Archive for June, 2011:
Sir Mervyn to Inflation: Grrrrr
By: Adrian Ash, BullionVault
“We don’t see that. We don’t see that at present.”
- Newly knighted Bank of England governor Mervyn King, speaking to Parliament’s Treasury Committee, Tues 28 June 2011
- HELP!
- Oh hullo there. Having trouble?
- Please! Get your lion away from me!
- Lion…?
- Yes, your lion.
- It’s not mine. What lion?
- The one you just let loose from its cage!
- I see no lion…
- What?!
- I see no lion here.
- Are you insane?! Do something!
- I would indeed if there were, as you put it, a lion. Why, I would crack this whip and shake this chair at him. Show him who’s boss – grrrrr! – get him back in that cage. But as there is no lion…
- Christ, shoot him! He’s going to pounce!
- That cage is very tightly locked I can assure you. And in any case, the cage is empty.
- You and your mates just let him out, you idiot! Shoot him!
- As the circus’s most recent Lion Report makes clear, what little lion there is remains very well caged. Here outside the cage there is no lion, nor has there been any lion to speak of, and nor will there be any lion worth cracking my whip or shaking this chair at – grrrrr! – for the foreseeable future…
- It’s eating my leg!!
- Clearly you are suffering a high level of discomfort. But the requisite conditions for there to be a lion, ravenous or otherwise, do not currently present themselves.
- Ow!!
- Lions require a very specific set of pre-conditions, most notably a dry sub-Saharan climate, vast tracts of open prairie land, and large herds of migratory bovine upon which to feed. Which hardly describes England in Wimbledon week, you’ll agree. Apart from all those tourists on the Tube perhaps…
- Please, I’m begging you – get your lion off my leg NOW!
- Perhaps we could come back to that notion of it being “my” lion in a moment. Because your idea of there being any lion at all is a symptom – and not the cause, I would suggest – of your leg being eaten.
- What?! Owwww!
- More importantly, the issue isn’t whether or not there is a lion eating your leg right now. It’s whether or not you expect there to be a lion eating your leg two years from now.
- Two years from now?! Oh, he’ll be long finished by then…
- My point exactly.
- I thought you were the ring-master. But a clown? Owww!!
- Well, one wears many hats in my job…
- And the big red nose? Ow!! Mother! Anyone! Help!
- Really, I am fully concerned by your discomfort. But as there is no lion, I don’t believe there is much that I can do to stop him eating your leg.
- Christ…help! Please…!!
- Your constant screaming, plus all that blood, as well as the very substantial chunk now missing from your thigh, could easily lead reasonable people to believe that there is indeed a lion eating your leg. And if I also saw a lion gorging on you too, then I would of course be concerned about my ability to stop him eating the rest of you, sometime over the next two years.
- NOW! NOW! Shoot it now! Or shoot me! Owwww…
- Such severe measures may perhaps be required down the road. But only if the lion – which doesn’t exist – were to break out of this big top and start mauling people. Whereas shooting it now, when it isn’t here, would risk not only my shooting you by mistake, but it would also jeopardize my chance of wowing the crowd by cracking this whip and shaking this chair – grrrrr! – at one or other performance in the intermediate future.
- Mummy…I…I…
- See? You’ve stopped yelling already. Whereas a lion attack would have been very much more severe. I’ve studied and written several books about the beasts, you know. Haven’t seen any around lately, though…
Adrian Ash
Formerly City correspondent for The Daily Reckoning in London and head of editorial at the UK’s leading financial advisory for private investors, Adrian Ash is head of research at BullionVault – winner of the Queen’s Award for Enterprise Innovation, 2009 and now backed by the World Gold Council market-development and research body – where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.
(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.
Gold and Silver Rise as Greek Politicians Choose Between “Austerity or Dignity”, Safe Haven Buying “Could Easily Shift to Gold”
London Gold Market Report
THE PRICE to buy gold rose to $1510 an ounce Wednesday morning London time – a 0.5% gain on the week – while stocks and commodities also gained and US Treasury bonds fell ahead of the Greek austerity vote.
The price to buy silver climbed too, hitting $34.49 an ounce – also 0.5% up for the week.
“Activity picked up this morning” in Asian trade, according to one Hong Kong bullion dealer, who says the market is “cautiously upbeat” on account of recovering risk appetite.
“Market participants are generally positive on gold,” agrees Yingxi Yu, commodities analyst at Barclays Capital. Yingxi questions, however, whether now is the right time to buy gold ”given the volatility in risky assets such as equities and oil”.
“People are not keen to go short, but we don’t see a rush to buy gold either because it is the low season,” adds a gold bullion dealer in Singapore.
Greek politicians were expected to approve austerity measures on Wednesday, in spite of protests in Athens. A so-called rebel from the ruling socialist PASOK party has now signaled he will back the measures.
