Wednesday, December 30, 2009

The Two Secrets to Successful Market Timing

Many so-called experts would have you believe that it's impossible to "time" the markets.

That's just not true.

There's actually a secret to market timing. It's not just a matter of the economy. It's a matter of how perception and collective psychology gauge the risk of realizing a real profit - doing so with shifting economic conditions as the market's backdrop.

This works for all the markets, including stocks, bonds, commodities, precious metals and currencies.

Look back to 2007-2008 and you'll see that a handful of players got the "timing" right and made billions of dollars. Ever heard of John A. Paulson? He made what is being called the "greatest trade of all time." His hedge fund shorted the sub-prime market and raked in some $15 billion. Paulson's take was a little less. He personally pocketed $4 billion - the equivalent of $10 million a day for the relatively short stretch it took for this trade to play out.

While you wouldn't have been able to amass the capital, leverage, structured positions and risk tolerance of Paulson & Co., you could have seen what Paulson saw, and made a killing. At least you could have saved your portfolio by going to cash before what was already a bad situation got a lot worse.

As for the rally in stocks that started back in early March, there have been plenty of big winners. Goldman Sachs Group Inc. (NYSE: GS) is raking in record profits. Several hedge funds made back their losses and are gearing up both for major profits and for a resumption of the coveted performance fees they'd grown used to collecting until the financial crisis hit.

There's no reason for you to have missed this rally, either. How much you would have made, again, has to do with your personal allocation of capital and tolerance for risk. But if you had employed a "timing" strategy, you would have effectively purchased a seat on the gravy train.

Using the aforementioned examples, let's look at how to generally time market entry and exit opportunities and see how you could have called the housing collapse and correctly timed the March rally.

The tipping point for Paulson & Co. was an analysis of how far housing prices had skyrocketed from historic growth rates. Paolo Pellegrini, Paulson & Co.'s brilliant analyst, also determined how far prices had to fall, or "regress," to get back to their historic norms. And while Paulson was early to the trade - and was actually able to add to his positions even as they initially went against his fund - you didn't need to catch the very top of this play to reap the resultant windfall.

In fact, the No. 1 lesson of market timing is this: It's never a good idea to try and time tops and bottoms.

Leave that to the swing-for-the-fences professionals whose careers prepare them for such risk-taking. Joining the party after it's already started - and then riding along as the trend strengthens and plays out - is a lot safer than being hopeful your mere presence will attract a crowd.

Timing requires a big-picture, top-down perspective. Here's how I look at the big picture: Identify the largest constituent elements that move the stock, sector, industry or economy you are measuring. For housing, I look at the availability of credit, the cost of credit, the trajectory of growth, and the sustainability of those trends.

In 2007, I used Countrywide Financial Corp. and IndyMac Bancorp. Inc. (OTC: IDMCQ) as proxies for credit availability, and I used interest rates on adjustable rate mortgages (ARMs) and the profitability of big banks as a proxy for the cost of credit. I followed the trajectory of growth around the country simply by reading the real estate sections of newspapers. By the fall of 2007, it was easy to see strains on the proxies I was watching, even though closer to home everything looked rosy.

Both Countrywide and IndyMac faltered. That told me there was a problem with the sustainability of credit extension, especially in the subprime-mortgage market where both had made a giant push. You didn't need to read their balance sheets or income statements, the newspapers were full of telltale stories. There was plenty of evidence that teaser rates were giving way to higher rates and strains were developing on borrowers.

At the same time, big banks were having a harder time syndicating and selling off covenant-lite debt pools of leveraged loans. And there was plenty of noise about banks' shaky structured investment vehicles (SIVs), created to finance and hold risky mortgage-based assets off of their balance sheets. It became obvious that none of the trends that propelled housing were sustainable. You could just have easily seen it, too.

The tipping point for me was a couple of big quarterly losses at Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). The ultimate proxy for the entire housing market was flashing red; it was time.

No, I didn't catch the top. But, I told the readers of my blog to get out of the markets entirely and into cash in February 2008. Not cash proxies like money market funds. I mean cash.

If you were employing a timing strategy, even if you missed the exact turn - as I did - you would have locked in built-up profits, as opposed to losses.

You do that by applying the second lesson of timing: Because no one has perfect timing, a timing strategy requires investors to place profit-target orders and stop-loss orders across their portfolio holdings.

Lots of you had soaring profits in the run-up to late 2007. And even if you employed a "dance-‘till-the-music-stops" strategy, if you didn't take profits and didn't have stop-loss orders in place, when the music did stop you fell on your rear.
The lesson here is that exact timing is impossible. But profitably timing your exits is a simple matter of emphasizing prudence over greed.

In 2007, investors put little stock in a collapse of the housing market. That was evidenced by the tiny risk premiums investors were demanding on housing-related debt. By March 2009, quite the opposite was happening.

Perception and psychology had certainly changed. The perception that we were headed over a cliff and the collective psychology to avoid any further pain created a giant spread in the risk premium investors applied over non-existent growth prospects. And again there was a flashing light that market timers saw as a beacon.

While I can't speak for the other market timers that got it right, I can tell you that although I missed the exact turn, I am on the record in calling for a strong rally from the end of March.

My timing lights were flashing because the risk premium (implied perception and psychology) for holding financial assets had created a spread so wide that even the hint of potential profitability would trigger a rally. It looked like it may have started, but I needed a macro model to analyze the whole market.

I used a simple supply-and-demand equation to stress test the timing of my desire to re-enter the market. My proxy for "supply" was the actual level of shares outstanding in the market (a level that had fallen dramatically over the previous decade) - and their newly cheaper prices. My proxy for demand was cash on the sidelines and the difference between investors' holdings of short-term U.S. Treasuries before the crisis and those same holdings at the beginning of March.

At some tipping point, it was obvious that no matter what the perception and psychology actually was in the marketplace, even a few small waves of demand had the potential to swirl into an investment tsunami that would take prices higher. When I saw prices rising on increasing volume, I knew that successive waves would continue to lift prices, regardless of actual profitability or sustainability of corporate earnings.

Given what we've learned from these recent experiences, the question is now very clear: Where do we go from here?

