by the rest of Europe will encourage the Greeks to think again. But equally, the Greeks might end up voting even more decisively against the rest of Europe.

The country is fed up with austerity. And there are too many vested interests who don’t want the status quo to change. Alexis Tsipras, head of the second-placed Syriza party is playing a smart game. He’s standing up and denouncing ‘barbarous’ austerity, and getting the people riled up for the second round of elections. If he plays it right, then this round of populist campaigning might even boost his support sufficiently to get in next time.

A Greek Exit From the Eurozone
Could Be Just What Europe Needs

A Greek exit doesn’t need to be a disaster. If handled correctly, it could be just the thing that Europe needs to nail the crisis once and for all.

On the same day that Greece exits the euro, you let the ECB open the floodgates. The ECB promises to print what it needs to cap the yields on all European government debt, as long as member countries abide by the rules of their various reform packages.

It all comes down to how the Germans react. But if you throw Greece to the wolves to encourage the others, that should pacify the German voters’ thirst for perceived fair treatment.

Leaving the euro is definitely the best thing that could happen to Greece. A return to the drachma would allow the country to re-price itself rapidly. Ditching its debts would mean it could focus on growth.

And the country can continue to avoid reform and be run by insiders, for insiders, if that’s the sort of society it prefers, without being judged by its fellow Europeans.

Under this scenario, assuming the ECB money-printing was seen to be unlimited, then stocks would surge. The trashiest ones would surge the most. The euro wouldn’t do so well of course.

Any other global stocks you hold just now, not to mention gold, would also be buoyed by an inflationary solution to the euro crisis.

Then Again, A Greek Exit From the Eurozone
Might Also Be a Total Disaster

Of course, that’s the optimistic view. What are the other options? Firstly, Greece could be allowed to stay in Europe and renegotiate its bailout deal. But even if that happens, it’s only a matter of time before it breaks down. Greece is in too deep a hole to repay its debts. So a renegotiation – unless it also involves wholesale money printing, in which case just refer back to the scenario above – would simply lead to more of the same, further down the line.

Secondly, Greece could leave, but without any proper backstop in place to prevent the chaos from spreading. If that happened, you’d probably see bond yields spike across Europe. Portugal would come under severe pressure, and Spain’s economy and Italy’s wouldn’t be far behind. Chances are banking stocks in particular, and shares in general would collapse.

That would almost certainly encourage some form of money printing by the Federal Reserve and the Bank of England. And the ECB might be allowed to follow suit if things got that drastic. But there’d also be a much greater chance of things spiralling to the point where the euro’s continued existence in any form would be questionable.

That’s one of those ‘too grim to contemplate’ outcomes. It makes me think that ultimately, the ECB printing is still the most likely option.

John Stepek
Editor, MoneyWeek (UK)

Publisher’s Note: This article originally appeared in MoneyWeek (UK)

From the Archives…

Why China’s New Consumer Economy Won’t Give You the Trade of the Decade
2012-05-04 – Kris Sayce

Why China Could Be The Next Destination For the Financial Crisis
2012-05-03 – Merryn Somerset Webb

How Did We Get It So Wrong on Australian Housing?
2012-05-02 – Kris Sayce

This Indicator Shows the Copper Price Could Be Set to Soar
2012-05-01 – Dr. Alex Cowie

How Gold Nanoparticles Will Create A New Kind of Gold Rush
2012-04-30 – Michael Robinson

Why a Greek Exit From the Eurozone Could Be Great News For Markets

By MoneyMorning.com.au

The search for oil in the Arctic Circle – on ‘the roof of the world’ got more serious.

Over the weekend, Norway’s Statoil ASA (NYSE:STO) signed a massive exploration deal with Russian behemoth Rosneft in a venture that may require more than $100 billion in investment over the next few decades.

Specifically, the company is aiming to help Rosneft develop untapped oil resources in the Arctic, as Moscow struggles to gain a competitive advantage given declining conventional oil and gas production in Eastern Siberia.

The deal highlights a number of key issues for both companies and for Moscow moving forward.

For Russia, some of its most mature conventional oil basins are declining in output rapidly, at a pace that could reach 8% a year within this decade. With production waning and concerns about long-term supplies accelerating, Russia has no choice but to venture into the north.

But they know that they cannot make this push alone.

Such a radical change in procurement is technologically sensitive… and very expensive. Moscow needs outside investment and the most advanced technology to push into the hostile, energy-rich environments of the vast Arctic and East Siberian basins.

At the same time, Statoil has been scrambling to find new ways to get more involved in this push north. In recent months, oil giants Exxon Mobil Corp. (NYSE: XOM) and Italy’s Eni SpA (NYSE:E) had been very active in working with Moscow to develop in these oil-rich environments.

