Alan's Finance Blog

Reefer Madness in the Grain Markets

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

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

An Unusual Investment that Earns More as the Dollar Declines

Dear Sovereign Investor,

Business news reports describe how foreign exchange traders worldwide have abandoned their recent belief that the U.S. dollar was regaining some of its lost vitality.

So if not the dollar, where are those money experts going to go?

To more reliable currencies such as the Swiss franc, of course, which they know from experience will continue to rally while the dollar continues its multi-decade slide.

In this time of a wildly fluctuating, declining U.S. dollar, you would do well to follow suit. And one of the best ways to do this is with an investment that produces a guaranteed income free from the ravages of the diminished dollar…

That investment is a Swiss Fixed Annuity.

A “fixed annuity” may be unfamiliar because the word “annuity” is used in so many different ways.

As I recently told readers of Offshore Confidential, my new monthly whitepaper series, it’s nothing more than an insurance contract in which the insurance company promises to make fixed payments to you as the purchaser/annuitant for the term of the contract. Typically that means a fixed number of years, though sometimes contracts are structured to pay out until you die. The insurance company guarantees both earnings and principal.

The Flexibility of a Bank Account…
Without the Bank

While Swiss banking often gets the spotlight (for reasons both bad and good), its insurance companies offer a broad range of services that, in some cases, approach the flexibility of a bank account.

Indeed, many Swiss residents use their insurance company as their only financial institution. In the entire history of Swiss insurers, no life insurance company ever has failed to meet its obligations or been forced to close its doors.

Besides security, Swiss insurance policies – including annuities – have other important advantages:

1. Swiss law affords annuities special asset protection, exempting them from enforcement of foreign court judgments, including bankruptcy.
2. Insurance and annuity contracts are exempt not only from the Swiss 35% withholding tax on earned bank interest but from all other Swiss taxes, including taxes on income, capital gains, and inheritance.
3. Swiss annuities generally offer higher interest rates than Swiss bank accounts. In 2000-2010, Switzerland’s average bank interest rate was 1.52% with an historical high of 3.50% in June 2000 and a record low of 0.25% in March 2003. That low is matched currently at 0.25%. However, the interest rate paid on Swiss annuities as of May 2011 is about 1.75%.

What all this means is that a Swiss fixed annuity actually is both a savings plan and a pension fund all wrapped up in one policy.

But perhaps one of its most appealing benefits is that Swiss fixed annuities also offer unique protection against a declining dollar…

A Good Income Play for Savvy Investors

A Swiss fixed annuity, denominated in one of the world’s most reliable currencies, the Swiss franc, is also a good income play. The reason is, as the dollar depreciates, your annuity income appreciates.

For example, a 64-year-old Mr. Smith invests 100,000 Swiss francs (CHF) in a Swiss annuity. Every year, for the rest of his life, this annuity will repay him a guaranteed 4,623 Swiss francs.

His March 1, 2009 payment of 4,623 Swiss francs would have converted to US$3,952. Today, his 4,623 Swiss francs annuity payment would convert into US$5,268.

That is $1,316 more cash earned with no added effort… all because the Swiss franc has appreciated 27% in two years against the faltering U.S. dollar.

The bottom line is, when you invest in a Swiss fixed annuity, with immediate payments over a 10-year term, you will enjoy greater spendable income when you later convert those Swiss francs back into the dollar at a much better exchange rate.

Free Your Future From the Dollar

The franc has a history of strength and value, and has been largely unaffected by inflation. The Swiss franc generally has reflected the state of Swiss banking – strong, valuable and unaffected by inflation and monetary fads. In times of international economic trouble the franc has been a currency refuge.

Since 1971, the franc has appreciated nearly 400% against the U.S. dollar. American owners of Swiss franc-denominated assets have profited handsomely as a result. In recent years, the value of the franc has fluctuated against the U.S. dollar, strengthening in the early 1990s, weakening from 1995-2001, and strengthening once again in recent times. Today it’s generally at parity with or above the dollar.

