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Monday, May 31, 2010

GOLD? STOCKS? WHAT'S THE DIFFERENCE?

Gold gets all the press for being a hedge against crazed government spending and paper money debacles… but this week's chart displays another.

Our chart of the week is a "performance chart." This type of chart plots two assets together to provide a picture of how they are performing relative to one another.

In this case, we're looking at the past 12 months of gold (blue line) versus the performance of the benchmark S&P 500 stock index (red line). As you can see, gold and stocks are generally moving in lockstep with each other… and both have gained about 25% in the past year (gold is up much more than stocks over the past decade, however).

Worried about a crisis? Make sure to own "real money." Own gold. But diversify and own some stocks as well.

Friday, May 28, 2010

LOOK HERE FOR THE PERFECT HEDGE

Among the notable losers of the past few weeks: clean energy stocks.

Most clean energy companies are based on such terrible business ideas that you could say they are "perfectly hedged." They lose money in both good economic times and bad economic times. Their share prices are able to sink in both bull markets and bear markets.

For a picture of this hedged condition, we present the past two years of trading in the PowerShares Clean Energy Fund (PBW). As an easy, "one click" way to go long solar, wind, and various other clean energy companies, this fund has drawn in hundreds of millions of investor dollars over the past few years.

PBW was destroyed during the 2008 credit crisis. After all, if you don't have a job or money for a mortgage payment, you're not much concerned with "carbon neutral" energy. And despite last year's incredible stock rally, this fund simply drifted sideways… dragged down by the bad economics of its constituents (for instance, solar energy faces a problem called "night"). With the broad market faltering, the fund broke down to a fresh 52-week low.

Place money in your average clean energy stock? No thanks. Give us the stupendous cash flow, dividend, and compounding power of Big Oil, cigarettes, and Band-Aids.

Thursday, May 27, 2010

THIS STOCK BARELY BUDGED DURING THE PANIC

One of the major casualties in the recent commodity selloff is the oil-stock sector. Major oil players like Brazil's Petrobras, France's Total, and even giant ExxonMobil sunk to 52-week lows. Smaller, more volatile oil players fell 20% to 40%.

Energy stocks – whether they produce crude oil, natural gas, or a mixture of both – tend to move as a group. This makes the strength in natural gas royalty trusts all the more impressive. Like natural gas, these trusts held up just find during the brutal commodity selloff.

Several months ago, we pegged royalty trusts as our favorite way to play the "blown out" situation in natural gas. These trusts pay big dividends by selling a commodity that is already down in the dumps. One of the largest and most liquid of this group is San Juan Basin (SJT).

Remember… the energy sector was crushed this month. Many players hit fresh 52-week lows. And stocks in general got dumped with no regard to their underlying values. San Juan Basin and its fellow natty plays barely budged. Count this as bullish action for the trusts.

Lunatic Hugo Chavez is running Venezuela into the ground

Venezuela's economy shrank 5.8 percent in the first quarter from the same period a year earlier, the Central Bank said Tuesday in a report that revealed a deepening recession for the OPEC member.

The economy was pulled down in the first three months by a 5 percent decline in the key oil sector, a 6 percent decrease in the private sector and a whopping 27.9 percent fall in private investment, the bank said. The further drop came after a 3.3 percent contraction for all of 2009.

Gold soars to $1,700 in Greece

Coinupdate.com reports that prices at which the Greek Central Bank is selling one ounce gold equivalents are as high as $1,700 (40% over spot), and prices on the black markets are even higher.

The punchline, as Athens slowly returns to a forced gold standard: " A popular spot for street vendors to sell their coins is near the Athens Stock Exchange. There the traders wait for citizens to bring payments received from unloading their paper assets like stocks and bonds."

Wednesday, May 26, 2010

AMAZING STRENGTH IN THE "CONTRARIAN'S COMMODITY"

In yesterday's edition, we wrote about the major new low in the CRB Index, a widely followed gauge of commodity prices. The benchmark raw materials index is trading at its lowest levels since July 2009.

One of the major "drags" on this index is crude oil. Just weeks ago, the black stuff traded for $88 per barrel. It now goes for less than $70 per barrel… a stupendous short-term decline of more than 20%. Gold, copper, and platinum also plunged.

The raw material you won't find on the list of losers is one we've been writing about a lot lately: natural gas. As you can see from today's chart, the clean fuel has actually gained a bit over the past few weeks.

This bullish action from the contrarian's commodity demonstrates one of the greatest trading techniques known to man: Go long assets after they've been "blown out" and left for dead. This allows you to buy value and safety. In "natty's" case, the fuel has declined from $12 per thousand cubic feet in 2008 to its current price of $4. When the commodity selloff hit, gas was already lying left for dead in the corner. It simply said, "I'm already down and out. I can't lose anymore… Go pick on the other guys."

This could be the No. 1 source of U.S. oil imports this year

Canadian oil sands will probably become the No. 1 source of U.S. crude oil imports this year, and could make up more than a third of the nation’s oil and refined product imports by 2030, according to a new study.

The Role of Canadian Oil Sands in U.S. Oil Supply, a report from Cambridge, Mass.-based IHS CERA, says that in a fast-growth scenario, oil sands could represent 36% of oil imports by 2030, or 20% in a more moderate growth scenario, compared with 8% in 2009. Production of 1.35 million barrels per day (mbd) in 2009 could rise to between 3.1 mbd and 5.7 mbd by then.

Although production of oil sands has run into environmental opposition, innovation in the technology of oil sand production has been constant and there will be continued progress in cutting greenhouse gas (GHG) emissions and reducing its environmental impact, the report says.

Gold RUSH: U.S. gold and silver sales are soaring

Gold and silver bullion sales at the United States Mint have reached record levels in May 2010. With about a week left to go, more than 200,000 ounces of gold and more than 3 million ounces of silver have already been sold to the Mint's authorized purchaser network, Coinupdate.com reported.

Authorized purchasers are able to buy bullion coins directly from the United States Mint. They subsequently resell the coins to other coin dealers, bullion dealers, or the public, and facilitate a two-way market for the coins.

Tuesday, May 25, 2010

INFLATION? COMMODITY PRICES JUST HIT AN 8-MONTH LOW

The past few weeks have been tough on the "inflation is coming" argument.

One of the central investment questions of our time is: "Is the U.S. government's crazed spending going to stoke inflation and higher 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 can monitor the potential inflation problem by watching the CRB index. The "CRB" is the world's most widely followed gauge of raw-materials prices. It tracks price trends in energy (crude oil, natural gas), food (wheat, cattle, hogs, sugar, coffee, corn, soybeans), and metals (copper, silver, gold, platinum).

The CRB suffered a huge plunge during the 2008 credit crisis. This plunge bottomed around 200 in early 2009. The CRB staged a rebound into the 275 area… then entered "stall mode," trading sideways for nearly a year. And in just the past few weeks, the index hit its lowest low in about eight months.

Sure… the government's giant E-Z-Credit program will eventually stoke inflation, which will drive up the nominal price of things. But in the here and now, we have to note that prices are falling… not rising. Until the CRB resumes its climb, we have to ask, "Inflation? What inflation?"

Richard Russell: "This market has nowhere to go but down"

[If] we've seen top and the highs, this market has nowhere to go but down. And down it will go. The only question in my mind is the form or pattern this bear market will take as it makes its way down to its inevitable bottom. At the bottom, assuming that the US is still in "functioning" condition, we'll see blue-chip stocks selling at incredibly low prices. The problem -- will we have the cash and the guts and the understanding to buy the bargain blue-chips?