In the wake of Russia’s slumping reserves and production in Siberia, the Kremlin has been looking for ways to incentivize producers to help Rosneft replace waning production. Tax breaks have been one way, but companies also want a little bit of insurance when they work with Moscow.

The major question, of course, is this: How can shareholders know that Moscow won’t expropriate any major resource finds, should the exploration deal succeed?

The answer is “hostage taking.”

Taking Oil Hostages in the Arctic

A key feature of this Statoil deal is a strategy known as “hostage taking.” And it says a lot about the future of energy production and the cooperation required between multinationals and political leaders.

Statoil and Exxon (in their respective deals) are convinced they can protect themselves against the risk of having any major reserve discoveries expropriated by Moscow.

Both deals allow Rosneft to buy stakes in Statoil and Exxon-led exploration projects in the Arctic and elsewhere in the world. By encouraging greater exploration project cooperation around the globe, the companies are better able to reassure their individual shareholders.

This requires a lot of trust.

The real risk here comes if Statoil-led projects fail to produce any significant resource discoveries, while the Rosneft-led projects lead to massive reservoir finds. In that case, the hostages have no value.

But even if Rosneft were able to “freeze” Statoil out of the Arctic find, there’s one major problem. The Russian behemoth is in no position to actually produce the resources itself, given the lack of technological expertise and ongoing capital concerns.

So the Statoil-Rosneft agreement is yet another massive deal that we’ve seen develop in the Arctic with a sound economic and political risk strategy to boot.

Just last month, Exxon and Rosneft agreed to begin finalizing their initial $3.2 billion Arctic deal that would require about $200 billion for joint projects in the next decade alone, and the development of 10 ice-proof platforms for the Kara Sea that would cost about $15 billion each.

That deal was the latest in a string that included Royal Dutch Shell’s icebreaker contracts with Finnish suppliers, and TNK-BP’s joint ventures in the Yamal-Nenets region of Russia.

These deals point out the obvious. The Arctic is the last great frontier of energy production in the world.

The U.S. Energy Information Administration reports that as much as 22% of the world’s undiscovered oil and up to 30% of its natural gas could be in the Arctic Circle alone.

But none of this exploration and production will be cheap, which can only mean one thing.

Higher prices.

Unconventional Oil Sources Needed, Moving Forward

Oil prices have retreated right now to 2012 lows, while retail investors panic.

Concerns about Greece, Spain, and Italy are wearing down investor confidence. Meanwhile, the Iranian embargo looms large for July 1. The Saudis have guaranteed to meet the supply these three countries will lose, but they aren’t going to guarantee the price.

The world, whether in a recession or in high times, still runs on oil. And the bottom line is that cheap, conventional sources are declining rapidly, while the influx of unconventional projects continue to ramp up. We’ll see greater interest in Arctic oil production and greater cooperation between multinationals and governments in the coming months and years.

Multinational corporations don’t enter the most hostile environments engineers have ever seen because they enjoy the challenge. They are doing so for profits, and because they are quite aware that the cost of energy in the future and the ongoing political stakes around the world require development of these resources.

The costs will be much higher to produce, the technological complications will accelerate, and political tensions can create significant setbacks.

But, over time, the investment opportunities and profits will be greater than ever.

James Baldwin

Contributing Writer, Money Morning

Publisher’s Note: This article originally appeared in Energy & Oil Investor

From the Archives…

Why China’s New Consumer Economy Won’t Give You the Trade of the Decade

2012-05-04 – Kris Sayce

Why China Could Be The Next Destination For the Financial Crisis

2012-05-03 – Merryn Somerset Webb

How Did We Get It So Wrong on Australian Housing?

2012-05-02 – Kris Sayce

This Indicator Shows the Copper Price Could Be Set to Soar

2012-05-01 – Dr. Alex Cowie

How Gold Nanoparticles Will Create A New Kind of Gold Rush

2012-04-30 – Michael Robinson

For editorial enquiries and feedback, email [email protected]

The Great Push North for Arctic Oil Continues

USDJPY breaks below 79.63 previous low and reaches as low as 79.43, suggesting that a downtrend from 84.17 has resumed. Further decline could be expected in a couple of days, and next target would be at 79.00 area. Key resistance remains at the upper line of the price channel on 4-hour chart, only a clear break above the channel resistance could signal completion of the downtrend.

Daily Forex Forecast

By The Sizemore Letter

What’s the easiest way to find a stock with a 10% dividend yield?

Find a stock yielding 5% and watch its price get cut in half.

