Precious metals have always been intriguing to investors because they tend to hold their value. In times of geopolitical crisis or currency devaluation, for example, the value of paper money might fluctuate, but a hard asset will always be worth something. As a result, historically, precious metals have been considered a “safe haven” in times of economic and financial instability.

That brings us to why gold is on a tear today. It declined in 2008 and early 2009 as panicked investors rushed into cash in an attempt to weather the financial crisis. But sometime in the middle on 2009, when investors began to move their money from the sidelines, gold started to rally. It returned 32.59% through the third quarter of 2009, vs. 19.26% for stocks.

The question is, where can we expect gold to go from here? In order to predict whether gold prices will skyrocket or come crashing down, it’s important to understand the principal factors that affect the price of any commodity: supply and demand.

The supply side of the equation is not particularly relevant in regard to gold because gold supplies remain fairly constant. That’s because production has not significantly increased due to a lack of new mining sites. Should supplies increase, however, investors may want to be cautious.

The demand side of the equation, then, is the one gold investors must look at. And as we noted above, demand for gold tends to increase when investors have a lack of confidence in the U.S. economy and financial markets.

That’s certainly the case today. In fact, we see two factors, that could lead gold to outperform in the near future: inflation and currency devaluation. In response to the financial crisis of 2008 and 2009, the Federal Reserve injected massive amounts of liquidity into the money markets. Ultimately, that increase in the money supply could devalue the U.S. dollar and lead to inflation. In fact, the U.S. dollar is already shockingly low. On October 14, 2009, it fell to a 14-month low against the euro, hitting $1.4947, the weakest since August 2008, according to Bloomberg. And while inflation is not yet a problem, economists are on the lookout for it.

These conditions led Standard & Poor’s (S&P) to raise its gold price assumption for 2010 from $750 per ounce to $800 per ounce. “Investors seeking a hedge against inflation risks and uncertainty in the financial markets continue to support gold prices,” the S&P analysts write. “The metal’s properties as a safe haven, and to a lesser extent the demand for jewelry, also support its longer-term price prospects.”

S&P’s estimate, however, may be on the low side. As of November 2009, gold was trading at more than $1,000 per ounce. And since gold exceeded $1,000 per ounce level, the price has been extremely resilient, with no meaningful pullback seen. There have been periods of profit-taking, but increased demand quickly appears on any weakness in price.

In sum, then, good old-fashioned gold fever is back—and investors who are looking for a promising trend may want to consider investing in it and other precious metals.

But don’t consider gold an investment only for troubled times. One of the greatest advantages of precious metals exists regardless of economic and market conditions. Precious metals tend to perform differently from other assets. As a result, investing in precious metals may be a good diversification strategy for a portfolio comprised mainly of stocks, bonds and real estate—in all environments.

This article was written by OilPrice.com – who offer free information and analysis on Energy and Commodities. The site has sections devoted to Fossil Fuels, Alternative Energy, Metals, Oil prices and Geopolitics. To find out more visit their website at: http://www.oilprice.com

The financial services industry in the United States and Europe is still reeling from the financial crisis, shedding tens of thousands of jobs each month – even a year after the crisis hit its apex.

However, recent evidence suggests that the financial services industry in Asia – particularly China, which was largely isolated from the toxic assets that caused the crisis – is starting to rebound.

Indeed, many global financial firms are picking up hiring in Asia even as broad unemployment continues to rise. The reason: These financial firms want to be most active in the region of the world that has the best potential for growth, as well as the best opportunities for profit.

“The death of the industry has been greatly exaggerated,” Matthew Hoyle, founder of Matthew Hoyle Financial Markets, a Hong Kong-based headhunter for the banking and hedge fund industries, told the New York Times. “I am actually quite excited about the prospects for the rest of the year,” adding that “Things have picked up here — unlike in Europe and the United States, where that’s absolutely not the case,” he added.

Financial firms slashed 19,000 jobs in August – the 21st consecutive monthly drop for the industry, according to payroll processing firm Automatic Data Processing (ADP). The finance and insurance sector has shed 332,000 jobs since the recession began in December 2007. And the losses will likely keep piling on.

Labor Department data set to be released today (Friday) is expected to show the U.S. unemployment rate surged to 9.6% in August after dipping to 9.4% in July. From December 2007 to July 2009, the economy as a whole shed 6.7 million jobs.

“There’s a gradual improvement in labor markets underway in the sense that the monthly losses are diminishing,” said Joel Prakken, chairman of Macroeconomic Advisors LLC and an ADP spokesman. “The disappointing news it that we have several more months to go of job losses.”

There’s a similar story unfolding in Europe, as well. The unemployment rate across the 27 European Union countries rose to 9% in July from 8.9% in June, while the unemployment rate for the 16 countries that use the euro jumped to 9.5%, according to Eurostat.

As in the United States, many of the job losses have been sustained in the financial services sector. European banks and financial firms have cut 140,000 jobs since the third quarter of 2007, according to data compiled by Bloomberg.

About 84,000 European finance jobs are expected to hit the chopping block this year, according to a recent report by City of London Corp.That’s nearly ten times the number of finance jobs the region lost in 2008.

As the Europe’s largest employer of financiers, the United Kingdom will be most affected. It is expected to lose up to 35,000 finance jobs this year.

Employment at British, French and German financial services firms won’t return to its early-2008 highs until at least 2013 the report said. Even then, the United Kingdom will have 10,000 fewer finance jobs than it did in 2008.

The EU financial services industry employed about 1.4 million people and was worth about $315 billion (219 billion euros) at its peak in 2008, according to City of London. However, the entire industry will shrink 6.2% in 2009 and not return to growth until 2011.