Well, there are two destinations in the future. One is near and the other is farther on up the road. We need to discuss them both.

In the near term, good timing will be a function of the supply-and-demand equation. Stocks should go higher as more money comes off the sidelines and out of low-yielding U.S. Treasuries. Who knows how high the markets can go if retail buyers actually become buyers again?

Make sure to employ profit targets and reasonable stops. I suggest 15% lower than your point of entry.

Timing is more important when looking farther up the road. We're going to have to see real sustainable growth in profitability - well above the anemic levels that currently pass for robust when compared to the dark days of 2008.

Frankly, it's a race. Will an economic rebound generated by massive government stimulus make up for - and even surpass - the still-stalled engines of our consumer-driven economy? Or will weak fundamentals swamp a fragile recovery when government-support systems are dismantled?

As never before in the modern era, timing is going to be critical to investors. There will be no more dart throwing, no more sitting back and watching all boats rise with the tide. There will be no more one-way bets.
The nature of an increasingly global economy will show its own propensity for swiftly moving capital. And if investors don't become adept at timing, time will run out on their prospects for grabbing and keeping fleeting corporate profits, a key part of the march to amass truly permanent wealth.

Editor's Note: The Author Shah Gilani is a retired hedge-fund manager and a leading expert on the global credit crisis

Behind Financial Reform Lies Wall Street's Latest Rouse

Anti-Wall Street sentiment makes for a good cover, but behind the scenes and rhetoric, legislators are working with the country's largest financial firms to fashion a new system that concentrates even more risk and reward at fewer banks.

And what's more, the underlying socialization of the system will guarantee the success of excess with the full faith and credit of taxpayers.On Dec. 11, the U.S. House of Representatives passed the Wall Street Reform and Consumer Protection Act of 2009, which among other things, creates a consumer protection agency, strips the U.S. Federal Reserve of certain powers and subjects it to politicization, calls for big banks to finance a $150 billion bailout fund and gives the government power to break up or coddle financial firms as they see fit.The Senate will try and reconcile the House bill with an earlier version of its own bill. Legislators are hoping to have a final bill ready sometime in early 2010.

But, in a testament to the power of Wall Street, what's on the table is what works for bankers and the Street. The resulting de-facto socialization of American banking is nothing more than Wall Street's secret agenda to eliminate competition, grow bigger profit engines and rely on the perception of a socialized system to support cheap funding.

Tuesday, December 8, 2009

Time to Bank on the Brazilian Consumer

Hundreds of millions of Chinese citizens are on a crash course with the middle class.

A study from The McKinsey Quarterly supports this well-documented phenomenon, which estimates that it will take two decades before the Chinese nouveau riche reaches its full spending potential.

In turn, they're convinced that decades worth of profits are up for grabs.

I'm not about to refute that claim here. But instead, I want to caution you: Don't be blinded by the euphoria over Chinese consumers and overlook an equally compelling opportunity in another emerging market.

Let's head down to Brazil and I'll explain why - along with the best way to profit, of course...

Sizing Up the Profits in Brazil

Okay, I get that the scale of the Chinese opportunity - a population of 1.31 billion people, compared to Brazil's 192 million citizens - dwarfs Brazil's. But that doesn't mean the profit potential is any less.

On the contrary, in fact... I'd actually say it's greater when it comes to tapping into a blossoming middle class. In this regard, Brazil boasts several notable advantages over China...

  • It's a democratic nation, not a communist one.
  • Its population is much younger - the median age is 28.3, compared to 33.6 in China.
  • Brazil is far less reliant on exports. Only 14% of Brazil's GDP comes from exports, compared to 35% from China.
  • It already possesses all the natural resources necessary (and then some) to support its booming economy. Meanwhile, China needs to go out and gobble up foreign assets to ensure it can keep feeding its economic machine with enough oil, gas, coal, iron ore, etc.

But most important of all is the cultural difference. The Chinese are notorious savers, yet Brazilians love to spend, spend, spend. And don't just take my word for it. As Illan Goldfajn, Chief Economist at Brazilian bank, Itaú, reveals, "If the world is looking for savers, Brazil is not much good... But if it's looking for consumers, then we might be able to help."

Conspicuous Consumption, South of the Equator

Like China, Brazil's economy is also expanding at a healthy clip. GDP growth this quarter is expected to check-in at a tidy annualized rate of 9%.

As a result, unemployment is falling and incomes are rising. And that's leading to an explosion in the middle-class.

Over the last four years alone, Brazil's middle class has swelled by 24%, lifting roughly 20 million people out of poverty, according to Brazil's Census Bureau.

Furthermore, PriceWaterhouseCoopers Consultancy expects this rapid increase to continue. So much so, in fact, that it will propel Brazil's largest city, São Paulo, from the forty-sixth spot on the world's wealthiest city list to fifth place in a little over a decade.

Monday, December 7, 2009

Auto Sales – US, China and India

Auto sales are supposedly rebounding in the U.S. I’d love to believe it. It would mean this phony recovery is about to be replaced by a real one. But it’s not yet time to travel down that highway.

The official numbers aren’t in, but November sales should reach about 10.5 million (on an annualized basis). That’s still not close to the more than 13 million cars sold last year.

Besides, it’s just one month. And one month does not make a pattern.

But at least auto sales are over the 10 million mark, the level American car companies say must be reached in order to regain profitability. And, let’s not forget, it was done without the help of the “Clunker” program.

Auto sales are coming back more strongly in Asia. However, says Andy, they’re not great over there either...

“China’s auto sales this year are way up. Recent auto sales show 84% growth in September and 72% growth in October. Thing is, that growth probably isn’t real. I heard that state enterprises are buying fleets of cars they don’t need and parking them instead of driving them.

“If you have another explanation for why gasoline consumption is flat despite the jump in car sales, let me know."

“So Andy, I’ve got the picture. Buying the auto stocks at this juncture doesn’t make a lot of sense,” I said.

“One exception” said Andy.

“There is a potential game changer from India. It’s doing stuff that no other company has ever done. As a result, it’s created a huge market for itself without any competitors.”