Remember, now is your final and best place to raise cash. And if cash (Fed notes) are worthless by the time this bear market reaches its low, then we have gold. You can't devalue gold. You can't eliminate its value. Since pre-Biblical times, gold has been the one standard of value. "Why is that?" you ask. And the answer is that gold is imbedded in the DNA of man. Nothing else has ever been discovered or developed to take gold's place. Nor has any argument or rationale diminished man's eternal lust and desire for gold.

Korean peninsula could be headed for war

Smack in the midst of a "global recovery" tensions are heating up in Asia. Please consider Kim Jong II Orders Military to Get Ready for Combat:

North Korean leader Kim Jong II ordered the country’s military to get ready for combat in a message televised nationwide last week following South Korea’s announcement that North Korea torpedoed the South’s warship.

Amazing chart shows gold beats stocks and inflation

As the chart shows, if Gold had simply kept up with inflation since freed from $35/oz in Mar-68, it would now be at $225/oz. But in fact, Gold has gained over 4X more to $1,193/oz, protecting investors from inflation and yielding a return 4% above the CPI!

(As an aside, [I] was recently asked how Gold did versus the S&P500 over the period. It's not on the chart, but S&P500 began the period at 89.11 and closed yesterday, 43+ years later, at 1115.05... a 6.05% compound rate of return. Over the long term, Gold has trumped stocks and inflation.)

Monday, May 24, 2010

How to Protect Your Portfolio from the Next Panic

You've probably heard there's a volcano erupting in Iceland.

This volcano started erupting in early April. It sent such a large cloud of ash into the atmosphere, it stopped all European air travel for five days and is still causing disruption.

The last three times this volcano erupted, another volcano, 15 miles to the east, erupted too. That volcano, named Katla, is far bigger. It is one of the most powerful volcanoes in the world. According to Britain's Daily Telegraph, Katla has "some ten times the power" of its little sister.

According to the Institute of Earth Sciences, Katla averages two eruptions per century. It hasn't erupted in the last 92 years, so an eruption from Katla is overdue.

Iceland's president, Olafur Grimsson, recently told the BBC he expects Katla to erupt at any moment. He says it's not a matter of "if" but "when." Iceland's government has issued emergency evacuation plans to the population.

Now, I have no idea whether Katla is going to blow or not. It seems unlikely, given it only happens twice a century. Likewise, I don't expect any imminent nuclear bomb attacks in Los Angeles… or meteor strikes in Shanghai…

But I'm preparing my newsletter's portfolio to withstand these risks anyway.

Yesterday, the government passed the Financial Regulation Act. This month, regulators expanded their investigation into Wall Street fraud. Oil is leaking into the Gulf of Mexico. Confidence in the euro has evaporated. Stock and commodity markets are plummeting.

The point is: your investments face extraordinary risks right now. The volcano is simply another one you can add to the list.

With the stock market up 50% in the last year, trading at overvalued levels in terms of 10-year adjusted P/E levels, and paying historically low dividend yields, you're not being fairly paid to take these risks.

That's why I'm recommending you avoid stocks right now… and put your money into much safer alternatives. Fixed-income investments are one idea I've suggested to my 12% Letter readers. Instead of buying ownership in companies, we're lending them money. In return, these companies have a legal obligation to return our money in full, with dividends, when the loan matures.

We only lend money to companies with rock-solid balance sheets. By investing this way, we're able to generate 8% annual income at much lower risk levels than we'd have to take in the stock market. You read that right… you can generate 8% in annual income, safely, by following my recommended loan strategy.

The best part is, these fixed-income investments trade on the New York Stock Exchange, the Nasdaq, and the Amex and you can buy and sell them as if they were stocks. They call these securities "exchange traded fixed income securities" and over a thousand of them trade on the stock market.

For instance, last year we loaned money to Entergy, an electric utility in Texas. Our investment trades on the NYSE under the symbol EDT. It pays 7.88%, it matures in 2039, and a power plant property secures our loan. We've made 12% returns in less than a year from this investment.

If Iceland's most dangerous volcano erupts… or if any of the other risks I've just described turn into reality… stock market investors will suffer the worst in the ensuing panic. By sticking with my safe loan strategy, you make sure you're out of that crowd.

Sunday, May 23, 2010

CHART OF THE WEEK: THE WORLD'S NEXT DEBT CRISIS

Not many people are following it, but there's an incredible race happening in Europe right now… one we predicted. It's between the paper currency of mainland Europe and the currency of Great Britain.

As you can see from this week's chart, it's a race to the bottom right-hand corner of the price chart.

More than three months ago, we highlighted the downside breakout in the British pound. The country's government has taken on a ridiculous amount of debt… which makes it a likely candidate for "the world's next debt crisis starts here" award. We told the euro to expect some competition on the race to destruction. Since our bearish note, the pound has relentlessly plunged to a 52-week low.

This is just the latest in the government debt train wreck of the Western world… and the latest reason to make sure you keep a portion of your wealth in "hard currency" like gold.

Friday, May 21, 2010

THE S&P 500 IS IN A BEAR MARKET

It didn't take long for the market to close below our two major "lines in the sand."

In yesterday's Market Notes, we noted the benchmark S&P 500 was near two vital "support" levels. One was the closing price of the May 7 "Flash Crash." The other was the widely followed 200-day moving average. Yesterday's big decline caused flagrant violations of those two levels.

We don't like being the bearers of bad news or bearish analysis… but we know these violations will cause people to dump their stock holdings… with no regard to the value of the businesses behind those stocks. Stocks are in for rough going.

And as crazy as it sounds, the traders among us should be delighted at the coming volatility and price swings. They will create enormous valuation and sentiment extremes… which make for a rich trading environment. For instance, remember our bearish call on Freeport-McMoRan? The stock just violated that critical low.

China's global resource binge arrives in the United States

Sovereign wealth funds from China and South Korea are targeting a huge investment in one of the largest shale gas producers in the U.S.

China Investment Corporation and Korea Investment Corp are close to purchasing nearly $1 billion of preferred stock in Chesapeake Energy. This comes just weeks after another Chinese firm partnered in the purchase of $600 million in the company.

Most readers are probably familiar with China's global resource buying spree, but these are some of the country's first large investments directly in U.S-based energy resources.

Thursday, May 20, 2010

WE'RE ALMOST IN BEAR MARKET TERRITORY


Don't look now… but we're darn close to bear market territory.

Twelve days ago, we ran a chart of the benchmark S&P 500 index plotted with its "200-day moving average." This indicator is a popular gauge of whether the market is in a bullish rally or a bearish decline. Back then, the S&P was well above this important "line in the sand." But the past week or so has produced a big change in this picture…

The S&P 500 ended yesterday near its closing price of May 7, the day of the famous "Flash Crash." This is incredible market weakness. As you can see from today's chart, it is weakness that has the index close to violating its 200-day moving average.

Lots of traders pay attention to "support levels" like the May 7 low and the 200-day moving average. A breach of these two levels at the same time will appear in a lot of headlines… and it will kick off a wave of stock dumping. Danger ahead.

Germany could be preparing for a complete euro collapse

Zero Hedge has long claimed that Greece will be forced to default, with the only question being how this will be structured by Europe in a way to not allow the evil speculators to make buck on this process.