“I’m fairly optimistic on the financial sector returning to profitability, but that won’t necessarily feed through to dramatic employment growth,” Alistair Milne, a senior finance lecturer at London’s Cass Business School, told Bloomberg.

Financial firms will be focused on “growth efficiency” over the next four years and “earning money out of the staff they’ve got at traditional businesses” such as fixed income, equity trading and derivatives trading, Milne said.

Asian Growth a Beacon for Financial Firms

While the financial services sectors in the United States and Europe continue to shrink, finance firms operating in Asia are already rebuilding.

Standard Chartered Bank said last month that it would recruit 850 bankers in the next 12 to 18 months. The majority of those hires will take place in China, but significant numbers will also to be added in Singapore and Malaysia.

“We have aspirations to double the industry growth rate and double our customer numbers in three years,” Foo Mee Har, Standard Chartered’s global head of premium banking, told the Telegraph.

Household wealth in Asia, outside Japan, was expected to grow by 12% annually until 2012, she added.

Meanwhile, HSBC Holdings PLC (NYSE ADR: HBC) said last week that it is recruiting more than 100 staff members in Hong Kong, and it plans to add 1,000 employees in mainland China this year.

Vincent Cheng Hoi-chuen, chairman of HSBC’s Asia-Pacific unit, even said that his company hopes Shanghai will grow into a financial center that rivals Hong Kong.

“I sincerely hope that Shanghai will become a financial center, as China is able to have two centers, given its size,” he said. “There should be enough capacity for companies to list in both or either market at the same time, despite more and more companies planning to go public in the capital market.”

And Australia and New Zealand Banking Group, which competes with Standard Chartered, expects to increase its staff in the retail banking business in China more than 10-fold to over 500 by 2012. The company is currently moving ahead with a plan to open more than 20 branches in the country by 2012, up from three currently.

In addition to these recently released plans:

• Bank of America Corp. (NYSE: BAC) added five senior staff to its Asia Pacific Commodities team and JP Morgan Chase & Co. (NYSE: JPM) added seven members to corresponding Asia commodities unit.
• Credit Suisse Group AG (NYSE: CS) added nine specialists to its Asia sales and trading business. (Credit Suisse’s Asia-Pacific operations are on track to contribute 25% of the firm’s total revenue in coming years.)

• And Citigroup Inc. (NYSE: C) said it plans to expand its commodity team in Asia at a “double-digit” pace in a bid to capitalize on rising demand for raw materials.

“Asia will be the biggest contributor to growth in commodity consumption,” Ananth Doraswamy, regional head of commodities, toldBloomberg in an interview from Singapore. “We will need more people in energy trading and metal sales, as well as agricultural products.”

A survey by Singapore-based recruiting firm Robert Walters showed that job advertisements in Hong Kong, Singapore, China and Japan jumped 6.4% in the April-June quarter from the three months prior, the New York Times reported.

That’s not surprising considering that unemployment in Hong Kong, Singapore, and Japan – at 5.4%, 3.3%, and 5.7% respectively – are still relatively low when compared to the United States and Europe. And while unemployment is still an issue in China, that country’s economy expanded by 7.9% in the second quarter, exceeding most analysts’ expectations, and lending credence to Beijing’s goal of 8% annual growth.

Indeed, the finance industry seems to have found greener pastures in Asia, where economic growth is still taking place.

“Asia is seen as a growth market,” Robert Walters’ Mark Ellwood toldThe Times. “Companies are not going out all guns blazing again, but there is once again an appetite to hire in certain areas.”

Finance Jobs Going Where the Growth Is – Asia ]]> http://www.contrarianprofits.com/articles/finance-jobs-going-where-the-growth-is-%e2%80%93-asia/20377/feed 0 http://www.contrarianprofits.com/articles/the-coming-takeover-boom/20288 http://www.contrarianprofits.com/articles/the-coming-takeover-boom/20288#comments Tue, 01 Sep 2009 17:00:32 +0000 Chris Mayer http://www.contrarianprofits.com/?p=20288 “Work eight hours and sleep eight hours and make sure that they are not the same hours.”

– T. Boone Pickens

Inflation can do tricky things to markets. It creates distortions. In those distortions, an intrepid investor can find some big moneymaking ideas. I think we’ve got one opening up in oil and gas, and it is not without precedent in financial markets. In fact, it’s starting to look a little like the tail end of the 1970s in some respects.

In the spring of 1969, the Dow Jones industrial average stood at 969. By 1982, the Dow hit 1,071. That’s thirteen years of going nowhere. (We’ve had 10 years or so of going nowhere, though the ride between the poles has been…

You’re hearing about it here first. But I promise that you’ll soon be hearing about it virtually everywhere.

Let me explain.

China’s New Profit Catalyst

Most investors are aware of China’s massive profit potential. But what they may not understand is this: Before all that potential can be transformed into actual profits, this Asian giant needs to develop a modern, fully functional financial system. That obviously can’t happen overnight, and China’s been smart – and avoided making major mistakes – by not rushing things.

In fact, despite some stinging criticism from the West, Beijing has held its companies and its financial markets in check to ensure an orderly development. It’s even left some protectionist measures in place to make sure that opportunistic foreign firms don’t overrun its markets.

Naturally, there’s been a near-term cost. It’s held some China-based companies back, making them less competitive in such developed markets as the United States and Europe. Chinese firms were severely limited in their access to funding, meaning they were also limited in their ability to capitalize on business opportunities in these overseas markets.