“Pretty big market in India?” I asked.

“Last time I checked it was somewhere around 1.2 billion people. With a growing middle class, it’s not a pretty big market. It’s huge.” Replied Andy.

Dubai is emptying out

Dubai is emptying out,” said ted.

No, this conversation didn’t take place yesterday or the day before. It took place last February.

Yesterday, he e-mailed me an article he’d read back then with this note: “I warned you.” Here’s an excerpt...

“Police have found more than 3,000 cars outside Dubai’s international airport in recent months. Most of the cars – four-wheel drives, saloons, and ‘a few’ Mercedes – had keys left in the ignition.

“‘Every day we find more and more cars,’ said one senior airport security official, who did not want to be named. ‘Christmas was the worst – we found more than two dozen on a single day.’”

That, of course, was last Christmas.

Under Sharia law, bouncing a check is a serious crime. Dubai routinely jails deadbeats. Hence, the mad rush out of town by the expat owners of those cars who’d been living beyond their means.

I couldn’t let Ted’s message go without asking him if there were any more Dubais in our future. This is what he told me...

“I expect serious debt problems from about a dozen nations. The three most serious ones should come from Russia, Ireland, and Latvia.”

Then Ted dropped this bombshell...

“Down the road, even wealthy countries like the U.S., the United Kingdom, and Japan could have trouble repaying their debts once interest rates start going up.

“Besides the governments, I’ll be shocked if we don’t see one or two more corporations with supposed backing from their governments asking for relief. And that’ll do then what the Dubai situation is doing now: raising the price of gold as investors seek shelter from the storm.”

Strategies to prevent losses in this Bull Market

As I write this morning, the S&P 500 pushes toward another 52-week high. And I'm seeing a lot of bullish indicators hit the wire...

~ U.S. employers cut the fewest number of jobs in November since the recession began more than a year ago. Payrolls fell by only 11,000 workers, trumping even the most optimistic forecasts.

~ The jobless rate was expected to hold steady at around 10.2%. However, it surprisingly declined to 10%. (Hey, in this economy, that 0.2% means a lot!)

~ U.S. factory orders notched its sixth gain in the past seven months, also surprising forecasters. The data gives bulls their proof that the manufacturing sector is beginning to emerge from the storm.

~ Bank of America (NYSE: BAC) just raised $19.3 billion - at $15 a share - in the largest sale of stock by a U.S. public company since the dawn of the millennia. It's been nearly 10 years since we've seen a successful sale of that magnitude.

Like a dog getting out of the ocean, the market's current reaction to bad news is to simply shake it off and run onto the next thing.

Dubai can't pay its bills? No worries - the market immediately recoups its one-day losses.

Government spending set to increase even further to pay for healthcare reform and more troops in Afghanistan? The Dow tacks on another few hundred points.

Tiger Woods' wife goes upside his head with a 5-iron? Tiger is the biggest celebrity endorser of Nike(NYSE: NKE), yet the company's shares remain unaffected.

Even weak companies have shuffled up to the trough and are getting fat. Take financial firm Zions Bancorp (Nasdaq: ZION), for example, which has more than doubled since March. Same goes for shares of poorly run retailers like Sears Holdings Corp. (Nasdaq: SHLD). Even Continental Airlines(NYSE: CAL) and other beleaguered airlines, which are hemorrhaging money, have also posted 100%-plus gains from the lows.

The situation reminds me of the hobo fantasyland in Harry McClintock's "Big Rock Candy Mountains" song. But instead of free hooch, food and handouts, the market is dishing out gains indiscriminately.

Here's what you can do to participate in the upside, while also protecting yourself in case the party gets messy...

Survey results showed that 50.6% of advisory services were bullish, versus 17.6% that were bearish. There were 2.88 bulls for every bear. To put that in perspective, the 39-year average is 1.73 bulls for every bear.

The last time the reading was this high was October 17, 2007 - one week after the market topped out.

Back then, we were swimming along, aware of what dangers lay beneath the surface, but naively ignoring them. As long as we couldn't see them, we couldn't be hurt, many people thought.

Sound familiar?

Just two years later, after the housing and credit crisis reared their ugly heads and extracted many tons of flesh, it's ludicrous to not at least acknowledge that we could be in for some trouble ahead.

Question is... How do you prepare for it?

Three Ways to Protect Gains and Grab Big Upside

Here are three ways to play defense and attack the market at the same time...

~ Tighten Your Trailing-Stops: When you've got gains of 78% on one stock and 37% in another, you'd be foolish to let them evaporate.

If you have winning positions in your portfolio, be sure to place your stop level at least at your entry price, so you won't lose money. And if you already have stops in place that are pretty generous, you might want to consider tightening them up, particularly if the stocks are not especially volatile.

~ Buy LEAP Options: LEAPS are options that have expiration dates of a year or more into the future. The great thing about LEAPS is that they allow you to control shares for a fraction of the price you'd pay if you bought the shares outright.

For example, let's say you're bullish on Apple (Nasdaq: AAPL). At the current price, you'd have to shell out $19,700 (plus commissions) to buy 100 shares. Alternatively, you could buy a January 2011 call option with a strike price of $200 for $32.30. That means you can control those same 100 shares of AAPL for just $3,230 instead of $19,700.

The difference is that with the LEAPS, you only control those shares until January 2011, whereas if you buy the stock itself, you own them indefinitely. Just like a stock, if the price of AAPL rises, your LEAP options should, too. And if AAPL declines, so should your LEAPS.

~ Sell Put Options: Selling puts is an excellent strategy when you're looking to own a stock, but want to do so at a lower price than it's currently trading. By selling put options on the stock at a certain strike price, you're selling the right for someone to "put" (or sell) the stock to you at that pre-determined price.

Let's say you like (Nasdaq: AMZN), but at $145, you think it's too expensive. However, you'd be willing to buy it for $130.

In this case, you could sell the July 2010 $130 puts for $13.20. That means you'd receive $1,320 in your account for the right to have 100 AMZN shares sold to you for $130 by July expiration.

