Month: June 2013

By MoneyMorning.com.au

Zombies…zombies everywhere!

Popular culture is infested with the un-dead.

No less than sixty-five zombie movies hit the silver screen in the last twelve months. Some, like World War Z are worth watching, while you can probably miss Dating a Zombie.

The infestation has spread to TV shows too, with series like The Walking Dead.

No longer are you safe on the streets either. ‘Zombie walks’ – where tens of thousands of people stumble through the streets as zombies – have erupted globally including Australian cities.

What is it with this recent obsession with zombies?

On the way home from watching World War Z at the cinema with the missus, the answer struck me.

…We can blame Ben Bernanke, and let me explain why…

In a world where apathy reigns, the zombie walk resonates as a mild mannered protest.

Take a look at this photo from the recent Brisbane zombie walk:

Click to enlarge

It’s the same demographic each time: Generation Y, the teenagers through to the ‘thirty-somethings’.

Sure, they’re out to have some fun. But why do it all, and why specifically zombies…why aren’t they dressing up as the other current horror genre: vampires for example?

Is it a coincidence that zombies are a social metaphor for a rudderless, corrupted, join-or-die culture, mindlessly consuming as it spreads?

And is it by chance that Gen Y is has found expression in the zombie metaphor over the last few years in particular, as financial turmoil has spread to economic and social turmoil?

If this is getting a bit heavy, think about it. We are all Bernanke’s zombies in the markets too.

Almost half a decade of quantitative easing has long since transformed the investing community from fresh-faced free-marketeers into the half-alive-half-dead, stumbling around for fresh QE to feed on – all the time festering and slowly rotting a bit more.

The drip feed of US Federal Reserve QE has kept the market twitching for years. But is it all about to dry up?

Bernanke is hinting so. But I don’t want to add more zombie column-inches to the pointless discussion of ‘will he or won’t he’. The messages out of separate Fed members make it clear that they couldn’t agree on the colour of an orange between them.

Let’s look further up the food-chain instead to get word from zombie central command (AKA: The Bank of International Settlements – or BIS). BIS is ‘the central bank’s bank’ and their message is clear – no more QE please:

‘Central banks cannot do more without compounding the risks they have already created…How can they avoid making the economy too dependent on monetary stimulus? When is the right time for them to pull back … how can they avoid sparking a sharp rise in bond yields? It is time for monetary policy to begin answering these questions.‘

Tough words indeed from the Zombie Central Command…

60 countries’ central banks are members of BIS.

These include the Federal Reserve, the Bank of Japan, the Peoples Bank of China, as well as the European Central Bank.

BIS has clearly aimed this not just at the Federal Reserve, which has talked about dialling back the QE, but also Japan which is in the early stages of an epic QE program planned to go for another eighteen months.

But let’s not worry about Japan for today. That’s a whole separate barrel of worms.

Front and centre for market zombies today is if the BIS is pressuring the Fed to dial back on the QE sooner rather than later.

Markets Are Crashing Everywhere On the Prospect

And it doesn’t matter what it is.

…Bonds are falling.

…Currencies are falling.

…Commodities are falling.

…Stocks are falling.

Markets in Free Fall – Across All Asset Classes

<img src="http://portphillippublishing.com.au/images/MPR20130625c.jpg
” width=”367″ height=”198″>

Source: stockcharts

The zombies are in full-blown panic as their life support threatens to dry up.

But it’s not just the fear of the Federal Reserve liquidity drying up.

There has been a big China scare in the last week regarding interbank lending. The rate at which banks lend to each overnight other spiked to 14%, when 1-3% is more normal.

But instead of hosing the problem down with liquidity as is the usual response, the Peoples Bank of China (PBoC) has held back, with reports of a small level of support for one bank.

What stands out is that the PBoC has put the blame on the banks, telling them to do a better job of managing liquidity, and not to expect the cavalry to come riding over the hills to the rescue every time they stuff up.

The official response read:

‘At present, the overall liquidity in China’s banking system is at a reasonable level, but due to many changing factors in the financial markets and also because of the mid-year point, the requirements for commercial banks in liquidity management have become higher … commercial banks need to closely follow the liquidity conditions and boost their ability to analyze and make predictions on the factors that influence liquidity.’

It’s a dangerous game to play. Once a credit bubble pops, you don’t have much, if any, opportunity to stop it. So PBoC needs good reason to respond this way.

Maybe the words from Zombie command (BIS) hit home. After all, China has been one of the biggest credit junkies in recent years.

My colleague Greg Canavan at Sound Money Sound Investments has closely followed this story for a few years, and recently put out a chilling video of how this could pan out. It’s worth a watch.

The markets have very quickly flipped from complacent to fearful in the last few weeks. Until we get a better idea of what to expect from the Fed, and from China’s central bank…watch out for attacking zombies.

Dr Alex Cowie
Editor, Diggers & Drillers
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From the Port Phillip Publishing Library

Special Report: The Sixth Revolution Has Just Begun

Daily Reckoning: When it Comes to Future and Technology, Which Camp Are You in?

