Month: March 2012

By MoneyMorning.com.au

I get really interested when I think that I’m getting conned.

Take this con that I’m going to tell you about today…

Fancy Some Free Money from the ECB?

The ECB has just lent half a trillion euros to European banks.

Mario Draghi, the ECB’s new head, has come in with all guns blazing. In December practically the first thing he did was launch an initiative to try to tackle the ever-escalating euro crisis. You’ve probably heard about the LTRO (Long Term Refinancing Operation). Well, here’s how it works:

First the ECB asks a load of banks “Do you want some free money?”… Well, not exactly free. They’ll have to pay 1% interest and give the money back in three years’ time.

So now a load of shrewd bankers consider their options. Do they take the money and pump it into some investments where they hope to get more than 1%? Or do they say, “Aaah, thanks but no thanks. I don’t reckon I’m clever enough to find anywhere to put your cash and make more than 1%.”

Well – let’s see what they did…

When the offer was first made back in December, 523 banks took the ECB up on their generosity. This time round it was nearer 800!

Super Mario Draghi and His Great Big Bazooka

The question is: why is Mario Draghi so eager to give money away so cheap? Well, because he’s up to his neck in it.

As I see it, Draghi’s ECB has got two problems. First, they’re the central bank and are ultimately responsible for ensuring European banks are stable. But of course many aren’t. Some of Europe’s finest are cash-strapped.

And the second problem he’s got is that the markets have been shunning the bonds of many eurozone nations. And they are his employer!

This is not a good situation for Mario. And it’s not good for the financial system he’s supposed to protect.

But Mario’s a clever fellow. He was vice-chairman of Goldman Sachs after all. He reckons his LTRO remedy is just the cure that Europe needs. And with just one pump of the bazooka!

Simply lend the money to the banks – at 1% remember – then let the banks buy up the miserable looking bonds and earn themselves say 5, 6, or 7% (even more on the really dodgy stuff) on their brilliantly masterminded carry trade.

Hey presto! Suddenly investors aren’t shunning dodgy Italian, Spanish (etc, etc) bonds. And weyhey – the banks can earn 5% or more on billions and billions of freshly minted cash. That way they can earn their way out of trouble.

And on the face of it, the ruse seems to have worked. Here’s the chart of European sovereign debt yields over the last few years.

When yields go over the black dotted line (7%) there’s trouble – basically it’s an ominous sign that the market is seriously worried about lending to you. As you can see Greece, Portugal and Ireland have been in the danger-zone for ages.

But what was causing the ECB sleepless nights was the fact that Italy and Spain were skirting with the danger-zone.

You see how late last year the red and orange lines were hitting the dreaded black dotted line? Well now look at how yields have come down – not just for Spain and Italy, but for Ireland too. Mario’s wonder scheme even seems to have arrested the upward-spiralling Greek and Portuguese yields.

So far so good…

This is When It All Goes Wrong

But I ask you: Have the underlying problems of the peripheral nations been sorted out?

I would say no.

In fact, the ECB’s financing initiatives only make the situation worse. I suspect the write-downs Greek bond holders are currently negotiating (‘default’ in the words of anyone, other than the ECB) will not be the last. I reckon we’ve got more debt forgiveness negotiations to come with more of the peripherals. The problems haven’t been fixed after all. And that means somewhere down the line, the bonds these hopeless banks are currently buying may start to disintegrate.

Remember, these guys are buying the bonds for a carry trade – maybe they make 5% a year. But what good is a 5% profit if the value of your bonds get cut in half (or worse, as has been the case with Greece)?

I mean, you take the weakest banks in the world, then you load them up on debt from the dodgiest countries you can find. And you expect things to turn out rosy!

The Eurozone Has Become a Giant Ponzi Scheme

Like all classic Ponzi schemes, it can only last as long as you keep pumping in new money. The ECB knows this isn’t a final solution.

So how do you solve a problem like Mario’s?

The answer should be clear. You don’t stop the LTRO…. Never!

