Month: June 2011

Source: ForexYard

The US economy will be publishing its weekly unemployment claims numbers today alongside more manufacturing data, this time out of Philadelphia. After the Empire State manufacturing report revealed a sharp downturn in New York, today’s Philly manufacturing report may be the game-changer in today’s market. Traders should be eyeing this news for hints at the second quarter’s industrial and manufacturing outlook.

Economic News

USD – USD Trading Higher as Risk Aversion Increases

The US dollar was seen increasing late yesterday as traders began to seek shelter following several pessimistic economic data releases. The EUR/USD was seen moving towards 1.4130 yesterday after dismal economic reports pushed many investors into the safety of the greenback. The GBP/USD was also in a stark bearish channel, witnessing a move from as high as 1.6400 to this morning’s low of 1.6160.

Yesterday’s bearish TIC investment report and detrimental manufacturing figures out of New York have so far helped to lift the value of safe haven assets as investors seek safety. The EUR, GBP, and AUD were each plummeting against the US dollar throughout Wednesday’s session, with mild upticks coming towards the day’s closing.

With another heavy news day expected today, traders are sure to see heightened volatility. Most significantly, the US economy will be publishing its weekly unemployment claims numbers as well as more manufacturing data, this time out of Philadelphia. After the Empire State manufacturing report revealed a sharp downturn, today’s Philly manufacturing report may be the game changer in today’s market. Traders should be eyeing this news for hints at the second quarter’s industrial and manufacturing outlook.

CHF – Switzerland to Dominate Euro News Today

The Swiss economy is scheduled to release several significant data releases today, most important among them is its interest rate differential statement between the UK and Switzerland. The London Inter-Bank Offered Rate (Libor) is a 3-month interest rate for loans offered between the two central banks. It is a primary gauge of Swiss franc (CHF) values.

Expectations for today’s rate statement are for the Libor to remain unchanged at 0.25%. The inflationary pressures mounting on several European countries, along with their northern Scandinavian neighbors, also carry the potential for a hawkish statement out of the Swiss National Bank (SNB) today. Though it isn’t likely that the SNB will tighten its monetary policy anytime soon, rumors have begun to spread that interest rate differentials are coming under scrutiny and pressure may be mounting to alter the present record low rates.

The CHF has been a top performer among global currencies since the financial crisis of 2007-08, but many analysts wonder how much longer the Swiss can continue to push the value of their currency higher while Swiss exports begin to feel the pinch. Another indication of just how much pressure is being placed on domestic producers in Switzerland is today’s industrial production report which is forecast to reveal a stark 7.5% contraction for this quarter. Traders may begin to see the Swissie meet resistance as a result of today’s figures, should they prove as detrimental as forecast.

AUD – Aussie Trading Lower as Traders Flee Risk

The Australian dollar (AUD) was seen taking a hit versus the US dollar (USD) yesterday after news began to shift many traders away from the riskier currencies. The Aussie has been a top performer these past several months considering many traders bank on a strengthening of the AUD due to a rise in Chinese demand for Australian raw materials.

Indeed, the insatiable appetite for the raw ore produced in the Land Down Under by the Chinese manufacturing and industrial sectors have, in some ways, transformed the AUD/USD into one of the more frequently traded pairs in the forex market. Investors view the pair as a gauge on the strength of China. As the AUD rises versus its American counterpart, a number of analysts begin to speculate that it is out of an expectation for a boom in demand by China for natural resources out of its southerly Pacific neighbor. Savvy traders have lately been using this metric as a way to determine whether or not to buy into the Chinese stock exchanges.

Oil – Fears of Reduced Fuel Demand Drops Oil Prices

Crude Oil prices dropped sharply towards $94 a barrel Wednesday as sentiment appeared to favor a downturn in global industry alongside a slump in demand for the black gold. Data releases out of Britain and the US yesterday were driving many investors back into safe haven assets as most reports suggested murky growth in global industrial output and consumer spending.