Money Morning: Why The ‘Asia-Zone’ Crisis Makes Australian Stocks a Buy…

Pursuit of Happiness: Don’t Blame Progress, Blame the Governments

Diggers and Drillers:
Why You Should Invest in Junior Mining Stocks Now

By MoneyMorning.com.au

Thursday, I picked up my copy of the Wall Street Journal. On the front page was a photo of Federal Reserve Chairman Ben Bernanke, looking professorial. That, and he was smiling. The headline stated, ‘Markets Flinch as Fed Eyes Easy Money End.’

‘Why is that man smiling?’ I thought.

Then, on Friday, the WSJ headline did an about face, ‘Turmoil Exposes Global Risks.’ This refers to the selloff of pretty much everything that would attract a bid.

Well, which is it? ‘Markets Flinch,’ or market ‘Turmoil?’ How does it affect us? And is Ben Bernanke still smiling?

I’m only using the WSJ headlines to illustrate how, despite labels, markets are down hard across a spectrum. Stocks, bonds, gold, silver, energy, other commodities. Down, down, down. All of ‘em. It’s only a question of how far, how fast and where’s the landing point.

The scope of the selloff was vast, to the point of odd. That is, when one or two asset classes sell off, others usually rise while investors flee to so-called ‘safe havens’. It seems people want to go to cash – mostly dollars – and wait.

Of course, we don’t really know what’s coming next from the Federal Reserve. In fact, the Fed hasn’t done anything different versus previous, recent policy.

The so-called ‘news’ behind the headlines is that Federal Reserve gurus and economic witch doctors are talking about…y’know…maybe…eventually…changing policy from sort of ‘expansive’ monetary approach, to…something else…likely with higher interest rates.

That’s news? It’s not as if we haven’t heard something like that over many months. Indeed, media rumour mills have offered ample vibes that our Fed would eventually raise interest rates. It can’t keep interest rates negative, or at near-zero forever, right?

That, and the Federal Reserve needs to scale back its program of spending $85 billion per month to buy bonds and prop up the stock markets. The Fed can’t do that forever either, right?

Looking ahead, the Federal Reserve will likely scale back on its low-interest bond subsidy. The training wheels are coming off. Global markets will have to stand on their own. Thus markets ‘sold’ the news.

Shiny Stuff Down

Closer to our beat, the price of shiny stuff like precious metals – gold and silver – took it hard. Copper, too.

Why sell? Because nominal inflation is low. Gold prices have stagnated or declined in recent months – all that new Federal Reserve money supply notwithstanding. Meanwhile, many sectors of the investing space are hard-wired for relatively high return, and hard assets don’t seem to offer that just now.

Specifically, the price of gold is under $1,300 per ounce, down over 30% from its high above $1,900 in August 2011. Silver is under $20 per ounce, down a similar percentage from a recent excursion towards the $30 level. Copper is down from $3.30 per pound a few weeks ago to near $3.00.

You can call it a metal meltdown. Or at least a metal adulteration, as if the Fed is turning ‘precious’ metals back into lead. (Although in all fairness, lead has traded in a reasonably stable, $1 range per pound for most of nearly four years!)

Destroying Capital in the Mines?

It’s worrisome that, across the Big Gold industry, fully burdened costs of production are about $1,250 per ounce. That’s eerily close to the current selling price. So if this keeps up, say goodbye to profit margins. Over time, dividend payouts could be at risk too.

Plus, if low gold prices carry on, mining companies lose sustaining capital for expansion, and/or acquisitions. In a worst-case scenario, mining becomes capital destruction instead of wealth creation.

Look at one of South Africa’s largest players. Harmony Gold (HMY) is hard-down as well of late, with its shares trading in the $3.50 range.

In terms of ounces, Harmony has among the largest gold resource of any company, anywhere. But its shares have declined over the past six months as gold prices generally drifted down and mining costs generally crept up.

Yes, I understand the risk issues for South Africa. But right now, with Harmony, you can buy the outfit for a measly $1.5 billion. That’s simply bizarre!

Freeport McMoRan Copper & Gold (FCX), is down sharply, as well. Shares are trading in the $27.75 range. That’s quite a comedown, considering that within the past two weeks Freeport CEO James Flores bought a cool one million shares of his company’s stock at about $31.

On that last point, the Freeport shares were not a ‘grant’ to Flores. He wasn’t exercising options. This was a stand-up ‘buy’ order. Apparently Flores thought that his company’s stock was cheap.

What’s the Value of ‘Cheap?’

Let’s think about that last item. Here we have a company insider at Freeport, one of the world’s largest producers of key materials – copper, gold, silver and more. He knows as much about metal markets as anyone.

He knows all about his company’s business condition, to include those nettlesome government, labour and technical issues at its largest production facility at Grasberg, Indonesia – another story.

The Freeport guy walks up to the trading window and buys a million shares of his own firm, at $31 each. Then a few weeks later, the Fed guys mention that they might raise interest rates and make some other changes. Freeport shares tank by 10% or so.

Heck, if the guy who runs Freeport can’t make a lowball buy, what chance does anybody else have? Talk about not fighting the Fed!

