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Thursday, December 31, 2009

China wins approval for huge Canadian oil sand purchase

China continues to snap up the world’s resources…

This week, state-owned oil giant PetroChina received approval to take a $1.8 billion stake in two large Canadian oil sand projects.

It’s the latest in the huge trend of China buying into every iron ore, copper, oil, and base metal deposit it can get its hands on.

Wednesday, December 30, 2009

THIS IS HOW TROPHY INVESTING WORKS WONDERS


As we near New Year's Eve, it's time to look at how one of the secrets of rich investors played out in the stock market in 2009.

You see, seasoned investors monitor a handful of the world's best trophy assets. These elite assets include Miami condos, Canada's huge heavy oil deposit, Hong Kong skyscrapers, and Freeport-McMoRan's monster Grasberg copper mine. The best investors look to buy these trophies during a crisis... when prices reach "fire sale" 50%-75% discounts. After all, trophies are the best... so they tend to rebound in price.

One of these trophies is the tiny Asian city-state of Singapore. Singapore sits in the center of the booming East Asia/Australia region. It's currently No. 4 in MasterCard's world financial center rankings. It's home to the world's largest water port. Most importantly, it's considered the world's easiest place to set up and conduct business. All of this creates a powerful tailwind for Singapore investments...

Like all assets, Singapore stocks were crushed early this year. But as you can see from today's chart, the big Singapore fund is soaring right now... and sits at a new 52-week high. It pays to buy trophies.

The China Gold Rush continues: Holiday sales are surging

According to a report in the China Daily, Chinese citizens have been rushing to buy gold after major department stores cut the price of gold jewelry by around 3% in year end promotions for the Chinese holiday season, which runs from Christmas to the Chinese New Year which falls this year on February 10th. Gold jewelry sales increased by around 30% or more over the weekend.

Some of the major department stores have been cutting prices to as little as 269 yuan per gram (around US$1224 an ounce) prompting a big rise in purchases. The report says that China's biggest gold store has sold 30% more gold this year than last over the weekend after marking down prices to this level, which is a rise of 28% compared with prices a year ago.

Apple soars on rumors of next blockbuster device

Shares of Apple Inc. reached their all-time high on Thursday, as excitement builds over the expected release of its tablet computer.

Although Apple itself has never acknowledged the existence of such a device, anticipation is peaking as the company enters the new year.

China is a runaway train

China became the world’s second largest economy in 2009, passing Japan, which has held this distinction for decades.

The People’s Republic raised its growth forecast for 2008 to 9.6% from 9% which took the total to over $4.6 trillion. The Chinese government says it will have economic growth of 8%. The financial ministry has suggest that the 2009 number will almost certainly be revised up early next year.

Japan’s GDP did not grow at all this year and could actually drop by 6% or more depending on the direction of its economic revisions.

Friday, December 25, 2009

The Greatest Currency Trade of the Millennium

Even though gold has been in a correction during these last few months, it is important to step back and see how it has outperformed every other currency since this decade, century, and millennium began.

I first recommended gold and gold stocks back in February 2002 because the trend I saw of currencies cheapening themselves against their trading partners. You can call this "competitive devaluation." This had not been seen since the Great Depression, and to me, even back then, it was a signal that the world economy was heading into tough times.

Since about 2001, whenever any currency rises too much, the local manufacturers or farmers – or anyone who lives by exporting – start to scream about it. Their local governments respond by doing all they can to lower the value of that currency, having it fall in value and thus making exports cheaper, all this in the hope that the domestic economy will become better.

Pick any period so far this young century and you'll see how this is true. For instance, right now you see it in those countries whose currencies have soared the most in the last few months. Let's focus on a recent highflying currency...

The New Zealand dollar has soared 23.6% against the U.S. dollar from mid-March through mid-June. That's the best three-month performance for the Kiwi dollar since way back in 1971, when currencies began floating against each other. New Zealand depends on exports, especially agricultural exports. Total export prices have plunged 8.2% from last quarter 2008 to first quarter 2009. This is not an annualized rate, either, but a quarter-to-quarter drop. If it continued at that rate, it would mean a 33% fall in export income over the year.

Now, the New Zealand monetary authorities are doing all they can do to cheapen their dollar. That includes slashing interest rates to just 2.5%, which is a shock to those of us who remember Kiwi interest rates as being the highest in the world. They are printing money and talking about actively intervening in the currency markets to sell their dollar short. New Zealand's Finance Minister, Bill English, just came right out and said that his government would prefer a weaker currency.

The same thing is happening in Switzerland, Australia, Canada, and Norway, which have all seen their currencies strengthen recently.

At any given time in the last few years, whichever currencies have been strongest have screamed about it. A year ago, with the euro at $1.60, Germany – a huge exporting country – basically said it wanted a cheaper euro. It got it: The euro fell to $1.23 within months. The UK wanted its highflying pound, then $2.10, to fall to boost domestic and foreign demand for its goods. It got its wish: Within months, the pound had plunged to $1.45. And on it has gone for a few years now.

As all the countries with unwanted strong currencies move to cheapen them by printing more money, slashing interest rates, or just "talking" it down, the question remains, just what are those high currencies declining against?

If you answer, "against the currencies of their main trading partners," well, yes, this is true. But it is only temporary. If they are successful in this, then the trading partners don't want their own currencies to go too high, so at some point they try to cheapen them.

It has become an endless round-robin game, except to call it a "game" is a little perverse. All holders of currencies suffer in the decline of the purchasing power of their money. You go lower, but then your partners go even lower, and then you have to cheapen your money yet more... It's an endless cycle that really doesn't help the world economy in the long run.

But there has been one money that has benefited from this huge trend. Moreover, it has benefited by giving profits of hundreds of percent – minimum – to anyone on Earth who has owned it since 2000. It is the oldest money of all, a money that has been used long before any of the other currencies were even dreamed about and will be used long after all of them are memories in history books. It is a money that cannot be printed at will and artificially cheapened. And even though all central banks own it, it is the creature of none of them.

I'm speaking, in case you haven't guessed, about gold. Sure, you can play the currency market. I've done it for over 35 years now, and have done nicely. You can buy a currency that is way too cheap and wait, getting paid nice interest while you wait. (At least you could have done that until recently. Now no matter what currency you hold you get paid nearly zero.)

But shall we now see what gold has done in terms of the major currencies of the world?

The South African rand has been the strongest currency so far this year. It is a big gold producer. Yet look the price of an ounce of gold since 2000 in terms of the rand.

Now let's go to another currency which has risen sharply this year, the Aussie dollar.

You see the pattern. Now, gold has not gone up in value against the Chinese yuan (+200%) as much as it has against the U.S. dollar (+260%). Still as great as the Chinese economy has been over the past decade, as powerful as it has become, gold has still soared in terms of the yuan.

It has soared against the Canadian dollar (+178%), the Russian ruble (+360%), the Mexican peso (+417%), and even the Swiss franc (+155%), a currency that has long been regarded as the strongest on Earth.

You can talk about or trade the merits of one paper currency against the other, but they've all been falling against gold.

Put another way, every person on Earth over the past decade, regardless of where they live, would have made hundreds of percent in terms of their own currency had they just owned gold.

Most people do not hold mostly gold and silver in their portfolios. With this fact, I believe that both have much more to rise before their bull markets are finished. Well into the future we'll see the phenomena of the average person piling in, as happens toward the end of every bull market... We'll see the same action in gold; it's just a matter of time.

Thursday, December 24, 2009

World's best traders loading up on this big government bet

What do money managers extraordinaire John Paulson and Julian Robertson have in common? They're both placing their chips on higher interest rates over the coming years. The FT reports:

Mr. Paulson, who made big gains earlier this decade by betting against the subprime mortgage market and whose firm, Paulson & Co, manages $33bn, has said he believes that government stimulus efforts would inevitably lead to higher inflation and a corresponding rise in rates.

