Month: May 2012

Source: ForexYard

Disappointing German data sent the euro to fresh lows against the USD during European trading yesterday. In a sign that even the euro-zone’s biggest economy was not immune from the region’s debt crisis, the German Flash Manufacturing PMI and Ifo Business Climate both came in significantly below expectations. As a result, the EUR/USD dropped as low as 1.2515, close to a two-year low. As we close out the week, traders will want to continue monitoring any developments out of the euro-zone. Any new negative developments could send the common currency below $1.2500 before markets close for the week.

Economic News

USD – Safe-Haven USD Sees Additional Gains

The US dollar was able to extend its gains against the euro yesterday, following the release of several disappointing economic indicators out of Germany. That being said, a worse than expected US Core Durable Goods Orders figure left the dollar near its recent lows against the Japanese yen. The EUR/USD fell as low as 1.2515 during early morning trading. The pair eventually staged a slight recovery, reaching 1.2610 during the afternoon session. Against the JPY, the dollar dropped to 79.33 during mid-day trading before correcting itself. By the afternoon session, the pair reached as high as 79.47.

As we close out the week, traders will want to note the result of the US Revised UoM Consumer Sentiment figure, set to be released at 13:55 GMT. While the dollar has seen significant gains against currencies like the EUR and AUD in recent weeks, it has remained weak against its safe-haven rival the JPY. Should today’s news come in above the expected 77.7, the USD/JPY could turn bullish during the afternoon session.

EUR – EUR Drops Once Again Following Negative Data

Following the release of a worse than expected German Ifo Business Climate and Flash Manufacturing PMI yesterday, investors grew increasingly concerned that the euro-zone’s strongest economy may also be vulnerable to the region’s debt crisis. As a result, the euro dropped to an almost two-year low against the USD, reaching 1.2515 during the morning session. Against the Japanese yen, the euro fell some 80 pips, reaching as low as 99.34. The pair then managed to stage an upward correction, eventually stabilizing around the 99.90 level.

Turning to today, a lack of significant euro-zone news means that the common currency will not have many opportunities to stage a meaningful recovery ahead of markets closing for the week. That being said, the euro may be able to limit its losses if any announcements out of the euro-zone signal that progress is being made in talks about how to best stimulate growth in the region’s economic recovery. That being said, any additional negative news may lead to risk aversion which could send the euro lower.

AUD – Risk Aversion Causes AUD to Remain Bearish

The Australian dollar remained bearish against its safe-haven currency rivals yesterday, following negative European news. The AUD/USD fell as low as 0.9710 during the morning session before staging an upward correction and eventually reaching 0.9809. Against the Japanese yen, the aussie dropped as low as 77.07 before correcting itself. The pair stabilized around 77.60 during afternoon trading.

Turning to today, analysts are warning that without significant improvements in the euro-zone crisis, riskier currencies like the AUD are unlikely to stage a meaningful recovery. Traders will want to monitor any announcements out of the euro-zone for clues as to what Greece’s future is in the euro-zone. Any additional negative developments could weigh down on the AUD.

Crude Oil – Crude Oil Hovers Close to $90 a Barrel

Risk aversion in the marketplace sent the price of crude oil tumbling below the psychologically significant $90 a barrel level yesterday. Uncertainty about Greece’s future in the euro-zone combined with low demand for oil in the US has caused oil to fall in recent weeks. Eventually, the commodity was able to stage a slight recovery before stabilizing around the $90.70 level.

As we close out the week, oil traders will want to pay attention to any announcements out of the euro-zone which could result in further risk aversion in the marketplace. Should the euro extend yesterday’s bearish trend, crude oil may see additional losses as a result.

Technical News

EUR/USD

The Relative Strength Index on the daily chart indicates that this pair is in oversold territory, meaning an upward correction could occur in the near future. This theory is supported by the MACD/OsMA on the weekly chart, which has formed a bullish cross. Going long may be the wise choice.

GBP/USD

The weekly chart’s Williams Percent Range has dropped below the -80 level, indicating that an upward reversal could take place. Furthermore, the Slow Stochastic on the daily chart has formed a bullish cross. Traders may want to go long in their positions.

USD/JPY

Long term technical indicators for this pair are providing conflicting signals at this time. On the one hand, the weekly chart’s MACD/OsMA has formed a bearish cross. At the same time, the Williams Percent Range on the same chart is in oversold territory. Taking a wait and see approach may be the wise choice for this pair.

USD/CHF

The weekly chart’s MACD/OsMA has formed a bearish cross, indicating that this pair could see downward movement in the near future. This theory is supported by the Willaims Percent Range on the same chart, which has crossed above the -20 line. Opening short positions may be the wise choice for this pair.

The Wild Card

GBP/JPY

The daily chart’s Slow Stochastic has formed a bearish cross, meaning that this pair could see upward movement in the near future. Additionally, the Relative Strength Index on the same chart has crossed over into oversold territory. Forex traders may want to consider opening long positions ahead of a possible upward breach.

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.

Article by Investment U

There’s a way to shift gears out of the stock market’s volatility and into the safety, reliability and predictability of bonds, but almost no one is doing it correctly.