“I have made the decision to vote for the plan because national interests are more important than our own dignity,” Thomas Robopoulos told Reuters on Wednesday.
“A positive vote in Greece today…would remove a significant risk in the near term,” says Olivia Frieser, analyst at BNP Paribas in London.
“But the Greek issue will be a chronic one, so we wouldn’t get overly carried away on the news.”
A memo from the Fédération Bancaire Française – dated Friday and leaked on Tuesday – proposes a scheme whereby holders of maturing Greek bonds agree to roll over at least 70% of the principal, in return for 30-year Greek government bonds and guarantees from a newly-created special purpose vehicle.
The stated aim of the French proposal – reminiscent of the Brady Bonds created in the wake of the 1980s Latin American debt crisis – is “to prevent a credit event” on Greek credit default swaps. Such an event would trigger a default rating from ratings agencies.
Over in Washington meantime, French finance minister Christine Lagarde was appointed Tuesday evening as managing director of the International Monetary Fund.
“There is no room for benevolence when tough choices must be made,” Lagarde said earlier this month in her interview for the post, referring to Greece.
Lagarde has previously suggested that the European Stability Mechanism – which from 2013 will become the Eurozone’s permanent bailout mechanism – should be rated AAA by ratings agencies.
Back in Europe, European Central Bank president Jean-Claude Trichet said Tuesday that the ECB is “in strong vigilance mode” – widely believed to be a hint that the central bank will raise interest rates next week.
“We’re taking the decision progressively to anchor inflation expectations,” said Trichet.
“The European economy is strong enough to get the ECB raising rates,” says Joseph Capurso, currency strategist at Commonwealth Bank of Australia in Sydney.
“We hear a lot about Greece [but] it’s really just a lot of noise…the Euro’s got a bit more upside from here.”
The price to buy gold in Euros dipped slightly on Wednesday morning in London, falling to €33,622 per kilogram (€1046 per ounce) – 0.2% above Tuesday’s one-month low.
“The gold market may not have dropped enough to invite substantial emerging market and safe haven buying to emerge,” reckons James Steel, precious metals analyst at HSBC.
“Longer term, we remain bullish,” Steel adds, citing recent strength in the Swiss Franc as evidence of safe haven buying “that could easily shift into gold”.
Demand for physical bullion “remains supportive of gold” says Marc Ground, commodities strategist at Standard Bank, who adds that, tactically, investors should buy gold below $1530 per ounce.
“Strategically, our view remains the same – stay long gold.”
Ben Traynor
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.
What Will Happen to the Stock Market When QE2 Ends?
Club EWI’s free “Independent Investor eBook, 2011 Edition” offers you an unorthodox view of the Fed’s quantitative easing program
By Elliott Wave International
The second round of the Federal Reserve’s quantitative easing program, better known as QE2, will expire this week.
The QE2 policy was officially announced on November 4, 2010, and has been widely credited with subsequent stock market gains. And now, according to rumors, the end of this “experimental” program will kill the stock rally — with potential impact across all markets.
Let’s think about that.
For starters, there is little “experimental” about QE2. As EWI’s November 2010 Elliott Wave Financial Forecast pointed out to subscribers, “In Japan, the very same remedy the U.S. is applying today — rate cuts followed by quantitative easing — finds its stock market still down more than 75% from its December 1989 peak.”
Also, this chart, from EWI president Robert Prechter’s January 2011 Elliott Wave Theorist, shows “the effect” the first round of quantitative easing (QE1) had on the market:
But investors have short memories. And even many of those who remember how powerless the Fed was during the 2007-2009 crash are convinced that “it’s different this time.”
What do the facts and the evidence say? Read the expanded, 2011 edition of our popular free Club EWI resource, The Independent Investor eBook.
From the very first pages, the charts and graphs will show you that the Fed’s QE programs are far less powerful than is commonly presumed.
- Why QE2 was a major tactical error
- Why interest rates don’t drive stock prices.
- Why rising oil prices are not bearish for stocks.
- Why earnings don’t drive stock prices.
- What inflation has to do with the prices of gold and silver
- Why the problem with the Fed is its very existence.
- Why central banks don’t control the markets.
- MUCH MORE
Keep reading this free report now — all you need is a free Club EWI membership.
This article was syndicated by Elliott Wave International and was originally published under the headline What Will Happen to the Stock Market When QE2 Ends?. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Can the Fed and Economists Forecast the Future? See This Startling Chart
Elliott Wave Financial Forecast Editors Kendall and Hochberg on economists, the Fed and forecasting
By Elliott Wave International
Business Talk Radio host Gabriel Wisdom recently spoke with Pete Kendall, Co-Editor of EWI’s Elliott Wave Financial Forecast. Their discussion included a crucial but rarely asked question about economists and the Federal Reserve. Here’s the relevant excerpt:
Gabriel Wisdom: “Ben Bernanke, the chairman of the Federal Reserve, says the economy is slowing but there’s faster growth ahead. Is he wrong?”
