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Hyperinflation Here We Come!

Contrarian Profits — Thu, 30 Oct 2008 13:27:43 +0000

Governments are hosing down the markets with bailout money. Central banks, meanwhile, are making sure the cost of borrowing is as close to zero as possible. We smell another bubble in the making…and another inevitable crash. Talk about priming the pump for the next bout of excessive exuberance.

– “The once unthinkable prospect of zero interest rates moved closer to reality yesterday,” says The Times. “Interest rates going to zero in our heroic struggle to become Japan,” says Henry Blodget on Clusterstock.

– Even Japan is racing to become the next Japan. Today, Japan announced it’s joining the global bailout bonanza. Prime minister Taro Aso says he will pump $275 billion of public funds into world’s second-largest economy. This will go toward expanded credits for small businesses and a cash payback to every household.

– Uncle Sam is also considering spreading more government-funded love around, too. This from the NYT:

Senior Bush administration officials are discussing a plan that could help up to three million homeowners struggling to pay their mortgages to stay in their homes, three people briefed on the proposal said Wednesday.

The initiative could be the most sweeping government effort directed at mortgage borrowers since the financial crisis began last year. Under the plan, the government would agree to shoulder half of the losses on home loans if mortgage companies agreed to lower borrowers’ monthly payments for at least five years, according to the people briefed on the plan who asked not to be named because details were still being negotiated.

– U.S. stock futures pointed to strong gains this morning ahead of data that will likely show that GDP is contracting — further evidence, if any were needed, that Mr. Market doesn’t give a hoot about the ‘real’ economy. Yesterday the Fed handed the market another rate cut. And there’s nothing the market loves more than a rate cut…all that easy money to play with.

– “Talk about priming the pump for the next bout of excessive exuberance,” says a commenter on Paul Kedrosky’s Infectious Greed blog. “If the next big problem isn’t hyperinflation, it will mean that we have crashed and burned. I believe there is a movie called No Way Out that basically says it all! Nothing good can come out of where we are at the present moment economically.”

– We’re already seeing a massive rally in commodities, just one day after the Fed cuts. “Gold, crude oil and corn extended the biggest surge in commodity prices in five decades on speculation interest rate cuts in the U.S. and China may revive demand for raw materials consumption,” reports Bloomberg.

The Reuters/Jefferies CRB Index of 19 raw materials jumped 5.9 percent yesterday, the most since at least 1956, when the data begin. The index is still down 24 percent this year. China, the world’s largest industrial-metals user, trimmed interest rates for a third time in two months, and the Federal Reserve slashed bank borrowing costs in the U.S., the biggest oil user, to 1 percent.

Follow Investing Guru Leon Cooperman into Atlas Pipeline (APL)

Chris Mayer — Tue, 14 Oct 2008 15:42:07 +0000

Leon Cooperman is one of the best living investors. He’s the founder of Omega Advisor, a $4.5 billion hedge fund based in New York.

According to Leon, “This is the most difficult environment I’ve lived through. And I’ve been doing this for 41 years.”

Capital & Crisis editor Chris Mayer caught up with Leon at a value investing conference recently. Cooperman presented Atlas Pipeline (NYSE:APL) as one of his favorite ideas of the moment — a pick Chris previously recommended to Catital & Crisis readers.

Get Ready for the ‘Biggest Reversal of Resource Stocks in History’

Contrarian Profits — Mon, 13 Oct 2008 21:39:23 +0000

“In my view, the oceans of new fiat money will chase scarce assets: energy and resources,” says Dan Amoss in The 5 Min. Forcast. “It will stave off the deflationary depression scenario, but not re-inflate the credit/housing bubble. This means the biggest reversal in resource stocks in history is likely soon.More from Dan:

“Since we could be on the verge of the biggest reversal in history in resource stocks, I recommended a call option in Friday’s Strategic Short Report alert. It’s hard to imagine recommending a put right now, when I’m almost certain it’ll lose value in the coming weeks.

“We may retest the lows in the stock market, but if interbank lending rates compress, I think we’ve seen the lows in resource stocks. I’m looking forward to this earnings season more than any in my career. We’ll find out just which companies will be able to deliver decent earnings in 2009, and which ones will just try to survive.”

BTW, the call Dan recommended went for around $5 when he recommended it before the market’s close on Friday. As we write, it’s just below $9. Not bad for a one-day trade. To learn more, check out Dan’s latest alert here.

Why Energy and Resource Plays Will Profit in the Long Term

Byron King — Mon, 13 Oct 2008 14:41:50 +0000

One of the biggest collapses this year hasn’t been in stocks. Crude oil has lost half its value since it peaked at just under $150 a barrel in July. Today, a barrel of the black goo sells for just over $80.

