Month: September 2013

By MoneyMorning.com.au

Technology:
Why Your Kids Will Be Banking With Facebank

eBay just announced that they’re going to buy a new company. That company is Braintree, and eBay is going to pay $800 million for them.

Braintree will integrate with PayPal as each complements the other. But as the parent company it’s eBay forking out the cash.

What it really means though is something far bigger than you might realise. Importantly, this is another piece of the puzzle that signals the beginning of the end for money as we know it.

If you’re unaware, Braintree is a mobile payments company. Developers and programmers use Braintree in their apps, programs and software. Braintree lets them take and manage payments, much like PayPal does.

Braintree is a fast growing, innovative company. In fact there’s a very good chance you’ve already used Braintree and didn’t even know.

You may have also heard of AirBnB, Uber or LivingSocial. If you have you’ll know these are all fast growing start-up companies. Each one is shaking up their industry; hotels, taxis and shopping respectively.

A payment made through the app of AirBnB, Uber or LivingSocial runs through the Braintree system. As a result Braintree take a clip of every payment to make their money. In short Braintree makes it easy for developers and programmers to get paid.

This buyout of Braintree has a big impact on the future of money. How? Because the takeover coincides near perfectly with an under-the-radar rollout of a new Facebook product this week.

Facebook have released a new payment method called ‘Autofill with Facebook’. What Autofill does is automatically fill in card details when you’re making mobile payments.

A good example would be, you’re on your way to work surfing the web on your phone, or tablet. You spot a great shirt at a great price in an online store. You add the shirt to your checkout basket and click ‘buy’.

Usually at this point you have to pull out your wallet and fumble around with your credit card.  You’re trying to put in details of your credit card in front of a packed train on your 4-inch smartphone screen. It’s a nightmare, and you’re likely to either give up or just simply be unable to make the purchase.

But with ‘Autofill With Facebook’ at the buy screen, one single button appears. It says ‘Autofill with Facebook’. You tap it, it populates the payment screen, and you’re done. That’s it. Simple, easy, no cards, no cash, just tap, tap, buy.

It’s possible because Facebook has your card details stored on its platform. It has them because you made an in-app purchase or might have bought a Facebook Gift previously.

Where this gets really interesting is that ‘Autofill with Facebook’ sits on top of the Braintree API with relative ease. Autofill will also work very soon with PayPal…who now own Braintree. Essentially Facebook is working with eBay (PayPal) to make mobile payments quick and easy. Facebook is getting into banking.

The shape of global payments is changing. The current state of world economies is shaky at best. Companies like Facebook, Google, and Amazon are dipping their toes into payments, financial services and money. It’s the perfect storm for a complete revolution in the global financial system. 

We’ve said for some time that what you think about money is going to be very different in five to ten years time. It’s all beginning right now. This is just the beginning. There is a shift underway, and there will be opportunities to make money from it…while money still exists.

Health:
This Might Be Too Weird for Some of You

When it comes to making people’s lives better you can’t fault innovative and pioneering doctors. As weird as some of the treatments might sound you have to consider one thing when you hear about it.

And that is the outcome for the patient. These weird approaches to treatment often result in a return to normal living, something many of us take for granted day to day. It’s impossible to imagine what some of these patients go through not just physically but mentally and emotionally.

That makes it all the more important when technology plays its part to rebuild the lives of these people.

In China at a Hospital in Fuzhou, Fujian Provence medical technology has gone to a new level. As reported by the BBC, doctors are growing a new nose on the forehead of a patient.

The man had severe nasal disfigurement after a traffic accident in August last year. Doctors couldn’t initially save his nose or rebuild what was left. So they decided the best form of treatment was to grow a new one.

The doctors have been able to use modern medicine to grow a perfect nose with the man’s forehead skin and cartilage from his ribs. Soon the nose will be fully-grown and they will simply transplant it back onto the correct part of his face.

I’ll save you the bizarreness of the picture, but should you wish to see it, click here.

There’s no limit to what medicine can do with the aid of technology and innovation. Growing a nose on a man’s head is the tip of the iceberg. Medicine and technology have the ability cure the incurable, regenerate our own slowly ageing organs and ultimately help us live longer and healthier lives.

Energy:
If You Had a Really Big Desert, Solar’s a No-Brainer

Solar is no doubt the most important renewable energy source on earth, until we can sort out fusion power. And more solar farms are coming online every year. Harnessing the power of the sun is crucial to weaning ourselves off the fossil fuel dependence we’ve had for so long.

One of the most sun-drenched places on earth is the Mojave Desert in California. Therefore it comes as no great surprise to see the world’s largest solar power plant under construction smack bang in the middle of the Mojave.

Click to enlarge

Although most of the plant is still under construction some of it is complete. And on Tuesday, Unit 1 had its first “sync” to the power grid and produced power.

The plant, Ivanpah, is 3,500 acres in size, produces 377MW, can serve 140,000 homes annually and lists Google as one of its key equity investors.

It’s really a no brainer that if you’ve got a lot of space where it’s really sunny, you’d put down some solar plants like Ivanpah.

It’s somewhat baffling to think that as a country the best Australia can dish up is an under construction plant near Mildura with a peak output of 154MW.

Australia only has the 4th, 7th, 10th and 11th largest subtropical deserts in the world. I mean surely that’s as good a reason as any to plonk down as many solar farms as possible?

The Mildura plant is a good start. But as the world’s 11th biggest producer of carbon dioxide emissions per capita, you’d think our government would do more.

