Thanksgiving Day Market Hangover

The lack of US traders at their desks yesterday didn’t stop the markets from selling off big time. The market was in a strong “pull-back mode” after the Dubai story broke. The state-owned investment company Dubai World unexpectedly announced it would have to postpone payment of tens billions of dollars-worth of debt for six months. This was tantamount to a default and the bulls went running for cover. The FTSE 100 fell 3.2%, the most in eight months while oil pared nearly 5% off its price. Instead of waiting to see what European banks were exposed to Dubai World, traders decided that the safest option was to shoot first and ask questions later. Barclays (BCS), HSBC (HBC) and Royal Bank of Scotland were all down more than 6.5%. In a case of plucking a name out of a hat, JPMorgan (JPM) said that RBS (RBS) was Dubai World’s biggest loan arranger to the tune of about $2.3B.

The US markets have risen a little since they opened for trading. They have a long way to go before they have recovered all of the losses that yesterday inflicted though. DuPont, Cisco and United Tech are doing the best on the Dow so far.

Today’s Market Moving Stories

• Euro area sentiment rose to a stronger than expected 88.8 (consensus 88.1). The pickup in confidence was strongest among industry, while consumer sentiment rose less sharply as respondents expressed fears over losing their jobs.
• Japanese consumer prices declined in October for the eighth straight month, underscoring deflationary pressure. Core consumer prices fell 0.4% MoM.
• Electronics retailer Best Buy said its Black Friday traffic is up so far as consumers purchased smart phones, flat panel televisions, laptops, netbooks and digital cameras. “We are pleased with the traffic and pleased that consumers are out,” Chief Executive Brian Dunn said. Black Friday is the single busiest shopping day of the crucial US holiday season. The annual ritual of American consumerism is being monitored closely for signs the US shopper is back.
• The ECB president and other senior European officials will fly to China this weekend to try and convince government officials there to let its currency rise against the euro, although a similar trip two years ago accomplished little. A senior China official said China will keep the yuan “basically stable around reasonable, balanced levels,” suggesting China’s unlikely to buy into a faster yuan appreciation.
• European Commission President Barroso named Finland’s Olli Rehn as the EU’s economic and monetary affairs chief, a role in which he will oversee efforts to revive Europe’s economy. I did a quick background check on Olli but couldn’t find anything too interesting. He takes over from Spaniard Joaquin Almunia.
• The Bank of England is sticking with its view that the worst is over for the UK and the economy will return to growth in the final quarter of this year. They’re looking for about 0.2% - 0.4% of growth in the quarter. If they don’t get a move on soon, France and Germany will be at their next recession in the boom and bust cycle by the time the UK gets out of this one.
• UBS believes that authorities will not have taken the decision to restructure Dubai World lightly and that there are three potential explanations for the decision. Firstly, Abu Dhabi’s support for Dubai might be less generous than assumed. “Perhaps Abu Dhabi has forced Dubai to tackle the problem of excessive corporate debt before extending more financial support”. A second possibility is that corporate-sector problems might be more severe than assumed. Thirdly, Dubai’s debt might be higher than the generally assumed $80bn - $90bn due to potential off-balance sheet liabilities.
• Ireland’s long-awaited National Asset Management Agency will finally begin operations within a fortnight and could start legal action against loan defaulters as early as next year, NAMA’s acting and future chief executive Brendan McDonagh said. Mr McDonagh reiterated that NAMA will at least break even over its lifetime if the economy begins to grow here. More like, it’ll break even if McDonagh manages to re-engineer a property bubble!
• Irish Taoiseach Brian Cowen has criticised what he called the “overwhelming negativity” about the economy, saying that it is not in our national interest. Well here are some hard facts and come up with your own view on whether they are positive or negative - €23bn exchequer deficit so far this year; 12.5% unemployment rate; new car sales -62% YoY; new home prices -40% from peak; Central Bank 2009 GDP growth forecast of -8.3%. Pretty overwhelmingly negative if you ask me. But some people are negative just to stir up controversy and get publicity and I absolutely don’t agree with that.

