Month: September 2011

The Ceska Narodni Banka (CNB) kept the two-week repurchase rate on hold at 0.75% as expected.  The Bank also held the the discount rate unchanged at 0.25% and the Lombard rate at 1.75%.  The Bank said: “At this moment, when we look at risks to our forecast, which are principally driven by external environment, they are quite markedly in the direction of lower rates, and less markedly in the direction of lower inflation.”

The Czech central bank also kept the repurchase rate unchanged at its August meeting this year, its last change was a 25 basis point cut in May 2010.  The Czech Republic reported annual inflation of 1.7% in August and July, 1.8% in June, 2% in May, 1.6% in April, and 1.7% in March this year, and above the Bank’s official inflation target of 2%.  The Czech Republic’s currency, the Koruna (CZK) has gained about 2% against the US dollar this year, and the USDCZK exchange rate last traded around 18.32

Let Wall Street Drop… It’s Time to Go Shopping

by Matthew Carr, Investment U, Commodities Specialist
Friday, September 23, 2011: Issue #1607

One of my core tenets in investing: “All I can say with any certainty is that something bad will happen at some point in the future.”

Now, that’ll probably never get me quoted as often as Warren Buffett, George Soros, or John Templeton. But it’s simple, elegant and effective.

At the heart, I believe in crisis investing – looking for opportunities during disasters, sell-offs, downturns, or outright market implosions to get the biggest bang for my buck, using broader investor panic as an advantage. And right now is one of those times.

The Dow Jones Industrial Average is suffering through a 600-plus point fleeing by investors, with the vast majority of stocks on the decline. There’s panic in the streets… Or more specifically, panic on Wall Street.

And like Buffett believes, these are the times we look to buy… especially with third-quarter earnings season right around the corner.

Autumn “Panic” or Opportunity?

Let’s cut to the quick: September and October are notoriously volatile months for the markets.

They’re populated with the ghosts of ominous days like, “Black Monday,” “Black Tuesday,” “Black Thursday” and “Black Friday…”

All we’re missing is a “Black Wednesday” and we’d have a full week of historic disastrous trading days that took place in those two months.

Looking back through history, of the top 10 largest point drops ever in the market, six of those happened in September and October. And between 2000 and 2010, September finished in the red six times.

But this really isn’t a groundbreaking revelation… The concept of “Autumn Panic” goes back to before the modern stock market even existed. And there are countless theories that have tried to pinpoint the reasons for this.

Here’s the deal though: In the last 10 years, October has only followed a September loss with a loss of its own twice. Once for a minimal decline (0.05 percent) in 2004, and the second time in 2008.

So I consider this current sell-off more of an opportunity than the beginning of the apocalypse or the end of America. And even better, the opportunities don’t have to be exotic. Because when we’re in a volatile market like this, we want stability.

A Contrarian Approach to Dividend-Paying Stocks

In my other publications, we’ve been banging one particular drum for a while now: dividend stocks.

These are the true safe havens – not gold.

Dividend-paying stocks consistently outperform the market and, as a whole, trump the performance of non dividend-paying stocks.

But not all dividend-payers are created equal…

• We want to focus on companies that pay a dividend that outpaces inflation (which is currently around three percent).

• And we want to target companies in industries that have growth and where earnings per share are more than the dividend yield (so we avoid the risk of having the dividend cut).

So, where do we begin? Well, with a little bit of a contrarian approach…

On Thursday, FedEx (NYSE: FDX) had the unfortunate luck of the draw to release its earnings on the back of the Fed’s warning for the U.S. economy and growing concerns about the global economy. Sales for the world’s largest cargo airline operator and second-largest package delivery company rose 11 percent to $10.5 billion, and foreign shipments climbed 38 percent. Its earnings per share even narrowly beat out Wall Street estimates… And yet the stock tumbled nine percent because it lowered its full-year earnings outlook by $0.10 per share.