The rush is on and the next cliff is coming into focus.

The herd has formed, and the uninformed and best guessers are filling the ranks for the next plunge into the money abyss.

I’m talking about the huge shift from equities to treasuries and bond funds. It’s grown to numbers even I didn’t expect when I started writing and talking about it last year, and I’m convinced it will be the next disaster.

Most of you know I’m the bond guy at The Oxford Club, so this at first may sound contradictory, but it isn’t. There’s a way to shift gears out of the stock market’s volatility and into the safety, reliability and predictability of bonds, but almost no one is doing it correctly.

Yes, just as in stocks, there’s a right way and a wrong way to invest in bonds. And, just as in the stock market, if you don’t know the “ins and outs” of bonds, you’ll lose a lot of money when the market goes against you.

Not might lose or could lose, will lose!

Most investors know less about bonds than they do about the stock market. And the current mad rush out of stocks into bonds – bond funds especially – will result in one of the biggest money disasters the average guy has ever seen. It will dwarf the losses in 2007 and 2008.

Barron’s reported recently that most investors are buying income investments that are paying less than the inflation rate. That’s how out of touch most people are about bonds, and this is only the beginning and a small percentage of the losses they’ll see.

All the Wrong Moves

There are two basic issues at play that guarantee disaster for those rushing to the wrong bonds and bond funds.

One, most people are rate pigs.

Two, these rate pigs aren’t using any of the safety tools that can make bonds safe and rewarding.

The “rate pig” idea is quite simple. When the average guy goes into bonds he looks for the best yield he can get. Forget about leverage, duration, maturity, the affect of rising rates and quality – to the pigs it’s all about that yield number.

It’s nothing short of financial suicide! I’ll show you why in a minute.

Safety tools like shorter maturities, staggering maturities, limiting position sizes, shopping for mispriced bonds and buying on market dips or bad news are being ignored. The list of things you can do to protect yourself goes on and on, but rate pigs look at none of these factors and simply buy yield.

This mad rush, ignoring safety and looking only at yield will be at the root of the coming debacle in interest sensitive investments.

Here’s how it will unfold…

Bonds are interest rate sensitive. When rates go up, bond market values drop. How much they drop is a function of maturity and quality. The longer the maturity of a bond the more it drops with a one-, two- or three-point interest rate increase.

The lower the quality of a bond, the more it tends to drop in value when rates go up, but maturity is the overriding factor in the formula.

For almost four years we’ve been sitting at some of the lowest interest rates in our history, it’s no longer a question of if rates will move up, but when.

As rates move up, the market value of bonds will drop, but the value of bond mutual funds will drop even more. Most bond funds are leveraged, which means they borrowed money against the portfolio to buy more bonds to pay a higher yields to attract rate pigs. The cost of that borrowing goes up with the rates, as well. It’s a vicious circle.

As the market values drop, and they will really drop in the longer maturities, investors who never understood the relationship of value to maturity will start panic selling. As they do they drive prices down even more.

Get the picture?

The really sad part of this scenario is that most investors won’t realize how much damage has been done until it’s too late. The vast majority will be left wondering what happened.

As I said, this doomsday outcome is avoidable and there are ways to invest in bonds using a number of loss limiting factors that can allow you to earn above market rates – double digit in many cases – without being crushed by the herd when rates move up.

Rules of the Road

• Rule No. 1 to Survive the Coming Debacle: Buy Short Maturities

If you’re selective, and realistic in your expectations, you can stay on the ultra-short end of maturities, less than a five-year average, and still earn returns above what the stock market is paying. You may earn a little less than longer maturities offer, but the drop in value when rates increase is significantly less.

Take a look at the table below. It illustrates this point. These are approximate numbers buy very close to what will actually happen.

This shows the drop in value of the two-, 10- and 30-year treasuries with one-, two- and three-point interest rate increases.

As you can see, the 30-year bond with just a 1% increase in rates will drop in value to 84.55%, or from about $1,000 to $845.50.

The two-year however will only drop to 98.50% or $980.50 with the same increase in rates.

As rates continue to move up two and three points, the 30-year will drop as low as 62.58, $625.80.

Keep in mind that these are numbers for treasuries – the most “secure” investment in the world. Their drop will be less than all other types of interest sensitive investments.

Maturity is the key. Stay short!

• Rule No. 2: Limit Your Position Sizes

The tendency in bond investing is to plow a lot of money into a few bonds that look good at the time. I have seen some portfolios where people have had one third to one half of their money in one and two bonds of big-cap, big name companies.

Financial suicide, especially in this market!

Buy as few bonds as you can in any one position and buy many small positions. Spread your risk around as much as you can. It’s the same as diversifying in stocks.

Small positions also have another function. Two bonds of the same maturity may not drop the same amount. There are many variables that drive this value shift, too many to detail here. The idea though is to maximize your safety by using every tool, so keep them small.

• Rule No. 3: Stagger Your Maturities

Ladders are a familiar tool to most people, but staggering gives you more options in a rising interest rate environment.

Below is an example of a typical ladder of bonds.