The super traders are buying instruments most "at home" investors can't easily buy. You can join them in the trade with an ETF that rises along with interest rates like the TBT.

Iran mocks approaching nuclear deadline

The United States warned Iran that December is "a very real deadline" after Iranian President Mahmoud Ahmadinejad dismissed an international ultimatum over its nuclear program.

The United States and France have repeatedly urged Tehran to accept a U.N. nuclear watchdog-drafted deal to swap enriched uranium for nuclear fuel by the end of the year or face the threat of further sanctions.

White House spokesman Robert Gibbs said that the so-called P5+1, which gathers U.N. Security Council veto-wielding permanent members Britain, China, France, Russia and the United States plus Germany, were all on board with the deadline.

Wednesday, December 23, 2009

China could grow fast enough to choke a horse next year

You've got to hand it to the Chinese. They can stimulate an economy like nobody's business.

The Middle Kingdom's largest brokerage said this week that China's GDP may surge 12% in 2010, courtesy of its gigantic government stimulus plan. A record $1.3 trillion in loans were handed out in the first 11 months of 2009.

All this growth and cheap money will likely fuel a huge property and stock bubble.

Treasury bond yields reaching critical juncture

The yield on the 30-Year Treasury Bond is now over 4.60% and the 10-Year Treasury Note is yielding 3.75%.

It was just at the last bond auction that the T-Bond was 4.49% and sold at 4.52%, and the 10-Year’s yield was a mere 3.20% on November’s closing yield. Most traders will look at the prices of the on-the-run bond futures rather than an outright yield, but that inverse relationship between price and yield is always present.

These rising yields might not be a major concern on the surface and when considering we are in the holiday trading with lower market participation.

The Federal Reserve Is Openly Telling You to Buy Gold and Silver

At the end of last year, I began writing about what I saw happening as the Federal Reserve started assuming the liabilities of the investment banks and the federal government began deficit spending at an unprecedented pace.

I've been calling these changes the "End of America" because I believe the fiscal policies of the U.S. will result in a massive devaluation of the dollar and the end of the U.S. dollar as the world's reserve currency.

To get an idea of why I'm concerned, have a look at a chart James Bullard, president of the Federal Reserve Bank of St. Louis, included in a recent presentation to the National Association for Business Economics.


What you see here is Bullard's estimate of the future growth of Federal Reserve assets.

A lot of people seem to have forgotten something that is very much on Bullard's mind: The growth of the Fed's balance sheet isn't nearly finished. In fact, the Fed has only completed purchasing about half of the $1.75 trillion worth of assets it has promised to buy. The assets are mostly mortgages and mortgage-related securities.

Even though these direct purchases are unprecedented, that's only about 10% of the story. Since the beginning of the crisis, the Fed has lent, spent, or guaranteed $11.6 trillion.

That includes providing a backstop on the entire system of mortgage finance in the United States, a system that currently shows nearly a $1 trillion loss.

Since the expansion of its balance sheet got started in earnest last fall, the trade-weighted value of the dollar has fallen 15%. Keep in mind, the Fed's assets form the base of our monetary system. The more it grows, the more money and credit become available to the banking system. And the faster the money supply grows, the more likely the value of the dollar will continue to fall.

As Bullard points out, a doubling of the monetary base won't necessarily cause an immediate doubling of inflation... But suppose it takes 10 years? The average inflation rate would still be 7% a year. If inflation does grow to this average level, at least a few of those years will see inflation running at or near double digits.

Nothing in our financial markets is prepared for this kind of inflation. Inflation at these rates would cause the average multiple of earnings for equities to fall by at least 50%. Likewise, we would see high-yield corporate bonds yielding at least 20% – double what they are now. And U.S. Treasuries would probably see their yields triple. The destruction of wealth in the bond markets would be unprecedented in modern finance.

It's going to happen. I guarantee it.

My forecast only assumes the Fed's actions don't continue past what's been announced so far. My bigger concern is what happens if Congress decides the Fed did such a good job fixing the housing bubble that perhaps it should lend a hand on health care or the entitlement time bomb? Although a small handful of people have been writing about the enormous fiscal challenges that all the Western democracies face over the next decade, I'm sure most of today's equity investors don't really understand what lies ahead.

Consider these numbers: Right now, today, without counting any of the unfunded liabilities of our government (which are very real obligations, by the way), our national debt is $12 trillion. There are roughly 100 million American households. So that's a national debt of roughly $120,000 per family. That's more than the average American owes on his mortgage.

Think about what this means in terms of interest payments. Even with interest rates at all-time lows around the world, the U.S. will spend almost $400 billion on interest to service our existing national debt – that's a 3.3% interest rate. Currently, the U.S. takes in roughly $2 trillion in taxes, half of which come from income taxes. So the interest on our debt is already consuming 20% of all tax receipts, or 40% of all income taxes.

It seems obvious to me this money will never be repaid – could never be repaid. The only real question is how much of a "haircut" our creditors are willing to accept in terms of the loss of purchasing power of the U.S. dollar. So far, inflation remains relatively benign. Our creditors don't seem to be losing very much. But we know this will change and could change rapidly, as the Fed continues to expand its balance sheet with less and less creditworthy assets. At what point will our creditors finally decide they can't finance any more of our deficit spending because we're simply not worth the risk?

No one in Washington realizes you can't borrow money endlessly. By the time Barack Obama leaves office (assuming he is reelected), the national debt will likely exceed $20 trillion. What will our creditors charge us to finance this debt? How will our debts compare to the value of our economy? It is impossible to know what will happen. But here's the one thing that seems most obvious: Our borrowing costs will go up, a lot.

At some point in the next few years, our creditors are going to stop believing in our ability to pay our debts in honest money. I don't know what will break first, but we can't go on printing money to prop up our banks and spending money we don't have to prop up our culture of entitlement.

And I don't believe there's any way to avoid it – certainly not with the political system we have in place right now. To protect yourself, you'll have to be very good at managing your assets. You also need to make sure to take the advice we've been issuing for years: Buy and hold plenty of real, honest money that cannot be debased by the government. Buy and hold plenty of gold and silver.

Greece debt crisis continues

Moody’s (NYSE:MCO) downgraded the government debt of Greece from A1 to A2. Very few economists or bankers will be surprised. Greece is dealing with a shrinking economy and growing national debt and budget deficits. It problems are no different than most other nations, including the US. The economies of more economically sound countries are not being affected by concerns of credit agencies, at least not yet.

Tuesday, December 22, 2009

What the "Man Who Made Too Much" Says About Gold

The U.S. dollar is a sort of monetary brand.

And like any other brand, it can fall out of favor. Even iconic brands can rapidly lose their "must-have" cachet. Sometimes, a brand can disappear entirely, as did Pan American Airways or "Members Only" jackets. But there is always something else waiting to take its place. So it is with the U.S. dollar, a brand making lows in the financial markets.

The dollar has been the "Coca-Cola of monetary brands," says James Grant, editor of Grant's Interest Rate Observer. But even the best of brands can be lousy investments. Grant uses the analogy of the New York Times. It was the greatest name in newspapers. In 2002, the stock sold for $53 per share – an all-time high, as it turned out. Today, the "Gray Lady" fetches only $8 per share.

"What happened?" Grant asked. The World Wide Web happened, he says. "The Times has hundreds of reporters, but this is a story they seem to have missed." As if the lowly stock price was not evidence enough of its decline, the NY Times got another reminder when it borrowed $225 million against its headquarters building.

The cost of such borrowing, Grant reports, was 14%. The august Times today borrows at rates no better than a working-class stiff at a pawnshop. The U.S. Treasury should take note. The government seems as intent on creating dollars as prolifically as bunnies create other bunnies.