All things considered, with the rapidly declining U.S. dollar, a Swiss franc-denominated fixed annuity can produce both a good income and unparalleled investment safety.

Faithfully yours…

Bob Bauman, JD
Chairman, Freedom Alliance

Weak Holders Have Sold Their Gold – Now the Metal Can Make its Next $300 Move UP

Dear Sovereign Investor,

This move – weak holders selling their gold – is the next tipping point in gold. And it’s your cue to add more gold to your holdings NOW.

Because gold is “moving on up baby!”

It’s not in a bubble… as several market naysayers would have you believe. Here’s why…

What the Technical Indicators
Say About a Gold Bubble

First, open interest – that’s the number of longs and shorts in the futures market – has actually dropped by over 13% since the beginning of 2011! That means that there are fewer positions in the market. This is not the hallmark of a “bubble.”

Second, the volatility that option traders believe the gold market will be trading in the future is at levels between 16% and 20%. Currently gold’s historical volatility is running at 15%. So option traders are on to something…

These levels are consistent with a non-volatile- slow and steady market.

If implied volatility – which determines option prices – spiked suddenly to 40% or 50%, then I’d argue that the market is overdone! Since the rally has been slow and steady, option prices haven’t blown through the roof like that.

Third, the precious metal’s Daily Relative Strength Index (the RSI), which measures if gold is oversold or overbought, is at 67%.

Clearly, none of these numbers indicate any “frenzy” in the gold market.

So where’s this gold bubble analysts are talking about?

It’s nowhere.

It doesn’t exist.

Gold is not even remotely near bubble territory.

In Fact, the Best is Yet to Come for in Gold

Just think about it. Central banks across the globe are still buying gold.

The Chinese continue to consume more than their annual gold production. On February 19th, 2011 Forbes reported that, “China’s Industrial and Commercial Bank (ICBC) says purchases of physical gold and gold-related investments are growing at record setting rates.”

John Paulson, the investor who made billions during the 2008 housing crisis, owns 25% of the largest gold ETF (GLD). He’s owned it since gold was $900 an ounce. He also holds significant positions in gold producing companies. Today, his ETF holding alone is worth over $14 billion!

George Soros owns a significant amount of gold too.

J.P. Morgan Chase recently announced it would accept gold as collateral for loans.

With fiat currencies collapsing around the globe, economies teetering on the brink of collapse, natural disasters, civil unrest, war, and just general fear and uncertainty gold is a strategic reserve… a safe haven.

Gold Remains in a Sustained Uptrend

Gold has been in a sustained uptrend for ten years. Since 2000, it’s up over 500%. And I believe this trend will continue.

Here’s a little-followed fact for you. The number of contracts in out-of-the-money gold call options is huge!

There are 25,000 contracts open on June $2,000 Call options and June $2,500 Calls. This means some traders and investors believe gold will be above the $2,500 per ounce mark by June.

Even more staggering are the more than 37,000 open contracts on December $2,000 Calls and December $3,000 calls! Some traders and investors expect gold to cost more than $3,000 an ounce by December.

These contracts represent over $14 billion worth of gold if it goes to a price higher than $3000 per ounce.

The Gold Trend Will Be Your Friend to $3,000 an Ounce

The gold daily chart:

It’s important you don’t miss this golden ride, so let me reiterate: there is no bubble in the gold market.

All market indicators, both technical and fundamental, point to higher prices in 2011 and beyond.

Buy gold.

Happy trade hunting!

Andy Hecht
Blog: Commodity Options Outlook

The Worst Stock Pickers in the World

Looking for some simple guidance on what stocks to buy or sell?

Well, Wall Street is more than happy to help.

In fact, big banks in Wall Street employ hundreds of equity analysts who spend countless hours analyzing stocks. These highly educated analysts then issue very clear “buy” and “sell” recommendations.

So when a bunch of Wall Street Analysts have a “buy” rating on a particular stock, obviously you should be buying, right?

Wrong!

The reality is the weatherman is better at predicting the future than most Wall Street analysts. These highly paid experts are horrible at picking stocks.