Outstanding Investments co-editor Byron King says “it seems like the investment locomotive — energy, resources and related infrastructure — has derailed.”

Does this mean you should sell your resource stocks? Byron says selling now would leave a lot of value on the table. That’s because resource stocks are now priced well below their intrinsic value. This from Byron in Penny Sleuth:

Before you do anything precipitous — like sell your last stocks and stuff the cash into your mattress — let’s ask a few more questions.

If you sell out now, what price will you get? A low price, right? So if you sell now, you will leave a lot of value on the table.That is, most things in the world of energy and resources are underpriced compared with their intrinsic value.

I don’t care how bad the market looks just now (and it looks awful). Go out and try to find an oil field somewhere, or build an oil refinery, or find an ore deposit and build a mine. Can’t do it, can you?

So if you sell out now, just be aware that you will be getting a relatively low value. You will be leaving long-term value behind. If that’s what you want, then that’s what you ought to do. Just understand the point.

Which brings up the next set of issues. How badly do you need the money? How soon do you need it? How scared are you of further declines? How much risk can you handle, especially going forward? What kinds of reassurance do you need?

The markets are down. A lot of Elvises have left the building. And who is left to do the selling? Just you? Nope. Whatever you think, you are not alone. There are still a lot of people holding their shares. What do they know? And what is their reasoning to hang on?

Have You Lost Control?

From what I have seen, the biggest sellers — the market drivers who are taking the express elevator down to the subbasement — are people who have lost control of their money, if not their investment destiny.

People are selling to meet margin calls. The wildest sellers are traders who are just plain behind the eight ball.

It’s more than being scared by what is happening.

Heck, we’re all scared in some way or another. I wasn’t around in the 1930s, so I have no firsthand experience with the Great Depression. I know only what my parents and other relatives and friends told me. It was pretty bad for a lot of people.

But right now the serious sellers are people who cannot afford to be patient. A lot of the sellers in the energy and resource field are hedge funds. These firms are meeting redemption calls from investors who want out. The hedge funds just plain need cash. They have to sell. And a lot of those funds are throwing everything over the side, even the life rafts and the emergency rations.

Hedge Fund ‘Extinction’ Could Kill Off Commodities

J. Christoph Amberger — Wed, 01 Oct 2008 15:14:29 +0000

Since mid-2007, 81 hedge funds have imploded. Another 34 are in trouble.

“No matter how you cut it, it’s been a rough year for the hedge fund industry,” says J. Christoph Amberger, editor of Today’s Financial News.

These funds may soon be forced to sell off their assets – many of which are commodities.

J. Christoph says this have a market-flooding effect… and weigh heavily on commodities prices.

This from Today’s Financial News:

Economics professor Nouriel Roubini now considers it possible that we could see a run on thousands of highly-leveraged hedge funds. Hundreds of smaller funds that have taken excessive risks with high leverage and are poorly managed may disappear, wiping out billions in capital. Roubini considers a massive shakeout of the bloated hedge fund industry likely in the next two years.

According to EuroHedge, a hedge-fund data provider, 272 individual funds strategies were launched during the first six months of 2008, the lowest for nine years. In the same period, 243 have been liquidated, the highest in a six-month period.

Average performance is on the low side. Some top funds are down 20, 30, even 40 percent.

Investors could have lost that much money doing their own trading.

Insiders have hinted that hedge funds could have an unprecedented level of cash pulled out by investors this quarter. Some funds have suffered significant declines in value or even temporarily halted redemptions.

A big problem of hedge funds is the extent of leverage. Many had to write down exposures to investments in risky instruments – including collateralized debt obligations and asset-backed securities like high-risk mortgages.

The recent crash in commodities plays has also choked off new capital inflows… while increasing redemption pressure.

Funds soon may be forced to sell their better assets to raise capital. That means a potential – and quickly accelerating flood of commodities will hit already instable markets.

The result will be a destruction of commodities valuations on a similar scale as we’ve seen in the financial and real estate sectors – wiping out those investors who sought out the treacherous shelter of hard assets as “inflation hedges” and “real money”.

PS: J. Christoph says he and his team of analysts will be serving up protective profit strategies on TodaysFinancialNews.com every day. Simply click on the following link to take advantage of their free email alert TFN eNews. You’ll also receive TFN’s crisis investing report, The 3 Best Small Caps to Own This Fall.

Source: The Great Hedge Fund Extinction

Early Indicators: AIG Bailout… Running Out of Rescue Cash?