But I could see that the long-term profit potential for these companies was huge – and I’ve repeatedly said so to the audiences that I’ve spoken to at events all around the world, or that I’ve written to via my columns here in Money Morning. In both venues, I’ve told listeners and readers that the day would come when these companies were able to raise enough investment capital at home to finance their forays abroad.

The day that occurred, I’ve said, is the day when the real fireworks would begin.

Beijing finally lit the fuse.

By announcing the launch of a new market for dollar-denominated bonds that are issued by non-financial firms, China has now taken a major step toward modernizing its capital markets. The move hasn’t made much of a splash here in the United States. But I was in China, heading my annual investment tour of that country, when the announcement was made. And believe me when I tell you that China’s company executives, investors and government officials fully understand the implications of what’s just been done.

The move is very shrewd, for it brings about the confluence of highly complimentary trends.

• For China-based companies that want to invest abroad, or that want to buy foreign companies, product lines, or other assets, these new dollar-denominated bonds will make it possible to do these deals more easily, and at a much lower cost.
• Beijing had already launched an official campaign that urges “Corporate China” to acquire overseas companies and assets. But there had to be a liberalization of the financial system for this to happen. So back in August, in fact, for the first time in 11 years, China’s government eased rules governing its foreign-exchange systems.
• These new regulations permit companies to retain foreign-exchange income offshore, if they want, and thus helped pave the way for the new bond market because it stokes potential demand for dollar-denominated investments.
• And that comes at a perfect time for – up until now – the ongoing global financial crisis, which has made Chinese investors wary of buying foreign-currency bonds that were issued outside China. But these dollar-denominated bonds will be created inside China, effectively short-circuiting that worry.

Given what we know about China’s global natural-resource-acquisition ambitions, the first entrants into this new market will likely be one or more of China’s huge natural-resource concerns that are presently scouring the globe, creating captive supplies of the very commodities that will be necessary to ensure China’s future growth. My experience here suggests that high-tech and infrastructure companies will follow almost immediately. Many of those firms may head straight for Taiwan, thanks to newly inked agreements that make it easier for Mainland China companies to invest across the Taiwan Straits for the first time in decades. After that, these firms will direct their appetites for acquisitions elsewhere around the world.

Just how big could this new dollar-denominated financing market turn out to be?

At a time when Western debt markets remain mired in muck, it’s too soon to tell for certain. But Bank of China Ltd. analyst Shi Lei estimates that non-financial Chinese firms may issue as much as $30 billion during the next two quarters alone.

That amount tallies closely with China’s estimated $23 billion pipeline of outbound mergers-and-acquisitions deals that have been announced this year, but not yet consummated – especially if you factor in the $9.7 billion worth of deals that were announced in the past three years, but that are still pending, Thomson Reuters reports.

Could New Financing Deals Accelerate the U.S. Recovery?

Many Americans will clearly view a big uptick in investments from China with significant fear – especially if they remember the late 1980s Japanese shopping spree that sent ownership of Rockefeller Center, Columbia Records, Universal Studios and the Pebble Beach Golf Course back to Tokyo.

This is different. In fact, I think the new rules are likely to create entirely new funding sources that will boost international trade and that could actually accelerate the U.S. economy’s recovery from the global financial crisis. In fact, it’s entirely possible that this new form of financing will help facilitate a post-recovery golden age of expansion led by such as-yet unsaturated markets as China.

Call it the “Mother of All Carry Trades” – only this time it will be yuan-based, instead of yen-based.

A carry trade is an investing strategy in which an investor takes advantage of interest rate differences between two countries. He’ll borrow money in a country where rates are low and invest it in another market where rates are higher, profiting from the difference. The rate disparities are often caused by the respective central banks; one may be trying to combat inflation with high rates even as another is trying to nurture economic growth by reducing rates.

There are no actual examples to point to, yet, since the market isn’t yet up and running, but we can draw some inferences based on who’s filed to issue this dollar-denominated debt, and look at who’s likely to file in the months to come.

According to The China Daily News, China National Petroleum Corp., the Red Dragon’s biggest oil company, is planning to issue $3 billion in dollar-denominated bonds and is planning to auction as much as an additional $1 billion in three-year floating debt, whose rate will be tied to the London Interbank Offered Rate (LIBOR).

Traders familiar with the new market suggest that CNPC will probably pay a coupon of 60 basis points to 80 basis points (0.60% to 0.80%) more than six-month LIBOR – a much lower cost than the 2.8% coupon for the $2.93 billion worth of yuan-based, three-year, fixed-rate, medium-term bills issued back in December.

Last year, China’s yuan had appreciated steeply against the U.S. dollar, meaning funding costs were high for Chinese companies. Now, however, the situation is reversed, and companies can issue huge amounts of expansion debt for comparatively little money.

As a byproduct of all this, companies that take advantage of the new dollar-denominated funding markets help take the strain off of the People’s Bank of China, the central bank that has shouldered almost all of the dollar-based exchange risk to date.

In Shanghai, which is China’s financial capital, my trading contacts tell me that six-month dollars – which were quoted at 0.40% earlier this year in China, now reflect approximately 0.80%, which is roughly in line with onshore-dollar yuan forward rates for the same time period.

By comparison, the six-month implied forward rates hit 15% in March 2008. So you can see why Chinese companies have such a powerful incentive to use this new funding venue – especially when so many otherwise-solid global companies have been brought to their knees by the credit crisis.

The Three Keys for Investors

So what does this mean for investors?

In a word, plenty.

First, it’s conceivable that the sheer volume of dollar-denominated bonds could indirectly prop up the U.S. dollar. Not only would that potentially wreck traders who are betting that it’s headed the other way, it could actually solidify U.S. and global markets that are still searching for an anchor. By implication, this could also wreck the “gold bugs” who are betting the farm, instead of investing in the precious metal as part of a disciplined investment strategy.