As investors sought safety, the value of crude oil, which has been seen plummeting all week, fell to a monthly low of $94 a barrel. A sudden jump in dollar values due to yesterday’s risk averse environment has helped many investors ram up their short-taking positions on physical assets. Crude Oil Should sentiment hold steady this week, oil prices may continue to fail to find weak support near its current price.

Technical News

EUR/USD

A three week rally was met with a failure of the pair to breach 1.4700, a level not far from the previous trend line which opened the door for a significant pullback that retraced 50% of the late May to early June gains. The week’s declines ended at the 20-day moving average at 1.4330 and will serve as initial support. Falling daily stochastics suggest the move lower may have scope to continue where the pair may find resistance at 1.4250, a level that coincides with the 61% retracement and the rising trend line from the May low. A breach here and the pair will test the 100-day moving average followed by the May low at 1.3970. To the upside, resistance will likely come in 1.4570 followed by 1.4700.

GBP/USD

The weekly candlestick suggests further declines may be in store as last week’s candlestick ended on a shaven bottom, indicating momentum is moving to the downside. A confirmation will be needed from this week’s trade to confirm the bearish pattern. In the meanwhile the move lower finished at the 38% retracement level of the December to April move and is quickly approaching the trend line off the May 2010 low at 1.6180. The pair could receive a bounce from this level, as was the case in late May. Resistance is located at 1.6400 and 1.6460, and 1.6550. Should the pair not receive a bounce at the trend line declines could mount to 1.6060 and the April low at 1.5935.

USD/JPY

The yen was relatively unchanged from the previous week after an attempt to breach below the 80 yen level was only briefly successful before the pair was bid higher. While most oscillators remain in neutral territory, the pair continues to trade lower with resistance at the falling trend line from April high which comes in near the 20-day moving average at 81.00. This level may offer traders a better price to enter short. Further resistance is located at 81.75 from the May 31st high followed by 82.25 of the May 19th high. Support comes in at the May low of 79.50 followed by the all-time low at 76.11.

USD/CHF

The pair is testing a short term resistance level at 0.8450 and a breach here would expose the resistance at 0.8855 which lies just below the 20-day moving average. A rise to this price may offer traders better levels at which to enter short. Above these levels rests the falling trend line from the mid-February high which comes in at 0.8720. Support is found at the all-time low at 0.8325.

The Wild Card

Oil

Spot crude oil prices tumbled yesterday making a significant breach below the triangle consolidation pattern on the daily chart. Forex traders may want to be short as the price could continue to decline. Support comes in at the rising trend line from the August low at $93.00, a level that coincides with the late January/early February highs.

Forex Market Analysis provided by ForexYard.

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

The daily chart for the GBP/USD shows a potential head and shoulders reversal pattern.

After falling from 1.6750 in April and the subsequent recovery in late May cable is currently testing the neckline of a head and shoulders chart pattern. Today the neckline comes in at 1.6100. A breach at this level and a measured move from the chart pattern could take the GBP/USD lower to 1.5370. The likeliest target on the charts is the December low at 1.5350.

While this level may seem far off, judging by the fundamentals and the price action over the past two days the move may not seem to unreasonable.

Read more forex trading news on our forex blog.

The USD surged as Greek riots and a lack of a Greek bailout is upping the political tensions in Europe. Pressure will continue to remain on both the euro and global bourses until an agreement has been hashed out between Germany and the ECB surrounding investor participation (debt restructuring) for the next Greek bailout.

CHF – SNB Monetary Policy Assessment – 07:30 GMT
Actual: 0.25%. Expectations: 0.25%. Previous: 0.25%.
The Swiss Libor Rate was held steady earlier today by the SNB while noting exporters’ margins are beginning to come under pressure due to the strength of the franc versus the euro and the USD. The SNB sees rising inflation rates over the next three years but threats to the global outlook and CHF strength should be sufficient to keep inflation and therefore interest rates at current levels in the near term.

GBP – Retail Sales m/m – 08:30 GMT
Expectations: -0.5%. Previous: 1.1%.
Disappointing UK employment data yesterday combined with the Greek debt crisis was the trigger to send the cable below the rising trend line from the May 2010 high. Currently the GBP/USD is testing the neckline of a head and shoulders pattern at 1.6100 which would signal a reversal of the long term trend.