What’s Going On In Norway
I do like an auld trade on the Norwegian Krone which requires me to know a tiny bit about how the Nordic country’s economy is going. Well, Norway’s employment picture remains the brightest in Europe as September unemployment remained unchanged at a mere 3.1% (Obama, Brown or Cowen would love a rate like that!) This has been an important driver for the economy shaking the recession bug in the 2nd quarter. But the Krone has a huge correlation to oil, so any rise in the oil price will also give boost to the currency. This has worked wonders in the past eight months. But not yesterday. Oil’s slide lead to USD/NOK rising 1.95% as the Krone was sold off. Keep an eye on USD/NOK though. The trend is still undoubtedly downwards so any market recovery will lead to a further USD/NOK slide.

Company News

• Carphone Warehouse raised its full-year earnings forecast after a strong first-half performance at both its telecoms and retail arms and said it was on track to split in two by the end of March 2010. With the lucrative Christmas shopping season around the corner, things are looking rosy for the telecoms company as they ring in the New Year in style. I’m not a man for puns but I had to throw that in there.
• BHP Billiton’s CEO Marius Kloppers says demand from China’s steel sector remains surprisingly strong. Annual contract iron ore price talks between the world’s biggest miners and steelmakers are getting underway; Kloppers’ remarks may help boost expectations that miners will push for a sizable increase in price.
• ING may have wished it choose a different day to raise cash as the Dutch bank’s $11.2 billion Rights Issue came in at a 52% discount today amid a plunge in global markets sparked by Dubai’s debt crisis.
• The Dutch Supreme Court found that Goldman Sachs, ABN Amro and Internet provider World Online misled investors during World Online’s 2000 initial public offering, via a prospectus that didn’t mention its CEO sold discounted shares in advance. A shareholder group says investors lost €2.3bn and calls for damages. Probably nothing more than a slap on the wrists for Goldman.

And Finally… The World’s Largest Shopping Centre, In Guangzhou China, Is Almost Entirely Empty

Why Long-Term Investors Should Look Into Gold

As we enter a new decade we are compelled to point out what, in our opinion, is the “Lost Decade” of the United States. The financial media, brokerage houses and advisors have done a good job promoting the opportunity of owning US Equities, and as a result the average investor continues to wait and hope that their cookie cutter, simplistic investment strategies will provide for their future.

The reality is that investors have been severely punished for “buying” and “holding” US equities over the past decade.  The following chart illustrates the “nominal” performance of the Dow Jones from January 2000 to October 2009.

The next chart illustrates the Dow Jones performance when it is adjusted for the government’s measure of inflation, the questionable Consumer Price Index (CPI).

The next chart illustrates the performance of the Dow Jones when it is compared to a more stable measuring stick; gold.

To the average investor this insight should be devastating to say the least.  In the world of investing, ten years should be considered “long term” and investors should not be okay with this kind of performance.

Conventional thought suggests that an investor can expect an 8% annual return from the broad stock market over the “long term”.  The following chart compares this expectation versus the reality.

Contrary to historical evidence many professionals have insisted that the market always rises at 8% per year over the “long term”.  Unfortunately this past decade was a tough learning experience for many investors as capital fled the stock market and entered the hard asset market.

The point of this article is not to win an argument about Gold being a better investment than Stocks.  We do not favor one asset class over another asset class.  Instead we are trying to illustrate that markets are cyclical and not linear.  No market goes straight up or straight down.  There are times that it makes sense to invest more heavily in the general stock market and there are times that it makes sense to invest more heavily in hard assets.  Unfortunately the average investor has been led to believe that one investing strategy could be used regardless of market conditions.

From 2000 - 2010 the place to invest has been hard assets and during this time it was wise to limit exposure to the general stock market.