This Long Term Refinancing Operation is an exercise in can-kicking, the likes of which only a super banker could put together. And you keep on kicking until the can finally disintegrates.

Good luck to all who put their faith in it.

I’m on Tim Price’s side with this. This scheme by the ECB is destined for failure. As Tim pointed out a couple of weeks back:

“The ECB creates electronic money. It then uses that money to buy government bonds from eurozone banks. Flush with new money, eurozone banks can then buy more government bonds! If this sounds like a Ponzi scheme designed to rig the market for the prices and yields of eurozone government debt, that’s because it is.

“The wrinkle in this scheme is what happens when a eurozone government is so overborrowed and with such a small chance of growing its economy that it defaults on its debts anyway (which looks increasingly likely for Greece, and possibly Portugal).”

This is one of the biggest threats to your wealth in a generation. So you need to take steps to protect yourself.

Bengt Saelensminde
Contributing Editor, MoneyWeek (UK)

Publisher’s Note: This is an edited version of an article that first appeared in MoneyWeek (UK).

From the Archives…

The Stock Market Financial Winter is Coming
2012-03-02 – Dan Denning

Why You’ll Want to Watch This ‘Bad’ Retail Stock Very Closely
2012-03-01 – Kris Sayce

Higher Oil Prices – Government Guaranteed
2012-02-29 – Dr. Alex Cowie

Asymmetric and Economic Warfare with Iran
2012-02-28 – Dan Denning

Why the Greek Debt Crisis Has Nothing to Do With the Euro
2012-02-27 – Nick Hubble

How the ECB Kicks the Can Down the Road

By MoneyMorning.com.au

There are some commodities so rare, so valuable, and so indispensable that their mere existence in large quantities makes them a source for the wealth of a whole nation. These commodities create huge surplus profits for a country.

Oil is the best example.

For instance, Norway, Abu Dhabi and Saudi Arabia have built up more than a combined $1.63 trillion in assets thanks to their oil sales. Simply by recognising and investing in a commodity the world can’t do without.

What if you applied that logic to your own investing strategy?

What if you could find a little discussed – but indispensible – commodity to add to your investment portfolio? Perhaps something that not many people are talking about yet, but will take off – just like oil did – when the masses realise how valuable it is… What do you think that could do to your overall profit and loss statement?

Well, there is at least one commodity out there that seems like it could fit the bill. Which I’d like to tell you about today…

Why You Want to Add Potash to Your Portfolio

Potash is potassium-rich rock. Plants need potassium to grow, but heavily farmed soil can be very low in potassium. Farmers apply potash to the land as a fertiliser to nourish crops and get more produce from each hectare. Without fertilisers like potash to boost potassium levels in the soil, there wouldn’t be enough food to go around.

Why?

Two reasons. Supply and demand.

The global population increasing steadily (at a rate of about 11 million hungry mouths a month), meaning the demand for food is growing.

However, the amount of viable farmland keeps shrinking (each year some is lost to urban development – and still more becomes desert). This puts a great deal of pressure on the farming sector to increase production. They do this by using fertilisers such as potash.

Potash Prices are Climbing

Potash is in demand wherever farmers are growing crops. The world’s biggest potash consumers are therefore China, Brazil, India and the United States.

The US is a big consumer. But, surprisingly, it imports 91% of the potash it uses.

Most US potash imports come from Canada. The US is keen to be more independent of its reliance on Canada.

One of the most important points to remember is that potash is less volatile than many other commodities. It moves mostly in line with good old-fashioned supply and demand. There are no futures markets, ETFs or hedge funds playing around with the price.

Because of this, potash stocks are a bit less unpredictable.

And, even in a recession, there are almost seven billion people who need to eat.

That’s why potash is what I’d call a recession-proof commodity. An indispensable commodity. And one well worth thinking about adding to your portfolio.

