I call them the “zombies,” the institutions being propped up by government bailouts. Companies like Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC), General Motors Corp., Chrysler LLC, etc. On an operating level, these walking dead are sucking the life out of the recovery.

Unlike in previous downturns, huge resources have been devoted to propping up entities that should have been taken out of the picture.

Of course, it’s easy to avoid zombies directly. No one is going to force you to take a position in GM. But if you really want to know where to look for the bargains – for companies that have the greatest potential for serious growth in real numbers and real markets – you need to look for what I call “zombie-free zones.”

Unfortunately, the United States and the United Kingdom are not “zombie-free” zones – and thus offer the worst hunting ground available right now.

If you’re looking for something solid, there are only three places to aim your portfolio. In fact, my top three picks are…

Germany, Korea, and Canada.  All have an abundance of companies you can invest in with at least a good chance of not being forced to compete with the undead.

The Problem with Zombies

You see, the problem with zombie banks and companies is that they soak up resources that should be devoted to living banks and companies, while providing unfair competition that makes their competitors unsound.

It’s difficult to see this effect at the moment, because the U.S. Federal Reserve is propping up the banking sector. It’s much clearer in the automobile sector, where the zombies GM and Chrysler make it more difficult for Ford Motor Co. (NYSE: F) to compete. There’s no question that the continued existence of Chrysler after its first non-bankruptcy in 1979 drastically weakened Ford in the 1980s and 1990s.

There’s the effect on wages too. The United Auto Workers (UAW) union is a huge supporter of the GM and Chrysler rescues, partly because they keep UAW members employed at above-market wage rates. One certainly can sympathize with the great many American autoworkers that have lost their jobs, but by keeping the sector over-employed, the government is driving up wages and hurting businesses – particularly Ford, the only member of Detroit’s “Big Three” to not ask for a bailout.

The same effect can be seen in the banking sector. The bonus pool at JPMorgan Chase & Co. (NYSE: JPM) is partly inflated by the continued employment of all the Citibankers who should have lost their jobs. Since banking pay scales got over-inflated during the bubble, it is reasonable now for them to come back down to earth, but that’s not going to happen while banks are in their current undead state.

Turning to the international market, it is immediately clear that Britain has the same problem as the United States, only on a larger scale. Royal Bank of Scotland Group PLC (NYSE ADR: RBS) and Lloyds Banking Group PLC (NYSE: LYG), two of Britain’s largest banks have been kept open by the government. (Though, to be fair, Lloyds only got in trouble because the government made it acquire another failing bank, HBOS.)

Financial services is a huge part of Britain’s economy, which needs to diversify, but it won’t be able to diversify if so much of its talent is locked up in banking, and its best graduates are sucked into the high-paying dealing rooms of the City of London.

Japan has the same problem. Here the zombies are really ancient, cobwebbed skeletons left over from the 1990 collapse of Japan’s bubble. Some of them were put out of their misery by Junichiro Koizumi, the reformist prime minister, in 2003. Yet just this week we learned that many Japanese retailers face losses because of competition from The Daiei Inc. and Ito-Yokado Co. Ltd., gigantic retailing companies that were effectively bankrupt in 1993 but have been propped up by Japan’s banks. If you’re afraid of zombies, Japan is really creepy!

Historically, Europe is the continent where investors have suffered most from zombies propped up by governments. Certainly some countries, notably Italy, are attractive only for investment necrophiliacs.

Where to Find “Zombie-Free Zones”

There are some exceptions. Germany has only a few relatively small zombies. Both Sachsen LB and IKB Deutsche Industriebank AG, the banks that got in trouble buying U.S. subprime mortgage-backed bonds, have been sold to other buyers – Sachsen to a larger Landesbank and IKB to the private equity group Lone Star Funds. Whatever their subsequent fate, those banks are currently being managed on a profit-maximizing basis.

There is a large older zombie, Hypo Real Estate Holding AG, the former Bayerische Hypothekenbank, which got in trouble in the late 1990s lending to real estate in the former East Germany, but that appears an isolated example. Industrially, Germany has been admirably rigorous in cleaning up its dead companies, and with its new pro-market government looks attractive for zombie-fearing money.

In Asia, South Korea is probably your best bet. The country had a big zombie problem ten years ago, but that problem has been cleared up with the bankruptcy and reorganization of several conglomerates and much of the banking system. This time around, there have been few major casualties and so the economy looks relatively zombie-free.

Finally, there is our northern neighbor, Canada. Canadian housing never became as over-extended as U.S. housing, and the Canadian bank bailout was correspondingly smaller, with none of the banks facing bankruptcy. Canada had a bad zombie problem fifteen years ago from decaying heavy industry, but today those zombies are long gone and the Canadian economy is resilient. The most recent bankruptcy, Nortel Networks Corp. (OTC: NRTLQ) in Jan. 2009, is being handled in a thoroughly market-oriented fashion, with its assets being sold off piecemeal. So your money is safe in Canada – lots of snow, but no zombies!