Contrarian Profits — Wed, 17 Sep 2008 12:20:46 +0000

– Another day another bailout. At 6:30pm yesterday evening on Capitol Hill the government’s plunge protection due Hank Paulson and Ben Bernanke announced to lawmakers a plan to plunge $85 billion of taxpayers’ money into insurer AIG (NYSE:AIG) to prevent it from going under. In return, the government will take a 79.9% stake in the company.

– Interests of taxpayers “protected,” according to Fed statement. “Loan is collateralized by all the assets of AIG.” “Loan is expected to be repaid from the proceeds of the sale of the firm’s assets.”

– “The US government will receive a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders.”

– Here’s a scary thought, says the WSJ: What if the US government runs out of rescue cash? What if investors lose their appetite for Treasury bonds?

That thought likely lay behind Ben Bernanke and Henry Paulson’s hesitation to aid AIG, though finally the Fed seemed ready to cough up in a truly big way last night. Even those who closely follow the credit crisis probably expected to see banks and savings institutions heavily laden with mortgage debt end up on the triage pile — not an insurance company known for its pioneering work in China, its giant aircraft leasing business, and the like.

– “What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy,” says The New York Times, “but A.I.G.’s role as an enormous provider of financial insurance, which effectively requires it cover losses suffered by other institutions in the instance of defaults of securities that they have purchased. That means A.I.G. is potentially on the hook for securities that were once considered safe.”

– It would have been a chain reaction,” said Uwe Reinhardt, a professor of economics at Princeton University quoted in the paper. “The spillover effects could have been incredible.”

– An AIG bankruptcy would dwarf that of Lehman Brothers (NYSE:LEH), says William Patalon III. “The diversified insurance-and-asset-management firm is much bigger than Lehman, with $110 billion in annual sales last year and an employee roster of 116,000 people. An AIG failure would impact many more average consumers than the Lehman debacle, as some of AIG’s biggest units include commercial life insurance and retirement planning.”

– Credit default swaps and mortgage business to blame, says WSJ.

– The AIG bailout is burying some other pretty stirring news… like the crash in Russian stocks. This from the FT:

Russia’s two main bourses, RTS and MICEX, said on Wednesday they were suspending trade until further notice from the state’s main market regulator as shares continued to tumble one day after their steepest decline in more than a decade.

Russian stocks had continued to slide on Wednesday morning even as the government unveiled new anti-crisis measures to pump up to $29.5bn in extra budget funds into the three main state-controlled banks.

– The worse things get on Wall Street the better the Vanguard Short-Term Bond Index ETF (AMEX:BSV) looks says Andrew Snyder at Today’s Financial News. This high-yield bond fund is one of the safest places to park your cash right now.

– “It’s during times like this when all those guys you read about (Buffett, Templeton, et al.) made their best investments,” says Chris Mayer.

This from the 5 Min Forecast:

During times like this, there are no ‘safe’ stocks, in the sense that the prices can’t go down. Nearly everything goes down when the market averages fall 20% or more. Anyone tells you to buy safe stocks, hit ’em over the head with a book. There are a lot of great companies out there, I certainly agree. And many great buys. But they are safe only insofar as their businesses are highly unlikely to suffer some permanent impairment – like a bankruptcy or major loss.

– Crude oil is getting hammered. Prices dropped below $90 a barrel, and are now at just over $94 a barrel.

– That AIG is the sponsor of one of the largest commodities index isn’t helping matters. The DJ-AIG commodity index has about $30 billion in derivatives that track the benchmark, says the FT. The index fell 2.7 per cent to its lowest level since September 2007.

– Eric Fry at Rude Awakening says commodities will rebound. Stupidity and greed can wipe out stocks (see above); they can’t wipe out commodities…

A hypothetical portfolio that contained half S&P 500 stocks and half commodities would have lost 9.75% during the month of September, so far. That performance would rank as the fourth worst monthly performance of the last 50 years. In other words, these are strange times indeed.

But even though commodity prices have retreated substantially from their all-time highs, they will rebound eventually. By contrast, the financial sector has wiped out more than one trillion dollars of investor wealth…and that wealth is gone for good.

So at the risk of repeating ourselves, we will repeat ourselves anyway: we like commodities, at least for the long haul, if not also for the short haul. We like commodities because supplies are limited and demand is not. But we also like commodities because they lack CEOs and executive management teams. We like commodities because greed and stupidity cannot destroy their value.

Unlike Stocks, Stupidity Can’t Wipe Out Commodities

Eric J Fry — Tue, 16 Sep 2008 13:33:57 +0000

The carnage on Wall Street can be put down to two toxins: leverage and greed. This was the view of Bank of America (NYSE:BAC) chief Ken Lewis, speaking on CNBC yesterday.

