Sunday, January 31, 2010

It's Time to Bet Against the Euro

It's time to bet against the euro...

That's the trade I recommended over a month ago in my True Wealth newsletter. And the trade is still as good... no, better... than it was when I first recommended it.

Here's why I recommended it in the first place... and why NOW is an even better time to make the trade than when I told my paid subscribers about it in mid-December...

First, as I'm sure you've already heard, Greece is at risk of falling out of the euro. But we have many other factors telling us the euro will continue to go down...

First off, we have the trend... In currencies in particular, once a trend gets going, it's hard to derail it.

Last year's trend was a crashing dollar. In 2010, it looks like the trend will be a crashing euro. No matter how you analyze trends, you'd have to say the euro is finally in a downtrend right now... It peaked in late November and is down more than 8% already. That's a huge move for such a short time in a major currency.

When I first recommended betting against the euro in mid-December, I wasn't certain we were in a downtrend yet. Now, it's absolutely clear... the euro fell into the $1.30s yesterday for the first time since last summer.

Also, importantly, the euro is WAY overvalued relative to the dollar.

One of my favorite simple indicators of whether a currency is overpriced or underpriced is the "Big Mac Index" from The Economist magazine... As the chart here shows, whenever a Big Mac in Europe is 50% more expensive than a Big Mac in the States, the euro crashes.

We're not at the 50% overvalued point anymore (which is a real extreme). But the euro is still very expensive... A Big Mac in euros is around 35% more expensive than a U.S. Big Mac.

We will also likely have interest rates in favor of the dollar in 2010...

If the European Union must save Greece and the other "PIGS" (Portugal, Italy, Greece, and Spain), then interest rates in Europe will stay low. But the U.S. is in recovery, where rates can rise. At the very least, Europe won't have any interest-rate advantage.

Other factors in the dollar's favor include a potential reversal of the Big Trade of 2009. In 2009, as risk abated, everything went up and the dollar went down. Now, risk is making a bit of a comeback – the dollar (the safe haven) could go up. Another factor is, with the troubles in Europe, the euro has little chance of competing with the dollar as the world's reserve currency.

I could go on... But in short, this type of opportunity doesn't come along often.

The euro is in a horrible situation right now. A mountain of factors is against it. It is overpriced. And in the last two months, a firm downtrend has been established. It is time to bet against the euro.

Saturday, January 30, 2010


Traders take a note from Jeff Clark: Gold stocks are ready for a quick bounce.

In his morning e-mail for traders, our colleague noted how the recent market decline has punished gold stocks far worse than your typical sector... producing a trading opportunity.

You see, a market moves in waves. While these waves are impossible to accurately predict, they do have a tendency to stage "rubber band" snapbacks after big moves. As you can see from today's chart, the big gold stock fund (GDX) just suffered a big move. It's down 16% from its January high.

Now look at the "pane" at the bottom of the chart. This displays an indicator called RSI. This indicator simply measures how "stretched" an asset is to the upside or downside. Note how gold stocks rally each time the RSI dips into "oversold" territory (red arrows). Now note that gold stocks are as oversold and abandoned as they have been in a year. Expect a rally soon.

Friday, January 29, 2010

George Soros: Gold is the ultimate asset bubble

George Soros has joined the chorus of high profile investors warning that low interest rates will cause inflation and additional asset bubbles, but he caused quite a stir when he targeted gold in particular.

In comments from the World Economic Forum in Davos, Switzerland, Soros called gold "the ultimate asset bubble," and set off fears that gold could have further to fall.

Critics are using these comments to suggest Soros is "anti-gold," but a quick look at the holdings of Soros Fund Management shows that GLD, the gold ETF, is the fourth largest holding of Soros Fund Managment.


The bears are starting to win the "China argument" we told you about a few weeks ago.

To recap, the Chinese economy and stock market are the center of a big debate. Some say the country is a huge pile of malinvestment. Some say don't worry, things are fine there. Now let's ask the market who is right...

Chinese stocks enjoyed a huge rise from their November 2008 low to their August 2009 peak above 3,400. A few months later, the benchmark Shanghai Index declined to a low of 2,700. It then made a few weak attempts to get back to that peak during the winter. But exhausted buyers failed each time to push up prices.

This chart pattern is a like an aging athlete who enjoyed a great career (rising prices, A) and reached his high point (market peak, B). Then, after a stumble from greatness, made several comebacks (failed rally attempts, C and D), only to be reminded he's 40 years old instead of 26.

Granted, this is only a 10% decline from recent highs. It doesn't necessarily mean China is going to collapse. But it is fair to say the bull market in China has been dealt a severe punch to the gut... and the path of least resistance is now down.

Thursday, January 28, 2010

This is how China is taking over the world

Plagued by high deficits and a drop in its credit ratings, Greece has to raise money as quickly as it can to fund its national debt. According to the FT, is will try to market $25 billion euros in paper to Beijing. China has, as it likes to remind the world, $2.4 trillion in foreign exchange reserves.

China will probably take the Greek offer and get very high interest rates in exchange. The transaction may be a sign of things to come.

The stock market is falling on extraordinary trading volume

The past five trading sessions have resulted in an amazing wipeout. Three months of stock market gains have been erased in days. Today's chart shows how the "big money" has played a big role in this loss.

You see, a healthy stock market is like a big truck. It requires a constant supply of "buying fuel" to drive prices higher and higher. This fuel can only be supplied by the large portfolios controlled by hedge, mutual, pension, and insurance funds. No market can climb hills without this big money buying power.

Wednesday, January 27, 2010


The past five trading sessions have resulted in an amazing wipeout. Three months of stock market gains have been erased in days. Today's chart shows how the "big money" has played a big role in this loss.

You see, a healthy stock market is like a big truck. It requires a constant supply of "buying fuel" to drive prices higher and higher. This fuel can only be supplied by the large portfolios controlled by hedge, mutual, pension, and insurance funds. No market can climb hills without this big money buying power.

At the bottom of our chart is a series of red and black vertical bars. These bars represent the trading volume on a given day in the huge S&P 500 investment fund (SPY). Red bars represent the trading volume on days the market declined. Black bars represent the trading volume on days the market advanced. The taller the bar, the greater the volume.