Second, for those on Wall Street who continue to believe they are the “masters of the universe,” the strength and ferocity with which China’s dollar-denominated bond market may develop will probably come as a rude shock. Not only are the vast majority of Wall Street firms likely to be cut out of the underwriting process, but chances are very good that they’ll probably be relegated to the back seat when it comes time to pony up in the never-ending game of global one-upmanship.

And third, depending on the ultimate size of this new bond market, the prices of resource-based companies and commodities could go sharply higher as investors realize there is a potentially unlimited source of funding chasing relatively few quality assets. To the extent that Chinese companies mirror Beijing’s plans for the future, the same will be true for technology, medical and infrastructure plays.

Will this happen immediately?

Probably not. Even though the market is potentially huge (like just about everything else here in China), Beijing will almost certainly keep its hand on the throttle, meaning it will grow at a reasonably impressive – albeit measured – pace.

Beijing is very aware that an imprudent use of debt was a key part of the elixir that created the global financial crisis, meaning government officials will work hard to make sure the tiger stays in its tank – so it can’t bite anyone.

Over the long haul, however, there’s no question that this new market is an important – and much-needed – step in China’s continued development into a global financial juggernaut that investors cannot afford to ignore.

Source:  How the New ‘Yuan Carry Trade’ Will Add to China’s Global Muscle, and Possibly Even Accelerate the U.S. Recovery

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever.

Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this; "New Reality"; will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as"The Golden Age of Wealth Creation" The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and on this new market environment.]

]]> http://www.contrarianprofits.com/articles/how-the-new-%e2%80%98yuan-carry-trade%e2%80%99-will-add-to-china%e2%80%99s-global-muscle-and-possibly-even-accelerate-the-us-recovery/16649/feed 0 http://www.contrarianprofits.com/articles/another-day-for-the-currencies/15034 http://www.contrarianprofits.com/articles/another-day-for-the-currencies/15034#comments Tue, 17 Mar 2009 19:45:42 +0000 Chuck Butler http://www.contrarianprofits.com/?p=15034 Disappointing data…  Euro held ground…  Down under… And Now… Today’s Pfennig!
Good day…And a Terrific Tuesday to you. Another Monday morning has come and gone but not before confirming the US economy is still heading down the wrong side of the slippery slope. The uneventful trading day from Friday certainly didn’t carry over as we saw a sizeable run up in currencies along with equities during the morning session. As the day progressed, the equity markets shed their gains but most of the currencies remained resilient and held on. I guess I’ll stop beating around the bush and get right to it…

It seems that Bernanke’s calming approach during his interview with 60 Minutes gave investors the feeling that we are not…

This from Lee:

In this globalized world, it’s no surprise to see the world’s financial markets intertwine in some fashion. That’s why we continue to see volatility run at much higher levels – be it in the stock market or commodities sector.

In the past, the physical and agricultural commodities have typically had very loose ties to the movement of the stock market. After all, why would the falling share price of Dell Inc. (Nasdaq: DELL) have anything to do with the price of corn or sugar? Ordinarily, no reason at all – but it’s not as simple as that any more…

A Changing Commodities World

The commodities world has changed in recent years – and if you know how to play volatility to your advantage, it’s changed for the better. Here are just three quick reasons why…

1. Instead of farmers merely using the commodities markets to hedge their crop, commodities have become more of a speculative game today.
2. It’s become very easy to trade commodities with a click of a mouse today.
3. Commodities are now seen as a viable and valuable portion of investment portfolios.

As a result of these three reasons, commodities are more subject to large money flows into and out of markets. With more individuals holding more commodities, they can sell off just like any other asset. And this can occur at the same time and with the same force as it does in the stock market.

In particularly volatile, and often irrational, markets like the current one, once the herd mentality takes over, the true fundamental value of crops can get unceremoniously shoved to the back burner in favor of what the crowd is doing.

In any event, the markets seem to have decided which direction they’re going to head in: Down…

Remarkable Value Amid The Market’s Rubble

Speaking of that irrationality I just noted, that’s pretty much the only way to sum up the price of numerous top-quality blue-chip stocks today. Many are trading at 15-year lows, with some even under $10.

But while this may cause some investors to throw a big pity party, if you believe in the long-term viability of the markets, putting some of your money to work today while everyone else is selling, it could present one of the greatest buying opportunities in a lifetime.

As for commodities, they will continue to trade on long-term fundamentals such as crop-growing cycles, weather patterns, herd size, supply and demand, etc. And there are some terrific opportunities here, too. So let’s get to it…

OPEC’s Winter Move Might Not Play Out Till Summer

In July 2008, the oil market began a downtrend that is still going strong today. The black stuff continues to make new lows, interspersed with quick bouts of short-lived upside rallies.

But once the price hits the descending moving averages (see chart below), the market gets knocked down again.  The combination of large oil supplies and waning worldwide demand has kept oil on the defensive, with $25 a barrel still in many analysts’ sights.

Three months on from OPEC’s supply cuts, we’re still waiting for the decision to factor into the market. At the moment, the farther-dated oil futures contracts are still moving lower in tandem with the front-month futures contracts.

I don’t think we’ll see the cuts make a dent in the market until at least June, so it looks like status quo for oil for the time being.

Two Ways To Play Our Bullish Outlook On Natural Gas

In a word… bullish.

That’s my take on the natural gas market, as the front-month futures contract has dipped below the pivotal long-term support area of $4.500 per MMBtu – a solid support level since late 2002.

At current levels, I continue to have a long-term bullish outlook. So how can you play the market?