Alex Cowie
Editor, Diggers & Drillers

From the Archives…

The Stock Market Financial Winter is Coming
2012-03-02 – Dan Denning

Why You’ll Want to Watch This ‘Bad’ Retail Stock Very Closely
2012-03-01 – Kris Sayce

Higher Oil Prices – Government Guaranteed
2012-02-29 – Dr. Alex Cowie

Asymmetric and Economic Warfare with Iran
2012-02-28 – Dan Denning

Why the Greek Debt Crisis Has Nothing to Do With the Euro
2012-02-27 – Nick Hubble

Potash: How to Profit from the World’s Most Indispensable Commodity

By MoneyMorning.com.au

“Australian house prices could decline by more than 5 per cent in 2012 if China’s economy experiences a soft landing with GDP growth at about 8 per cent.” – ratings agency, Standard & Poor’s

The problem with mainstream thinking is that it only joins the dots after an event.

In June 2010, the Age reported, “Despite the high debt levels, Standard & Poor’s said the housing market’s robust fundamentals would ‘continue to support the housing market’.”

It’s a point we’ve made many times. Mainstream economists only look at the surface of an issue. They rarely think about the layers beneath. Or the side effects of an economic action.

That means they’re always playing catch-up to an event. As any top investor will tell you, that’s the last thing you want. As it means you’re more likely to buy at the top and sell at the bottom.

But if you’re ahead of the game, that’s when you can bank the rewards. It’s how a good pal of mine picked three stocks that have made big double- and triple-digit percentage gains in less than 12 months.

How did he do it? Simply by thinking ahead and acting before everyone else caught on…

In February 2010, this ahead-of-the-game analyst wrote:

“My strategy… is to largely stay OUT of the stock market. The only reason to be in it is when you have a chance to make either a very safe, low-risk return, or a very large speculative return for a small amount of money.”

In this case, the analyst (Australian Wealth Gameplan‘s Dan Denning) was looking at a “very large speculative return”. It was in an industry few others in the Aussie market had looked at – shale gas.

To make the big return, Dan had three specific stocks in mind.

Today, those stocks have made gains of 72.9%, 185.7% and 217.7%.

But despite the good run, there could still be a lot more to come. When Dan picked two of these stocks last June he wrote:

“For the risk-averse investor who still doesn’t mind having a shale punt, Santos may be the goer. But it is not the kind of company that can give you a 10 to 1 return. And since I think that’s genuinely on offer… Let’s look at the two recommendations I’m making…”

Dan didn’t tip Santos. But he did tip two stocks that are up 185.7% and 217.7%.

But here’s the thing. When you take a punt on an ahead-of-the-game idea, you shouldn’t think you’ll get it right the first time.

Sometimes you need to take a couple of stabs at it.

Dan had originally written to Aussie investors about shale gas in May 2009. The story was much the same as when he wrote about it over a year later. The only difference was the market wasn’t ready for the shale gas story in 2009.

That’s why contrarian investors need patience. Just because the market doesn’t react to an event as you expect, it doesn’t mean the idea is wrong. It may just mean your timing is off.

That’s why Dan stuck with it. Because he knew the shale story would hit the Aussie market for three reasons…

First, the U.S. had already exploited shale gas reserves. The U.S. had known about shale oil and gas since 1910.

Second, according to the U.S. Energy Information Agency, Australia has 396 trillion cubic feet (tcf) of recoverable shale gas. To put that in perspective, China used around 4.4 tcf of natural gas last year.

By comparison, the U.S. uses around 22 tcf per year.

Assuming most gas exports will go to China, Australia has almost a 100-year supply of natural gas. That’s based on China’s current usage.

Of course, if the Chinese economy grows as much as most expect it will, the demand for natural gas will grow too. That’s good news for natural gas explorers and producers.

And third, Dan knew shale was a big story was because he had told U.S. investors about it in October 2005.

Back then, he wrote:

“If the U.S. government is eventually going to pump billions of dollars into the development of the shale industry, with the goal of national energy independence, I want to figure out who’s going to benefit the most…

“…I’d rather be ahead than behind on the shale curve.”

The shale gas story has been a winner for U.S. investors. And now it’s set to be a winner for Aussie investors too.