Source: Why You Need to Look at these Three ‘Zombie-Free Zones’

Billionaire investor George Soros thinks the worst of the global financial crisis is behind us.  In a June 20 interview with Polish television, the Hungarian-born Soros acknowledged that this has been the most serious crisis he’s seen in his lifetime, but said, “Definitely, the worst is behind us.”

For those that like to interpret “Soros-speak,” that’s as powerful a sign as any that one of the world’s most successful investors is “going long.”

But is he wrong?

On one hand, the World Bank is busy roiling the markets with recently updated figures that project a 2.9% decline in global economic activity this year. Then there are the signs that the “green shoots” (how I’ve come to detest that term) may be more like weeds. Debt is devastating the developed world and the once-mighty G-7 looks more like a G-1 every day.

On the other hand, I wouldn’t bet against him. When it comes to financial influence and acumen, Soros is about as powerful and prescient as they come. He’s made billions over the years speculating on things that others simply couldn’t see or, more often, didn’t want to believe. He’s as iconic as he is legendary for making big bets on market timing even if, by his own admission, he’s not always right.

For the millions of investors who are tempted to interpret Soros’s comments as bullish, that admission forces me to urge caution. In fact, my advice to proceed with caution extends to any comments that might be made by such other investment legends as Warren Buffett, or even Soros’ former investment partner, noted author and commentator Jim Rogers.

I preach caution for three reasons:

• Despite the fact that each of these men is fabulously successful, the typical retail investor has no idea how much money they’re betting on the upside, or what percentage of their wealth is involved in any publicized position.
• It’s not clear what – if any - protective stops are being used so you don’t know whether the positions they’ve taken represent core portfolio holdings or speculative trades.
• These revelations – disclosures – are usually made after the fact, which means that investors who may want to tag along for the ride are put in the risky position of having to make “me too” investments.

So if you’re a savvy investor, what steps can you take to translate moves being made by three of the best investors of our time into profits of your own?

A good place to start is by taking the time to understand precisely what drives these guys. Even though Rogers hunts for opportunities around the world, Soros tends to pursue investment plays involving currencies and macroeconomic trends, and Buffett is a deep value guy, they are more alike than they are different. That’s especially true since the core elements of the strategies these three investors use to win and profit usually run counter to Wall Street’s conventional wisdom.

Take the very concept of profits, as an example. Most people are surprised to learn that none of these gentlemen sits around over coffee in the morning, rolling his hands with an evil laugh as he wonders aloud how much money he’s going to make on that day. But nearly all have gone on record at one point or another talking about the importance of not losing money in the first place. They’ve also repeatedly stressed the importance of waiting until the really compelling opportunities develop before they put their money at risk.

Rogers, once Soros’ partner at the Quantum Fund, a hedge fund that’s often described as the first real global investment fund, goes a step further. He describes his investment process as a little like waiting until somebody else puts money down in the corner, then “walking over and picking it up.”

Another common trait is that not one of these three investors believes that you have to take big risks to make big money. In fact, all three gentlemen believe, as I do, that it’s how you concentrate your wealth that matters.

This flies in the face of what Wall Street would have you believe which is that you need to diversify your assets to get ahead. Diversification as Wall Street practices it is a complete misuse of the math and a proxy for an entire establishment that doesn’t know what it’s doing.

The thinking is that by spreading your money around willy nilly, some of your holdings will rise in value, even as other parts of the portfolio fall. Even so, by diversifying, Wall Street says that you will be better off for it over the long run. Granted, there are some instances where taking steps to “diversify” leaves you better off than if you’d done nothing at all, but one of the critical problems with diversification as Wall Street has practiced it is that it doesn’t work when everything goes down at once – as so many investors who had been led to believe they were protected found out the hard way in 2000 and again in 2007.

That’s why, for example, I’m a proponent of concentrating my efforts on a few relatively high-probability choices, especially when it comes to trading services, such as the Geiger Index or the New China Trader, for example. It’s a strategy that individual investors should consider, as well.

But what matters most is that people put the comments they hear from these guys into perspective and think for themselves. It’s important to remember that neither Buffett, nor Soros nor Rogers care about what other people think. That’s one of their real strengths. Nor do they care what the markets will or won’t do.

In fact, none of the three – as least as far as I can tell from the research that I’ve done – subscribes to the “random walk” or “efficient market” theories I’ve mentioned as complete bunk in recent months.

The bottom line is that Soros, Buffett and Rogers have demonstrated time and again that they’ll only make a move when they’re darned good and ready – when they’ve done all they can to scope out the situation at hand, and done everything possible to make sure that the percentages are in their favor.