As you can see, the big money isn't much interested in stocks right now. The market was punched in the gut by several high-volume down days back in October. It then staged a rally on flimsy holiday volume in November and December. In the past week, however, this rally has been wiped out by big declines on mega selling volume. Color this decline "big money approved."

How to know if your gold is real

As the 10-year gold bull continues its stunning run, rumors of fakery seem to be cropping up as fast as new Eagles can be minted. Should you be worried? Do you need to run to the coin shop for a home test kit?

Well, the counterfeiters are out there, and have been for millennia, but how to counter them?

You probably remember movies about the Old West, wherein a shady-looking character would offer to exchange a gold coin for a horse, and the nag’s owner would bite down on the coin. That was about all you could do, if you lacked proper assaying equipment and had to make a snap judgment on the fly: depend on your teeth to tell you whether the metal in your hand was sufficiently soft to be genuine gold.

The bite test is actually a pretty good one since gold, despite being among the heaviest metals, is also very soft. If you chomp down and shatter a tooth, it ain’t gold. But does that mean you need to munch your way through your coin collection?

Top strategist: This country is the "world's best investment"

Japanese stocks will be the best investment among the world's biggest markets during 2010, says Byron Wien, vice chairman of Blackstone Advisory Services and former chief market strategist for the Pequot Capital Management hedge fund.

Stock prices are low and the economy is improving in Japan, which is good news for companies there, Wien tells Bloomberg.

Another way China is taking over the world

The FT has determined that the growth of China’s scientific research has been greater than that of any other nation in the world over the last three decades. And, China could pass the US as the largest provider of “research knowledge” by the end of this decade. The paper reports that “China far outperformed every other nation, with a 64-fold increase in peer-reviewed scientific papers since 1981, with particular strength in chemistry and materials science.”

The news is another frightening example of how China’s financial and intellectual strength is beginning to eclipse...

The No. 1 reason commodities will go much higher in the next decade

The biggest emerging economies have ambitious plans that require a greater share of the world's limited commodities. This trend is spurring profound and permanent disruptions in how these resources are allocated now and in the future. For investors, these disruptions present opportunities.

… In only 10 years, China has gone from being the world's 20th largest oil consumer to No. 2 behind the United States as a result of its accelerating shift from the bicycle to the car. Getting around also means more roads, more bridges, more airports, more and faster railroads - all of which add to commodities demand.

Global debt crisis builds

S&P said it will consider a downgrade of Japan’s sovereign debt. The nation faces the same pressure that countries from Ireland to Greece face. Japan’s national debt obligations are growing while its economy is not.

“The policies of the new Democratic Party of Japan government point to a slower pace of fiscal consolidation than we had previously expected,” S&P said.


The past 16 months' trading in shares of Intel are one of the great "the market leads the news, not the other way around" stories we've ever seen. It's a story we constantly updated you on.

Last year, the world's largest producer of semiconductors was a monthly guest in this column. Intel makes the tiny engines that run the world's computers... which makes it a high-tech version of Dr. Copper. Tracking Intel's sales, profits, and share price gives us an "instant read" on the world's economy.

In April, we noted how Intel shares held like a rock around $15 after releasing a horrible earnings report. When a stock holds steady or rises in the face of horrible news, it's a classic sign the bottom is in… and things are destined to get "less bad." Intel moved exactly as we scripted and shot up 33%… and the economy got "less bad."

We've come full circle now. Eleven days ago, Intel reported a huge 28% increase in sales and beat analysts' expectations. So what did shares do with this great news? They fell!

The moral of this 16-month story: You'll never make money buying on bullish news or selling on bearish news. "Easy" trades like that never work. This is one of the hardest lessons for a new trader to learn. We think this short-term story of Intel is a great teacher.

Tuesday, January 26, 2010

How America is losing the most important energy race of our time... to CHINA

…In discussions with Chinese intellectuals, government officials and company executives, the Chinese are often incredulous, all asking essentially the same question: Why is America letting us have a free and uncontested ride in all these energy ventures?

In contrast, American "Big Oil," (ExxonMobil, ConocoPhillips and Chevron — the only companies really able to play along and compete with the Chinese) not only are not supported or encouraged by the U.S. government, they've been routinely vilified by politicians. To the sizeable portion of the American public that's unaware of the role energy plays in the modern world, they are the devil incarnate.

Traders expect stocks to crash

This week's decline in U.S. stocks has prompted institutional option traders to position for a more substantial pullback in exchange-traded funds covering the consumer, materials, banks and retail sectors.

After a positive start for the year, a sudden three-day reversal on Wall Street has raised the specter that a larger technical downside correction, perhaps of a magnitude of 20 percent, is looming in the first quarter.

Market participants noticed a burst of nearly 400,000 contracts traded in downside.

Saturday, January 23, 2010


This week saw an important breakdown we've been forecasting for a while...

Back on December 16, we noted the pan-European currency, the euro, had registered a textbook "1-2-3" trend change... and that the path of least resistance was DOWN.

Just after we wrote the piece, the euro suffered an incredible drop for a major currency... and reached a three-month low. It then staged a natural "relief rally" for about three weeks.

But in the past eight days, the euro registered another major technical breakdown. It violated the lows set on the last decline. We stand by our original thesis: Debt troubles for several of its members, plus an overvaluation, plus a major trend breakdown equals lower prices for the euro.

China alert: Investors dumping hundreds of millions in stock...

Worries of a China bubble and government efforts to curb bank lending are sending investors for the exits. Bloomberg reports that:

Investors pulled $348 million from China equity funds last week, the biggest outflow in 18 weeks, on concern China’s moves to cool its economy will slow growth, according to EPFR Global.

This is the first indicator the “hot money” is leaving the country.

The No. 1 reason to invest in emerging markets

The streets of Mumbai, India, are so congested, you can't walk on them. So the city is going to spend $300 million to build 50 elevated steel walkways to allow pedestrians to get where they're going. Mumbai has nearly 18 million people and its sidewalks are crowded with street vendors, some of whom have been selling their wares on the same spot for 20 years or more, according to the Wall Street Journal.