Then again, the Federal Reserve has managed to warp the whole world economy for years at a time. And with smiling Ben Bernanke and his crew sailing the Seven Seas, is anything safe? Can we know the proper value of anything anymore?

The Federal Reserve’s zero-interest rate policy has undermined incentive of people to save. Constant inflation – even at nominally ‘low’ annual rates – has destroyed capital.

Direct Fed intervention has distorted price levels, such that it’s hard to affix a long-term value to most things anymore, such as housing, stocks, bonds, commodities, precious metal or energy. Even the guy who runs Freeport doesn’t know when to buy cheap.

Thank the Oil Patch

Which takes me back to a theme I’ve addressed before. The ‘fracking’ revolution in the North American oil patch has created immense monetary flexibility for the Fed.

That is, at the wellhead level, fracking has freed up otherwise tight oil and gas resources. At the macro-level, fracking has added large volumes of new energy to the national economy.

Every new barrel of domestic oil displaces an imported barrel. This helps keep a lid on global energy pricing, much to the chagrin of OPEC potentates. This oil price-lid is kind of like a massive tax cut to the overall energy-consuming economy. Meanwhile, reduced import levels for oil help to contain the US current account deficit in foreign trade.

There’s nothing like an ‘extra’ two million barrels of oil per day to help the Federal Reserve Chairman manage U.S. monetary policy. That’s a net gain of $200 million per day to the domestic economy, at $100 oil. And since oil is foundational to the rest of the economy – in the form of motor fuel, chemicals and the entire downstream industrial ladder – there’s a multiplier effect.

No wonder Ben Bernanke is smiling. He’s one lucky guy.

What Does the Future Hold?

They say not to bet against the Federal Reserve. OK, I get that. Then again, the Fed benefits from higher US energy output, and I have to wonder how long those US oil numbers will keep heading upwards. The Federal Reserve benefits from fracking and the oil that comes out of the ground. But fracking is capital intensive. Those fancy wells are expensive, and they deplete fast. And the Fed is tightening up on how much capital is out there.

In other words, what happens with the fracking revolution when the Fed raises interest rates and stops pumping big bags of new bucks into the economy? I believe we’re about to find out. We may not like what we see.

With higher interest rates, we’ll likely witness fewer wells drilled, first of all. They’ll be more expensive wells. We’ll see worse economics at the well head. Eventually, we’ll see a plateau in US oil output.

I won’t be overly pedagogical here. I’ll just say that the current sell-down for metals and miners is a classic shakeout of the weak hands. But gold, silver, etc. all ran up in the first place for a reason – the Fed. Now, what can we say has changed?

Eventually, I suspect that the Fed’s inflation will pop up to the surface in the economy. It would not surprise me that future inflation will be led by energy prices when…yes…the fracking revolution slows down. Courtesy of the Federal Reserve.

I’ll put it another way. Easy money helped increase the US energy supply. Tighter money will scale things back, out in the oil patch. The Federal Reserve is powerful, but it can’t have it both ways.

Byron King
Contributing Editor, Money Morning

Publisher’s Note: This is an edited version of an article that first appeared here.

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From the Archives…

The 12 Most Important Rules Every Investor Must Know
21-06-2013 – Vern Gowdie

The US Economy Butterfly Effect
20-06-2013 – Murray Dawes

Beware The Federal Reserve’s Deadly Game of Poker
19-06-2013 – Dr Alex Cowie

Why Thursday Could Be a Key Day for Silver…
18-06-2013 – Dr Alex Cowie

The Single Biggest Mistake a Technology Investor Can Make
17-06-2013 – Sam Volkering

USDJPY remains in uptrend from 93.79, the fall from 98.70 is likely minor consolidation of the uptrend. Further rise could be expected after consolidation, and next target would be at 100.00 area. Support is at 96.80, as long as this level holds, the uptrend will continue. On the downside, a breakdown below 96.80 support will indicate that the upward movement from 93.79 has completed at 98.70 already, then the following downward movement could bring price back to test 93.79 support.

Daily Forex Forecast

If oil and gas is a profoundly dynamic phenomenon, then so too must be environmental risk and conflicts over natural resources—and we are not getting the full picture from the mainstream media, according to Michael T. Klare, professor of peace and world security studies at Hampshire College, TomDispatch blogger, and author of Rising Powers, Shrinking Planet: The New Geopolitics of Energy (Metropolitan Books, 2008). As risk multiply, conventional sources evaporate and we are left with “extreme” energy, renewables may be the only way to avoid war and disaster.

In this exclusive interview with Oilprice.com, Klare discusses:

• Why we are talking about a “resurgence” of American power
• Why the issue of US natural gas exports is a geopolitical dilemma
• Why Myanmar is important but not critical to the US Asia-Pacific “pivot”
• Why Myanmar IS critical to China
• Why India and Japan are key to the US’ evolving Asia policy
• Why the shale revolution is the number topic around the world
• Why unconventional oil and gas has the unfair advantage
• Why WE don’t need Keystone XL, but the tar sands industry is desperate
• Why the renewables are the only way forward

Interview by. James Stafford of Oilprice.com

James Stafford: In a recent article, you opined that “Militarily, culturally, and even to some extent economically, the US remains surprisingly alone on planet Earth in imperial terms, even if little has worked out as planned in Washington.” Can you add to this from the perspective of the unconventional oil and gas boom in the US?

