Month: October 2012

By TraderVox.com

Tradervox.com (Dublin) – Signs that Britain is out of a double-dip recession were confirmed by a report showing that the economy expanded at the strongest pace in five years as Olympic ticket sales and an increase in services aided the economic rebound. According to the Office for National Statistic, the Gross Domestic Product rose by one percent in the third quarter. This is the fastest rate since 2007, according to the institution’s data. The data beat the market forecast of 0.6 percent and caused the pound to strengthen against major peers.

The data from the Office for National Statistics indicated that the rebound was as a result of Olympic ticket sales and the surge in services. The statement from the office also noted that the rebound from the second quarter, which was affected by an extra public holiday, is indicative that the economy is healing from the effects of troubles in Europe. Despite the temporary relieve that this data will give to the Prime Minister, David Cameron, the Bank of England Governor mervyn King has noted that the advanced is slow and uncertain. The market is still watchful of the fundamental weaknesses that might warrant further stimulus.

According to James Shugg, who is a London-based economist at Westpac Banking Corp, there are concerns that the Britain’s economy will remain flat throughout the year, adding that the progress in the economy will depend on who rigidly the government is determined to remain committed  to its deficit reduction plan. The surge in the GDP was caused by the 1.3 percent leap of the UK services that constitute about three quarters of the GDP. The ONS data indicated that the Olympics tickets sales amounted to 0.2 percentage points of the GDP.

After the release of the data, the pound advanced against the dollar to $1.6134 at the morning session in London, before closing the day at 0.6 percent up from the previous day close.

Disclaimer
Tradervox.com is not giving advice nor is qualified or licensed to provide financial advice. You must seek guidance from your personal advisors before acting on this information. While we try to ensure that all of the information provided on this website is kept up-to-date and accurate we accept no responsibility for any use made of the information provided. Opinions expressed at Tradervox.com are those of the individual authors and do not necessarily represent the opinion of Tradervox.com or its management. 

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Article by AlgosysFx Forex Trading Solutions

A weaker US dollar is foreseen opposite the Australian dollar today as gauges from the housing, manufacturing and employment sectors in the US are seen to further highlight the improving prospects for the world’s largest economy. Yesterday, the Federal Reserve reiterated its commitment to continue with its asset purchases until unemployment improves significantly.

Federal Reserve officials held steady on their new stimulus program, opting to launch no new initiatives while saying there has been some improvement in household spending and an uptick in inflation since the scheme began last month. In a statement following its two-day meeting, the FOMC left short-term interest rates unchanged and reaffirmed its plans to keep them at current levels at least through mid-2015 because of the ailing economy. Nonetheless, analysts say that the Fed offered a slightly more upbeat picture of the US economy, citing that the economy has continued to expand at a moderate pace in recent month. The central bank also deems that household spending has advanced a bit more quickly and that inflation had recently picked up. It also acknowledged that the housing market has shown signs of improvement, albeit from depressed levels.

Echoing this optimism, the Commerce Department reported yesterday that American demand for new homes inclined to its highest level in more than two years in September. New home sales rose 5.7percent to a seasonally adjusted 389,000 annual rate, the highest level since April 2010, in a sign that the real estate market is gaining steam. The report also revealed that the median price of a new home inclined 11.7 percent from a year ago. The rebound in the sector is being support by record-low mortgage rates, which have been pushed down by the Fed’s easy monetary policy stance. Meanwhile, the National Association of Realtors is awaited to disclose today that Pending Home Sales recovered last month to suggest that the recent strides in the sector are apt to continue. Pending home sales are estimated to have jumped by 2.3 percent in September following the 2.6 percent fall recorded in the previous month.  On encouraging views that the housing market could provide a boost to growth, risk-on trades are presumed to dominate today.