Here we get to John Paulson, a presenter at the Grant's Fall Investment Conference and undoubtedly the richest man in the room. Portfolio magazine dubbed him "The Man Who Made Too Much" after he made $3.7 billion by betting against mortgage-backed securities (MBS). He is one of the greatest hedge-fund managers ever.

Gold is his favorite today. As to why, Paulson presented a simple, but compelling case. First, the monetary base has exploded in a way we've never seen before. The monetary base is essentially the Federal Reserve Bank's currency and reserves. The Fed, by buying up securities in this crisis, has pumped a lot of money into the economy.


You've probably seen this chart, or some variation of it. Still, there haven't been noticeable signs of inflation as a result of that big spike – not yet.

As Paulson explained, that's because this base money has not yet been lent out and multiplied throughout the economy. Yet the monetary base and money supply are highly correlated, "almost 1-to-1 between the two," Paulson said.

That means that as the monetary base expands, the money supply surely follows, though there is a lag. (Money supply is a broader measure of money than just the monetary base, as it includes personal deposits and more. The monetary base is like a kind of monetary yeast. It makes money supply rise.)

If money supply grows faster than the economy, that will create inflation, says Paulson. As it is impossible for the economy to grow anywhere near that vertical spike in the monetary base, Paulson contends inflation is coming.

The U.S. is not alone in its money-printing exercise. The supply of most currencies is expanding rapidly – even the normally tame Swiss franc. In the race of paper currencies, they are all dogs. Hence Paulson's interest in gold, which no government can make on a whim.

Therefore, in the content of the exploding monetary base, gold seems relatively cheap. In other words, as the money supply rises, so does the price of gold, eventually. As a result, says Paulson, "gold has been a perfect hedge against inflation."

There is some slippage over time. The gold price can change faster or slower than the money supply. But when the market gets worried about inflation, the gold price usually changes much faster – as happened in the 1970s. In 1973 – to pick a typical year – inflation was 9% and gold rose 67%. That was a pattern common in the 1970s.

The potential for inflation this time around is greater than it was in the 1970s, given that the growth in the monetary base is so much greater than it was in the 1970s. Gold could do much better this time around, reaching "$3,000 or $4,000, or $5,000 per ounce" as Paulson said.

Future historians will look back at the present day and see clearly how this unfolded. They will see the litany of news items that pointed to the dollar losing its top perch: China and Brazil are settling up trade in their own currencies. The Russians and others are openly calling for a new monetary standard. Even mainstream outlets are discussing alternatives to a dollar-based standard, a province once solely occupied by cranks and gold bugs. Not a week goes by without these kinds of stories.

As for a replacement waiting in the wings, Grant offers up gold. Indeed, a kind of "de facto gold standard" seems to be taking shape. The SPDR Gold Trust, the largest gold-backed security in the world, is now the sixth largest holder of the metal in the world. Anybody with a brokerage account can easily buy gold today through the trust, which trades on the NYSE under the ticker GLD.

It's still early. Most people still own no or very little gold. As it becomes clearer what's happening, they will buy more gold, especially as it is now easy to do so.

The gold supply, too, is limited against the vast pool of dollars. As Paulson points out, global money supply is 72 times the value of gold. I'm betting that gap will narrow. It only has to narrow a smidgen and the gold price flies.

As Grant eloquently put it: "Gold is a speculation. But it is a speculation on a certainty: the debasement of the currency." Gold stocks, too, are a speculation. But they are a speculation on an inevitably higher gold price.

Monday, December 21, 2009

This is how America gets toppled from No. 1 world power

The fact is that [America's] leadership is a bunch of spineless opportunists with no more important items on their personal agendas than getting elected. They are spending this country into ruin. And they are doing it on our watch.

Paradoxically, while Americans have rolled over and wet themselves like scared dogs, as Doug Casey so colorfully puts it, the nation’s salvation may have to come from the very same people we in the U.S. most enjoy denigrating: the Chinese and the Arabs.

And, adding paradox to paradox, they may save us by first bringing us to our knees – by backing away from our Treasury auctions and, in time, maybe even backing their own currencies with something more tangible than crossed fingers. Those actions would cut off the life blood of the U.S. bureaucrats: the on-demand fiat money that is the source of U.S. political power.

Sunday, December 20, 2009

CHINA'S UPTREND IS IN DANGER


This week's chart shows it's tough going in China right now...

China's stock market turned in an extraordinary performance this year. The benchmark Shanghai Composite Index is up 75%.

But as our chart shows, the index has struggled since reaching a peak in August. It has tried to best its August high twice in the past few months, only to fail each time. This is a bearish development that shows buyers simply don't have much power anymore.

Keep an eye on this index. It's one of the world's best gauges for how risky assets are performing. Right now, it's sporting a bearish "I tried to reach my old high, but failed," pattern.

Saturday, December 19, 2009

Dollar BREAKOUT: Big rally continues

The US Dollar index has made a nice move higher since the end of November with a gain of about 5%.

The important part about this rally is that the index has broken the long-term downtrend that it had been in since early 2009. As shown below, the recent action in the Dollar looks a lot like the start of the rally that occurred in the second half of 2008.

Friday, December 18, 2009

CRISIS: Greece is in liquidation right now

Greece pledged on Thursday to sell off state assets and make deeper deficit cuts, as bonds and bank stocks took another hammering and communist strikers marched on parliament in protest at austerity plans.

The risk premium on 10-year government bonds over benchmark German Bunds hit its highest level since April after a second credit rating downgrade in a week highlighted a lack of trust in a country set to become the euro zone's most indebted next year.

Why China is on the path to MEGA oil consumption

In November, auto sales in China continued their torrid growth, with sales up by 93% compared with November 2008. Furthermore, those Chinese auto transactions accounted for a quarter of total global sales, the highest proportion ever recorded. China is now the world’s largest automobile market, a fact that was corroborated by General Motors’ recent announcement that it sold more cars in China in November than it did in the US.

While the huge growth in the current auto market is impressive, it’s worth pausing for a moment to look back at China’s history to see how its auto sector has grown over the past three decades.

AN INCREDIBLE OPPORTUNITY IN PRECIOUS METALS


Our colleague Dan Ferris just made his readers 197% on the kind of stock he told us about early this year. And he's going to do it again...

You see, most mining insiders love "royalty companies." These companies avoid the dirty work of digging up rocks and processing ore. They simply invest in a lot of early-stage projects and collect income streams off the ones that become producing mines.

Back in March, Dan told us how acquiring royalties is one of the world's all-time great businesses. The royalty business involves a small staff... low upfront investment... and the ability to profit off someone's great work.

One of Dan's favorite royalty companies is Extreme Value recommendation International Royalty. This small cap is up huge this year... and it just soared to a new high on buyout rumors.

As we've mentioned many times in the past, the mining sector is set to enjoy a major uptrend in the coming years. Royalty companies are an incredible way to play it. And right now, Dan is pounding the table on the next royalty company set to rise hundreds of percent, which we encourage you to become familiar with immediately.

ONE OF THE YEAR'S GREATEST STOCKS


The uptrend in small resource stocks – which we've profiled nearly every month in Market Notes – is cranking out huge winners as predicted. Just ask shareholders of Ivanhoe Mines...

Ivanhoe Mines is a company put together by master financier Robert Friedland. Ivanhoe gives investors exposure to one of the great resource finds of the last 20 years, Oyu Tolgoi. Located a few miles from China's northern border, Oyu Tolgoi is set to become one of the most productive copper and gold mines ever found.

After getting clobbered in 2008 along with all other assets, Ivanhoe has enjoyed an incredible rise this year. Shares are up 422%.

The gigantic gain displays one of our favorite "trader's themes" for the coming years: As gold, silver, and energy prices trend higher, the small-cap mining sector will regularly produce triple- and quadruple-digit winners.

Thursday, December 17, 2009

HERE'S A CURRENCY TRADE YOU CAN MAKE IMMEDIATELY


For all the currency traders out there: The euro just fell victim to a textbook "1-2-3 trend change."