I hear the word "infrastructure" thrown around a lot, especially when investors talk about China and India. But I rarely hear anyone tell me what it really means in simple terms that anyone can understand.

A city of 18 million without enough sidewalk space... that I understand.

Mumbai's space problem reminds me of Julian Simon, economist and author of The Ultimate Resource II. The ultimate resource Simon refers to is human beings. Peak Oil proponents and other environmental alarmists don't get that with every new mouth to feed comes a new brain that thinks. Though there can certainly be short-term shortages of various goods and services - like walking space - over the long term, the rule for humanity has been abundance.

Think about New York City. Today's population (19 million) is roughly similar to Mumbai's. But 150 years ago, the population of pre-Civil War New York wasn't near its current size, and the city would be hardly recognizable compared with today's metro area.

Given Mumbai is starting off with enormous population resources, imagine what 150 years of progress will look like there. New York to the 10th power? It boggles the mind.

This potential for huge growth excites investors more than just about anything else. It's the reason Jim Rogers remains so bullish on China, despite his admission that property markets there are overheated. I'm heading over to Chennai, India, in early March. Maybe I'll have a good sidewalk story to tell when I get back.

Friday, January 22, 2010

Obama attacks the banks

The big news today is President Obama's proposed bank regulation plan.

The plan aims to limit the size of financial institutions and prohibit banks from conducting proprietary trading or investing in hedge funds or private equity funds.

In his statement, Obama said, "While the financial system is far stronger today than it was one year ago, it’s still operating under the same rules that led to its near collapse... Never again will the American taxpayer be held hostage by a bank that is too big to fail... If these folks want a fight, it’s a fight I’m ready to have.”

The plan would first have to be approved by Congress - where the plan is likely to hit tough resistance from lawmakers and the financial lobbyists who pull their strings - but if it passes it could have severe effects on the largest banks like Goldman Sachs, Morgan Stanley, JPMorgan Chase, and Bank of America, as well as the market as a whole.

This is how America goes bankrupt

A new “shocker” from Washington…

Senate Democrats just proposed allowing the government to borrow a fresh $1.9 trillion to cover its bills. The increase would lift the national debt to $14.3 trillion.

Where does our money go? To buy votes, basically. Rather than drastically reduce spending, our politicians are shoveling out tons of money to car companies (to get the union vote), food stamp recipients (to get the poor vote), to the military-industrial complex (to get the war monger’s vote), and to busted homeowners (to sop up the rest).

This is how America goes bankrupt…

Thursday, January 21, 2010

Euro crisis update: Greece continues to deteriorate

Things in the eurozone deteriorated further this morning as the yields on Greek government bonds soared on concerns that the country won't be able to sell the debt it needs to fund its massive deficits this year. Bloomberg reports:

The two-year note yield jumped 88 basis points to 4.60 percent as of 12:28 p.m. in London, the biggest increase for the security since it was issued almost two years ago. The 10-year bond yield advanced 27 basis points to 6.18 percent, with the premium investors demand to hold the debt instead of benchmark German bunds to 294 basis points, the most since March 16.

This could be the pin that pops the China bubble

Growing concerns about excessive credit and lending in China, have lead the Chinese government to begin tightening up monetary policy and increasing the amount of reserves banks must hold, actions with are directed at decreasing the amount that banks can lend.

In addition, China's largest banks are taking independent steps to cut back on new loans, including complete bans on new yuan-valued loans at Bank of China Ltd, after record numbers of new loans were issued earlier this month.

Whether or not China is in a bubble is debatable, but it's clear much of the China growth story is dependent on the flow of easy credit, so these developments are likely to be a significant headwind for the Chinese economy going forward.

Wednesday, January 20, 2010

Morgan Stanley: Dollar set to soar

Morgan Stanley currency analyst Sophia Drossos says the dollar is very undervalued and will rise significantly.

“We forecast the USD to rally 10 percent against other developed market currencies in 2010, with most of these gains concentrated against other G4 currencies,” Drossos writes in a note to investors.

“For the dollar to remain weak, U.S. data would need to continue to disappoint versus other major economies,” she notes.

“However, we do not expect this will be the case.

Not One Trader in 1,000 Knows This Secret

The secret I'm going to share with you today is probably the single most important factor in determining the success of stock market traders. If you can master it, you can make millions in the stock market.

This technique is simple, but it requires months of training and dedication to master. The trouble is, it goes against our basic emotional conditioning. Don't worry if you don't get it immediately. Keep practicing...

So what's the secret?

The amateur thinks winning in the market is about predicting the future. The amateur buys some shares and hopes the market rises. He has no idea what to do if something unexpected happens. He wings it completely and ends up trading with his emotions. There's nothing more destructive to wealth than emotional trading.

The market is a game of probability. It has nothing to do with predicting the future. When you treat the market as a game of probability, money management becomes your most important weapon. What I mean is, the stocks you buy become far less important than the position size you use and the decisions you make after you pull the trigger.

This is the secret to beating the stock market. Maybe one speculator in 1,000 knows this. Until you realize this, you have hardly any chance of making money in the market. It boils down into three easy rules...

Trading Rule No. 1: Risk a constant amount of capital in each trade... and keep it small.

Most investors put more money into their favorite ideas than they put into their least favorite ideas. They have no system for figuring out bet size.

Skillful traders know they can't read the future, so they give every bet the same chance. They make thousands of small but profitable trades and accumulate their fortunes slowly but surely. The key is to keep your bets small and constant by putting, say, 2% of your total trading capital in each trade.

Trading Rule No. 2: Cut your losses. You are trading against some of the world's smartest people, armed with incredible research budgets and advanced supercomputers. They don't trade as a side job or as a hobby. These people live, eat, and sleep the market.

The market is a hostile place. It's like a medieval army trying to get into your castle day and night. Your stop losses are the castle gates. A position without a protective stop loss is like an open gate. You're letting the army pour in and take your gold.

To control your losses, use a stop loss. This way you know exactly how much money you stand to lose if your stock falls, before you've even entered the trade. The stop loss applies at all times and can never be overridden.