Take now, for example. At the moment, Wall Street analysts all hate one emerging market in particular. Personally, I can’t wait to grab some shares in it…

When Analysts Say “Sell”, it’s Time to Buy

Recent data from Bloomberg proves you could have outperformed the stock market just by buying stocks the mainstream analysts hated the most.

Since the market bottomed in March of 2009, stocks with the best ratings rose 73% on average. That may sound great, but considering the market has risen 100% since then, that’s a pretty lame performance.

On the other hand, stocks that had the worst ratings rallied by 165%.

Analysts’ favorite sectors for 2010, healthcare and technology, were among the worst performers across 10 industries in the S&P 500. These losers gained less than 10%. Meanwhile, out-of-favor sectors, like banks and real estate firms, gained at least twice as much.

This is just one more reason to disregard all those so-called “great stock tips” coming from Wall Street.

Don’t get me wrong. These Wall Street types are pretty smart people. But when all analysts give a specific stock a “buy” rating, it means everyone is already in love with it. When that happens, there aren’t a lot of investors left to buy and push the stock up higher.

The other side of the coin is that when all analysts hate a particular stock, there’s a great potential for outperformance.

Right now analysts hate one of my favorite emerging markets: Brazil.

Why Everyone Hates
One of My All-Time Favorite Markets

Wall Street analysts are now giving Brazilian stocks the fewest “buy” ratings in history. In other words, Latin America’s biggest equity market is out-of-favor.

That’s interesting considering everyone was in love with Brazil up until recently. It was one of the best performing markets in 2009. But it has been moving sideways for the past year or so, while stocks rallied here in the U.S.

Why did these Wall Street guys change their minds?

Like many other emerging markets, Brazil is struggling with rising inflation. Its Central Bank has started a series of rate hikes to cool down the booming economy. So analysts are concerned higher interest rates will slow consumer demand.

The fact that analysts don’t like Brazil now is telling me it’s time to buy. But I see two other reasons to buy now, especially if you’re a long-term investor.

The Perfect Time to Buy

Analysts are right about higher interest rates pushing stocks lower. But that’s already priced into the market. In fact, that explains the underperformance of Brazilian stocks.

But these rate hikes will soon come to an end.

The Brazilian Central Bank has increased the benchmark lending rate by 1% to 11.75% this year. Local economists expect rates to finish 2011 at 12.5%, bringing this cycle of rate hikes to an end.

So interest rates will peak soon. History has shown that it’s always a good time to start accumulating a country’s stocks once rate increases come to an end. The chart below shows that whenever rates peak, stocks rally.

End of Interest Rates Hikes is Good News for Stocks

It’s also hard to not like the Brazilian market when it’s this cheap.

Brazilian stocks are trading at a price to earnings (P/E) ratio of only 10.6. Compared to the U.S. market, sitting at 13.4, that’s incredibly cheap. In fact, Brazilian stocks generally trade at a ratio 22% higher.

Anyway you look at it, the Brazilian market is trading at a discount. Usually, you only see these types of discounts when there’s something fundamentally wrong with Brazil.

On the contrary, Brazil now has a growing middle class, thriving commodity exports, and exposure to rising oil prices with their booming oil reserves. Not to mention it’s also hosting the next football World Cup and Olympics.

These are all reasons why Brazilian stocks are on my buy list this year. For Americans, there are easy ways to buy Brazilian stocks through both ADRs and ETFs.

So it’s really a no-brainer to buy – even if the financial geniuses on Wall Street haven’t caught on yet.

Mark my words: It won’t take too long for investors to fall in love with Brazil again. But in the meantime, this is the perfect opportunity to buy this scorned market.

Remember: once all analysts have “buy” ratings on Brazil, it will be too late.

Best Regards,

Evaldo Albuquerque,
Editor, Exotic FX Alert

Your Cue to Abandon Treasuries

By Evaldo Albuquerque, editor, Exotic FX Elite

How would you feel if Warren Buffet suddenly dumped all his U.S. stocks?