1. Bullish trades involving long-dated, limited-risk options strategies (like option credit spreads) on natural gas futures options contracts, which trade on the NYMEX.
2. Invest in the Natural Gas exchange traded fund UNG that trades on the New York Stock Exchange.

I currently hold bullish natural gas positions in my Instant Money Trader and Triple Zone Profit Trader service that we run.

Knowing how the market can react to the upside with the threat of cold winters in the Northeast (where a majority of natural gas is consumed) and possible damaging hurricane activity on natural gas rigs in the Gulf of Mexico, I feel bullish plays here have a great risk/reward profile.

When You See The Dip… Buy

Amid all the financial market’s doom and gloom, one of the lone bright spots comes from a sector that we’ve mentioned as a pocket of strength for several weeks here.

It is, of course, the metals market – home to stalwarts like gold and silver.

Since December 2008, both have bounded along and made large upside moves. April gold futures have now crossed the watershed $1,000 per ounce mark – an area not seen since July 2008 – while May 2009 silver futures have managed to pop through $14.50 an ounce – silver’s first foray to that level since August 2008.

In mid-December, we noted that the gold and silver markets were beginning to look tradable again after washing out the speculative selling that had knocked the sector down from its all-time highs in July 2008.

With more “rational” investing now in these markets, and with global stock markets and economies still in turmoil, it continues to keep hard assets like gold and silver as the “go-to,” en vogue safe haven play.

Since we’ve already reached our near-term gold price forecast from the my previous column, plus our silver price outlook, too, we now believe that investors should step into bullish plays on large pullbacks in the gold and silver markets. It’s a strategy that should serve you well for the rest of 2009.

Look for gold to re-test the $865 area, while silver should re-test the $12.00 per ounce level.

And the way to play it…?

Other than looking at limited-risk option strategies from the COMEX futures options market, you can invest in the gold and silver markets through shares in ETFs like the SPDR Gold Trust (NYSE: GLD), Market Vectors Gold Miners (NYSE: GDX), or iShares Silver Trust (NYSE: SLV). You can also play options on these ETFs.

Drifting Below Support… And Creating Better Value

Having touched support levels that we thought would hold, the coffee and cotton markets have continued to drift lower. This will create an even better level to go long from and we’re just waiting for both markets to find a level that sticks.

With A Big Move Back Down, OJ Is Setting Up A Great Potential Entry Point

Lastly, I want to show you a long-term chart for orange juice futures.

This is another market we’ll be watching closely, as it’s now just about retraced the big upside move it made since the wave of hurricanes hit the Southeastern portion of the United States, beginning in 2004.

Each year, during late spring/early summer, the OJ speculators come out of the woodwork, trying to capitalize on potential disaster trades.

If OJ futures can re-touch the lows of 2004, it could be a great place to put in a low-risk bullish trade that aims to take advantage of any disruptions to the orange juice crop from this season’s hurricanes.

Lee Lowell

Source: Investing in Commodities: 3 Reasons Why Commodities Have Changed

“I think we can break the back of this thing,” said Ben Bernanke yesterday, as much of a Braveheart-style battle cry as he could muster. If the Fed and U.S. government take “strong and aggressive action,” he assured us, “we will begin to see improvements in 2009.”

That was the height of Mr. Bernanke’s optimism yesterday… here are the forecast highlights from his speech at the National Press Club and the latest FOMC minutes.

• Unemployment will reach 9% by the end of the year, and will stay above 5% until 2012
• The economy will contract between 0.5-1.3% this year. That’s worse than the
• Fed’s previous forecast of a 0.2-1.1% decline
• FOMC participants “generally expected that strains in financial markets would ebb only slowly, and hence that the pace of recovery in 2010 would be damped”
• Inflation should remain tame, around 1.5-2% over the next couple years. (As you know, we think this is a gross underestimation… proof below.)

The stock market reacted nervously to all the Federal Reserve hubbub . We showed you yesterday that the Dow was at a critical crossroads… well, it seems traders agreed, as the index crossed its break-even point 50 times Wednesday before coming to rest with a mere 3 point gain.

So we’re still at the precipice of new credit crisis lows. Today looks like we might step back from the cliff’s edge… with the help of better-than-expected earnings from CVS, Whole Foods and Sprint Nextel, the Dow opened up 50 points. Ironically, the only Dow component to report earnings was HP, which slashed its 2009 outlook after reporting a 13% drop in profits.

“For individual investors with a small-cap focus,” notes our small cap analyst Greg Guenthner, with a helpful list in hand, “there are ways to play the recession and come out on top:

“1) You need to think cheap. No, we’re not talking about fundamentals (although it’s always good to take a look at price to sales, debt and other important metrics before buying a stock). In this case, we mean cheap goods sold by discount retailers. When consumers are stretched thin, cheap stuff rules the roost. Don’t believe me? Just look at Tuesday’s drop. As of 4:00 p.m., only one Dow component had posted a gain: Wal-Mart. For the small-capper, screen for retailers with market caps less than $1.5 billion and you should find some interesting plays related to this idea. And for this screen, avoid specialty retailers and stores that primarily sell big-ticket items.

“2) During tough times, sin wins… Sin stocks are the comfort food of troubled times. A consumer who recently lost his job probably isn’t going to go out and buy a new car. But by the same logic, he isn’t going to give up his beer and cigarettes, either. In fact, the best-performing stocks during past recessions have been tobacco and alcoholic beverages.

“3) Find the necessities. We’ve already talked about the top two recession gainers from the chart above. But what about household products? Yes, families are cutting back. But we seriously doubt they’ll stop buying toilet paper and bleach just because they’re stretched thin. There are plenty of items every family can’t live without. Companies that make the goods should do just fine.”