Trading Rule No. 3: If your trading idea shows a profit, add to your position. If it keeps rising, add more. For example, begin your investment with a purchase of $2,000. Once your stock is up Y%, invest another $2,000. Then, once your stock is up Z%, invest another $2,000, for a total cash investment of $6,000. Decide what Y and Z are before you enter the trade. Write them down so there's no confusion.

In my Penny Trends trading service, I have a mantra that captures the essence of this secret. We call it "doing more of what's working and less of what's not." This mantra drives every decision we make.

By using these three simple money management techniques... that is, push your profits, cut your losses, and keep your positions small and constant... you can beat the market, too. You won't win every trade, but in the long run, you'll generate a positive return in your trading account.

Tuesday, January 19, 2010

Today's entertainment: Dubai halts construction of indoor mountain range

Representatives from the emirate of Dubai announced with disappointment this week that its recent debt crisis has forced developers to halt construction on the city's long-planned 22-mile-long indoor mountain range.

Planners continue to take future reservations for the mountains' 9 and 10-star hotels.

The culmination of a decade's worth of ambitious and expensive building projects, Dubai's estimated $100 billion debt officially brought work on the artificial mountain range to a stop on Tuesday.

"This is a very sad day for the emirate of Dubai," Crown Prince Hamdan bin Mohammed al-Maktoum told reporters at a press conference held inside the gold-plated anti-gravity chamber in his palace. "Although I believe it is the basic right of all who visit us to be able to scale to the top of a 15,000-foot-tall manmade snowcap, these tough economic times have...

Sunday, January 17, 2010


Our chart of the week displays a rally in one of the most important financial indicators nobody watches: high-yield bonds.

It's vital to watch the action in corporate bonds. The bond market represents the loans taken on by American businesses. It's a giant market... far larger than the one for stocks. If the price of bonds is trending lower, it means companies aren't making enough money to even pay the interest on their loans. If the price is trending higher, things are getting "less bad."

One excellent way to track the bond market is through the iShares High Yield Fund (HYG). This investment fund holds a basket of bonds issued by companies with considerable debt levels. As you can see from the chart, this fund is soaring right now... and sits at a 52-week high.

HYG's enormous rally reflects a big trend right now: Sure, the U.S. economy has problems (debt and debt are the two biggest). But before you get too bearish on things, listen to the market. As long as the bond market is healthy, we know interest is being serviced, loans are being paid back, and, at least in the short-term, the government's huge "E-Z-Credit" program is keeping things going.

Saturday, January 16, 2010

Euro suffering huge hit this morning...

The Euro declined by the largest amount in nearly a month this morning, falling as much as 1.1% against the yen. The usual suspect was the cause: Worries of a debt blowup in Greece. Bloomberg reports:

The yield on the benchmark Greek two-year note jumped 16 basis points to 3.72 percent, the highest level in almost a year. Rating downgrades sparked a rout in Greece’s bonds in December as the budget deficit headed for 12.7 percent of gross domestic product, more than four times the European Union limit.

Friday, January 15, 2010

Greek default risk explodes to all-time high

Greek CDS hits another all time record at 342.50 bps. Greece is now trading nearly 5 times as risky as the entire universe of investment grade US corporates.

In other news, Greek Prime Minister Papanderou repeats for the third time (and fourth, and fifth) that the country will not, repeat not, repeat not, repeat not, repeat not, need a bail out from the EU, and will not (etc) drop the euro or leave the eurozone. If only anyone believed...


The stock market has gone to sleep.

Talk to any trading pro, and they'll tell you how there just isn't much action in the market these days. As we showed you last week, investors and traders were lulled to sleep over the Christmas break... and Wall Street's "fear gauge," the VIX, is at its lowest point in 19 months. We offer another example of how quiet things are today...

Today's chart of the past year's trading in the benchmark S&P 500 stock index features an extra "pane" on the bottom. This pane displays an indicator called Average True Range (ATR).

Put simply, ATR shows how much the stock market is "wiggling" up and down in a given period. When the market is volatile, ATR readings rise. When the market is calm, ATR readings shrink. Notice how ATR was at elevated levels during the wild credit crisis days last year. The past six months of steady market gains, however, have left ATR at its lowest level in over two years.

If the market were an ocean, this low ATR reading is the equivalent of flat seas and not a cloud in the sky. It's a graphic display of what traders call "no action." But as we learned last year, the market has a way of providing action when most folks least expect it.

Thursday, January 14, 2010

Chinese banks are a disaster

An excellent piece in the Financial Times highlighted the growing discrepancy in global bank share valuations. As the credit crisis unfolded and U.S. banks tumbled Chinese banks have continued to thrive.

At the height of the equity market bubble in 2000 U.S. banks ranked as 5 of top 6 most expensive in terms of price to book value. As money has poured into emerging markets over the last 10 years Chinese banks have seen unprecedented growth. Valuations have ballooned as well. Chinese banks now own 5 of the top 6 positions in terms of valuations...

The impending global crisis no one is talking about

Ambrose Evans-Pritchard, the International Business editor of British newspaper the Telegraph, is out with a piece on the impending crisis in Japan that you probably haven't heard about.

Citing several new reports, Evans-Pritchard shows how dangerously close Japan is to total meltdown, complete with debt defaults and hyperinflationary bust. He says the only reason it hasn't already happened is because Japanese investors "have not yet had the leap in imagination required to understand their predicament, and act on it."

Google could leave China

Google (NASDAQ:GOOG) made a threat to China which does not have a precedent in the actions of any other US company. It threatened to pull its business from China due to potential cyber attacks on its online operations.

The actions appear to have been against the company’s e-mail service-GMail. Google said it would stop censorship of its search results as a result of the attacks. Google has cooperated with the Chinese government on a certain level of keeping some results out of the hands of the country’s citizens.

The FT took a different view of the story saying Google would be forced out of China if it continued to attack the government there.

Warren Buffett's Chinese electric car coming to US soon

China's Build Your Dreams Auto took aim at the U.S. market Tuesday with the unveiling of a four-door electric car at the Detroit auto show.

BYD, 10 percent owned by Warren Buffett's Berkshire Hathaway, aims to have the e6 ready for sale in North America by the end of 2010, which would make it the first Chinese automaker to enter the highly competitive market.