Meanwhile, improved labor prospects are deemed to further advance the amelioration in the housing and retail sectors. The number of individuals claiming unemployment-related benefits is projected to have dipped from 388,000 to 371,000 in the previous week, suggesting that recent developments in the broader economy have caused an uptick in business confidence. Meanwhile, after registering their largest plunge in three years, orders for US durable goods likely inclined last month as demand for airplanes recovered. Analysts estimate that bookings for goods meant to last at least three years rose by 7.2 percent in September following the 13.2 percent drop in August. The core reading, which excludes transportation equipment, is believed to have mounted by 0.8 percent from the 1.6 percent fall previously. Although business investment is taking a hit from waning exports and fiscal uncertainty at home, the report suggests that the slowdown in manufacturing is not as deep as previously thought. Considering these positive trends for the world’s largest economy, buoyed market sentiment is seen to wane demand for the Greenback. Hence, a long position is advised today.

For more news, analysis, technical charts and candlestick analysis, visit AlgosysFx

Greetings,

In July 2008, when crude oil prices were at $148 a barrel and “peak oil” bulls were forecasting a rise to $200, even $300 a barrel, contrarian technical analyst Robert Prechter took the opposite stance:

“One of the greatest commodity tops of all time is due very soon,” he wrote in his June 2008 Elliott Wave Theorist.

By December 2008, a barrel of oil cost just $32.

In recent months, the “peak oil” bulls are back to their same old forecasts from 2008:

T. Boone Pickens: Oil Could Hit $148 Per Barrel
– CNBC, April 3, 2012

Are such forecasts more valid now than they were then?

You can now read Prechter’s big-picture outlook on the oil markets in a newly released report.

Follow this link to download Prechter’s 26-page oil report now — it’s free for a limited time.

About the Publisher, Elliott Wave International
Founded in 1979 by Robert R. Prechter Jr., Elliott Wave International (EWI) is the world’s largest market forecasting firm. Its staff of full-time analysts provides 24-hour-a-day market analysis to institutional and private investors around the world.

Source: ForexYard

The US dollar hit a four-month high against the JPY during the overnight session, as investors remained convinced that the Bank of Japan will soon announce a new round of monetary easing to help the Japanese export industry.

The euro was able to recover some of its recent losses against the dollar last night, as expectations that the Greece will be given more time to implement economic reforms boosted risk appetite. The EUR/USD, which is once again trading above the psychologically significant 1.3000 level, gained more than 50 pips during Asian trading.

After falling by close to $2 a barrel yesterday due to a significantly higher than expected US inventories report, crude oil was able to gain close to $0.70 during the Asian session and is currently trading at $86.50.

Main News for Today

US Core Durable Goods Orders- 12:30 GMT
• Core durable goods orders are forecasted to come in at 0.8%, significantly higher than last month’s -1.6%
• Any better than expected news could boost the USD/JPY during mid-day trading

US Unemployment Claims- 12:30 GMT
• Figure is expected to come in at 371K, which would represent an improvement over last week’s 388K
• Should the figure come in below 371K, risk appetite may increase which could boost higher yielding commodities like gold and crude oil

US Pending Home Sales- 14:00 GMT
• Pending home sales are expected to have increased to 2.3% last month
• If true, it would represent a substantial improvement in the US housing market, which could boost the USD in afternoon trading

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 Central Bank News
Here’s today’s Central Bank News link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don’t miss any important news.

By Central Bank News
    Sweden’s central bank held its benchmark repurchase rate unchanged at 1.25 percent, but the Riksbank said it was more likely to cut than raise its rate in coming months to stimulate economic growth and push the inflation rate higher towards the bank’s target of 2 percent.
    The Riksbank, which has cut its rate twice this year for a total cut of 50 basis points, revised downwards its forecast for the future path of the repo rate, saying it expects an average rate of 1.2 percent in 2013, down from September’s forecast of 1.4 percent, and an average rate of 1.7 percent in 2014, down from 2.0 percent. For 2015 the Riksbank forecast an average rate of 2.3 percent.
    “It is now more probable that the repo rate will be cut than raised during the winter,” the Riksbank said in a statement following a meeting of its executive board.
    The low repo rate path is expected to be accompanied by a stabilisation of households’ debt ratios at current levels, it added.
    The downward risks to the forecast are a worsening of the euro area’s problems, which would lead to an even lower repo rate, while higher-than-expected demand by Swedish households and companies than expected would justify a higher rate path, the Riksbank said.
    Two of the Riksbank’s six board members dissented from the decision to keep the rate unchanged, with Deputy Governor Karolina Ekholm advocating a cut to 1.0 percent and Deputy Governor Lars Svensson wanting the repo rate cut to 0.75 percent.