Buffet is arguably the best stock investor ever. So I know I would be concerned. I’m guessing you wouldn’t feel confident about your own stock portfolio either if “the Oracle of Omaha” completely eliminated his exposure to local stocks.

Of course Buffet isn’t doing that. But something just as drastic is happening in the fixed-income market.

Bill Gross, manager of the largest bond fund in world, has completely eliminated his exposure to U.S. Treasuries.

His fund now holds 0% of U.S. Treasuries.

I like to think of Gross as “the Warren Buffet of the fixed-income world.” His decisions are just as important. The fact that he doesn’t want to have any exposure to Uncle Sam’s bonds sends a critical message to the market.

And if you are searching for retirement income, his message is especially important to you…

“Don’t Be the Biggest Fool”

In 2007, investors were flipping houses for a quick profit. It didn’t matter if houses were grossly overvalued. As long as you could find someone willing to pay more, it made sense to invest in housing.

That’s a real life example of what’s called the “greater fool theory.”

According to this theory, an investor buys an overvalued asset because he hopes to sell it at a higher price to another investor, who’s planning to do the same.

That kind of selling from fool to fool can’t last. Eventually, rationality returns to the markets. Then, the last investor becomes the greatest fool who now owns an asset that’s about to plummet in value.

The same thing seems to be going on in the Treasury market right now. Who would lend money to the U.S. government for a decade for a mere 3.3% yield? Not many. Such low yields don’t compensate investors for the risk of inflation.

Inflation Steals a Treasury Bond’s Value

The chart above shows the tight correlation between bond yields and inflation.

When inflation rises, bond investors start demanding higher yields to compensate for the loss of purchasing power. If yields rise, any bonds you own today that pay lower yields will drop in value. It makes sense – everyone will want new bonds that pay higher yields.

In early 1980s, inflation forced yields as high as 15.8%. If we see a similar episode of inflation now, investors buying 10-year Treasuries today will suffer an estimated loss of about 61%.

By getting out of Treasuries now, Gross is making sure he won’t be the biggest fool.

The Message from the Bond King is Crystal Clear

The best fixed-income investor in history doesn’t want to touch U.S. Treasuries with a 10 foot pole. You couldn’t get a message clearer than that: stay away from them too.

You don’t have to be an investment genius to understand his reasons.

Unprecedented debt spending from the U.S. government and continuous money printing from the Fed are two very good reasons to stay away from U.S. Treasuries.

Those two factors will ensure the dollar’s long-term downtrend continues for the next decade (even if there are short-term bounces along the way).

But you don’t have to fall victim to the declining dollar and the loss of your purchasing power.

Where to Build Income for Your Retirement

From an investment perspective, Gross advice is to stay clear of “bonds in dollar denominated terms.”

So if Gross is selling Treasuries, where is he putting his money? Well, one of his favorite investments is bonds denominated in foreign currencies that pay higher yields. With those assets, you not only get a higher income, but you also diversify away from the dollar.

Personally, I prefer simply buying higher-yielding foreign currencies for the long-run. There are plenty of foreign currencies that pay much higher yields than Treasuries (yields as high as 22 times the lowest-paying Treasuries).

Also, holding foreign currencies helps protect your purchasing power – because these currencies are much more likely to rally against the dollar in the long-term.

Federal Reserve Chairman Ben Bernanke still believes inflation will be contained. Meanwhile the world’s best bond investor is dumping U.S. Treasuries and getting out of U.S. dollars.

Who would you rather believe: the man who’s debasing the dollar or the best fixed-income investor ever? I would listen to the Bond King if I were you.

Best Regards,

Evaldo Albuquerque
Editor, Exotic FX Alert

Believe It or Not, Now is the Best Time to Buy Chinese Stocks

Dear Sovereign Investor,

The best profits in the stock market routinely come to those who buy when investors are disenchanted with a stock or a market.