Sadly an election has just gone. It was a wasted opportunity for a leader with foresight to assume responsibility for the future of the country. Australia has got the ability to make a real mark on the way the world moves forward from a technology and energy perspective.

Sadly Australia’s sitting on its hands. It’s no fault of people like you and I, but because of the sheer ineptitude of our so-called leaders.

At least we still have private industry that might just pull out a trump card and push on with creating a solar country. Maybe with any luck we’ll slowly work our way down that list of carbon producers and give our country a cleaner and greener global image.

Sam Volkering+
Technology Analyst, Revolutionary Tech Investor

From the Archives…

Why it’s Time to Reassess Your Stock Strategy
20-09-2013 – Kris Sayce

The Stocks Best Placed to Gain From This Rally…
19-09-2013 – Kris Sayce

Cyber Security at the SIBOS Conference
18-09-2013 – Sam Volkering

Is the Federal Reserve Using the Bank of Japan’s Playbook?
17-09-2013 – Vern Gowdie

Has the US Federal Reserve Created a ‘Fool’s Rally’?
16-09-2013 – Kris Sayce

By MoneyMorning.com.au

US congressman Ted Cruz has hit the headlines for reading Dr Seuss’ Green Eggs & Ham during a filibuster of a US budget bill.

And so in the spirit of re-telling old yarns, here’s another story you’ve probably heard before. According to the Financial Times:

‘The US government could start to run short of funds to meet its obligations by October 17, said Jack Lew, the Treasury secretary, unless Congress votes to lift the debt ceiling before then.‘

As old yarns go, this one is about as tedious as it gets.

But all you need to know is that you shouldn’t let boring old yarns like this divert you from your investing goals…

Take for instance the guff about the stock market in the month of October.

The old story is that October is a terrible month to invest…that the market is certain to crash and you’ll lose all your money.

We understand where folks get this doom and gloom idea. The famous 1987 stock market crash happened in October 1987. And a big chunk of the 2008 stock market crash happened in October 2008.

But if you look at the stock market’s record over the last 11 years you’ll find the truth about October isn’t as scary as bearish commentators and most in the mainstream would have you think…

The ‘Chart of Octobers’

We remember for as long as we’ve been interested in financial markets that October is supposed to be a horrific month for investors.

But how does the tale stack up to reality? Not very well, as the following chart shows:

Data Source: Yahoo! Finance

The blue bars show the point gains or losses in the month of October for the S&P/ASX 200 going back to the creation of the index in 2001.

As you can see, the 2008 crunch took a big chunk of points off the index. But as you can also see, based on this 11 year period, 2008 is also an extreme outlier.

Now, that doesn’t mean a crash of that proportion can’t happen again (as you’ll hear in the next couple of days from our old pal Dan Denning, he suggests such a crash is ‘unavoidable‘), but there’s also no guarantee it will happen next month or in October 2014.

In fact, our bet remains that you won’t see a major stock market crash until after the Australian share market takes out the high above 7,000 points in 2015.

But getting back to the ‘Chart of Octobers’, the chart shows that the record for October isn’t that bad. On a net points basis, the index is actually up 317 points…despite the 618 point drop in October 2008.

Putting a Line Through the Market

However, this doesn’t mean everything is rosy. As you know, the share market is in an extremely volatile state. It could lose 200 points or more in a flash. Remember, the Aussie index lost nearly 600 points during May and June of this year.

But now that the index has moved into and above the key level around 5,200 points we’re prepared to bet the market won’t fall back below that level again this year:

Source: CMC Markets Stockbroking
Click to enlarge

It’s a big call. And we know we’re sure to take some flak for saying it. But these are the kind of calls you have to make as an investor.

Take the period from May to June this year. We had held a bullish view right up until that time. We felt that low interest rates and the surge into dividend stocks would continue to boost the market, and that companies would use this to their advantage by boosting payout ratios.

But when interest rates started to rise in May, investors didn’t like it and so they sold stocks. Even so, despite the fall, we stood firm in our view that it was a short-term event.

It was the right decision.

We don’t always get it right, but this time we did. Stocks have recovered from all their May and June losses and are now trading above where they were in May.

And that’s the thing. When you’re making big investment decisions it’s important not to be rash. One false move can have a huge impact on your savings.

Stick to Your Investing Plan

This is why we suggest that you ignore most of the peripheral stuff. Rather than focus on things you can’t control (such as central bank money printing and the US debt ceiling), focus on things you can control such as picking quality stocks.

As we said at the top of this letter, we can’t guarantee we’re right. As much as we’ve screeched and warbled about stocks going up and the market heading towards 7,000 points, there’s always the chance we’ll get it wrong.

But so far our analysis has been pretty much spot on. And if you’ve followed our advice you should have bagged good returns by betting on dividend stocks and small-cap growth stocks.

If you want to make big returns you’ve got to take a view and build your strategy around it. That doesn’t mean sticking your head in the sand and ignoring everything else entirely.

But if you decide to change direction with your investments, make sure you don’t do it on a whim. Investors who sold in May and June fearing a complete collapse are doubtless regretting that decision as stocks continue to climb.

Cheers,
Kris+

From the Port Phillip Publishing Library

Special Report: Are You Waiting for a Real Estate Crash That Isn’t Going to Come?
 
Daily Reckoning: How Much Juice can Australian Property Have Left?

Money Morning: Why the Next Commodities Boom Could Take Place in a Science Lab

Pursuit of Happiness: The Pope Has Got This One Wrong about Money

By MoneyMorning.com.au

It’s a small world we live in. Physically it’s quite large, but metaphorically it’s not.

But way back in the 1900′s the world was epic. It was hard to travel around and communication barely existed outside the written letter.