    The Riksbank said Sweden’s unemployment rate, which is expected to average 7.7 percent this year from 2011s 7.5 percent, is expected to rise to 7.9 percent in 2013 and then ease to 7.4 percent in 2014.
    With no upward pressure on inflation, the Riksbank forecast that consumer prices would average an increase of 0.9 percent in 2012, down from its previous forecast of 1.3 percent, and the inflation rate would then rise to an average 2.4 percent in 2014,  below its September forecast of 2.6 percent.
    In September Sweden’s annual inflation rate fell to 0.4 percent from 0.7 percent. In 2011 consumer prices rose by 3.0 percent.
    Sweden’s economy has shown resilience to Europe’s debt crises, helped by the high purchasing power of Swedish households. But uncertainty surrounding the euro area’s fundamental problems, Sweden’s main trading partner, remains high and the area’s economic growth is expected to remain weak, the bank said.
    Sweden’s second quarter Gross Domestic Product grew by 1.3 percent, down from 1.5 percent in the first quarter.
    In contrast to Europe, the Riksbank was relatively upbeat about global growth.
    “Although there is a slowdown in many emerging economies, the global economy was still growing at a relatively good pace,” the bank said.
    Last month the Riksbank surprised financial markets by cutting its rate by 25 basis points to avoid inflation falling further. It said last month that it expected to keep the repo rate at that level to mid-2013.
    www.CentralBankNews.info

By MoneyMorning.com.au

We couldn’t decide whether to write about this subject in Money Morning or in our new free eletter, Pursuit of Happiness.

So we’ve come to a compromise. We’ve decided to write about it here and then post it to the Pursuit of Happiness website too.

To be honest, this subject matter could fit in either spot. It’s a matter of financial freedom and personal freedom.

It’s also a subject that could make your editor unpopular around our office. But we’re used to being unpopular, so we can live with it.

Anyway, you decide, because what we’re about to say could have an important bearing on how you build and secure your wealth…

One of the hottest topics in contrarian investing is whether the world’s banking system will return to either a gold standard (where currency is backed by gold), or a gold exchange standard (where a currency is priced against another currency, which is backed by gold).

In the end, we think one of those will happen. History tells you that gold and silver have been the money of choice for thousands of years.

But history tells you something else. And this is the thing many gold investors don’t talk about.

History tells you that governments will always try to fiddle with the money supply in order to pay for votes and wars.

In order to fiddle with the money supply, the government needs control over the money supply. Most importantly it needs legal tender laws. Legal tender laws create a money monopoly that makes it illegal for people and businesses to transact in a competing currency.

And they also mean people and businesses must by law accept the legal tender currency.

The problem for governments with gold-backed money is that it’s harder to wage wars and pay for votes. That’s why at every time through history that a nation goes to war, it’s not long before it openly or covertly abandons the convertibility of paper money to gold.

So, how likely is it that the Western world will return to a gold money standard? Well, it’s both likely and unlikely at the same time…

Government Outlaws

What makes it unlikely is the fact that Western economies haven’t been on a gold exchange standard for 40 years. And no Western nation has been on a genuine gold standard since before World War II.

Even the US dollar wasn’t a genuine gold standard under Bretton Woods, because US citizens didn’t have the right to convert their dollars into gold.

In short, crazy politicians, central bankers and bureaucrats have done a darn good job of demonising gold for at least 80 years…if not longer.

That means it’s hard to see the general public urging for a return to a gold standard. Think about it, if you play a word association game with most people and say the word ‘gold’, the first word they’ll say in reply is ‘rich’.

People still see gold as a rich person’s investment.

That’s why we’ll make this cautionary point: if the world’s central bankers and politicians start talking about a gold standard, don’t celebrate it, take it as a warning.

In previous times when the state abandoned gold, many people owned gold and silver. Although the government may have suspended convertibility of paper money to gold, it was hard to outlaw the ownership of gold.