I say this mostly in jest, but this is precisely what happened to investors in RadioShack (NYSE:$RSH), the iconic electronics and gadgets chain still found in most American shopping malls.  At time of writing, RadioShack yields 9.8%, and this is after the company already slashed its dividend.

Given that it is paying out substantially more than it earns, RadioShack will almost certainly further reduce or eliminate its dividend in the coming quarters.  The company barely earns a profit, and it faces a war of attrition it can’t win against larger “big box” rivals like Best Buy (NYSE:$BBY) and Wal-Mart (NYSE:$WMT) and from internet retailers like Amazon (Nasdaq:$AMZN).

In a race with no winners, it will be interesting to watch what falls faster, RadioShack’s price or its dividend.

I’ll quit beating up on RadioShack.  In fact, I wouldn’t be surprised to see the company enjoy a nice rally in the months ahead.  No one can argue that RadioShack is not cheap; the stock trades for 0.67 time book value and a shocking 0.11 times sales.  Almost incredibly the stock currently sells for less than the value of its cash in the bank, $4.97 vs. $5.70.  (Before you value investors start licking your chops, keep in mind that RadioShack has substantial debts against that cash; as of year end, the company had $1.4 billion in debts vs. a little under a billion in cash and receivables.)

The stock could also benefit from a dead-cat bounce.  With the short interest in the stock currently more than seven times the average daily trading volume, it could benefit from a short-covering rally if nothing else.

But that is exactly how investors should view RadioShack—as a potential short-term trade and nothing more.  It should certainly not be considered a long-term income play, as that 9.8% yield can disappear overnight.

This brings me to the point of this article: an investor should never chase a high dividend yield.

Exceptionally high dividend yields generally mean one of two things:

1. The dividend is expected to be the only source of return, and investors should not anticipate much in the way of capital gains.
2. The dividend is at serious risk of getting cut and the market has already priced the stock accordingly.

The first category is not all bad, so long as investors understand this going into the trade.  Many popular investments such as mortgage REITS would fall under this category.  Annaly Capital (NYSE:$NLY) and Chimera Investment Corp (NY6SE:$CIM) both currently yield in excess of 13%.  The dividends are by no means stable, however, and the payout will almost certainly fall when the Fed eventually raises rates.

Tobacco companies have enjoyed phenomenal returns of late and have been the Sizemore Investment Letter’s best-performing investment theme over the past year (see “Tobacco Stocks Still Smokin’”), but they too should be considered zero-capital-gains investments over the longer term. Investors can profit quite handsomely from the reinvestment of dividends and from share buybacks, but this is a sector in long-term terminal decline.

It is the second category where investors tend to get themselves in trouble, both in the stock investing and bond investing.  Alas, your humble correspondent was one of the hapless souls who bought shares of Thornburg Mortgage in 2008 because it had a yield of over 10% and a “solid” portfolio of super-prime jumbo mortgages.  That 10% yield didn’t get me very far when the company filed for bankruptcy. How many other investors were seduced by the 20-30% yields offered on General Motors bonds around that same time?  Again, we know how that worked out.

Investors can avoid these traps by setting reasonable expectations.  If a yield seems too high to be true, it probably is.  Roll up your sleeves, take a look at the company’s financials, and make that judgment call with a sober mind.

Income seekers currently have their pick of the litter of safe, moderately high-yielding stocks with room for dividend growth and price appreciation.  As an asset class, master limited partnerships are attractively priced, and several—including Williams Partners (NYSE:$WPZ) and Kinder Morgan Energy Partners (NYSE:$KMP)—yield over 5%.

REITS are more expensive as an asset class, buy here too there are bargains to be found.  National Retail Properties (NYSE:$NNN) and Realty Income Corp (NYSE:$O) yield 5.7% and 4.5%, respectively, and consider both to be safe.

Investors willing to accept modest risk of a temporary dividend cut should consider Spain’s Telefonica (NYSE:$TEF).  Telefonica currently yields over 10%, and its share price has taken a beating along with the rest of the Spanish stock market.  I consider a dividend cut to be unlikely, though the Board may opt to conserve cash if the European capital markets seize up again.  Still, any cut in this case would be temporary, and I expect the dividend to be substantially higher 3-5 years from now.  Unlike, say, RadioShack, Telefonica has a healthy business with excellent long-term prospects, particularly in Latin America.  Use any weakness as a buying opportunity.

Disclosures: KMP, NNN, O and TEF are all holdings of Sizemore Capital’s Dividend Growth Portfolio.