USD – Philly Fed Manufacturing Index – 14:00 GMT
Expectations: 7.1. Previous: 3.9.
Yesterday weak US data from the Empire State Manufacturing Index fed into the “risk off” environment and USD buying. While many are focusing on the Greek debt crisis a downturn in macroeconomic data from the US is also weighing on growth currencies and US equities. The S&P 500 fell -1.74% yesterday. Weak manufacturing numbers today may be an opportunity for further USD gains and equity losses. Early this morning the EUR/USD failed to extend its declines below 1.4100. Support under this psychological level is found at the May low at 1.3970 with the next significant technical level the 200-day moving average at 1.3810.

Read more forex trading news on our forex blog.

By Elias Horne

About the Author

I have lived in Asia for the past 20 years. Have worked in Foreign Investment consultancies in many different asian countries.

For more information please visit my website Invest in China

Understanding ‘Dollar – Rupee Relation’ amidst current financial crises

About ‘Exchange Rate’ of a currency:

The exchange rate of the currency of a country in relation to the currency of another country depends on the comparative trade advantages and economic strengths of the countries.
If one US dollar is equal to 45 rupees, it simply means that in the US, if a dollar fetches 45 oranges while in India, a rupee would fetch only one orange of equivalent size and quality.

Just like any other commodity, the currency of any economy is based on dynamics of supply and demand, and its value depends on trading in currency exchanges all over the world. Higher the demand for a currency on an exchange, the stronger it becomes and vice versa. However, for currencies like INR which are not traded on exchanges, the value depends on capital inflows in the country.

Appreciation & Depreciation of currency:

A currency appreciates means its value has increased in relation to another currency.
A currency depreciates means its value has decreased in relation to another currency.
Eg. If 1 $ costs Rs 45 and if it now costs Rs 44, this means rupee has appreciated in its value (i.e. instead of Rs 45 you will get 1 $ in Rs 44, this also means the dollar has weakened). Similarly, if 1 $ costs Rs 45 and if it now costs Rs 46, this means rupee has depreciated in its value (i.e. instead of Rs 45 you will get 1 $ in Rs 46, this also means the dollar has strengthened).

Why do currency values fluctuate?

There are many participants in any foreign exchange market. These entities — like banks, corporations, brokers, even individuals — buy and sell currencies everyday.
Here too the universal economic law of demand and supply is applicable: when there are more buyers for a currency than sellers, its exchange rate rises. Similarly, when there are more sellers of a particular currency than buyers, its exchange rate will fall. This does not mean people no longer want money; it only means that people prefer to keep their wealth in some other form or another currency.

Scenario before occurrence of the current financial crises:

We were witnessing a surge of dollar-inflows into India due reasons like strong economic fundamentals and favourable business atmosphere, etc. These dollar inflows can be in the form of Foreign Direct Investment, portfolio inflows (foreign investment in equity), External Commercial Borrowings by Indian companies abroad,
remittances to India by Non-Resident Indians. Since the Indian economy and the Indian stock markets have been on a roll, the capital inflows to India has been pretty strong which has primarily led to the appreciation in value of rupee. This huge influx caused a significant demand – supply gap between the dollar and the rupee. Going by the laws of demand & supply, the rate of the rupee vis-à-vis the dollar, rises.

Due to this exporters were placed at a disadvantage with a rising rupee, since the dollar became weaker. Thus a dollar which fetched Rs. 48 about two years ago today fetched only Rs. 44 eating into the profit margins of exporters (since they earned less on their exports).
At the same time, importers benefit (since they need to pay less for their imports), but our economy was at a stage where we first needed to build our dollar reserves to meet our import payments and so the exporters’ woes were needed to be tackled first.

The Reserve Bank of India (RBI), as the central bank of India, which oversees the foreign exchange (forex) management of this country quite often intervened to ensure that the rupee was adequately propped at a particular rate. This was done to ensure that there are no sudden currency shocks, to protect exporters and importers and above all, to ensure the feeling of ‘national pride,’ which is attached to a stable and healthy currency.