If the shares remain above $130, it's very unlikely that you'll have to buy the shares, and you simply keep the $1,360. But if AMZN shares dip to $130 or below, you may have the stock sold to you at $130. But remember, you've already collected $13.60 per share from selling the put option contract, reducing your buy price to $116.40.

Selling puts is an excellent way to invest in any market - but particularly one that's overheated. It reduces your risk by only getting you in the stocks that you want if the price falls to your chosen level. It also generates income while you're waiting.

I suspect that at some point in the not too distant future, we're going to see a sizeable market correction. But that doesn't mean you should sit on the sidelines and watch it happen. You can be proactive - and the three strategies above will reduce your risk, while still letting you participate and giving you the opportunity to make money.

Saturday, November 7, 2009

What Will Santa Bring Us This Year?

Neiman Marcus is cutting merchandise orders by 20 percent in anticipation of weak Christmas sales. Saks Inc. is dong the same. American Eagle Outfitters says it expects to hire fewer temporary workers this Christmas.

This year, I'm betting we'll see a steep hike in unemployment across the board, starting with a rash of retail bankruptcies that will begin in March or April.

You aren't hearing about this in the media, because most of it will involve small companies (i.e., with less than $500 million in revenues). But those companies are a huge part of our economy -- and they account for most new hires.

The government won't provide any useful help. On the contrary, the Obama administration is spending most of its time cranking up regulations. That makes doing business more expensive and less productive -- especially for the small guys.


Unemployment is already at 11 percent or 16 percent, if you do the right sort of accounting. In this type of environment, people lose jobs. Even good, hardworking, loyal people.

Don't make the mistake of thinking your job is secure. You don't want to get to work one day and find a pink slip on your desk or, worse, the front door padlocked.

There are two things every smart working person must do immediately to secure his or her financial future.

* Become an invaluable employee.

* Develop valuable skills that can be used to get another job or start a business.

There is a difference between a good and an invaluable employee. Good employees come in to work every day and do a good job. They have a good attitude. They work overtime when asked. They don't complain.

Invaluable employees are instrumental in producing profits for their business. Salespeople, marketers, copywriters, and profit center managers -- if they are really good at what they do -- are invaluable.

If you are working in customer service, accounting, or engineering, your salary is on the expense side of the ledger. You may be great at what you do -- but when a business has to cut expenses, employees who fall on that side of the line will always be let go sooner than employees who are bringing in the bacon.

But if you demonstrate a superior attitude by volunteering to do extra work and showing an interest in the profit side of the business, you may be considered "potentially invaluable" when it comes time to chop off heads. (When I consult with clients about cutting down payroll, I ask them to focus on individual people and their potential, not their current roles.)

The core profit-driving mechanisms of every business are salesmanship and direct marketing. So I recommend that you study one or both of these skills. The more knowledge you have of them, the more potential you will show for becoming invaluable one day.

This is also a good time to look into home-based business opportunities. If you have spare time in the evenings or on weekends, why not put it to good use by developing a second stream of income?

The Secret to Investing in Gold

The secret to investing in gold is to know what makes it go up. Most people think it’s many things. It’s not. It’s just one thing. And it’s incredibly easy to track. But few people even know about it. Instead, some invest in gold when they see inflation rising or the economy doing poorly. Others invest when political tensions mount in some “hot spot” in the world. Still others invest when they see the value of the dollar declining.

These are all good reasons to buy gold for safety ... as a store of value that won’t let your savings dissolve into worthless paper. But none of them have anything to do with what makes gold go up in the short term.

To see where gold is headed right now, all you have to do is look up the Fed Funds Rate. You can easily find it on the site under “Mortgage.” The target rate is now 0-0.25.


Good News for Gold, Bad News for the Economy

The Fed is keeping the Fund Rate down to ease credit. The lower the rate, the more people and businesses can afford loans. The more they borrow, the more they have to spend. And spending is what keeps the economy humming.

But, as I’ve said before, the economy is not so much recovering as stabilizing at a very low level of performance. The last thing the Fed wants to do is hinder spending by raising interest rates. Practically everybody agrees that rates will remain low for at least another year. But I think it will be several years longer than that.

That may be bad news for the economy. But it’s good news for gold holders. The price of gold will be going up for at least another year. Unless the U.S. economy discovers a miracle cure, it could be as many as 5-7 years.

Asia Rising?

The taxi driver in Singapore told me, “I want to visit my niece in America.”

The schoolteacher in Surabaya, Indonesia told me, “I want to visit my brother-in-law in America.”

The engineer’s mother in Taiwan told me, “I want to visit my son in America.”

I’ve been to Asia dozens of times. (In a previous life, my trading company had an office in Jakarta.) And wherever I went, I heard the same thing ... from business colleagues to hotel clerks: “I want to go to America.”

For them, America symbolized the future.

But now it’s clear that, for many Westerners, Asia has taken over that role.


Who Has the Baton?

If Asia is leading the rest of the world out of the global recession (like Wall Street says it is), we’re in trouble.

Asia has big problems. I saw some of them first-hand: overcrowded cities, pollution, and way too much poverty. As a businessman closing deals over there, I also got a close-up view of the corruption in the government and bloated state-owned enterprises.

Asian countries are trying hard to grow their middle classes and, thus, the spending power of their populations. But they have a long way to go. Their economies still live and die by how well their exports do. And to keep their exports going, all of them – led by China – are rigging their currencies. They’re about 30-40 percent undervalued against the dollar.

But Asia’s biggest problem is its demographics. The older generation in Asia is failing to replace itself. The birth rate in the U.S. is 2.12 per woman. In Taiwan? 1.13. In Korea? 1.2. In Japan? 1.22. In China? 1.77.

An aging population puts undue strain on a country’s social programs. But the problem goes deeper than that. It’s the younger generations that drive change and technological innovation. An aging population becomes a little more set in its ways. Think of the mostly young online media versus the older established print media. Who’s winning that battle?

Asia will have its day. However, I’m not quite ready to hand off the baton to my counterpart in Kuala Lumpur.

But there’s one Asian country that isn’t following the example of its Asian neighbors. For example, its birth rate is 2.34 per woman.