(In fact, thanks to Dan, we jumped on the shale gas bandwagon last year in Australian Small-Cap Investigator. The stock we tipped is up 66.7% since.)

If Dan’s right about two of his stocks becoming 10-baggers (that means rising 1,000%) there’s still much further for these stocks to go.

You can find out more on Dan’s research and current stock tips by clicking here…

Cheers.
Kris.

Publisher’s note: Slipstream Trader, Murray Dawes says the market has just hit a key inflection point. This week he told us, “Bad economic news globally – including China’s forecast lower growth rate and the aftermath of Europe’s LTRO – and today’s bad Aussie GDP number (0.4% against expectations of 0.8%) means the market has turned bearish.” But before you panic and rush to sell everything. Remember there is a way to make money from falling markets. To find out how Murray plans to help his subscribers do this, check out his latest free YouTube market update…

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Natural Gas Demand To Quadruple

Shale Gas: One American Analyst’s Winning Aussie Investment Idea

3-8-12-Navistar International (NYSE:NAV) reported a fiscal Q1 loss of $2.08 per share, missing estimates by $1.80.Revenues in the quarter rose 11% year-over-year to $3.05 billion, inline with estimates.The company reiterated its annual revenue outlook of $15 billion – $16 billion, vs. estimates of $15.2 billion.The company sees annual EPS of $4.25 – $5.25, vs. its prior guidance of $5.00 – $5.75, vs. estimates of $5.41.The company sees N.A. truck demand up 5% – 18% in FY ending October 31st.

In the 32 years of his benighted rule, Zimbabwe’s President Robert Gabriel Mugabe has done more damage to the country than its white-led minority government ever did.

With the exception of the smuggling of “blood diamonds” the country’s economy, once the “breadbasket of Africa,” resembles nothing so much as a slow motion train wreck.

One of the foundations of modern nations’ economic prosperity are reliable sources of power and here too, Mugabe and his Zimbabwe African National Union cronies have managed to screw things up.

While the country has a peak electricity demand of about 2,200 megawatts, it only produces 1,200 megawatts because its installed power generation capacity cannot meet demand, which primarily comes from the Hwange Power Station (HPS) and Kariba Power Station (KPS).

According to Mugabe, it’s because those pesky international sanctions scare away potential investors and are a covert cover for the return of the colonialist British.

So, in the meantime, what to do to meet the energy shortfall?

Why, import electricity from neighboring Mozambique, South Africa and the Democratic Republic of Congo.

Here too the bankruptcy of ZANU-PF policies is evident, as last month Mozambique’s government threatened to shut off electricity exports from its Hydro Cabora Bassa dam if Harare didn’t pay its outstanding $90 million debt.

But, a million here, a million there – at the same time that Maputo was threatening to pull the plug, Zimbabwean Energy and Power Development Minister Elton Mangoma informed the country’s legislature that the Zimbabwe Electricity Supply Authority (ZESA) has run up a $1 billion debt in un-serviced loans, imports on unpaid credit and the country’s investment in a joint power project with Zambia, yet to be built. No doubt adding to the politicians’ unease, Mangoma has stated that the troubled power utility has no capacity to extend, much less alleviate, the outstanding debt.

So, what to do to return ZESA to financial health? On 22 February Mangoma told a press conference that some customers have not paid their electricity bills since 2009, noting, “ZESA has offered to customers a facility to propose workable payment plans, regrettably some have chosen either to ignore this facility or not to honor their payment plans, leaving ZESA with no option except to withdraw supplies. Power disconnections are currently being applied ‘wholesomely’ to ensure that all customer categories meet their obligation of paying for service rendered. All customers currently in arrears run the risk of disconnections” before salving the announcement somewhat by stating that all disconnections will be done after a five-day notice.

As for why these multitudinous miscreant scofflaws stopped paying their bills several years ago, it might be noted here that ZANU-PF mismanagement of the economy by July 2008 produced an inflation rate of to 231 MILLION percent, according to Zimbabwe’s Central Statistical Office. Driven by soaring food prices, the government abandoned the nation’s old currency completely the following year. At the time that the Zimbabwean government issued its data, the economy had imploded by nearly 50 percent over the previous decade.