When the RBI intervened to keep the rupee at some weak value, it had to buy the dollar inflows from exporters, from NRIs, from foreign direct investors, from companies that borrow abroad. In any case the sellers of dollars need rupees to conduct their businesses here. The RBI buys or sells dollars via state-run banks to prevent excessive volatility in the forex market and avoid any sharp appreciation or depreciation in the currency. When the RBI purchases foreign currency inflows, the domestic monetary base or money supply or both rises since for every dollar the RBI buys from the market, an equivalent amount of rupees gets injected into the system, adding to excess money in the system or the liquidity overhang. When the RBI buys dollars, it pays for them using freshly printed rupee notes. This leads to greater money supply, higher credit growth and inflation.

And precisely, here comes the catche. As RBI sells more rupees, the money supply increases which means too much money chasing same (or less) number of goods, thereby leading to inflation. So in effect one act of RBI creates another problem. In other words, when the RBI buys dollars from the Indian market, it simultaneously pumps rupees into the currency markets, creating the risk of inflationary pressures. The RBI typically controls the appreciation by manipulating demand-supply dynamics of currency market. It purchases dollars (to create more demand for dollar) and sells rupees (to increase supply of INR, thereby decreasing its value).

To contain inflationary pressures, the RBI adopts a measure termed as ‘sterile intervention.’ Under this measure, the RBI sells Government of India bonds in the market. With the sale of these bonds, the rupee, which had flowed into the market for buying dollars, is once again sucked out of the market. When the RBI buys dollar-denominated assets, (to create demand for dollars and reduce supply of rupee) it sells rupee-denominated securities to suck the rupees back. But when the RBI has to suck out a whole lot of rupees back, it has to raise rupee interest rates, the Repo rate (the interest rate at which commercial banks borrow for short term from RBI) and the Cash Reserve Ratio (CRR).

This is how the RBI protects the dollar-rupee exchange rates and yet, manages to contain inflation.

Scenario after occurrence of the financial crises:

The sub-prime crises, bankruptcy, sale, restructuring and merger of some of the world’s largest financial institutions caused cataclysmic disruptions in the international stocks and money markets. Imprudent financial decisions, fed by greed and bad luck, have seen global financial markets collapse.

The current financial crises that shook the global financial markets has seen unprecedented bailouts and infusion of dollars into the US economy at a cost of many an emerging market, from where funds have been pulled out to flow back into America.
India, which was till recently having huge capital dollar inflows, now is experiencing flow of dollars outside the country due to selling of more Indian shares than bought (to the tune of over $9 billion), thereby making dollars scarce in India and reduced demand for rupees, simultaneously, as there is increased demand for dollars due to spurt in crude oil prices and the dipped capital inflows.

The dollar prices fell by some considerable amount with respect to most of the currencies. Here in India the rupee rose to around 40-41 a dollar from around the 45 rupees a dollar. There is a lot of panic among the exporters because a weak dollar adversely affects the exporters, especially in the services sector who have all their expenditure in rupees and earnings in dollar.

The growing Indian trade deficit and the large fiscal deficit are also contributing to the fall of the rupee. The higher price of imported goods, especially oil (India is a heavy importer of oil), has also led to an increase in domestic inflation and a fall in the value of the Indian currency. High inflation and a strong growth in the Indian economy have already forced the RBI to raise interest rates.

Example: Consider a firm; say ‘K software’ that has a profit margin of 5 %. Now ‘K software’ bags a contract of 100,000 USD from a big US based firm when the dollar Rupee exchange rate is 45 Rs a dollar. So the profit of ‘K software’ would be 5 % of 100,000 i.e. USD 5k (= 225k Rs at the exchange rate of 45Re= 1USD) and expenditure which is in Rupees as USD 95k i.e. 4275k Rupees. Therefore, ‘K software’ goes ahead with its project and when the project is completed the dollar gets weak and trades at 40 Rupees a dollar. Now ‘K software’ has already spent 4275k and now despite getting the promised 100,000 USD they get only 4000K rupees and end up, in effect, paying 275k for developing the software. So weakening of dollar is detrimental for the exporters.

