Month: July 2011

How will the never-ending eurozone crisis finally end? All roads lead to the printing press…

Recently, I have said, “watch the bond market.” The action in U.S. Treasury bonds makes for a good risk barometer. If bond prices rise and yields fall, that means “risk off” is back on the menu.

That is what happened this week. The yield on the 10-year note has fallen back below 3%. (When yields are falling, bond prices are rising.)

The big spike in yield came as markets soared in the final week of June. That was the burst of stock market euphoria coupled with a “problem solved” verdict for Greece and two pieces of positive manufacturing data from the U.S.

But yields have tanked again — and bond prices round-tripped back to recent highs — as Europe slides right back into crisis. The warm happy feelings over Greece, and the notion of “problem solved,” had a life cycle on par with the adult mayfly.

A ways back in these pages, we argued that Europe is being held together with duct tape. The tape is now badly frayed and coming apart.

If you look at the cycles of crisis coming out of the eurozone, they are getting faster and tighter. More countries are getting sucked in. The breathing space between problems is getting smaller.

This week Italy took center stage, with Spain waiting in the wings. As The New York Times recently wrote (emphasis mine):

Throughout Europe’s debt crisis, Italy has largely managed to steer clear of the troubles that have engulfed its profligate Mediterranean neighbors.

But the contagion that started in the euro zone’s smaller countries is suddenly moving to some of its largest. As Greece teeters on the brink of a default, the game has changed: Investors are taking aim at any country suffering from a combination of high debt, slow growth and political dysfunction — and Italy has it all, in spades.

In recent days, Italy has become Europe’s next weak link after Greece, Ireland, Portugal and Spain, harmed in particular by a power struggle between Prime Minister Silvio Berlusconi and his finance minister, Giulio Tremonti. The dispute threatens to turn the euro zone’s third-largest economy, after Germany and France, into one of its biggest liabilities.

As we have said before in these pages, the eurozone’s sovereign debt problems are getting bigger, not smaller. Proposed solutions are either fiendishly complicated, logistically impossible, or a mix of both.

Even worse, the crisis grows as time goes by. Dialing back the clock, a small country like Greece could have been firmly dealt with a year or two ago. Honest action far earlier in the process could have cut off the contagion.

But now the gangrene has spread from the patient’s big toe to infect his entire leg. Italy? Spain? These problems are too big to fix without radical surgery.

So at what point does Europe stop throwing markets into a crisis? When does the great snowball of problems finally relent?

Some observers have predicted the euro itself is on its deathbed — that the euro currency will not last another year. This prediction is often coupled with a bullish argument, that Europe will finally be able to heal itself when the constraints of a bad currency union are gone.

Others argue that the euro will almost certainly survive no matter what… even if it survives in a different form. We could see the euro continue to exist even if a handful of countries are kicked out, or if a two-speed Europe emerges (a sort of “core euro” and “peripheral euro” or “Mediterranean euro”).

In this particular case, your editor does not support as dramatic a forecast as all that. The euro currency itself need not die within a year. Not when the simpler solution of a much, much lower valuation could do the trick.

There are really only two options in Europe. Countries like Greece (and possibly Italy?) can be allowed to default, or withdraw from the euro, or both. Barring that, either the European Central Bank or the European Union can print up a hell of a lot of euros and use them to “monetize” the bad debt.

European leaders are paralyzed because both options are so bad.

Allowing default would risk a catastrophic domino chain of follow-up consequences. Not only might a number of big European banks fail (thanks to derivative exposure), depositor banks in multiple countries might experience a “run” as the public withdraws all its cash. (This happened to Northern Rock, a British bank, earlier in the financial crisis.)

Monetizing the bad debt, on the other hand, would make the Germans very, very angry. The Germans hate and fear inflation so much that the very idea practically makes their heads explode.

(This also explains why Jean Claude Trichet, the head of the ECB, is a knee-jerk raiser of interest rates even as the peripheral eurozone economies crumble all around him.)