Michael Klare: The United States emerged from the end of the Cold War with the most powerful military force on Earth and, because of the decline of the USSR and its other rivals, was seen as the world’s dominant power. In recent years, however, the rise of China has led some analysts to question America’s overwhelming superiority, saying that China’s accumulation of economic and technological power will allow it to compete on equal terms with the US in the not-too-distant future.

This, combined with the economic toll generated by the economic crisis of 2008 – largely attributed to lax economic oversight in the US – has led some to speak of the eventual “decline” of American power. But now, with the rise in domestic oil and gas production, that talk is disappearing; instead, analysts are speaking of a “resurgence” of American power based on strong oil and gas output.

James Stafford: In terms of the pending decision on whether to expand US natural gas exports, the geopolitical argument for this appears to be trumping the economic arguments. Will the geopolitical argument–natural gas exports to challenge Russia and Iran–win out in Washington?

Michael Klare: This is hard to predict, as the geopolitical argument cuts both ways:

while increased exports bolster American power vis-a-vis Russia and Iran, a revival of domestic manufacturing based on cheap energy also bolsters American power in the global economic equation. I would predict some exports, but not so much as they endanger the expected surge in domestic manufacturing.

James Stafford: How important is Myanmar to Washington’s Asia “pivot”, and how should we interpret the sudden blossoming of relations here despite the systematic ethnic cleansing that is taking place? China has the foothold here, but can it maintain it?

Michael Klare: Myanmar is important to the Asia-Pacific pivot, especially in symbolic terms (as it was long in the Chinese orbit), but not especially critical. Far more important are US ties with Japan, the Philippines and, above all, India. You can expect a major US drive to bolster military ties with New Delhi – this will really capture the attention of the Chinese!

James Stafford: How important will Myanmar’s potential hydrocarbon reserves be against its position as a strategic gateway?

Michael Klare: Myanmar’s hydrocarbon reserves are not that important to either China or the US. But it is becoming very important as an alternative delivery route from the Indian Ocean to southwest China, diminishing their reliance on the vulnerable Strait of Malacca, which is largely dominated by the US Navy. China is keenly determined to reduce its reliance on sea lanes controlled by the US Navy.

James Stafford: Iraqi Kurdistan is shaping up to be one of the hottest exploration venues in the Middle East, and while it comes with a lot of political baggage, oil companies show no concern. What do you think the political risk potential is once the Kurds get a new pipeline up and running directly to Turkey by the end of this year or early next year, courtesy of Anglo-Turkish Genel Energy?

Michael Klare: I think it would be very dangerous to make predictions about this, given all the instability in the region. The Iraqis in Baghdad are obviously very unhappy about this, and have various means to make it difficult for companies that invest there. But these companies may feel that the risks can be overcome, or minimized. Given the unrest in Syria and Turkey, I just don’t know how all this will play out.

James Stafford: We’ve written a lot about the petro-politics surrounding the conflict in Syria, both in terms of the Iranian-Qatari race for good pipeline acreage as well as the recent discoveries in the Levant Basin. What role do you think hydrocarbons and hydrocarbon infrastructure are really playing in the end game for this conflict?

Michael Klare: Well, I always tend to look for the role of oil and gas in conflicts like this, and I’m sure that they’re present. But I suspect that this is less about oil and gas per se than about the ultimate division of power in the Middle East between long-contending actors – the Iranians, Kuwaitis, Turks, Iraqis, Russians, Americans, and so on. Of course, this has a lot to do with oil and gas in the long run, as the victor in this power struggle will be able to dominate the production and sale of hydrocarbons. But for now I see it as a power game first and foremost.

James Stafford: What is the number one energy topic that grabs your readers, and how does your coverage of it go beyond the depths (or shallows) of the mainstream media?

Michael Klare: Right now the number one topic is how the “Shale gas (and oil) revolution” will alter the power balance between the United States and its major rivals, especially Russia and China. I heard this in Russia, China, and Mexico during visits to universities and think-tanks to these countries last year – it was always the #1 question. They want to know if other countries can replicate the US success in this field, or will be forever dependent on American fracking technology. People also want to know how this “revolution” will affect the future of renewables. Will more gas production prove a “bridge” to renewables, or a “bridge to nowhere?”

James Stafford: In your view, how is the mainstream media being manipulated in the climate change debate? How is the public being cheated out of a rational, smart debate?

Michael Klare: I am concerned that the media is not adequately explaining the difference between conventional and unconventional oil and gas. Proponents of fracking, the Keystone XL pipeline, deep-offshore production, and so on all say that these are just other forms of “oil” and “clean-burning natural gas,” without explaining that vastly different production techniques are involved and that these techniques have significantly worse impacts on the environment.