The idea is to have a bond maturing every so often and then move the money out to the long end of the maturity curve. This gives you an expanding portfolio and also allows you to buy into a rising interest rate market.

The problem is that when rates start to move up you won’t have a few years to buy into it. They’ll move quickly and you have to be ready for the shift.

Below is what I called a staggered maturity portfolio. As you can see, it has bonds coming due every few months rather than every few years. It gives you more opportunities to buy into what will be a very rapidly rising interest rate market.

Average maturity 3.3 years, average annual return 10.78%

Obviously if you’re going to buy this many positions to fill this type of stagger, you’ll have to buy smaller positions. You also don’t have to have quite as many positions as this example shows.

The idea is to have at least one bond a year coming due and in small positions – one to 10 bonds. The exception is if you’re working with a large amount of cash, you can increase you positions accordingly.

Short maturities, no leveraged mutual funds, stagger your maturities, limit your positions sizes and don’t be a rate pig.

Bonds can be a very stable, profitable part of your portfolio, but you have to follow the rules of the road or pay the price.

Good Investing,

Steve McDonald

P.S. In today’s Investment U Plus edition, I tell readers about a bond that fits all of my criteria. Not only is the maturity ultra-short, but it’s a beaten-down company in a beaten-down industry. It returns over 7% and matures in 2013 – just the type of opportunity I look for…

For more information on accessing today’s bond recommendation, click here.

Article by Investment U

Article by Investment U

"Believe me when I say I’m not down on Facebook. I just don’t feel comfortable with the valuation in regards to the IPO."

Although I wasn’t high on Facebook’s IPO last week, I do think there’s some potential in the company down the road. I just don’t feel comfortable buying shares right now. It’s all about the price, and Facebook has a lot of “ifs” cooked into its current price…

In a minute I’ll share a couple of ways to capture some of Facebook’s potential without plunking down for its overpriced shares. But first, let’s take a look back at why I’m not sold on its current valuation.

In a February essay, Facebook IPO: Nowhere to go but Down, I was little skeptical about possibly the biggest IPO ever. And here’s a little recap about why I felt that way:

1. Very High P/E

First of all, if Facebook’s shares were actually going to sell at their high end of around $35, that will place a nearly 100 P/E valuation on the company. I think it’s safe to say that this would give the stock maybe the highest P/E of anything trading on the S&P 500. According to Rick Summers of Morningstar, Facebook could only justify such a high valuation if “the company makes $40 billion in revenue within the next six to seven years while maintaining the same profit margins.”As I’ve written before, any slip up after this IPO valuation will cause a decrease in value.

2. Slowing Ad Revenue

My next point relates to first quarter 2012. Facebook knocked it out of the park with regards to earnings and revenue. However, those numbers were lower than the preceding quarter’s. What should be considered a red flag is that it seems the drop-off was largely due to a decrease in advertiser revenue.

3. Where Will Growth Come From?

Then there’s growth. Where will it come from? Facebook has over 800 million users that log in. Have they reached a saturation point? You can’t just say, “We’re going to take it over seas and explore more markets.” This product isn’t nicotine, where you can dump it in the Third World and continue growth. International growth can only happen where devices are accessible and the infrastructure is in place.

4. The Tech IPO Trend

IPOs over the last year, except for Zynga (Nasdaq: ZNGA) – which just stunk it up at the beginning –all follow a very distinct pattern. They all traded significantly higher at open, but then followed a downward trend. And this is where it gets interesting. Each and every stock that follows this trend reverses to post gains near 50% in a short period of time.

Groupon later followed suit with a 50% fall from its high – only to see it rise 54% from that low in early December 2011.

5. I Don’t Have a Swiss Bank Account

Finally – and most importantly – I’m not rich. If you think you’re going to buy Facebook shares right from the start, it ain’t happening. Accredited investors are those with a net worth of more than $1 million (excluding their primary residence) or an annual income over $200,000 for the past two years can buy shares of private companies at online marketplaces such as SharesPost and SecondMarket. (Trading in shares of pre-IPO Facebook at both sites halted on March 30, at the request of the company, so that it could set its IPO price range.)

Those initial shares are reserved for the venture capitalists, bankers, employees and Mr. Zuckerberg. Of course, you can try, and you certainly get in on day two or so, but at what, an inflated price?

How to Make An Alternative Play

Because of the way Wall Street works, the average investor needs to consider alternative ways to take advantage of the company going public. And financial advisers and planners have figured out indirect ways to be part of the Facebook action.

1. Mutual Funds With Facebook Exposure

One of these means for regular investors to join the party is by investing in mutual funds that own slices of Facebook. The list is fairly large.

T. Rowe Price (Nasdaq: TROW) has a group of funds that own Facebook, including the $30-billion T. Rowe Price Growth Stock Fund (PRGFX), with a 0.7% position. Several Morgan Stanley (NYSE: MS) Investment Management funds also own the Internet firm, including the $1.7-billion Morgan Stanley Focus Growth fund (AMOAX), which has a 3.6% holding. Fidelity Investments says more than 30 of its funds have invested in Facebook.