In other words, says Eric Fry at Rude Awakening, Wall Street could have avoided the whole mess by applying some restraint and foresight. It didn’t.

The lesson to be learned from Wall Street’s hubris, says Eric, is that although stocks can be ruined by over zealous management, commodities cannot. Stupidity is not a risk factor in the commodities sector. And this makes them attractive despite their recent selloff.

When the Fed Cuts Rates Again Watch Commodities Lift Off

Dan Amoss — Fri, 12 Sep 2008 19:28:24 +0000

Crude oil prices are nudging $100 a barrel today. That’s a long way down from oil’s summer high of $147 a barrel.

“It has been a brutal couple of months for commodities investors,” says Dan Amoss in Rude Awakening.

But it’s the type of wild swing that opens up a great profit play for contrarian investors. Whereas prices this summer overshot fundamentals, prices now look like they may overshoot to the downside.

But commodities will take off, says Dan, when the feds cut rates again…

The fundamentals of supply and demand will matter again once current fears ebb. They always do. Energy and commodities have solid long-term fundamentals that rest on a foundation of human need. By contrast, financial companies are still facing ugly fundamentals, like plunging collateral values, rising defaults, and capital shortages.

Central banks will prevent the worst-case scenario of uncontrollable, self-reinforcing defaults. But their money-printing efforts will not bring about a re-inflation of the housing and credit bubbles. We probably won’t see another credit bubble for at least a decade.

Once the fall in housing and mortgage securities slows down, excess liquidity created by central banks will find its way back into inflation hedges like gold and oil, potentially creating a future bubble in commodity-oriented investments.

As for the rest of 2008, my research leads me to the following most likely outcome: The stock market remains weak until the Federal Reserve totally abandons its “inflation fighting” stance. The Fed may even cut rates further as unemployment rises. At that point, commodity-oriented stocks will probably regain their position of leadership.

The recent decline in commodity prices allows the Fed to conjure up another “deflation” scare. This would provide cover to slash rates and inject reserves more aggressively into the banking system. Then, the U.S. dollar would resume its descent, while gold and commodities would resume their ascent.

The Fed’s current inflation campaign has been very modest thus far. Rather than expand its balance sheet and flood the banking system with liquidity, it has concentrated on swapping U.S. Treasuries for dodgy mortgage securities.

Central bankers on the other side of the Atlantic, though, seem to care more about what’s backing their currency. The European Central Bank just announced that it’s going to limit its role as a dumping ground for impaired mortgage securities. The Financial Times explains:

“[ECB President Jean-Claude] Trichet announced a series of measures to increase the cost of using asset-backed securities to obtain ECB funds and to exclude some such deals when underlying mortgages or other loans are not denominated in euros. The announcement follows comments by ECB council member Yves Mersch last month. He said there were still cases where ‘you see dangers of gaming the system.’

“This year, it emerged Macquarie Bank had constructed a deal backed by Australian car loans that could be used at the ECB and Lehman Brothers had formed a huge collateralized loan obligation of risky buyout debt to use at the central bank.

“Mr. Trichet said the ‘general character’ of its broad-based operations remained unaffected. ‘We’re not changing it, we’re refining it,’ he said.

“Only a ’small fraction’ of collateral would be affected. Banks’ ability to take part in its financing operations would be unimpaired, the ECB president said.

I see the ECB’s decision as a tactic to convince savers and investors that the euro will not be forever backed by securities of dubious quality. But European politics may eventually overwhelm the ECB’s fairly disciplined monetary record. Voters will demand easy money.

In the U.S., fiscal and monetary policy will likely be influenced more and more by big investors and foreign creditors. Bill Gross, manager of a huge bond portfolio, is concerned about the potential for “financial tsunamis” and “debt liquidations.” He thinks that the Treasury Department (i.e., taxpayers) has not done enough to stop the bleeding in mortgage securities. In his latest “Economic Outlook,” Gross describes how institutional mortgage buyers may sit on their hands until the Treasury Dept. initiates a new, huge bailout.

Whether taxpayers like it or not, Gross’ plea for a new bailout will probably be answered. The leverage in the banking system has grown beyond the point of no return. There’s no way the Fed and Treasury would allow a spiraling liquidation of debts. One way or another, mortgage losses will be partially “socialized.” Most of the burden will fall on savers because over the next decade, more paper money will be created than would otherwise have been created.

Think of paper money as a shock absorber for losses in the financial system. In times of crisis, central banks try to calm fears about bank runs. They spread losses from bad loans around to everyone who holds paper money. This game can keep going until the holders of that paper money lose confidence in its function as a store of value.