Could those Zimbabwean consumers had issues on their minds marginally more pressing than paying the electricity bills?

Like buying food when bread’s price in July 2008 had risen to over $7,000 a loaf?

But ZESA, showing impartiality, last month also disconnected the services of three government Cabinet ministers. While Magoma declined to provide their names to the press, citing confidentiality concerns, informed sources identified the trio as Local Government Minister Ignatius Chombo, Manicaland Governor Christopher Mushowe and Energy Permanent Secretary Justin Mupamanga.

Their collective tab?

A mere $378,000.

So, where does Zimbabwe go from here?

Mugabe’s wrecking of the Zimbabwean economy can be squarely laid at his policy for favoring political loyalty over expertise, as he showered political office, land and favors on his ZANU-PF supporters. Crawling through the bush with an AK-47 is one thing, farming another.

Compare Zimbabwe’s travails with neighboring South Africa, whose first black president, Nelson Mandela, pursued instead a conciliatory approach to the country’s white minority despite 27 years in prison at the hands of same.

Enough said.

In 1994 Mugabe was appointed an honorary Knight Grand Cross in the Order of the Bath by Queen Elizabeth II. On 25 June 2008, Queen Elizabeth II cancelled and annulled Mugabe’s honorary knighthood. But Zimbabweans may yet have further traumas and/or a sunnier future in store. Last month Mugabe revealed that his 15-year-old son, Bellarmine Chatunga, harbors presidential ambitions. In a series of interviews in the state-controlled media, the 88 year-old Mugabe told his nation, “Bellarmine always says ‘I want to be president’ and so on, but I say you must pass, you see, the President, your father, how many degrees does he hold? Can you do that?”

No doubt the teenaged Bellarmine has profound ideas on how to salvage the country’s economy.

And turn the lights back on.

And deal with an estimated 50 percent unemployment rate.

And an outbreak of typhoid in the capital Harare.

And if Junior needs help, he can always turn to Dear Old Dad. At his 88th birthday on 21 February Mugabe jokingly told state radio, “I have died many times. That’s where I have beaten Christ. Christ died once and resurrected once. I am as fit as a fiddle.” The birthday celebrations for the octogenarian were estimated to cost $1 million.

What is the Shona word for “yikes?”

Source: http://oilprice.com/Energy/Energy-General/Zimbabwes-Ongoing-Energy-Nightmare.html

By. John C.K. Daly of Oilprice.com

American Eagle Outfitters (NYSE:AEO) announced Q4 EPS of $0.35, missing analyst estimates of $0.36. Revenues rose 14% year-over-year to $1.04 billion, missing consensus estimates of $1.14 billion.For the year, the company is planning a modest sales increase, and margin improvement. Increased product costs will continue to pressure margins in the first half of the year and lower product costs should benefit margins in the second half.American Eagle Outfitters (NYSE:AEO) has potential upside of 9.1% based on a current price of $14.63 and an average consensus analyst price target of $15.96.American Eagle Outfitters should find initial support at its 50-day moving average (MA) of $14.12 and further support at its 200-day MA of $13.10.In the last five trading sessions, the 50-day MA has remained constant while the 200-day MA has remained constant.

Jeffrey Kennedy has developed a theory that guides his analysis

By Elliott Wave International

When you are watching a pattern develop on a chart, how can you be sure that your wave count is correct? The Elliott Wave Principle offers rules and guidelines that you can use to add confidence to your wave count.

Elliott Wave International’s Senior Analyst Jeffrey Kennedy spent years designing his own technique to improve his accuracy. He came up with the Jeffrey Kennedy Channeling Technique, which he uses to confirm his wave counts. The following excerpt from Jeffrey’s Trader’s Classroom lessons, a regular feature of his Futures Junctures Service, offers an overview of his method.

My theory is simple: Five waves break down into three channels, and three waves need only one. The price movement in and out of these channels confirms each Elliott wave.