The Biggest Asian Country You’ve Never Invested In

The biggest Asian country you’ve never invested in (I’m betting) has gone up 120 percent in the last year. A clue: It’s not China.

Unlike China, this country doesn’t have to worry about bubbles forming or the economy cooling off.

Its biggest telecommunications company has handed shareholders an 80 percent profit over the last 12 months. Compare that to Verizon and AT&T. They went up only a few percentage points during the same period.

So, besides China, which country has the most impressive growth in Asia? It’s Indonesia. Its economy grew 4 percent in the second quarter of this year, 4.4 percent in the first quarter.

Indonesia has gone down a different path from its neighbors. Much of its growth is fueled by domestic demand. And that has shielded it from the worst of the global recession. Car sales have risen 10 percent in the past three months. Consumption is buoyant. And its companies’ shares are relatively cheap.

In addition, Indonesia has a good man at the top: President Susilo Bambang Yudhhoyono. He’s honest. He’s pro-business. And he’s a reformist. I hear good things about him from my old colleagues in Indonesia. And he was just re-elected to another term in office.

Yes, this is the same country where suicide bombers blew up two upscale hotels (in Jakarta) earlier in the year. I’ve stayed at both hotels. They were good at making their mostly Western guests feel at home. I guess the terrorists didn’t like that.

Bombings like these kill and injure far more Indonesians than Westerners. And that’s raised the hackles of the local population. The vast majority of Indonesians oppose such terrorist tactics. As a matter of fact, they’re very pro-Western. And the government has done a good job of rooting out many of the culprits.


The Dumbest Thing We’ve Heard All Week ...


When the U.S. injected $80 billion into AIG last year, it gained 77.9 percent ownership and effective control. That’s when the fun began.

AIG had sold billions of dollars worth of “financial insurance policies” to banks. When the banks’ financial assets (they were debt instruments) soured, AIG owed them more money than they had. So AIG began negotiating a settlement to pay off their insurance obligations at 60 cents on the dollar. Then the New York Fed, led by its president, Timothy Geithner, took over AIG.

After less than a week of back and forth, Geithner’s team issued new terms. As a result, instead of paying the banks 60 cents on the dollar, or $19.5 billion, AIG paid the full amount: $32.5 billion. A difference of $13 billion!

“There’s no way they should have paid at par,” said Janet Tavakoli, head of Tavakoli Structured Finance. Another Wall Street researcher said, “In cases like this, the outcome is always along the lines of 50, 60, or 70 cents on the dollar.”

So how did the banks avoid getting a haircut from a basically bankrupt AIG?

Dumb, of course, is the benign interpretation of AIG’s actions. Believe it if you want. I believe in a much darker interpretation. I think the Geithner-led New York Fed knew exactly what it was doing...

It was giving banks a big wet kiss and American taxpayers the finger.

Tuesday, October 27, 2009

Oil Prices Are Headed to $90...

When it comes to the energy sector, this market is the undoubted leader of the pack in terms of making large intraday moves and the effect it has on the broader economy and other markets.

And right now, it's moving like a wildfire.


Sure enough, December 2009 crude oil futures (the front-month contract right now) has just tagged the $82 per barrel level. What's more, it came after hitting a recent low of $65.55. Even for the oil market, a two-week, $16.50 non-stop run is an impressive move.

Two Ways to Take Advantage of Oil's Continued Rise

With the perception that the U.S. economy is finally moving out of the doldrums, all the hedge fund and speculative money that has sat on the sidelines for months is finding a home in the oil market. Depending on which report you read, world demand for oil is expected to pick back up, and this is adding fuel to the fire.

Since hitting its lows in March, you can see the unabated move higher. Oil is trading above all three popular moving average levels, which just adds to the bullish momentum.

Once oil moved above $76 per barrel, it was off to the races. But we should see a touch of consolidation here, as all markets need to take a breather after such a strong move.

After that, we don't see any reason why oil shouldn't continue to keep moving higher. The $90 level is next in line and we could even see $100 again by the end of the year.

To play the move, you could do the following...

  • Buy shares or options of exchange-traded fund (ETF) like United States Oil(NYSE: USO). It tracks the movements of the crude oil market, but allows you to trade it directly from your stock brokerage account.
  • Go directly to the source - the trading pits of the New York Mercantile Exchange (NYMEX). This is where a majority of the trading volume still takes place and it offers a safe forum for buying and selling futures and futures options contracts. Although you'd need to conduct a trade through a commodity broker, you can access these markets electronically. Stick with limited-risk option strategies.

Four Reasons Why Natural Gas Has Set a Low... and is Ready to Rise

Having hit major new highs in the summer of 2008, it has been a long ride down for natural gas.

Simply put, that's because natural gas supplies are reaching maximum capacity. With the Energy Administration Information's announcement last week that supplies reached a record 3.734 trillion cubic feet, there's not much room left to hold all the supplies, which are reaching full U.S. storage capacity.

Naturally, traders have jumped on this huge supply as a "no-brainer" shorting opportunity. But as we've seen over the last few weeks, natural gas prices have only gone up. This leads to a few conclusions:

  1. Shorting the natural gas market was a great strategy for a year, but it's finally reached an end.
  2. No matter how bad the fundamentals may be, all the news finally gets factored into prices.
  3. Winter is approaching and colder weather could draw down supplies.
  4. Those who were too late to short to the market are being forced to buy back their positions.

At this point, I believe this market has finally put in a solid bottom and should see higher moves going forward. It looks like the technical side of the market is the driving force right now and with the price holding above key moving averages, we should continue to see it move upward.


There are two ways to play the natural gas market...

  • The United States Natural Gas (NYSE: UNG) ETF. Like USO, you can play UNG directly via regular shares, or options contracts through your stock brokerage account. Be warned though: UNG is undergoing potential changes to its holdings profile, as the Commodity Futures Trading Commission (CTFC) is discussing possible regulatory legislation that would curtail futures contracts purchases by large speculators and impose caps on the number of futures contracts they can hold.
  • Futures and futures options contracts in the commodity trading pits at the NYMEX. Once again, we recommend sticking with limited-risk option purchases or option spread purchases.