Today, Greece shot itself in the foot a little after announcing its latest debt number, which makes any expectations of climbing out of its Keynesian hole even more laughable.

As Market News reports, "Greece's general government debt rose to E310.3 billion in 1Q from E298.5 billion at the end of last year, according to data released Wednesday by the General Logistics Office of the Finance Ministry."

COPPER IS NOW ON THE CRASH LIST

After a stunning decline of 60 cents in just a few weeks, we are placing copper on "crash alert."

Long-time readers know we monitor the price of copper for a "real time" reading of global economic health. Copper is a major ingredient in cars, power lines, electronics, and housing… so its price tends to rise and fall with economic activity.

In late April, we highlighted the "bear case" for copper. Several mining insiders are worried about a huge supply overhang… and if the brilliant Jim Chanos is right about a China slowdown, copper will crash.

As you can see from today's chart, copper has suffered an incredible drop in the past month. This decline from $3.60 per pound to $3 per pound has taken the metal close to its February low around $2.90. If this area gives way, one has to be worried about China, the global economy, and just about every asset on earth. One would also expect our bearish note on copper producer Freeport-McMoRan to be hugely profitable. Our "bonus chart" (the second chart below) shows this large miner is plunging.

Wednesday, May 19, 2010

Gov't stupidity: Germany to ban short selling at midnight tonight

...[T]he German Finance Minister will institute a short-selling ban at midnight.

[T]his is huge, as it means the market will become massively dislocated once again. We can show charts of how Thailand, US and Greek markets reacted when this was introduced (short jump followed by significant slide lower), but you get the image.

Tuesday, May 18, 2010

THE WORST CHART IN THE WORLD

It's getting easier to convince the average American to buy gold… You can thank the plunging euro currency for the new state of affairs.

Back in December, we identified the classic "1-2-3 trend change" in the euro… and we've highlighted its demise nearly every week. The pan-European currency just struck its lowest low since 2006. It now sports one of the most gruesome charts you can find anywhere. Why is this currency plunge bullish for gold?

Americans occasionally hear about an odd currency crisis happening far off in Thailand, Zimbabwe, or Argentina. But the current crisis in Europe is much more real…

Europe is as developed as the U.S. Many Americans have relatives there. Europe is home to familiar names like Ikea, Volkswagen, Shell, Nokia, and Nestle. All this makes hearing that the region's currency is crumbling different than hearing about problems in Thailand… and it works to get folks nervous about the U.S. dollar… which, like the euro, is managed by a spendthrift government.

We doubt the euro's decline will cause every American to run out and buy gold. But it will cause many "fence sitters" to take notice. Paper currencies are under immense and growing debt loads. The decline in the euro will cause many Americans to visit the nearest bullion dealer to buy a few ounces. Long term, this is bullish for gold.

You will be financially destroyed if you ignore this trend

For more than 60 years, the U.S. dollar has unquestionably been the world's safest, most liquid form of money – its reserve currency. During times of economic trouble, investors rush to buy U.S. bonds as a safe haven, causing their value to rise sharply.

And that's what happened – briefly – during the Greek crisis last month. But then, something changed. As soon as the ECB announced its big bailout and established a swap line with the U.S. Treasury, investors realized there's no real difference between the U.S. dollar and the euro. They're simply different names for the same thing: paper money. And investors understand the value of paper money may finally collapse under the weight of these massive sovereign debts.

What did investors buy when they sold the U.S. dollar in this crisis? Where did they run? As you can see, they bought gold… and to an increasing degree, silver. We believe this preference for metallic money will continue to strengthen as the financial problems of the U.S. Treasury begin to mount.

If you ignore this trend, you will be financially destroyed over the next several years. If you act now to protect yourself and your family, it will be the greatest single investment decision of your life.

This speculative bubble threatens nearly every asset in the world

Peering through the fog of daily distractions, there is only really one thing that concerns me: China. It has been 5 days since the Chinese equity market (as measured by the Shanghai Composite) officially entered bear market territory. But there is much more ominous portents than trading 20% from its top in August 2009 (at 3478 points).

As China’s economy has grown in size, it has come to take a pivotal role in global economic fundamentals. Where their economy is headed not only has implications for them but for everyone else as well. If we assume that the stock market is an imperfect forward discounting mechanism for economic realities then the current weakness should give any bull some pause.

Monday, May 17, 2010

Why the world's best investors own a small group of gov't-backed banks

Anyone who doubts the big banks will succeed in the new regulatory environment by quickly jumping into bed with government is already wrong. To secure its place in the Treasury-financial complex, Bank of America has come out in full support of Komrade Obama's sweeping overhaul of financial services regulation. As Bloomberg put it, "The Obama administration has found a banker it can do business with: Bank of America Corp.'s Brian Moynihan."

Moynihan, Bank of America's CEO, has wined and dined the likes of Treasury Secretary Tim Geithner and economic advisor Lawrence Summers. He's in. He's one of them now. And Bank of America will remain competitive because of it.

Jamie Dimon, CEO of JPMorgan Chase, is coming around, too. Back in June 2009, Dimon warned in a Wall Street Journal op-ed piece about "the danger of the pendulum swinging too far," meaning too much government intervention in the economy. A month ago in a Chicago speech, according to Bloomberg, Dimon expressed support for 80% of the overhaul plan. Goldman Sachs has already settled with the SEC in the mortgage trading scandal. Big bankers make big money not in spite of the government, but with its substantial assistance. Whether they admit it or not, government support is one of the most important reasons investors like John Paulson and Bruce Berkowitz own stocks like Bank of America, Goldman Sachs, and Citigroup.

Meet the investors pushing gold over $1,200 an ounce

In the past several months, gold has enjoyed an incredible "bid" underneath its price. I believe the bid is coming from a mountain of money controlled by central banks and large institutional investors.

India, for example, made major headlines last year when it bought 200 tonnes of gold to diversify its currency reserves. China has more than doubled its gold holdings since 2003. It's also one of the largest owners of the big gold bullion fund (GLD). John Paulson, one of the world's biggest and best money managers, owns more than $3 billion of that same fund. He also owns more than $1.5 billion worth of gold miner AngloGold Ashanti... and several other huge mining positions.

Money is flowing into gold because big money managers know they shouldn't park their money in the euro anymore. It's a piece of garbage. And Obama & Co. are promising free lunches to everyone who can help reelect them... This is harmful to the U.S. dollar's long-term value.

Gold is now reasserting itself as a viable place to park wealth. After all, with interest rates so low, you're not missing out on fat interest payments by owning gold, which pays no interest. The Western debt problems will take a long time to play out. I believe they could send gold to $2,000... even $3,000 an ounce in the coming years.

For pure "wealth insurance" purposes, the best route here is to own physical gold. Buy it from a reputable dealer with low fees and store it in a safe place.

Remember, as I've written before, physical gold isn't an investment, it's a form of savings.

GOLD RUSH: Europe now in a panic to own gold

Last week we noted that several prominent Austrian and German gold dealers had run out of inventory and were no longer transacting with a European population that has suddenly discovered gold religion.

As a result, dealers are now focusing procurement efforts outside of Europe, with South Africa receiving the brunt of Europe's panic for physical precious metals. As the FT reports, "At the Rand refinery in South Africa, the phone has not stopped ringing this week." Just imagine what will happen when the gold bug goes airborne and jumps across the Atlantic...