With that in mind think about what technology was like in the early 1900′s.

TV didn’t exist, radio was new, powered flight was about to be invented and the car was only something for the uber rich.

Imagine what it would be like to go back and speak to someone in 1913. Could you explain to them what technology would be like in 100 years’ time?

A Different World

Try explaining what a mobile phone is considering that the telephone barely didn’t even existed then. That cars which had just been invented will become electric.

What about that contraption the Wright brothers were working on? Well a big version of that will take people across the world in a matter of hours. And then a really big version will one day take people into space.

Try telling someone back then that you can monitor their entire world with tiny sensors. And these sensors will tell us everything. Everything needed to help make day-to-day living easier, safer and more enjoyable.

It’s likely if you tried to explain what today’s world would be like to someone 100 years ago, or even 30 years ago, they would certify you insane.

But insane or not, the constant theme is that amazing developments happen over time. And as the world progresses, governments come and go, and doom and gloom appears and disappears.

Regardless of the ‘economic climate’ the human race still advances.

Sometimes we take for granted the progression of the world. We lose perspective of the long game and focus on the short term mish-mash of drama that dictates the daily papers and news.

Here’s a good example. Aussies went to the polls on 7 September. That’s right, the election. Let me make something clear: this has absolutely no impact on the technological development of the world whatsoever. It has no impact on a cure for cancer, the reality of hypersonic flight or if the internet of things will become a way of life.

Take this as a strong reminder that short term concerns have very little impact to the longer term play.

Problems Equal Profit Opportunity

If you want to build wealth, generational wealth, don’t get bogged down in the day to day nonsense. Instead, look at the trends we’re helping you to identify and then seize the opportunities to take part in it rather than just watch.

One of the trends we’ve talked about since launching Revolutionary Tech Investor is another example of this. You’ve seen us write about it and heard the terms. This includes the Quantified Self Movement and Immersive Technology.

This particular trend is part of your life already and you may not even realise. Bloomberg recently reported on this trend:

‘"It’s smart cities, smart buildings, smart water," said Susan Eustis, president of WinterGreen Research Inc. "It’s enabling a world of things. It’s going to grow unbelievably fast."

‘The market for sensors integrated with processors will reach 2.8 trillion devices in 2019, up from 65 million this year, according to WinterGreen. Some of these sensors could be no larger than a pinhead.’

2.8 trillion devices! Remember there are only 7 billion people in the world. That’s 400 devices per person.

However, big problems exist with so many devices and sensors. But with those problems also comes innovative companies with company-making solutions.

One of these problems is too much data. It’s so excessive it’s near impossible to make sense of it all. The other problem is an even greater risk…cyber security.

Everything you do these days creates data. So it’s important the right protection exists to keep your information safe. That’s why we need cyber security.

And while we go about our day to day business there’s something monumental getting momentum that could tear everything down. It’s the silent war. It’s all-out Cyber Warfare.

Make no mistake about it, as positive as we are about the future, the inherent risk of cyber warfare still exists. We certainly don’t believe it will result in a dystopian future though.

Cyber security is a problem, but one that’s being tackled head on. The digital war is already underway, and there are a few companies on the front line of this battle.

Right now we’re scrutinising these companies as we find, research, analyse and present the best of the best in Revolutionary Tech Investor. Because we know there’s great opportunity for the right company to profit from the threat of cyber warfare.

But cyber warfare aside, the immersive technology trend is real; it’s happening right now.

Sam Volkering+
Technology Analyst, Revolutionary Tech Investor

From the Archives…

Why it’s Time to Reassess Your Stock Strategy
20-09-2013 – Kris Sayce

The Stocks Best Placed to Gain From This Rally…
19-09-2013 – Kris Sayce

Cyber Security at the SIBOS Conference
18-09-2013 – Sam Volkering

Is the Federal Reserve Using the Bank of Japan’s Playbook?
17-09-2013 – Vern Gowdie

Has the US Federal Reserve Created a ‘Fool’s Rally’?
16-09-2013 – Kris Sayce

By MoneyMorning.com.au

According to many, the commodities boom is over.

It’s time to sell iron ore.

Sell copper.

Sell gold.

Sell oil.

Sell everything. It’s all over; no one will use a single ounce, pound, tonne or barrel of a commodity ever again.

That’s clearly an over-reaction. There will still be demand for commodities. The question is whether the demand is enough to make investing in resource stocks profitable…

The latest chart of the Reserve Bank of Australia’s Index of Commodity Prices paints a conflicting picture.

Is the boom over? Or is it just a pause before the commodities sector kicks off again?

Source: Reserve Bank of Australia

So which is it? The worst thing we can do in this game is sit on the fence and not give you clear cut advice. In which case, we’ll try our best to give you our thoughts on the state of play for commodities today…

There’s Still Life in the Commodities Market

To give you the short answer, it’s not the end of commodities. So if you think you should sell all your commodity stocks, think again.

The world’s economies will always need to build things and make things. And it’s probable that in one form or another there will always be demand for iron ore, copper and aluminium.

China’s plan to build the world’s tallest building, in pre-fabricated form and in just 90 days, is proof that raw materials are still in demand.

Not to mention all the other grand building plans you see around the world and in Australia. Even though the merit of some of these plans is questionable.

And so with these materials in demand there will always be a need for companies to explore for and produce them.

As you’d expect with the laws of supply and demand, the price will move up and down. That means sometimes it will be good to invest in resource stocks, while other times it won’t.

Although there’s one thing we can almost guarantee. Regardless of the market conditions, if an explorer discovers a brand new resource the stock price will likely take off in a flash. So don’t write off resource stock investing just yet.

