Archive for May, 2010:
The Federal Reserve Does NOT Control the Market
FREE eBook reveals why the Fed is powerless to change the economic course
By Elliott Wave International
As the world’s leading stock markets continue to play stomach-hockey with investors via one triple-digit turn after another, the mainstream community takes solace in this core belief: No matter how uncertain things become, the Federal Reserve can at any moment swoop in to set the economy right.
In reality — the Fed has no such power. This is the revelation of Elliott Wave International’s newest complimentary resource from Club EWI: the 35-page eBook titled “Understanding the Fed.” Including excerpts from the selected works of EWI President Robert Prechter — including his 2002 book “Conquer the Crash” and several past “Elliott Wave Theorist” publications — this riveting report exposes once and for all the most dangerous myths about the Federal Reserve.
Chapter 3 (of the 8-chapter anthology) attends to the “Potent Directors Fallacy” — i.e., the false notion that the central bank is in control of the U.S.’s money, market, and economy — and offers this “Conquer the Crash” insight:
“For recent examples of the failure of the idea of efficacious economic directors, just look around. Since Japan’s boom ended, its regulators have been using every presumed macroeconomic ‘tool’ to get the Land of the Sinking Sun rising again, as yet to no avail. The World Bank, the IMF, local central banks, and government officials were ‘wisely managing’ South East Asia’s boom until it collapsed spectacularly in 1997. In America, the Federal Reserve has lowered its discount rate from 6% to 1.25%, an unprecedented amount in such a short time… What will it do if the economy resumes its contraction; lower rates to zero?“
Note: The underlined sentence above was written in 2002. Today, that forecast has come to fruition after the Fed’s rate-slashing campaign since September 2008 has brought rates to the zero level.
Chapter 3 then goes on to explain WHY the Fed’s monetary policy failed to lift the hot-air balloon of the economy out of the violent credit and housing downdraft. Here, the eBook writes:
“The Fed’s ultimate goal is to influence public borrowing from banks. During economic contractions, banks become fearful. At such times, low Fed-influenced rates cannot overcome creditors’ disinclination to lend and/or customers’ unwillingness or inability to borrow. Thus, regardless of assertions to the contrary, the Fed’s purported ‘control’ of borrowing, lending, and interest rates ultimately depends upon an accommodating market psychology and cannot be set by decree.”
Once again, flash ahead to today and the disintegration of optimism and shift toward conservation can be seen in the following data from February 2010:
- Year-over-year bank credit was (negative) – 6.8% vs. 10% in 2007
- Loan availability to small businesses plunged to the lowest level since interest rate crisis of 1980, thus drying up a major means of debt repayment.
- The number of banks tightening their lending standards has soared, while consumer credit and tax revenue is plunging.
- And, residential and commercial mortgages are plunging, as more and more home/business owners are walking away from their leases.
In Bob Prechter’s own words: Once you can assimilate the truths contained in this eBook, “you will have knowledge of the banking system that one person in 10,000 has.”
Do you want to really understand the Fed? Then keep reading this free eBook, “Understanding the Fed”, as soon as you become a free member of Club EWI.
This article was syndicated by Elliott Wave International. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Budget-Busting Bailouts in Europe to Drive Global Debt Burden Higher!
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I’ve been out in Las Vegas this week for the MoneyShow. So naturally, I have gaming on the brain. My conclusion after reading the latest news out of Europe?
The European Central Bank (ECB) and European Union (EU) policymakers are going “all in” to head off the sovereign debt crisis there. Specifically …
• The 16 countries that share the euro currency and the International Monetary Fund (IMF) are going to offer as much as 750 billion euros ($953 billion) in loans and aid to nations who are struggling with massive debts and deficits.
Individual euro-zone governments will pay 440 billion euros ($559 billion), while the EU will pay 60 billion euros ($76 billion) and the IMF will cough up as much as 250 billion euros ($318 billion).
• The ECB, for its part, is going to purchase billions of dollars in government and private debt. Central banks in Germany, France and Italy all are buying government debt. And the ECB is going to start offering three-month loans at fixed rates to institutions which need them. The cap on this program? None.
• Finally, the Federal Reserve will throw a few chips onto the table by reopening its currency swap line with the ECB. The Fed will get euros in exchange for dollars so the ECB can then extend dollar-based loans to euro-zone banks that need them.