These long term market trends tend to last a very long time and we expect this trend to continue into the next decade.  However, no market goes straight up or straight down.  We expect that there will be times that the US Stock market and even the US dollar will outperform gold and other commodities.  We expect that many investors will foolishly cash in their stocks and then buy into a frenzied hard asset market only to be disappointed when they once again miss the trend change.  Ultimately, we expect a parabolic, mega spike in precious metals that rivals the 2000 Nasdaq mania.  However, it is our opinion that this market mega blow off will happen many years down a very bumpy road.

Going into 2010 we caution long time, hardened stock investors not to wait another decade to decide that commodities are a wise investment.  At the same time we caution long time, hardened commodities investors not to expect a straight up, one direction bull market.  Both of these investment views are likely a recipe for disappointment.

Governments’ Endless Borrowing - This Freak Show Cannot Go On Forever

Governments benefit from ‘teaser’ rates. Wait ’til they come to an end…

There are so many breathtaking things going on around us we practically suffocate. Last week, three-month US Treasury-bills yielded all of 0.015% interest. Some yields were below zero. In effect, investors gave the government money. The government thanked them and promised to give them back less money three months later. How do you explain this strange transaction? Was there a full moon?

Moonlight on the week of November 6 must have been especially intense. Bids totaled a record $361 billion for just $86 billion worth of T-bills. This was $100 billion more than the peak set during the credit crisis a year ago. What? A third of a trillion dollars, per week, gives itself up to the hard labor of government service and asks for nothing in return?

Even lending to the government for much longer period yields little to the investor. The 10-year yield is only 3.32%. Thirty-year lenders get only 100 basis points more. And this in a currency that is melting faster than polar ice. Gold, the traditional bank reserve, is soaring in comparison. Not surprising; the US dollar money supply - measured by the US monetary base - rose 147% over the past 24 months.

The only thing rising faster than the demand for government debt is the supply of it. All major governments of the West - and Japan - are now borrowing as if their lives depended on it. The IMF predicts that Britain’s ratio of public debt to GDP will rise 50% between 2007 and 2014. In America, the increase is forecast to take taxpayers nearly to the debt levels of WWII. Those estimates are probably far too low, since they depend on an economic ‘recovery’ that will almost certainly prove to be a disappointment. The purpose of a depression is to get rid of bad debts and correct bad investment decisions. But an economy cannot correct itself unless it is allowed to enter a correction. When you try to prevent it, you get a zombie economy in constant need of freshly borrowed blood. Debts rise, but with no recovery. As reported on this back page, former US Office of Management and Budget director David Stockman expects a zombie economy in the US, with deficits twice as great as those now projected…that is, of $2 trillion per year, not $1 trillion. This will send US debt beyond WWII levels…up to Japan-like heights.

Other governments, too, are likely to see similar swelling in their public debt limbs. All right-thinking economists and commentators have come to the same conclusion - that fiscal and monetary stimulus must continue until the ‘recovery’ is more manifest. Worse, they’ve been trapped by the logic of Keynesianism itself. Now, everything is ‘stimulus.’ Nothing can be cut. The boils cannot be lanced.

When you come to the end of a war, spending is naturally reduced.

Deficits can go home with the troops. Debts can be paid down. But there is no end in sight for these deficits. Because only a small part of them is the direct consequence of the war against depression. Instead, they are merely the inevitable result of governments that spend too much money. In the US this “structural deficit” is estimated by the IMF at 3.7% of GDP. In Japan and Britain it is twice that amount.

Whatever else can be said of it, this freak show cannot go on forever. The US has $2 trillion worth of short-term bills that must be refinanced in the next 12 months. It must also refinance about $1 trillion more of notes and bonds. That’s without adding any additional debt! So put a deficit of $1.5 trillion on top of that and you have $4.5 trillion of financing for the US alone.