To explain it with another example; Say that exchange rate is US 1 $ = 50 INR. If an exporter X earns US $ 1000 by exporting his goods/services to US, his earnings in Rupee terms is Rs. 50,000. If the Rupee appreciates to US 1 $ = 40 INR, then in rupee terms the earnings of exporter will be Rs. 40,000. A fall in earnings despite the exports being constant. But the exporter who is based in India has to spend in INR in India; he has less money at his disposal constraining his further growth by way of limiting his investment capacity.

Importers on the other hand have to pay less to import the same thing suppose you buy a 100$ iPod now you will have to shell out just around 4k instead of the earlier 4.5k. This is one of the reasons why all those Oil economies which are primarily the importers maintain very high exchange rates by regulating their currencies.

Reverse of what was happening before the crises:

Therefore, where the RBI was sucking out the excess liquidity from the system caused due to huge capital dollar inflows, it is now compelled to reverse its stance and infuse liquidity back into the system. Where previously the CRR was hiked, RBI now reduced the CRR, repo rate and adopted to increase the reverse repo rate(the interest rate at which RBI borrows for short term from the commercial banks), since there is shortage of money supply in the system and therefore reduced credit in the market.

About the Author

Anand A Wadadekar
B.Com (Law), M.A (Economics), PGD Finance & Banking, AMFI, DIT

Will There Be Profits in Pandora’s Box?

by Justin Dove, Investment U Research
Wednesday, June 15, 2011

With more than 90 million registered users in the United States, chances are you or someone you know uses Pandora (NYSE: P) as a music service or smartphone application.

Pandora’s opening on June 15 resembled a rollercoaster ride. The stock surged to nearly a 50 percent gain just after the markets opened… Then, when it looked like it might follow in LinkedIn’s (NYSE: LNKD) path, it leveled off. By closing, Pandora fell back to earth for a gain closer to 9 percent of its $16 starting price.

There are varying opinions on how good of an investment Pandora is… so let’s look under the hood…

NYSE: P – The Undisputed Market Leader in Online Radio

Pandora has shown strong growth over the past three years, according to its income statement. Revenues went from $19 million through 2008 to $55 million after 2009 and last year exploded to $137 million. The net loss from operations shrunk from more than $28 million through 2008 to just above $1.5 million last year. This is the type of pattern you want to see in a growing technology market such as internet radio. Whether that pattern continues into the black is anyone’s guess…

Sure, there will be plenty of competition in the online media market with streaming online radio such as Slacker Radio, Yahoo! Music, and so on. There are also the new cloud computing options such as the iCloud from Apple (Nasdaq: AAPL), due out in the fall, and Cloud Drive from Amazon (Nasdaq: AMZN). The cloud will let users save music files and playlists to a personal online “hard drive” which they can access from any internet-connected device.

But despite the competition, The Music Genome Project and a polished user interface have made Pandora the undisputed market leader in online radio.

So what’s the concern?

Pandora claims to contain a library of more than 800,000 songs. Each time a user plays a song, Pandora must pay royalties. With an ever-growing base of listeners, the expenses increase with the expansion of the user base. The current deal in place, which expires in 2015, is generous for Pandora. However, a subsequent deal may end up increasing long-term royalty expenses.

The Gift and the Curse of The Mobile App Market

One of the biggest developments in the life of Pandora was the introduction of the iPhone App Store in 2008. As the web version of Pandora seemed to be stalling, the mobile app market version quickly became the most downloaded application by iPhone users in late 2008.

In 2011, mobile device users comprised 60 percent of Pandora’s total usage. But the company still hasn’t figured out how to fully capitalize on this customer base. According to the Risk Factors section of Pandora’s latest SEC filing states, the company acknowledged that “To date, we have not been able to generate revenue from our advertising products delivered to mobile devices as effectively as we have for our advertising products served on traditional computers.”

Mobile expansion has been a double-edged sword for Pandora. While its mobile application certainly catapulted the usage and convenience of the service, it also brings up new difficulties in the business model.