That, alone, is a terrific lesson for retail investors to learn. Wall Street tries to push investors into action with advertisements that portray “real” people making trades from their kitchens, or getting the latest quotes on their mobile phones. They show attractive retired couples who’ve achieved their dreams with big sailboats, or antique cars, or on expensive vacations. Ignore those messages and you’ve effectively elbowed aside the artificial sense of urgency that Wall Street is trying to create.

Not only is this manufactured urgency designed to separate more of you from your money, but they wouldn’t do it if they knew that most investors got it “right” more often than they got it wrong.

Buffett, Soros and Rogers act only when they believe the time is right. Buffett has referred to this as waiting for the Sunday pitch. If you’ve never heard that term before, it’s one that dictates extreme patience while all the spitballs, knucklers and sliders go by. You only take action when the one pitch you know you can hit out of the park is on its way – then you swing from the heels, giving it all your effort.

There’s one final task that these guys do better than almost anyone – and that’s to keep everything in perspective. They assemble their portfolios carefully with diligent planning, attention to detail and an emphasis on the objectives they expect to achieve. They make investments based on a clearly defined set of expectations and do not hesitate to cut their losses if they find out they were wrong.

In that sense, every investment choice they make fits a specific role in their portfolio. Nothing, if they can help it, is left to chance. So to the extent there’s any action to be taken right now, let me leave you with one final thought.

No nation in the history of mankind has ever bailed itself out by doing what we’re doing now, which means that placing bets on a “recovery” is really a fool’s errand. On the other hand, making choices that capitalize on the trillions of dollars now being injected into the world’s financial system is the place to be. History shows that it’s better to be generally long resources, inflation-resistant choices, and real companies with real earnings.

Not only will these types of profit plays fall less than others if the markets stumble and fall from here, they’ll also rise faster and farther once the capital infusions start to work their way through the global financial system and the rebound gets under way.

And I’ll bet my bottom dollar that George Soros knows it.

Source: Is George Soros Long or Wrong on the Global Rebound?

[Editor's Note: Fourteen trades. All profitable. Since launching his Geiger Index trading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 14 for 14, meaning he's closed every single one of his trades at a profit. And he did this in the face of one of the most-volatile periods since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, the Geiger Index .] ]]> http://www.contrarianprofits.com/articles/is-george-soros-long-or-wrong-on-the-global-rebound/18632/feed 0 http://www.contrarianprofits.com/articles/soros-bets-big-on-oil-and-gas/16236 http://www.contrarianprofits.com/articles/soros-bets-big-on-oil-and-gas/16236#comments Tue, 05 May 2009 16:57:11 +0000 Contrarian Profits http://www.contrarianprofits.com/?p=16236 Billionaire hedge fund manager George Soros has taken a position in Plains Exploration & Production Company (NYS:PXP). According to the blurb on Google Finance (our homepage here at Notes):

Plains Exploration & Production Company (PXP) is an independent oil and gas company primarily engaged in the activities of acquiring, developing, exploring and producing oil and gas properties primarily in the United States. The Company owns oil and gas properties with principal operations in Onshore California; Offshore California; the Gulf of Mexico; the Gulf Coast Region; the Mid-Continent Region, and the Rocky Mountains. As of December 31, 2008, the Company had estimated proved reserves of 292.1 million barrels of oil equivalent, of which 61% was comprised of oil and 72% was…

David Einhorn, the hedge fund manager who predicted the downfall of Lehman Bros., recently bought gold for the first time. And then there is John Paulson, the guy who made billions of dollars by correctly anticipating the housing bust and credit crisis.

Paulson just plunked down $1.3 billion for an 11% stake in AngloGold (NYSE:AU). He’s also got a big position in Kinross Gold (NYSE:KGC).

Peter Munk, the 82-year-old chairman and founder of Barrick Gold, also offers up his own anecdote about gold’s broadening appeal. “I have had more phone calls in the past six months than ever before – from people who have $120,000 inherited from grandmother, and from hedge fund managers with millions,” he says. “I am not saying George Soros, but people of that caliber have told me they are buying gold.”

You no longer have to be a gold bug to think gold will rise in price. In fact, this buying by some of the world’s greatest investors may be the leading indicator for a quick 116% climb – to $2,000 per ounce or higher. Give gold the cold stare of a professional handicapper and the odds look very good, indeed.

Why? The biggest reason is that the value of the dollar looks about as brittle as a 90-year-old’s hip socket. And if you worry about the value of the dollar – or any paper currency – then gold is a good alternative.

In fact, gold has held up well while most everything else has taken a beating over the last year. On a recent conference call with investors, First Eagle fund manager Abhay Deshpande points out that gold is at a new high in just about every currency apart from the U.S. dollar and Japanese yen. “It has performed its job for everyone in these countries,” he says. “It has held its value.”