But the US is not the only one fishing in this pond. Japan’s national debt already measures 200% of its GDP and is increasing rapidly. So far, Japan’s deficits have been financed internally. The Japanese saved 20% of their household incomes in 1980. But the Japanese are aging. When they retire, people cease saving and begin drawing on savings to cover living expenses. At the current pace, the household savings rate should fall to zero in 5 years. Then, who will buy Japan’s bonds? Who will cover Japan’s deficits? The same people who are supposed to cover America’s deficits?

Taken all together, the world’s governments will need $1 trillion per month, in financing, over the next 12 months, according to an estimate in the Financial Times. Who has that kind of money? Total US savings are only $700 billion. Even the Chinese, if they put their entire cash pile to it, could only fund the deficits for about 67 days’ worth. Warren Buffett? Less than 48 hours.

There is also the problem of paying the interest on rising debt loads. Thanks to the forgetfulness or credulity of the world’s lenders, borrowers now benefit from exceptionally low rates - just like the ‘teaser’ rates once accorded to sub-prime lenders. But the tease will come to an end soon. Even the Obama Administration forecasts interest payments to rise from $200 billion at present to $700 billion by 2019. This assumes interest rates only regress to ‘normal.’ But “hot money” from the feds has acted like spent nuclear fuel; every fish in the financial pond now seems to have two heads and a bag over both of them. The freaks of November 2009 may be replaced by things perhaps no less strange, but in a different way. The last time gold was over $800 lenders to the US government demanded yields in excess of 18% in order to part with their money. That was odd too. But it had very different consequences for investors.

See No Asset Bubbles … Hear No Asset Bubbles … Speak No Warnings About Asset Bubbles

Ever see one of those “See no evil, hear no evil, speak no evil” statues or pictures? The ones with the three monkeys, one covering his eyes, one covering his ears, and one covering his mouth?

That’s pretty much what the Federal Reserve appears to be doing now when it comes to the asset markets …

Stocks up 67 percent from their lows? No worries.

Junk bonds up 52 percent this year - the biggest increase in the history of the high-yield debt market, even as default rates are hitting their highest levels since the Great Depression? That’s cool, too.

The Fed seems to be ignoring what’s going on in the asset markets.

Gold at all-time highs of over $1,170 an ounce? Fine with us.

Crude at $80 and climbing? Agriculture commodities ramping? Surging prices for sugar … cotton … wheat … platinum … silver … copper … aluminum … lead … ZINC? Pu-shaw! Nothing to worry about.

Is it just me or are we apparently ready for round THREE of idiotic asset speculation fueled by too much easy money? Sure looks like it …

Deny, Deny, Deny

You think I’m exaggerating the Fed’s blissful state of ignorance here? Don’t take my word for it. Take THEIRS!

In just the past several days, Fed speakers have practically been tripping all over themselves to deny the existence of any asset bubbles.

First up was Fed Chairman Ben Bernanke in New York. He said:

“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” … but “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”

Next in line was Fed Vice-Chairman Donald Kohn in Illinois. He said:

“The prices of assets in U.S. financial markets do not appear to be clearly out of line with the outlook for the economy and business prospects as well as the level of risk-free interest rates.”

Then there was San Francisco Fed President Janet Yellen. She basically waved off the idea of raising rates to combat surging asset prices, saying in Hong Kong that:

“Further research into the connections among monetary policy, the banking and financial sectors, and systemic risk is needed to help answer this question.”

That’s bureaucrat-speak for “We’re going to kick the can down the road.”

Fed President Bullard said we could expect two more years of easy money.

But St. Louis Fed President James Bullard trumped them all. In a speech in his hometown, he essentially pledged that the Fed would keep rates unchanged through 2012. His comments:

“If you look at the last two recessions, in each case the FOMC waited two and a half to three years before we started our tightening campaign … If we took that as a benchmark, that would put us in the first half of 2012.”

Yes Virginia, there is a Santa Claus. And he lives in Washington, DC! He’s going to give you more than two years of abundant liquidity and cheap money. Go ahead and party and speculate like mad because the cops aren’t going to shut things down anytime soon.