"As a major developer and manufacturer of electric vehicles, BYD is devoted to...


There's a small controversy in the world of financial gurus this week.

On one side, you have Jim Chanos, one of the world's greatest "forensic accountants." Chanos was the first guy to unravel Enron's fraudulent books... and he's made a ton of money betting against credit and spending excesses. Chanos says China's economy is a credit bubble waiting to explode (read the full story here).

On the other side, you have Jim Rogers. The legendary hedge-fund manager is one of the biggest China bulls you'll ever find. He literally wrote the book on being a bull in China, which is naturally called A Bull in China. Rogers says China bubble fears are overblown.

It's a big story with big implications. A China crash would hammer stock and commodity prices around the world. We can track this potential crash with the "Dow Industrials of China," the Shanghai Composite Index.

As you can see from today's chart, this index enjoyed a monster rally in 2009, which peaked in August. And despite the terrific growth headlines surrounding the country, the index has "bumped its head" around 3,300 three times in the past three months. If further weakness takes the index below its short-term low around 2,700, it would put the market on the side of Mr. Chanos. We'll keep you updated...

Wednesday, January 13, 2010

China specialist: A big fact the China bears are missing

Throughout this crisis, we've heard lots of pundits crying about how China's falling "exports" would crater the Red Dragon.

Right...and we've got a bridge in Mongolia to sell you.

What the panda bashers repeatedly fail to understand is that exports account for less than 20% of China's GDP. Not only that, but as I've stated in several interviews recently, it's what they import that matters most - especially when it comes to helping the rest of the world recover from its fiscal follies.

Not many people know this but China imports as much as $0.90 on every $1 they export which means that in contrast to spendthrift image promulgated in the ignorant western media, China is actually spending lots of money which is why any credible analyst worth his or her salt, if at least somewhat familiar with Chinese consumption patterns knows this by now.

Case in point, on Monday, Business Week reported that Chinese imports have increased 55.9% to record levels, which means that Chinese consumption is gathering some serious mojo exactly as we have suggested since the onset of this crisis.

The key point here is this - China is a whole lot more balanced and globally integrated than most people think.


Our favorite member of the "unlikely new highs" club is becoming its new leader.

Back in November, we covered the upside breakout in the iShares Healthcare Providers Fund (IHF). This fund is a one-click way to buy a diversified basket of America's largest health care businesses. Major weightings include DaVita (dialysis), Aetna (insurance), Laboratory Corp (testing), Express Scripts (pharmacy management), and Covance (drug development).

Months ago, conventional wisdom said the health care industry's profit margins would be pressured by government bureaucrats. But as our colleague Rob Fannon commented, a "free health care for everyone" system would create a ton of new demand. After all, nobody can spend money like Uncle Sam. This demand will drive health care stocks higher for years.

As you can see from today's chart, the market likes this thesis. The IHF is enjoying one of the steadiest, strongest uptrends in the market right now. Shares have climbed from $42 to $51 in just three months. Millions of customers, who couldn't care less about cost (after all, their neighbors are paying for it), are headed its way...

Sunday, January 10, 2010


Our top "shoot the moon" asset is doing just that right now.

Last year, we updated you monthly on the enormous potential of small resource stocks to produce big returns. There's simply no other sector that can match the gains that small gold, copper, and uranium miners will produce if the government continues its insane fiscal mismanagement.

We track small resource companies with the Toronto Venture Exchange index. You can think of it as the "Dow Industrials of small resource stocks." We timed a bullish note on this index at its extreme bottom in December 2008.

As predicted, this index is rallying like crazy as gold, oil, and other commodities climb in price. The "Venture" is up 120% since our first note... and has climbed 24% in just the past four months. As commodities trend higher over the coming years, this gain will go down as just the beginning.

Saturday, January 9, 2010


About that "farm income through the stock market" idea...

Humans have the desire to collect farm income seared into their DNA. After all, it's great to have any income stream... you're providing a vital product... and you're invested in something permanent, instead of a "" stock.

Real Estate Investment Trusts (REITs) are securities that allow investors to collect income on things like apartments, office space, warehouses, and hospitals... but there's no REIT with big exposure to farmland. We have to get creative here...

One industry's fortunes are tied so closely to land values and crop prices, owning shares in it is like owning a chunk of farmland. This industry is fertilizer mining. These days, farmers slather fields with fertilizer to boost crop yields. When crop prices are robust, farmers have more profits to buy more fertilizer to grow more crops. Shares of fertilizer concerns like Potash (POT) and Mosaic (MOS) rise as a result.

For this idea in action, take a look at yesterday's chart of the agriculture fund DBA. As we mentioned, this fund is quietly building a bullish series of "higher highs and higher lows." Today's chart of fertilizer producer Mosaic is the same.

One can earn yield on farmland by owning this stock and performing the income strategy of selling covered calls on it. For the "option-able" folks out there, the June "near the money" calls will throw off an 11% instant payout here. Beats sitting on a tractor all spring!


It's still a quiet bull market in the "contrarian's commodity investment."

Last year, we kept you updated on the steady uptrend in Jim Rogers' favorite commodity investment. It's an uptrend that goes unreported in the mainstream financial press... and one you can see below in the investment fund DBA. This fund is a one-click way to buy the agricultural commodities corn, soybeans, wheat, and sugar.

Why is DBA the contrarian's commodity idea? Well, commonly traded commodities like crude oil, gold, copper, and platinum have soared in the past year. Copper, for instance, is up 125% in the past 12 months. The ag complex, however, is in the "beaten down" category. But as you can see from today's chart, the DBA is quietly building a series of "higher highs and higher lows." It's classic bull-market action... action that will likely carry DBA to an upside breakout above June highs.

We've spent time thinking about how an investor can earn income from farmland – without going to Brazil or Iowa to buy 640 acres and a tractor. In tomorrow's Market Notes, we'll show you a way to collect 15%-20% annual yields on this idea.

"Absolutely convinced the euro is going to fall apart"

I’ve been surprised that the first of [currency union] currencies, the euro, has lasted as long as it has. It was officially adopted in 1999, though not put into actual circulation as bank notes and coins until 2002. It started out with a theft, in that the old currencies that people had were only good for another three years. After that, your deutschmarks, guilders, francs, and what-have-you were good only for wallpaper. If you had any stuffed under your mattress, you found out what their intrinsic value was.