In his classic trading book, Trader Vic, the great trader Vic Sperandeo laid down the best way to spot a major trend change. Vic's system is as simple as 1-2-3, and it can make you a fortune if you use it properly. Here it is...

First, a trending asset has to break its old trend line. The euro did this at point (1). Then, after declining a bit, the asset tries to match or exceed its old high, but fails. The euro did this at point (2). Finally, the asset breaks below its previous low point. The euro just did this at point (3). When this 1-2-3 process takes place, a trend reversal has occurred.

The euro soared in 2009 in kind of a mirror image to the falling dollar. Most currency advisors now consider the euro overvalued. So... you have a currency union suffering big debt problems from Greece and Ireland, you have overvaluation, and you have a textbook trend change. The path of least resistance is now DOWN.

Tuesday, December 15, 2009

The 4 pillars of the gold bull market

Notwithstanding the recent correction - and the possibility that gold may yet fall further before bargain hunters and other buyers (including central banks) reappear - the four pillars of gold-price strength remain intact. We've spoken and written about these often - but they are worth repeating.

These are:

(1) Inflation-fueling U.S. monetary and fiscal policies;

(2) Central bank reserve diversification with the official sector being a taker rather than a supplier of gold in 2009 and the next few years;

(3) Expanding retail and institutional investor participation in the United States, China, and around the world;

(4) Declining world gold-mine production.

Warren Buffett continues to dump large holding

It wasn’t that long ago that we had given a list of stocks that Warren Buffett’s Berkshire Hathaway Inc. (NYSE: BRK-A) needed to dump to help pay for its Burlington Northern Santa Fe (NYSE: BNI) acquisition.

And to trim its equity portfolio. Moody’s Corp. (NYSE: MCO) was one of those stocks. He had already lightened up some since, and on Monday evening came a filing at the SEC confirming that Buffett was dumping more stock…

IT'S AN INCREDIBLE RALLY IN "SPENDING STOCKS"


Dillard's... Nordstrom... Home Depot... Best Buy... Disney. These are all stocks that "should" be struggling.

After all, unemployment is at a 26-year high. Manufacturing jobs continue to flee to Asia. It's not an environment that should support profits for the "spending stocks" of America. Thing is, these five stocks are now at new 52-week highs.

And let's remember one of our favorite "real world" indicators... the share price of Starbucks. Today's chart displays the extraordinary 2009 performance of the world's largest seller of $5 lattes. Starbucks is up 50% in just the past six months. What's going on here?

The market has a way of confounding nearly everyone, that's what. Especially when the government is providing the biggest credit "goosing" in history. We have to agree with the "bears" out there: Yes, the U.S. economy is facing major problems. The government is spending money like a man with two days to live. But until stocks like Starbucks start to falter, we have to respect that the government has inflated prices and demand. Whether these six companies are enjoying "real" demand or not, the trend in spending stocks is up.

Dollar rally starting: A big headwind for stocks

Since its close on November 25th, the US Dollar Index is up 3.09%.

This is a pretty big move in the currency market, and it has been an important move because it has broken the long-term downtrend that the Dollar has been in over the last six months.

How Asia makes the US look like a third world country

Sorry to say it, but in many ways traveling back to the U.S. these days feels like you're entering a third world country.

You fly back to America and you think, "Where are the bullet trains, automated customs, and man-made snowstorms?"

While America definitely had an early lead with allegedly important breakthroughs such as the computer, car, airplane, and internet, Asia has been far better at actually implementing new technology and ideas.

Euro unraveling: Greece and Ireland could exit the union soon

The economic crises in Greece and Ireland may necessitate financial bailouts or even an exit from the euro for these countries, according to Standard Bank analyst Steve Barrow.

“Countries like Ireland and Greece may not be able to grow out of the current crisis,” Barrow, head of G-10 currency strategy for the bank, told Bloomberg.

“With interest-rate cuts, exchange-rate depreciation and significant fiscal support all off limits for these countries, bailouts or even pullouts from EMU (European Monetary Union) may happen next year.”

Sunday, December 13, 2009

A NEW HIGH FOR PIPELINES


Back in June, we highlighted the developing uptrend in pipeline stocks, saying they were "finally acting like they should."

Pipeline stocks are normally boring investments. You have some pipes in the ground. You transport fuel and natural gas through them. You collect fees. Repeat as necessary.

Pipeline stocks got "less boring" during last year's credit crash. The benchmark Alerian index fell 50% in six months. But as you can see from this week's chart, folks are flocking to the tax advantaged safety of pipelines again. The Alerian index punched through to a new 2009 high this week.

Along with the uptrend in health care, the uptrend in pipelines is among the strongest in the world right now.

Saturday, December 12, 2009

THE "BIG MONEY" IS ALWAYS MADE HERE


The past 12 months of trading in crude oil is why we urge all readers to become connoisseurs of extremes...

Back in December 2008, we noticed a little-known indicator had turned bullish on crude oil. This indicator is the "gold/oil ratio."

Gold and oil are both widely traded commodities... and they respond similarly to inflationary pressures and investor sentiment. But occasionally, gold and crude get extremely out of whack. These extremes present trading opportunities. We highlighted such an "extreme" opportunity last Christmas, when oil became incredibly cheap relative to gold.

Right after, crude staged a huge rally from $38 per barrel to $73. Then, in late June, we noticed the crude rally had returned the gold/oil ratio to a normal level. We even said "the easy, early money" had been made in oil.

Today's chart shows this prediction was right on. Since reaching the mid-$70 area in June, crude has drifted sideways. It staged a small breakout in October, only to fall back down toward $70. It's a perfect example of how you make the easiest, biggest money at the extremes. From there, it's a hard dollar, baby.

Friday, December 11, 2009

The great parallels between the U.S. and ancient Rome

Along with the Greeks, the Romans form the base of Western civilization. We know a lot about Rome now, and they were people exactly like us. And the rise of Rome does in many ways parallel the rise of America. Its rise, its peak - and at this point I think you can even see its decline reflected in the distant mirror of Rome.

We see the same change from a republic to a highly bureaucratized state with tentacles all over the world and great importance placed on the military. The population relying on welfare (after the time of the conquest of Egypt by Caesar, most of the grain and olive oil, the two big commodities of the ancient world, were no longer grown in Italy; they were imported from Africa and given for free, or nearly free, to the people in Rome). Even what went on in the Circus Maximus, the Coliseum, and their many copies in smaller cities, has its parallel in today’s massive football events - not to mention cage fighting and other grisly sports. The big one, of course, is the gradual destruction of the currency.

Quite interesting to me is that in the days of the republic, Roman coins portrayed mythical figures, like gods and goddesses, and ideal concepts. They changed to portraits of the emperor after Caesar.

In the U.S., 1913 - which was a pretty bad year overall, with the initiation of the income tax - was the year the first coin with a dead president’s head on it was introduced, the Lincoln penny. Before then, we only had things like Liberty, Indians, buffaloes, etc. on our coins. Since then, all our coins have had dead emperors on them. We started out with semi-mythic figures like Washington and Jefferson. But now we do the recently dead - Roosevelt, Kennedy, Eisenhower.

It’s simply wrong to put the features of your rulers on the coinage. And the Romans, before Augustus, agreed. And, of course, gold was taken out of daily circulation in 1933, silver in 1965, and copper from the penny in 1982.

Nothing new.

The euro is doomed

Greece’s debt has just been downgraded, and experts say that if the country goes belly up, the euro could be in big trouble.

"The Greek problem will be an acid test for the currency union," a senior German government official told German magazine Der Spiegel.

A GOVERNMENT-SPONSORED BULL MARKET


Today's chart is proof the market likes the "Everybody Wins" health care thesis from our colleague Rob Fannon.

One month ago, we profiled the new uptrend in the IHF. This investment fund is a "one-click" way to invest in the health care industry. From insurers to device makers to pharmacy managers, the IHF gets your money in the health care business.