If you want Gunner to do the legwork for you, check out Bulletin Board Elite.

This week’s commodity trade seems to be on pause today. Gold remains near its recently lofty high, around $980 an ounce. And oil remains suppressed, at $35 barrel.

“Lots of commodities look cheap these days,” notes Chris Mayer, “compared with what prices were before the meltdown started in full swing. Gold may not come to mind as a cheap commodity, because unlike oil or copper, it’s not wallowing near yearly lows.

“Yet on an inflation-adjusted basis, gold is nowhere near its all-time high of $850 per ounce reached on Jan. 21, 1980. To get there, gold would have to rise to $2,306 per ounce. All of which is to say we’ve got a long way to go in this bull market for gold.

“Perhaps the best chart I’ve seen on this is from Casey Research. The folks at Casey note: ‘Last month, the price for a single ounce of gold surpassed the S&P 500 index for the first time in 18 years. Following the last such inflection point that occurred in 1973, gold surged ahead over 600%.’

“There are other reasons for liking gold stocks in 2009,” Chris continues. “The first is the gold miners will enjoy a windfall from falling energy prices. Largely because of lower energy costs, mining costs will fall in 2009. Then there is the currency effect. In many gold-producing countries, the local currency collapsed against the dollar.”

Naturally, Chris found a gold stock for his Special Situations readers with both these assets. Get the ticker here.

Here’s what our colleague Dan Denning says is “the most disturbing story of the day.” Credit spreads and bond pricing in Europe hint of looming defaults and credit downgrades for practically half the continent.

For starters, the market is currently betting on credit downgrades for Hungary, Poland and the Czech Republic. Investors are demanding higher yields for these countries than other nations with the same credit rating.

“Investors are getting nervous about governments in Spain, Ireland, Greece, Portugal and Italy, too,” says Dan. “The spread between 10-year government bonds in these countries and 10-year German bonds is widening.

“What’s more, the credit default swap markets now appear to be factoring in the possibility that certain national governments in Europe may simply default on their debt. Take, for example, Ireland. According to The Times of London, the pledges made by the Irish government to support its banking sector amount to 220% of the country’s GDP.

“The Irish government has promised to bail out its banks. But who’s going to bail out the Irish government? That’s what everyone’s starting to wonder. And that’s why — in addition to the billions in loans made by Western European banks to Eastern Europe — the euro is looking shakier by the day.”

That’s also why “the mighty U.S. dollar is still rolling on!” proclaims our currency man Bill Jenkins. Do we detect… sarcasm?

“I’m looking for more dollar strength in the near term, not because the dollar is stronger, but only because of its relative strength against other major currencies. With the unthinkable drop in GDP by Tokyo, it looks like the USD is challenging all opponents! In the end, what will in the short run appear to be the cure for the dollar (short-term stimulus) will be its fatal death blow (longer-term massive inflation).”

The dollar index roared up as high as 88 yesterday, about half a point below its credit crisis high. Closer to 87 now, we’re seeing some profit taking this morning, especially after this number hit the tape:

Wholesale inflation shot up 0.8% in January, beating the Street’s estimate nearly threefold. The government reports today that its producer price index broke its five-month losing streak last month, led by a 15% boom in gasoline price inflation. Even the core PPI — which the Fed used throughout early 2008 to quell inflation fears — popped up 0.4%.

But we suspect deflation will remain the fear du jour. The Labor Dept. reports wholesale inflation fell 0.9% in all of 2008, the first year of wholesale deflation since 2001.

Elsewhere in the data patch, the number of Americans filing for unemployment benefits has attained a new record high. “Continuing claims” climbed to 4.98 million strong last week, the most since at least 1967, when the Labor Dept. started keeping track. Initial claims — people seeking unemployment benefits for the first time — matched last week’s count of 672,000. That’s just shy of a 26-year high.

But fear not, lowly American, Barack Obama is coming to the rescue. Mr. President unveiled the details of his new housing rescue package yesterday. What was described as a $50 billion program early this week has already morphed into a $275 billion beast.

Essentially, $75 billion goes toward “encouraging” lenders to lower monthly payments or extend the length of loan agreements. The other $200 billion goes straight to Fannie and Freddie, who will refinance loans on their books (also conveniently keeping the two GSEs on life-support).

The mission of the program will be to reduce all American monthly mortgage payments to no more that 31% of the owner’s monthly income. Those who are already in a home they can afford, well, they get reassurance of knowing they did the right thing… and the bill.

Aside from plenty of other concerns, we wonder… what happens five, 10, 20 years from now when the bailed-out homeowners sell their homes? If they’re worth more than the price today, who gets to keep the profits?

And look at this… enterprising homeowners around the country are finding their own ways to stall foreclosure. Here’s our favorite: Just ask to see the original mortgage paperwork.

“During the real estate frenzy of the past decade,” explains the AP, “mortgages were sold and resold, bundled into securities and peddled to investors. In many cases, the original note signed by the homeowner was lost, stored away in a distant warehouse or destroyed.”

We can only imagine the paper trail cluster%*#$ emanating from boom-to-bust mortgage villains like Countrywide and IndyMac. Oy… sadly, this sounds like a decent strategy.

“I guess it didn’t occur to Alan Greenspan and Lindsey Graham,” writes a reader referring to yesterday’s “nationalization” buzz , “that it would have been much less expensive to ‘assume temporary control’ over some banks by letting them go bankrupt, rather than bailing them out? Sheesh… our government at work.”

The 5: Ugh… don’t get us started.