But the euro that’s replaced them, too, is backed by nothing. Nothing but the good faith and credit of the participating governments which are all going bankrupt. The problems in the EU aren’t just with Greece, Italy, and Spain; Britain and France are being downgraded, and its going to get much worse.

…If the dollar is an “IOU nothing,” the euro is a “who owes you nothing.” When it collapses, a lot of people are going to suffer a big wealth haircut. Bernie Madoff swindled thousands of people out of billions. The euro will swindle millions of people out of trillions.

…The average urban peasant in Europe thinks his government is somehow watching out for him. I suppose that’s true, at least the way a dairyman watches his cows, or a swineherd watches his pigs. But the euro really is backed by nothing. Though, at the moment, you could say it’s backed by Mercedes cars and Gucci bags… anything you can trade euros for. But that’s for a limited time. I’m absolutely convinced the euro is going to fall apart it

Thursday, January 7, 2010

The Nine Chinese Men Who Control the Fate of America

Nine politicians in China control the fate of the United States of America.

I'm not kidding. The implications are scary. Let me explain...

These nine men are the Standing Committee of the Communist Party of China. They control the value of China's currency.

Fortunately, it's easy to forecast what a politician will do... He will do whatever it takes to keep his job.

The story is remarkably simple...

In China, the goal of these nine politicians is to keep the Communist Party in power. The way to accomplish that goal is for the masses to stay employed. Right now, China keeps the people working by exporting cheap goods. In order to make sure those Chinese goods stay cheap, the Standing Committee sets the currency exchange rate artificially low. And that is the crucial part of the story...

How do these nine politicians keep the exchange rate low? They buy U.S. dollars. Importantly, these nine men don't just sit on stacks of dollar bills... They invest those dollars in U.S. Treasury bonds.

It's gotten out of hand. China owns nearly $1 trillion worth of U.S. debt. China's holdings have increased dramatically every year... They've grown nearly tenfold since the end of 2000:

China* Treasury Bond Holdings
  • 2000 $ 99 billion
  • 2001 $127 billion
  • 2002 $166 billion
  • 2003 $209 billion
  • 2004 $267 billion
  • 2005 $350 billion
  • 2006 $451 billion
  • 2007 $529 billion
  • 2008 $804 billion
  • 2009 $941 billion
*includes Hong Kong

And China's soon-to-be trillion dollars of U.S. government debt is not the end of the story. It's the beginning...

In order for other Asian countries to compete with China, they have to artificially keep their own exchange rates low. And that's exactly what they're doing. They're doing it the same way China does... They're buying mountains of U.S. Treasury bonds, too.

At this point, foreigners now own half of the U.S. Treasuries outstanding (of the ones that are not held by the U.S. government). And they're buying more... Most importantly, there's enough demand for U.S. debt from foreigners that the U.S. government can finance its deficits for years to come... all by simply selling Treasury bonds to foreigners.

Would you lend money to the U.S. government at 3.5% interest for 10 years? I sure wouldn't. I really can't name anyone who thinks 3.5% in government bonds is a good deal. The foreigners aren't buying to earn 3.5% interest. They're buying to keep the value of their currencies down.

India is an interesting example... Earlier this year, when India spent $6.7 billion buying gold from the IMF, it was all over the news. What WASN'T reported was that India bought far more U.S. Treasury bonds than gold. India has increased its stake in Treasuries by over $22 billion since last summer – increasing its Treasury bond holdings more than 200%.

So, yes, there's a mountain of demand for U.S. dollars – Treasury bonds – from all over the developing world. The important thing is demand will last. It will last as long as the nine men on China's Standing Committee don't change their minds.

So what does all this mean?

It means the U.S. dollar will not crash right now.

Most investors believe the U.S. dollar is about to crash. But the facts are clear... The dollar has ready buyers of hundreds of billions of dollars worth of Treasuries. While the dollar might lose ground against gold, the reality is, no other paper currency has a tailwind of hundreds of billions of dollars of buying waiting in the wings like the U.S. dollar does.

Eventually, the dollar bears will be right. The U.S. will have to face all its debt one day. But that story is not in my True Wealth Script for 2010.

Wednesday, January 6, 2010

China will control gold prices in 2010

How will India’s reluctance to continue its gold buying spree affect the global bullion market? This is the question haunting many analysts across the globe as the world’s numero uno consumer of gold, India, posts a huge fall in gold imports in 2009.

But, the ray of hope for the bullion market is that China has fast emerged as the leader in gold buying. In fact, in 2009 China has pipped India to the post in gold purchases.

Chinese New Year gold rush has already begun, and...


Another leg higher for copper, another blow to the "deflationists."

Last year, we told you one of the great investment debates of our time is this: "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?"

For a rough gauge of inflation, we track copper prices. Copper is a major ingredient in nearly everything around you: from computers and cars to power lines and plumbing. In November, copper staged a major upside breakout that pushed the metal over $3 per pound. In December, it broke out again to climb over $3.20 per pound. And just yesterday, the most active copper contract traded for over $3.40. It's an incredible short-term gain for this "in everything" metal.

As we declared last month, "Deflationists, you've lost badly." Governments around the world are handing out stimulus funds and free money to anyone of voting age. That's how you get into office these days... it's how you dilute the value of paper money... and it's how you push the nominal price of "real stuff" like copper to the sky. The flight from junk money into commodities continues...

The 2 best trades for 2010

What are the big trades for 2010? We have two ideas...

First, we think natural gas bottomed last year and will continue a new bull market this year. Relative to oil, we think natural gas is still cheap (though not as cheap as last year, when we called the bottom). And while vast new quantities of natural gas are coming on line, power companies are switching a large number of coal-fired power plants to natural gas. As demand for electricity rebounds this year, demand for natural gas will grow faster than expected - fast enough to push prices back to more than $10 per thousand cubic feet (mcf).