Now, FedEx has already had a tough go, falling nearly 30 percent year-to-date – three times the drop of the S&P 500.

But I like parcel delivery companies, particularly in light of the current woes of the U.S. Postal Service.

That’s why I think investors should be looking at FedEx’s rival, United Parcel Service (NYSE: UPS).

• Like FedEx, UPS is trailing the S&P, but not as drastically – down 14 percent year-to-date. But, what I think makes UPS more attractive is that it pays a dividend of $2.08 per share, which at the company’s current share price, is a yield of 3.3 percent.

• Add on top of that, UPS repurchased 14.4 million shares and increased its dividend payout by 10.6 percent this year. Its dividend is now three times what it was when initiated in 2000. And it plans to buy back $8 billion between 2012 and 2014.

• In the second quarter, UPS’ earnings per share increased 25 percent to the highest level the company ever recorded for the second quarter, while total revenue moved up 8.1 percent.

UPS is currently caught in the undertow of FedEx’s lowered global outlook. But it emerged from the recession stronger and leaner. The company’s cash position increased from $3.25 billion in the second quarter of 2010 to $5.64 billion at the end of the second quarter this year.

So I think now’s a good time to get in cheap…

Doing Our Holiday Shopping Now

We’re also heading into the holiday shopping season. And the largest online shopping day – Cyber Monday – is on the horizon on November 28.

For those who don’t know, Cyber Monday began in 2005 and is a coordinated effort by retailers to offer consumers deals for online purchases. It gets bigger and bigger each year.

• In 2006, Cyber Monday generated $610 million in sales.
• In 2008 and 2009 – during those dismal Great Recession days – Cyber Monday sales increased to $846 and $887 million.
• And last year, sales on Cyber Monday topped $1 billion.

That means, in the last five years – despite a recession – sales on Cyber Monday grew 68 percent.

One of the things getting lost in the rhetoric over a possible double-dip recession and falling consumer sentiment is that this year, retail sales are up more than seven percent. Comparing June to August 2011 to the same three-month span in 2010, total retail sales are up eight percent. Meanwhile, electronic and mail-order sales for the first eight months of 2011 are up 13.3 percent.

The other aspect I like about UPS is that it drastically expanded its distribution agreement with Merck (NYSE: MRK) in June. To support Merck’s manufacturing, UPS is constructing new distribution centers in China and Brazil to deliver Merck’s pharmaceuticals. And domestically, UPS will handle the majority of Merck’s deliveries, as well as those in Europe and Latin America.

I think UPS is in a much stronger position than FedEx. In the near term, there may be some softening. That’s why I’d rather buy in now while UPS is near its 52-week low. UPS is projecting revenue growth between six and eight percent over the next five years and expects free cash flow to top 100 percent of net income in 2012. Over the long term, there’s great upside, and it pays a 3.3-percent dividend to boot.

Good investing,

Matthew Carr

Article by Investment U

A Lost Decade in the Housing Market

by Jason Jenkins, Investment U Research
Friday, September 23, 2011

Tuesday morning, the Commerce Department released figures showing builders began work on a seasonally adjusted 571K homes in August. This translates into a five-percent decline from July and makes up less than half of the 1.2 million starts considered consistent with healthy housing markets.

A survey conducted for MacroMarkets LLC, a financial technology company co-founded by Yale University economist Robert Shiller, found that economists expect home prices to drop 2.5 percent this year and rise only 1.1 percent annually through 2015. Currently, prices are down nearly 32 percent from their peak in 2005.

If this is the case, economists are essentially forecasting a lost decade for the housing market…

Not only will millions of homeowners be left with little or no equity in their homes, but these repercussions will also be felt for consumers and the broader economy for a long time to come.

A Few Current Problems With the Housing Industry

• Twenty percent of Americans with a mortgage owe more than their home is worth.

• Nearly $7 trillion of homeowners’ equity has been lost in the bust.