That changed in 1933 when US president Franklin D Roosevelt issued Executive Order 6102. This order outlawed ‘the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates within the continental United States’.

But even by then, 20 years after the creation of the US Federal Reserve, and 15 years after the monetary inflation of World War I, paper money was already well established.

Bottom line: if the US government could easily confiscate gold while most of the population still had a concept of sound money, don’t you think it will be much easier when 99% of the population has no concept of sound money?

That’s what makes a return to gold likely.

And remember, the Australian government, central bankers and bureaucracy prepared for Aussie gold confiscation over 50 years ago…long before the paper-money credit boom of the 1970s, 1980s and 1990s…

Australia’s 53-Year Gold Confiscation Plan

Part IV of the Banking Act 1959, specifically addresses the conditions where the Australian government can order the confiscation of private gold.

Section 42 notes:

In other words, when the Governor-General says so.

Right now, Part IV of the Banking Act isn’t in effect. But it’s a ‘sleeping clause’. In other words, it’s not in force until ‘the Governor-General is satisfied that it is expedient so to do, for the protection of the currency or of the public credit of the Commonwealth…’

What we’re getting at is this. If any government proposes a return to a gold standard, it will be under the government’s terms.

And because returning to a gold standard would involve devaluing the currency (leading to a higher nominal gold price), governments would only do this after it has confiscated private gold.

That’s exactly what happened in the US when that beacon of liberal thought, Franklin D Roosevelt, confiscated gold from the people. He gave them dollars in return of course. But then the rascal immediately devalued those dollars by 40% compared to the value of gold.

What a great guy. What a hero. What a crook.

Divide Your Gold to Conquer the State

So our advice is this. Yes, hope and urge for a gold standard. But you and our colleagues should be careful of what you wish for. Because if we’re right, the government would first direct the Governor-General to invoke Part IV of the Banking Act 1959. This would compel you to hand in your gold.

We don’t think this will happen yet…in fact it may not happen for years. That means you’ve still got plenty of time to think about how you can keep your gold from the government’s grasp.

The words ‘hole’ and ‘shovel’ spring to mind. But you should also look at other options such as a safety deposit box…or even asking trusted family members overseas to take care of some of your gold and silver (make sure you really trust them).

Put simply, it’s time to think about dividing your precious metals in order to conquer the inevitable government grab for your wealth.

As we say, it won’t happen yet, but it’s definitely something to start planning for anyway.

Cheers,
Kris

From the Port Phillip Publishing Library

Special Report: After the Bust

Daily Reckoning: A Safer Than Super Investment?

Money Morning: The Big Fall in the Stock Market I’ve Been Waiting for is Still to Come

Pursuit of Happiness: Why Lost Super Is Government Theft of Personal Property

Why a Return to the Gold Standard Could Actually Be Bad

By MoneyMorning.com.au

Five years have passed since the financial crisis brought the world to its knees.

Gone are likes of Lehman Brothers and Bear Stearns among others who were driven into ruin by the epic collapse of the [US] housing bubble.

In the aftermath, life appears – on the surface at least – to be returning to some form of normal. Normal, that is, if you happen to have a job.

It may be anemic, but there is real growth. And the truth is even housing may have bottomed.

Admittedly, it’s not exactly sunny, but it’s nowhere near as dark as it was in 2008 either.

Or is it?

According to a recent survey by State Street Global Advisors, there’s still plenty to worry about-especially in the sordid world of finance.

In fact, the world’s 3rd biggest money manager said 71% of investors worldwide are afraid the next Lehman could strike within the next twelve months.

Keep in mind, we’re not talking about small retail investors here. Not at all.

We’re talking about some of the largest and best-informed, most sophisticated pension funds, private banks, and asset managers in the world and the wide majority of them think a “black-swan” type event could strike before this time next year.

A Financial Crisis Rerun

What do they think could be the trigger for this event?

Their biggest fears revolve around the next global recession, a potential euro break-up, or another episode of bank insolvency.

Other concerns cited were a slowing Chinese economy, an oil price shock, or the risks of asset bubbles from unending economic stimulus. Thanks to ongoing debasement wars, the asset class they feel holds the biggest risk at the moment is the currency markets.