Something new and interesting on the scene is the Global X Social Media Index Fund (Nasdaq: SOCL). SOCL made its debut late last year. Facebook is not yet in SOCL’s lineup. However, SOCL is home to companies like Zynga, Google (Nasdaq: GOOG), LinkedIn (NYSE: LNKD) and plenty of well-known foreign social media firms

You better believe that Facebook will very soon become one of SOCL’s holdings. And with the $100-billion valuation for Facebook, it could be its largest holding. So you can play Facebook with an ETF pretty soon and with a heavy amount of exposure to the company.

2. Invest in Related Companies

Another option, says financial adviser Robert Russell in Dayton, Ohio: buying shares of publicly traded companies that create apps for Facebook; including social gaming app developer Zynga Inc. and SNAP Interactive (OTC: STVI.PK), which has created a popular dating app. Mr. Russell says more investors could pile into these companies if Facebook’s stock takes off. “You can play the trickle-down effect coming from Facebook,” he says.

You have to believe that Zynga will capitalize on the IPO. If you’re on Facebook, you’ve probably been saturated with “Mob Wars” or “FarmVille” requests to the point of absolute annoyance. Well thank Zynga for that, because it’s the company behind those games and several others.

Zynga has already been mentioned as a possible takeover target for Facebook. After all, Zynga accounts for 12% of Facebook’s revenue, according to Benzinga. Zynga’s current market value is about $9.4 billion, even if that doubles, Facebook could easily buy it after the IPO.

The Take

Believe me when I say I’m not down on Facebook. I just don’t feel comfortable with the valuation in regards to the IPO. I’ve just seen the “herd” go crazy on too many occasions. But no matter what I say, this stock is going to be a popular one. So do what you can to profit from it while limiting your exposure to the volatility.

Good Investing,

Jason Jenkins

Article by Investment U

Article by Investment U

In focus this week: Carl Icahn kicks some Chesapeake (NYSE: CHK), a contrarian tech play (CTSH), a perfect pile of fertilizer (IPI, MOS, POT) and the SITFA.

According to the Journal, the ultimate bargain hunter and activist investor, Carl Icahn, is closing in on Chesapeake Energy (NYSE: CHK). Following what could only be described as a circus over the past few weeks, Chesapeake seems to be so weak, it’s fair game for an activist like him.

An activist investor is a person or group who buys enough stock to force the board of a company, Chesapeake in this case, to make changes in how they are doing things to benefit the shareholders.

In most cases, it can drive the stock price.

Essentially Ichan will be forcing Aubrey McClendon, the CEO of CHK, to act like CHK is a public company, which it is, and act in the best interest of the shareholders, not himself.

If this sounds a little obvious, it is. McClendon it seems has been setting himself up quite well in the CHK structure, giving himself a percentage of all of the company’s production.

That’s a good deal!

Look for Icahn to put a stop to that or seriously limit McClendon’s reach in the company.

So what does all this mean to us? If Icahn does in fact drive the board to make serious changes at CHK, it may be worth a second look to us. But wait to see what happens when Icahn announces his intentions.

CHK is the second-largest gas producer in the U.S., but there are some very big concerns about it being over leveraged. With gas prices still below $4, it’s weighing very heavily on the stock.

Watch Icahn and CHK.

Next up…

A Contrarian Tech Play

"CTSH’s PE is currently right in line with its earnings growth rate."

The upper echelon of the investing world loves bad news. Buffet has often said he loves it when things are really bad.

So it’s easy to see why some of the top contrarians in the money world are looking at Cognizant Technology (Nasdaq: CTSH). The stock fell 27% in one month and the volume during that period was 20 times higher than its average daily volume.

According to a Barron’s article, Citi Group is telling its clients to buy it and Susquehanna Financial is advising its client to capitalize on the fear premium in the stock following what they called a “mob overreaction.”

Susquehanna is making its buy recommendation based on the GARP, growth at a reasonable price. GARP is when the PE is at or below the earnings growth rate, in other words a stock that balances growth and value.

CTSH’s PE is currently right in line with its earnings growth rate.

But be aware, when a stock disappoints, as Cognizant has, there is always the chance it could get whacked by a bad earnings report or even a competitor, either of which could drive it down even further.

Contrarian plays are my favorites but don’t let the low price cloud your judgment. Always protect yourself with reasonable position sizes and trailing stops, especially with a play like this.

Perfect Fertilizer

Everybody it seems is taking a look at Intrepid Potash. Buy recommendations and glowing comments about it are everywhere in the news.

One article this past week called it the perfect investment. Perfect or not this small potash manufacturer is in the right place at the right time.

Potash demand in the U.S., where Intrepid (NYSE: IPI) sells almost its entire product, is very bullish.

Farm income this year is expected to be the second highest ever and farmers are expected to spend a lot more on potash.

Corn, which consumes the most nutrients, is being planted at the highest rate in two decades. That will require more potash.

Reuters reported that Mosaic (NYSE: MOS), one of the big players in potash, sold as much potash in one day as it did in all of January.

Potash Corp. (NYSE: POT), another big player, said that potash levels in the soil are at five-year lows and farmers have to replenish it.