And that’s China today…

Yet now is actually the best time to be a buyer of high-quality Chinese stocks, particularly those that serve the growing consumer sector. Here’s why…

Cheap Stocks Litter the Hong Kong Exchange

Today, China is largely in the aversion camp. Investors have been rushing out of Chinese stocks because Chinese leaders have raised interest rates a few times recently to ward off inflation, particularly food inflation. Investors worry that higher interest rates will crimp corporate profits and impale consumers’ ability to spend.

To some degree that’s a valid concern, at least in the short term.

But investing is about finding companies that you want to own for longer than a few weeks. These are the companies with strong, underlying fundamentals and are priced fairly.

Those kinds of stocks are scattered around the Hong Kong Stock Exchange today – the primary exchange for high-quality Chinese companies. And you want to own them now precisely because they’re underappreciated.

If you look back to early 2009, some of the best names in Chinese consumer stocks plunged when America’s debt crisis undermined stock markets globally.

Fundamentally there was nothing wrong with the companies, and America’s woes were not going to drastically reshape the Chinese consumer over the long term.

But investors did not care. They fled – and left in their wake some amazing values.

Consider Mengniu Dairies, China’s leading milkman…

A Case Study in Milk

Mengniu is a perfect example of the kind of stock you want to own as China builds a consumer culture, and as increasing numbers of Chinese can afford better quality foods, like dairy.

Dairy, in fact, is one of the fastest growing food groups in China, with compounded annual growth in the 20% range. And Mengniu’s brand is all over the place … the company even sponsored China’s first astronaut.

I’d been watching the stock since about 2007, when it was trading in the high-20s. When America flooded the world with economic fear in 2008, Mengniu dived to less than HK$7 a share (US$0.90).

At that price, investors were valuing the company’s stock at ridiculously cheap levels. Long-time China investors who knew the story of the company and who understood the market rushed to buy shares even as the rest of the world rushed to dump them.

Were wealthier Chinese suddenly going to stop drinking milk because American banks can’t properly gauge mortgage risk?

Not likely. And, lo and behold, they didn’t.

They kept right on consuming increasing quantities of milk, and one year later Mengniu’s shares were back in the mid-20s.

This Isn’t the End of the China Story

Yes, the markets today are worried about Chinese inflation. That, in turn, has undermined stock prices. But all of that is only a byproduct of short-term thinking.

Smart investors recognize that the trends driving consumer-oriented companies like Mengniu Dairies have not suddenly vanished. Instead, they see this as an opportunity to start accumulating long-term winners again at cheaper prices.

Rest assured China will get a handle on inflation. Moreover, food-price spikes have a way of reversing fairly quickly.

So buy Chinese consumer stocks while they’re still cheap.

Until next time, keep a global view …

Jeff Opdyke
Editor, Emerging Market Strategist
Blog: http://globetrotter.sovereignsociety.com/

Two Swiss Blue Chips to Own Now

I was sitting in the center of Europe last week, in Zurich, Switzerland, talking to the managing partner of an investment firm about the fate of the embattled euro.

He told me, “Europe is not sure where it is going at the moment, and no one is talking the same language when it comes to figuring out a solution.”

It’s a message I heard echoed in the numerous conversations I’ve had with investment managers, bankers and asset-protection experts in Switzerland, Liechtenstein and Denmark.

The euro is a mess, they told me. And no one is quite certain how to fix the problem.

After all, when one party has all the responsibility – think, Germany – and the other parties generally take on very little responsibility – insert Greece, Portugal, Ireland, etc. – you end up with a situation where divorce seems inevitable.

Only, no one wants to talk about divorce for fear for scaring the kids … in this case, investors.

Me? I think divorce is all but assured in the euro zone. And the only way to protect against that likelihood is to own exposure to Switzerland.

When the Euro Goes, Go to Switzerland

I don’t know when Europe’s divorce will happen. If I had to venture a guess I would say we’ll see movement along this front within the next three years or so.

But it is destined to happen.

Germans, already burdened by the unification with the former East Germany, have been carrying too much of the euro’s load. At some point the Germans will reach a pain threshold and will scream “Nicht mehr!” No more!