But don’t interpret a new bailout plan for mortgage investors as a sign that the financial stock bear market is over. It’s not – at least not for banks holding the worst credit exposures. Over time, these institutions will have to confess losses; take write-downs; and raise new, dilutive capital. Many will be taken over by the FDIC, which wipes out shareholders.

During times like these, investors do well to remember that the commodity sector never requires a “lending facility” from the Fed or a bailout plan for the Treasury.

Source: The Commodity Washout – Gift or Curse?

Expect Negative Trend in Copper Prices to Continue

Gabriel Andre — Fri, 12 Sep 2008 13:41:12 +0000

“Price developments change very quickly on commodities markets these days,” says Gabriel Andre. Just look at oil. Pushing at $150 a barrel this summer, the black goo is now down towards $100 a barrel. Gabriel says copper prices are also in bearish territory and are likely to fall further…

This from The Daily Reckoning Australia:

Copper has fallen 22 percent from the peak of $8,775 posted on June 30, as increasing stockpiles signaled weaker demand. Imports of copper and copper products by China fell 4% in August compared with July.

Another element that has an impact globally on commodities markets is the recovery of the US Dollar. Remember that despite the exchange being based in London, copper is priced in US Dollars. A rebound of the Greenback therefore reduces the dollar-priced investments.

The price had moved within a long-term indecision triangle pattern. The basis line of this triangle was the long-term support line that backs the bullish trend started in late 2003. It had been tested and validated in February and December 2007 (points A and B on the chart) where the price bounced back strongly.

The upside of the indecision triangle pattern was the resistance line that goes through the highs posted in May 2006, and in March and April this year. This resistance zone was set around $US 8,900.

The last retracement level (61.8%) of the sharp bullish trend occurred between last December and last March (between points B and D). This had been the opportunity for a small rebound (point H) but it failed to cross above the 38.2% level (point K).

Since the beginning of this month, both the 61.8% level and the long-term support have been broken on the downside. This means the negative trend still goes on.

The MACD has just triggered a new bearish signal, and the Momentum indicator and the RSI are also negatively oriented. In this bearish scenario the next important target is the level of the previous long-term low which is the low posted in December last year (point B), around $6,300.

Source: Profiting From the Copper Indecision

Unsupported Dollar Makes Commodities the Best Long-Term Bet

Byron King — Tue, 09 Sep 2008 14:43:05 +0000

Oil expert Byron King says it is a credit to years of investment that the oil infrastructure in the Gulf of Mexico survived a direct hit from Hurricane Gustav relatively unscathed. But the real story is the lack of any real fundamental support for the recent dollar rally. Byron says this rally can’t last forever. That is why energy, precious metals and resources will bounce back in the long term.

This from Byron’s Energy and Oil blog:

Back in mid-summer, oil approached $145 per barrel. People were asking whether or not oil was in a bubble. Well perhaps it was the “froth on the beer,” but not a bubble.

And oil was rising as the dollar was falling. In fact, oil has been rising for well over a year, as the dollar has tumbled. For the currency traders, life was easy. Bet against the buck, and the Euro would rise. You saw this in gold and other precious metals as well.

Then in mid-July, it all changed. Overnight. There was no big announcement from the Federal Reserve or the European central bank. Nobody said “We’re Tanking the Euro.” But it’s pretty clear that they decided that enough was enough. The falling dollar and rising Euro was killing exports from European countries. It was putting Germany and France into recession.

So the central banks of the world started buying dollars. The U.S. buck strengthened. Oil fell from $145 into the $115 range. And even the Russian invasion of Georgia, or Hurricane Gustav, could not cause oil to rise. Stay tuned as this drama unfolds.

And while you are tuned-in, don’t give up on the long-term prospects for energy, precious metals and resources. The dollar is rising? This too shall pass.

Really, is the U.S. economy strong and getting stronger? No. Is the U.S. tax code becoming friendlier to investment and long term capital creation? No, again. Are the demographics of the U.S. labor force changing towards a long period of increasing productivity? Nope. Has the U.S. solved its problems in banking, finance, housing, energy, trade deficit, government spending? No, no, a thousand times no.

So it’s frustrating to watch as falling oil prices, falling gold prices, falling other things take down many of the companies in the OI portfolio. But have faith over the long haul.

Over the long haul, go with companies that own real stuff. Like oil reserves, or mine reserves, or critical technology in advanced resource industries. Go with the hard-stuff. Avoid the fluff. Or come the next financial hurricane, you might get blown away.

Source: Hurricanes, Price of Oil, Rising Dollar…