Month: September 2011

A Twist on How to Play the Fed’s Newest Gambit

by Jason Jenkins, Investment U Research
Thursday, September 22, 2011

On Wednesday, the Federal Reserve announced it would proceed with a new $400-billion program that will tilt its $2.85-trillion balance sheet more to longer-term securities by selling shorter-term notes and using those funds to purchase longer-dated Treasuries.

It’s rationale?

The Fed is attempting to bolster a weak U.S. economy by launching a campaign to put more downward pressure on long-term interest rates over time and help the beleaguered housing market.

This same idea was launched by the Kennedy Administration more than 40 years ago and was duly named “Operation Twist.” The Fed will reinvest those proceeds from maturing mortgage and agency bonds back into the mortgage market – which demonstrates the general feeling of sustained weakness in the sector. Officials believe that by shifting their bond holdings they could stimulate mortgage refinancing and encourage the overall market into riskier assets – such as corporate bonds and stocks – without causing inflation.

The Market’s Down Today… But What’s the Long-Term Impact?

The Fed aims to flatten the yield curve in order to ease financial conditions and credit creation, and shift capital from investors and lenders to consumers. The premise is that in a consumer economy, the shifting of money into risky assets and from lenders to consumers will create a catalyst for consumption. The rebalancing creates wealth, by which investment in productive, but riskier, assets leads to job creation, rising wages and aggregate consumer demand.

But not everyone agrees it will work. Several economists argue that the approach is fundamentally flawed. If you flatten the yield curve, you reduce the incentive of those with funds to provide dollars for production and real growth. The new incentive is to go short and not long. Operation Twist’s flatter yield curve would take away the availability of long-term capital and present a landscape where funds would be reallocated to short-term investments in order to get the biggest bang for the buck.

And Now… How to Play It

What you have is a Fed Reserve Chairman who is a disciple of monetary policy and is under fire from Republicans on Capitol Hill and internally from some of his own Commissioners.

Operation Twist was already a known quantity for the markets. There was an initial sell-off in the stock market once word hit that there would be no announcement of further quantitative easing, and then markets kind of adjusted accordingly.

Furthermore, it seems like Ben Bernanke’s Operation Twist, while slightly larger than expected by about $100 million, won’t have much effect on the downward slide of the economy. The Fed Chair has done all that he can think of. He’s out of bullets and he knows it…

He has, in the last two months, stated several times that it’s Washington’s turn to do its part.

Late Wednesday the dollar soared against the euro, yen and U.K. pound. The rise came after a global equities sell-off as investors piled into safe-haven assets like… the dollar.

The euro was at $1.357, down about one percent from $1.370 the following day. As I wrote earlier this week, Alexander Green, Investment U’s Chief Investment Strategist, wrote an article Monday recommending how to take advantage of what he believes is an oversold dollar: PowerShares DB US Dollar Index Bullish (NYSE: UUP). There’s plenty of upside.

Good investing,

Jason Jenkins

Article by Investment U

Sept. 22 (Bloomberg) — Mitul Kotecha, head of global foreign exchange strategy at Credit Agricole CIB, talks about factors affecting the outlook for global currencies. Kotecha speaks with Rishaad Salamat on Bloomberg Television’s “On the Move Asia.” (Source: Bloomberg)

By Chris Vermeulen, thegoldandoilguy.com

How to Get Rich in China Without Chinese Stocks

by Carl Delfeld, Investment U Senior Analyst
Thursday, September 22, 2011: Issue #1606

Do not fear going forward slowly; fear only to stand still.

– Chinese Proverb

China is one country where 10-percent economic growth in a given year doesn’t necessarily lead to a strong stock market. As an investor in the Asian markets since the 1980s, I have learned this lesson the hard way.

Sure. A loss of capital is worse than a loss of opportunity. But it’s a mistake to just sit there and do nothing. Especially since the Shanghai Composite Index has gone from 6,100 to 2,500 and is trading at single-digit valuations. Looks like the base for another bull market looking for liftoff.

Although many are bullish long term on Chinese growth, they’re uncomfortable right now (with good reasons) investing directly in Chinese companies. So what’s an investor to do…

Well, first you need to realize that a country’s growth is distinct from its markets. But if you’re looking to capture that growth, it’s probably best to do so by avoiding highly speculative stocks.