In fact, our bet is that now is a perfect time to buy resource stocks while most other investors run scared.

But as important as the big bulk commodities may be, the really exciting ‘commodities’ are anything but bulk. These are the commodities operating at the other end of the spectrum. We’re talking about nano-materials…

Thinner Than a Human Hair, Stronger Than Steel

This is a subject we covered in the latest issue of Revolutionary Tech Investor. It’s the idea of a revolution in the materials used to manufacture large and small goods.

But don’t assume that large goods mean ‘large materials’. Because the reality is that the auto and aerospace are two of the leading industries involved in the development of nano-materials.

So, what are nano-materials? To put it simply, they are materials that you can measure in millionths of a millimetre. A great example is this image of a carbon fibre strand. And although technically speaking carbon fibre isn’t a nano-material, it gives you a clue about how important these materials could become over the next few years:

Source: Carbonfibredesigns.com

The white strand running from top left to bottom right is a human hair. The black strand running from bottom left to top right is a carbon fibre strand.

But despite carbon fibre being just a fraction of the size of a human hair, it’s five times as strong as steel, twice as stiff, and much lighter than steel.

What’s more, it’s resilient to heat and doesn’t expand and contract like steel under extreme temperatures.

This is why the auto and aerospace industries have led the way with innovation into the use of carbon fibre. If they can replace the chassis and body of cars and planes with carbon fibre, not only does it lighten and strengthen the structure, but it improves fuel efficiency too.

But that’s not the only area where nano-materials (or micro-materials in the case of carbon fibre) are set to have a major impact.

Commodities Boom in a Science Lab

As the BBC reports:

‘The first computer built entirely with carbon nanotubes has been unveiled, opening the door to a new generation of digital devices.

‘“Cedric” is only a basic prototype but could be developed into a machine which is smaller, faster and more efficient than today’s silicon models.‘

In short, carbon nanotubes are made from a single sheet of carbon that is one atom thick, and when rolled into a tube provides an incredibly strong structure.

But it’s not just its strength that appeals to scientists. Its conductivity makes it an ideal alternative to silicon in the microchip industry.

In an industry where size is important, the nano-scale size of carbon nanotubes is a key development. The more transistors that can fit on a micro-chip the greater the computing power.

If you’ve heard of Moore’s Law you’ll know that microchip processing power doubles every 18-24 months. Well, if microchip makers can reduce the size of transistors at the atomic level, it stands to reason they can increase the number of transistors and therefore the computing power.

Again, to put this in context, a human hair is about 100 microns (one micron is equal to 1,000 nanometres). The latest silicon chips are about 22 nanometres. The single carbon nanotubes used in ‘Cedric’ are about 1 nanometre.

In other words, a human hair is approximately 100,000 times thicker than a carbon nanotube. That makes carbon nanotubes invisible to the naked eye. But more importantly to the micro processing industry, carbon nanotubes are 22 times thinner than existing silicon chip technology.

In short, when you think about commodities in the future, you need to think more than just iron ore, copper, steel and oil. The future commodities are just as likely to be the product of a science lab in Silicon Valley as they are of a mill or foundry in China’s industrial heartland.

Cheers,
Kris+

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Special Report: Are You Waiting for a Real Estate Crash That Isn’t Going to Come?

By MoneyMorning.com.au

Today we’ll discuss the prospects for gold and silver.

But first, let’s discuss Richard Nixon.

That is, after he lost the election for governor of California in 1962, he remarked to the assembled news reporters, ‘You won’t have Nixon to kick around anymore.‘ Of course, we all know what happened with Mr. Nixon in later years.

(Heck, speaking of gold, Nixon took the US off the gold standard in 1971. And it was on Nixon’s watch that oil prices quadrupled in 1973. But I digress….)

Nixon’s so-called ‘last press conference’ came to mind as I saw news that former Treasury secretary and presidential economic adviser Larry Summers…umm…’withdrew’ his name from consideration to be the next chairman of the Federal Reserve.

He won’t succeed the current Fed ramrod, Ben Shalom Bernanke. Yes, indeed. Larry Summers withdrew his name. I read it on the internet, so it must be true.

Did Summers walk? Or was he ‘helped’ in making his decision? Or just plain pushed? Whatever happened, I’ll bet Summers thought long and hard about whether or not to plunge into that Fed briar patch with his monetary weed whacker. His designated role would have been that of the central bank ‘fall guy’.

That is, the duty Summers won’t seek is similar to the mission of Paul Volcker back in the late 1970s and early 1980s. Volcker was the Fed head in an era of raging inflation and economic stagnation. Volcker gritted his teeth and raised interest rates to nosebleed levels, which smashed inflation down – and tore the guts out of an already weak economy.

In an alternative universe, today Summers would have had the unpleasant duty of scaling back on Bernanke’s still-raging $85 billion per month program of quantitative easing (QE). Hey, somebody has to fall on that monetary hand grenade sooner or later. But I guess it’ll be later. And the perp will not be Larry Summers.

Keep the QE Flowing

Evidently, big shots within the Obama administration and the Senate noticed that our grand US economy is less robust than they would like. Plus, we have looming budget battles and political dogfights over taxes and spending.

Add in the approaching storm of Obamacare – a job-killing, economy-wrecking tsunami already flooding across the land, from what I can see (long story). So the issue for the Federal Reserve becomes whether to throttle QE just now or let the Fed’s money spigot run.

Politically, it’s risky to scale back on QE. Or to paraphrase that old line about cancer, there are more people living off it than dying from it.