These elite asset managers are not alone their fears either.

For its part, the International Monetary Fund (IMF) sees mounting risks too, with European uncertainty as the most prevalent concern.

Consequently, the IMF’s is pushing its plan to harmonize the European financial system through a more integrated banking union and fiscal integration.

They’ve warned that intensifying pressure on banks could lead to “asset shrinkage” ranging from $2.8 trillion to $4.5 trillion by end next year.

Of course, “asset shrinkage” is nothing more than a fancy way to say: “lose money”

Yet in a complete “about face”, this bastion of economic wisdom has taken a dramatic new stance on austerity. After years of pushing financial aid recipients to right their fiscal ships, the IMF’s Christine Lagarde now favors relaxing timelines for Greece and Spain to narrow their deficits.

Given the circumstances, you’d think this is a no-win situation. But the truth is other options do exist, and some have even worked out rather well.

The Right Way Out Of a Financial Crisis

Take Iceland for instance.

Iceland was slammed by the 2008 financial crisis. It witnessed the collapse of three major banks, a stock market crash, and the blow up of potentially crushing debt for its small population of 320,000.

Not surprisingly, it all led to riots, something this peaceful and remote northern nation hadn’t seen for 50 years.

The case of Iceland’s economy is fascinating, because it’s a microcosm of what could have happened elsewhere.

At the start of the financial crisis, Iceland was in very dire straits, worse off perhaps than virtually any other developed nation. But instead of bailing out its banks, these ailing entities were simply allowed to fail.

How novel: failure as an option.

And guess what? Iceland did not fall off the face of the earth, or go back to the dark ages.

According to a recent Wall Street Journal article, unemployment in Iceland has now fallen to 5%. What’s more, its economy, which naturally shrank 6.6% in 2009 and 4% in 2010, has actually now dramatically reversed course growing 2.6% in 2011.

As for 2013, Iceland is expected to grow by 3% this year. Wow.

The turnaround is pronounced enough that private Chinese business interests are investing a total of $100 million in Iceland to cultivate tourism. Beijing-based Zhongkun Investment Group will develop a hotel, racecourse and themed resort in the country’s northeast.

There are a couple more things you may want to know about Iceland.

Rather than bail out their bankers, Iceland chose to arrest and jail them. Now its economy is one of the fastest growing in the developed world.

According to the IMF, the country’s economic resurgence continued this year thanks to “solid policy implementation” and a stabilized currency.

So you’d think that would jolt a little common sense into the top brass “planners” over at the IMF. What’s more, Iceland is (or maybe was?) a European Union candidate. But public opinion now seems decisively set against joining.

That tells me Icelanders have learned their lesson. They finally get it. And when the next financial shock comes, chances are good they’ll hold up much better than most.

Protect Yourself Against
the Next Financial Crisis

Meanwhile, concerns in a bailed out Europe continue to linger. So much so that even Switzerland, the traditionally neutral landlocked country is raising its level of alert.

This non-EU member shares borders with Germany, France, Italy and Austria. But thanks to the ongoing European debt crisis, the army is concerned about potential refugees from Greece, Italy, Spain, Portugal, and even France.

In fact, Swiss Defense Minister Ueli Maurer recently warned that violence could escalate in Europe as a result. In order to remain prepared, Switzerland recently launched a military exercise to respond to a potential threat of instability in Europe, mobilizing 2,000 troops from infantry, air force, and special forces.

So what should you do to protect yourself against the next financial crisis?

Those surveyed by State Street suggested a number of strategies to hedge against possible market shocks including alternative asset allocation, real estate, and even managed futures.

But let’s face it, the best available option in a crisis are commodities and precious metals-especially gold.

That’s a sentiment PIMCO chief Bill Gross agrees with. His fund has over $1.8 trillion under management.

In a recent investment outlook, Gross said that unless ongoing deficit problems are resolved they will likely to lead to inflation, and the U.S. dollar would decline.

Gross went on to say, “bonds would be burned to a crisp and stocks would certainly be singed: only gold and real assets would thrive within the “ring of fire’.