Intrepid is the largest potash producer in the U.S. and they are getting a higher price per ton than the big suppliers, $526 versus $497 for Potash Corp. and Mosaic.

Great numbers, favorable and improving trends and the largest producer in the U.S.; definitely take a look at this one. Intrepid, IPI.

And Finally the SITFA

It goes this week to Tempur-Pedic (NYSE: TPX), the makers of the space age foam mattresses that have taken the market by storm.

In a recent Barron’s article, it was reported that this mattress, which is heavily favored by baby boomers, has one big complaint. Some buyers are reporting that sex is not as good as on a conventional mattress.

I am not joking. Take a look at this week’s Barron’s.

According to one owner, the soft texture doesn’t give you enough traction. Another complained you don’t get the bounce of the coil spring mattress.

But according to the manufacturer, who offers a 90-day full money back offer, none have been returned for that reason.

I’m really at a loss on this one.

See you next week.

Article by Investment U

Article by Investment U

Fergie is clearly an astute investor, one you might be wise to emulate. Now if she would only drop the hip-hop and stick to rock and roll…

You probably don’t make a habit of taking investment advice from a 37-year-old singer and dancer, a former East L.A. gangbanger who has struggled with addictions to ecstasy and crystal meth.

But in the case of Stacy Ann Ferguson, better known by her stage name Fergie, maybe you should make an exception.

Fergie is the female vocalist for the hip-hop group The Black Eyed Peas. She has achieved chart success worldwide and won no less than eight Grammies. I am not a fan of her music, quite frankly. (Although her recent performance at the Rock and Roll Hall of Fame with Mick Jagger and U2 will definitely raise your pulse… if not an eyebrow.)

However, aside from making a boatload in the music industry, Fergie has enjoyed extraordinary success as an investor.

How? By plunking her money in recession-resistant opportunities, especially in luxury industries.

Investing in the Lap of Luxury

Fergie, for example, owns a stake in the Miami Dolphins. She has a luxury shoe line, her own perfume brands, a stake in a low-calorie vodka called Voli, and a new vineyard that will soon be producing cases of Ferguson Crest.

I don’t know who is advising this woman, but she definitely knows what she’s doing. In fact, we’ve made many similar moves in The Oxford Club over the past few years.

One of our past winners, for example, was Tiffany (NYSE: TIF), the world’s premier jeweler. It owns and operates more than 200 stores worldwide, specializing in gemstones, sterling silver merchandise, crystal, glassware, china, writing instruments, stationery, eyewear, and fashion accessories.

Tiffany caters not to middle class consumers who are concerned about job security, but rather the rich, the newly affluent, and those who aspire to be. Unlike virtually every other retailer, Tiffany isn’t doing any discounting. Fergie seems to understand the luxury industry protects profit margins ferociously. And that, in turn, protects profits.

In the “Spirit” of Investing

I also like her forays into the spirits industry. One of our top recommendations right now is Diageo (NYSE: DEO). It operates in more than 180 countries and offers a wide variety of famous international brands, including Smirnoff vodka, Johnnie Walker and J&B scotch, Guinness stout, Bailey’s Original Irish Crème, Jose Cuervo tequila, Captain Morgan rum and Tanqueray gin, among dozens of others.

History shows that Diageo’s customers are unlikely to substitute “Brand X” for their preferred liquor brands, even during tough economic times. Moreover, demographics favor its business. The number of consumers reaching legal drinking age has been on a steady upswing since 1999. And while the over-21 crowd is expanding, so is business with Baby Boomers. Studies show the over-55 group is increasingly reaching for spirits, not beer.

But the real bonanza with Diageo lies overseas, particularly in emerging markets. The population has been increasing much faster here than in the developed world. Fifty years ago, approximately two thirds of the world’s population was based in less developed countries. Today it is more than 80%. Millions more can now afford to enjoy a Guinness after work, or a scotch and water. That’s why Diageo has recently made major forays into China and Brazil.

In short, Fergie is clearly an astute investor, one you might be wise to emulate. Now if she would only drop the hip-hop and stick to rock and roll…

Good Investing,

Alexander Green

Editor’s Note: Aside from leading Investment U, Alex is also the Chief Investment Strategist for an exclusive fellowship of investors called The Oxford Club. His stock selections have been ranked in the top five over the past 10 years for investment newsletters by the independent Hulbert Financial Digest.

To find out more about the Club and how you can join, click here.

Article by Investment U

By MoneyMorning.com.au

Your editor spent yesterday morning at the Platts LNG Forum in Sydney.

The audience contained a mixture of industry professionals and investment analysts.

Anyone who turned up hoping for a healthy dose of ‘China will spur growth in the Asian energy market for years to come’ was sorely disappointed.

In fact, we walked away even more convinced of what we had already started to think – that China (and India) won’t have the same influence over the global energy market as they’ve had over the metal markets.

But if that’s so, what does it mean for natural gas, oil, and Aussie energy stocks?