These Two Grains Are Making Gains

Like natural gas, corn and wheat have remained stuck in the doldrums since hitting highs in the summer of 2008.

However, over the past month, both have tacked on impressive gains. I profiled both markets on August 25 and October 13 and noted how higher prices could ensue, given that crop sizes could be lower this year.

In addition to the fact that it's tough for corn and wheat to move much lower, we've got cold, wet weather starting to hamper prime growing areas in the Midwest. This coaxed bullish speculators into the market and the upward moves began.

Corn: We pegged $3.90 per bushel for the December 2009 corn futures as a first upside resistance point, as that coincides with the 200-day moving average. Not only has corn hit that mark, it has powered through it, hitting $4.05 late last week.

Although there is no quality exchange-traded fund for the corn market, you can still participate through the use of futures options contracts that trade on the floor of the CBOT (Chicago Board of Trade). The March 2010 and May 2010 options contracts are the best choices.

Wheat: We've seen an equally impressive move in the wheat market. It has tacked on a solid $1.10 per bushel move ($5,500 per contract) and looks set to continue its trek higher.

Based on the December 2009 futures contract (the most active contract), we could see wheat move up to $5.70 before it tackles the next psychologically important level of $6.00. We could easily see this occur, especially if the weather continues to hamper the harvest.


Like corn, wheat futures and options trade on the CBOT. Again, focus on the March 2010 and May 2010 expiration periods. Grain options are worth $50 per cent, so if you bought an option for 10 cents, it would cost you $500 per option. That's a small investment for a potentially unlimited upside.

Sunday, October 25, 2009

The Lone Refinancer

Andy is refinancing his house. Yes, it is still possible. But, as Andy points out, rarely done.

"I've lived in the same house in Catonsville (a southwest suburb of Baltimore) for 25 years. My wife and I refinanced once before, back in 2002," says Andy. "I'm going to give a lot of business to local construction and remodeling companies. But I'm in the minority. The days of rampant refinancing are behind us."

The real estate bust made getting a home equity line of credit or second mortgage almost impossible. Gone are the days when Americans could go to their local bank and simply pull the equity out of their homes.

That's where the government comes in. What the banks have taken away, the government has given back ... to the tune of a $787 billion stimulus-spending package.

But the math doesn't add up. Economist magazine recently reported that 1.25 trillion in credit lines have already been cut. And another $1.5 trillion will vanish by the end of 2010.

I've got a bad feeling about this. The little growth we have is from the stimulus spending. Take it away and we're right back in the throes of a bad recession fed by falling demand.

I predict the government will be throwing us another stimulus-spending "lifeline." In the short run, it'll keep demand from falling off a cliff. But our $11 trillion-plus debt hole is getting deeper and deeper.

It's too early to declare the death of the dollar. But it's not too early to buy gold. (I've been recommending gold for years now.) Our economic policies stink. I hate bad government and bad policies. But gold loves this stuff ... and it's going up.

If you have trouble falling asleep and staying asleep, the problem may be related to additives in your food. Substances like aspartame, MSG, artificial coloring, nitrates, and even soy contain "excitotoxins," chemicals that can alter your brain chemistry.

Hormone levels can drop significantly as you age or as a result of lifestyle factors. And when they do, your sex drive plummets, you start putting on extra weight, and you tire out faster.
Hormone deficiencies can also cause serious health problems. In men, for example, low testosterone levels can cause metabolic syndrome. This leads to high cholesterol, high blood pressure, and insulin resistance. And in women past menopause, low levels of DHEA can cause musculoskeletal pain.  

It's not just the levels of your sex hormones that you need to be aware of. Chronic stress increases the hormone cortisol in your blood. And too much cortisol can cause inflammation, high blood glucose and insulin levels, low thyroid function, and even impaired immunity.

I talk regularly about the restaurant business because:

* I used to be in the business.
* I know half a dozen people who are restaurateurs.
* I am aware that opening a restaurant is the number one fantasy of people looking for a retirement "job."

My advice has always been the same: Don't do it -- unless you have money to burn or are willing to start small and work your ass off for less than a hundred grand a year.

These days, I'd say don't do. Period. Here's why.

A recent survey by a restaurant trade organization asked its members how their restaurants performed during the first six months of 2009 compared to the first six months of 2008.

Of the 628 respondents, only 25 percent reported an increase in 2009 sales.

That's not good. But most of those who are in trouble are working hard to survive. Some of the things they say they are doing:

* Reducing staff and cross-training to improve productivity
* Training dishwashers to be pantry cooks on slow nights
* Renegotiating credit card processing fees
* Shopping insurance policies and waste removal services
* Cutting out low-margin specials
* Tracking their numbers much more closely
* Eliminating non-essential employees
* Tying management compensation to food, labor costs, and profitability
* Reducing ads in newspapers and the Yellow Pages
* Tracking the usage of their top 10 inventory products
* Reducing inventory levels to reduce waste
* Putting more focus on portion control
* Getting rid of unprofitable services (mostly breakfast M-F)
* Converting to new sources for electricity and phone service
* Replacing high-priced managers
* Getting lease concessions
* Closing on slow nights
* Eliminating menu items that don't sell

It occurs to me that all or most of these actions make sense for any business that's in trouble.

Cutting expenses is always a good strategy -- if, that is, doing so does not denigrate your product or service. Before you make a proposed cut, consider how it will impact your customers. Any change that could diminish their experience with your product or their perception of your company is probably NOT worth the potential savings.

In the long run, you'll be better off focusing on building your customer base, no matter what the economy is doing.

Two recent news items caught my attention:

* In Charleston, West Virginia, the tap water is toxic. Bathwater burns sensitive skin. Drinking water takes enamel off teeth. Tests show that the local water has concentrations of arsenic, barium, lead, manganese, and other chemicals that cause cancer, damage kidneys, and wreck the nervous system. The cause? Local coalmines that were pumping illegal amounts of these pollutants into the ground. And what did state regulators do about it? Nada.