What Does this Mean For Investors Like You?

Well, in my trading services, I have been aggressively long various ETFs and options despite technical indicators that don’t look incredibly bullish. My subscribers are sitting on a couple rounds of triple-digit gains, and in my view, more are coming down the pike.

Why the success?

Investors who stick around too long will get creamed.

Because I’m keeping it simple. This is an environment where any and all assets are levitating on a sea of easy Fed money. We had the tech stock bubble. We had the housing bubble. Now we have an “everything” bubble - courtesy of the “See nothing, hear nothing, speak nothing” crowd at the Fed.

I say ride it while it lasts. Make as much money as you can. But keep an eye on the exit door, take profits along the way, and use trading tools like trailing stop losses.

Because I will guarantee you right here and now that this Fed-fueled insanity will end in yet another epic blow up. And investors who overstay their welcome are going to get creamed … again.

Midpoint Of Weeks High Low Ranges Tested In EUR/USD, GBP/USD, USD/JPY And USD/CHF

The dollars moves in NY on the back of the stock markets rally from lows on the opening brought the major currency pairs back to the midpoint of the weeks trades.  The levels seems to have slowed the momentum of the corrective moves this morning and may have set tops/bottoms in the respective pairs.

The EURUSD tested the 50% Retracement level at the 1.4986 level. Support comes in at hte 1.4949 level now where 200 hour MA (green line ) and 38.2% retracement is found.

The GBPUSD tested the 50% retracement level at the 1.6507 level.  Support comes in at 1.6451 now.

The USDJPY tested the 50% retracement at the 86.98 level.  Support comes in at 86.47 now for the pair.

The USDCHF tested the 50% retracement at the 1.0057 level. Resistance comes in at 1.0074/76 and 1.0090 now.

Microsoft Targets News For Bing - But Is It A Viable Strategy?

Microsoft Corp. (MSFT: 29.22 -0.57 -1.91%) is trying to lure news providers to its Bing search engine. The company appears ready to pay providers for allowing it to index their sites on Bing. We are skeptical about the viability of such a venture, since paying the many popular news providers would be a huge drain on cash. We do not think this would be a sustainable business model.

But Microsoft seems to be pursuing the strategy in earnest. No doubt the company is trying to take advantage of the current slump in the newspaper industry, which is yet to devise a satisfactory system of delivering news online.

For newspaper companies, a search engine (such as Google or Bing) is a double-edged sword. While they direct users to news providers’ websites, they simultaneously take a cut off the publishers’ advertising revenues. So although news providers welcome the increased traffic, they are always sore about the loss of revenue.

The reason that Google (GOOG: 579.76 -5.98 -1.02%) has assumed so much importance is the success of its rating system that consistently churns out the most relevant news. It therefore attracts more users and the best in advertising revenues.

Rupert Murdoch of News Corp. (NWS: 13.69 -0.52 -3.66%) is probably trying to twist Google’s arm by threatening to take its business to Microsoft. No one knows whether this will ultimately materialize because the decision is likely to be expensive for News Corp. and may not have a significant impact on Google at all. The advantage for Bing is also debatable, since it would come at extra cost.

However, Microsoft has not stopped at News Corp. alone. Microsoft officials were in Europe this month, discussing prospects with the European Publishers Council. Although the details of the discussion were not disclosed, it is broadly expected that the company was trying to buy news for Bing.

A decision on the part of news providers to transfer business to Microsoft could also meet with regulatory hurdles.

According to October numbers released by Comscore (SCOR: 16.00 0.00 0.00%), Google had a 65.4% share of the search market compared to Bing’s share of 9.9%. Yahoo (YHOO) had an 18% share. Overall search volume increased 13.2% in October, with Bing growing the strongest of the three at 5.3% followed by Google’s 0.8%. Yahoo’s market share was down 4.3%. If the Microsoft-Yahoo deal goes through, Microsoft would have a 27.9% share, still significantly lower than Google.