The hope of eurozone politicians has been, “If we stall for time, economic growth will help us out of this jam.” They have been pushing off the reckoning and hoping for a global recovery, or a miracle cash infusion from China, or both.

But neither of those is coming. The recovery is stalling out, not picking up speed. Meanwhile China is contributing here and there, but has its own serious problems.

This is why, most likely at some point, they will have to “monetize” the bad sovereign debt. Either the ECB or the European Union will have to buy up huge chunks of the toxic debt, paying euros for it, much as the Federal Reserve bought toxic debt with dollars after the 2008 meltdown.

This forced action could cause the euro to fall sharply and dramatically. We could see a return to $1.30 or $1.20 levels, if not lower — at which point uncertainties surrounding the “ugly contest” with the U.S. dollar would kick in again.

Written by Justice Litle for  Taipan Publishing Group. Additional valuable content can be syndicated via our News RSS feed. Republish without charge. Required: Author attribution, links back to original content or  www.taipanpublishinggroup.com.

A Free Lesson on How to Combine Technical Indicators with Elliott Wave Analysis

By Elliott Wave International

Trading using technical indicators — such as the MACD, for example, Moving Average Convergence-Divergence — can do one of two things: help you or hinder you.

Using them as a forecasting method alone can be about as predictable as flipping a coin. But when you combine them with other forms of technical analysis (i.e. the Wave Principle), the same MACD can be your new best friend.

Technical indicators are meant to do exactly what the name implies: “indicate” that a buy or sell signal may be in place. (Don’t confuse “indicate” with “guarantee”: They are not called “technical guarantors” for a reason.)

Elliott Wave International’s Futures Junctures editor Jeffrey Kennedy shows you how he uses technical indicators to his advantage in his FREE eBook, The Commodity Trader’s Classroom:

“Rather than using technical indicators as a means to gauge momentum or pick tops and bottoms, I use them to identify potential trade setups.”

Jeffrey goes on to describe his favorite indicator, the MACD:

“Out of the hundreds of technical indicators I have worked with over the years, my favorite study is the MACD [which] uses two exponential moving averages (12-period and 26-period). The difference between these two moving averages is the MACD line. The trigger or Signal line is a 9-period exponential moving average of the MACD line.”

Figure 10-1 gives you an example of the MACD indicator in Coffee futures.

One of the signals of a potential trade setup that the MACD often introduces is what Jeffrey refers to as the Hook. Here’s another quote from the free eBook:

“A Hook occurs when the MACD line penetrates, or attempts to penetrate, the Signal line and then reverses at the last moment. In addition to identifying potential trade setups, you can also use Hooks as confirmation. Rather than entering a position on a cross-over between the MACD line and Signal line, wait for a Hook to occur to provide confirmation that a trend change has indeed occurred. Doing so increases your confidence in the signal, because now you have two pieces of information in agreement.”

Figure 10-4 gives you an example of the Hook at work in live cattle futures.

“A Hook should really just be a big red flag, saying that the larger trend may be ready to resume. It’s not a trading system that I follow blindly. All I’m looking for is a heads-up that the larger trend is possibly resuming.”

Learn more about other technical indicators that you can use to your advantage, as well as the other important lessons in the FREE 32-page eBook, The Commodity Trader’s Classroom. It is filled with actionable lessons you can apply to your trading strategy. Download it right now, instantly, when you create your free Club EWI profile.

July 13 (Bloomberg) — Jim McCafferty, a Hong Kong-based Asia research product manager for Royal Bank of Scotland Group Plc, talks about China’s economy, stock market, and central bank monetary policy. China’s economy grew at a slower pace last quarter, a moderation that may ease inflation pressures in the world’s second-biggest economy. McCafferty spoke with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” (McCafferty’s interview took place before China announced economic growth data. Source: Bloomberg)

A Note From Managing Editor Sara Nunnally: Let me be blunt… High crude oil prices are drowning our economy. On Tuesday, oil prices climbed back above $96 a barrel. Our trade deficit soared to $50.2 billion as we imported an average of 9.01 million barrels of crude oil every day in May — each barrel adding another $100 to our import tab.