Pete Kendall: “Economists are extrapolationists. They tend to look at what’s happening in the economy and extrapolate that forward. So here we have a situation where not just Bernanke but economists in general are looking at… what they call the ‘soft patch’ and somehow contorting that into growth later in the year.
Pete’s startling reply flatly contradicts conventional wisdom. Most people believe that the Fed really is able to anticipate the economic future. After all, they’re the most “qualified.” But what do the facts say?
Pete’s Elliott Wave Financial Forecast Co-Editor Steve Hochberg recently included this eye-opening chart (from Societe Generale Equity Research) in his new subscriber-exclusive video, “Buy and Hold, or Sell and Fold: Where Are The Markets Headed in 2011?”
The red line in the chart is the S&P earnings, and the black line shows economists’ forecasts relative to those earnings. Here’s what James Montier, head of equity research for Societe Generale, said about it:
“The chart makes it transparently obvious that analysts lag reality. They only change their minds when there is irrefutable proof they were wrong, and then only change their minds very slowly.” (emphasis added)
That comment is spot-on. In 2002-2003, as you can see, earnings turned up despite economists’ forecasts for earning declines. It took them a while to “turn the ship around” and play catch-up with the trend.
Yet in 2007-2008, earnings turned down — despite the forecast by economists for continued increases. The devastating truth is that earnings did more than fall in the first quarter of 2008: they had their first negative quarter in the history of the S&P. As Steve said in his subscriber video, “Economists were wrong to a record degree” — and investors felt the pain.
So what’s the point? Economists do extrapolate the trend. That approach works fine, until it doesn’t — and you’re on the hook.
Elliott wave analysis never extrapolates trends — it anticipates them. The Wave Principle recognizes that markets must rise and fall — and that they unfold according to changes in investor psychology, in a way that is patterned and recognizable.
—–
Most people believe that the Fed really is able to anticipate the economic future. Now you know the facts. Uncover other important myths and misconceptions about the economy and the markets by reading Market Myths Exposed.
EWI’s free Market Myths Exposed 33-page eBook takes the 10 most dangerous investment myths head on and exposes the truth about each in a way every investor can understand. Download your free copy now.
This article was syndicated by Elliott Wave International and was originally published under the headline Can the Fed and Economists Forecast the Future? See This Startling Chart.. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.
Gold Rebounds, Dollar “Looks Strong” Despite Debt Ceiling Deadlock, Eurozone Problems “Will Deepen, Not Ease”
London Gold Market Report
U.S. DOLLAR prices for gold bullion rallied Tuesday morning London time, hitting $1503 an ounce – just above last Friday’s closing price – as stocks were mixed and commodities and US Treasury bonds gained after President Obama held meetings on the debt ceiling.
Heavy selling in both Asia and the US saw gold bullion prices twice fall to $1492 an ounce on Monday, with a rally in London in between.
“The break below $1504…has gold in a negative light,” reckon technical analysts at bullion bank Scotia Mocatta.
“We would need a close back above $1512 to shake the uncertain outlook.”
“The price won’t likely fall below $1470,” says Park Jong Beom, trader at Tong Yang Futures in Seoul, citing the Euro crisis and continued loose US monetary policy as factors supportive of the gold bullion price.
The silver price meantime climbed to $34.17 per ounce on Tuesday morning – 11% down on where it started the month – before easing back slightly.
“Technically silver is in a falling channel,” says a trader in Tokyo.
“Some industrial users have been buying silver, but it is not enough to push prices back up because investors are not buying.”
President Obama meantime met with Senate majority leader, Democrat Harry Reid, and Senate minority leader, Republican Mitch McConnell, in separate meetings on Monday to try to break the deadlock on deficit reduction ahead of a vote on whether to raise the $14.3 trillion federal debt ceiling.
President Obama believes that “a balanced approach is the right approach,” said White House press secretary Jay Carney on Monday, arguing that increased tax revenue as well as spending cuts should form part of a deficit reduction package.
The US Treasury has said it will hit the debt ceiling by August 2, after which it will be unable to cover payments to government bond holders unless the ceiling is raised.
“[But] the Dollar is still looking strong in the face of the Eurozone debt crisis,” says Hou Xinqiang, analyst at Jinrui Futures in China, adding that the Dollar’s strength means “gold is facing more downside pressure in the short run.”
Since the start of 2011, however, the Euro has gained 7% against the Dollar. The Euro gold bullion price, meantime, rose to €1054 Tuesday morning – still 0.8% below where it started the year.