Take a look at the nearby chart and you can see the falloff of the dollar in recent years and the rise of gold.

“But there have always been worries about the value of the dollar,” you say. “That’s not new.” True. What is new is a global financial crisis unlike anything we’ve seen in the post-World War II era. And that crisis has brought with it serious doubts – the most serious in decades – about the dollar’s ability to keep its top perch in the aviary of world currencies. As that doubt increases, gold gathers new fans.

As I write, the headlines are abuzz with China’s proposal to replace the dollar as the world’s reserve currency. (The U.S. Treasury secretary, in a weak moment, said: “We are quite open to that.” He took back those words, but the hammer had already hit the nail.) China and other countries hold a lot of dollars. And they are not too happy to see the U.S. government handing out bills like after dinner mints. America’s $2 trillion (and ballooning) annual deficit and ballooning national debt causes them to wonder about the value of all the paper they hold.

They are not the only ones worried, as I noted up top. Many top investors are already buying gold.

It is easy to buy gold today with gold exchange-traded funds (ETFs). They are like mutual funds that hold gold. As investors pile into these ETFs, the ETFs’ gold holdings also go up. It’s one way to see the dramatic increase in demand for gold in just the last few quarters. (See chart below.)

So we have to ask: At $900 per ounce, are all the fears baked in or are we on some new history-making path?

I have a good friend who advises institutional clients on investing. As he reminds me, the really big money hasn’t started buying yet. There are no big pension funds or endowments with significant gold holdings. That could change. If so, the gold price will go wild.

“Gold is a small market,” Munk notes. Munk’s career spans 60 years and he knows the gold market as well as anyone. Says he:

“Let’s say a small percentage of the world’s central banks – or simply the United Arab Emirates itself – do not believe President Obama’s pledge that he will halve the U.S. deficit by the end of his first term. They shift some of their dollar reserves to gold. It would not take many decisions of this kind to push the price above $2,000 per ounce.”

That’s how gold gets to $2,000 per ounce – just a bit of doubt turning into action. The mind boggles at what would happen if China decided to hold more gold! Gold could well hit $5,000! As long as President Obama, Fed Chief Bernanke and pals treat the dollar like confetti, gold should continue to gather new fans. And gold stocks should do even better.

Gold stocks are supposed to do especially well as gold rises. But that has not been the case over the last year and a half. Mostly, this was because mining costs were rising as fast as, or faster than, the price of gold – thanks in part to record-high energy prices. But as Deshpande points out: “These things have reversed in recent months as gold stocks became quite cheap relative to the underlying value of the gold in the ground.”

The case for gold and gold shares is a nice and clean setup, like one of those toy houses in the window at Macy’s on Madison Avenue. The world order will not always hinge around the dollar. Global finance will not always find its center on Wall Street. As Munk pointed out: “Look around Davos this year. So Goldman Sachs (NYSE:GS) cancels its dinner party. In its place, a Kazakh company has a dinner party.”

As the dollar goes bust, who knows what will replace it? With gold, you don’t have to worry too much about the answer.

Source: How Gold Will Top $2,000 Per Ounce

Speaking at a dinner at Columbia University, Soros actually compared the current situation to the breakup of the Soviet Union, and said that the whipsaw effects of the crisis are actually more severe than the Great Depression.

“We witnessed the collapse of the financial system,” Soros told his audience. “It was placed on life support, and it’s still on life support. There’s no sign that we are anywhere near a bottom.”

He said the bankruptcy of. Lehman Brothers Holdings Inc. (OTC: LEHMQ) in September marked a turning point in the functioning of the market system.

His comments echoed those made earlier at the same conference by former U.S. Federal Reserve Chairman Paul A. Volcker, who is now a top adviser to U.S. President Barack Obama. Volcker said that overseas industrial production was declining even more rapidly than it was in the United States, which is itself under severe strain.

“I don’t remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world,” Volcker said.

Market Matters

Nothing has been able to get this economy (and stock market) back on track. Congress passes – and President Barack Obama signs – a near-$900 billion stimulus package and the U.S. Federal Reserve revises (negatively) its economic outlook for the remainder of 2009. Major financial institutions get significant (bailout) assistance from the government and Bank of America Corp.’s (BAC) chief is subpoenaed for misleading investors over Merrill Lynch & Co. Inc.’s (MER) (excessive) bonuses.

Automakers beg Congress for (and receive) a bailout of their own and General Motors Corp. (GM) and Chrysler LLC come back for even more as part of their restructuring plans.  Investors try to look past the unscrupulous practices of Madoff and the U.S. Securities and Exchange Commission (SEC) brings suit against billionaire Alan Stanford’s global enterprises over an apparent $8 billion fraud through its high-yielding CDs (with Venezuelans particularly hard hit).