London Gold Market Report
from Ben Traynor
BullionVault
Wednesday 9 May 2012, 08:00 EDT

SPOT MARKET gold bullion prices fell to their lowest level in four months during Wednesday morning’s London trading, hitting $1581 an ounce – 3.7% down on the week so far – while European stock markets and commodities also fell and US Treasuries gained, with Greek uncertainty continuing to cast a shadow.

A day earlier, gold fell below $1600 for the first time since early January.

“Gold seemed to know only one direction today – down,” says Tuesday’s note from Swiss precious metals group MKS.

“The bearish close opens up a full retracement to the December low of $1522,” adds the latest technical analysis from bullion bank Scotia Mocatta.

Silver bullion fell to $28.69 per ounce – also a four-month low, and 5.6% down on last week’s close.

On the currency markets, the Euro failed to regain $1.30, after falling back through that level yesterday having breached it on Monday for the first time since February.

Sterling meantime hit its highest level since August 2009 on a trade-weighted basis. The stronger Pound saw Sterling gold prices drop to £982 per ounce on Wednesday, their lowest level since last July.

On the New York Comex, open interest in gold futures trading rose to the equivalent of 1312.5 tonnes yesterday – up 2.4% on Tuesday last week – though it remains broadly in the middle of its range for the last five years.

It will not be known however what proportion of these positions were long and short until the Commodity Futures Trading Commission publishes its weekly Commitments of Traders report on Friday.

The volume of gold bullion held by the world’s biggest gold ETF, SPDR Gold Trust (GLD), remained unchanged Tuesday from a day earlier at just under 1275 tonnes.

GLD volumes did though spike higher yesterday, more than doubling from a day earlier to 17.8 million shares – although Monday’s volume was towards the lower end of the recent range.

The largest volume for GLD trading this year was 44 million on February 29, when gold fell $100 an ounce following Federal Reserve chairman Ben Bernanke’s appearance before Congress.

Alexis Tsipras , the leader of Greece’s left wing Syriza, which came second in Sunday’s election, will continue his efforts to form a government today, according to press reports.

The mandate to form a government passed to Tsipras after first-placed New Democracy was unable to form a coalition. The Syriza leader has outline a five-point plan which includes cancelling the terms of Greece’s bailout, suspending service payments on public debt, and investigating Greece’s banking sector.

“Voters [on Sunday] rejected the barbarous policies in the bailout deal,” said Tsipras Tuesday.

“They abandoned the parties that support it, effectively abolishing plans for [public sector] sackings and additional spending cuts…the popular verdict clearly renders the bailout deal invalid.”

Tsipras is today due to meet the leaders of New Democracy and third-placed Pasok – former coalition partners that backed Greece’s latest bailout and who both saw their shares of the vote fall on Sunday.

Many analysts, however, say they do not believe Tsipras will gain the agreements he needs to form a government.

“Mr. Tsipras asked me to put my signature to the destruction of Greece,” said New Democracy leader Antonis Samaras on Tuesday.

“I will not do this. The country cannot afford to play with fire.”

Should Tsipras fail to form a government, the mandate would pass to former Greek finance minister and Pasok leader Evangelos Venizelos.

“The Greek people asked for two things,” said Venizelos Tuesday.

“For Greece to stay safely in Europe and the Euro and at the same time to seek the best possible change in [bailout] terms so that citizens and growth can be helped.”

“Greece needs to be aware,” warned European Central Bank executive board member Joerg Asmussen Tuesday, “that there is no alternative to the agreed reform program if it wants to remain a member of the Eurozone.”

“A Greek return to the polls in mid-June looks increasingly likely,” says Malcolm Barr, London-based economist at JPMorgan Chase.

“There is little doubt that the drop in support for New Democracy and Pasok has raised the probability of an eventual Euro exit.”

“Greece in itself isn’t a big issue,” adds Adrian Cattley, European equity strategist at Citi.
“What does matter of course is the knock-on effects and contagion fears and what that would mean for the wider market.”

Here in the UK, prime minister David Cameron described the Euro as “a project in transition” in a newspaper interview published Wednesday.

“There’s nowhere in the world that has a single currency without having more of a single government,” said Cameron, although he added that “all these countries have to make their own choices” and that the Eurozone project “could go in a number of different ways”.

Spain’s government will tell the country’s banks to set aside an additional €35 billion as provision against loans made to the construction sector, newswire Reuters reports.

Ratings agency Moody’s meantime will begin cutting the credit ratings of over 100 banks this month, which could increase their funding costs and force them to reduce lending, according to Bloomberg.

China meantime has been buying oil from Iran and paying with Yuan and gold bullion, according to the Wall Street Journal.

Ben Traynor
BullionVault

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Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.