James Stafford: Will we ever get to the real debate, or will interest groups continue to maintain control?

Michael Klare: We can have a fair debate in universities and think-tanks, but the American media are saturated with advertising paid for by the oil and gas industry that distorts the environmental consequences of relying on these fuels – and it’s very hard for ordinary people to challenge these accounts.

James Stafford: Recently you have expressed your disappointment over the climate change rallies, focusing on the Keystone XL pipeline. What’s gone wrong? Has the movement lost its momentum?

Michael Klare: Perhaps I’ve expressed some disappointment from time to time but I’ve been very impressed by the emergence of a new movement on college campuses–including my own–to get colleges and universities to eliminate their investments in big carbon corporations, as a way of persuading them to keep unproduced carbon in the ground.
James Stafford: Do we need the Keystone XL pipeline?

Michael Klare: We Americans do not need Keystone XL – there are plenty of other available sources of energy, and we can reduce our demand through conservation efforts. But the tar sands industry desperately needs KXL, as all other practical conduits for exporting increased tar sands production seem to be closed off (like the Northern Gateway pipeline through British Columbia) – meaning they’ll have lots of resources, but no export options. No wonder they’re desperate to get Obama to approve the pipeline!

James Stafford: What should we know about Keystone XL that the mainstream media doesn’t tell us, or doesn’t understand?

Michael Klare: The fact that KXL will not carry “oil” at all–despite their claims–but a heavily polluting mixture of bitumen, diluents, and toxic chemicals that must be processed through extraordinary means before it can be refined into anything resembling a usable fuel.

James Stafford: How do you address the renewable energy-vs-fossil fuels race?

Michael Klare: My argument is that the production of oil and gas is not a static phenomenon but is undergoing profound changes, involving greater risk to the environment and greater risk of conflict over disputed sources of supply (such as offshore and Arctic reserves). These risks are bound to multiply as all sources of “easy” oil disappear and we become increasingly reliant on hard-to-reach, hard-to-process “extreme” energy. Only through the accelerated development of renewables can we avoid an inevitable spiral of war and disaster.

James Stafford: Is there a point at which we will be able to say that the two can help each other?

Michael Klare: Some investments in biofuels may have this capacity, but otherwise I do not see how.

James Stafford: There has been a lot of transparency activity in the US and Europe this year aimed at punishing big oil and its bankers for manipulating energy prices, for which the end consumer eventually foots the bill. Energy price manipulation is a time-honored tradition and usually the giants get a slap on the wrist and a fine that wouldn’t even make them blink. Are times changing, though? Will things be different now?

Michael Klare: Well, we can always hope so. But with Chinese, Indian, and Russian state-owned companies playing an ever-increasing role in the extraction of fossil fuels, I’m not optimistic about this!

Source: http://oilprice.com/Interviews/Extreme-Energy-Extreme-Implications-Interview-with-Michael-Klare.html

By. James Stafford of Oilprice.com

By Profit Confidential

Since the announcement from the Federal Reserve about tapering off quantitative easing, the key stock indices have been showing increased selling pressures. Just take a look at the chart of the S&P 500 below.

Chart courtesy of www.StockCharts.com

The S&P 500 started 2013 with momentum to the upside. Investors bought in hopes that the index would continue to go higher, and by no surprise, it did reach its all-time high. As expected, after the Federal Reserve announcement, sellers took hold of the S&P 500, and it broke below its 50-day moving average for the first time this year (indicated by the black circle in the chart above)—a bearish indicator, according to technical analysts.

The last time the S&P 500 reached this far below its 50-day moving average was in October 2012. When that happened, the S&P 500 declined six percent, and it didn’t recover until December (as noted by the green circle in the above chart).

Note: other key stock indices like the Dow Jones Industrial Average and the NASDAQ Composite Index have also fallen below their 50-day moving averages.

Looking at this, I have to ask: is the bear market rally that lured investors into buying over?

The decline in the key stock indices has certainly proved my theory: money printing was a major factor in their flight to their all-time highs. Now, when we have hints that the Federal Reserve will be pulling back on its quantitative easing, the key stock indices are sliding lower.

Corporate earnings, one of the main reasons for the rise in the key stock indices, aren’t improving as expected either. As a matter of fact, 86 companies on the S&P 500 have issued negative guidance for their second-quarter corporate earnings. The expectation for earnings growth has been continuously declining.

At the end of March, analysts expected the corporate earnings of the S&P 500 companies to grow 4.4% in the second quarter, but unfortunately, their estimates came down to 1.3% at the end of May. (Source: FactSet, May 31, 2013.)

On the global macro level, the Chinese economy is sending threats to the key stock indices. Not only is the country expected to grow at a very slow pace compared to its historical average, but the amount of credit has also amassed in the Chinese economy since the financial crisis of 2008 and 2009. Recently, the country experienced a slight cash crunch when the rate banks charge each other rose significantly. (Source: The Globe and Mail, June 21, 2013.)

Dear reader, be careful. When I look at all this, the best investment strategy seems to be capital preservation. The risks of the key stock indices like the S&P 500 sliding even lower are piling up.