As Mark Walsh of MoBlog states, “Pandora is caught between the more established world of Web advertising and the mobile ad frontier, where advertising hasn’t caught up to usage.”

A Wait-And-See Approach

There’s obviously a hype surrounding the potential of these internet companies. It’s also easy to love a company that you like as a consumer. That doesn’t mean it’s a sound investment though. There are questions with the business model and if the model is overhauled, there will be risk of losing user base.

Pandora, valued at more than $2.6 billion on the day of the IPO, is now awash in cash. This infusion of money may be just what it needs to buy time and find a way to become profitable. But it could also be a temporary flotation device for a ship taking on water.

As my colleague Alex Green pointed out on Monday, the technology sector, outside of social networking, is on the upswing for the long term. Pandora is kind of stuck in the middle though. It isn’t a social network and it earns substantial revenues with an attachment to the smartphone boom. But many experts are claiming the company is being overvalued considering a lack of profits and the current technology stock frenzy. It should be an interesting story to follow throughout the rest of the year.

Good investing,

Justin Dove

Hello traders, Adam Hewison founder of INO.com just finished his 1 p.m. Market Update for the 15th of June.

All you need to do to watch the video is grab your free log-in information, just click here. You will only need to do this once to access Adams daily updates and seminars from Chuck LeBeau, Jack Schwager, Ron Ianieri, John Murphy, Larry Williams, Mark Douglas, George Fontanills, Mark Cook and more…FREE! Its a great free tool and I can’t believe Adam is just giving it away.

Now here’s a brief summary of what’s in today’s video and what’s happening right now in the major markets:

– SP 500: -70. The market action today can only be described as negative. A score is now -70 and our downside target for this market is 1250. Major downside support is at 1250.

– Silver: -70. I would watch this market very carefully today as I feel that it is probably at the lower end of its range. We would use the Donchian Channels along with the fact that this market is oversold and expect to see a bounce from current levels. Major Support at 34.00.

– Gold: +70. Gold is currently oversold and we expect to see this market balance sometime in the near future. We would not be surprised to see further sideways action but we want to be long this market as the Donchian channel comes in at 1503. Major support at 1,500.

– Crude Oil: +55 Trading range. This market continues to pound out a base to go higher. Long term indicator remains positive. Support coming into this market at $96/barrel. This market is currently oversold and choppy.

– The Dollar Index: -55. Despite today’s strong dollar rally in the index, the longer-term and mid-term Trade Triangles remain negative. Resistance now at 76.50. The dollar index is now in overbought territory. Minor support at 73.50 and major support at 73.00.

– Reuters/Jefferies CRB Commodity Index: +55. This index is now beginning to reach an oversold condition and we may see further backing and filling-in softness. Near-term resistance at 350.00. Minor support at 340. Major support at 335.00. Trading range.

The big question is are we going to close lower seven weeks in a row in the major indexes. Many people trading the markets now have not seen the classic bear market which does not give you a chance to get out. Several of our major long-term indicators are close to turning negative and when they do we would recommend moving into an all cash position for hitting any portfolio you might have in stocks.

See what you can do to protect your portfolio and to watch Adam analyze these markets click here for instant access to INO TV.

By CountingPips.com

The US dollar has been stronger in forex trading today against the other major currencies as risk aversion has boosted the American currency while pushing stocks and other riskier assets lower. The dollar has been gaining ground on the euro, British pound sterling, Japanese yen, Australian dollar, Swiss franc, New Zealand dollar and the Canadian dollar, according to currency data in the afternoon of the US session.

The US stock markets have had large selloffs today with the Dow Jones industrial average decreasing by over 150 points, the Nasdaq falling by over 35 points and the S&P 500 down by over 20 points at time of writing.

In commodities, oil has traded lower by approximately $3.00 to the $96.37 per barrel level and gold futures have been almost unchanged at the $1524.20 per ounce level.

Much of today’s risk aversion stems from the ongoing confusion and lack of a resolution surrounding the Greece debt crisis and the second bailout package. The Moody’s rating agency said today that it might downgrade some French banks with exposure to Greek debt liabilities while protests have broken out in Greece over the austerity package being implemented to cut their debt.