So apparently, policy honchos within the Obama administration told Bernanke to keep the Fed’s signature easy-money programs in place for a while longer. How much longer? Well… through this fall, at least. Then we move into 2014, when the US will hold elections for the entire House and one-third of the Senate. So politically, this is a no-brainer, and QE should last a while longer.

Volcker’s Ghost

Getting back to Larry Summers, I suspect he knows what happened to Paul Volcker back in the 1980s, when the guy battled America’s inflation problem in a post-Vietnam, oil-shocked economy.

In terms of monetary policy, Volcker did what he needed to do. Volcker raised interest rates. He raised them high!

I lived through it. It was good to be a saver or lender, but I also recall that Volcker’s high interest rates sure stung if you were the borrower. Ugh. I once signed up for a 16% rate on a used car loan – a beat-up Dodge Omni, no less! I still cringe at the thought.

In the larger picture, Volcker was much hated in many quarters. In the Midwest at the time, the steel and auto industries were contracting due to rising global competition. (It’s where the term ‘Rust Belt’ originated.)

Volcker’s high interest rates made things worse, leading to more plant and mill closings and attendant layoffs. People rioted in the streets against Volcker and burned him in effigy. As things unfolded, Volcker required personal protection due to death threats.

I’ll add this for perspective, though. Back then, the world was in the depths of the Cold War. The West faced a very real and dangerous nuclear threat from the former Soviet Union, which set the overall political tone. Absent that, I doubt that either President Jimmy Carter or even President Ronald Reagan would have gutted it out with Volcker’s high interest rates, even to halt inflation and save the dollar.

In other words, no matter how bad things were with Volcker’s high interest rates, the politicians could rationalise it all and think it was better than losing out in the Cold War to the evil commies, if not getting nuked. These days, we lack that comforting choice of alternatives.

Thus, Larry Summers ought to breathe sighs of relief at missing out on receiving rivers of unadulterated hatred from entire populations across the now wired-in world, which lacks the former military motivations of the Cold War era. Really, today those flash mobs of ‘Occupy This or That’ can track you down in a heartbeat.

So Summers will avoid the fate of personal vilification and destruction that’s otherwise primed and aimed at whoever takes the dirty job of draining a trillion dollars per year of fake Fed liquidity out of the global economy.

Indeed, global markets were setting up to sell off at merely the hint of Summers at the helm of the Good Ship Fed. And then? No more Summers. Bernanke announced more QE. And the markets firmed up – as did gold prices.

Also, as per the touching custom of Kabuki theater that is modern Washington, DC, President Obama graciously accepted the Summers withdrawal. Heck, Mr. President even offered kind words for Mr. Summers’ many years of national service. Now we can only wonder about what might have been with Summers running the Fed. What might he have accomplished? Scaling back QE? We’ll never know.

Recalling the Happy Golden Bygone Days

Then again… let’s not overly romanticise Larry Summers. It’s not as if he’s a ‘doomed son of heroes’ out of the tale of Ossian, riding toward the steel.

When I think of Larry Summers, I look back to his tenure as president of Harvard, where he left a mixed legacy. For instance, he initiated a long-overdue crackdown on grade inflation – sort of a ‘QE of grades’, if you will. Bravo!

Summers also encouraged several academically challenged Harvard faculty members to seek other opportunities. I won’t mention names, but the matter is not exactly a state secret. Again, bravissimo to Summers!

But then Summers oversaw the loss of $2 billion of Harvard endowment funds due to bad interest rate swaps, a subject on which he’s supposed to be an expert – or at least the smartest guy in the room.

On that last matter, consider that Harvard’s undergraduate tuition is about $50,000 per year, per student. So Summers losing $2 billion is equivalent to burning a year’s take from 40,000 students.

But there are only about 6,000 undergraduate students on campus in any given year. Thus, one could say that Summers broke Harvard’s enrolment bank – zeroed the account – for almost seven entire years of operations. Ouch.

Of course, Harvard continues to function, as one might expect of an enduring institution that dates back to 1636. And the US will likely endure as well – QE or no – considering our resilient national history since 1776.

No matter who runs the Fed, though – and it won’t be Larry Summers – I think we’re in for a rough ride for a while. At least for now, we won’t have Summers to kick around.

What’s the takeaway here? QE, QE and more QE. The Fed is propping up Wall Street, so to speak, while the ‘real’ economy languishes. It’s investable for stock pickers. And buy physical gold. Buy physical silver. Hold oil. The dollar will live through another time of troubles. That’s where this is heading.

That’s all for now. Thanks for reading.

Byron King
Contributing Editor, Money Morning

Ed Note: Larry Summers Won’t Burn in Effigy originally appeared in The Daily Reckoning USA

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By MoneyMorning.com.au

Technology is wonderful.

But it can be mightily cruel too.

We remember the launch of the early BlackBerry [NASDAQ: BBRY] phone models in the late 1990s and early 2000s.

It was so different to everything that went before.

The shape, the screen, what you could do with it.

As we recall, it was more of a data device than a phone because you couldn’t hold it to your mouth and ear to talk. You had to use a handsfree headset.

But now, barely more than a decade after BlackBerry revolutionised the world of mobile communications, the company is about to die.

It’s a worthy reminder to investors that just because something has always ‘been around’ doesn’t mean it will always be around in the future…

As Bloomberg News reported yesterday:

‘BlackBerry Ltd., once valued at $83 billion, may be stuck with the cheapest valuation ever for a North American technology or telecommunications takeover.