Why not tap into Chinese economic growth through a couple of proxies that have democratic political systems and well-regulated, transparent markets that are chock-full of private companies with China at the heart of their growth strategies?

China Proxy #1 – The Biggest Investor in China

Let’s start with a place that knows China better than any other – the Republic of China – better known as Taiwan.

When I spend a lazy Sunday afternoon walking through its capital of Taipei, I always pause at the many monuments dedicated to the nationalist leaders who fled from the mainland to Taiwan in 1949.

The tables sure have turned.

Taiwan has become the world’s biggest investor in China, with 42 percent of its exports also headed to the mainland.

With a youngish population of 25 million, Taiwan enjoys a highly educated workforce producing a solid middle-income per capita GDP of about US$20,000.

While renowned for its tech prowess, with most investors thinking of Taiwan Semiconductor, its economy is largely led by vibrant small- and medium-sized enterprises.

But rather than chase market share and growth at all costs like many Chinese, Japanese, or South Korean giants, Taiwanese firms are acutely focused on profitability and shareholder returns.

The Taipei government, which signed a trade deal with the mainland last year, is also relaxing its restrictions on Taiwanese investing in China. Evidence of this is the approval last December for leading flat panel manufacturer AU Optronics to invest $3 billion in China.

In addition, Taiwanese entrepreneurs almost always look beyond their home base in crafting and executing their business plans.

While we’re watching Starbucks’ expansion plans for China, insiders keep an eye on Taiwanese competitor 85C (the temperature of a perfect cup of coffee), which now has more shops in Taiwan than Starbucks and is listed on the Taiwanese stock exchange. You might not like its squid ink buns, but you will like its plans to expand from its current 150 shops in China to 1,000.

I love 85C Founder Wu Cheng-Hsueh’s motto of “be flexible, be fast” and the importance of having the courage to admit mistakes and limit losses, as he outlined in a recent interview with the Financial Times.

Get a slice of Taiwan in your portfolio, but keep in mind that it’s an aggressive pick due to the periodic flare-ups between China and Taiwan. There will be a Taiwanese presidential election in January and the Chinese Communist party is preparing to pick a new generation of leaders next year.

China Proxy #2 – Quality, Balanced, Conservative Growth

Next let’s balance dynamic Taiwan with the more conservative and high-growth Singapore. With a diverse population led by ethnic Chinese, Singapore lies at the heart of the booming Southeast Asian region between China and India.

This very livable city-state benefits greatly from its role as the world’s busiest port and strategic location at the pivot and choke point of trade flows in the Asia-Pacific region. As China trade grows, so does Singapore. Its well-earned, high-quality reputation and balanced economy make it a great proxy for China’s growth. Bilateral trade between China and Singapore jumped 25 percent in 2010, with China the top overseas investment destination for Singapore companies.

Singapore has a reputation as an efficient but slightly overbearing government, but this does not square with its top personal and corporate income tax rate of 22 percent, headed for 20 percent. Singapore also offers one of the world’s highest real growth rates, a trade surplus and very low public debt, all of which leads to a strengthening Singapore dollar. What else could an investor ask for?

To execute your own conservative China strategy, look first at the iShares MSCI Singapore Index (NYSE: EWS) and iShares MSCI Taiwan Index (NYSE: EWT) exchange-traded funds. Surprisingly, there are no Singapore stocks that trade on the NYSE or Nasdaq, but DBS Group (OTC: DBSDY.PK) is one of my “pink sheet blue chips” trading in the over-the-counter market. DBS is well-capitalized and has deep tentacles both in Singapore and regional economies.