Despite what you may think, we’d say it means a very bright future indeed. And with the recent hammering taken by energy stocks, we’d say now could be the best chance you’ll ever get to buy energy stocks on the cheap. Here’s why…

China’s Energy Demands

Yesterday I showed you a chart of China’s share of global natural gas demand. As of 2009 it was about 4%. But what we didn’t have were the numbers for the last two years.

Had China’s demand for natural gas taken off like a gas-fired rocket? Was it in control of 50%, 60% or even 70% of global demand?

Not quite.

Hong Chou Hui, managing editor of Platts’ Asia LNG gave us just the info we were after.

In 2010, China’s natural gas demand was 4.8% of global demand. And in 2011 it was 5% of global natural gas demand.

In growth terms, China’s share has increased 25% in two years. But so what? It was starting at a low base. And when you think about it, given that the Chinese economy has grown so quickly, and the fact it’s consuming more raw materials than you can possibly imagine…it still only accounts for 5% of the world’s energy demand.

Again, compare those numbers to the chart we showed you yesterday, where China is by far the biggest consumer of iron ore, coal and copper.

When Chinese demand for iron ore, coal and copper drops, related commodities and stocks will drop too. In the case of BHP Billiton [ASX: BHP], Rio Tinto [ASX: RIO], and Fortescue Metals [ASX: FMG], they already have.

Inelasticity of Energy Demand

So what does this tell us?

It tells us that the energy market isn’t a China-driven market.

For that matter, it’s not necessarily an American, European or Australian market either. The energy market right now is probably the closest you’ll get to a fully diversified commodity.

But, what’s happened?

China’s economy has slowed, the Europeans look as though they’re heading for recession, the oil price has tanked and Aussie oil and gas stocks have taken a bath.

It doesn’t make sense. And we’ll show you two charts to explain why. The first is a chart of world oil consumption from 1980 to 2010:

Click here to enlarge

The second chart is world dry natural gas consumption between the same dates:

Click here to enlarge

You see the same pattern on both charts. A steady increase. Yes, there are some peaks and troughs, but even during 2008-2009 (the biggest global recession since the Great Depression), oil and gas consumption barely dropped.

That’s because there’s an ‘inelastic demand’ for energy. In other words, the demand is reasonably stable regardless of economic conditions.

Power stations need oil, gas and coal to produce electricity (even with the advent of alternative energy supplies).

Industry and individuals need to drive to work, or use public transport that relies on an electricity supply powered by oil, gas and coal.

And people and businesses need to warm or cool their premises…and cook meals…and do all sorts of other things that require fuel.

Yet when China shows signs of slowing down, energy prices and energy stocks take a hit along with every other resources stock.

(Not quite every resources stock. Our old pal, Diggers & Drillers editor, Dr. Alex Cowie was dancing on his desk on Wednesday as his recent stock pick clocked up a huge gain. You can check out the Doc’s investment advisory service and the stock he reckons has further to run by clicking here…)

Why China Doesn’t Matter to the Energy Market

And let’s say China’s economy slows down. What kind of impact will this have on energy markets? Yes, there will be an impact. But it won’t be energy Armageddon.

According to Martin Daniel, editor of Platts Power in Asia, industry accounts for 75% of China’s electricity generation.

This is twice as much as in Japan and most other western economies where less than 35% of electricity demand is for industry.

Based on that, Chinese industry accounts for 3.75% of global natural gas demand. And even we aren’t predicting that Chinese firms will switch off all their machines when the economy crashes.

Firms will carry on making stuff. And sure they may not use quite as much electricity and natural gas, but as the charts above show, the impact of even major economic slowdowns only has a negligible effect on oil and gas demand.

You don’t get many opportunities in your lifetime to buy unfairly beaten-down stocks. This is one of those times.

Cheers,
Kris

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Free of the Dragon: Why the Energy Market Doesn’t Need China

By MoneyMorning.com.au

Greece is frozen in a political stalemate. Youth unemployment is running at over 50%. And there has been a $1 billion run on Greek banks.

From near and afar, there appears to be no easy way out, especially now that the Eurozone is heading back into a recession.

It’s times like these when investors pour into the U.S. dollar for its “perceived safety.”

With commodities priced in U.S. dollars, this spike in the greenback has sent commodities-including gold prices into a tailspin since early March.

That has many doubters asking: “Has the commodities super-cycle ended?”

It’s a reasonable question considering the Continuous Commodity Index (CCI) is back down to levels it last saw in September 2010.

What’s more, gold prices have backed off to near $1,500/oz., and oil prices have fallen from $110 to $90/barrel.

But as you’ll see, the commodities coin does have another side.

The Other Side of the Commodities Story

In fact, a recent article by Frank Holmes, CEO and chief investment officer at U.S. Global Investors, pointed out how China and other emerging nations are in better fiscal shape than much of the West.

Even if China is slowing somewhat, it is still growing at an enviable 8% per year, with only 42% debt to GDP ratio. So rather than go for more outright stimulus, it’s expected that China will target new loan growth and its M2-money supply growth to around 14%.

Meanwhile, India and Australia have just lowered interest rates while other central banks are basically refusing to raise rates.

It means the world will keep turning, people will keep consuming and annual demand of raw materials is likely to remain elevated.