And just last week, Rob told us why the IHF is rising much faster than the general stock market: Even if the government pressures profit margins, the health care industry will enjoy millions of new customers from health care reform. Those customers won't care a bit about the price tag. After all, their neighbors are picking up the tab. (We consider Rob's essay a "must read.")

This trend is at work below. The IHF is up 21% since July... and sports one of the strongest uptrends in the market right now.

Thursday, December 10, 2009

WHY THE SEASONED INVESTOR ISN'T CONCERNED ABOUT GOLD


Yesterday, we took the "long view" on gold. We saw how gold could decline all the way down to $850 an ounce and remain within the confines of a big bull market.

Today, we offer another common-sense view as an antidote to the ridiculous mainstream commentators asking, "Does the recent decline in gold mean the bull market is dead?" We take a look at the old "50% rule."

The 50% rule is an old Wall Street maxim that bull-market moves often give back 50% of their gains before making a new push higher. These declines serve to shake off the latecomers and frustrate as many people as possible.

Starting in September, gold made an enormous run from $955 an ounce to its December high of $1,218 – a $263 jump. Using the 50% rule, we see it would be perfectly normal for gold to decline down to $1,086. Common-sense perspectives like the "long view" and the "50% rule" leave the seasoned investor unconcerned with the recent decline in gold.

U.S. Mint has suspended sales of one ounce gold coins

"The United States Mint has depleted its inventory of 2009 American Buffalo One Ounce Gold Bullion Coins. ... No additional inventory will be made available. As additional information becomes available regarding 2010-dated American Buffalo One Once Gold Bullion Coins, you will be notified."

HOW TO VIEW THE FALLING GOLD PRICE


It's amazing what a $50-per-ounce drop in the price of gold does nowadays.

The decline is front and center in the financial papers. CNBC hosts are grilling every analyst they can find with drivel like, "What a drop! Is the gold rally now dead?"

Our advice to the nervous gold owner: Sit back and take the "long view" of gold. Remember, no bull market rises in a straight line to the sky. And gold regularly experiences wild swings in price.

Gold is the "odd man out" among financial assets. It's not like a rental property, where you can say, "I'll pay eight times annual rent for this." Or a blue-chip stock, where you can say, "I'll pay 10 times annual cash flow for this." Gold represents real wealth and crisis protection. Folks go through periods where they'll dump this protection... or buy it with both hands. This leads to lots of volatility, like we've seen in the past few days.

It could even lead to a bigger drop in gold. But as you can see from today's five-year chart of gold, the yellow metal could drop all the way down to $850 an ounce and still remain in the confines of a big bull market. This sort of drop is unlikely, but anything can happen in the gold market... so be prepared.

Tuesday, December 8, 2009

Relief rally is here: Dollar hits one-month high

No bear market runs lower in a straight line… which is why the U.S. dollar just hit a new one-month high. Driving the rally is the better than expected non-farm job numbers reported last week.

A rally in the dollar is bad for stocks and gold. If the dollar puts together a sustained rally, it could also make this dark prediction from Dr. Doom Nouriel Roubini come true...

Dubai shares down big this morning... decline another 6%

More misery in Dubai this week. Dubai's benchmark stock index fell 6% on news the government would not sell off assets to help tanking Dubai World. The index is at its lowest point since July.

Dubai World has tons of assets it can sell off. It owns a stake in Cirque du Soleil… Barney's of New York. It also has plenty of port assets. It had better get busy selling. The first big debt repayment is due next week.

Monday, December 7, 2009

STOCKS VS. REAL WEALTH


Remember when we showed you how stocks were struggling against gold last month? It's getting worse.

To recap, we urge DailyWealth readers to gauge their real estate and stock market returns not in terms of the arbitrary (and usually declining) value of the U.S. dollar... but in terms that rich investors use... in terms of real wealth... in terms of gold.

Nominally, stocks are up big since May. But the U.S. dollar has plummeted in value, and the price of "real stuff," like copper and gold, is soaring. Measured in gold, stocks just plunged to their lowest low since April.

Sure, dollars are flowing into stocks right now... but the yahoos running the controls in Washington D.C. are making those dollars worth less and less every day.

$1,007 is the new floor for gold

We are living history as I write this article.

Gold is now setting new all-time high prices daily. Since the 28-year high of $850/oz. was eclipsed in March 2008, the gold price has been surging like a kite in a gale.

The bull market in gold has motivated investors to call us every day, with questions such as, “Is it too late to buy gold?” “Should I wait for a lower price?” and, “How high will gold go?”

They are all are good questions. Where do we find good answers?

The best way to win the war in the Middle Ea

The only way to win [the conflict in Afghanistan] is not to play. You simply can’t win against a guerilla. And the worst thing about this is that the main conflict in the coming years is likely to be the West’s unadmitted war against Islam.

Since there are over a billion Muslims in the world, and since as a general rule, Muslims take their religion much more seriously than most other people around the world, and since it says in the Koran, which is supposed to be the direct word of Allah, that they must spread their religion around the world, the conflict is not going to go away. Especially since there is also a small but quite virulent minority of Christians in the U.S. that have similar views, and a rather disproportionate number of them are in the military.

It’s become a redux of the Crusades, at this point. Actually, the Crusades never really ended; they’ve just waxed and waned since the Middle Ages. Using the distributed warfare tactics we’ve just discussed, the Muslims are going to win on a cost-benefit basis. The new crusaders will attack their countries with expensive junk, and the Muslims will counter with unstoppable, low-cost violence. Even though they are largely primitive societies, they are going to win both on the attack and on the defense, creating huge chaos in the process.

You can’t conquer a primitive society. There’s nothing to destroy or hold hostage. The only way to win is to commit genocide.

Everything Western governments, and the United States especially, are doing politically and militarily is counterproductive.

THE BIGGEST INVESTMENT TREND IN THE WORLD


The market is warming up to super investor Bill Gross' recommendation to buy utility stocks.

Last month, Gross recommended buying shares in regulated utilities that deal in basic stuff like electricity generation and municipal water supplies. Utilities are stable, recession-resistant businesses... and they're famous for paying dividends. Today's chart shows investors are taking Gross' advice. The big utility stock fund (XLU) just "broke out" to a new 52-week high.

Our point today isn't "Bill Gross is right." There's a much bigger trend at work here: The rallies in utilities... and gold... and silver stocks... and agriculture... and Visa are being driven by a global rush out of the dollar.

Sure, these assets "have something going for them" in a fundamental sense. But the major factor here is the federal government's reckless E-Z-Credit and money-printing program. It's driving folks to stick their wealth into anything but the junk paper dollar.

Well done, Ben Bernanke. Well done, Barack Obama. You're making speculators out of the widows and orphans of America. They will end up losing big in a game dominated by the lobbying geniuses of Goldman Sachs. You should be ashamed of yourselves.

Friday, December 4, 2009

Amazon.com is now one of the most expensive stocks on the planet

It is impossible to argue against the success of Amazon.com Inc. (NASDAQ: AMZN) as a company, and it is also impossible to say that the stock is not on fire. After all, 52-week highs AND all-time highs are the greatest measurement a stock can get.

The problem herein is that this last run has so many investors excited that the metrics for valuing Amazon are starting to resemble the great tech bubble all over again, at least for a time of “the new normal.” And Wednesday night’s tout from Jim Cramer on CNBC’s “Mad Money” said Amazon has another 74 points of upside.

The problem is that if you take the math used to get there, consider where this stock has been, consider the outside forces, and add in just a few small risk factors, this figure gets more than difficult to justify in almost any scenario short...

How investors are profiting from Somali piracy

Somalia just brought modern piracy to a new level. The latest innovation of Somali pirates is a new “stock exchange” located in the town of Haradheere, where investors can buy stakes in future piracy expeditions.