Call it what you will-a black swan or a ring of fire-the fact is five years of bailouts have lulled us into a false sense of comfort.

But I wouldn’t get too cozy with those thoughts at the moment.

The timing may be a matter of discussion but the end result is a fact. The black swan will eventually return.

In the meantime, do your best to be a good boy scout: be prepared.

Peter Krauth
Contributing Writer, Money Morning

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

From the Archives…

Why this Could be the Most Important Day of the Year for the Stock Market
19-10-2012 – Kris Sayce

A Back-Door Way to Invest in the Electric Car Industry
18-10-2012 – Kris Sayce

The Stock Market is Up, What’s Next?
17-10-2012 – Murray Dawes

Debt and Government Spending Means You Should Be Wary of this Stock Market
16-10-2012 – Greg Canavan

The Secret Investment to Buy When GDP Falls
15-10-2012 – Nick Hubble

The Next Financial Crisis: Why 71% of the Big Money Fears the Black Swan

By MoneyMorning.com.au

After a surprisingly comfortable re-election, Venezuela has decided to stick with Hugo Chavez and all that comes with him.

That has prompted The Wall Street Journal and other pundits to forecast nothing less than economic doom for Venezuela in 2013.

But when it comes to poorly run South American countries, Cristina Fernandez de Kirchner is someone that could easily give Chavez a run for his money.

As Argentina’s president, Fernandez de Kirchner is a master of economically inept policies in her own right.

So who will win this race to the bottom?

Let’s examine which one of the two economies – Venezuela or Argentina will run out of money first. Starting with Venezuela’s Chavez.

After all, when it comes to wealth destruction, Chavez has had a pretty big head start. He was elected in 1998, while Fernandez’s husband was first elected president in 2003 (she succeeded him as president in 2007; he died in 2009.)

What’s more, the wealth destruction in Venezuela did not begin with Chavez. The Conference Board Total Economy Database shows that Venezuelan productivity was more than 20% lower in 1998 than it had been in 1970.

In fact, I did a study on the potential for Venezuelan corporate finance for a client bank back in 1990 and came to the conclusion that there was very little potential for it.

Other than the oil company PdVSA, there were very few corporations in Venezuela for which one could imagine doing corporate finance deals of any substance.

There were a few local monopolies like the tobacco company, but essentially all business activity beyond the mom-and-pop store level centred round the oil sector.

That same thing was not true in Argentina’s economy.

Venezuela vs. Argentina

Argentina was genuinely rich in 1929, and its minerals and commodities business was sufficiently diversified that even when I was there in the 1980s – a low point – there was obviously lots of locally owned stuff going on.

What’s more, the Argentine economy was decently run in the 1990s, with the currency pegged to the dollar. At the time, free market policies were basically in force and the level of corruption was reduced to a manageable level under President Carlos Menem.

However, commodity prices were low throughout the 1990s, so the budget and balance of payments ran into difficulties. That resulted in a default on debt and a sudden devaluation of the peso from parity against the dollar to 4 to 1, wiping out many middle class savings which were forcibly “pesified.”

The skills needed to run a decent economy in the two countries thus are different.

In Argentina’s economy, while commodity prices are high, you just need to run a free market system and keep the Argentine government from bloating itself. If you can stick to that, wealth will come.

Of course, since Argentina ran more or less free-market policies in the 1990s, which ended badly, and admirably free-market policies in the 1930s, which coincided with the Great Depression, the chances of the Argentine electorate accepting decent policies is pretty slim.

By comparison, Venezuela’s economy is more difficult.

If PdVSA is run properly (a job at which Chavez is failing – Venezuelan oil output is down by about a third since 2001), then there will generally be enough revenue to keep the place afloat.

However, it will all be concentrated in the government.

Even if PdVSA were fully privatized, a rational government would charge it huge royalties and produce the same effect. Thus the Venezuelan economy has not had free market policies since the 1950s, and is unlikely to get them as long as the oil lasts.

Even if the Venezuelan electorate underwent a mass conversion, Venezuela’s economy would still remain badly run; its troubles are far less the fault of its people’s foolishness than in Argentina.