What He Said:

“The U.S. lowered interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of lowering interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in Profit Confidential, July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning that the coming real estate bust would wreak havoc with the banking system.

Article by profitconfidential.com

By Profit Confidential

As of March of this year, 47.7 million Americans are now on some form of food stamps. Between 2000 and 2012, the number of Americans resorting to food stamps increased more than 171%. In 2000, there were just 17.1 million Americans on food stamps. (Source: U.S. Department of Agriculture, June 7, 2013.)

There are more individuals on food stamps in the U.S. economy than the entire population of Spain—46.17 million. (Source: World Bank web site, last accessed June 21, 2013.)

That costs the government money. The expenditure for food stamps in 2012 was $74.6 billion, almost 116% higher than what it paid in 2008. That’s a cost that could pick up even more speed if, as all indicators show, inflation begins to rise.

The key stock indices in the U.S. economy have skyrocketed since the Great Recession, due in large part to money printing, but the average American Joe hasn’t seen his living conditions improve—in fact, they have actually deteriorated.

Instead, the rich appear to be getting richer and the poor are facing more challenges, while the middle class is disintegrating. According to a Pew Research report, the bottom 93% of households in the U.S. economy witnessed their net worth drop by four percent between 2009 and 2011. The richest seven percent of U.S. households saw their wealth increase by 28% in the same period. (Source: Associated Press, April 23, 2013.)

The misery for the middle class doesn’t end here; the Census Bureau reported in the first-quarter that home ownership in the U.S. economy dropped to its lowest level in 18 years. Just 65% of Americans owned their homes in the first quarter, as compared to 65.4% in the same period a year ago. (Source: Bloomberg, April 30, 2013.)

I have said this before: economic growth occurs when a country’s citizens are able to find work to make money, spend, and save. But then the U.S. economy is still far from that.

Unfortunately, there might be more troubles ahead as the Federal Reserve moves towards slowing its printing presses.

I’ve been writing in Profit Confidential for months now that the Federal Reserve created a stock market bubble with its monthly printing program. With the news last week that the Fed would pull back on printing paper money, we had a mini-crash in stock prices—this confirms my long-term belief that some of the massive amounts of money the Fed was creating was somehow making its way back to the stock market and pushing stock prices higher. Bernanke put the brakes on the stock market rally last week.

Michael’s Personal Notes:

Since the announcement from the Federal Reserve about tapering off quantitative easing, the key stock indices have been showing increased selling pressures. Just take a look at the chart of the S&P 500 below.

Chart courtesy of www.StockCharts.com

The S&P 500 started 2013 with momentum to the upside. Investors bought in hopes that the index would continue to go higher, and by no surprise, it did reach its all-time high. As expected, after the Federal Reserve announcement, sellers took hold of the S&P 500, and it broke below its 50-day moving average for the first time this year (indicated by the black circle in the chart above)—a bearish indicator, according to technical analysts.

The last time the S&P 500 reached this far below its 50-day moving average was in October 2012. When that happened, the S&P 500 declined six percent, and it didn’t recover until December (as noted by the green circle in the above chart).

Note: other key stock indices like the Dow Jones Industrial Average and the NASDAQ Composite Index have also fallen below their 50-day moving averages.

Looking at this, I have to ask: is the bear market rally that lured investors into buying over?

The decline in the key stock indices has certainly proved my theory: money printing was a major factor in their flight to their all-time highs. Now, when we have hints that the Federal Reserve will be pulling back on its quantitative easing, the key stock indices are sliding lower.

Corporate earnings, one of the main reasons for the rise in the key stock indices, aren’t improving as expected either. As a matter of fact, 86 companies on the S&P 500 have issued negative guidance for their second-quarter corporate earnings. The expectation for earnings growth has been continuously declining.

At the end of March, analysts expected the corporate earnings of the S&P 500 companies to grow 4.4% in the second quarter, but unfortunately, their estimates came down to 1.3% at the end of May. (Source: FactSet, May 31, 2013.)

On the global macro level, the Chinese economy is sending threats to the key stock indices. Not only is the country expected to grow at a very slow pace compared to its historical average, but the amount of credit has also amassed in the Chinese economy since the financial crisis of 2008 and 2009. Recently, the country experienced a slight cash crunch when the rate banks charge each other rose significantly. (Source: The Globe and Mail, June 21, 2013.)

Dear reader, be careful. When I look at all this, the best investment strategy seems to be capital preservation. The risks of the key stock indices like the S&P 500 sliding even lower are piling up.

What He Said:

“The U.S. lowered interest rates in 2004 to their lowest level in 46 years. And what did Americans do with their access to easy money? They borrowed and borrowed some more, investing the borrowed money into real estate. Looking ahead, perhaps the Fed’s actions (of lowering interest rates so low as to entice consumers to borrow more than they can afford) will one day be regarded as one of the most costly errors committed by it or any other banking system in the last 75 years.” Michael Lombardi in Profit Confidential, July 21, 2005. Long before anyone was thinking of a banking crisis, Michael was warning that the coming real estate bust would wreak havoc with the banking system.