The exchange - only four months old - has grown from 15 “maritime companies” at inception to 72 companies today, and is open 24 hours a day.

Investors don’t even have to use cash to buy interests. Since many don’t have much cash to invest, they can contribute anything of value... One individual contributed a rocket-propelled grenade.

ONE OF THE GREAT INVESTMENT QUESTIONS: ANSWERED


Deflationists, you've lost. Badly.

Early this year, one of the biggest questions an investor had to consider was, "Is the U.S. government's crazed spending going to stoke inflation and higher commodity prices? Or is the consumer so tapped out that he can't buy anything... and is a long slog of deflation on the way?"

We're in the inflation camp... but we always check our theories against the market. It's the judge, jury, and executioner of any idea. As today's chart shows, the deflation argument has met the ax. The government's E-Z-Credit and money-printing scam has clobbered the dollar... and is driving the price of "real stuff" through the roof. It's behind the enormous surge in the price of gold. And it's behind the surge in Dr. Copper.

Last month, we tagged $3.25-per-pound copper as the level we'd need to see to say, "Inflation wins." This week, March copper blasted through that level to reach its highest high since its pre-crash levels in August 2008. "Real stuff" is now shattering price levels as folks flee junk paper dollars the government is handing out like Halloween candy.

China gold demand soaring even more than you thought

The Chinese rush into gold continues…

Reports coming from the Middle Kingdom claim a Chinese study group recommended the government increase its gold reserves to 6,000-10,000 tonnes in the coming years.

As of April, China reported it held 1,054 tonnes in gold. The high end of the recommendation would mean a more than nine-fold increase in holdings. It's a source of tremendous buying power for the metal.

World's largest gold miner soaring in price

Barrick Gold Corp said on Tuesday it had completely eliminated its fixed-price hedge book, allowing the company to take full advantage of rising gold prices and sparking a 7.6% rise in its shares.

Perhaps appropriately, the announcement came on a day the price of gold hit $1,200 for the first time, as the hedges -- which totaled 3 million ounces before Barrick began buying...

SILVER STOCKS: ONE OF 2009'S BIGGEST WINNERS


To recap, silver is among the most volatile assets in the world. It's half precious metal like gold, half industrial metal like copper... so its price fluctuates wildly along with currency fears, factory production, and interest rates.

As we like to say around the office: If all assets were patients in a mental ward, bonds would be the guy who sits silently in the corner and stares out the window. Stocks would be the guy who wanders the hall and mumbles to himself. Silver would be the guy they keep in the padded room all day. The companies who mine the stuff soar when folks smell inflation and currency mismanagement.

Today's chart shows this idea at work. It displays the 2009 price action of one of our favorite silver stocks, Silver Wheaton (SLW). In response to rising silver prices, SLW has gained 162% this year. If the government's funny-money scheme turns out badly, the gains made this year in SLW are only the beginning.

Wednesday, December 2, 2009

The bankruptcy of the United States is now certain

It's one of those numbers that's so unbelievable you have to actually think about it for a while... Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?

How did we end up with so much short-term debt? Like most entities that have far too much debt - whether subprime borrowers, GM, Fannie, or GE - the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due. As they say on Wall Street, "a rolling debt collects no moss." What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt… at ever shorter durations… at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.

When governments go bankrupt it's called "a default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists - Alan Greenspan and Pablo Guidotti - published the secret formula in a 1999 academic paper. That's why the formula is called the Greenspan-Guidotti rule. The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default. The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world's largest holder). That's 16,267,000 pounds. At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger.

According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we've been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months - an amount far larger than our reserves.

Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

So… where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP. Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or the Russian central bank, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing they're not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None own even 1% of their total reserves in gold.

THE WORLD'S MOST POWERFUL MARKET


Chalk up another positive mark for the global economy: The LQD just hit a new high.

Longtime readers know we track the price of bonds for an instant read on the economy. While the stock market gets all the press, the bond market is a much larger and more powerful beast. This is where American businesses go to borrow money to pay for factory additions, new equipment, and new hires. If debts aren't being repaid, bond prices decline. If bond prices decline significantly, we have major problems.

We track bonds with shares of the LQD fund. This is a broad basket of bonds issued by big companies like Dow Chemical, IBM, and Pfizer. As today's chart shows, bonds prices are climbing. The LQD is at its highest level of the year.

Sure... the U.S. has all sorts of financial problems (the three biggest being debt, debt, and debt). But as long as real-world indicators like the LQD are soaring, we have to mind the market's message: "The government's giant funny-money program is staving off financial calamity, for now."

Monday, November 30, 2009

George Soros: Major bloodletting ahead

Billionaire George Soros believes a “bloodletting” may be in the offing for leveraged buyout firms (LBOs) and commercial real estate investors amid the worst economy in seven decades.

“In commercial real estate and leveraged buyouts, the bloodletting is yet to come,” Soros said in a speech in Europe, reported by Bloomberg News.

“These factors will continue to weigh on the American economy, and the American consumer will no longer be able to serve as the motor for the world economy.”

Bankers across the globe have accounted for $1.66 trillion of write downs and write-offs on bad loans since the start of the credit crisis in 2007.

Crisis averted? UAE offers Dubai bailout

As a potential financial crisis, traders have already forgotten about Dubai.

The key factor is that the UAE is backstopping banks, which, as we know from experience here, is the signal to go back to business as usual.

Sunday, November 29, 2009

A Run on the Dollar Starts Soon

It's one of those numbers that's so unbelievable you have to actually think about it for a while...

Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion.

Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?

How did we end up with so much short-term debt? Like most entities that have far too much debt – whether subprime borrowers, GM, Fannie, or GE – the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due. As they say on Wall Street, "a rolling debt collects no moss."

What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt... at ever shorter durations... at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.

When governments go bankrupt, it's called a "default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists – Alan Greenspan and Pablo Guidotti – published the secret formula in a 1999 academic paper. The formula is called the Greenspan-Guidotti rule.

The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money-management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default.

The U.S. holds gold, oil, and foreign currency in reserve. It has 8,133.5 metric tonnes of gold (it is the world's largest holder). At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger.

According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we've been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months – an amount far larger than our reserves.

Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

So... where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP.

Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or Russian central banks, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing they're not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None owns even 1% of its total reserves in gold.

All of this is going to lead to a severe devaluation of the U.S. dollar... Which I expect to happen within 18 months. I examined these issues in much greater detail in the most recent issue of my newsletter, Porter Stansberry's Investment Advisory, which was published last week. Coincidentally, America's paper of record – the New York Times – repeated our warnings (nearly word for word) last weekend. Word is getting out.

If you haven't taken steps to protect yourself from the coming devaluation – like owning gold and silver bullion, foreign real estate, and farmland – make sure you do it soon. The dollar rout is coming.

Good investing,

Friday, November 27, 2009

WHY YOU SHOULD INVEST IN AUSTRALIA


Today's chart shows that once again, the ABCs are the place to be these days.

Years ago, Wall Street began using the acronym "BRICs" when discussing investments in the developing countries of Brazil, Russia, India, and China. We say, "Go ahead and watch the BRICs... but also watch the ABCs."

The ABCs are Australia, Brazil, and Canada. These are the three best countries for long-term investment in commodities like oil, uranium, copper, iron ore, and sugar. Each country has managed its finances better than the U.S. Each is loaded with the raw materials growing giants like India and China need.

Take Australia. The Land of Oz is a major producer of iron ore, coal, wheat, gold, uranium, and natural gas. It has excellent rail and port infrastructure. It sits on the doorstep of Japan and China. And while the U.S. dollar has spent its time crashing, the Aussie dollar has spent its time soaring. It's as close to a gold and commodity-backed paper currency as it gets.

Thursday, November 26, 2009

Worldwide escape from the dollar continues

India - whose central bank recently bought half of the 400 tonnes of gold the International Monetary Fund had offered for sale - has indicated it may now buy the remaining 200 tonnes. It is open to making additional purchases in the future.