Key US data released today showed that consumer prices rose more than expected in the month of May, according to the US Department of Labor report. The consumer price index increased by 0.2 percent (YOY +3.6%) following a gain of 0.4 percent in April and surpassing forecasts expecting a 0.1 percent gain. The core reading, excluding food and energy prices, rose by 0.3 percent (YOY +1.5%) following April’s 0.2 percent rise and also beating forecasts looking for a 0.2 percent advance.

Also released out of the US was the Empire manufacturing survey which fell much more than expected and showed that manufacturing activity slowed in June. The survey fell to a -7.79 score for June after having registered a 11.80 reading in May and was forecasted to reach a 12.00 score for June.

EUR/USD Forex Daily Chart – The euro has dropped more than 1 percent today versus the dollar in trading as the EUR/USD pair has fallen from the 1.4400 level to trading under the 1.4200 level in the US afternoon session. Further depreciation of the euro could see the pair descend to the 1.4050 support level in the coming days with the 1.4250 level providing potential resistance.

Investing Strategies for a Volatile Chinese Market

by Carl Delfeld, Investment U Senior Analyst
Wednesday, June 15, 2011: Issue #1535

Last week, we looked at the big picture on why raging China bulls should temper their short-term expectations. And that China’s growth could sharply slow dashing expectations of eternal double-digit growth. This, in turn, could send markets into a tailspin.

Today, we look at some recent cracks in the China story and then get to the important part: What should investors do about it?

• The myth that a China IPO could never fail went bust last week as an already launched offering for auto part manufacturer Nanning Baling was scrapped after it failed to attract bids from the required 20 institutional investors. Shares of Renren, the hyped (and unprofitable) Chinese version of social networking leader Facebook, are in a tailspin since its May debut. Renren fell by more than 10 percent last Wednesday alone.

• Last week, China became the largest energy consumer in the world, and the social costs of 10-percent growth are coming home to roost. My friend Elizabeth Economy’s new book on China’s environmental disaster, The River Runs Black, hit Amazon’s top-10 list on the day it was published.

• Battered by soaring material and financing costs, the head of a small Chinese manufacturer and exporter of eyeglasses recently chased two Reuters reporters from his office crying, “This business is not tenable anymore… we are quitting!”

• Li & Fung, which handles about four percent of American retailers’ imports from China, stated that average costs for goods rose 15 percent in the first five months of this year compared with the same period last year.

• Coach, the luxury handbag manufacturer, recently announced that it would try to reduce its reliance on China to less than half of its products within four years, from 80 percent now, by moving production to Vietnam and India.

• Sales of cars, minivans and sport utility vehicles grew only seven percent in April from a year earlier. This signals a further slowing after year-over-year sales growth of 20 to 120 percent each month in 2010.

• After a month-long investigation into local government liabilities, Beijing determined that local governments borrowed approximately 10 trillion yuan ($1.5 trillion) and some anticipate that up to 25 percent would go bad.

• In nine major cities tracked by market-research firm Dragonomics, real-estate prices fell 4.9 percent in April from a year earlier. Last year, prices rose 21.5 percent in those nine cities.

Stay With China – Manage the Risk

The above list alone could easily send investors in China scurrying to the sidelines, but that would be a great mistake. Every country has its challenges and these are really just the flip side of opportunities. When pessimism is highest, the smart investors find a way to stay engaged and manage the risks.

Here’s a few ideas to stay engaged while coping with China uncertainty.

Beneath the headlines, there are plenty of Chinese companies surging ahead with eye-popping growth in sales and profits. For example, China’s environmental disaster means big bucks for companies with solutions. Put together a basket of Chinese and western firms that will profit from cleaning up the mess.

Consider investing in Chinese growth indirectly to lower risks.

• Brazil’s Vale (NYSE: VALE) gets 30 percent of revenue through exporting iron ore to China.

• Aberdeen Indonesia (AMEX: IF) has become the world’s largest exporter of thermal coal on the back of exports to China.

• The iShares MSCI Singapore Index (NYSE: EWS) sits in the center of the Chinese growth train.