Article by profitconfidential.com

By Profit Confidential

Wall Street keeps a close eye on Oracle Corporation (ORCL).

It’s a benchmark in part because the company has high institutional ownership. Larry Ellison, the company’s CEO, is its largest shareholder.

For the previous quarter (fiscal third quarter of 2013) the company’s earnings came in just slightly below expectations. Wall Street was mildly disappointed, but institutional investors believe in Ellison for the long term and the position sold off only marginally.

Oracle is still very much a good long-term holding for such a mature technology company. The company spends a lot of money on marketing, as well as research and development.

Oracle is the world’s largest provider of enterprise software. The company is organized into three main selling units: software (about 77% of revenues), hardware systems (13%), and services (10%).

It’s an active acquirer of other technology companies.

Just over half of the company’s business is generated in the Americas; Europe, the Middle East, and Africa (EMEA) account for about one-third; and the rest of Oracle’s business comes from the Asia-Pacific region, primarily Japan.

Any large-cap mature global corporation is going to have a tough time generating double-digit growth. Oracle’s long-term performance on the stock market is solid, but its latest quarter disappointed Wall Street again. The doubling of its quarterly dividends was notable.

Chart courtesy of www.StockCharts.com

Oracle just announced its 2013 fiscal fourth-quarter numbers; the company’s earnings results met consensus, but revenues came up short.

According to Oracle, its fiscal 2013 fourth-quarter generally accepted accounting principles (GAAP) revenues were unchanged at $10.9 billion. GAAP operating income was up nine percent, and the company’s GAAP operating margin was 46%.

GAAP earnings grew 10%, while non-GAAP earnings were down one percent. GAAP earnings per share were up 17% to $0.80, while non-GAAP earnings per share grew five percent to $0.87 (which was the Wall Street consensus).

The doubling of the quarterly dividend was clearly meant to assuage the marketplace after flat revenues.

The company plans to move its listing to the New York Stock Exchange on July 15.

Last quarter saw a six-percent increase in software license updates and product support (in U.S. dollars) to $4.4 billion, or about 40% of total revenues.

Compared to the same quarter last year, the company’s fiscal fourth-quarter earnings increased 10% in U.S. dollars and 12% in constant currency. Cash and marketable securities grew only slightly over the comparable quarter.

Oracle is very much a company that offers good potential over the long-term, as the stock is not expensive considering its earnings growth. But the lack of top-line growth is a problem as it’s exactly what the stock market was looking for after fiscal third-quarter revenues.

Near-term, I’d say this position will be stuck at or below $30.00 a share for a while.

Sales of new software and Internet-based subscriptions disappointed again, which means that competition and weakness abroad must be having a meaningful impact. The company’s form 10-Q will be revealing.

The company missed consensus revenues only by about $220 million, but the marketplace was giving Oracle the most recent quarter to shore up on sales execution. The company was unable to do this.

Article by profitconfidential.com

By Profit Confidential

Originally published in Investment Contrarians on June 20, 2013.

Debt is deadly, and it’s made even worse with rising interest rates that can prevent you from eliminating the load. What happens with rising interest rates is that more of the payments go toward the interest and less to the principal. In fact, it’s what I call a death spiral of debt that worsens as rates move higher.

When individuals face excessive debt, often the solution is to reduce spending and adhere to a strict repayment program.

When corporations face excessive debt, they tend to streamline; but they must be careful when they do so, because any cost-cutting could impact the company’s growth. What generally happens is more debt or credit is issued.

But when governments build up massive debt loads, there is no definitive solution, and it becomes problematic. The national debt is estimated to reach $17.55 trillion by the end of this year, while the country’s total debt, including federal, state, and municipal debt, is earmarked at $20.54 trillion. (Source: USGovernmentDebt.us, June 18, 2013.)

Congress and Obama must resolve the national debt limit.

Take a look at the chart below of the national debt from 1970 to today (blue bars), and the projected national debt to 2018 (red bars). What’s made clear from this chart is not only the steady buildup of national debt but the rate of the buildup since early 2000, especially following the Great Recession in 2008. It’s obvious that the national debt is spiraling out of control.

Chart courtesy of www.USGovernmentSpending.com

Despite the popular adage “a picture is worth a thousand words,” this chart of the national debt can be defined by one word: debt.

That’s why the Federal Reserve and the U.S. government must deal with the country’s massive national debt load—and how it’s getting out of hand.

But not only is the national debt an issue, the debt buildup at the state and municipal level is also a major concern. By the end of this year, the debt amassed by the state governments is estimated to reach $1.19 trillion. (Source: Ibid.)

What’s alarming is that the municipal, state, and federal governments will inevitably be subject to a cash crunch when yields and interest rates ratchet higher.

As I recently mentioned in these pages, we’re seeing debt issues in many states that are vulnerable to rising interest rates, and not only with the federal debt.

Recall that California and its municipalities have accumulated a debt load of about $848 billion, which could eventually be eclipsed by $1.1 trillion, according to The California Public Policy Center. (Source: “Report: California’s Actual Debt At Least $848B; Could Pass $1.1T,” CBS web site, May 1, 2013.)