• Homeowners’ equity as a share of home values has fallen to 38.6 percent from 59.7 percent since 2005.

• Banks hold nearly a half million homes on their books, but over four million additional loans are considered in some state of foreclosure or seriously delinquent.

• Even while mortgage rates have fallen to their lowest levels in decades, applications submissions are at a 15-year low. Financing remains available to only “the most credit-worthy purchasers.”

Do not expect declines in prices to be as drastic as they were three years ago. However, even small decreases can feed into the psychology, forcing more homeowners in the red and perpetuating the snowball effect with foreclosures. That, in turn, could prompt more credit tightening by lenders.

This environment would be detrimental to the currently shrinking number of home buyers and decreases the pool of buyers needed to purchase bank-owned foreclosures. Mortgage-finance giants Fannie Mae and Freddie Mac sharply tightened their standards in 2008 and many banks continue to do so because of concerns they will be forced to buy back defaulted mortgages.

Another issue that weighs in on the real estate industry is the problem that home prices have been beaten down for such a long period of time that many people are skeptical that home improvements will increase the value of their property. Home owners now believe that prices are dropping independent of whatever improvements they make, so why do it?

Housing Market Analysis and a REITs Play

The housing bust is weighing on the economy in part because bank-owned foreclosures have sidelined new construction, a traditional employment engine following a downturn. Housing markets are also hurting because possible first-time homeowners are taking a back seat due to all the economic doom and gloom that’s prevalent all over the 24/7 news cycle. Current homeowners, meanwhile, don’t have enough equity to move, so the ever important “trade-up” market is stalled. That has left housing heavily dependent on investors buying homes at discounts with cash.

As we have stated in previous articles, renting will be “king” for a long time to come. Real estate income trusts (REITs) should be a play in this market. Look at the Vanguard REIT Index (VGSIX).

Good investing,

Jason Jenkins

Article by Investment U

Sept. 23 (Bloomberg) — Charlie Robertson, global chief economist at Renaissance Capital, discusses China’s currency stance and the prospects for emerging-market economies. He spoke yesterday with Andrea Catherwood on Bloomberg Television’s “Last Word.” (Source: Bloomberg)

Sept. 23 (Bloomberg) — Russell Napier, a strategist at CLSA Ltd., talks about the outlook for the global economy, financial markets and investment strategy. Napier speaks with Rishaad Salamat on Bloomberg Television’s “Asia Edge.” (Source: Bloomberg)

Is The United States is Becoming a Banana Republic?

by David Fessler, Investment U Senior Analyst
Friday, September 23, 2011

The term “banana republic” was first coined by O. Henry in his 1904 book Cabbages and Kings. It referred to the fictional Republic of Anchuria – a servile dictatorship engaging in the large-scale production of bananas.

In our current political lexicon, it refers to a melding of government and private enterprise. The public incurs the expenses, while the profits are taken in by the private companies.

In the United States, we see this in government subsidized – or in the case of GM, bailed out – companies that retain profits. These companies, such as Freddie and Fannie, were made possible by you, the taxpayer.

Devaluing Our Nation’s Currency

This type of activity effectively reduces a nation’s currency to devalued paper money. As this devaluation continues, it becomes increasingly difficult for the country to borrow money, and the currency becomes more useless as a means of payment.

The whole scenario stymies growth. Take a look at the woefully small GDP growth in the United States and you begin to get the picture. The government has pumped trillions of dollars into the system in an attempt to get the economy moving again. That effort has failed miserably.

Meaningful solutions to the problem would require meaningful action on the part of Congress. Well, forget it…

Political gridlock in Washington will continue, especially in an election year.

Surprised…? Don’t be.

Even with an approval rating around 12 percent at last count, Congressional members wouldn’t think of voting on anything that could raise the ire of any special interest groups that closely watch them. Gridlock is here to stay, perhaps for a long time.