Powering demand for electricity will be a surprising rebound in global economic growth. This leads to our second main prediction for 2010: much higher interest rates. We are bullish on the economy for 2010. And we are bearish on government debt of nearly every stripe, but particularly on the fixed-rate, long-dated debt of the world's largest debtor - the United States of America.

The global economy is going to boom this year, powered by soaring money supply and robust public sector deficit spending. Over the next few years, the world is going to relearn a very painful lesson about paper money and public finance. In short, paper money is inherently unstable because paper systems don't restrain lending or spending with savings. When reserves can be printed, why bother with the pain of saving money? Untethered by any market discipline, sooner or later every paper system collapses under the weight of its accumulated debts and the resulting inflation.

Likewise, when a political system (like ours) promises voters more in benefits than it collects in taxes... trouble is only a matter of time. Combining the two systems - a democracy with a heavily progressive income tax and a paper money monetary system - is a recipe for a massive financial collapse. And make no mistake, that's exactly where we are heading.

The new Scramble for Africa: India vs. China

The nearly insatiable hunger for oil has led the world’s most-populous countries to Africa. And while China’s efforts to tap Africa’s oil resources are well known, India is trying to catch up.

Earlier this month, during an India-Africa summit in New Delhi, which was attended by representatives from 15 African countries, it became clear that India needs to learn from China’s success in dealing with Africa. The resource base is certainly attractive. Africa has about 10% of the world’s oil reserves and the oil tends to be of better quality than the high-sulfur crude found in India.

Tuesday, January 5, 2010

Obama is pushing the US towards a trade war with China

The administration continues their relentless march towards a Trade War with China:

Trade disputes between Beijing and Washington over exports of tires, chickens, steel, nylon, autos, paper and salt are multiplying and further damaging the already tense relationship between the two economic powers.

The Obama administration says it only aims to protect the country's rights, but the Chinese counter that the United States started the whole thing by launching an unprovoked attack...

Why I'm Buying Stocks This Year

Right now, it's easy to make the case that sometime this year we'll be in the middle of a stock and credit bubble.

This potential bubble has its roots in the $787 billion American Recovery and Reinvestment Act (ARRA) passed early last year. It's the largest stimulus package in our nation's history. Billions in "free money" is being passed around to the infrastructure, technology, and energy sectors.

And only 32% of the stimulus has been spent thus far. Based on the laws of the ARRA, most of the remaining cash must be spent in 2010 and 2011. In other words, there will be a huge amount of cash flowing into companies over the next two years.

The surge in gold and commodity prices supports the idea that we'll eventually see inflation and bubbles from the massive government spending... especially with our government throwing money into every problem area of the market.

So it would be difficult for any analyst to say they are not concerned about future bubbles or inflation. I certainly am.

But here's what I'm about to show you: Bubbles are not created overnight. It could take up to four years before another credit crisis or inflation hits the markets.

The fed-funds rate is the interest rate banks charge each other for overnight loans. The Federal Open Market Committee (FOMC) controls the fed-funds rate and may lower it to spur growth or raise it to combat inflation.

In March 2001, the U.S. economy slipped into recession. A recession is defined as two consecutive quarters in which gross domestic product (GDP) is negative. To make it easier for businesses to get capital for projects and hiring, the Fed began to lower ("ease") short-term interest rates.

The Fed lowered rates more aggressively later in 2001 and into 2002 because consumers were reluctant to spend after the September 11 terrorist attacks.

Let's look at the chart of the S&P 500 during that timeframe:

The Fed pushed interest rates to 1% in 2003 and 2004. Notice the huge turnaround during this timeframe in the S&P 500. Lowering the fed-funds rate to unprecedented levels resulted in huge economic growth and a spike in the stock market through 2007.

Lower interest rates made lending too easy. Almost anyone on any pay scale could get a mortgage. In 2008, we saw the negative effects of the easy-money policy as the housing and credit bubble popped. The S&P 500 crashed to 666 from a peak of 1,560... That's nearly 60%!

But as you can see from the chart, it took roughly four years for the credit and market bubble to burst from the time interest rates were at record lows. So it took about four years from the time when the fed-funds rate was at 1% (2003 to 2004) until the stock market crashed (2008).

There is no denying easy money leads to bubbles. But my point is, there's a long time between the boom and the bust.

Today is similar to 2004. Interest rates are at historic lows (0% to 0.25%). The stock market is trending higher. Economic data including manufacturing and unemployment bounced off lows. Plus, corporate profits are rebounding.

Sure, the creation of new money through stimulus plans coupled with low interest rates will create future bubbles. And I don't expect the time between the next boom and bust cycle to take four years – especially with the deficit at $1.5 trillion and unemployment above historical norms.

But it won't happen over the next 12 months either. Not as long as the government keeps the printing press running.

Could the bears be right much sooner than I think? Sure... anything can happen. But big shifts in monetary policy and credit flows happen glacially. They take much longer to play out than impatient investors expect. And history suggests this one will take at least a year. That's why I'm bullish on stocks for 2010.

Sunday, January 3, 2010


Jim Rogers was right.

Early this decade, the former hedge-fund superstar Rogers told anyone who would listen to buy commodities like lead, oil, and copper. He even wrote a book about the big trade, called Hot Commodities.

One of Jim's top commodity picks back then was sugar. He even passed around sugar packets at investment conferences to drive the point home.

As we close out the decade of the "aughts," we see sugar is the top-performing commodity of the last 10 years, up 321%. Demand is growing, and awful growing conditions in major producing countries Brazil and India have driven the sweet stuff to its highest level in over 20 years. Well done, Jim!

Thank ExxonMobil for These Solid 10% Dividends

ExxonMobil is the world's largest oil company. Two weeks ago, Exxon announced it would purchase XTO Energy for $41 billion...

XTO Energy is a giant natural gas company. It's the second-largest producer of natural gas in America, and Exxon's biggest acquisition since it bought Mobil 10 years ago.

Imagine if Coca-Cola spent $41 billion on a tea company... or Ford spent $41 billion on a bicycle factory. You'd know big changes were afoot. So why is the world's largest oil company paying $41 billion for a natural gas business?

Six days before announcing the merger, Exxon published a special report on its website titled "Outlook for energy: a view to 2030." In this report, Exxon says electricity generation is the largest and fastest-growing source of energy demand in America.