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| The Fed has agreed to trade our dollars for euros. |
The program won’t have any cap, meaning the Fed’s exposure could theoretically be unlimited! The last time the Fed allowed ECB swaps, activity peaked at $583 billion in December 2008.
The Bank of Japan, Swiss National Bank and Bank of England will also have access to an unlimited amount of dollar swaps. Up to $30 billion will be made available to the Bank of Canada, too.
Good and Bad News in Wake of
Europe’s Major Wager
The immediate impact of the move? Stocks soared around the world. The gains were particularly noteworthy in the PIIGS countries — Portugal, Ireland, Italy, Greece, and Spain.
We also saw the difference, or spread, in yield between “core” German 10-year debt and debt in the PIIGS countries collapse. That spread tightened to 343 basis points (3.43 percentage points) from 973 points in Greece. It also narrowed to 201 points from 254 points in Portugal and to 94 points from 173 points in Spain.
The drawback?
By bailing out the worst offenders, the more well-behaved European nations are handicapping themselves. They’re exposing themselves to more risk. And they’re going to have to foot the bill for the massive rescue package, driving up their own debts and deficits!
That’s not exactly something the euro-zone nations can afford, by the way. The region-wide budget deficit is on track to hit 6.6 percent of GDP in 2010 — more than twice the so-called “cap” of 3 percent. Next year won’t be any better, with the current forecast calling for a deficit of 6.1 percent.
Result: German bond yields surged 18 basis points after the rescue was announced.
What about the U.S.?
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| While we help finance another bailout, our deficit continues to skyrocket. |
Our deficit could be as much as $1.6 trillion this year, or almost 11 percent of GDP.
Our debt load is soaring and on track to double to $18.6 trillion over the next decade.
Our Treasury is borrowing more than $375,000 per SECOND in certain weeks.
Our politicians have shown zero willpower to get the deficit under control, beyond a few token “window dressing” moves. And now, via the IMF and the Fed, we’re going to be ponying up untold billions of dollars more to bail out profligate European nations.
Is it any wonder that U.S. Treasury bonds also got clubbed after the bailout was announced? Bond futures prices plunged more than three points from their recent high, while 10-year Treasury note yields surged more than 30 basis points.
The Most Important Question to Ask:
“Where’s All this Bailout Money Going to Come From?”
What about the longer-term outlook for interest rates? Well, investors need to ask themselves a simple question: Where the heck is all the bailout money going to come from? It’s not like we have it sitting around in some national piggy bank somewhere.
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| To pay for it all, government printing presses will shift into overdrive. |
The answer is that policymakers at the Fed and ECB are going to print some of it out of thin air. And government officials are going to borrow hundreds of billions of dollars more in the bond market both here and in Europe.
All the money printing raises serious inflation concerns. And all the borrowing will drive up bond supply. Both are downright bearish for bond prices.
Oh, and now that the sovereign debt crisis has been temporarily tamped down in continental Europe, what do you think is going to happen next?
I’ll tell you what …
Investors are going to start searching for the next major victim. I believe they’re going to focus their ire on two of the biggest debt and deficit offenders on the planet — the U.K. and the U.S.
So if you are still exposed to long-term government, corporate, junk, or municipal debt here, now is the time to sell — and not look back! Or you can use specific vehicles such as inverse bond ETFs to profit or hedge yourself against an upward move in interest rates.
Until next time,
Euro; the Worst Is Yet To Come
By: Sol Palha, Tactical Investor
If the thunder is not loud, the peasant forgets to cross himself.
Russian proverb
I think it is a given that Greece will have to default, everyone knows this, but they are just playing cat and mouse for now. Most Greeks are dead set against the new Austerity measures and they will likely throw this government out of power for the new changes they have instilled. The next government will cater to the people’s needs for fear of receiving the same treatment. Change is not wanted in Greece. The only way to fix this problem is if the nation as a whole understands that they have to go through a painful period of cuts, but as evidenced from the past riots this is not the case. The story below further substantiates our claims.
Greek unions announced on Wednesday that they would stage a 24-hour nationwide strike on May 20, the second major protest against tough austerity measures pledged in exchange for billions of euros in aid. The main public and private sector led a 50,000-strong march a week ago in which hundreds of angry Greeks fought pitched battles with police in the streets of central Athens and three people were killed in a petrol bomb attack on a local bank.