“Your reader slamming the comments about our way-too-expensive military budget sounds slightly insane,” writes another. “Nobody said the military should be abolished. Just that they get too much money and have too much influence. I don’t care how good it is at helping teach people to be leaders. Our economy simply can’t support the combined total of all other countries’ military spending, which is what our military budget represents. It’s a simple fact. That doesn’t mean we should get rid of the military all together, as your overly excited reader seems to think was proposed. I mean, after all, it was a former general, Eisenhower, who coined the term ‘military-industrial complex’ and warned of its power and influence. And I’m sure he knew the value of the system.”

“If not for the military,” writes the last reader, “Uncle Sam wouldn’t be able to execute these stimulus programs and other wealth-redistribution programs. The military is the ‘teeth’ that the government needs to carry out all of its evil deeds, both foreign and domestic. As for speaking German and Japanese, get real! Common military doctrine teaches that to conquer an enemy the invaders need to outnumber the defenders 3-to-1. Let’s say only 100 million Americans owned a rifle. You’re talking about an invading force as large as the current population of the U.S. Sorry if I don’t get misty-eyed about you heroes splattering your guts for Leviathan. To defend a country, a volunteer militia is sufficient. Note the meaning ‘volunteer’ means it is done for free, without leeching off of the taxpayers.”

Source:Small Cap Wisdom, Bernanke’s Forecasts, Gold Stocks, the Foreclosure Mess and More!

Immediately, I jump to my feet to scream my guts out that, “It’s because the amount of corruption is, like it always is at the end of long booms, completely off the freaking charts, and nothing is as it seems; everybody is lying to you; everybody is trying to steal your identity and you are being ripped off every freaking day, in countless ways, by corrupt thieving morons in government who are so, so desperate at this point that they are resorting to insanity!”

Apparently, that was not the winning answer, and my powerful entry was tossed aside in favor of, “Financial services are different from other industries, if only because so much of the business is writing bets. One side pays the other for a claim that comes good if, say, oil prices fall, or a company defaults on its bonds, or householders make the mortgage payments on time.”

So, stung at not having my answer selected as the winning entry, I think to myself, “Insurance policies don’t explain why the financial markets are unstable! So my answer is better! Where’s my damned prize?”

Perhaps in response to my anticipated objection, I could tell by long experience that they started to say something like, “You’re a moron, so why don’t you shut up?” But instead they took the “high road” and put me in my place by saying that “Expansion in most businesses is held in check by the need to build assembly lines, rent retail space or hire workers. All that takes time and money. By contrast, financial contracts can be written almost instantaneously and without limit.”

Instantaneously and without limit! Wow! Now I see!

The problem arose when people found out that everybody lied about the money or the collateral that they were putting up as their halves of the bets! Hahaha!

And then they lied about those bets to use as collateral for other bets, around and around until everybody owned, and owes, lots and lots of these derivative bets until one day – surprise! – they are all found out to be a Big Load Of Lying Crap (BLOLC)! Like now! Hahahaha!

They don’t call it BLOLC, of course. They call it “counterparty risk”! Hahahaha!

The interesting thing to me is that The Economist magazine explains that the market for derivatives has gotten so huge because (and this is the important point) they are useful to people signing contracts, as “After America came off of the gold standard in 1971, businesses wanted a way of protecting themselves against the movements in exchange rates”, by which they mean that nobody wants to experience a loss of the buying power of their stupid fiat money!

So, figuratively climbing upon my soapbox to thunder at passersby, once again we have one more damning piece of evidence, to add to the mountain of other evidence, that the dollar being tethered to gold, as per the Constitution, was a Good, Good Thing (GGT), and that any other arrangement was a Bad, Bad Thing (BBT), especially the fiat dollar thing, which was the worst thing of all things, and now the Worst Of The Worst Things (WOTWT) is going to happen to us!

And the reason for the calamity is stupidity, pure and simple, as The Economist magazine notes that the infamous Black-Scholes option-pricing model “showed how to work out an option price from the known price-behaviour of a share and a bond. It is as if you had a formula for working out the price of a fruit salad from the prices of the apples and oranges that went into it”, while at the same time price movements in the option prices come from “the equation in physics that describe the diffusion of heat.” Hahahaha!

The Economist doesn’t go so far as to agree with me that this stupid theory that “all probabilities are always normally distributed, even over the long-term” is ridiculous, and which is even stupider than thinking that “investing in the stock market is the same as saving”, which, along with the tragic concept of “everlasting love”, are the three stupidest things I have ever heard of in all my years on this planet you call Earth.

Well, let’s not forget the other stupidity that brought Black, Scholes and Long Term Capital Management to ruin; assuming that there would always be somebody out there who was so stupid as to take the other side of their bets, no matter what was happening, at predicted prices! Hahaha! Morons!

Apparently, since I see that I am the only one laughing, I assume that I am missing the point, because The Economist magazine keeps insisting that “The idea behind quantitative finance is to manage risk. You make money by taking known risks and hedging the rest” which doesn’t make much sense to me because if the risks are known to everybody, then the option is priced as a 50-50 bet, and I am here to tell you that I laugh at anybody who says that they can make money on a 50-50 bet! Hahaha!

Of course, nobody at the offices of The Economist will answer the phone when I call to argue the point, but they imply that my theory, my ignorance and my sheer stupidity notwithstanding, problems soon arose because “the idea behind modeling got garbled when pools of mortgages were bundled up into collateralized-debt obligations (CDOs)”, resulting in a “baffling complexity” of assets where “each one contained a unique combination of underlying assets”, thus making them “impossible to model in all but the most rudimentary way”.