As for gold prices, let’s cut right to the chase.

Interest Rates and Demand is Pushing Gold Prices Up

Real interest rates [in the US] are running around negative 2% and thanks to ZIRP (Bernanke’s Zero Interest Rate Policy), they’re likely to remain so at least until late 2014.

And debt in the West (U.S., Europe, England, and Japan) has doubled in a little over three years to almost $8 trillion in a veritable monetary flood that’s bullish for gold.

On top of all that, the demand for physical gold is still increasing.

According to the World Gold Council’s (WGC) Q1 2012 trends review, they see record levels of Chinese gold demand, surging 10%, for a new quarterly high of 255.2 tonnes. They also see further growth, as the Chinese remain concerned about high inflation persisting.

The demand is so great that China has surpassed India as the world’s largest gold consumer.

European demand has also held up well, with physical metals in the form of bars and coins selling at higher than historical levels.

And central banks keep doing their part, with net purchases totaling 80.8 tonnes, or about 7% of global demand. WGC believes there’s been a secular shift, with central banks now set to remain net buyers of gold for the foreseeable future.

Prepare Yourself for Gold Price Fluctuations

Yet, gold investors who are dismayed by its recent price action need to be psychologically prepared.

If we were to see a scenario similar to the 1970s bull market, gold could easily drop in half at any time.

That’s exactly what happened when gold reversed from $200 in January 1975, and fell for 18 months to $100 in August 1976.

Certainly, a drop that big would have forced a lot of gold investors to sell. But the truth was that the best was yet to come.

From $100 in August 1976 until its peak in 1980, gold rose 8 times to over $800.

In fact, a chart of the entire current bull market shows that gold prices could easily pull back to $1,300 and still not violate its upward trend line.

A QE Boost to Commodity and Gold Prices

So yes, the markets are in a funk over Europe and less-than-stellar economic news here.

But this is déjà vu all over again. Since the financial crisis began, we’ve been here three times before. In fact, each time since then, the Fed has stepped in following a clear market pullback and opened the monetary spigots.

First came Quantitative Easing 1 (QE1), then QE2, then Operation Twist. Each one of these liquidity injections quickly sent the market soaring.

The Fed also promised to keep rates low until the end of 2014. Of course, Ben’s been denying for months that more stimulus is coming. Yet recently released Fed minutes from its April monetary policy meeting showed more openness to another round of quantitative easing to coax the economy along.

But each time one of these injections ends (wears off), the market (junkie) goes into withdrawal, and looks for its next fix.

I’ve been saying for a while that it’s coming. With an election pending this November, odds are good we’ll see QE3 before the end of summer.

With falling stocks, retreating commodity prices, and weak jobs reports, it’ll make the QE3 sales pitch a much easier sell than your average time-share.

And based on the reaction the last three times, I’m pretty confident the commodities markets will smile at this one, too.

Still, it won’t be enough. We’re going to see a lot more central bank easy money. QE4, QE5, and QE-pick-a-number will not be far behind.

Get ready. Commodities and gold are about to come roaring back.

The commodities bull market is far from over.

Peter Krauth

Global Resources Specialist, Money Morning (USA)

From the Archives…

How the Ukraine Could Be Europe’s Biggest Shale Gas Play
2012-05-18 – Kris Sayce

Why Greece Can’t Afford to Stay in the Euro
2012-05-17 – Dan Denning

Get in Early on Shale Gas
2012-05-16 – Dr. Alex Cowie

APPEA – Day One at the Oil & Gas Show: Sand Dunes, Scuba Diving and Camels
2012-05-15 – Dr. Alex Cowie

The Case for Higher Gold Prices
2012-04-14 – Diane Alter

Good For Gold Prices: Commodities are Wounded, But Far From Dead

By MoneyMorning.com.au

The uncertainty looming around worldwide economies sent oil prices sinking below $90 a barrel, a level not seen since October of last year.
The decline came on the heels of several weeks of slipping oil, sparked by a plethora of less than stellar economic reports. The concerning data mostly involved Europe’s ongoing sovereign debt saga.

Oil gained 0.5% in early afternoon New York trading Thursday, but the reasons for the rally were unclear.

“You don’t know if this is just a short-covering rally or the start of a more significant rally,” Andy Lebow, an oil analyst with Jefferies, told The Wall Street Journal. Lebow said that progress in the talks between Iran and Western powers about Tehran’s nuclear ambitions could have spurred Thursday’s price reversal.

If the gain isn’t maintained, however, prices could head closer to $85 a barrel.

Europe and the Oil Prices Slide

Contributing to [the] decline were mounting concerns about the strength of the global economy.

European finance ministers gathered for an ad-hoc meeting in Brussels Wednesday night to discuss measures to prop up stagnant economic growth in the region and to confer about the dire situation in Greece.

Red flags have been raised warning of a “severe recession” in the 17 nations that use the euro, which Greece is threatening to leave.

Also weighing on oil was the latest government report that showed U.S. stores swelled last week by 900,000 barrels to 382.5 million barrels. That was the highest level since 1990 and above forecast of supply growth of 750,000.