China down HUGE overnight... hits lowest low in a year

If you're bearish on China, you're making money today.

China's benchmark stock index, the Shanghai Composite, lost 5% in overnight trading. The decline took the index to its lowest low since May 2009. Real estate developers and commodity producers suffered the biggest falls… many in the 6%-10% range.

Legendary short seller Jim Chanos calls China's real estate sector the biggest bubble in the world. This stock market weakness is starting to prove him right.

Sunday, May 16, 2010

CHART OF THE WEEK: STOCKS AND GOLD ARE MOVING TOGETHER

The thought running through many investors' minds goes something like this: "OK… all this crazed bailout spending by world governments has me worried about holding risky paper currencies. But should I flee government paper for gold… or for stocks?"

As our chart of the week shows, there hasn't been much difference lately. Below is a chart comparing the past year's gain in the price of gold (black line) versus the gain in stocks (S&P 500 index, blue line). As you can see, these two assets have moved almost in lockstep in the past 12 months… although gold has nudged higher in the past few weeks.

Remember… this is just a one-year snapshot. Gold has trounced stocks over the past eight years (gold has quadrupled, stocks are flat). But in a flight from paper currencies, owning both stocks and gold is the safe, diversified way to go.

Saturday, May 15, 2010

You're Not Too Late: Three Euro Trades You Can Make This Week

In March 2009, the Federal Reserve announced it would spend $300 billion buying Treasury bonds…

The Federal Reserve has immense financial power. You'd expect this announcement to cause prices to rise in the Treasury bond market. And they did. The day they made the announcement, Treasury bond prices had their biggest one-day gain in history… and continued rising for a few days after.

Then, a funny thing happened. Treasury bonds started falling again… and a few weeks later, they were hitting new lows.

Imagine trying to dam the Mississippi River. You use the world's strongest concrete, the most expensive machines, and the smartest engineers. For a while, your dam holds the river back. A reservoir forms. But then the dam starts crumbling. What do you think happens to the reservoir?

It gushes into the valley, of course.

When I saw the Federal Reserve's dam wasn't strong enough to hold back the Treasury bond price, I knew a flood was coming. Treasury bond prices were going to fall much farther. And as you can see in the chart above, that's exactly what happened.

Right now, the same situation is playing out with the euro.

The euro has been falling for almost six months over fears of a debt default by some of the bankrupt European governments. Last week, European bureaucrats announced a trillion-dollar bailout package, intended to protect these governments from default.

The euro soared on this news in one of the largest one-day rallies in many months. But guess what? The rally lasted about an hour. Last week, the euro broke to new lows again…

In other words, the European dam has failed. The forces pushing the euro down are too strong and there's a flood coming. Even though the euro has already fallen a long way… my broken dam theory makes me almost certain the euro's exchange rate will fall from here.
There are several ways you can make this trade. Buying European manufacturing or commodity companies would be one way. These companies pay their costs in euros but earn their profits in dollars. When the euro falls, their costs fall. But this is too indirect for me…

Buying the double-short euro fund is a second way you could play this. The symbol is EUO. This is the trade I recommended to subscribers of my trading service, Penny Trends. (We timed it perfectly and my readers are showing a 25% gain.) Let's say my broken-dam theory is right and the euro falls to $1.20 this summer. That's a 5% move in the euro. The double-short euro fund will rise 10% in that scenario.

Buying a put option on the euro fund is your third choice, although I'd only recommend it for experienced option traders. The euro fund's symbol is FXE. It's a large fund and there's plenty of liquidity in the option market.

If none of the above ideas suit you, don't worry. With all the government intervention I see in our future, you'll have plenty more "broken dam" opportunities to take advantage of over the next few years…

THE GREAT INVESTMENT QUESTION OF THE WEEK… ANSWERED!

The great investment question of the week: "Was last week's panic the first sign the economy isn't doing so great? Should I sell everything and move to a bunker in Montana?"

Answer: Note the strength in Home Depot shares… and don't call the movers just yet.

Longtime DailyWealth readers know we believe Home Depot shares are among the best ways to monitor the economy. Owning and maintaining a home is still the American dream for most folks. As the country's largest seller of things to spruce up the basement, bathroom, kitchen, roof, and garden, Home Depot's profits and share price rise and fall with America's fortunes.

As you can see from today's chart, America is still rising. Home Depot suffered a decline of a few dollars per share last week… but has surged back to its yearly high. Depot's price action is similar to nearly every other economically sensitive stock we follow… Cummins (high-horsepower diesel engines)… Darden Restaurants (largest U.S. casual dining chain)… and transportation stocks (hauling and shipping goods).

Unless these crucial "real world" indicators start to break down, we must treat last week's panic as a brief interlude in the huge "E-Z-Credit" bull trend the Fed has engineered.

Thursday, May 13, 2010

What really caused the stock market crash

[E]veryone is wrong about what happened in the stock market last week...

I've seen various calls by journalists, hedge-fund managers, and others to ban "bots," computer software that automatically sells stocks when the market falls, similar to the portfolio-insurance programs that helped tank the market in October 1987. Bots or not, the idea that you should follow the market's momentum and sell what's falling certainly contributed to Thursday's rout.

But I'm loath to say, "There ought to be a law." The trouble isn't bots. It's the idea that you should let the market's action tell you what to do. It's as impossible to outlaw that idea as it is to outlaw human nature. There were no bots in 1929, and the market still jumped out of bed and hit the floor like it was late for work.

Outlawing bots wouldn't eliminate the certainty that markets will correct and rally and crash and soar, and there's not a damned thing anyone can do about it. You can't change it because you can't change human nature. Since there's no problem other than the persistence of stupid behavior, the lack of a pat-sounding solution leaves politicians without a soundbite to vomit up for the news media.

The only "solution" is the one you don't want to hear. In financial markets at least, human beings should be fully exposed to the risks inherent in their own flawed nature. It's impossible to expect people to become better investors if you protect them from their own foolish behavior. I'm not holding my breath, though. I realize the removal of paternalistic market regulations is off the table, since it would put a whole class of politicos and pseudo-intellectuals out of business...

Academics, lawyers, and other highly educated people tend to suffer from a fatal conceit. They believe deeply in their own ability to micromanage other people's lives. So they're constantly coming up with schemes like Social Security, Medicare, Medicaid, and compulsory health insurance. And they want to outlaw everything that reminds them of their own stupidity (i.e., their limits). When the market proves to them they aren't in charge of anything, they respond by calls for more regulation.

The situation is perpetuated by another quirk of human nature. Meddling society-designers don't acknowledge the often horrible unintended consequences of their actions. For example, Chicago's murder rate has soared since the gun ban, even as the murder rate in Washington D.C. has dropped in the wake of the Supreme Court's decision to strike down the city's handgun ownership ban.

The only reason for the persistence of failed ideas – like mandatory health insurance, financial market regulation, and gun control – is bad ideas feel good to pseudo-intellectual Ivy League graduates. As educated people who can speak and write effectively, they're able to convince thundering herds of lesser intellects to go along with bad ideas. That's why society-designers tend to thrive in places where ideas don't have to work to survive, like academia and government.

In reality, more guns coincide with less crime, all over the United States. In reality, mandating health insurance ruins the quality of medical care, all over the world. In reality, financial markets work best without meddling bureaucrats getting in the way of the price-discovery process (as they have in the sclerotic mortgage and housing markets).