Stanford Financial manages assets of $50 billion in 140 countries, with the primary bank operations in question based in Antigua.  With the Dow Jones Industrial Average hitting a six-year low and falling below the perceived floor set in November, investors are left scratching their heads.

So much for the “challenging” times setting a tone for bipartisanship in Washington.  As the stimulus package passed with only token Republican support in the Senate, its party leader called it “a missed opportunity, one for which our children and grandchildren will pay a hefty price.“  He then revealed that not one House member even took the time to read the bill.  The Obama administration also announced a plan to help millions of homeowners avoid foreclosure, while attempting to stabilize the housing market (to the tune of another $275 billion).  As long as the Treasury’s checkbook is out, GM wants another $16 billion and Chrysler could live a few more days with an additional $2 billion.

Oil rose (briefly) late in the week as the U.S. Department of Energy revealed a surprising decline in crude inventories and a slight increase in the demand for gas now that prices at the pumps have fallen below $2 a gallon and stayed for a while.

After taking the Dow down more than 300 points following Presidents’ Day, nervous investors sold all the way to a new six-year low and the worst week for equities since October.

Financials continued to be hammered as talks of bank nationalization picked up steam.  Global stock markets followed suit with Japan’s Topix closing at a 20-year low.   With investors shunning equities of all shapes and sizes (and U.S. Treasuries offering little in the way of returns), gold became the safe-haven recipient and futures climbed above $1,000 an ounce.  For now, investors just talk of “values,” “opportunities,” “rallies,” and “rebounds,” but few seem willing to follow-through with any real buying.

Economically Speaking

With U.S. Federal Reserve Chairman Ben S. Bernanke and friends trying any and all tricks in their arsenal to jumpstart the economy, the central bank chief admitted that the efforts to date have resulted in very limited successes.  The Fed negatively revised its outlook for the remainder of the year and now projects that unemployment could reach 8.8% and the GDP may shrink by as much as 1.3% in 2009.  Meanwhile, our global trading partners are struggling with problems of their own.  Japan’s economy experienced its worst quarter in almost 35 years as its manufacturers suffered through substantially declining demand for their goods.

The domestic economic data confirmed that the Fed’s new (weaker) projections may be right on target.  Housing starts in January fell by almost 15% and activity now stands 56% below the pace of construction last year.  Industrial production tumbled more than expected last month, and automakers face even more shutdowns as part of their recently proposed restructuring plans.

The labor market remained incredibly weak as new jobless claims rose again in the most recent release and the number of workers receiving unemployment benefits for over a week stood around a record high 5 million people.  On the inflation front, the cries of deflation can be put on hold for the time being.  Both the producer price index (PPI – wholesale) and the consumer price index (CPI – retail) experienced their biggest gains since July 2008, as energy prices actually rose last month.

Still, consumer prices remained flat (no real increase) on an annual basis, the lowest level of price change since August 1955.

Weekly Economic Calendar

Source: Super-Investor George Soros the Latest to Predict the Worst is Yet to Come

This from Lou:

Billionaire investor George Soros and I don’t normally see eye to eye. He supports drug decriminalization, assisted suicide, America bashing… and a host of other off-the-reserve liberal causes.

I don’t. I’m an old-school Reagan conservative. (Full disclosure – I’m so old school, I named my first born after the late President.)

But here’s the thing. When it comes to investing, great political divides matter little. Because it’s not about getting our guy elected or unashamedly pushing a partisan agenda.

Instead, business – and by extension, investing in businesses – is only about increasing profits, as Milton Friedman put it. And based on the latest SEC filing for Soros’ hedge fund, we both agree on the best way for investing in crude oil’s imminent rebound…

Interested in Making Money In Stocks? Bookmark This Website…

If you’re interested in making money in stocks, regardless of your political leanings, you should bookmark the following website – and visit it daily. It’s a link to the most recent SEC filings.

• The first thing you should scan for are Form 4 filings. For a refresher on why, consult my friend Alex Green’s recent column on tracking insider trading.
• The next best thing to insiders backing up the truck is institutions doing so. And that’s because numerous studies confirm heavy institutional buying almost always leads to excess returns in future months.
• In other words, follow the “smart money” and you’ll often profit, too. And thankfully, we can easily monitor institutional purchases (and sales) via Form 13-F filings.

You see, the SEC requires all money managers with over $100 million in assets to disclose their U.S.-traded stocks, options and convertible bonds each quarter. And yesterday, Soros’ hedge fund firm, Soros Fund Management LLC, made its holdings public.

Turns out he increased his stake in one company by roughly 16 million shares, or 74%. And since April, he’s more than tripled his stake in this company to 36.8 million shares, up from 11.4 million.