These are huge numbers… but even bigger are the profits Big Oil is making off our unhealthy addiction to crude oil.

And they offer no apologies.

Indeed, their greed and laziness is notorious throughout crude oil’s history. It hasn’t just been in the past decade that oil companies have sought to suck as much profit out of a barrel of oil as possible. They’ve bludgeoned every rule and regulation in their way.

New crude oil found in Libya that Big Oil doesn’t own? The industry drove ’em out of business by slashing oil prices. Profits should be for big oil companies alone, the dominators figure, not some “rogue” nation in the middle of a desert.

Project in the Gulf of Mexico behind schedule? Take some short cuts to get that oil out of the ground as quickly as possible! Who cares if that negligence results in the worst oil spill in history…

U.S. at war in the Middle East? That’s a great time to gouge the Pentagon out of millions of dollars! Our military needs oil and gasoline, so companies like Halliburton can charge what they want for fuel.

Unscrupulous, outrageous and barbaric…

These examples are just a few of the reasons why Sandy Franks and I wrote Barbarians of Oil. This book uncovers the real motivations behind Big Oil, oil-bought governments, OPEC… the unholy trio of oil barbarians with the power to hold economies hostage to black gold.

Today, I’d like to show you to a little bit more of why we wrote Barbarians of Oil. I’ve asked Andy Snyder, our editorial director and editor of Taipan Insider to stand in as MC for today’s Smart Investing Daily.

Take it away, Andy…

It is not every day I get to escape my perch on the “Inside” and join in a conversation with two of the industry’s brightest minds. When Sara asked me to help shine a spotlight on Big Oil’s barbaric ways, I felt obligated.

After all, we spend so much time and effort showing our paid readers the opportunity hidden deep inside the fallacies of the nation’s leadership. It’s only right we spread the truth to Smart Investing Daily subscribers.

My first question for the duo is simple…

Andy: Out of all the topics affecting us today, why this one? Why did you write Barbarians of Oil?

Sandy: When Sara and I wrote our previous book, Barbarians of Wealth, we concentrated our efforts on Wall Street, the banking industry, lobbying groups and the Federal Reserve. Little did we know that our research would lead us to the oil industry and specifically Big Oil.

Oil is a dirty business, figuratively and literally. Oil has created multibillion-dollar businesses, the largest corporations on the planet. Money changes people — sometimes for good, sometimes for the worse. Most often, money is the oil industry’s only allegiance.

As we looked deeper into the industry, we saw how often money influenced the decisions related to this country’s energy policies. For example, as Secretary of Defense, Dick Cheney gave millions of dollars’ worth of contracts to Halliburton until he was chosen by Bush to serve as his vice presidential candidate.

Although he resigned his post, as vice president, he AGAIN gave hundreds of millions of dollars’ worth of contracts to Halliburton during the Gulf War in 2003.

Turns out Halliburton was overcharging the government by as much as $61 million for transporting fuel from Kuwait to Iraq. Bunnatine Greenhouse, a whistle-blower in the Army Corps of Engineers, brought the incident to the public’s attention. She was fired for doing so.

Money rules this industry. And therefore the barbarians need to be exposed.

Andy: Interesting. I had no idea Greenhouse was fired. That brings me to my next question. What is the most surprising thing you learned while writing the book?

Sandy: What surprised me the most was that we’ve been addicted for oil so long, we forget there are alternative sources of energy available. The truth is the U.S. has the resources to gain a competitive advantage in alternative energy sources. But the oil barbarians will stop short of nothing to prevent that from happening.

For example during the Arab oil embargo, interest in wind-generated energy soared. In fact the U.S. Federal Wind Energy Program was established. A federally backed wind-power test center was set up in Colorado. At that test center, at least 25 different wind turbine systems were tested including residential, commercial and agricultural designs.

From there about 40 small commercial wind systems were installed in areas throughout the U.S. Some of the systems worked, others couldn’t produce enough energy for large-scale use. But that was only because no large-scale testing had been done yet.