Argentina Takes the Lead

So while the two countries are fairly close on their road to ruin, Argentina has the lead.

Here’s why.

Venezuela has nationalized almost all the foreign companies operating in the country, whereas Argentina has only begun by nationalizing the oil company. Indeed, in Argentina several mining companies are expanding, foolishly imagining they will avoid the treatment.

Both countries operate rigorous foreign exchange controls, both countries have “free market” exchange rates far lower than the official rates, and in both countries the governments have taken steps to seize the foreign exchange reserves.

Still, even though Venezuela’s economy has been slightly more hostile to foreign investment, my bet would be on Argentina running out of money first.

The reason is that Venezuela already controls its main source of export earnings through PdVSA, whereas Argentina’s economy is reliant on its agriculture sector and foreign mining companies to provide foreign exchange.

Thus bad behavior by the Argentine government will eliminate the flow of foreign money, whereas provided Chavez can find even a few top managers for the oil company, Venezuela’s foreign money flow is guaranteed.

So here’s the bottom line: unless Chavez gets sick again, the Venezuelan economy can probably stagger on for some years.

The Argentine economy, on the other hand, could collapse within a year.

Needless to say, you should avoid investing in either one of these black holes.

Martin Hutchinson
Contributing Editor, Money Morning

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

From the Archives…

Why this Could be the Most Important Day of the Year for the Stock Market
19-10-2012 – Kris Sayce

A Back-Door Way to Invest in the Electric Car Industry
18-10-2012 – Kris Sayce

The Stock Market is Up, What’s Next?
17-10-2012 – Murray Dawes

Debt and Government Spending Means You Should Be Wary of this Stock Market
16-10-2012 – Greg Canavan

The Secret Investment to Buy When GDP Falls
15-10-2012 – Nick Hubble

Which Economy Will Be First to Fall – Argentina or Venezuela?

By The Sizemore Letter

John Mauldin is far too much of a gentleman to say “I told you so,” but he would certainly be within his rights to do so.

When Mauldin published the original Bull’s Eye Investing in 2003, he made his case that U.S. stocks were in the early stages of a secular bear market.  Today, nearly a decade later, he has been proven largely correct.  The S&P 500 is still below its 2007 all-time high and, far more significantly, still below the previous high set after the secular bull market of 1982 – 2000.  Adjusted for inflation, investors that held throughout this period would be sitting on some stinging losses.

The Little Book of Bull’s Eye Investing, published in 2012, is a shorter, more digestible update to Mauldin’s original magnum opus.  And Mauldin is adamant that, despite his belief that the secular bear still has a few years left in it, the book is not about “doom and gloom,” and “the world as we know it is not coming to an end.”  There is money to be made; it just so happens that you might have to look in unfamiliar places to find it.

Let’s start with a few definitions.  A secular bear market is a long-term period in which stock prices are flat or falling.  In practice, this has been anywhere from 8 to 20 years, with approximately 17 years being the average of the past century.

Investing in a secular bear is very different than investing in a secular bull.  As Mauldin writes,

In secular bull markets, an investor should search for assets that offer relative returns—stocks and funds that will perform better than the market averages.  If you beat the market, you’re doing well…

In a secular bear market, however, that strategy is a prescription for disaster.  If the market goes down 20 percent and you go down just 15 percent, you’d be doing relatively well, and Wall Street would call you a winner… But you are still down 15 percent.

In markets like these we face today, the essence of Bull’s Eye Investing is to focus on absolute returns.  Your benchmark is a money market fund.  Success is measured by how much you make above Treasury bills. 

Mauldin sees another five to six years of secular bear market conditions, “in terms of valuations, if not in price.”

This requires a little explaining.  In a secular bear market the price of most stocks falls or stagnates, but price is less significant that valuation.   A stock that cost $500 can be “cheap,” just as a penny stock can be “expensive.”

Value has to be measured relative to something—such as earnings, revenues, cash in the bank, or accounting book value.  In a secular bull market, investors become more and more optimistic about the future earnings potential of stocks and assign them higher and higher valuations, often to the point of absurdity.  By the time the S&P 500 reached its top in early 2000, the average price/earnings multiple was over 30, and it was not uncommon to see multiples of well over 100 on popular technology stocks.