If the society-designers in Congress banned the bots used to pursue momentum-trading strategies, I promise there'd be at least one enormous, bad unintended consequence. They'd deny responsibility for such consequences, as always. I also guarantee you they'd offer even more regulations to solve the new problem they created.

Bots didn't cause the market's decline last week. The decline proved the efficiency and power of markets, and represented the lack of problems in that part of our financial system, not the presence of any big problem, like you see being widely reported in the news.

The inconvenient truth is that human nature caused last week's decline. That's what irks the society-designing meddlers so much. That's why the voices were so many and so shrill to have Congress "do something." For once, I wish these people would just do nothing. If they all failed to show up for work for a year or two, we'd be much better off.

STOCKS THAT CAN GO THOUSANDS OF PERCENT HIGHER

Today's chart is proof that when gold and silver move higher, the returns in gold and silver stocks can get ridiculous.

About a year ago, our colleague Matt Badiali told his S&A Resource Report readers to buy shares in Silvercorp Metals, one of the world's elite silver stocks. Silvercorp mines several extremely rich silver deposits in China. Matt saw the stock as a way to profit from a bull market in gold and silver, plus China's mushrooming demand for the stuff.

At the time of his recommendation, Silvercorp shares traded for around $3.25. Silver has climbed about 25% since then. In an incredible example of the leverage gold and silver stocks offer to the underlying metals, Silvercorp has almost tripled during the same time.

How much higher could Silvercorp go if gold and silver continue their bull markets? Let's just remember legendary speculator Doug Casey's observation: The gold and silver stock sector is tiny compared to the rest of the market… and a widespread rush to buy these companies would be like "trying to siphon the contents of the Hoover Dam through a garden hose."

What You're Not Hearing About the Coming Offshore Drilling Ban

Several months ago, I published a research report on the Strait of Hormuz, the narrow waterway that runs along the Iranian coast.

Around 40% of the world's oil supply moves through this "chokepoint." That oil is pumped from the fields in the Middle East, loaded onto ships, and sent to Asia, Europe, and North America.

In case of a shooting war with the U.S. or Israel, military strategists see a huge risk in Iran attempting to close this waterway. Even a partially successful attempt to close the Strait of Hormuz could double oil prices… which would make for economic disaster.

The Strait of Hormuz remains a major danger zone for the global oil industry. But right now, it's taking a back seat to the Deepwater Horizon oil disaster, which is one of the worst ecological catastrophes in American history.

The second largest oil spill in history occurred at PEMEX's "IXTOC 1" well. That was the last time a massive blowout occurred in the Gulf of Mexico (yes, it's happened before). Mexico's state-run oil company let 3.3 million barrels of oil leak out before they got the well plugged.

It will take 20 months for that much oil to leak out of the current well. We're at 22 days right now, roughly 110,000 barrels – or half the size of the Exxon Valdez spill.

What will make this spill so devastating is its proximity to land. Louisiana could lose its entire oyster industry forever. Its shrimp and fishing industries will be shut down for years. The cost of this catastrophe will be well over $10 billion once the losses of industry and tourism are factored in.

I expect this horrible accident will result in a ban on offshore drilling.

I also expect it to provide a long-term tailwind to one of my favorite areas for investment: the Athabasca oil sands.

Before I tell you why, it's vital to keep in mind the United States' four largest sources of foreign petroleum. Currently, they are 1) Canada, 2) Mexico, 3) Venezuela, and 4) Nigeria. (You read that correctly… No Middle Eastern country is even in the top 3. Saudi Arabia is No. 5.)

In April, I told you how Mexico's national oil company, PEMEX, is a bastion of incompetence and corruption. Venezuela is a basket case run by a lunatic. And Nigeria regularly deals with unstable governments and terrorism. Now, let's get back to the first country on our list…

Alberta, Canada's Athabasca oil-sand deposit is the world's largest source of stable, sure oil. At current prices, it holds around 200 billion barrels of recoverable oil (a reserve that is second in size only to Saudi Arabia's).

Oil coming from this deposit is what makes Canada the largest crude exporter to the U.S. From a geopolitical standpoint, it's a beautiful thing for the U.S.

Canada is a stable country. Also, there's no offshore drilling involved. And no terrorism. There's no need to ship the oil over thousands of miles of ocean. We know the oil is there, so there's no risky exploratory wells to be drilled…

Nope… the Athabasca deposit is just a huge swath of oil-soaked Earth a quick pipeline ride away from your gas tank. The Horizon disaster shines more light on just how valuable having this deposit is. The less we rely on offshore drilling, the more we must rely on the bounty of Athabasca… and the more investment interest in big oil-sand players like Suncor (SU) and Canadian Oil Sands Trust (COS.UN on the Toronto Exchange).

The two big offenders in the Horizon spill – driller Transocean and giant British Petroleum – have suffered stock price drops of 25% and 19%, respectively, since the accident. "Crisis investors" are jumping into these stocks in the hopes of a rebound.

I'm holding off on "crisis investing" right now. These two companies might make for attractive stock buys. But it's too early in the blame game for me to risk my money. I'd rather take the sure bets.

In this case, it's Athabasca.

Wednesday, May 12, 2010

BEAR MARKET ALERT

It's official: The breakdown we've been tracking in Chinese stocks has turned into a bona-fide bear market.

For the past four months, we've noted how the "Dow Industrials of China," the Shanghai Composite Index, has been stuck in a bearish series of "lower highs and lower lows."

In the past three weeks, this gradual weakening has produced a significant breech of the 2010 low (A). And just yesterday, it produced a MAJOR breech of the August 2009 low of 2,667 (B). This is a decline of more than 20% from its peak… or by most definitions, an "official" bear market.

China bulls say, sure, China is overheated right now, but not so much that a big crash is possible. China bears – like Marc Faber and Jim Chanos – say a market crash is just around the corner. We'll note both arguments and let the market be the judge. Right now, the gavel is coming down for the bear case. The trend is DOWN.

The Worst $1 Trillion Ever Spent

Just under $1 trillion…

That's what the European Union promised in an emergency rescue package to stabilize the euro currency and Europe's financial woes.

The result? NOTHING.

On Friday, the euro hovered around $1.27 all day. As I write… $1 trillion later… the euro is hovering around $1.27. Like I said, nothing.

In fact, the result turns out to be worse than nothing… It may prove to be the worst $1 trillion ever spent.

To me, this $1 trillion spells the end of the euro as a credible "threat" to the U.S. dollar. And it brings gold one step closer to being at least the world's No. 2 reserve "currency" (behind the U.S. dollar).

You see, before the $1 trillion promise (along with new promises from the European Central Bank to spend money to prop markets up), the euro currency had some semblance of credibility…

The euro's credibility goes back to the predecessor of the European Central Bank – Germany's "Bundesbank." For decades, Germany's old currency (the deutschemark) was one of the world's strongest. The Bundesbank had a reputation for not sacrificing the value of the deutschemark for political needs, so investors wanted to hold Germany's currency.

With the start of the euro, financial markets assumed the new European Central Bank would inherit the legacy of the Bundesbank. That's what kept the euro up as a credible threat against the U.S. dollar's world dominance.

But the $1 trillion promised over the weekend – along with promises to prop up the markets – killed the idea that the European Central Bank would act like the Bundesbank. It horribly damaged the euro's long-term credibility.