However, once the embargo was lifted, the program was pretty much forgotten. James Schmidt, a wind energy expert, says that if the government had not stopped building windmills so many years ago, the problems they encountered back them would have been solved.

The U.S. would have been ahead of the game. Now we’ve given that advantage to China. Here’s what most people don’t know… China surpassed Germany to become the world’s biggest builder of wind turbines and it added the largest amount of new generating capacity.

Sara: I will jump in here. I was shocked to find out that oil nationalism wasn’t just for Russia, Iran and OPEC. In fact, Harold Ickles, Secretary of the Interior, proposed an idea to nationalize Standard Oil in order to control oil reserves in Saudi Arabia. It would be a very different world if that were allowed to happen.

We criticize governments everywhere when they try to nationalize their energy industries because most often, U.S. oil companies lose out on lucrative oil contracts… but it’s very interesting to note that the U.S. doesn’t have the same standards when it comes to nationalizing its own oil interests, even if they’re located in another country.

Andy: After you found what you did, your perspective must have changed dramatically. How has what you uncovered changed the way you live and invest?

Sandy: First, I don’t trust what the media or the government tells us. Our readers shouldn’t either. Most of what you hear from Washington is “sugarcoated” so as to protect the public.

We don’t need protection, we need the truth. And that’s just something Washington and the media aren’t willing to hand out.

As for investing, I do a large amount of due diligence. I’m looking for the areas that are being ignored. I think there’s a hidden goldmine in alternative energy. I think natural resources and commodities will continue to explode in price. Yes, we’ll have some down periods, but overall, those areas should fare well.

Sara: Writing this book has definitely made me more skeptical of any energy initiative… even renewable energy projects. I question who’s behind these programs, and what do they have to gain from them.

It’s made me a little more cynical about what investments we look at for our readers. Everything has to go under the microscope, and even then the power of these barbarians of oil can smash into an investment idea. Sometimes, we just have to hold our nose and ride their coattails. We know what these oil companies are doing is wrong, but we also have a responsibility to give our readers sound investments.

At the same time, however, we want to prepare our readers for the tipping point in the oil industry. High, unsustainable oil prices are going to radically change the way we look at energy in the U.S., and the turning point is right around the corner.

Andy: A common theme here is the ties between Big Oil and Uncle Sam. Who represents us… the little guy? How do we get our hand under the spigot?

Sara: It’s really a question of who’s driving whom… Government makes it easy for Big Oil to make money, but it’s Big Oil who “owns” the government officials.

And sometimes, Big Oil and government are one in the same. Take former Vice President Dick Cheney, for example. He “double-dutched” his way through Secretary of Defense, to the CEO position at Halliburton, to the vice presidency, giving Halliburton billions of dollars’ worth of government contracts all the while.

Tracking the ties themselves, in addition to the government’s energy policies, is where the opportunities are for oil investors. At the same time, government policies have a big effect on other energy programs. The more money poured into alternative energy, the bigger the market’s response.

That means there are opportunities on both sides of the issue.

Andy: The media seems to have no clue what’s behind the curtain. Is that because it is ignorant to the situation or are they tangled in the web of deceit?

Sandy: It is because as you say, they are tangled in a web of deceit. All readers have a responsibility to dig a little deeper, ask a few more questions about what they read. Take a look at what’s happening with the phone hacking scandal with Murdoch. Doesn’t that show just how far the media will go to get a story?

Our job here is to tell the truth. We expose the truth. Not many are willing to do that. But it’s the right thing to do.

Andy: Thank you… I think. The pair of you raise some serious issues — problems that must be fixed before this nation can resume its path to prosperity. Although alarming and at times disheartening, readers will appreciate learning what you have found.

Editor’s Note: Your glimpse into Barbarians of Oil does not have to end here. To continue reading Sandy’s thoughts on how Big Oil’s net has entrapped us all, follow the link. Let me warn you… it’s not for the squeamish.