‘The smartphone maker said yesterday it reached a tentative agreement for a $4.7 billion buyout by a group led by Fairfax Financial Holdings Ltd., its biggest shareholder. Including net cash, the proposal values the Waterloo, Ontario-based company at an 80 percent discount to its book value and just 0.17 times its sales, the cheapest revenue multiple on record among similar-sized North American telecommunications or technology acquisitions…‘

Technology companies can be like the proverbial Apollo V rocket launch. They can blast off in a flash, delivering investors quick and spectacular gains.

But unless the company continues to innovate, bringing new ideas and technology to the market, the gravitational forces of the free market can quickly see the stock price return to Earth…

‘Wow! This Could Revolutionise the World’

Now, we don’t mean to scare you off technology stocks. As the editor of Revolutionary Tech Investor  that’s the last thing we’d want to do.

Instead, what we want to make clear is that as an investor, technology stocks shouldn’t be an ‘either/or’ proposition. By that we mean you shouldn’t choose between tech stocks or bank stocks, or tech stocks and retail stocks, or tech stocks and industrial stocks.

Generally speaking, tech stocks should be part of your speculative portfolio. So in the same way you’d never choose between a blue-chip banking stock and a tiny mining penny stock, you shouldn’t choose between a blue-chip banking stock and a speculative technology stock – even if that speculative technology stock is a multi-billion-dollar company.

So why is that?

Aside from the obvious, that tech stocks are riskier than banking stocks, you tend to get more accelerated price action with tech stocks. That’s what causes them to shoot up so fast.

Because technology stocks are innovative, investors tend to build all future growth potential into the stock price. When a tech stock unveils a new product or process, investors don’t think ‘Oh that should help businesses achieve a 1% improvement in productivity.’

No, investors think, ‘Wow! That will revolutionise the world.’

And so you get this kind of price action…

Don’t Hold on Too Long

Remember what we said. Tech stocks tend to explode onto the scene. And you shouldn’t confuse a tech stock with a standard blue-chip stock.

Here’s a chart of the BlackBerry share price going back to February 1999:

Click to enlarge

You’re probably looking at the blue line. If you bought BlackBerry (or Research in Motion as the company was then called) shares in 1999, you could have clocked up more than a 12,000% gain in eight years.

But if you had held on until today, you would have gained just 379%…which still isn’t bad.

But now look at something else. Look at the red line at the bottom of the chart. Compared with BlackBerry the red line barely budges from the bottom of the scale. That’s how it appears anyway. In reality, those shares have gained 177.7% over the same timeframe.

Those are shares of Commonwealth Bank of Australia [ASX: CBA]. Here’s the thing, if you bought and held on to CBA shares over that time you would have picked up $33.47 in dividends. So inclusive of dividends your return would have been a 306.9% gain – not far behind the ‘buy-and-hold’ gain of BlackBerry.

So, what are we saying?

Not a Stock to Buy and Hold

The important message is that you should buy and hold some stocks, but other stocks you shouldn’t.

The comparison between CBA and BlackBerry is a perfect example. It’s why we recommend you hold reliable dividend-payers in your portfolio. This is the part of your portfolio you can afford to buy and then set to one side.

With any luck you’ll never have to do anything with them again…except cash the dividend cheques.

Speculative stocks on the other hand are completely different. We know it’s hindsight investing, but it’s clear BlackBerry wasn’t the type of stock to buy and hold.

And as Sam Volkering pointed out last week with his essay on Apple [NASDAQ: AAPL], odds are that Apple isn’t a stock you want to have lingering around in your portfolio for the long term either.

This is why in Revolutionary Tech Investor we see our tech and biotech stock picks as short-term punts. And the last thing we’d recommend is for investors to see these stocks as an alternative to a reliable dividend-paying stock.

This is super important when it comes to building or rebalancing your portfolio.

Make Sure Your Stocks Know Their Place

You have to know exactly where a stock fits within your portfolio. You can’t have all safe dividend payers because odds are you won’t achieve your investing goals.

But you can’t stack your portfolio with only high-risk growth stocks either, otherwise you’ll find your portfolio crashing and burning all over the place.

The key is to lay the foundations with a handful of quality and reliable dividend stocks, and then supplementing this with a number of volatile speculations to help boost your returns.

Tech stocks are some of the most exciting companies you can invest in. It’s what makes it so enjoyable to write about them every week in Revolutionary Tech Investor. But make sure you understand their role in building your wealth – the goal is to buy, make quick and spectacular gains… and then get the heck out of there.

Cheers,
Kris+

From the Port Phillip Publishing Library

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By MoneyMorning.com.au

The GFC brought into stark contrast just how vital the banking system is to the functioning of an economy.

At the height of the GFC banks did not trust each other. And people did not trust the banks.

Banks viewed each other with suspicion. Letters of credit were no longer accepted on face value. The shipping industry, which relies heavily on letters of credit, ground to a standstill.

Customers lined up outside banks (some with suitcases) to withdraw their savings.

Such was the demand for cash, the Reserve Bank of Australia came close to running out of physical notes.

Modern commerce is a function of faith. When faith in the financial system is lost, chaos follows. 

Banks are the Heart of the Financial System

Money pumps in and money pumps out. The flow of money through the system is as vital to economic health as the flow of blood is to our physical wellbeing. We all know what happens when arteries become blocked or, worse still, when a heart stops pumping.

Governments are only too aware of the need to maintain public faith in the banking sector. Government backed deposit guarantees still remain in force five years after the event – albeit the guarantees are now applied to lower dollar levels.

The first premise of my theory is governments must and will support the banking system in times of crisis. They cannot afford to have the heart stop beating. While nothing is ever certain, the prospect of government not wheeling out the defibrillator is extremely remote.