By this, I assume they mean that if it weren’t for that One Tiny Thing (OTT), everything would be fine, and we would be prospering and laughing, having a wonderful time, perhaps sharing a pizza el supremo mucho grande extravaganza, a princely cholesterol-bomb topped with every pork product known to man, instead of hunkering down in our filthy, stinking bunkers waiting for the world to collapse in flames and the fiat dollar to collapse, as have all other fiat currencies in all of history and all the stupid economies that depended upon them.

Of course, there is still time to buy a pizza, and a little more gold and silver before the prices explode! Whee! This investing stuff is easy!

Source: Financial Contracts and the Lying Liars Who Create Them

• With inflation easing, China has lifted temporary inflation controls on key commodities such as liquefied petroleum gas, power-station coal, grains and cooking oil. Ten months ago, China was facing inflation at a 12-year high, Bloomberg reported. Now it’s slowed to the weakest pace in nearly two years.

• India’s rupee slid 19.2% in 2008, its worst annual performance since 1991, and the second-worst among the 10 most-active Asian currencies excluding Japan. “It has been ecstasy to agony for the rupee this year,” K.V. Mallik, treasurer at state-owned UCO Bank, told Bloomberg. “The outlook isn’t any better as it appears far from certain as to when the financial markets will stabilize. I expect the rupee to be under pressure in the next few months.”

• Rates on 30-year mortgages fell to 5.1% this week, down from the previous record of 5.14% set last week, Freddie Mac reported. Mortgage rates have plunged by about 1.3 percentage points since late October.

• Online holiday sales fell 3% from last year, marking the first decline in online spending since comScore Inc started tracking online sales in 2001, Reuters reported. Online spending totaled $25.5 billion between Nov. 1 and Dec. 23.

• UBS AG (UBS) the Swiss banking giant struggling to rebuild its balance sheet after taking $49 billion in losses form writedowns, has sold its stake in Bank of China, Reuters reported. UBS said it offloaded about 3.4 billion Bank of China H-shares through a discounted placing for at a profit of “a few hundred million dollars.” The bank had paid $500 million for a 1.6% stake in Bank of China in 2005.

Source: Global Investing Roundups Friday, January 2nd, 2009

Too many investment myths have gone unchallenged lately. Today I plan to refute them – and explain why financial markets are likely to perform much better than most investors believe in the year ahead.

Let’s begin by examining the four biggest investment myths circulating right now…

Investment Myth #1: The Era of Free Markets is Over

It’s true that many of the apostles of free-market economics have begged Congress for government intervention during the current credit crisis. But nobody is seriously arguing that Uncle Sam should nationalize the economy, set wages and prices, or establish production quotas.

The free market still constitutes the best means of securing prosperity over the long term. (Just ask the Chinese. Three hundred million people there have been lifted out of poverty over the past three decades.) We will find ways to make free markets work better – not abolish them.

Investment Myth #2: The United States Has Lost its Competitive Edge

The reality is the United States continues to lead the world in innovation, technology, higher education, worker training and the ability of the labor force to move from one job to another.

Three months ago, the Swiss-based World Economic Forum released its global competitiveness report and, once again, the United States topped the list. The study further noted that our strong productivity will help us “ride out business-cycle shifts and economic shocks” better than most countries.

Investment Myth #3: The United States is No Longer an Attractive Market for Investment

Yes, the Fed’s move to take interest rates near zero has predictably knocked the dollar for a loop again. But that isn’t deterring foreign investors. Perhaps they know that the biggest bargain of all is inexpensive assets in a cheap currency.

According to the World Bank, the United States attracted more than $2 trillion worth of foreign direct investment last year. Britain, Hong Kong and France – the next three top finishers – each registered less than half as much. The United States remains the economic engine of the world – and smart capital will continue to seek a home here.

Investment Myth #4: U.S. Financial Markets Will Take Decades to Recover

In the more than 200-year history of equity investing in the United States, stocks have never taken decades to recover. Those who argue they have always omit dividends. Dr. Jeremy Siegel of the Wharton School points out that even if you invested a regular amount in the Dow every month beginning at the market peak in 1929, within four years you would still have outperformed someone who invested the same amount each month in T-bills. (The key is regular investment and reinvested stock dividends.)

The Nikkei 225 in Japan, of course, is still down more than 70% from its peak in 1989. Could the United States be headed for the same long, deflationary spiral? That’s extremely unlikely. The Japanese real estate and equity bubble was much bigger, government action there was clumsy and ineffective, and the banks were not cleaned up quickly or efficiently. Congress and the Federal Reserve are being much more proactive here.

It’s true that the economy is in for a few rough quarters. Understandably, the media is focused on the bad news. We all know that hundreds of thousands of jobs have been lost. Venerable names in banking and finance are no more. American automobile manufacturers are begging Congress for a lifeline. Residential real estate and the stock and corporate bond markets have all taken it on the chin.

But there are reasons for optimism, too. Oil has plunged from $147 a barrel to less than $40. Low interest rates will ultimately make it cheaper for businesses and consumers to borrow. A cheap greenback boosts exports and makes U.S. assets inexpensive to foreign buyers. And fundamental valuations on stocks are the cheapest they’ve been in 17 years.

Make no mistake, 2009 is going to be a tough year for the economy. But the financial markets – always looking forward – have already discounted this and could surprise you in the year ahead.

So don’t get waylaid by the gloom-and-doomers. There are always attractive investment opportunities out there and right now is no exception.

We’ll be highlighting dozens of new ideas – here and in our Oxford Club Communiqué – in the weeks just ahead.

Let’s buck the trend together – and look forward to a happy, healthy and prosperous New Year!

Source:The 4 Biggest Investment Myths of 2008