Petrobras – The Best Play for Investing in Crude Oil

The object of Soros buying is none other than Brazil’s state-controlled oil company, Petrobras (NYSE: PBR). It’s a wise investment in my opinion. In fact, I recommended it to Oxford Club members last month at our Chapter Meeting in Managua, Nicaragua.

Here are five reasons why -

1. New discoveries. Worldwide oil demand might be off. But it’s temporary. And even if demand miraculously plateaus (don’t count on it with gas below $2 per gallon), the world would still “need to replace one Saudi Arabia per three years,” according to Petrobras’ CEO. No other company is making bigger discoveries than Petrobras. In fact, the company’s recent finds could triple its reserves. And as we all know, the country with the oil is always in control.
2. Long-term focus. With crude below $40 per barrel, most oil companies are cutting back on exploration and development. Not Petrobras. They plan to spend $174 billion by 2013, which ensures they’ll have plenty of products to sell when oil prices climb higher.
3. Low cost. Management estimates it can be profitable on new projects, even if crude oil stays around $45 per barrel. Few – if any – other major oil producers can claim such a low hurdle rate. Basic economic principles govern here – the low cost provider of a commodity enjoys the most profits when prices rise. And share prices often go along for the ride, too.
4. Deep-water expertise. All the easy-to-find crude oil is gone. But Petrobras is an expert in deep-water exploration. That’s a competitive advantage no other oil company can touch. And it should continue to help Petrobras add reserves at much lower costs than its peers.
5. Valuation. Emerging markets took it on the chin – twice as hard as the United States – despite stronger underlying fundamentals. It’s pointless to argue whether or not it was deserved. What matters is many high-quality stocks got caught up in the downdraft and now trade at mouthwatering levels. Petrobras is no exception, trading for less than 10 times earnings.

Add it all up, and this is one time I’m willing to admit I actually agree with George Soros. But forget about me. His sizeable investment and track record – last year his Quantum Endowment Fund returned 8%, compared to an 18% loss for the average hedge fund – are reasons enough to consider adding Petrobras to your portfolio.

Source: Investing in Crude Oil: The Best Way to Play Oil’s Imminent Rebound

Well, front and center this morning, the euro and other currencies are still reeling from that shot to their mid section by George Soros at the World Economic Forum, in Davos Switzerland. The dollar has flexed its muscles a bit more and taken the euro to just above 1.27… Not that euro holders want to hear this, but this IS what I was talking about all last month with the talk of an Obama bounce. The stock market hasn’t caught on yet though…

Friday’s print of 4th QTR GDP didn’t, on the outside, look as bad as forecast, printing at a negative -3.8% (forecast was -5.5%). But, like I said, and you what you would fully expect me to find, on the inside, this is not a good number folks… Here’s the skinny…

OK, first of all, the print of -3.8% was the worst print / performance in almost 27 years! And it could have been worse… Let me explain… You see, business inventories, the goods that retailers could not sell to consumers and manufacturers, goosed up the GDP number. Inventories moved from a $30 Billion reduction in the 3rd QTR to a buildup of nearly $6 Billion in the 4th QTR. In the strange computation that’s used for GDP, the growth numbers get credit for inventory buildup… However, that’s going to be a HUGE drain on the 1st QTR growth numbers for 2009. When inventories are subtracted from the equation, the negative growth falls to -5.1%, almost at the forecast number.

You have to wonder now, just how long this recession is going to last, as I’m already marking down a negative -5% GDP for the 1st QTR of 2009… If it lasts past May, and I would almost bet the farm that it will, this recession will turn out to be the longest and perhaps the deepest period of economic decline in the U.S. since the Great Depression…

I recall last year at the Orlando Money Show, telling the crowd that we were already in a recession, and hearing some of the snickers… I had a brief conversation with an old colleague, that’s a big shot now in other markets, that we had gone into a recession, and he laughed at me… Well…

So… If the trading theme remains in place during this quarter, the dollar is sure to be on an upswing, as you may recall… The Trading Theme rewards the dollar any time the economic data shows a deeper, darker, more dangerous economy / recession… And… Unfortunately, that’s what we now have!

We also have a recession going on in the European Union… But, folks, let me tell you something… This falls under Chuck’s reasons for a Positive Balance of Payments…

When all this started going down, I mentioned that stimulus packages, or bailouts come a little easier when a country is dealing from a position of strength, and by that, I mean if a country has a surplus. And isn’t adding to deficits that already exist.

One day, this will matter… I may not today, tomorrow, next week, or next month… But eventually, you have to pay the piper… And the only way the U.S. can pay the piper right now is by printing more dollars to pay for the debts… And so, therefore, they would love to pay for them with “cheaper dollars”…

Here’s another reason to strive for a surplus… On Friday, it was announced that Japan had made a loan of $100 Billion to the IMF. Better to have that $100 Billion in the checking account, eh? OH! And the IMF said it wasn’t in danger of running out of money… They said the needed the loan because they Expect to be dealing with BIGGER problems in the future…

Now that gives you a nice warm and fuzzy, eh? NOT! I would rather the IMF say they needed the cash, because they’ve already helped everyone that needed help, rather than to say they EXPECT BIGGER PROBLEMS!