They are due to march in the capital on Wednesday from 6 p.m. (1500 GMT), in a rally which will give indications about the public mood before the big walkout next week. Investors are closely watching public reaction to government wage and pension cuts amid concerns broader unrest could hit Prime Minister George Papandreou’s resolve in pushing them through. New figures published on Wednesday showed Greece’s economy contracted 0.8 percent in the first quarter compared to the last three months of 2009.
The austerity measures, pledged in return for 110 billion euros ($139.7 billion) in emergency aid from the European Union and International Monetary Fund, are expected to keep the economy in recession through 2011.”The IMF will not stop thirsting for workers’ blood,” said Yannis Panagopoulos, chairman of Greece’s main private sector labor union GSEE. “Its recipes are a disaster and the government must turn them down.”
The country’s socialist government on Monday unveiled a draft law to raise the average retirement age and cuts benefits, which further angered unions already opposed to previous steps including public wage cuts and tax hikes. Full story
Adding to the host of problems is the fact that Greece is now officially in a recession. Painful cuts have to be implemented and maintained or Greece will default. Sometimes markets should be allowed to settle matters, intervention only delays the inevitable. Our stance has been that the Euro is going to trade down to the 115 ranges and could possibly trade down to the 110 ranges. The massive 1 trillion Package had no lasting impact on the Euro, after mounting a brief rally, the Euro crumbled and is now on its way to putting in another series of new lows.
Spain’s new austerity measures, too little too late
Prime Minister Jose Luis Rodriguez Zapatero said Madrid would slash civil service pay by 5 percent this year, freeze it in 2011, cut investment spending and pensions and axe 13,000 public sector jobs in a drive to meet EU deficit targets. “We have to make a singular, exceptional and extraordinary effort to reduce our public deficit and we have to do it when the economy is starting to recover,” he told parliament. The announcement came two days after euro zone governments, the European Central Bank and the IMF agreed on a $1 trillion (674 billion pound) rescue package to stabilise the euro in exchange for pledges by highly indebted countries to pare down their deficits. Full story
We think this is action is a little late as Spain had ample time to address these difficult changes, but instead decided to sit on its fat rear and do nothing. The current recommendations are just too little to produce any meaningful change. Unofficially the employment rate is well past 20%, the housing sector has crashed, fiscal debt is roughly 112% of GDP and Rising and estimates put private debt between 160-180% of GDP. Thus unless they put forth some bone crushing changes, the odds are that Spain will be joining the Greeks sooner than later. Furthermore, this 1 trillion euro aid package is more of a band aid than a fix because the nations that are spending beyond their means are still doing so. Nothing has changed other than the day of reckoning.
Financial markets are showing they have their doubts, with markets in Europe and Asian drifting lower Wednesday after Monday’s initial euphoria over the initial 750 billion euro package announced by European Union officials over the weekend.”Is the package big enough?” asked Paul Lambert, the current director of currency and macro strategies at Polar Capital who’s also held roles at Deutsche Asset Management, UBS, Citibank and the Bank of England. “That depends on the success of the debt consolidation in the periphery [and] whether they’re ultimately able to have falling real wages so that they can come back in line with the core.”
Much criticism has been lobbed at places such as Greece for high public sector wages, which will now be brought down sharply by the government as part of the agreement for its bailout package. That’s also been one of the key reasons Greeks have taken to the streets over weeks that have turned violent at times. On Wednesday, Spain announced a plan to reduce public wages 5% this year and freeze them in 2011 while suspending a pension hike. The moves come as the government there fears being dragged into a situation similar to Greece’s.
“I’ve observed that if any country in the emerging markets had been offered a loan package like the Greeks were offered before they got the eventual loan package they got, people wouldn’t have been rioting on the streets, they would have been saying thank you,” said Lambert at a Morningstar Investment Conference in London.
“The fact they’re rioting on the streets means ultimately there may not be the ability of the Greeks to see a 20% fall in real wages,” he said. Full Story
Yeah we would like to see how long individuals are willing to keep quiet once the government starts to cut their salaries, increase taxes and cut benefits. People used to the good life do not take kindly to such measures, they are going to get rid of the existing government, (Greece is the lead candidate for such a move) and replace it with one that is more sympathetic to their cause. The only way to solve this is by the properly (instead of the miserably program called shock and awe, more like shock and shake) is for the Euro zone to set an example. They need to let one country default; this will send a strong message to the others that if they don’t wake up, a sledge hammer is going to fall right on their heads and snap them out of their coma.