We don't know where gold is going tomorrow, next week, or next month - but the trend of large gold purchases by foreign countries has clearly begun, and it should help put a long-term floor under its price.

Another huge country dumping the dollar

Russia's central bank gold stocks rose by 0.5 million ounces (15.6 tonnes) or by 2.6 percent in October to 19.5 billion ounces (606.5 tonnes), data on the bank's web site showed.

Russia's central bank has said it aims to increase gold's share in its reserves this year to keep its investments diverse. The metal is also seen as a safe-haven at times of financial market turbulence and economic crisis -- a status which has helped send the price of gold to record highs this year.

GOLD IS DUE FOR A BREAK


Today, we check in with an asset that needs a break soon: gold.

Below today's price chart, you'll find an indicator called the "RSI." The RSI measures overbought or oversold conditions on a given asset. When folks go wild for an asset, the RSI can reach "race car in the red" readings above 80.

Gold staged an upside breakout in early October. Since then, it has enjoyed a monster $150-per-ounce rally. This rally has left gold badly "stretched" to the upside. The RSI's "overbought" reading is at its highest point in 12 months. When a market is this stretched, all it takes is a lack of buying to cause a sharp correction. (I've marked previous examples with red arrows.)

Long term, gold has a bright future. The U.S. government's crazed "spend and tax and inflate our way to prosperity" program is murderous on our currency... which will drive people into real money (gold) for years. But in the short term, gold is like a runner that has sprinted flat out for a mile. It will take a deserved rest soon.

Wednesday, November 25, 2009

The bankruptcy of the United States is now certain

It's one of those numbers that's so unbelievable you have to actually think about it for a while... Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?

How did we end up with so much short-term debt? Like most entities that have far too much debt - whether subprime borrowers, GM, Fannie, or GE - the U.S. Treasury has tried to minimize its interest burden by borrowing for short durations and then "rolling over" the loans when they come due. As they say on Wall Street, "a rolling debt collects no moss." What they mean is, as long as you can extend the debt, you have no problem. Unfortunately, that leads folks to take on ever greater amounts of debt… at ever shorter durations… at ever lower interest rates. Sooner or later, the creditors wake up and ask themselves: What are the chances I will ever actually be repaid? And that's when the trouble starts. Interest rates go up dramatically. Funding costs soar. The party is over. Bankruptcy is next.

When governments go bankrupt it's called "a default." Currency speculators figured out how to accurately predict when a country would default. Two well-known economists - Alan Greenspan and Pablo Guidotti - published the secret formula in a 1999 academic paper. That's why the formula is called the Greenspan-Guidotti rule. The rule states: To avoid a default, countries should maintain hard currency reserves equal to at least 100% of their short-term foreign debt maturities. The world's largest money management firm, PIMCO, explains the rule this way: "The minimum benchmark of reserves equal to at least 100% of short-term external debt is known as the Greenspan-Guidotti rule. Greenspan-Guidotti is perhaps the single concept of reserve adequacy that has the most adherents and empirical support."

The principle behind the rule is simple. If you can't pay off all of your foreign debts in the next 12 months, you're a terrible credit risk. Speculators are going to target your bonds and your currency, making it impossible to refinance your debts. A default is assured.

So how does America rank on the Greenspan-Guidotti scale? It's a guaranteed default. The U.S. holds gold, oil, and foreign currency in reserve. The U.S. has 8,133.5 metric tonnes of gold (it is the world's largest holder). That's 16,267,000 pounds. At current dollar values, it's worth around $300 billion. The U.S. strategic petroleum reserve shows a current total position of 725 million barrels. At current dollar prices, that's roughly $58 billion worth of oil. And according to the IMF, the U.S. has $136 billion in foreign currency reserves. So altogether... that's around $500 billion of reserves. Our short-term foreign debts are far bigger.

According to the U.S. Treasury, $2 trillion worth of debt will mature in the next 12 months. So looking only at short-term debt, we know the Treasury will have to finance at least $2 trillion worth of maturing debt in the next 12 months. That might not cause a crisis if we were still funding our national debt internally. But since 1985, we've been a net debtor to the world. Today, foreigners own 44% of all our debts, which means we owe foreign creditors at least $880 billion in the next 12 months - an amount far larger than our reserves.

Keep in mind, this only covers our existing debts. The Office of Management and Budget is predicting a $1.5 trillion budget deficit over the next year. That puts our total funding requirements on the order of $3.5 trillion over the next 12 months.

So… where will the money come from? Total domestic savings in the U.S. are only around $600 billion annually. Even if we all put every penny of our savings into U.S. Treasury debt, we're still going to come up nearly $3 trillion short. That's an annual funding requirement equal to roughly 40% of GDP. Where is the money going to come from? From our foreign creditors? Not according to Greenspan-Guidotti. And not according to the Indian or the Russian central bank, which have stopped buying Treasury bills and begun to buy enormous amounts of gold. The Indians bought 200 metric tonnes this month. Sources in Russia say the central bank there will double its gold reserves.

So where will the money come from? The printing press. The Federal Reserve has already monetized nearly $2 trillion worth of Treasury debt and mortgage debt. This weakens the value of the dollar and devalues our existing Treasury bonds. Sooner or later, our creditors will face a stark choice: Hold our bonds and continue to see the value diminish slowly, or try to escape to gold and see the value of their U.S. bonds plummet.

One thing they're not going to do is buy more of our debt. Which central banks will abandon the dollar next? Brazil, Korea, and Chile. These are the three largest central banks that own the least amount of gold. None own even 1% of their total reserves in gold.

Top forecasters agree: Dollar slide to continue

The top performing forecasters in Bloomberg’s survey of 46 firms predict the dollar will continue falling next year.

The sluggish economic recovery and exploding government debt will weigh on the currency, they say. Already the dollar has hit 14-month lows this year.

Sunday, November 22, 2009

THIS IS MAJOR JUICE


This week's chart is picture of what traders like to call "juice."

You can use all kinds of different financial vehicles to take a position on any given idea in the market. Some vehicles are conservative and slow moving, for folks who avoid risk and volatility. Some are faster moving, for folks who know how to manage risk and want to shoot for quicker profits. These latter vehicles give you leverage... or "juice."

Juice in the copper market can be found in Freeport-McMoRan (FCX), the world's largest publicly traded copper producer. Regular DailyWealth readers know "Dr. Copper" is enjoying a big rally right now. The red metal is up 94% in the past 12 months.

Expensive copper means higher profit margins for FCX. Shares have more than quadrupled in price during the same time... and sports one of the biggest uptrends in the market right now. Major juice!

Saturday, November 21, 2009

Jeff Clark: There are 2 kinds of bulls right now

The bullish money managers seem to be divided into two camps...

1. Those who believe the market will stay propped up through the end of the year, thereby cementing big bonuses for big returns, and

2. Those who are ready to hit the sell key at the first sign of sustainable weakness in order to lock in big returns on the year and guarantee a big bonus.

I think the second camp is much larger.

Friday, November 20, 2009

China gold BLOWOUT: Demand for the metal surging

Chinese consumer demand for gold continues to grow. It reached record levels in the third quarter of the year, as demand for jewelry and other items celebrating the 60th anniversary of the founding of the communist state added to already high investment demand.

In all, Chinese consumers bought up an astonishing 120 tons of gold, up over 12% compared to last year, even as total world demand fell.

The Chinese continue to buy up the world's gold as much of the western world sits idle. You'd be wise to consider buying gold now, before the rest of world wakes up and joins China.

South African gold industry on "deathwatch"

Despite claims of massive below ground reserves, researchers say that South Africa's gold industry is on deathwatch, with its goldfields nearly 95 percent exhausted and production rates set to fall permanently below 100 tons a year within the next decade.