Down under in Australia, where it’s getting to late summer, it looks like the global slowdown is beginning to take its toll here. Kevin Rudd, the prime minister, said the slowing down of global growth was forcing the government into a budget deficit for the first time since 2001-02… The Reserve Bank of Australia (RBA) meets tonight, and will announce afterwards that they cut interest rates again… Probably by 1% or 100 BPS…

There are quite a few Central Banks meeting this week to discuss rates… Here’s a preview…
Sweden’s Riksbank meets on Wednesday and I’m looking for a 50 BPS cut. Thursday sees both the Bank of England (BOE) and European Central Bank (ECB) announce their decisions. ECB President, Trichet, was quite hawkish last week, and has me believing that that ECB will skip a rate cut this month. However, I fully expect the BOE to cut rates by 100 BPS. The “experts” are calling for 50 BPS cut… But as I’ve said all along, the BOE is following the Fed down the road to ZIRP (zero interest rates), so why wait? Go ahead and cut 100 BPS now to .50%, and get it over with!

I understand that London was smacked by the worst snow storm in years this morning, and that the transport system is in disarray, causing many markets people to stay home, thus causing some real thin volume in the morning session…

But… Even as much as I would like to… I can’t blame the snow and lack of volume for the dollar’s strength this morning… No… As I said at the top of the page, I blame it on the pasting that George Soros laid on the euro last week… And now the euro and other currencies have to pull themselves up by the bootstraps if they want to get back into “the game”…

Well… On Friday, (our little Christine’s birthday, I might add) I mentioned to the boys and girls on the trading desk that Gold was outperforming just about everything! On Friday, Gold ran up to $927… That level looked too good to some holders this morning though, as profit taking has brought Gold back to $914…

You know… My friend, Bill Bonner of The Daily Reckoning fame (www.dailyreckoning.com) has been telling people for 9 years now, that his “trade of the decade” is to sell the DOW and buy Gold… Sure has been one heck of a trade, eh?

With all the countries in the world racing to zero, it makes even more sense to hold Gold, as the Gold is a non-interest bearing investment, but neither is just about anything else these days! And while the news from China scared Treasury holders a bit a couple of weeks ago, the fear is waning, and yields are on their way back down again. OH BOY! You can get about 2.5% for a 10-year Treasury! Like I said, Gold compares with other holdings now that there’s a race to zero… And… There certainly isn’t the same amount of Gold in the markets as there is Treasuries! HA!

Well… Last week, we had a data cupboard that was chock-full-o-data, and none of it was good! We follow up that week of bad data with one that starts off strong and then has an even stronger finish! That’s right, we finish this week up with the January Jobs Jamboree, which I’m afraid will show another 1/2 million unemployed were added during the month. In between now and Friday, we’ll see Personal Income and Spending for Dec. ISM Manufacturing, which has fallen into the abyss in recent months, and with the dollar stronger, has no chance of improving. Pending Home Sales tomorrow, and Vehicle Sales on Wednesday.

With all the dollar strength, you have to make the assumption that the Risk Takers are no where to be found… And with no risk takers, guess what currency is also booking gains? That’s right, Japanese yen… And the beat goes on…

Currencies today 2/2/09 (Groundhog Day): A$.6285, kiwi .50, C$ .8075, euro 1.2770, sterling 1.4110, Swiss .86, rand 10.225, krone 6.9920, SEK 8.3410, forint 233.15, zloty 3.4790, koruna 22.10, yen 89, sing 1.5140, HKD 7.7550, INR 48.93, China 6.8478, pesos 14.49, BRL 2.3575, dollar index 86.27, Oil $40.46, Silver $12.43, and Gold… $912

Source: Groundhog Day 2009

Yes, the British prime minister and the French president are eager for some sort of “new Bretton Woods” to come out of this process.  Yes, George Soros has remarked on a number of occasions, always with the same careful choice of words, that there is “no suitable alternative” to the dollar.  But does that mean we’re going to wake up Monday morning with a new international currency regime backed by gold?  That gold will be revalued to $10,600 an ounce, or even $53,000?

Maybe.  But not now, I’m guessing.

The most compelling argument against bold, dramatic action this weekend is the interregnum between the current U.S. presidency and the next one.  A lot of news stories speak of the summit coming at an “awkward” time.  This is hokum, of course.  The really big policies don’t change much from one president to another.  But as Carroll Quiqley wrote in Tragedy and Hope, the pretense of divisions between the major U.S. parties must be maintained for the sake of the power elite staying in control.