Now, the euro is just like a dollar – politicians are willing to sacrifice its value. Wait… a euro is now worse than a dollar. The euro is less traded (less liquid) than the dollar. And if the euro fails, there is nobody to blame.

It gets worse…

Yesterday, in his excellent Gartman Letter, trading guru Dennis Gartman asked essentially, What is the propensity of the reserve banks of China and India to add euros to their reserve assets now? We have to think it is somewhat reduced from what it was only a short while ago… On the other hand, what is their propensity to own gold now? Almost certainly it is enhanced.

The numbers are showing it…

Gold is hitting highs in BOTH dollars and euros. In short, paper money really lost credibility over the weekend.

The euro is now a garbage currency. It deserves even less credibility than the U.S. dollar. But the U.S. dollar doesn't deserve a lot of credibility, either…

It's easy to sit in the States and see the problems over there. But the thing is, we have the same problems. We have too much government spending… and we have too many future promises we can't fulfill, like Social Security.

What makes our government's problems that much different than the countries of Europe? They're just ahead of us.

What we need is change… We need countries to commit to changing their ways.

You don't fix a drug addict by giving him more money. He'll go spend it on more drugs. Instead, you need to get him to rehab, to give him a fighting chance to change his ways.

You don't fix someone who's overspent on their credit cards and is living beyond his means by giving him more money. He'll simply get himself deeper in debt. Instead, you need to cut up the credit cards and force him to live lean for a while.

What can you do? Two obvious things:

1. Own some gold instead of paper currencies. The U.S. and Europe have made it crystal clear their "release" valve is the value of our paper currencies.

2. Make your presence known to your government representatives. Do your best to "take their credit card away" and "send them to rehab" to prevent the U.S. from becoming the next Greece.

Both the dollar and the euro will be weak against gold, as politicians the world over have now proven they'll sacrifice the value of their currencies for short-term political gain.

Trade and invest accordingly…

What no one else will tell you about Thursday's crash

The events of the past week require comments, but not the comments you're expecting. If you think the whole thing seems absurd, I agree. Some guy sells a billion shares of Procter & Gamble instead of a million, and the whole stock market panics? It doesn't make sense... unless there was already fear and panic in the air, and Mr. Market was dying for an excuse to hit the sell button on thousands of stocks.

First, let me tell you what no one else will tell you about what happened on Thursday.

Nothing bad happened in the stock market last week. The stock market behaved the way it always does. And it did so with brilliant efficiency.

When you enter billions of orders to sell stocks, the market is supposed to tank 8% in 10 minutes. That's how it works. The market instantly balanced an insanely unbalanced set of buy and sell orders. If the market soared last week, nobody would say there was any big problem that required more government interference. But it fell, so everybody says there's something wrong. The efficiency of the markets was on full display last week. The real lesson, the one that won't be reported anywhere, is that markets work. So what?

If anyone tells you I'm wrong about this, take a look at how he makes a living. Most of those who say last week's market action represents some kind of problem will tend to be in the business of offering "solutions." It's easy to look like a magnanimous hero by saying your industry should be more regulated, even though regulation naturally enhances incumbents' already substantial advantage. Voicing support for the government to "do something" is the perfect camouflage for scheming to eliminate or cripple the competition.

The U.S. dollar is about to implode

The world has officially entered what we believe will be the final chapter of the U.S. dollar's reign as the world's reserve currency. The dollars in your wallet now not only back bankrupt U.S. money center banks and subprime home "owners"... they are also officially backing all of the economies of Europe. The world's monetary system has evolved into a new kind of global socialism. We don't think that can be bullish for long.

Here are the facts we've been told so far... The European Central Bank (the ECB) will spend $1 trillion (750 billion euro) bailing out Europe's sovereign borrowers (like Greece, Spain, and Portugal). It will also purchase billions of troubled assets from Europe's largest banks – like UniCredit. The mechanisms for these purchases will likely be convoluted. The EU treaties contain a no-bailout clause, forbidding any member to "be liable for or assume the commitments of" another EU country. And the European Central Bank cannot lend to countries or buy their debt directly. To get around the technicalities, the EU created an off-balance-sheet entity that will "borrow" the money and lend it to countries in trouble. Whether this matters to the EU's creditors or not, we can't say... but we certainly wouldn't lend to an off-balance-sheet entity of a central bank that's not represente d by any country. Buying euros used to be a game of "who owes me nothing." Now, it will be a game of "whose off-sheet entity owes me nothing." We doubt that will make Europe more creditworthy in the long term.

What does any of this have to do with the U.S. dollar? More than you'll ever hear anywhere else. On paper, the money is supposed to come from Europe's biggest governments and the IMF. But in reality, most of the money will be borrowed from the U.S. Federal Reserve, which just happened to re-open its trillion-dollar swap account with the ECB this weekend. Ironically, the Federal Reserve says these loans are risk-free because the counterparty is a central bank (or at least the off-balance-sheet entity of a central bank). But if the ECB is truly creditworthy, why couldn't Greece, Spain, Portugal, Italy, or Ireland raise the money for themselves?

At the beginning of the year, we declared rising interest rates in the U.S. as "the single most important trend in finance." We believe interest rates on long-term U.S. government bonds will rise to compensate investors for the increased risk of owning paper-backed sovereign debt. Our logic is simple: The more money the U.S. prints to bail out banks and other sovereign borrowers, the riskier the U.S. balance sheet becomes. By the first half of 2010, the Fed had already spent $2 trillion to bail out Wall Street's banks and the U.S. mortgage market. And as we reminded subscribers just last Friday, because the world's banking system uses the U.S. dollar as its reserve currency, the Fed would eventually be forced to bail out Europe's economy. Indeed, that's exactly what happened over the weekend. The U.S. Federal Reserve has officially become the world's lender of last resort. We would humbly suggest these policies will likely lead to a permanent loss of value for holders of U.S. dollars.

Why are we so concerned? Printing money to bail out borrowers around the world will not solve the problems of overleveraged governments or debt-ridden economies. It simply shifts the risks from private balance sheets to the U.S. government's. The U.S. dollar has assumed all of these risks. Our currency has become a ticking time bomb.

You can watch the dollar die, one day at a time, by keeping your eye on the growing spread between the value of long-term U.S. bonds and the price of gold. Over the last year – even as the U.S. economy apparently improved – the spread widened by about 35%.

Chinese stocks plummet into bear market territory

The rout in Chinese stocks continues.

The Shanghai Composite Index just hit 8 months lows - down 20% from their peak last fall - after a report showed inflation and home prices may be rising out of control. Inflation jumped the most in 18 months while property prices increased nearly 13%... meaning China's central bank may need to raise interest rates soon.

China's easy money policies have not kept Chinese stocks from falling, so there could be serious problems when rates begin to rise.

Monday, May 10, 2010

The Most Important Wealth-Protection Step You Can Take

They're calling it the "Flash Crash"…

With a market cap of $25 billion, Accenture is one of the largest technology, consulting, and outsourcing companies in the world. For a few minutes on Thursday, Accenture's stock price fell to zero. Its stock market value literally vanished.

Something similar happened to a dozen other companies and funds. Even Proctor & Gamble, one of the largest and most stable companies in the world, dropped 37%. CNBC observed it was a loss of $35 billion in market cap.

A few moments later, everything returned to normal…

Some are blaming an electronic trading glitch. Others say high-speed trading programs caused it. Some are even saying an individual trader caused the crash by entering a position incorrectly into the system.