So I go with the balance of probability and assess that the banking system will be rescued. But who pays and at what cost?

Sayings like ‘safe as a bank’ refer to an era of prudence that is not reflective of modern banking.

Yet, by and large, banks are still viewed as these conservative pillars of society.

This chart from last week shows US credit growth exploding from 1980 onwards.

Click to enlarge

This graph applies equally to the rest of the western world. Who facilitated and profited (handsomely) from this debt mania? The banks. Fractional banking enabled banks to gear up by a factor of 10x or more. This highly leveraged pillar is what our monetary system rests upon.

The Impact of Shrinking Credit

After 30-years of unbridled debt expansion we have reached the stage where there are too many vested interests prohibiting the stabilisation of banking system.

Firmer foundations would require banks to reduce their gearing – lend less. Think of the ramifications of banks systematically reducing the credit flow throughout society:

• Government tax revenues (on which all those entitlement promises have been built) would shrink faster than a wool sweater in a dryer.
• Retail profits would fall and staff would be laid off.
• The lay-off contagion would affect all business sectors and unemployment would rise. (And how does the government afford all this NewStart while on its Jenny Craig budget diet?)
• Imagine the reaction from the real estate industry as property prices fall.
• Bank profits would fall and share prices follow – member balances in superannuation would suffer and cause more pressure on the age pension to fund the shortfall.
• Last but by no means least in a list that could go on and on, bank executive remuneration would collapse to under the $1m per annum mark. Shock, horror; imagine all those Porsches and North Shore homes that would flood back onto the market.
• And the domino effect continues right through society.

I think you get the drift on how society is so hooked on the debt. Due to debt dependency, it is virtually impossible for anyone or any institution to voluntarily embark on the stabilisation process.

There have been token attempts at so-called banking reforms. In reality very little has changed. Bankers still get remunerated for taking risks, and not for being conservative.

The banks are even bigger than they were before Lehmann Brothers’ demise.

And the system is totally dependent upon unlimited central bank support. The system, in my opinion, is more unstable than it was in 2008. A cardiac arrest awaits.

Vern Gowdie+
Chairman, Gowdie Family Wealth

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By MoneyMorning.com.au

Here’s some good news…or not…from the Financial Times:

‘The age at which people retire has absolutely no effect on when they die, a joint Australian-Norwegian research project has found.‘

Actually, we think it’s good news.

Your editor is a glass half-full kinda guy.

The report suggests that whenever you retire, odds are you’ll die at your pre-destined age. In other words, if you’re destined to die at 94, then you’ll die at 94 whether you retire at 55, 65 or 75.

The key then is to do all you can now to save for retirement to make sure that you’ve got enough time left up your sleeve to enjoy yourself.

But how on Earth can you do that without taking unnecessary risks?

There’s a fine balance when it comes to saving for retirement.

Remember, you don’t save money for the sake of saving money. There’s no benefit for you if your only goal is to save as much money as possible.

We know that may sound an odd thing to say, given how we’re always banging on about wasteful governments and how folks go into too much debt these days.

But the reality is that ‘saving’ is just another way of saying ‘delaying consumption’. If you spend all your money today then you’re reducing the amount you can consume in the future.

That’s when folks get into trouble during retirement. They haven’t saved enough, so they don’t have the ability to consume.

Turn a 29.9% Gain into a 188% Gain

Therefore it’s important to save. But, it’s possible to take things too far. Some folks forgo all current spending. They live a subsistence level lifestyle and squirrel every last penny away.

You then tend to hear about them in the papers after they die; ‘We were so surprised that Uncle Jack/Auntie Beryl had $5 million in the bank. They scraped by every day.’

Sorry, but that’s no way to live. It’s one thing to think about the future, it’s another thing to be so frugal that you never get around to enjoying the money you’ve saved.

And now, if as reported in the Financial Times, your time on Earth is somewhat pre-determined regardless of how long you work, it makes even more sense to structure your finances so you can build your savings quickly without impacting negatively on your current lifestyle.

So, how can you do that?

Well, there is one simple technique that’s available to most shareholders of blue-chip stocks, and some small-cap stocks too.

It’s a technique that could help you increase the value of your shares by 188% even if the share price only gains 29.9%. That’s more than a six-fold boost to your returns. Here’s how it works…

Warren Buffett Does This

The simple technique involves getting companies that you invest in to give you more shares for ‘free’. It’s something we’ve recommended to Australian Small-Cap Investigator subscribers, as has Nick Hubble to subscribers of his Money for Life Letter.

You may think that sounds like a tough ask. After all, who wants to give anything of value away for free? But surprisingly, it’s pretty easy.

Some of the biggest Australian stocks, including the big banks, retailers, industrials, and even some of the big mining stocks, offer this ‘free’ share service.

All you need to do is know what to look for. But don’t just take our word for it. World famous investor Warren Buffett says this technique has been one of the biggest influences of Berkshire Hathaway’s [NYSE: BRK/A] growth:

‘Our net worth has thus increased from $48 million to $157 billion during those four decades and our intrinsic value has grown far more.  No other American corporation has come close to building up its financial strength in this unrelenting way.‘

The technique in question is dividend reinvestment programs (DRPs).

Big companies such as Commonwealth Bank of Australia [ASX: CBA] and Australia & New Zealand Banking Corporation [ASX: ANZ] offer DRPs to shareholders.

The way it works is simple.

A $15,000 Difference on a $10,000 Stake!