Here in Europe, Greece began its fourth general strike of 2011 at midnight on Tuesday, ahead of the parliamentary vote on a new austerity package, agreed as part of a new aid deal.
“The stability of the entire Eurozone would be in danger” were Greece to reject the package, German finance minister Wolfgang Schaeuble said on Sunday, adding that the next tranche of last year’s bailout would be threatened.
“Germany’s internal debate about whether to pay for the Greek debt is risible,” says former German Joschka Fischer.
“Refusing to pay is not a viable option, because Germany and all other Eurozone members are in the same boat. A Greek default would threaten to sink them, too.”
“Lying below the surface are much bigger countries, like Spain and Italy,” says Steve Barrow, currency strategist at Standard Bank.
“And even if Greece votes itself more austerity and receives more cash…the problems of the Eurozone will deepen, they will not ease.”
Elsewhere in Europe, Norway’s trade minister Trond Giske said Monday that the Norwegian Krone would not offer investors protection from a European crisis.
“I don’t think the Norwegian Krone and the Norwegian economy is big enough to become a safe haven for the large investors,” adding that Norway is “very closely connected” to the Euro as 80% of its exports go to the European Union.
Central banks, meantime, look poised to buy gold over next decade, according to a poll by investment bank UBS. The survey found that 6% of central bank reserve managers expect the biggest change in their reserves over the next 10 years will be the addition of more gold bullion.
Ben Traynor
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.
Why Obama’s Desperate Move Could Send Oil Prices Soaring!
by Kevin Kerr
Wednesday, June 29, 2011 at 7:30am
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The sudden announcement last week that the International Energy Agency (IEA) would release strategic oil supplies onto the world markets caused a significant selloff. And crude oil prices dropped around $9 in about two days.
Mission accomplished? Hardly!
The 60 million barrel release from the Strategic Petroleum Reserve (SPR) is merely a drop in the bucket of global usage, and will likely have the opposite effect on prices longer term. The move is simply more psychological window dressing for the comic theater that is happening in Washington right now. It would be funny, if it wasn’t so sad.
In fact, it’s really a sign of …
Desperate Measures
By releasing supplies from the SPR with crude at around $90, if prices do run up again, the administration will have to fill the SPR back up at a higher price. And as shown in the chart below, a big chunk of that oil will come from outside our borders.
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| The Strategic Petroleum Reserve is intended solely for emergencies that threaten the U.S. economy or national security. |
It’s another foolish rob-Peter-to-pay-Paul action by the imploding U.S. government.
The careless action taken by the IEA and President Obama, has now underscored how worried they actually are about global economic growth and tight supplies. So in essence this move could actually stoke the fire to drive prices much higher, much more quickly.
In a recent Bloomberg report, Caroline Bain, of the Economist Intelligence Unit, was quoted as saying:
“Although the immediate impact of the IEA’s reserve release will be to depress prices, in the more medium term, it could actually be bullish for prices. Reserves are finite and cannot be released forever.”
Unlike Uncle Ben’s printing press that never seems to run out of ink, oil supplies are not something the U.S. government can simply print more of.
To put the gravity of the situation in perspective, this is only the third time in the past 50 years that IEA has released strategic reserves. And in order to tap the SPR, President Obama had to authorize it.
Frighteningly, the prior two times resulted in super-spikes. And I think we can expect that record to hit 3-0 very shortly.
It’ll Be Different This Time,
Just Not in a Good Way
Many things are very different this time around that make it even more unlikely this small release of oil will have any measured impact to the downside.
For instance, we don’t have the added supplies of barrels of North Sea Crude to help cushion prices.
Supplies from Norway are falling fast, and Norwegian oil production decline is devastating. The figures from some of the producers are downright scary …
According to reports, production has fallen in the region by more than 20 percent from 1991 levels. Problems have included: Corrosion of old infrastructures combined with a lack of proper investments prior to the merger of Norway’s two largest oil groups, Statoil and Norsk Hydro.
Meanwhile production from Mexico’s oil fields, which the U.S. also has counted on heavily in the past, is also falling drastically. So the likelihood of the SPR release bringing any sustained relief to oil prices and thus consumers, is highly unlikely.
No Real Answers …
Just Fairy Tales!
The recent correction in commodities across the board is a welcome opportunity for those who can step out of the land of unicorns and candy canes for a moment, and see the true disaster that is unfolding before us, especially in the energy sector.
Bloomberg recently quoted a top trader, Michael Cuggino, who helps manage $13.5 billion at Permanent Portfolio Funds in San Francisco:
“I still like the growth story. Commodity prices are going to continue to go higher. Worldwide, the economy continues to grow and monetary policy is going to stay relatively consistent with no changes.”
Amen.