But my first thought was the Daemon…

The Daemon (pronounced like "demon") is the fictional creation of author Daniel Suarez, in a novel titled Daemon.

The novel is centered on Matthew Sobol, a genius game designer from California. He creates a program, called Daemon, to hack global computer networks and wreak havoc.

Infiltrating the computer systems of major corporations is one tactic the Daemon uses. Once embedded in a corporate data system, the program contacts management and threatens to destroy the company's databases. The Daemon will allow the databases to function – and the business to operate – in return for billions of dollars in ransom.

Some companies refuse. The Daemon destroys their financial records, and their stock market values vaporize, just like we saw happen to Accenture last Thursday.

I'm not saying this was a cyberattack on the stock exchange. Truth is, I have no idea what caused this "flash crash," and nor does anyone else it seems. Even the Wall Street Journal refrained from speculating in Friday morning's edition. But a dozen stocks saw their value go to zero, and the stock market lost 10% of its value in seconds.

Now… think about how much of your business depends on the smooth functioning of computers, databases, and the Internet. Think about how much of your life is now online and vulnerable to genius computer criminals. If you're like most people, you don't know much about how it all works… You just go along with everyone else and trust the system.

As yesterday's stock market glitch – and our series on personal Internet security – showed, trusting 100% of your life and money to technology is risky.

Or as one of the characters in Daemon notes, "Apparently, people thought nothing of hanging their personal fortunes on technology they didn't understand."

Daemon is a brilliant book. I read it cover to cover without stop. It discusses all kinds of technology I didn't know about… and does it in an entertaining way. Best of all, all the technology featured in the book exists today. In other words, the book's premise is absolutely plausible.

The point Thursday's market action reinforces is this: If you hold wealth in electronic form, you're taking a risk. That risk is technological failure. It may be a tiny risk… or it may not be so tiny. You can't know. But are you willing to risk so much on something you don't understand?

Fortunately, it's an easy risk to insure against. You simply have to keep a small percentage of your wealth in physical gold, silver, and cash. And don't trust anyone else to store it. Keep it yourself, secure it, and don't tell anyone about it. And consider taking some of the online security steps we've discussed here before.

We've all come to rely and depend upon technology we don't understand to store our wealth. We're taking a small, but potentially catastrophic risk. By keeping a stash of physical wealth, you're taking the first step in mitigating this risk.

Saturday, May 8, 2010

CHART OF THE WEEK: THE BREAKDOWN IN CHINA IS GETTING WORSE

With all the stock and currency panics this week, we almost forgot to check in on the giant breakdown in China's stock market. Almost…

For the past several months, we've highlighted how the "Dow Industrials of China," the Shanghai Composite, has been stuck in a bearish series of "lower highs and lower lows." On Wednesday, we noted how the index suffered a major breakdown that took it to its lowest point in 2010 (A).

Just hours after our note, the Shanghai suffered another major breakdown… this one took it within a whisker of its September 2009 low (B). This is extraordinary weakness from a major stock index.

And keep in mind this huge problem for China's export machine: Europe makes up about 20% of China's overseas sales, its largest market. If Europe's debt crisis continues to worsen (and it will), expect China's economy to slow… expect this downtrend to get worse. And who knows, it could slow China's economy so much that Jim Chanos' dire prediction comes true.

THIS IS A KEY LEVEL FOR THE BULL MARKET IN STOCKS

With the euro moving toward "toilet paper" status, stocks plunging, and volatility surging, now is a good time to step back and look at the "big picture." We'll use a "moving average" to do it.

A moving average works by collecting a bundle of an asset's closing prices, say each one from the past 200 days, then taking the average of those prices. This produces a chart line that "smoothes" out market volatility so we can gauge the general trend. When a market is trading above its moving average, it's considered to be in a bull trend. When a market is trading below its moving average, it's considered to be in a bear trend.

One of Wall Street's most widely followed moving averages is the 200-day moving average on the benchmark S&P 500 index. There's nothing magical about the 200-day moving average. It's simply popular because it's popular.

As you can see from the chart below, the S&P has spent the bulk of the past year in a bull trend. And while the index has suffered huge selling pressure in the past few weeks… and was hammered yesterday… on a closing basis, the index has not violated this key level (around 1,100). Stock market bulls need it to hold.

These are the world's greatest income investments

I've been complaining that the stock market is expensive and good ideas are hard to find. Well... at the Value Investing Congress this week, I found two stocks that seem like bargains right now and another I hope gets cheaper. In the May issue of Extreme Value, which comes out next week, I'll have two new picks.

One of them is a brand new World Dominator stock. World Dominators are the No. 1 companies in their industry. They beat competition year after year, and they have pricing power that allows investors to beat inflation.

My new World Dominator pick is the No. 1 brand in seven of the top 10 markets in the world. It's No. 1 or No. 2 in 25 of the top 31 markets. It sells a product virtually immune to inflation, recession, depression... you name it. Management is stellar, and the price is incredibly cheap for such a high-quality business.

Most investors think you can't make a lot of money in a short time with World Dominating blue-chip stocks. But my readers made 53% in a few months on TJX Companies, the No. 1 and No. 2 discount department-store chain. Subscribers made 50% on UPS, the world's No. 1 package delivery company. And they're up 49% in a little more than a year on the world's No. 1 microprocessor company. I think this new World Dominator stock can double within the next three years.

World Dominator stocks are also the world's greatest income investments. When you hold them for years and years, World Dominator stocks are like bonds with coupons that grow. Wal-Mart has raised its dividend every year since it went public. ExxonMobil has raised its dividend every year for 27 years. Automatic Data Processing has raised its dividend every year for 34 years. Procter & Gamble has raised its dividend every year for 56 years.

If you aren't building your portfolio around these stocks, you're probably making a mistake. I'm willing to bet the World Dominators will outperform the S&P 500, the Russell 2000, and the Nasdaq 100 over the next three years. They're the most compelling values in the stock market today. They're also the safest stocks you can own. If you think the market is going to be difficult for the next few years, you should have more money in World Dominators than any other type of stock today.

The super-wealthy are terrified of a currency collapse

By the way, a 1935 Picasso just sold for an all-time record of $106 million. The opening bid price was a mere $56 million, and at that price bids came in from all over the world.

Big money is gobbling up jewelry and works of art as fast as it can. Why? They want intrinsic wealth instead of fiat junk money. And remember, these cats didn't get rich by being stupid.

How does a "poor man" like you and me protect ourselves from the ultimate collapse of fiat junk money? Gold, baby, gold. Coin by coin -- coin by coin.

Thursday, May 6, 2010

Crash alert: Euro plunge continues

The euro continued its downward slide in European trading on Thursday, battered by fears that the financial crisis that has enveloped Greece may infect Portugal and Spain.

The euro has dropped to lows last seen in early 2009 as markets debate whether a planned 110 billion euro ($142 billion) European Union and International Monetary Fund bailout will stem Greece's woes and whether other countries in the euro zone could be at risk.

ARE YOU WATCHING THIS BLOW-UP, WASHINGTON?

In late March, we noted a strange phenomenon in the pan-European currency, the euro.

Back then, the entire world hated the euro. Debt-crisis stories dominated the financial news. The amount of negative bets against the currency was at an extraordinary high. Since the market always frustrates as many people as possible, these points of maximum pessimism are typically "relieved" by rallies that kick folks out of the trade. But a strange thing happened on the road to relief…

The euro did manage a tiny rally… but it was soon overwhelmed. Despite so many people standing on one side of the boat, the euro could not tip them out. We noted these rare occurrences are signs of EXTREME weakness… often a sign an asset will blow up.