Good investing,

Carl Delfeld

Article by Investment U

Sept. 22 (Bloomberg) — Patrick Legland, head of global research and strategy at Societe Generale SA, talks about the outlook for European Central Bank interest rates and his equity-investment strategy. He speaks with Francine Lacqua on Bloomberg Television’s “Countdown.” (Source: Bloomberg)

Sept. 22 (Bloomberg) — Morten Kongshaug, chief equity analyst at Danske Bank A/S, talks about stock market volatility. He speaks from Copenhagen with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

Sept. 22 (Bloomberg) — Kweku Adoboli, the UBS AG trader accused of fraud and false accounting that led to a $2.3 billion loss, arrives at a hearing in a London court where he may ask to be released on bail while awaiting trial. Maryam Nemazee and Poppy Trowbridge report on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)

London Gold Market Report
from Ben Traynor
BullionVault
Thursday 22 September, 08:30 EDT

U.S. DOLLAR gold prices dropped to $1739 an ounce Thursday lunchtime in London – a 4.1% fall in less than 24 hours – as stocks and commodities also fell heavily following Wednesday night’s announcement by the US Federal Reserve.

Silver prices dropped to $37.22 an ounce – 8.4% off yesterday’s high – while major government bonds and the US Dollar saw strong gains.

Gold prices are “failing to find support from the kind of pessimistic headlines that have recently fuelled its bull run,” notes one gold bullion dealer in London.

“There are significant downside risks to the economic outlook, including strains in global financial markets,” the US Federal Reserve said Wednesday following the end of its latest Federal Open Market Committee meeting in Washington.

The Fed that it will buy $400 billion of longer-dated (6 to 30 years) US Treasury bonds – while selling shorter-dated bonds worth the same amount – in a widely-anticipated move dubbed Operation Twist.

The Fed will also reinvest proceeds from agency debt and agency mortgage-backed securities – meaning securities it bought from government-sponsored enterprises such as Fannie Mae and Freddie Mac – “to help support conditions in mortgage markets.”

“The Fed may be setting us up for November, a move toward another, more aggressive quantitative easing,” Tim Condon, Singapore-based head of Asia research at ING, told Bloomberg Television on Thursday.

Stock markets fell heavily on Thursday morning – with the FTSE down nearly 5% by lunchtime. “While Operation Twist was well anticipated perhaps the severe warning from the Fed that ‘there are significant downside risks to the economic outlook’ was not,” says Jane Foley, senior foreign exchange strategist at Rabobank.

“Monetary policy is reaching its limit,” adds Manish Singh, head of investment at Crossbridge Capital in London, which manages assets worth over $2 billion.

“The outlook has not improved despite QE1 and QE2…fiscal measures have to do the heavy lifting…so far [though], what we have got from the Congress is only disappointment and half- baked measures.”

Elsewhere in Washington, the Republican-controlled House of Representatives on Wednesday voted against a bill designed to keep the US federal government funded beyond the end of this month.

Here in Europe, public transport workers in Greece went on strike Thursday in protest at deficit-cutting measures announced by the Greek government.

“We are obliged to resist…not even Greece’s German and Turkish conquerors imposed such taxes,” said Antonis Stamatopoulos, head of staff on the Athens subway.

Greece needs to convince the European Union, European Central Bank and International Monetary Fund that its austerity measures are on track in order to receive the next installment of last year’s bailout – without which the Greek government expects to run out of money within weeks.

The problems in the Eurozone “threaten to reignite an adverse feedback loop between the banking system and the real economy,” the IMF warned earlier this week, adding that some European banks may need more capital if they are to withstand an escalation of the crisis.

“We cannot rule out that some banks will need help from the state,” EU financial services commissioner Michel Barnier added on Thursday.

Economic activity in the Eurozone is contracting this month, according to flash data published Thursday morning.

The provisional September Eurozone purchasing manager index for services fell to 49.1 – down from 51.5 for August (a figure below 50 indicates contraction).

Eurozone manufacturing PMI meantime fell to 48.4 – down from 49.0 last month.

Similar figures for Chinese manufacturing also indicate contraction – with provisional PMI figures from HSBC falling to 49.4 – down from August’s 49.9.

“There is no doubt the risks of a global recession have grown,” says Jeavon Lolay, head of global research at Lloyds Banking Group.

“Looking at gold,” says David Wilson, director of metals research at Societe Generale, “you’d have thought that gold would be well supported given the European situation, the US situation and a slowing China…it’s really the Dollar rally that is not particularly helpful.”

Dollar gold prices were down 4.2% for the week by Thursday lunchtime.