China’s Fast-Growing Economy Overtakes U.S. in 2040

Then there’s the China factor. In the past, China has been a willing buyer of U.S. debt…

Not so these days.

China is beginning to ratchet back its purchases of U.S. dollar-denominated financial instruments in favor of the euro.

That’s because 30 percent of China’s economy depends on exports, and U.S. consumers aren’t spending like they used to. Now China is scouring the globe in search of new customers, and Europe is high on its list.

Fast-forward to 2040. The United States is replaced by China as the world’s largest economy. Take a look at the graph below, courtesy of mining giant Rio Tinto plc (NYSE: RIO).

It concludes that we are smack dab in the center of a “momentous swing in economic power.” The chart may seem a bit confusing at first, but it tells three stories:

• How large various economies will be in 2040 compared to 2010 (the size of each circle).

• How fast each will be growing (percent GDP shown along the bottom).

• How wealthy individuals will be who live there (GDP per capita on the left).

Surprising Global Economic Projections

India, not China, will be the world’s fastest growing economy by 2040. According to Rio Tinto, it will have at least quadrupled in size.

Equally surprising is the limited growth prospects for both Brazil and Russia, once thought to be part of the BRIC group of emerging, fast-growth countries.

China’s economy will be four times as large, as well, and per capita income will have risen by 200 to 300 percent, to around $30,000 per person.

The U.S. economy will be slightly larger, and will have raised its per capita income by 50 percent. That will be largely due to a smaller population, and a decrease in annual GDP growth to just below two percent.

The bottom line for the United States is that stagnant growth could continue for decades. Get used to it. Plan for it.

How to Play the Banana Republic Scenario

Is the United States destined to become a banana republic? We don’t know. But there are companies that will benefit even if it does.

Economic growth in India and China takes cheap energy, and lots of commodities, many of which have to be mined. Rio Tinto is one of the dominant miners of commodities in the world. It will surely benefit from the continued growth, even if it’s at a slower pace than previously thought.

Caterpillar Inc. (NYSE: CAT) is one of the largest makers of heavy equipment, including mining equipment, in the world. Both CAT and RIO are globally diversified companies. Both yield just over two percent, share prices are at rock bottom (no pun intended) and both trade at ridiculously low PEs.

Good Investing,

David Fessler

Article by Investment U

Sept. 23 (Bloomberg) — Daniel Morris, a global strategist at JPMorgan Asset Management, discusses Greece’s debt problems. He talks with Francine Lacqua on Bloomberg Television’s “On the Move.” (Source: Bloomberg)

London Gold Market Report
from Ben Traynor
BullionVault
Friday 23 September, 08:30 EDT

U.S. DOLLAR gold prices fell again on Friday, falling to a seven-week low below $1700 as world stock markets continued to slump – as did industrial commodities – while the zero-yielding Dollar and Yen currencies continued to rally.

Ministers of the G20 group began their weekend meeting to address the Euro crisis. This Sunday marks the 80th anniversary of Great Britain being forced to formally abandon the Gold Standard in 1931.

“Many may well be and some already have been liquidating their gold positions to cover their losses in other sectors, putting downward pressure on gold prices,” says a note from Swiss precious metals group MKS.

“A break of $1704 [confirms] a double top is in place,” add technical analysts at bullion bank Scotia Mocatta – who now see a move down to $1488 a possibility.

By Friday lunchtime in London, gold prices were looking at their biggest weekly loss for nearly three year, with a 6.8% for the week. Based on Friday-to-Friday London Fix prices, the previous biggest weekly loss was in December 2008.

Silver prices fell to $32.44 – 20.3% down for the week, and looking at their biggest weekly drop since March 1980.

Stock markets continued to fall despite a brief rally in early European trading. The FTSE fell 2% by early afternoon, dropping through 5000, while Germany’s DAX lost 3.2%

Policymakers around the world “commit to take all necessary actions to preserve the stability of banking systems and financial markets as required,” according to a joint statement issued Thursday by the finance ministers and central bank governors of the G20 largest economies, who are meeting in Washington.