South Africa is the fourth-ranked gold producer in the world.

Gold production from the Witwatersrand, the biggest known gold field in the world, peaked at around 1,000 tons...

THIS IS SILVER'S YEAR


When they close the books on 2009, they'll chalk up a big win for silver vs. gold.

One of the big questions facing the precious-metals buyer is "Should I buy gold or silver?" As we profiled in September, since the bull market in precious metals began in 2001, the answer is, "There isn't much difference in the returns... but silver is much more volatile."

Since the 2001 "kickoff," gold and silver are both up a little over 300%. But as you can see from today's comparison chart, when a solid metals rally gets going, the returns in silver can get extraordinary. Our chart plots the percentage gains in gold (black line) versus silver (blue line). Silver is up nearly 65% this year, while gold is up 30%. The blue line, however, has much bigger peaks and valleys.

Moral of the story: You can make a heck of a lot of money in silver... just be willing to stomach a lot of volatility on the road to riches.

The Simplest Reason Gold Will Soar

When the bank pays you nothing in interest, gold goes up. And right now, the bank is paying you nothing in interest.

Why does gold go up when interest rates are low? It's simple...

The knock against owning gold has always been that, unlike cash, it pays no interest... Compound interest is almost irresistible. If you can earn 7% a year on a $10,000 deposit, in 10 years time, it will be worth $20,000. Gold will just sit there like a bump on a log.
But every so often, like right now, paper money pays you no interest... and the scales tip in favor of gold.

That's the simple version. Let's add one little tiny wrinkle to it, so you can see why gold has become irresistible now...

The forecast for inflation in 2010 is around 2%. Yet the Fed is keeping interest rates near zero. So instead of earning nothing in interest at the bank, you're actually LOSING 2% a year to inflation. That's what's REALLY happening – the REAL interest rate at the bank (minus inflation) is NEGATIVE 2%.

My longtime friend Porter Stansberry asked me to do a study of what happens when real interest rates are less than zero. The results were astonishing...

In short, when real rates are negative, gold soars and stocks stink. And when real rates are positive, gold stinks and stocks soar.

Here are the actual results. (Note: These are COMPOUND ANNUAL GAINS.)

1973 through 1980
The median real interest rate was -1.15%.
Gold returned +32% per year.
The real return on the S&P 500 was -7% per year (not including dividends).

1981 through 2001
The median real interest rate was +2.7%.
Gold returned -3.5% per year.
The real return on the S&P 500 was +7% per year (not including dividends).

2002 to today
The median real interest rate was -0.4%.
Gold returned +18.5% per year.
The real return on the S&P 500 was -3% per year (not including dividends).

Well, there it is, plain as day. And you can see, these trends persist.

In 2010, real rates will be negative. (Bernanke will keep nominal rates near zero... so subtracting inflation will give you a negative real interest rate.) There is essentially no chance for a POSITIVE real interest rate in 2010. Said another way, you WILL lose money in the bank in 2010. Whatever interest you earn won't keep up with inflation.

History shows, under that environment, stocks don't do well... and gold soars. There's nothing in sight to end that trend. Trade accordingly.

WHERE THE BULL MARKETS ARE


Breakouts. Everywhere we look in the commodity markets, we see breakouts.

Breakouts are one of the great "common sense" charting tools available to traders. It's simply when the price of a stock or commodity reaches a new high for a given period of time. No trend can start without one.

Here's this week's list of major commodity stock breakouts, aka, "where the bull markets are": BHP Billiton (world's largest mining company), Silver Wheaton (largest silver royalty company), Peabody Energy (largest public coal company), the Market Vectors Agribusiness Fund (food and fertilizer producers), Petrobras (Big Oil). And don't forget a fresh high in the Venture Index as well.

How about the commodities themselves? Try copper, gold, silver, and platinum. Crude oil, lead, aluminum, zinc, cotton, and sugar are within spitting distance of breakouts as well.

In addition to a bullish supply/demand picture, legendary investor Jim Rogers likes commodities because of the potential inflationary explosion the Federal Reserve is creating. As you can see from the chart below, he has the trend on his side.

A PICTURE OF THE ECONOMIC REBOUND

Score a victory for folks bullish on the global economy...

For a picture of this victory, we go to the past two years of action in the Baltic Dry Index. As we mentioned last month, the "BDI" is one of our favorite real world barometers of what's going on. It's the most widely followed gauge of the price it costs to ship raw materials like grain, coal, and iron ore.

The BDI fell 94% in just six months last year as credit – the oil of commerce – was drained from the global economic engine. It's the worst crash we've ever seen an index suffer. But like all economic indicators, the BDI is in rally mode right now...

After striking a bottom below 1,000 last December, the BDI rallied to 4,000 by June. It then corrected to almost 2,000 in September. But as you can see from today's chart, the BDI is set to reach a new 12-month high this week. As long as this index remains healthy, we have to say, "The economy ain't so bad..."

Monday, November 16, 2009

HOW THE RICH SEE THE RALLY


Our chart of the week shows why the rich, seasoned investor looks at the recent stock rally and shrugs his shoulders.

You see, the rich investor measures his gains not in the arbitrary value of government paper (dollars), but in real, honest money: gold.

This week's chart displays the 2009 return of the S&P 500 in terms of gold. Nominally, stocks are up big since May. But the U.S. dollar has plummeted in value... and the price of "real stuff" like crude oil, copper, and gold has soared. Measured in gold, stocks have drifted sideways for seven months... and are nearing a new short-term low.

We stand by what we said last month: Sure, dollars are flowing into stocks right now... but the yahoos running the controls in Washington D.C. are making those dollars worth less and less every day.

China shakes the gold industry: Rumored to be interested in major U.S. gold miner...

Newmont Mining (NEM), one of the world's biggest gold producers, has been on a tear lately. Its stock is up almost 20% in just the last week. Most are pinning the move on the company's great earnings at the end of October - third-quarter profits more than doubled as gold has risen above $1,000 an ounce... But there's also an interesting rumor behind the move.

Some on Wall Street are speculating China is looking to buy the U.S.-based company outright. It's no secret China has been on a buying spree for gold and other real assets, but this would mark its first attempt to buy a major gold company.

The rumor is unconfirmed at this point, and it's likely the U.S. government would get involved prior to a sale. But this type of news is certain to become more common as the world attempts to flee the dollar.

The 25 richest members of Congress

Did you know there are 238 millionaires in Congress?

That's according to a new study by the Center for Responsive Politics, which shows that more than 44% of Senators and Representatives are in the seven-figure club, compared to about one percent of all Americans.

Just as startling: 50 members of Congress boast estimated wealth of at least $10 million, according to 2008 data. And 7 are worth more than $100 million!

Overall, congressional median wealth...

Sunday, November 15, 2009

HEALTH CARE: THIS WEEK'S UNLIKELY NEW HIGH

The star of this week's "unlikely new highs" department: the U.S. Healthcare Providers investment fund, symbol IHF.

IHF is a one-click way to invest in a broad swath of the U.S. heath care industry. Major holdings include Cigna (insurance), UnitedHealth (insurance), Quest Diagnostics (testing), DaVita (dialysis services), and Express Scripts (pharmacy management). The fund is up 35% in the past seven months and just registered a new 52-week high.

The conventional thinking is at odds with this price action. After all, won't the government's reform efforts drive down profits for anyone who gives a flu shot, performs a lab test, or asks you to fill out an insurance form? We asked medical stock expert Rob Fannon (editor of the Phase 1 Investor) for his take on the situation...

Rob says sure, reform may pressure profit margins. But remember how the ancient law of supply and demand works. The government could make health care "free" to tens of millions of people. When you make a product or service free, you create unlimited demand for it. That's why Rob recommends getting on board this trend. Profits may go down a bit, but if Washington's "free houses, cars, and health care" panderers get their way, a lot of new demand and revenue is headed toward IHF and its holdings.

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