When that day comes, the Germans will talk with France, Finland and likely the Benelux countries about building a new currency – a northern euro or, a better name that recalls the solid Deutschmark, the euromark.

For many of today’s euro-denominated assets, particularly stocks, the divorce will likely be catastrophic.

But in the middle of that potential tempest sits Switzerland and its historically granite-like franc.

Two Swiss Blue-Chip Stocks to Own

Switzerland has always served as an island of neutrality when wars and other geopolitical crises erupt. And for eons the franc has been one of the world’s safe-haven currencies that investors flood into during times of unrest.

In the event of a euro breakup, the franc will be the island of stability in Europe that investors flock to for safety.

And that means large Swiss stocks are where you want some of your wealth.

Owning Swiss shares not only gets your money outside of the U.S. dollar, it puts you into a highly-developed and stable economy (Switzerland), in the middle of the world’s largest consumer base (Europe), yet you’re not exposed to the troubles still to befall the euro.

There are two key Swiss companies you should look to own: ABB Ltd (NYSE: ABB) and Syngenta (NYSE:SYT).

Both are ginormous Swiss blue-chips. ABB’s market cap tops $50 billion … Syngenta’s exceeds $30 billion.

ABB is a global leader in all manner of industrial-automation processes, and serves customers in electric, gas and water utilities, among others. In short, it’s an infrastructure play at a time when both developed and developing markets are pushing to improve various aspects of their infrastructure.

Syngenta, meanwhile, is an agribusiness giant. Its products, including its bioengineered seeds, improve crop yield – a crucial benefit at a time when rising demand for food is leading to the crisis now unfolding in North Africa.

Making Money When the World Panics

As an investor, it is impossible to sidestep all the crises that happen.

But you can increase your odds of surviving – and even profiting from – those events by having some of your wealth in the right location.
When it comes to the pending demise of the euro as we currently know it, having some of your wealth buried on a very safe island like Switzerland is the way to avoid the euro risk … while still protecting against the long-term decline of the U.S. dollar.

Until next time, keep a global view…

Jeff Opdyke
Editor, Emerging Market Strategist
Blog: http://globetrotter.sovereignsociety.com/

Bernanke’s Most Dangerous Lie Yet

The Fed Chairman Ben Bernanke isn’t a very good liar. But he does have the guts to lie on national television.

A few weeks back he gave an interview on 60 minutes. Bernanke boldly said there was no risk of inflation because “the money supply isn’t changing in any significant way.”

The fact that he was shaking throughout the entire interview is a pretty obvious sign he was lying (although you would think he would be used to it by now). But there’s also concrete proof that he was simply spinning this story his way.

This concrete proof is a forgotten indicator that the government has gone to great lengths to hide from you. It’s because this particular indicator shows inflation risks are rising.

I’m talking about the broadest measure of the U.S. money supply, known as M3. And for those of us still watching it, this indicator is predicting dangerous inflation and some killer profit opportunities for 2011.

Why the Government Doesn’t Want
You to Know About This

In 2006 the government stopped recording M3. Fortunately, a few economists still keep track of this forsaken statistic. And right now it’s pointing to inflation, not deflation.

The chart below shows the annual U.S. money supply growth through November of 2010. Although the government discontinued M3, the website Shadow Government Statistics is one of the few organizations that still keep track of it.

As you can see, M3 (blue line in chart) has been rising for the past six months. That tells me the Fed’s so-called deflation risks are disappearing.

More Money = Higher Inflation Risks

This rebound in broad money supply indicates inflation is more likely than a deflationary spiral.

One of the top indicators of CPI inflation is money growth. Over time, the broadest money measure (M3) has worked as the best single inflation predictor. So M3 changes before CPI inflation changes.

Once M3 starts rising at a more rapid rate, CPI inflation will start to pick up. By then, it will be too late for the government to control it.

But there are a few things you can do to protect your assets now.

Turn This Dangerous Possibility into Profits

The best way to shield your assets from inflation is by having solid exposure to commodities and assets denominated in foreign currencies.