Basically, by wasting valuable years that could have been used for research and development, drilling, and creation of alternatives, the U.S. has set itself up to be dependent on oil supplies from people whose ultimate goal is to destroy us.
A nightmare.
Couple that with the ongoing endless printing of dollars by the Fed and the ever-rising debt ceiling, and you have a recipe for disaster. So what is an investor to do?
Bent Over a Barrel
As investors and consumers we have to choose our own belief in what the reality of the situation in the U.S. is right now. But clearly job losses and lower wages, at the same time as rising food and energy costs, are a very bad combination. Regardless of what some government reports may show.
The national debt just seems to grow and grow and grow, and yet no real answers are being sought on how to change the underlying problems. And the partisan bickering and lack of any true energy policy in the U.S. is the biggest joke of all.
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| We need oil — and lots of it — to make everything from bubble gum to shower curtains to bandages. |
The fact of the matter is that when it comes to oil supplies the U.S. is bent over a barrel and not doing anything about it. The days of cheap energy supplies are over. And that translates into higher costs for everything that uses oil or related products. Transportation, manufacturing, industrial, building … you name it. Basically everything.
The bottom line: We all have exposure to higher oil prices, so we must find a way to invest in the rise to offset some of the costs and even profit from the inevitable.
There are many ways to invest in the energy markets … from commodity futures and options to individual energy stocks. But often the volatility and risks of these vehicles can dissuade some investors.
However one of the best ways I know for investing in rising energy prices are key energy ETFs, and ETF options should you want more leverage. Here are two possible opportunities you might consider:
PowerShares DB Oil (DBO): To play energy in the short-term, futures-based ETFs such as DBO are designed to help you accomplish that. While these funds aren’t intended to track the spot price of oil, they’ll often correlate better than equity-based funds.
SPDR S&P Oil & Gas E&P (XOP): Oil companies have been raking in profits hand over fist for the last several years, so it only makes sense that higher oil prices will continue that trend. And with this IEA-inspired pullback we could see those prices surge even more. So XOP, which tracks the performance of the oil and gas exploration and production portion of the S&P Total Market Index, could be a real winner.
There are many more oil-related ETFs to keep your eye on, and you can expect more to come out as this story is just heating up.
Yours for resource profits,
Kevin
Kevin Kerr has successfully traded commodities professionally for the last 22+ years. He a regular contributor to news outlets including CNBC, CNN, FOX News, CBS Evening News, and Nightly Business Report.
Source: Money and Markets
Reefer Madness in the Grain Markets
By Andy Hecht, Editor, Trade Hunter
Dear Sovereign Investor,
In 1965, Neil Simon brought The Odd Couple to Broadway. The play was a smash hit about two mismatched roommates, Felix “The Neat Freak” Unger and Oscar “The Slob” Madison.
The characters were portrayed by acting legends Jack Lemmon and Walter Matthau, who later starred in the 1968 film version of the play. In the 1970s, Tony Randall and Jack Klugman reprised the roles of Felix and Oscar in the hit TV show.
Forty years later, on June 23, 2011, The Odd Couple debuted in Congress…
Ron “The Libertarian” Paul and Barney “Big Brother” Frank are the latest iteration of Felix and Oscar. And, they are perhaps the oddest couple of them all!
These two well-known Congressmen have announced that they are co-authoring the Frank/Paul Marijuana Legalization Bill, or H.R. 2306. This piece of legislation, if passed, will repeal federal penalties for production, distribution and possession of marijuana.
The Ending Federal Marijuana Prohibition Act of 2011 is consciously modeled after the repeal of the 18th Amendment, which allowed states to establish their own rules governing alcohol. This is the first time such a bill has been introduced.
It will leave states free to address the issue as they see fit. The federal government’s role would be limited to preventing the importation of marijuana into states that continue to ban it.
Barney Frank said, “The bill has no chance of passing” in the near future. But it is “a first step.”
The legislation is consistent with the political ideology of Representative Ron Paul, a committed Libertarian. But I am a bit confused by the stance Barney Frank is taking on this issue.
I can only believe that Frank’s motivation is driven by some Orwellian-Huxleyan fantasy of Big Brother feeding a type of soma to the American masses. This could just be Frank’s attempt to numb the public as he continues to push through Big Brother-type legislation like his namesake, the Dodd-Frank bill that imposes the meddlesome hand of government on the financial markets.
Two politicians with two totally different agendas – an “odd couple,” to say the least…
So folks, as a person who will probably support Ron Paul in the next election, I am in favor of this legislation. The amount of money required to keep marijuana illegal is staggering. Think of the governmental costs in terms of law enforcement and prison expenses. Think about the potential tax revenue that this “commodity” could bring into the coffers of state and federal government.