“We will ensure that banks are adequately capitalized and have sufficient access to funding to deal with current risks…central banks will continue to stand ready to provide liquidity to banks as required.”

“Verbal support without any concrete action is no longer convincing,” says Joe Lau, Hong Kong-based economist at Societe Generale.

“Investors are now looking for viable credible actions from policy makers and, given the amount of nervousness and uncertainty out there, that may not even be enough.”

“If the situation deteriorates further,” World Bank president Robert Zoellick told news agency Reuters, “then developing countries’ growth could turn down, their asset prices could drop and then their non-performing loans could increase…we have to anticipate possible protectionist pressures, beggar-thy-neighbour policies and a risk of a retreat to populism.”

“This is not the time for go-it-alone measures,” warned Pascal Lamy, director general of the World Trade Organization, on Friday.

The WTO cut its 2011 forecast for trade growth to 5.8% today – down from 6.5% projected in April.

“[We] now expect a full blown recession,” says a note from Royal Bank of Scotland chief European economist Jacques Cailloux, adding that he expects the European Central Bank will cut interest rates by half a percentage point by November at the latest.

“It is inconceivable that the ECB would stand by whilst euro area banks came under increased pressure and we think the ECB could also announce additional measures to support the system.”

“Banks need urgent recapitalization,” says International Monetary Fund chief Christine Lagarde, in a piece called How to Save Europe published on news agency Bloomberg’s website.

“This is key to cutting the chains of contagion.”

The Eurozone needs “the right firewall to prevent contagion”, French finance minister Francois Baroin said Thursday, referring to the €440 billion European Financial Stability Facility – the ad hoc bailout mechanism set up last year.

Baroin added that policymakers might use the “power of leverage” to give the EFSF “systemic force” – echoing a suggestion made last week by US Treasury secretary Tim Geithner.

“It is very important that we look at the possibility of leveraging the EFSF,” agreed European Union monetary affairs commissioner Olli Rehn on Thursday.

Eurozone leaders agreed on July 21 to grant the EFSF new powers, including the ability to buy government bonds on the open market and recapitalize banks. These powers, however, still need to be approved by national parliaments.

Over in India meantime, the recent drop in gold prices has largely been offset by a weakening Rupee, according to local gold dealers.

“Some buyers are coming in, thinking that gold has become cheaper, but they get disappointed to see that prices are nearly the same,” says Girish Choksi, a bullion dealer in Ahmedabad.

Ben Traynor
BullionVault

Gold value calculator | Buy gold online at live prices

Editor of Gold News, the analysis and investment research site from world-leading gold ownership service BullionVault, Ben Traynor was formerly editor of the Fleet Street Letter, the UK’s longest-running investment letter. A Cambridge economics graduate, he is a professional writer and editor with a specialist interest in monetary economics.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

The Future of Nuclear: Is Thorium a True Threat to Uranium?

by Justin Dove, Investment U Research
Friday, September 23, 2011

Nuclear power took a huge public relations hit in the wake of the Fukushima disaster. A supposed “clean” energy, it caused massive devastation and left miles of land uninhabitable for thousands of years. At least 25 reactors in Europe were shut down or cancelled since the triple meltdown in March.

But what if nuclear power could produce more power with less material, while being incredibly less risky?

There’s a growing sentiment that it may be possible with a little-known radioactive metal called thorium. An article in the latest issue of Los Alamos Laboratories’ National Security Science opened with this introduction:

“Imagine an element that when used in a nuclear reactor is so safe that it may never lead to the possibility of the type of catastrophic meltdown that threatened the reactors in Japan. Picture one ton of such an element producing as much energy as 200 tons of uranium or 3,500,000 tons of coal.”

It sounds like science fiction. But when the prestigious Los Alamos Laboratories is involved, the concept receives a ton of credibility.