Online Retail Saving The Day

According to numbers presented by the National Retail Federation, U.S. holiday retail sales from brick-and-mortar outfits will be down 1% this year. On the other hand, comScore (SCOR) expects online retail sales to be up 3% in November and December.

The online retail segment is still a very small portion of the retail market (only 7% of total retail sales according to Forrester Research). However, there is good reason to believe that the segment will continue to grow into a larger share of total retail sales.

While online retail companies, such as Amazon.com (AMZN: 131.74 -2.29 -1.71%) and eBay (EBAY: 23.22 -0.39 -1.65%) have been around for a while, the number of traditional retailers exploring the area continues to grow. For example, Target Corp. (TGT: 47.70 -0.13 -0.27%), Best Buy Co. (BBY: 42.83 -0.43 -0.99%) Toys R Us and Wal-Mart Stores (WMT: 54.63 -0.33 -0.60%) have started their online stores.

Customers usually opt for online purchasing due to its convenience, or when they need to save time. Additional advantages include reviews by previous buyers, which reduce chances of bad buys and bargains and promotions, which bring down costs. However, most online retailers push the cost advantage the most, which is a pressure on margins.

With the economy still in the doldrums and unemployment rates still so low, consumers have an eye on their purse strings. Therefore, marketing programs this holiday season are targeted at budget spending.

eBay’s holiday deals include free shipping, discounts and guaranteed returns on new items. The company has also tied with Microsoft (MSFT: 29.22 -0.57 -1.91%) for a place in the favorites menu of Internet Explorer 8. The space is being used to offer information on its Daily Deals. Amazon.com and Walmart.com also offer similar benefits, including the limited-time offers.

Target.com has shown a bit more ingenuity, offering shopping tools such as a gift tracker that could help the user shop within budget and a Holiday 101 list that includes holiday necessaries that are likely to be overlooked.

The bottom line is, consumers intend to spend less this year, so older products on which prices have been lowered, such as Apple’s (AAPL: 200.59 -3.60 -1.76%) iPod touch, Nintendo’s (SNE: 26.68 -0.78 -2.84%) PS3 and Amazon’s Kindle are likely to remain hot. Garmin’s (GRMN: 31.01 -0.82 -2.58%) GPS products and Hewlett-Packard’s (HPQ: 49.07 -0.98 -1.96%) mini netbooks are also expected to do well.

Bank Of America’s Lending To Community Development Financial Institutions Exceeds $1B

Bank of America Corporation (BAC: 15.47 -0.48 -3.01%) said on Nov 24 that it has lent and invested more than $1 billion to over 120 Community Development Financial Institutions (CDFIs) in 37 states.

These institutions include credit unions, investment funds and niche banks that focus on low-income and disadvantaged communities. The CDFIs primarily focus on small and micro businesses, charter schools, childcare centers, primary health care facilities, projects on Native American lands, and arranging pre-acquisition and development loans for low-income housing.

BofA’s lending and investment with CDFIs is part of its 10-year, $1.5 trillion community-development lending and investment goal. This is the largest ever established by a U.S. financial institution.

BofA has also taken initiatives to provide grants to more efficiently acquire foreclosed properties. BofA’s efforts related to the efficient acquisition of the foreclosed properties followed its commitment to offer loan modifications to as many as 630,000 borrowers over a three-year period, representing more than $100 billion in mortgages.

According to the BofA management, the company is investing more in community-based institutions, such as small businesses and nonprofit organizations and other local efforts, which are the main sources of jobs and can significantly stimulate economic activity domestically.

Though BofA’s third quarter earnings benefited from the profit from its wealth management business, the company experienced continued net interest yield compression and credit quality deterioration. Additionally, the company is facing problems over new CEO appointment, litigation issues over Merrill Lynch acquisition and repayment of TARP funds. Revenues are also expected to be negatively affected by the new credit card regulation. However, we anticipate continued synergies from the company’s large scale operation and balance sheet restructuring.