As a sovereign individual, I also believe that prosecuting responsible adults who choose to use marijuana interferes with personal freedom. After all, we can already choose to drink alcohol or smoke cigarettes. The prohibition of marijuana just does not make sense from a practical, financial and moral point of view.
What Would a Country that Has
Lifted the Pot-Ban Look Like?
Well, I was recently in Venice Beach, California. When you walk along the beach in Venice every other store either sells marijuana paraphernalia or medical marijuana itself, or offers medical exams for a “license” to purchase the drug.
I was approached by a young man in dreadlocks who asked if I was interested in procuring this license. I don’t think he was a physician. I told him that I did not have any current medical problems that would qualify me for one.
He told me not to worry… “Do you have a hang-nail? Do you have $40 bucks in your pocket?”
Apparently, $40 bucks is all it costs to purchase a marijuana license in California!
Now, I don’t think legalizing pot will lead to “reefer madness,” as many fear… not even close. A lot of Americans already smoke pot and will continue to do so whether it is legalized or not.
It is possible that demand for corn chips and snacks will increase dramatically to satiate a munched-out American populous.
But seriously, I expect the biggest impact to be on the commodity markets.
Marijuana: The New Cash Crop
America is the breadbasket to the world. The U.S. feeds itself and many other countries that import our corn, wheat, oats and soybeans.
Farmers always decide which crops to plant based on the relative economics of each commodity. We have seen crop substitution cause dramatic price movements in these commodities over the past few years.
Higher oil prices led farmers to plant more corn for ethanol production. As farmers planted corn in lieu of other crops such as cotton, soybeans and wheat, these other commodities appreciated dramatically in value.
The supply and demand equation tilted towards deficit in the production of the crops not selected for planting. In fact, we saw cotton prices rally over 500% in 2009-2010 when farmers planted corn and wheat instead of cotton in 2008.
Pot won’t be cheap, at least initially, if it is legalized. U.S. farmers will be tempted to grow marijuana in lieu of other crops. They will profit many times more from growing weed than they would from growing corn, soybeans, wheat, cotton, rice, rapeseed, oats or any other grain.
The bottom line is that the legalization of marijuana would cause shortages in traditional crops and huge price rallies for the grain complex. Fertile land is finite and farmers will make choices based on economics.
Cashing in on the Pot Bonanza
Companies like Archer Daniels Midland (ADM), Bunge (BG) and Monsanto (MON), as well as other agricultural processors and even cigarette manufacturers, would all look to profit from this newly legalized crop. They have a responsibility to their shareholders to do so – these companies are in business to make money.
Where there is demand for a commodity, there will be companies looking to supply and maximize the yield of that commodity. The U.S. could very well go from the breadbasket of the world to the smoke shop of the world.
Not to worry… in the long run demand is rationed by price, and over-supply will depress the price of a commodity. As the U.S. gets used to growing this new, profitable crop, prices will adjust to reflect supply and demand fundamentals.
However, initially, the legalization of marijuana will cause the prices for all agricultural commodities to skyrocket as farmers look to cash in on the initial marijuana bonanza!
Marijuana will be traded on exchanges just like any other raw agricultural commodity so that farmers and consumers can hedge their price risk. (I told Sovereign Investor readers recently how they can make money from the increased volatility created by producers and consumers trading in these markets.)
I believe that Rep. Ron Paul is well intentioned with this piece of legislation. It all comes down to sovereign rights for this principled politician. On the other hand, I believe that Rep. Barney Frank is either banking on pot as the new soma, or buying some farmland to cash in on the bonanza that he wishes to create.
The Broadway version of The Odd Couple won a Tony award. Neil Simon was nominated for an Oscar for the screenplay. The TV version of the show won several Emmy awards. I wonder if the Congressional version has any awards in its future…
Happy Trade Hunting…
Andy Hecht
Editor, Trade Hunter
Blog: Commodity Options Outlook
You’re Being Watched
By Evaldo Albuquerque, Editor, Exotic FX Alert
Dear Sovereign Investor,
Creepy, but true…
Every time you go shopping, surf the Internet, or share an online news story with a friend, someone is watching.
In fact, there is an enormous, multibillion-dollar industry based on collecting personal data.
What books you buy…
What search terms you type into Google…
Even what charities you donate to.
It’s called “data mining.”
Retailers like Wal-Mart and Target use this technique to analyze local buying patterns.
Websites like Amazon and Netflix “data mine” your purchase and movie rental history in order to recommend products or films you might enjoy.
And the Central Intelligence Agency (CIA) is constantly “data mining” blogs, forums and wi-fi networks to identify terrorist “chatter.”
It’s a little creepy.
But it’s perfectly legal…
And what most people don’t know is, Wall Street banks and hedge funds are doing the same thing.