In the short term this is a very painful strategy, but long term this would be very beneficial to the Euro, as it would give it credibility and make it a true front runner as a challenger to the US dollar. Investor will have more faith in a nation that is willing to take strong measures to protect its currency. While these brain surgeons run around trying to figure out what is the best approach, make sure you have some of your money parked in Bullion (Gold, Silver, Palladium and or Platinum). In troubled times the best hedge way to protect oneself is via precious metals.
The enemy of my enemy is my friend.
Arabian Proverb
Prechter Describes The “Stunning Long-Term Elliott Wave Picture”
By Robert Folsom, Elliott Wave International
Please join me to consider a time in the stock market that lasted just under three years: 32 months, to be precise.
During this period a series of powerful rallies stand out clearly on a price chart. The shortest of these rallies was four weeks, the longest more than five months.
I can even list seven of these rally episodes, with the number of calendar days and percentage gains.
1. 152 days +52%
2. 28 days +11%
3. 77 days +19%
4. 69 days +27%
5. 31 days +30%
6. 35 days +39%
7. 28 days +27%
Get Robert Prechter’s Latest Analysis — Click Here to Download His 10-Page Market Letter FREE
For a limited-time, you can download Robert Prechter’s April 2010 Elliott Wave Theorist, the first in a two-part series entitled “Deadly Bearish Big Picture,” for FREE! Click here to learn more and download your free Theorist.
This information obviously seems to paint a bullish picture: The stock market was in double-digit rally mode during 43% of the total calendar days in question.
But in fact, those rallies were the days when the bear was catching his breath. The market was the Dow Jones Industrials; the overall period was from November 1929 to July 1932. It devastated investors. The Dow lost 80% of its value. Yes, that includes the rallies listed above.
I said that these rallies stand out on a price chart, and indeed they do — it’s just that the declines stand out even more. There’s virtually no “sideways” action. Prices moved rapidly in one direction or the other.
You can see the chart for yourself in the first issue (April issue, page 4) of the two-part series Bob Prechter has published in The Elliott Wave Theorist. Part One was in April, “A Deadly Bearish Big Picture.” The final sentence of that issue said Part Two “will update the stunning long-term Elliott wave picture.”
Bob just published Part Two. It completes the “Big Picture” he has now delivered to subscribers.
The past doesn’t “define” the present or the future, but it sure does provide context. No analyst alive today understands this better than Bob Prechter.
Believe me when I say that the charts and analysis in this two-issue series are unique. The word “stunning” only begins to describe what you’ll read.
Get Robert Prechter’s Latest Analysis — Click Here to Download His 10-Page Market Letter FREE
For a limited-time, you can download Robert Prechter’s April 2010 Elliott Wave Theorist, the first in a two-part series entitled “Deadly Bearish Big Picture,” for FREE! Click here to learn more and download your free Theorist.
This article was syndicated by Elliott Wave International. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts lead by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Japan: The Sleeping Sovereign Debt Giant
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Over the course of this year in my Money and Markets columns I’ve presented some compelling reasons why the euro zone and the euro were in for a life threatening crisis. And despite the general consensus along the way that the problems in Greece were contained and that dips in the euro should be bought, I maintained that the euro was in a no-win situation.
Then last week, I suggested that because of the systemic threats represented by the PIIGS countries, Germany and the ECB had no choice but to go all-in to try to save the monetary union.
And last weekend, that’s exactly what they did!
They went all-in, throwing massive funds and dangerous guarantees at the problems, and printing money to support it.
Make no mistake. This is not a bailout. A bailout implies that their response is a problem solver. Not so. Their response is a desperate attempt to stabilize what was clear to European officials … a death spiral of the 11-year old European monetary union.
So what’s next?
One thing is for certain: The sovereign debt crisis will not stop in its tracks.
With the rule book in Europe thrown out like last week’s fish, the euro is in devaluation mode and so is the debt of all euro members. When it’s all said and done, likely years from now, the euro may exist in name, but it will be composed of different members and different rules … i.e. a new currency with an old name.
Now, the focus turns to the UK, the holder of the biggest budget deficit of the G-7 world and the most rapidly deteriorating debt load since the financial crisis of 2008 unraveled.
But I’ve already warned about the UK as the next wobbly domino.
Today, I want to go into more detail about the country that could prove to be the BIGGEST domino to fall … with a gigantic global quake.