As you can see from today's chart, the euro is doing just that. The currency has plunged in the past month. The world is waking up to the fact that you cannot spend your way out of debt. Are you watching this, Washington D.C.?

This Is America's Gold Wake-Up Call

Americans are finally waking up…

And the story behind this chart is the alarm clock:

The chart shows the amazing all-time high just reached by gold… in terms of the pan-European currency, the euro.

You see, gold has been in a bull market for nine years now. But despite this price strength – and the reasons behind it – the average American has no idea this bull market exists. He has no idea what role gold serves or why anyone would want some, other than to buy the wife a birthday present.

He has no idea that huge money managers – like the central banks of China and India… and legendary fund manager John Paulson (who controls more than $30 billion of assets) – are accumulating huge amounts of gold.

The chart above is why… and it's starting to wake people up. Western governments, including those in Great Britain, Italy, Greece, and the United States, have promised ridiculous benefits programs to their citizens… and they've taken on crushing debt loads. As you read this letter, those debt loads are ripping apart the euro currency union, which began in 1999.

Your typical American can't even find India on a map. He believes the Chinese are evil job-stealers. He doesn't give a hoot what happens in South America. But he does read the newspaper… and he has seen that Europe is in the middle of a giant crisis.

Our typical American has also read that his country is in a similar situation. He sees runaway government spending. And now, with gold approaching a bull-market high in dollar terms… and sitting at a new high in euro terms, he actually sees the result: a flight from paper currencies into real money, gold.

This flight has sent gold from $1,100 an ounce to $1,180 in just the past month. I believe this rise is driven by the mountain of money controlled by central banks and large institutional investors.

India, for example, made major headlines last year when it bought 200 tonnes of gold to diversify its currency reserves. China has more than doubled its gold holdings since 2003. It's also one of the largest owners of the big gold stock fund, GLD. John Paulson, one of the world's biggest and best money managers, owns more than $3 billion of that same fund. He also owns more than $1.5 billion worth of gold miner AngloGold Ashanti… and several other huge mining positions.

Money is flowing into gold because big money managers know they shouldn't park their money in the euro anymore. It's a piece of garbage. And Obama & Co. are promising free lunches to everyone who can help reelect them… This is harmful to the U.S. dollar's long-term value.

Gold is now reasserting itself as a viable place to park wealth. After all, with interest rates so low, you're not missing out on fat interest payments by owning gold, which pays no interest. The Western debt problems will take a long time to play out. I believe they could send gold to $2,000… even $3,000 an ounce in the coming years.

Would I like to buy gold at cheaper levels than $1,180? Sure. If you've been reading DailyWealth for a while, you probably have. But if you haven't yet, don't worry. You still have a huge tailwind at your back.

As shown by the new ALL-TIME high gold just reached versus the euro, the world is finally waking up to the paper currency crisis… and folks will continue to accumulate gold.

Stunning photos of the meltdown in Greece

New photos from Greece show that today's demonstration is not a protest, it's a riot.

Over 100,000 Greeks are on the street. Three employees at Marfin Bank are dead from an arson attack on their building.

Wednesday, May 5, 2010

CHINA JUST SUFFERED A MAJOR BREAKDOWN

Well… China gave it a fourth go-around. As expected, it failed.

Back in April, we noted the miserable series of "lower highs and lower lows" being registered by the "Dow Industrials of China," the Shanghai Composite index.

Chinese shares screamed higher in 2009… and reached a blow-off top in August. But over the past eight months, the Shanghai Composite has made four attempts at besting that old high. Each effort failed more miserably than the last. The most recent failure is a serious one…

As today's chart shows, the Shanghai index has failed in its latest attempt to rally. It has plummeted from the 3,100 level to reach its lowest point in 2010 (A).

Many brilliant analysts like Jim Chanos and Marc Faber are predicting a severe economic slowdown in China… even a huge asset crash. Every good trader knows the market leads the news… and knows this latest break in Chinese stocks could be the start of something much worse, as Chanos and Faber predict.

Now let's keep an eye on the longer-term low of 2,700 (B). More to come on this potential meltdown…

This country is growing faster than India, China, and Brazil

Indonesia’s favorable demographics, natural resources and relatively stable political environment have set up the country for what could be a very strong decade of growth.

Indonesia’s economy doubled in the past five years.

A brutal day for the euro: Falls to lowest levels since 2008

There’s an old saying on Wall Street that stocks take the stairs up and the elevator down. Boy was that true today. You might even say that some people took an even faster way down - out the window.

If you’re living in Greece, Spain or Portugal that probably sounds pretty good right about now. Today was a disastrous day on just about any level.

Tuesday, May 4, 2010

THIS IS STILL OUR FAVORITE COMMODITY

We've spent most of our "ink" over the past three months detailing how the government's giant "E-Z-Credit" program is pushing up the price of nearly every asset imaginable.

This makes life difficult for the contrarian trader, who looks for cheap, beaten-down assets to buy. One of the few ideas we can provide you is (still) check out natural gas.

Natural gas is a vital fuel that heats our homes and powers electrical plants. It also trades in a ratio to its energy cousin, crude oil. Sometimes oil gets cheap relative to gas. Sometimes gas gets cheap relative to oil. Last year, due to a big glut of new gas supply, this oil/gas ratio hit an extreme "boiling point" reading of 24:1. This is a super-cheap gas reading.

Today's chart shows that, while the 24:1 reading has backed off the burner a bit, it's still at 22:1. Sure… we know natural gas supplies are high right now. But we also know buying during a glut – when you can get assets on the cheap – is the only way to make big money in the commodity markets. "Natty" is still a buy.

A frightening fact about the Greek bailout you haven't heard

Warren Mosler was kind enough to send us these excellent thoughts on the Greek bailout:

“The size Greece ‘needed’ implies the others will need numbers beyond euro zone capacity, especially as the Greek deal used up euro zone capacity.

So this means Greece is the last rescue possible- the rest are...

Saturday, May 1, 2010

CHART OF THE WEEK: LAST STOP ON THE CURRENCY TOUR

Our chart of the week is the last stop on the world currency tour. One might say, "The buck stops here." We'll say, "The BS ends here."

You see, many Americans complain about excessive war and welfare spending. But maybe 1 in 1,000 complainers stop to think about the dishonest system that enables it all – the system that allows politicians of all stripes to promise the world to ignorant voters, spend far more than we earn as a country, and devalue the savings of millions of hardworking people.

This system is paper money for which there is no gold backing. It is a system America's Founding Fathers made loud warnings against. Every instance of its use has resulted in plunder on a massive scale. A paper money system with zero gold backing allows governments to print more money to pay for every harebrained scheme imaginable… which silently dilutes the value of the money you save.

This system has caused a major devaluation in the U.S. dollar since 2002… and it's ripping apart the Euro Union as you read this. The antidote for this BS is the best form of real money humans have ever found – gold. We'll say it for the thousandth time, gold is no investment: It is money. As the dishonest system unravels… as Obama & Co promise a few more free lunches each month… gold ticks higher. It has done so for nine straight years. Below is this uptrend. It's our last stop… and it's going to continue.

THE MONEY MARKET

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