Now, individual investors can use this strategy to time the market.
Let me explain.
Twitter Predicts the Market?
Last year, a former U.S. Government Scientist named Johan Bollen published an eye-opening study called “Twitter mood predicts the stock market.”
In short, he analyzed the daily content of millions of online data feeds by using a pair of mood tracking tools.
And he found that by tracking American “mood states,” he could predict whether the stock market would rise or fall, with 87% accuracy – up to four days in advance.
Needless to say, this discovery caught Wall Street off-guard.
And now, some very powerful interests are scrambling to make it their own:
One former Goldman Sachs insider has funneled over $30 million into this “data mining” phenomenon.
Google and the CIA have invested millions of dollars together and now claim they’re using this technology to predict the future.
And U.K.-based Derwent Capital launched a $40 million computerized hedge fund to exploit the discovery. But they received so many investor phone calls, they’ve been forced to open a waiting list.
Over the past 12 months, I’ve been experimenting with a similar “data mining” strategy to win or breakeven on seven out of every 10 trades – without violating anyone’s privacy.
Instead of stocks, I’ve targeted the $4 trillion forex market. I’m using conservative leverage that gives me the ability to earn 10 to 20 times more than I ever could buy on the S&P 500.
Truth is, most traders don’t bother with currencies. But it’s simple to track the trend of any major or exotic currency and pounce when the moment is right.
Here’s how…
I’ve developed a basic, two-step strategy to minimize risk and maximize returns in the forex market.
The first part smoothes out the crazy gyrations so you can tell where the price of a currency is heading – higher or lower.
The second part – what I call “data mining” the forex market – can tip you off to a major breakout point.
It starts with knowing the direction of the trend…
Tip #1: Don’t Trade Against the Trend
One of the best ways to determine the overall trend is, drop a 50-period simple moving average on a currency pair’s daily chart. Check out an example of this below:
If the trend line is pointing down, you know that you have a better shot of playing against this currency pair. If the trend line is pointing up, you will have better odds if you go long.
Do this and you will gain a significant edge over other traders who waste time and money fighting the trend.
Tip #2: “Data Mine” the Market to Know
What the Masses Will Buy or Sell Next
Most people think it’s impossible to know when an established trend will reverse course. For good reason. Few traders (outside Wall Street hedge funds) possess the right technology to spot these subtle movements before it’s too late.
But over the past 12 months, I have been experimenting with a “data mining” strategy – similar to Dr. Bollen’s.
It tells me when to hop into a trade, hop out, or simply wait on the sidelines.
And though it’s not right 100% of the time, it’s helped me gauge with high confidence whether a currency pair will explode higher or lower – by letting me know if the masses are likely to pile into (or out of) a currency.
I’ve found this technique works very well on major currencies like the Euro and Australian dollar. But it works even better on a tiny corner of the forex market, made up of emerging market currencies.
My Exotic FX Alert subscribers have had the opportunity to benefit from this strategy for months. And we’ve used it to see currencies erupt anywhere from 7% to 132% higher… in as little as two weeks.
If you’d like to hear the full story on how this works, and whether it’s appropriate for you, we’ve recorded a brief tutorial video that explains everything.
I’ll be releasing it later this week. Until then…
Best Regards,
Evaldo Albuquerque
Editor, Exotic FX Alert
When it’s actually okay to “go naked”
by Nilus Mattive
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A few weeks ago, I told you about covered call writing … which is my favorite income-generating options strategy. And in that article, I told you that I absolutely, positively did NOT recommend writing naked calls.
Just as a refresher, the difference between writing a covered call vs. a naked call is simply that in the former case you own the underlying shares you’re writing against whereas a naked call is written without owning the underlying stock.
To understand why writing naked calls is so dangerous, let’s consider a simple example:
XYZ’s stock is trading at $28 a share when you decide to write a call option on it. The option expires two months out, and has a strike price of $35. You sell the contract for $200.
Importantly, you decide not to purchase 100 shares of XYZ nor do you already own them.
A few weeks later, XYZ announces that it’s being acquired by rival ABC for $60!
Now, if you had opted to write a covered call and bought the stock at $28, this wouldn’t be a big deal.
Sure, you’d be kicking yourself as you missed out on roughly $32 a share in upside but that’s the worst thing that would have happened.
Instead, you have literally lost at least $5,800 on your naked call. I say “at least” because there is still additional time left on the contract and the stock could go even higher should a bidding war ensue!
Reason: YOU are responsible for delivering 100 shares of XYZ when the contract is exercised. And that means you have to go out on the open market and buy them at $60 a share. That’s $6,000. Subtract the $200 in premium you collected and you’re down $5,800.
So now you can see why writing naked calls is so dangerous. Your profit is completely capped at the premium you collect while your losses can grow without limit.