So expect pretense in abundance.  The new president is sending a couple of steady establishment types as his representatives — Madeleine Albright and former Iowa GOP Congressmember Jim Leach (a reliable stooge of the banking industry) — to meet “on the sidelines” with the assorted luminaries.

Dramatic action might be discussed.  But it likely won’t be decided on, and certainly not announced.  Expect a formal statement at the conclusion that will be larded with platitudes, and no hint about future direction.

“Of course,” as Bugs Bunny said, “I could be wrong.”  So if you wake up Monday morning and find the gold ETFs have all been seized and your holdings in those funds will be compensated in cash at 20 cents on the dollar, don’t blame me.

Source: Don’t Waste a Weekend

- Italy may be the next country to ‘rescue’ its economy with taxpayers’ money. According the The Times the Italian government was working on plans over the weekend to pump as much as $26 billion into its biggest banks.

- Uncle Sam is about to bailout AIG from its bailout. Apparently, the original handout was too tough on poor old AIG. So now its going to get a sweeter deal. This from the WSJ:

The U.S. government reached a deal Sunday night to scrap its original $123 billion bailout of American International Group Inc. and replace it with a new $150 billion package, according to people familiar with the matter.

While the arrangement stands to considerably ease terms on the faltering insurer, it gives the government an unprecedented role as an actor in financial markets. It could also spark a political backlash, especially from congressional Democrats, because the Treasury, while adding to its AIG obligations, has thus far refused to extend a hand to the struggling Big Three auto makers.

- According to Infectious Greed blogger Paul Kedrosky, AIG “is serving as a kind of orifice via which the global credit default swap system pushes out its collateral calls, and it is forcing the U.S. government (read: you and me) into levering up on the other side. As long as asset prices keep falling, increasing the amount of collateral required in AIG’s ‘policies,’ these calls will keep coming, making AIG’s liabilities – and therefore ours – frighteningly open-ended.”

As Milton Friedman once put it, ” Nothing is so permanent as a temporary government program.”

- Of course, the story of AIG’s demise and its now near “zombie” status – it now relies on taxpayers’ money to stay afloat – is replete with ironies. AIG’s immediate problem is that it is neck deep in credit default swaps (CDSs), which it now must cover. As George Soros points out in the December issue of the New York Review of Books, the same administration that let the $50 trillion market for CDSs go “entirely unregulated” is now essentially left on the hook for these instruments.

Take for example credit default swaps … instruments intended to insure against the possibility of bonds and other forms of debt going into default, and whose price captures the perceived risk of such a possibility occurring. These instruments grew like Topsy because they required much less capital than owning or shorting the underlying bonds. Eventually they grew to more than $50 trillion in nominal size, which is a many-fold multiple of the underlying bonds and five times the entire US national debt. Yet the market in credit default swaps has remained entirely unregulated. AIG, the insurance company, lost a fortune selling credit default swaps as a form of insurance and had to be bailed out, costing the Treasury $126 billion so far. Although the CDS market may be eventually saved from the meltdown that has occurred in many other markets, the sheer existence of an unregulated market of this size has been a major factor in increasing risk throughout the entire financial system.

- Turns out Hank Paulson gave his bank pals and even sweeter deal than was oringinally reported under the terms of the $700 billion bailout bill. This from The Washington Post:

The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.

“Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no,” said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. “They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks.”

The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Henry M. Paulson Jr. in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.

It sure does pay to have friends in high places…

- All of this is small potatoes next to the Fed’s spiraling loan portfolio. Accoridng to Addison Wiggan and Ian Mathias at The 5 Min Forecast:

Ben Bernanke’s balance sheet expanded to a record $2 trillion this week — $2.058 trillion, if those billions even matter any more. That’s more than twice its size at this time last year.

The Fed’s loan portfolio is so bloated, we hardly know where to begin: Average DAILY bank borrowing from the Fed exceeded $359 billion last week… the Fed’s Commercial Paper Funding Facility has nearly doubled, and now holds $243 billion in “no one else will buy it” cooperate debt… primary dealers and brokers are running a $71 billion tab… AIG still owes $81 billion… it just keeps going and going. Over a third of the balance sheet is made up of some sort of bank loan or toxic asset.

Who’s paying for it? The U.S. Treasury has set up a supplementary funding account with the Fed, which is fueled by T-bill sales. That fund now exceeds $558 billion.

It’s not a new subject for Soros. He accurately predicted the crisis in subprime loans that punctured the lung of the financial markets.

In the interview Soros also slammed Treasury Sectretary Hank Paulson, saying the onetime Goldman Sachs boss was part of the very Wall Street system of “financial engineering” that caused the crisis in the first place.

Soros also said the American consumer economy — what he called the “motor” of the world economy — has now been switched off.

Watch it here.