Because commodities are priced in dollars, when the buck loses value, the price of these hard assets increases. So by investing in commodities, like gold, silver, grains, and oil, you can protect your wealth against inflation.

You should also invest a portion of your portfolio in assets denominated in stronger currencies, such as the Singapore dollar and the Australian dollar.

Keep in mind that a higher cost of living (in other words, loss of purchasing power) offsets capital gains in dollar denominated assets.

Let’s say for example your cost of living doubles because of inflation. In that case, even if your dollar assets double in value, you won’t be a dollar richer.

Investors who have all their assets in dollars ignore that simple idea. With money supply data indicating more inflation ahead, now is the time to rectify that mistake.

Bottom line: Bernanke may lie, but the money supply statistics don’t. Take action now to make sure you’re not on the losing end of this massive cover-up.

Best Regards,

Evaldo Albuquerque
Editor, Exotic FX Alert
Blog: http://wcw.worldcurrencywatch.com/

The Easiest Offshore Bank Account

Where can you find an easy, affordable, manageable, accessible offshore bank account? It’s closer than you think.

Just head north to Canada.

Before I continue, let me make something clear – our neighbor to the north is not a tax haven or ideal for asset protection. But for general diversification or to simply move some assets outside the U.S., Canada might be just the place you are looking for.

A Safe Haven Close to Home

Canada offers a sound banking system, conservative lending regulations and a currency that should continue to appreciate versus the U.S. dollar.

In fact, my colleague Sean Hyman believes the Canadian dollar will be the top-performing currency of 2011. For two reasons, rising oil prices and an economy that thrives no matter what’s happening in the world.

What’s more, Americans can look to Canada as a safe place to park some assets outside of the horrors of U.S. banking and the financial system.

It’s an easy-to-access banking destination that bears many of the same attributes you’ve become accustomed to in the United States — including the same language and deposit protection. The Canadian Deposit Insurance Corporation (CDIC) provides C$100,000 protection per account (US$100,000).

With 316 banks failing over the last two years here in the U.S., banks in Canada are now among North America’s leaders. Canadian banks are profitable and outperform their North American counterparts because of tighter government restrictions on lending capital requirements.

In the aftermath of the credit crisis, not a single Canadian bank collapsed thanks to the country’s responsible banking practices and conservative lending regulations. Financial institutions in the U.S., on the other hand, continue to founder and fail. In fact, 12 U.S. banks have failed this November and December alone.

One reason Canada has escaped the same fate is its foreign ownership law. This law restricts foreign banks from owning more than a 10% stake in domestic banks.
Because of this, Canadian banks are less dependent on risky foreign institutions and aggressive lending tactics.

Easily Add One of the
Top Currencies to Your Portfolio

Canada can also be considered a currency haven. The country has banks that are allowed to house accounts in various currencies. The Royal Bank of Canada (RBC), for instance, offers currency accounts in U.S. dollars, Canadian dollars and British pounds sterling. This is a good and simple way to diversify your nest egg.

In fact, some of the bigger Canadian banks may offer discount brokerage platforms. Using these low-fee services, investors can trade securities in Canada inexpensively.

In the last 12 months, the loonie has hit par with the U.S. dollar. As of yesterday, the loonie was hovering around $0.99 U.S. cents. The Canuck buck deserves to trade on par or at a premium to the greenback for many reasons.

Earlier this year, Canada also has a trade balance surplus with the U.S. compared to monthly trade deficits of over $40 billion here at home – and that’s to say nothing of the U.S.’s exploding budget deficits.

Canada’s economy, however, like most other economies, has been slowing since June. A high Canadian dollar continues to put pressure on exports and acts as a drag on employment growth in the country’s manufacturing belt in Ontario and Quebec.

But resource-driven exports — like oil and natural gas — have remained buoyant in 2010 and should continue to push the Canadian economy forward in 2011.

Bottom line: Canada is the nearby destination for “offshore banking.” Why not take advantage?

Stay Sovereign,

Bob Bauman, JD
Legal Counsel, The Sovereign Society
Blog: http://bauman.sovereignsociety.com/