Don’t get me wrong. Some people do use this strategy to make money. But they are very adept at writing contracts that will likely expire quickly and without being exercised. Most investors will be best served by avoiding naked call writing altogether.
However, There Is a Different Naked Options Strategy
That I Consider Safe and Effective for Income Generation …
It’s called naked put writing, and it’s like the mirror image of covered call writing. You are basically telling someone that you’d be willing to buy their shares if they fall to a certain level.
The investor buying your “insurance policy” is hedging against potential downside. And as with call writing, you’re collecting a nice premium upfront!
In short, naked put writing is yet another solid way to get income from options trading.
However, the key here is that you must be ready to take ownership of the underlying stock, too!
Like all options contracts, a naked put covers a round lot of stock, or 100 shares.
So let’s say you want to buy 100 shares of XYZ stock, but you think it’s overpriced at today’s level.
Well, instead of placing a good-till-cancelled limit order with your broker — or watching the ticker tape relentlessly for weeks on end — you could write a naked put near your buy price instead.
Then, if the stock falls to that level (or below it), odds are very good that the contract holder will “put” his shares to you. And since you also get to keep the options premium, you’ve actually gotten them a little cheaper than the strike price of the contract!
Alternatively, if the stock doesn’t reach your strike price during the life of the contract, you keep the premium and are free to write another put. Keep pursuing this same strategy and you could really make a lot of money just for waiting around!
There are just a few things to note:
First, you could start off with an immediate paper loss when you take possession of your shares if they’ve fallen below the strike price.
Second, those losses could be substantial if the price implodes.
Third, you must have enough cash in your brokerage account to cover the potential stock purchase under the put contract.
For all these reasons, I consider naked put writing riskier and more aggressive than writing covered calls. But if you’re looking for a way to target specific stocks upon further downside, this approach proves that it isn’t always a bad idea to go naked.
Best wishes,
Nilus
Source: Money and Markets
How Should Government Treat Energy Producers?
As the economy continues in its downward spiral and talks in Congress about reducing spending have only amounted to political theater, the subject of how the tax code treats energy has become a topic of controversy. Specifically, should we subsidize, enforce mandates, or give tax credits and deductions to industries like ethanol and natural gas? Having a thriving energy market domestically is a good thing and something the government should not hinder. Not only would decreasing our dependence on foreign oil simplify our foreign policy, but it would greatly enhance our anemic economy at home.
Of course, the government should neither inhibit nor subsidize any particular type of energy. While many people agree with that statement, there is much confusion over the difference between government subsidies and tax credits or deductions. The difference is night and day, yet so many times they are all lumped together as evil government handouts. A subsidy IS a government handout. It amounts to the government taking money from the people and giving it to a favored interest. It is the worst sort of market manipulation and it is something I can never support. This kind of government mischief is anathema to the Constitution and the principles of freedom and the free market.
By contrast, with tax credits and deductions, industries, business, and individuals simply get to keep more of the money they have earned. Ideally, the tax code should not be used for social engineering, but, until we have true tax reform, I will always support tax credits and deductions that keep more dollars in the private sector where they are spent, saved, or invested. This means I will support tax credits and deductions for energy producers, farmers, homeschoolers, family child care expenditures, expenses of evacuees from disaster areas, and even adoption expenses. I’ve almost never met a tax cut, deduction, or credit I didn’t like. Any measure that keeps money in the private sector to spend, save or invest, rather than allowing the government to waste or misallocate is a win for the economy.
Inequities in the tax code dealing with tax credits should be solved by giving all participants equal treatment. Removing
I oppose ethanol mandates because I do not think anyone should be forced to use or buy ethanol. Ethanol mandates often serve as corporate welfare for big agriculture ethanol producers. The marketplace should decide whether or not to use ethanol, and producers of ethanol have to discover if they can produce it at a price that makes good business sense. No industry should be allowed to use legislation to create a “market” for its products. The real reason ethanol mandates continue to surface in federal legislation is that agribusiness continues to have one of the most powerful lobbies in Washington.
Furthermore, while I do not support providing federal grants to any industry, I do support the tax credits contained in the NAT Gas Act, HR 1380. These credits reduce taxes for the production or purchase of vehicles that run on American-made natural gas. These credits are not subsidies. Of course, we should repeal federal barriers to energy production and reduce taxes on all forms of energy. Therefore, I have also introduced the Affordable Gas Price Act HR 1102 which would remove governmental barriers to offshore drilling, encourage private investment in new refineries and suspend taxes on gasoline when the price at the pump reaches a certain threshold. Lowering taxes to encourage the domestic production of energy and getting government out of the way of the American energy market is not a government giveaway; it is the way it should be in a free country.
Ron Paul
Syndicated by Alan’s Finance Blog