Most importantly, when you invest in a Chinese ADR or exchange-traded fund (ETF), always (and I mean always) put in place a 15-percent trailing sell stop order. This limits your downside risk but also allows you to lock in hard earned gains if the share price pulls back after making a nice advance.

It’s important that this happens automatically so that your emotions don’t get in the way. How many times have you seen your hard-earned profits disappear after rationalizing that a falling stock will “bounce back?”

Finally, never let one country dominate your global portfolio no matter how right you think you are. Always ask yourself the magic question: “What if I’m wrong?”

Good investing,

Carl Delfeld

The Second-Coming of the Texas Oil Boom

by David Fessler, Investment U Senior Analyst
Wednesday, June 15, 2011

It’s been almost 50 years since Americans heard that famous line from The Ballad of Jed Clampett: “Oil that is, black gold, Texas tea.“

For the rest of the world, the 20th century began on January 1, 1901. But for Texans, it started nine days later when the Spindletop well blew out drilling mud, gas and oil… Texas tea, as it soon became known.

The gusher spouted more than 100 feet into the air, and it took nine days to cap it. That single event transformed the Lone Star state from an arid cattle-herding wilderness into the nation’s premiere oil and gas supplier.

The Spindletop Field Discovery: Texas’ First Oil Boom

The discovery of the Spindletop field led to a flood of oil drilling and speculation. That ultimately resulted in even more discoveries, and the Texas oil boom got underway in earnest.

Petroleum quickly displaced agriculture and cattle as the primary economic driver of Texas. Personal fortunes were made, and government coffers swelled with cold, hard cash.

Often the discovery of oil led to the formation of entire towns. It also led to the start of companies that later grew to become huge oil empires.

The New Handbook of Texas has this to say about the discovery of the Spindletop oil field: “The discovery of the Spindletop oil field had an almost incalculable effect on world history, as well as Texas history.”

Eager to find similar deposits, investors spent billions of dollars throughout the Lone Star State in search of oil and natural gas. The cheap fuel they found helped to revolutionize American transportation and industry.

Shale Oil Fields Yield Vast Amounts of ‘Texas Tea‘

Recent data for the Foundation for Energy Education shows Texas has 28 of the top 100 oil fields in the United States, as ranked by proven reserves. In 2008, Texas had proven reserves of 4.555 billion barrels.

But that number could turn out to be low… way low. You see now horizontal drilling and fracking techniques – pioneered by the natural gas industry – being applied to shale oilfields in Texas.

The results are prompting experts to declare that Texas is on the verge of a second oil boom. This time however, it’s going to come from the state’s vast shale oil fields.

A RAND study conducted in 2005 indicated that crude would have to be in the range of $75-90 per barrel for shale oil extraction to be economical.

We’re certainly beyond that. Even better, with technological improvements, shale oil can now be extracted for as little as $20-30 per barrel.

The Bakken field in North Dakota has been producing sale oil in ever increasing amounts. Over the past several years, production has reached 460,000 bpd. Estimates are this figure could increase to over 1 million bpd by 2020, or even sooner.

Why Eagle Ford is THE Texas Big Oil Shale Play

The Texas big oil shale play is of course, the Eagle Ford Shale formation. Many players who gained valuable experience in the Bakken have begun to set up operations in the Eagle Ford area.

Players in the Eagle Ford formation include:

• Marathon Oil Corporation (NYSE: MRO)

• EOG Resources, Inc. (NYSE: EOG)

• Whiting Petroleum Corporation (NYSE: WLL)

• Apache Corporation (NYSE: APA)

• Carrizo Oil and Gas, Inc. (Nasdaq: CRZO)

Right now, production is just ramping up in Eagle Ford, and stands at a mere 50,000-100,000 bpd. Estimates are that this could quickly rise to 750,000-800,000 bpd in the not-to-distant future as more and more drill rigs are brought to bear on this lucrative oil field.

Investors who want to play Texas’ second oil boom should take a look at the companies listed above. They’re drilling like there’s no tomorrow in the Eagle Ford.

Good investing,

Dave Fessler