Natural gas is cheap, abundant, and produces 60% less emissions than coal. As electricity demand grows, Exxon thinks natural gas will be the fastest-growing fossil fuel in America.

In other words, Exxon bought XTO because it plans to supply the power industry with natural gas.

"This is not a near-term decision; this is about the next 10, 20, 30 years," Rex Tillerson, the chairman and chief executive of Exxon said in a conference call. "We think there will be significant demand for natural gas in the future."

To follow Exxon's lead, you could simply invest in higher natural gas prices in the long term. I don't like this option. We're finding so much natural gas in America right now, there could be a decade-long supply glut and low prices for years to come. High storage costs create an additional headwind for gas investors.

Power plants and utilities that use natural gas to generate electricity are a second option. This industry is a direct beneficiary of low gas prices, increasing demand for electricity, and the fashion for clean energy. With these excellent fundamentals, the natural gas electricity industry is one of the safest industries in America for your capital over the next decade. I discussed this opportunity in my previous column, here.

Midstream natural gas companies are a third way to play this trend. These companies gather, process, store, and transport natural gas. They run pipelines, compression stations, storage tanks, refineries, ports, field-gathering stations, and terminals. They sit between natural gas producers and consumers. The more gas America uses, the more fees they earn.

Because these companies are so valuable to America's economy and infrastructure, the government subsidizes them with tax breaks. Entrepreneurs get to set up these businesses as special corporate structures known as Master Limited Partnerships. MLPs don't have to pay corporate tax as long as they distribute 90% of their profits each quarter to their stock holders. The "blue chip" MLPs pay 8% dividends. The more risky ones pay anything from 10% to 20% in annual dividends.

Midstream gas stocks have risen this year in line with the broad stock market. But recently, they've begun to outperform. I bet it's the Exxon-XTO deal. By buying XTO, Exxon has given a big "thumbs up" to midstream gas investors.

I always begin my research on midstream natural gas companies at the National Association of Publicly Traded Partnerships. The NAPTP has all kinds of information on these companies, from tax treatment to investment presentations. It also maintains a list of traded MLPs, MLP funds, MLP ETFs, and MLP indexes.

Friday, January 1, 2010


China needs coal. That's the theme of today's chart, which displays the past seven years' of trading in shares of Yanzhou Coal, one of China's largest coal producers.

You see, despite any lip service China gives toward climate change, the country is coal crazy. China's coal consumption increased by more than 200% from 2000 to 2008... and the country generates around 75% of its electricity from the stuff. This incredible demand is driving a huge bull market in companies like Yanzhou...

After a suffering a huge decline in last year's credit panic, Yanzhou has enjoyed an amazing recovery... and now sits at an all-time high. Shares are up 11-fold since 2003.

Yanzhou's rise represents one of our favorite long-term investment trends: Determine what China needs, and sell it to them. One of the "no brainer" ideas here is fuel... the basic and essential need of a modern economy. If China wants to keep its economy racing higher, it's going to require incredible amounts of coal, oil, natural gas, and uranium to power the engine. Yanzhou is a shining example of this trend at work.

Asia Is Going to Make Investors Rich with This Commodity

Energy investors need to remember three things to make incredible returns in the coming decades:

Asia, Asia, and Asia.

Asia is going to make energy investors rich. Specifically, India and China will. And more specifically, they'll make folks rich in natural gas. I know you've heard the "billions of people need this and that resource" argument before, but hear me out...

From 1997 to 2007, China's total energy consumption rose from 38 quadrillion British Thermal Units (BTUs) to 76 quadrillion BTUs... roughly equal to 74 trillion cubic feet of natural gas. However, coal supplied 75% of that energy, while natural gas contributed a scant 2%.

Japan and South Korea already consume trillions of cubic feet of imported natural gas per year. India became a net importer in 2004. China became a net importer of natural gas in 2007... and that's not going to change. The country wants natural gas to supply about 7% of its energy needs by 2015. Even if China's energy consumption remained flat (and it won't), it would need to add 5 trillion cubic feet of natural gas from somewhere.

The problem is, China produced just 2.7 trillion cubic feet of gas in 2008. To add 5 trillion cubic feet of supply, the country must TRIPLE its production... or look elsewhere. But it'll face a lot of competition for natural gas in Asia.

In 2008, China, India, Japan, South Korea, and Taiwan imported a combined 5.5 trillion cubic feet of natural gas. China's natural gas imports are up 53% from 2008. India's natty imports are up 23%. Annual growth in global demand jumped from 7.5% in 2009 to a predicted 17% in 2010.

While coal and oil are still huge parts of the Asian energy picture, natural gas is becoming the "new" fuel of choice around the world.

(The demand for natural gas isn't just for energy. According to Indian hedge-fund manager Rahul Saraogi, a recent natural gas discovery in India will be used to manufacture fertilizer.)

ExxonMobil is the smartest oil company on the planet. It's also the best energy investment house on the planet. ExxonMobil's people know the facts on natural gas. They plan to supply that soaring demand. ExxonMobil is participating in several giant liquefied natural gas (LNG) projects in the Asian sphere, including the giant Gorgon project offshore Northwestern Australia.

The entire Gorgon complex contains about 40 trillion cubic feet of natural gas reserves. That's why China's interested. PetroChina agreed to buy 100 billion cubic feet per year from the project for 20 years. The estimated value of the deal is around $41 billion.

But natural gas isn't just a big boy's game. Asia needs so much gas that companies of all sizes are getting into the act. There are junior companies listed on the London Aim Exchange, the Toronto Venture Exchange, and the Australian Stock Exchange. Mid-cap energy companies are also poking around the region.

One thing every energy investor must understand: The age of natural gas is dawning around the world, even if it's still dormant here in the U.S.

We need to position ourselves to profit from that demand. At the very least, we should own shares of major oil companies like ExxonMobil, which is positioning itself to profit from Asia's voracious demand. But the sweet spot will be finding small companies in the right places.

At the S&A Resource Report, my plan is to find the most promising juniors – companies looking to discover energy supplies for China. With great teams working in far-away places, a few of those companies will make investors rich...