Instead of opting to receive a cash dividend payment from the company, you can choose to receive ‘free’ shares. Of course, the shares aren’t really ‘free’ because you’re paying for the shares using the dividend you otherwise would have received.

But buying shares in this way does have benefits. For instance, some companies will offer the shares at a discount to the prevailing market price. Plus, because the company issues the shares to you directly, you don’t have to pay commission to a broker.

Best of all is the impact taking part in a DRP can have on your investments. The two numbers we’ve circled show the difference in the value of a shareholding with a DRP and without a DRP:

Click to enlarge

That’s a difference of $15,920.95 over 10 years. And as you can see in the green box, each year the number of DRP shares grows as the value of your shares grow and (hopefully) as the dividend grows.

Of course, we’re making the assumption that this is a company with staying power and that it’s able to grow revenue, profits and dividends over the long term.

But that’s why you do your homework, to make sure you’re investing in the type of company that can hit those goals.

Look at the numbers. This is just with a starting point of $10,050 over 10 years. Now imagine you’ve built up a $100,000 over the first 20 years of your investing life and you can now compound your returns using DRPs over the next 20 or 30 years.

It can have a huge impact on your retirement savings. By compounding your returns through a DRP you could hit your retirement goals much sooner…which means retiring earlier and enjoying more of your life.

And providing you don’t need the income from the dividends now (which most people don’t during the accumulation phase of their savings) it won’t have an impact on your daily lifestyle.

Have Your Investing Cake and Eat It Too

As we see it, DRPs are about as close as you can get in the investing world to having your cake and eating it.

A DRP shouldn’t be the sole reason for investing in a stock. But if you’ve done the research on a stock you like and it happens to offer a DRP, run the numbers. It could be that taking part in the DRP is the single best decision you can make to boost your retirement savings pot.

Cheers,
Kris+

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By MoneyMorning.com.au

The Federal Reserve’s surprising decision to keep QE going at its current rate is still front page news. While the US fiddles with monetary policy to meddle with house prices, the Australian government is set to interfere with banks in order to manipulate mortgage lending. If you’ve been reading the Daily Reckoning for a while, you know we are sceptical that government action like this produces the intended outcome.

The problem with the Australian housing market is a simple one. For prices to be at such absurd heights compared to the rest of the world (not to mention common sense), there must be a lack of supply and/or a surplus of demand. We’ve got both.

The central bank keeps interest rates low to spur demand and the government messes about with things like zoning laws to restrict building. If there was a free market in housing, each time house prices rose relative to everything else, more houses would be built and prices would return to affordable levels. As commodity traders in the Chicago trading pits will tell you, ‘The cure for higher prices is higher prices.’ In other words, let the free market do its work.

But the government can’t have that. Housing is just too important, you can’t trust the free market, or some other such nonsense. This type of thinking has been virulent ever since none other than Adam Smith admitted that we need the government to build things like lighthouses. After all, who would build lighthouses if the government didn’t? There’s just no way the free market can provide such goods and services.

Unfortunately for Mr Smith, about three quarters of lighthouses in the UK at the time he wrote were privately funded and built. Over in the US, they often point out that the private sector could never provide certain goods and services – air traffic control, for example. Sure enough, much of ‘socialist’ Europe runs on a private air traffic control system. The examples just go on.

So when it comes to housing, yes the free market could do it all darn well. If it were just left alone, that is. But that’s not going to happen, is it? The good news is, the failures of government are prime opportunities for profiteering because governments fail in predictable ways. So let’s take a look at the latest shenanigans the government has come up with to solve a problem it created.

The Australian Financial Review reports on the meddleomaniacs looking to hamper the free market’s solutions:

‘Former Reserve Bank of Australia board member Bob Gregory said a property bubble seemed "inevitable" and Melbourne University professor Ross Garnaut said making banks set aside extra capital would be "simple and logical".‘

The other option being floated is New Zealand’s supposed solution. Over there they limited Loan to Value Ratios, restricting how much you can borrow against a house.

All that’s very nice. Good luck implementing it in a way that bankers can’t get around. For example, bridging loans for a deposit are already common. And if lenders are willing to fudge their client’s income and assetsto get past lending standards, a story which we have been documenting for months, they’re willing to fudge the value of a house.

Here’s our solution. Bring back Hammurabi’s Code. The key part of the code goes a little something like this, ‘If a house collapses, killing the owner, the house builder shall be put to death. If the first born son of the owner dies, the first born son of the builder shall be put to death.’ More modern versions of the same rule include ‘an eye for an eye’, and the politically correct version is ‘do unto others as you would have them do unto you’.

So what’s the mortgage lending version of this? Well, at the very least, if a loan you made goes into default, you should have to return the fees and commissions you made. Can you imagine a world where people are held to account like this? Used car salesmen would be popular and politicians seen as nothing more than an inconvenience.

Bring back Hammurabi!

Nick Hubble+
Editor, The Money for Life Letter

Ed Note: This article first appeared in The Daily Reckoning Australia

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CRUDE OIL: Bearish, Sets Up To Weaken Further.

CRUDE OIL: The commodity continues to weaken, leaving the risk of further downside expected in the new week. Support lies at the 102.00 level followed by the 101.00 level. A violation of here will aim at the 100.00 level and then the 99.00 level, its key psycho level. Its weekly RSI is bearish and pointing lower supporting this view. Resistance is seen at the 104.00 level followed by the 105.50 level where a violation will aim at the 106.50 level. Further out, resistance comes in at the 108.00 level with a cut through targeting the 100.00 level. All in all, Crude Oil remains biased to the downside

Article by http://www.fxtechstrategy.com/