Thorium and The Cold War Conspiracy Theory

The use of thorium in nuclear reactors is nothing new. Its research dates back to the Manhattan Project.

So why is it just beginning to create a buzz now? Well, to some, it’s a big Cold War conspiracy.

Former Oak Ridge National Laboratory (ORNL) Director Alvin Weinberg filed many of the patents on the uranium-based light water reactors (LWRs) that are currently used around the world. He knew LWRs and their limitations as well as anyone.

In 1954, Weinberg developed the first molten salt reactors as part of a project to create a nuclear-powered aircraft. While the nuclear-powered aircraft project never took off, Weinberg fell in love with thorium-based molten salt reactors.

By 1973, he became convinced that these molten salt thorium reactors were safer and more stable than LWRs. But according to the conspiracy theorists, the political powers that be were more interested in making nuclear weapons. The byproduct of uranium reactors is plutonium, which can be used to make nuclear weapons.

Thorium, on the other hand, is lousy for nuclear weapons. So in 1973, the Nixon Administration fired Weinberg. Research in thorium and molten salt reactors was forgotten.

But now that China announced they’re trying to develop thorium nuclear technology, the radioactive metal may regain political support.

According to a Wired report in February, “With nuclear weapons less in demand and cheap oil’s twilight approaching, several countries – including India, France and Norway – are pursuing thorium-based nuclear-fuel cycles…

A Chinese thorium-based nuclear power supply is seen by many nuclear advocates and analysts as a threat to U.S. economic competitiveness.”

Changing The Way Our Economy Views Thorium

Currently thorium has no real uses in today’s economy. It’s actually viewed as waste, a radioactive byproduct of rare earth mining.

The U.S. government even has 3,200 metric tons of thorium trapped in nuclear waste from the 1960s. Since disposal would cost $60 million, the waste is buried in a shallow grave in Nevada.

It’s estimated that there are only about 80 years left of sustainable uranium production.

Thorium would be inexpensive to mine, since it’s plentiful and little is needed.

Because of this, the mining and production of thorium would probably never be as profitable as it is for uranium. Thorium will most likely be produced and cheaply sold as a byproduct by rare earth miners, such as Molycorp (NYSE: MCP).

Lynas Corp. (OTC: LYSCF.PK) is actually planning to get rid of the thorium it will encounter at Mount Weld. The expensive plans involve diluting the radioactive metal with lime, encasing it in concrete and using it for artificial reef systems.

But if China, India, France, Norway, or even the United States’ plans for thorium nuclear reactors take hold, costs could be reduced greatly for Lynas. Instead of the expensive disposal of thorium, it could be sold for use in reactors. Thorium probably wouldn’t be very profitable, but the lack of expense would certainly help the company’s bottom line.

The Companies Leading the Way in Thorium Technology

Rather than investing in the miners or directly in thorium, the biggest beneficiaries will be entrepreneurial companies that lead the way in producing the reactors.

So far, the only publicly traded pure play on thorium nuclear power is Lightbridge Corp. (Nasdaq: LTBR). Dr. Alvin Radkowsky, who was a chief scientist at the U.S. Atomic Energy Commission (later named the Department of Energy), founded the company in 1992. Originally called Thorium Power, Ltd., the name was changed to Lightbridge in 2009.

However, with a market cap of $34 million and no profitability, Lightbridge is a wildly speculative company.

Another company to watch is Flibe Energy. It’s a private start-up created in May by Kirk Sorensen, a former NASA engineer who dedicated his life to promoting Weinberg’s work with thorium molten reactors. There’s no telling if the company will ever become public or profitable, but this guy seems to be the current authority on thorium nuclear power.

Also, pay attention to the effect this could have on energy companies that currently use coal plants or uranium-based reactors. Uranium miners and producers will also likely take a hit if this technology comes to fruition.

Good investing,

Justin Dove

Article by Investment U