Japan, in Trouble …
Take a look at the table below. Notice the aggressive growth of debt across nine advanced countries since the financial crisis and global recession set-in. Also notice which country holds the most government debt in the world. By far — it’s Japan.
In looking at this table, it’s no secret how important it is for leadership in these countries to demonstrate a credible plan to reduce deficits and growing debt loads. All of which was a result of their massive policy responses to the near global depression.
The key word in the above paragraph is “credible.” That’s where Japan falls short.
The Bank of International Settlements (BIS) said in a recent report on the growing debt problems,
“As frightening as it is to consider public debt increasing to more than 100 percent of GDP, an even greater danger arises from a rapidly ageing population.”
And within that statement are two of the three fundamentals in the Japanese economy that have it between a rock and a hard place, making a fix hard to imagine.
Fundamental Problem #1—
Declining Savings Rate
As I showed you earlier, Japan is approaching 200 percent of GDP … double what the BIS considers frightening. Moreover the BIS projects, under its best case scenario, that debt could shoot up to more than 400 percent by 2040.
So how will Japan finance it?
Now, here’s where Japan runs into trouble …
Japan has historically been a nation of savers. The savings rate in the 80s and early 90s had been steadily over 10 percent, higher than any other developed country. That has allowed the Japanese government to sell nearly all of its bonds to its citizens and institutions … to the tune of 94 percent of total outstanding public debt.
But since the economy in Japan went into stagnation in the 90s and given that interest rates for 15 years have hovered around zero, the savings attitudes in Japan have shifted. In fact, the savings rate is now lower than in the U.S. — a nation considered grossly addicted to spending, not saving.
Here’s the chart on personal savings in Japan …
Now, look at the next chart, and you’ll see …
Fundamental Problem #2—
Declining Population
While savings rates have been declining, so has the population in Japan, putting more pressure on the absolute quantity of savings. And it’s only expected to get worse. The projection for Japan’s population shows a big fall over the coming decades due to its ageing demographic.
And finally there’s …
Fundamental Problem #3—
Non-Competitive Interest Rates
With debt expected to keep growing and revenues and savings expected to decline, Japan will have to turn to the international markets to find buyers of its debt to keep its economy breathing.
But there’s a problem with that scenario: Japan’s interest rates don’t remotely match the risk!
Japan’s 10-year debt pays just 1.3 percent. Apparently that was enough for loyal Japanese investors. But that won’t cut it for attracting international capital. Debt in other competitive advanced economies, like Europe and the U.S. are in the 3 percent to 4 percent range right now.
So what’s Japan’s ticket out?
A Currency and Debt Devaluation
As I said last week, financial crises and sovereign debt crises typically go hand in hand. As do sovereign debt crises and currency devaluations.
In a world where debt has grown dramatically across the globe and economies remain fragile and vulnerable, we’re entering a period where countries will begin competing to weaken their currencies.
Europe is already underway by weakening the euro. The UK is likely next. And then, given the fundamental outlook I just laid out for you, Japan’s yen could be in for a huge plunge.
As for the dollar, the U.S. faces all of the vulnerabilities from bloated debt and deficits. But in a world crisis, capital has to flow somewhere, and that will keep U.S. debt in demand … and the dollar too.
Regards,
Gold Rallies to New 2010-High as Investors Doubt Effectiveness of the Bailout Plan
Comex gold price rallies to a new 2010-high at 1219.4, one more step closer to record high of 1227.5 made in December, as fears over sovereign crisis resurfaces. Moody’s said it may cut Greece’s rating to ‘junk’ in the coming month amid ‘dismal’ economic prospect. Silver also grinds higher to 18.6 while PGMs reverse gains.
Risk assets’ massive relief rally loses steam as investors worry that the stability package may not be sufficient to contain European sovereign crisis. Market sentiment is further dampened after receiving strong Chinese inflation data as it signals more tightening. WTI crude oil price plunges to 75.6 in European session while Brent crude falls below 80 again.
Growth in China remained robust in April. Although industrial production missed market expectations and expanded +17.8% y/y, CPI soared +2.8% y/y, the fastest pace in 8 months. Despite the government’s policy to curb lending, property prices rose +12.8% y/y while new lending also exceeded consensus and reached RMB 774B.
While the Chinese government aims to keep inflation at 3%, recent data shows that it’s hard for this target to be achieved. Escalated inflationary pressure indicates more tightening measures are needed. It’s likely the government will resume RMB appreciation soon, probably in June.