And then this past Monday, we found out that the city of Detroit, which has been ravaged by decades of slow growth and major population decline, has run out of money after defaulting on roughly $2.5 billion in unsecured debt. The city is trying to convince its creditors to accept $0.10 on the dollar to eliminate this debt. (Source: Williams, C., “Emergency manager: Detroit won’t pay $2.5B it owes,” Associated Press, June 14, 2013.)

But the problem won’t stop there, because Detroit will need new funds to survive, and based on the city’s default and low credit rating, the cost of the loan would likely be significant.

So, while the stock market rises to new records and new millionaires surface each day, the real problem will be when rates move higher and debt payments become unmanageable.

I would start to take some profits off the table, or move funds into more defensive sectors.

Article by profitconfidential.com

By The Sizemore Letter

I recently sat down with Covestor’s Mike Tarsala to discuss my core-satellite approach in the post-QE Infinity era.

Per Tarsala’s article:

A 200-point drop in the Dow Industrials is as good a reminder as any that it’s important to play both offense and defense with your investment strategies, says Charles Sizemore, portfolio manager on the Covestor platform.

One specific way he’s preparing for market volatility as investors react this week to the potential end of loose Fed policies is by taking a Core-Satellite approach to running his Tactical ETF portfolio.

“I’m playing cautiously with the majority of my holdings in Tactical ETF, and dialing up the risk on only a portion of the portfolio that I think offers strong potential reward,” he told me following our latest Google Hangout.

As Sizemore suggests, a Core-Satellite investing approach typically makes a significant allocation to a long-term, lower-risk “Core” strategy, and a lesser allocation to shorter-term “Satellite” holdings. The approach tries to minimize investment costs and volatility while still providing an opportunity to outperform the broader stock market.

The majority of Sizemore’s Tactical ETF portfolio invests in Exchange Traded Funds (ETFs) made up of income-oriented stocks. He is attracted to ETFs with stocks that have long histories of raising their dividends. Sizemore believes that companies that are boosting their distributions to investors will be attractive and may be more resilient to further market downturns.

Meanwhile, Sizemore also is keeping a small portion of his portfolio in the tech sector. In early June, he purchased the Tech Sector SPDR ($XLK) for the Tactical ETF Portfolio.

“If I am right and in the second half we see a sector rotation into higher beta, higher volatility, more cyclical sectors, then tech should do well,” Sizemore says. “Even if I’m wrong, tech right now is priced attractively. And it pays a great dividend yield.”

Tactical ETF also has Master Limited Partnerships in its satellite holdings. So-called MLPs are unique investments that are required to pay out a majority of their earnings as dividends. The underlying investments in most MLPs are energy-related companies.

Sizemore says that the group is attractively priced following a sharp second-quarter selloff amid fears that their distributions would be less attractive in a rising interest rate environment.

“They are one of the few areas of the market where you have excellent fundamentals, and by that I mean a substantial buildup of energy infrastructure projects in this country,” he says. “Yet they also have a nice current yield and potential for rising dividends in the near-term, as well as over time.”

“No matter how you do it, I think it’s important to be tactical in the second half of the year and react to what could be a very different market than what we’ve become accustomed to in the QE Infinity era,” Sizemore says.

By WallStreetDaily.com

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Yelp Inc. (YELP) might be losing money right now, but last quarter’s loss was smaller than expected. And losses were actually cut in half from the year before, thanks to increasing strength in local and mobile ad revenue.

According to the CEO of the company, Jeremy Stoppelman, “We have north of 100 million monthly unique visitors, and we’ve got north of 10 million people in our apps every single month – that’s active users. And we have north of 39 million reviews.”

Facebook’s (FB) new feature, Graph Search, might cut into Yelp’s future profits, however. Since it allows people to trawl their network of friends to find everything from restaurants to movie recommendations, users might be less likely to go to Yelp for business reviews.

On the plus side, Yelp is expanding into new territory, by offering ad placements on business’ review pages.

Ultimately, this could be a threat to Groupon’s (GRPN) daily deal space.

You see, Groupon currently swarms your inbox with low-priced deals on activities and dining experiences, in hopes that one of them will interest you enough to make a purchase.

Sure, you can provide it with a detailed profile of the types of deals you’d like to see. But that doesn’t mean you’d be down for that half-price massage every time you get one in your inbox.

For Yelp, the ads will be served to those who are currently looking at reviews of that restaurant or retailer. So they’re people who are already interested at the time – and, in turn, more likely to buy.

As Stoppelman says, “A sushi restaurant can put up a deal, $20 of value for $10. Very simple, they could just do it in their business owner tools on Yelp. And then, at the time that a customer is searching, they’d be able to discover that deal and potentially change their decision because – hey, they can get a discount if they transact right on their Yelp app.”

The post Yelp Takes a Stab At the Deal Space appeared first on  | Wall Street Daily.

Article By WallStreetDaily.com

Original Article: Yelp Takes a Stab At the Deal Space