But in a secular bear market, this works in reverse.  Investors get progressively more skeptical of future growth and assign lower and lower valuation multiples.  Today, more than twelve years after the last secular bull ended, the average price/earnings multiple is 15. That is less than half of the 2000 high.

Interestingly, throughout the cyclical bull market of 2003-2007 (in which the S&P 500 hit a new all-time high), valuations continued to shrink.  To keep things in perspective, had valuations remained at 2000 bubble levels, we would have seen the S&P 500 priced at 4,000-5,000—and the Dow Industrials priced at 40,000 or more.

Mauldin recognizes that markets go through long cycles of expanding and contracting valuations. But this is distinctly not the advice you are going to get from Wall Street or from most financial advisors.  Instead, they use modern portfolio theory (or, in Mauldin’s words, a “rigged” or “twisted” version of it) to justify a buy-and-hold investment plan under any and all scenarios.  After all, stocks “always” generate 7-10 percent returns over the long term.

Unfortunately, the “long term” can be very long indeed, particularly if you are in or near retirement.

Mauldin on Market Psychology

“The new era economists argue that we are now smarter than our fathers, something I understood implicitly when I was in my 20s,” Mauldin writes. “ Since then, as the father of seven kids, six of whom are older than 18, I have developed doubts.”

Speaking facetiously, Mauldin writes that “our emotional forebears invested without the wisdom that we now possess.  They didn’t understand that markets will go up eventually and that all you need to do is buy and hold and not worry about corrections and other transient phenomena.”

And naturally, we now have a smarter and more experienced Federal Reserve to step in and save us when need be.

All of this sounds good, of course.  We do know more about economics and about the workings of capital markets than our counterparts in prior generations.  But ultimately, it doesn’t matter as much as we would hope.  As Mauldin makes clear, emotion drives the stock market.

The biggest factor driving stock returns, in Mauldin’s view, is not earnings growth or underlying economic conditions.  It is investor perception of these, and as investors lose faith in the ability of equities to generate high returns, their selling creates a self-fulfilling prophecy that takes years to fully play out.  Thus, we have secular bear markets.

How To Invest in a Secular Bear

“The essence of Bull’s Eye Investing is quite simple,” Mauldin explains.  “Target your investments to where the market is going, not to where it has been.”

Fair enough.  But what about specifics?

Mauldin has a couple recommendations:

1. Go for a deep value approach.  Invest like a Benjamin Graham by systematically buying companies that are priced so cheaply they can be cut up and sold for spare parts at a profit.  This requires time, research, and patience that many investors may find too onerous, but you simply are not going to be able to generate decent returns in a value strategy by buying and holding a mutual fund.
2. Whatever your trading strategy, “cut your losers and let your winners ride.”  Set stop losses on your positions, and stick with them.   You should also have an exit strategy.  Set targets for profit taking before you actually invest.   And naturally, “do not fall in love.”  The stock will not love you back.
3. Consider dividend-paying stocks as income  vehicles…but only if you are reasonably confident that a broad market crash isn’t around the corner.  During bear markets, dividend stocks fall less than the broader market.  But they still most certainly fall.
4. Actively trade.  On this count, Mauldin is a little harsh, saying that only about 1 percent of his readers are really traders at heart.  “Any of the other 99 percent who venture in will be their cannon fodder.”
5. Investigate alternative investments, and particularly absolute returns funds.  On this count, select your managers very carefully and be sure to do your due diligence.

Finally, Mauldin’s best advice, as a confessed “serial entrepreneur,” is to consider starting your own business if you have a good idea and have the endurance to see it through to the end.  Even in a low-growth “muddle through” economy, there are new opportunities.  It  is simply a matter of finding them and exploiting them.

The Little Book of Bull’s Eye Investing is a nice, succinct primer on John Mauldin and his approach to the investing process.  It offers no quick fixes or get-rich-quick advice, but it is a good book to keep readers grounded in reality.  I keep a copy on my bookshelf, and I recommend it to readers today.

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