* On Wall Street, unemployment is at 7 percent. That is three percentage points lower than the national average. Executives at Goldman Sachs and other bailed-out brokerages are getting million-dollar bonuses. (The average bonus, including those for middle-level executives, is $700,000!) Meanwhile, the regulations meant to cut down on all the cheating and stealing have not been implemented. For brokers and bankers, it's business as usual -- but with taxpayers' dollars.

Government is supposed to protect its citizens -- not only from bodily harm but from this kind of thievery. Trillions are spent fighting wars against people who never attacked us. Yet little or nothing is spent to put a stop to the financial damage being done to us. That is a shame. Oh, well.

Saturday, October 24, 2009

20 reasons why American Economic collapse is inevitable

Has capitalism lost its soul? Guys like Bogle and Faber sense it. Read more about the soul in physicist Gary Zukav's "The Seat of the Soul," Thomas Moore's "Care of the Soul" and sacred texts.

But for Wall Street and American capitalism, use your gut. You know something's very wrong: A year ago, too-greedy-to-fail banks were insolvent, in a near-death experience. Now, magically, they're back to business as usual, arrogant, pocketing outrageous bonuses while Main Street sacrifices, and unemployment and foreclosures continue rising as tight credit, inflation and skyrocketing federal debt are killing taxpayers.

Yes, Wall Street has lost its moral compass. It created the mess, but now, like vultures, Wall Streeters are capitalizing on the carcass. They have lost all sense of fiduciary duty, ethical responsibility and public obligation.

Here are the Top 20 reasons American capitalism has lost its soul:

1. Collapse is now inevitable

Capitalism has been the engine driving America and the global economies for over two centuries. Faber predicts its collapse will trigger global "wars, massive government-debt defaults, and the impoverishment of large segments of Western society." Faber knows that capitalism is not working, capitalism has peaked, and the collapse of capitalism is "inevitable."

When? He hesitates: "But what I don't know is whether this final collapse, which is inevitable, will occur tomorrow, or in five or 10 years, and whether it will occur with the Dow at 100,000 and gold at $50,000 per ounce or even confiscated, or with the Dow at 3,000 and gold at $1,000." But the end is inevitable, a historical imperative.

2. Nobody's planning for a 'Black Swan'

While the timing may be uncertain, the trigger is certain. Societies collapse because they fail to plan ahead, cannot act fast enough when a catastrophic crisis hits. Think "Black Swan" and read evolutionary biologist Jared Diamond's "Collapse: How Societies Choose to Fail or Succeed."

A crisis hits. We act surprised. Shouldn't. But it's too late: "Civilizations share a sharp curve of decline. Indeed, a society's demise may begin only a decade or two after it reaches its peak population, wealth and power."

Warnings are everywhere. Why not prepare? Why sabotage our power, our future? Why set up an entire nation to fail? Diamond says: Unfortunately "one of the choices has depended on the courage to practice long-term thinking, and to make bold, courageous, anticipatory decisions at a time when problems have become perceptible but before they reach crisis proportions."

Sound familiar? "This type of decision-making is the opposite of the short-term reactive decision-making that too often characterizes our elected politicians," thus setting up the "inevitable" collapse. Remember, Greenspan, Bernanke, Bush, Paulson all missed the 2007-8 meltdown: It will happen again, in a bigger crisis.

3. Wall Street sacked Washington

Bogle warned of a growing three-part threat -- a "happy conspiracy" -- in "The Battle for the Soul of Capitalism:" "The business and ethical standards of corporate America, of investment America, and of mutual fund America have been gravely compromised."

But since his book, "Wall Street America" went over to the dark side, got mega-greedy and took control of "Washington America." Their spoils of war included bailouts, bankruptcies, stimulus, nationalizations and $23.7 trillion new debt off-loaded to the Treasury, Fed and American people.

Who's in power? Irrelevant. The "happy conspiracy" controls both parties, writes the laws to suit its needs, with absolute control of America's fiscal and monetary policies. Sorry Jack, but the "Battle for the Soul of Capitalism" really was lost.

4. When greed was legalized

Go see Michael Moore's documentary, "Capitalism: A Love Story." "Disaster Capitalism" author Naomi Klein recently interviewed Moore in The Nation magazine: "Capitalism is the legalization of this greed. Greed has been with human beings forever. We have a number of things in our species that you would call the dark side, and greed is one of them. If you don't put certain structures in place or restrictions on those parts of our being that come from that dark place, then it gets out of control."

Greed's OK, within limits, like the 10 Commandments. Yes, the soul can thrive around greed, if there are structures and restrictions to keep it from going out of control. But Moore warns: "Capitalism does the opposite of that. It not only doesn't really put any structure or restrictions on it. It encourages it, it rewards" greed, creating bigger, more frequent bubble/bust cycles.

It happens because capitalism is now in "the hands of people whose only concern is their fiduciary responsibility to their shareholders or to their own pockets." Yes, greed was legalized in America, with Wall Street running Washington.

5. Triggering the end of our 'life cycle'

Like Diamond, Faber also sees the historical imperative: "Every successful society" grows "out of some kind of challenge." Today, the "life cycle" of capitalism is on the decline.

He asks himself: "How are you so sure about this final collapse?" The answer: "Of all the questions I have about the future, this is the easiest one to answer. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent ... overspends ... costly wars ... wealth inequity and social tensions increase; and society enters a secular decline." Success makes us our own worst enemy.

Quoting 18th century Scottish historian Alexander Fraser Tytler: "The average life span of the world's greatest civilizations has been 200 years" progressing from "bondage to spiritual faith ... to great courage ... to liberty ... to abundance ... to selfishness ... to complacency ... to apathy ... to dependence and ... back into bondage!"

Where is America in the cycle? "It is most unlikely that Western societies, and especially the U.S., will be an exception to this typical 'society cycle.' ... The U.S. is somewhere between the phase where it moves 'from complacency to apathy' and 'from apathy to dependence.'"

In short, America is a grumpy old man with hardening of the arteries. Our capitalism is near the tipping point, unprepared for a catastrophe, set up for collapse and rapid decline.