Crude oil imports rose to 21.17M tons in April. With exports remained sluggish, net imports reached a record high of 20.98M tons during the month. However, there are concerns that demand will slowdown as China accelerates tightening.
In its monthly report, OPEC upgraded its global demand forecast modestly. The organization controlling 40% of oil in the world expects demand will rise to 85.38M bpd in 2010 from 84.4M bpd last year. This was slightly higher than last month’s forecast of 85.2M bpd. According to OPEC, China has been among the main drivers behind oil demand growth so far this year, which should continue for the rest of the year. On the supply side, non-OPEC supply will rise to 51.7M bpd, compared with 81.53M bpd projected in April. This signals less oil is needed from OPEC.
Demand/supply in oil market is again in focus and analysts anticipate US crude inventory rose +1.1 mmb in the week ended May 7 with Cushing stocks surging for another week. Gasoline and distillate stockpiles probably climbed +0.8 mmb and +1.3 mmb, respectively. American Petroleum Institute will release its estimates after market close today.
Source: Oil n Gold
Europe WANTS a Lower Euro
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The euro is in devaluation mode … in a sharp 17 percent decline against the dollar over the past five months. And I’ve written extensively on why, and why it still has further to go.
Now I believe a covert policy decision has been made by the European Central Bank (ECB) to use currency devaluation as a tool for the European monetary union (Emu) to survive.
Of course, each individual country within the Emu doesn’t have the luxury of devaluing their currency when times are tough. They’re locked into a monetary union of sixteen countries. And monetary and currency policy decisions are made by the ECB.
That puts countries like Portugal, Ireland, Italy, Greece and Spain (the PIIGS) at a competitive disadvantage when trying to salvage themselves from debt burdens and feeble economic activity.
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| The Emu will do whatever is necessary to save the floundering euro. |
But now, it’s becoming evident that the Emu as a whole is prepared to take such drastic measures to keep the euro intact!
I think we’ll find that the ECB will aggressively reverse course on exiting from the emergency monetary policies they put in place to deal with the financial crisis of 2008 … returning to emergency mode, and in a big way. They’ll likely be forced to openly buy up the government debt of the weak economies to keep them breathing — i.e. print money, and a lot of it.
The plan requires that Germany, the core of the euro, participate in serving the interests of the lowest common denominator in Europe: The PIIGS. Of course, they’ve already done so by agreeing to provide bailout funds to Greece. But the next moves in the playbook will likely drag Germany headlong into it.
Germany: Swimming with the Fishes
Germany is the biggest, most robust country in the euro zone. It was among the first major economies to emerge from recession. Its economy is expected to grow by 1.5 percent this year, and 1.8 percent next year. So things are going relatively well for the Germans following the harsh recession.
Why, then, would Germany agree to be dragged down by the weak and expose themselves to potential inflation problems in the process? Why not just hit the eject button and remove themselves from the euro?
Here in a nutshell lies the problem: Germany has a lot to lose if other euro countries end up in shambles. It’s exposed on two fronts …
First, Germany is on the hook for $668 billion in PIIGS sovereign debt. Not to mention the fresh $30 billion they’ve agreed to give Greece.
A default, or worse, a string of defaults would be disastrous for German banks and European banks in general. European banks bought about half of the general government bond market last year.
And second, if these countries continue their downward spiral, Germany’s intra-Europe exports (10 percent of total exports) promise to dwindle with it.
So what does Germany gain from sacrificing for the weak?
For one, it averts the problems mentioned above. And two, it will enjoy a much weaker euro in the near future, thus providing a nice kicker for its exports outside of continental Europe.
ECB Already Taking the Plunge
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| ECB President Trichet would not discuss the euro’s value in his recent press conference. |
Europe, the IMF and the ECB demonstrated this week that it’s ready to go all out to keep monetary union intact. They announced a massive multi-year bailout for Greece. And perhaps in a bigger move, the ECB is now accepting Greek junk bonds for collateral — jeopardizing the credibility and independence of the central bank.
As I was watching the ECB press conference following its monetary policy meeting this week, central bank President Jean-Claude Trichet looked flustered and measured his words very carefully. And two things gave me a sense that they had a plan, which included a much weaker currency:
- He adamantly said a Greek default is “out of the question.”
- And a biggie … he ignored all questions about the value of the euro, despite its slippery slide!