Article brought to you by Taipan Publishing Group. Additional valuable content can be syndicated via our News RSS feed. Republish without charge. Required: Author attribution, links back to original content or www.taipanpublishinggroup.com.

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July 13 (Bloomberg) — Wang Tao, a Beijing-based economist at UBS AG, talks about China’s economy and central bank monetary policy. China’s economy grew at a slower pace last quarter, a moderation that may ease inflation pressures in the world’s second-biggest economy. Tao speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” (Source: Bloomberg)

A recent survey taken by UBS AG, in collaboration with Campden Research, asked Russian business leaders and investors about their portfolio activity and found interesting results regarding the level of trust they have in their domestic currency.

According to the results, approximately 88% of respondents said they do not keep a significant portion of their assets in rubles (RUS). Between 2009 and 2011 the percentage of Russian business leaders who viewed international real estate as a safe haven grew from 32% to 89%. In the same period, trust in the security of domestic cash holdings declined to 5% from 40%, according to the Wall Street Journal’s summary of the findings. Over half of the survey’s respondents rated the UK and Switzerland as primary stores of value, whereas 72% had rated Cyprus as such in 2009.

The data, while indicative of a sign of distrust in domestic value, could be skewed somewhat considering that only those leaders with a personal net worth over $50 million were surveyed. It cannot be correlated with how smaller firms, start-ups, and young entrepreneurs feel about the RUS and has only a minor connection to the views held by the Russian central bank.

Read more forex trading news on our forex blog.

The fear of debt contagion spreading across the more fragile nations within the euro zone has begun to affect its regional neighbors to the north. The economies of Sweden, Norway and Denmark have all been bulwarks of stability during the economic crisis of the past several years. While this sentiment does not appear changed, the short-term impact of a debt fear and lowered consumer confidence has been to place an added weight to the value of the rising kroner of Scandinavia.

The Norwegian krone (NOK), as the first example, has been affected by stock prices seen in decline for several of its major companies, particularly in the telecommunications and technology fields. Climbing oil prices these past few days have also dragged on the NOK as it is commonly tied with the value of oil; Norway being a heavy exporter of crude oil.

Sweden’s currency woes are perhaps less severe, given a recent hike in interest rates by the Riksbank to 2% from 1.75%, but this week’s modest downtick has Swedish ministers noting the impact euro zone debt fears are having on regional growth at a more macro level. Bank governor Anders Borg has cemented his role as a fiscal conservative, however, taking lessons from Sweden’s financial crisis of the early 1990s to implement steps aimed at shoring up Sweden’s growth potential through 2015.

Denmark, too, has had its currency (DKK) affected by regional woes, but appears a formidable stalwart in a region relatively shaken by Greece’s debt concerns. The Scandinavian kroner may be in a mild downturn this week, but sentiment remains optimistic for the northerly region. Traders may want to anticipate the price shifts as risk sentiment is priced in, but take heed of the notion that Scandinavia is significantly more stable than its southerly counterparts.

Read more forex trading news on our forex blog.

This morning’s publication of the British Claimant Count Change report further revealed a growing weakness in the British economy. As risk aversion prevails in this week’s trading environment, the GBP finds itself at the mercy of a bearish sentiment.

While it does not appear to be as negatively affected as the euro zone, the UK pound has indeed been wounded by recent reports. Yesterday’s inflationary reports sparked a concern that a sluggish period was impending and many investors had begun to look to today’s employment data to determine if the downturn would be confirmed. With 24,500 British citizens filing for unemployment benefits for the first time in June, a structural deficit appears to be persistently nagging the UK.

Read more forex trading news on our forex blog.

July 13 (Bloomberg) — Christin Tuxen, an analyst at Danske Bank A/S, discusses the outlook for gold prices. Tuxen, speaking from Copenhagen with Owen Thomas on Bloomberg Television’s “Countdown,” also talks about volatility in silver prices and the performance of the U.S. dollar.

 Article by JW Jones, optionstradingsignals.com