15 more clues capitalism lost its soul ... is a disaster waiting to happen

Much more evidence litters the battlefield:

  1. Wall Street wealth now calls the shots in Congress, the White House

  2. America's top 1% own more than 90% of America's wealth

  3. The average worker's income has declined in three decades while CEO compensation exploded over ten times

  4. The Fed is now the 'fourth branch of government' operating autonomously, secretly printing money at will

  5. Since Goldman and Morgan became bank holding companies, all banks are back gambling with taxpayer bailout money plus retail customer deposits

  6. Bill Gross warns of a "new normal" with slow growth, low earnings and stock prices

  7. While the White House's chief economist retorts with hype of a recovery unimpeded by the "new normal"

  8. Wall Street's high-frequency junkies make billions trading zombie stocks like AIG, FNMA, FMAC that have no fundamental value beyond a Treasury guarantee

  9. 401(k)s have lost 26.7% of their value in the past decade

  10. Oil and energy costs will skyrocket

  11. Foreign nations and sovereign funds have started dumping dollars, signaling the end of the dollar as the world's reserve currency

  12. In two years federal debt exploded from $11.2 to $23.7 trillion

  13. New financial reforms will do little to prevent the next meltdown

  14. The "forever war" between Western and Islamic fundamentalists will widen

  15. As will environmental threats and unfunded entitlements

"America Capitalism" is a "Lost Soul" ... we've lost our moral compass ... the coming collapse is the end of an "inevitable" historical cycle stalking all great empires to their graves. Downsize your lifestyle expectations, trust no one, not even media. There is a high probability of a crisis and collapse by 2012. The "Great Depression 2" is dead ahead. Unfortunately, there's absolutely nothing you can do to hide from this unfolding reality or prevent the rush of the historical imperative.

Friday, October 23, 2009

Crossing China’s “Great Wall” Barrie

China Can Chew You Up

From my days in international business, I learned that Asia can make you a lot of money. It can also chew you up and spit you out.

I remember as if it were yesterday, hanging out with a couple of my favorite clients, Ben and George, in Singapore. Ben was in the fuel-tank business. He and I would hop over to China to catch some business meetings. George worked for an environmental firm. He was always pushing China with his CEO. He once told me that China would give his company tons of business and make him rich.

After about two years of traipsing back and forth between Baltimore and China, George closed just one tiny project. He had spent a bundle and the CEO wasn’t happy. George was fired. Ben’s products went viral after the first couple of years.

Crossing the “Great Wall” Barrier

The big difference between the two guys? George never got beyond the “Great Wall” barrier. And Ben did.

What is the “Great Wall” barrier? It’s the line of respect and reciprocity.

Until you cross the “Great Wall” barrier, it really doesn’t matter how much demand there is for your services or products. It doesn’t matter how well funded you are. Nor does it matter how bright your prospects are.

None of it matters until you get the respect and cooperation you need from the Chinese government. Until then your business is completely speculative.

But once you cross this “Great Wall” barrier, your success is almost inevitable. You’ve been admitted into their system. Instead of fighting you every inch of the way, the bureaucracy has your back. It’s like you’ve been given an official stamp of approval to do business in the country...

Only there’s nothing “official” about it. It’s invisible to the outside. But if you know how the “system” works, it’s obvious when your sales will explode.

So, how do you figure out if companies are on one side of the “Great Wall” barrier or the other? Well, take it from an old China hand, I can tell you when a western company has been “greenlighted” by the Chinese government.

One of China’s “Untouchables”

Some companies are too big and important for China to mess with. It doesn’t happen very often. Even in such cases contracts aren’t signed the first time you show up in China. But the cooperation you get from crossing the “barrier” is evident almost from the beginning. It helps when you’re one of a handful of companies in the world that can help the country modernize certain critical sectors.

China is woefully behind the curve in its aerospace development. The Chinese government was more than happy to usher this company past the “Great Wall” barrier to get the help it needed. In no time at all, the company got big-buck contracts to help develop...

  • China’s helicopter-producing industry
  • Its passenger planes- manufacturing industry
  • And hundreds of its airports

Due to the surge in bank failures, the Federal Deposit Insurance Corporation – the government insurance fund designed to protect consumer bank deposits – is out of money. And it will likely be in the red until at least 2012.

But don’t worry! In a prepared statement before the Senate Banking Committee last week, FDIC Chairman, Sheila Bair said, “The problem we are facing is one of timing.”

A problem of timing? Hmmm… I’ve had that problem before. When I was young and broke, I used to run out of money about two weeks before my next paycheck was due. “Don’t worry,” I told the landlady. “It’s just a problem of timing… I don’t get paid for two more weeks.”

The truth is that a fractional reserve banking system can never be insured. Banks today can loan out $10 for every $1 on deposit. As we have pointed out before, the idea of “deposit insurance” is a confidence scam. It holds up only as long as the depositors have confidence in the system.

How the FDIC Is Solving Their “Problem of Timing”

Part of their plan is to ask the nation’s already under-capitalized banks to prepay their deposit insurance premiums for the next three years. In other words, the “insurance company” is asking its own customers for a bailout.

How would you feel about your homeowners insurance if the company that wrote it asked you to pre-pay for three years of coverage… because they were running a little short on funds?

At the end of June, the FDIC had $10.4 billion to insure some $4.5 trillion of reserves. Now the FDIC is broke. That doesn’t exactly inspire confidence, especially considering that some analysts – including the Royal Bank of Canada – are predicting another 1,000 U.S. banks will fail in the next few years.

But the US Government Will Never Let the FDIC Go Bankrupt…

They will simply charge the member banks exorbitant fees...

And print up more dollars...

And the taxpayers will foot the bill by way of inflation.

While your bank deposits might be relatively safe… the dollar is not.

The government will print as many dollars as it needs to fund their programs – FDIC “insurance” included.

And that’s why you should protect your wealth and savings by holding a percentage of your assets in gold and silver bullion. Bullion is for savings and a store of wealth. To grow your savings, look to the precious metals miners, royalty companies and select exploration outfits.

Wednesday, October 21, 2009

FII Activity

DateEquity/DebtGross Purchase
(Rs in Crs)
Gross Sale
(Rs in Crs)
Net Investment (Rs in Crs)Cumulative Investment US $m at monthly exchange ratio