In May alone, the oil price has declined more than 15% and currently sits at its lowest level since Oct. 21.

“This is a good thing for consumers, that’s for sure,” oil analyst Andrew Lipow told the Associated Press.

Oil Price Decline Temporary

Don’t get too comfortable, however, with lower oil and gas prices.

[USA] Money Morning’s Global Energy Strategist Dr. Kent Moors sees the slide as temporary.

He wrote just a week ago, “We are seeing a short-term pullback in prices as concerns over falling demand levels parallel the European confusion.”

Moors wrote that the U.S. economy is “largely insulating itself” from what happens overseas, and that oil demand continues to be robust in the areas around the world that actually determine the pricing level.

“The current situation tends to benefit the value of the dollar against the euro,” said Moors about Europe’s debt debacle. “With virtually all international oil trades in dollars, that does mean prices may stabilize for a time. But it also means the concentrated asset wealth in oil transactions will increase.”

“And despite the events in Europe, the ultimate value of oil contracts will increase as well-especially in a market where the essential rise in demand is occurring in those regions of the world not directly impacted by the Eurozone problems,” Dr. Moors continued.

Other variables looming that could trigger an oil prices spike include Iran resuming its standoff with the West, and the possibility that OPEC could cut production if the oil price falls too low. Then there is the U.S. hurricane season which starts June 1; major storms are always a worry to oil rigs in the Gulf.

Diane Alter

Contributing Writer, Money Morning (USA)

Publisher’s Note: This article originally appeared in Money Morning (USA)

From the Archives…

How the Ukraine Could Be Europe’s Biggest Shale Gas Play
2012-05-18 – Kris Sayce

Why Greece Can’t Afford to Stay in the Euro
2012-05-17 – Dan Denning

Get in Early on Shale Gas
2012-05-16 – Dr. Alex Cowie

APPEA – Day One at the Oil & Gas Show: Sand Dunes, Scuba Diving and Camels
2012-05-15 – Dr. Alex Cowie

The Case for Higher Gold Prices
2012-04-14 – Diane Alter

Where Are Oil Prices Headed?

AUDUSD stays below a downward trend line on 4-hour chart, and remains in downtrend from 1.0474, the rise from 0.9689 is treated as consolidation of the downtrend. As long as the trend line resistance holds, we’d expect downtrend to resume, and next target would be at 0.9600 area. However, a clear break above the trend line resistance will indicate that the downward movement from 1.0474 has completed at 0.9689 already, then the following upward movement could bring price back to 1.0600 zone.

Daily Forex Forecast

Against the backdrop of discussions about pending negotiations over its controversial nuclear program and the upcoming deadline of an European embargo on Iranian oil comes a quiet push by the Islamic republic to become a major electricity exporter. Tehran had said it was expecting to secure electricity deals with Syria and Lebanon and had somehow attracted an estimated $1 billion to help build new power plants in the country. With some of the largest natural gas reserves in the world, Tehran might be able to shrug off international sanctions by embracing an ambitious electricity agenda.

European restrictions on Iranian oil go into force later this summer. Some U.S. allies in the European and Asian community have already started taking steps away from Iranian crude oil purchases in an effort to escape economic pressure from the West. Sanctions are meant to take oil revenue away from Tehran that its adversaries believe is financing a covert nuclear weapons program. But while U.S. Secretary of State Hillary Clinton was praising New Delhi for its coordination with U.S. nuclear concerns, Indian delegates were in the other room landing trade deals with visiting Iranians. This suggests that despite Western pressure, there’s still some interest in working in an Iranian economy.

A week after Clinton left, Tehran started announcing that it was keen to develop a self-sufficient power sector. The Iranian government said it already has electricity export contracts with its neighbours, including Turkey and Iraq, and was now looking further away to Lebanon and Syria. The Energy Ministry said its electricity exports were up more than 38 percent for the calendar year ending in March, so there was plenty to go around. Despite an eight-year military and reconstruction campaign in neighbouring Iraq, Tehran could claim, parts of Baghdad still don’t have a reliable source of electricity so why not take advantage of the opportunity.

Further still come claims that Tehran has set aside roughly $650 million for renewable energy programs. This, the government said, would come from a slush fund set up by Iranian President Mahmoud Ahmadinejad last year, when Iranian crude oil was still flowing freely, that designated 20 percent of the country’s oil and gas revenue for such social investments. On top of that was the announcement that the private sector can now sell Iranian crude in an effort to escape sanctions pressure.

OPEC in its monthly report said oil supplies were greater than oil demand. The IEA, for its part, said that while Iranian crude exports were down sharply, an “apparent” easing of tensions between Iran and the international community was helping to keep crude oil prices down. So much for back-breaking gasoline prices. That being said, with Iran ranking in the Top 5 among world natural gas producers, it might be onto something with its electricity ambitions. And if it’s indeed serious about a renewable energy program, its green revolution may come not from opposition leaders but in the form of renewables and natural gas.

Source: http://oilprice.com/Energy/Natural-Gas/Irans-Green-Revolution-may-come-from-Energy.html

By. Daniel Graeber of Oilprice.com