Euro and Sterling gold prices meantime were down 1.4% and 1.5% respectively – while gold in so-called commodity currencies Australian and Canadian Dollars was up for the week – 1% and 1.4% respectively.

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.

Sept. 22 (Bloomberg) — Jane Foley, a senior foreign-exchange strategist at Rabobank International, talks about the dollar amid a worsening outlook for the global economy. She speaks with Maryam Nemazee on Bloomberg Television’s “The Pulse.”

Income and Growth: All Wrapped Up Together in These Energy Plays

by David Fessler, Investment U Senior Analyst
Thursday, September 22, 2011

In these tumultuous markets, investors are shunning growth stocks in favor of income-producing investments.

But low-yielding bonds aren’t the place to be unless you’re a go-hide-in-a-corner-and-wait-till-the-storm-passes kind of investor. Faltering commercial real estate investment trusts (REITs) carry too much risk. And you can forget bank yields, as they’re practically zero.

The two hottest – and seemingly safest – places to be these days are in U.S. royalty trusts and master limited partnerships (MLPs). But not just anywhere. The best ones – you guessed it – are in the energy sector.

What’s the Differences Between Royalty Trusts and MLPs?

Both are yield-oriented, and typically generate huge quarterly cash distributions for their shareholders.

Both types of investments focus on oil and natural gas production to generate cash flow.

The difference between a master limited partnership and a royalty trust is usually whether the management team is oriented towards acquisitions or not.

• MLPs are great acquisition structures, especially for mature upstream oil and gas producing companies.

• Royalty trusts make sense for companies that aren’t acquisition oriented, but may still have great income-producing oil and gas properties. Since a royalty trust has a finite life, it fits better with these types of operations.

When you invest in a royalty trust, the distributions you receive are actually part income and part of your original principal. At the termination of the trust, typically 20 years, you will have received nearly all of your original principal back.

With a general underlying bullish uptrend in commodities, royalty trusts and MLPs should be considerations for risk-averse, income-oriented investors.

Tax implications are different between royalty trusts and MLPs, as well. Most royalty trusts are IRA-friendly, as they typically generate small amounts of taxable income.

Most MLPs file a K-1, similar to other limited partnerships. Investors should consult a knowledgeable tax attorney to determine which structure is right for their particular situations.

Great Time to Be in Either

Regardless of which type of investment you decide is right for you, it’s a great time to be in either, particularly in the energy sector.

With the U.S. printing presses running full blast, it’s only a matter of time before inflation rears its ugly head. Commodities like oil and gas do very well in inflationary environments, or even the anticipation of them.

MLPs have the ability to hedge their production any time, while royalty trusts can only do it at the beginning of the trust. As a result, royalty trusts have increasing exposure to commodity prices as the trust ages.

Two MLPs and One Royalty Trust Equals Three Great Examples

Yes, today has been a rough day in the markets… and there’s been a bit of a sell-off in the energy sector, particularly in the refineries. But it’s creating a terrific buying opportunity for high-yield MLPs and royalty trusts. If you’re looking to build your portfolio and yield exposure over the long term, now is the time to pay attention to these high-quality income producers.

Two great examples of MLPs delivering solid returns for their unit holders are:

• EV Energy Partners, L.P. (Nasdaq: EVEP) – EV Energy Partners has tremendous upside potential based on its yet undeveloped landholdings in the Utica Shale. As more and more of the Utica acreage is de-risked, EV Energy Partners’ share price should respond in kind.

• Linn Energy, LLC (Nasdaq: LINE) – Linn Energy is developing its holdings in the Granite Wash play to the tune of 30-percent production growth per year. This level of growth is relatively unknown in the energy MLP space. It could turn out to be the leader in distribution growth for this year and next. In addition, shares could see a 50-percent appreciation in the next 12 months.

Both also hold the prospect of future capital appreciation, as well.

A great royalty trust can be found in VOC Energy Trust (NYSE: VOC), which sports a yield to maturity of over 10 percent. Investors in the trust should do very well over its lifetime.

Whether it’s royalty trusts or MLPs that fit your investment strategy the best, both warrant a closer look if you’re interested in increasing income and capital appreciation in the energy sector.

Good investing,

David Fessler

Article by Investment U