Base Channel
Figure 61 shows three separate five-wave patterns with three different channels drawn: the base channel, the acceleration channel and the deceleration channel.

The base channel contains the origin of wave one, the end of wave two and the extreme of wave one (Figure 61A). Of the three channels, the base channel is most important, because it defines the trend. As long as prices stay within the base channel, we can safely consider the price action corrective. Over the years, I’ve discovered that most corrective wave patterns stay within one price channel (Figure 62). Only after prices have moved through the upper or lower boundary lines of this channel is an impulsive wave count suitable, which brings us to the acceleration channel.

Acceleration Channel
The acceleration channel encompasses wave three. Use the extreme of wave one, the most recent high and the bottom of wave two to draw this channel (Figure 61B). As wave three develops, you�ll need to redraw the acceleration channel to accommodate new highs.

Once prices break through the lower boundary line of the acceleration channel, we have confirmation that wave three is over and that wave four is unfolding. I have noticed that wave four will often end near the upper boundary line of the base channel or moderately within the parallel lines. If prices break through the lower boundary line of the base channel decisively, it means the trend is down, and you need to draw new channels.

Deceleration Channel
The deceleration channel contains wave four (Figure 61C). To draw the deceleration channel, simply connect the extremes of wave three and wave B with a trend line. Take a parallel of this line, and place it on the extreme of wave A. As I mentioned before, price action that stays within one price channel is often corrective. When prices break through the upper boundary line of this channel, you can expect a fifth-wave rally next.

In a nutshell, prices need to break out of the base channel to confirm the trend. Movement out of the acceleration channel confirms that wave four is in force, and penetration of the deceleration channel lines signals that wave five is under way.

14 Critical Lessons Every Trader Should Know Since 1999, Jeffrey Kennedy has produced dozens of Trader’s Classroom lessons exclusively for his subscribers. Now you can get “the best of the best” in these 14 lessons that offer the most critical information every trader should know. Find out why traders fail, the three phases of a trader’s education, and how to make yourself a better trader with lessons on the Wave Principle, bar patterns, Fibonacci sequences, and more! Don’t miss your chance to improve your trading. Download your FREE 45-page eBook today!

Cintas (CTAS) was upgraded today by JP Morgan (JPM) from neutral to overweight as investments made by the company are starting to add to profits. Shares are higher by 3.5 percent.

Honeywell (NYSE:HON) announced on Wednesday that it has endorsed a prior announced outlook in 2012 and narrowed the range of its first quarter profit to $0.96 a share to $0.98.Honeywell International (NYSE:HON) has potential upside of 13.4% based on a current price of $57.77 and an average consensus analyst price target of $65.53.Honeywell International is currently above its 200-day moving average (MA) of $53.26 and should find resistance at its 50-day MA of $57.99.In the last five trading sessions, the 50-day MA has climbed 0.55% while the 200-day MA has remained constant.

The European Central Bank (ECB) held its Main refinancing operations rate unchanged at 1.00%.  ECB governor, Mario Draghi, said: “Looking ahead, we are firmly committed to maintaining price stability in the euro area, in line with our mandate. To this end, the continued firm anchoring of inflation expectations – in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term – is of the essence.”

Previously the ECB cut the interest rate by 25 basis points at its November and December meetings.  The ECB last increased the interest rates by 25 basis points at its July meeting; pausing in May and June, after raising the rate by 25 basis points to 1.25% in April last year.  The Euro Area reported annual HICP inflation of 2.7% in January, 3% in November and October and September, 2.5% in August and July, 2.7% in June (same as May) and above the Bank’s inflation target of maintaining inflation below, but close to, 2% over the medium term. 

The Euro Area reported quarterly GDP growth in the September quarter of 0.2% (1.4% y/y); the same as the June quarter of 0.2%, following a 0.8% increase in the March quarter, and a 0.3% increase in the December quarter of 2010.  The Euro (EUR) has weakened by about 5% against the US dollar over the past year, while the EURUSD exchange rate last traded around 1.33