The Swiss National Bank must have sensed something, too. This week it chose to back away from buying euros as an intervention tactic to curtail the strength of the Swiss franc. Perhaps, the SNB knows that gobbling up euros at current prices is a recipe for losing money.
In sum, financial crises and sovereign debt crises typically go hand in hand. As do sovereign debt crises and currency devaluations. So be prepared to see a continued decline in the euro and other global currencies … and more capital flowing into the U.S. dollar in search of a safe haven.
Regards,
Add Energy Income with an MLP ETN
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You’re probably having a tough time these days if you live off the interest from your investment portfolio. For example, according to Bankrate.com, money market accounts are now yielding a paltry 0.76 percent (nationally).
There is no big mystery why this is happening …
Ever since the banking system started blowing up back in 2008, Ben Bernanke and his Federal Reserve have kept short-term interest rates at historic lows. That’s great for bankers, terrible for savers.
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| Many investors are watching their income slide. |
These low rates have income-investors looking for new sources of steady interest and dividends. The alternatives are few. And I’m concerned that some people are so desperate that they’re risking their principal in ways they don’t even realize!
The truth is that there is usually a direct relationship between risk and reward …
- If near-absolute safety is what you want, you can get it from Treasury bills and bank savings accounts, but the interest rate will be very low.
- If you must have more yield, it’s possible — as long as you’re willing to take on more risk.
In other words, there are no free lunches. The best you can do is find a happy medium somewhere on the risk-reward scale.
Today I’m going to tell you about an income investment that I think is a good balance — especially right now in this low-interest rate environment.
Master Limited Partnerships:
Energy Income
You might have heard about master limited partnerships (MLPs). They throw off nice income and have growth potential, too.
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| MLPs own energy pipelines and storage facilities. |
MLPs do this by concentrating on the storage and transportation of energy products. After all, no matter how cheap or expensive oil may be, it still needs to get to you. And the tank farms and pipeline companies are paid well for their services.
My Money and Markets colleague, Nilus Mattive, wrote a terrific column back in 2008 about the MLP market. It’s a good introduction to the topic.
You can, as Nilus says, invest directly in individual MLP issues. I know many people do this very successfully. There are some drawbacks, though …
For one, the tax advantages of MLPs can create some paperwork headaches. You’ll receive “K-1″ forms from each partnership. Many people find the IRS requirements aggravating when it comes time to do their tax returns.
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| Owning MLPs can complicate your tax return. |
You can also face potential tax problems if you hold these partnerships inside an IRA or other retirement accounts. So be sure to consult a tax advisor before you put a MLP in one of these accounts.
As with individual stocks, it’s often better to diversify by holding a broad portfolio of MLPs. Of course this also multiplies the paperwork problem. So wouldn’t it be nice if you could get a whole package of MLP issues in one convenient package?
Well, now you can!
MLP ETNs:
Good Things in Nice Packages
Several exchange-traded notes, or ETNs, now track major MLP sector indexes. They give you exposure to MLP investments in a convenient package with just one trade. They also greatly streamline the income tax reporting.
Sounds great but there are some drawbacks. As I’ve written before, the ETN structure is riskier than it looks. That’s because you don’t really own the MLPs that make up the index your ETN tries to follow. What you own is a bond, issued by a bank, whose return is tied to the index.
This is called “counterparty risk.”
If your ETN sponsor should go belly-up, you could lose part or even all of your investment. Is this a big danger? No, but the possibility is real. Think about Bear Stearns and Lehman Brothers.
Whether the risk is worth taking is a personal decision for you. If you are prudently diversified and pay attention to your investments, then the counterparty risk might be acceptable.
Currently there are three ETNs to choose from that specialize in the MLP sector. You may want to consider these for the income-generating part of your portfolio.
- JPMorgan Alerian MLP Index ETN (AMJ)
- UBS E-TRACS Alerian MLP Infrastructure Index ETN (MLPI)
- Credit Suisse Cushing 30 MLP Index ETN (MLPN)
All three of these ETNs have an attractive yield and good assortment of MLP issues. One big difference among them is that MLPN uses an equal-weighting methodology while the other two are weighted by market capitalization. This means MLPN is somewhat more diversified.
Best wishes,
Is it too late to buy stocks?
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I love fielding intelligent questions on the markets and other financial topics, and lately you’ve been sending me plenty of them.
For example, a Dividend Superstars subscriber named Sharlene recently asked the following question on my blog …
“I am wondering if we should be buying stocks right now, even the stocks that are supposed to be bargains?”
Her concern was that a broad market decline could be imminent, and would impact even the best shares in the process.
My short answer is simple: There is never a bad time to buy a quality stock that is undervalued, as long as your time horizon is measured in years rather than days or months.
Of course, there’s a much longer answer, too …
As I told Sharlene, I absolutely recognize the possibility of a major correction in the stock market over the next year. The reasons are plentiful and include:
- A monster rally of 77% in the S&P 500 since the March 2009 low …
- The simmering sovereign debt crisis sweeping Europe and threatening to land on our own shores …
- And many other threats including a consumer retrenchment, persistently high unemployment, and new legislation that hinders our country’s ability to grow
But let’s also remember that it’s nearly impossible to predict when, or if, another drop will materialize. The recovery — led by an all-too-accommodative Fed — could just as well continue on, with the market returning to its previous all-time highs.
This Is Why I Continue to Advocate
Investing Your Money in Stocks Over Time!
One way to do this is through simple dollar-cost averaging into index funds or individual stocks.
I’ve argued in favor of this approach many times before in this column, but let me just reiterate what it’s about — essentially, you consistently buy equal DOLLAR amounts of the same investment on a set schedule (weekly, monthly, quarterly, etc.). By doing this, you remove much of the risk with market timing and ensure that you are buying more of the investment when it’s trading at a lower price and less when it’s trading higher.
I last mentioned dollar-cost averaging in the fall of 2009, and you can read the full articles here and here.
At the time, I made the case that someone who had been dollar-cost averaging throughout the market decline was still doing quite well.
I used the example of an investor who began using a monthly dollar-cost averaging plan into the S&P 500 SPDR (SPY) in June 2008. And I demonstrated how that investor would have made more money than someone who had regularly put their funds into a money market account — even though the S&P 500 had declined 28%!
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Based on the price at the time, 101.2, the total holdings were worth $15,971.94.
Obviously, a lot has happened since that column was written — the S&P 500 was near 1,000 back then and now it’s closer to 1,200. And the latest market action simply proves my point further — someone who continued to pursue the strategy is even farther ahead today than they were last year!
After all, the SPY ETF is now trading near 119. That means that without any additional share purchases, the same $15,000 stake would be worth $18,781.22 today … another gain of 17.5% from my last column!
The results would be even better with additional monthly purchases of $1,000 in the interim, too. All with far less timing risk than you’d have by just moving a giant lump sum in at one time.
Of Course, There’s Another Way to Do This With
Far More Control and, Thus, Even More Upside Potential …
Instead of simply buying fixed dollar amounts of an index fund or a handful of stocks at regular intervals, you could take another approach — buying relatively undervalued stocks one by one, when sectors or companies fall out of favor without reason … when attractive shares are lagging the overall market … or when solid income-producing stocks are being mispriced.
The end result follows the same type of “one toe at a time” logic of a basic dollar-cost averaging strategy but also gives you the chance to make more active decisions (and hopefully outperform the broad market in the process).
This latter strategy is precisely how I run the Dividend Superstars portfolio. I’ve continued to make individual stock recommendations throughout the market’s ups and downs, and it’s worked out quite well so far.
Does that mean I don’t worry about the broad stock market’s direction at all? Of course not!
In fact, I recommended using inverse ETFs to hedge long positions on more than one occasion when the major decline began in full force. And I’m waiting for a couple of stocks on my radar screen to pull back to more attractive levels before I recommend them to my subscribers.
However, my biggest point on whether “now” is the right time to buy stocks is this: We can’t allow the fear of what could happen in a broad way prevent us from taking advantage of individual bargains when they present themselves, nor can we let them derail us from our long-term asset allocation goals.
It just takes research, courage and patience.
And if we’re focusing on stocks that also pay out consistent dividends, we’re mitigating our risk in another important way at the same time!
Best wishes,
1 “unusual” stock trading trick?
This may be the ugliest video about stock trading I’ve ever
seen…
-but the message in the story is worth it.
It’s about how a regular guy discovered 1 “unusual” trick in
trading the stock market…
…and how he was finally able to get an “edge” over
everybody else – other traders & even his own broker – after
years of trial & error.
Watch it through to the end here:
http://www.stockmasterymaterials.com/y/?u=2&i=773362&l=f1
(it’s worth it)
Good Trading,
Alan
