Wednesday, July 30, 2008

Australian GE bonds are triple-A rated - the highest rating bonds can get - which means they come with very little risk, and offer high yield

About a year ago, my father invested in a Merrill Lynch bond. I looked it over... noted its high rating... and saw nothing wrong with it.
Not long after that, I was speaking to a vice president of Bank of Nova Scotia. I asked him about the bank's exposure to the subprime crisis. He said it was negligible. I then asked him about the GMAC loans it had recently bought. He said they were fine... the defaults lower than they had projected. So I added the bank to one of the portfolios I recommend to my subscribers.
The Merrill Lynch bond has since plunged and then rebounded. And the Bank of Nova Scotia's shares are almost exactly where they were when I made my recommendation. That's much better than most North American banks have done over the past year. No harm, no foul?
I'd be the stupidest guy on the planet if I thought there were no lessons to be learned just because those investments didn't turn to mush.
Fact is, my assumptions have changed.
Had I known then what I know now, I would not have touched that Merrill Lynch bond with a 10-foot pole. And I wouldn't have cared if a high-ranking bank official swore to me they weren't exposed to the U.S. subprime mortgage market. I wouldn't have believed him. I definitely would have put off investing.
The housing bust, subprime mess, credit crunch, and resulting financial crisis have done more than just bring the market down. They've led to a stunning collapse of confidence that has infected the entire investment world. Banks don't want to lend to each other... institutional investors no longer know what's safe... and retail investors don't believe anything anymore.
How can they? The rating agencies have proved beyond a shadow of a doubt that they do not understand derivatives. Their ratings are worthless.
And the brokers and analysts who follow every twist and turn the market makes? The last year must have made them so dizzy that they can't see the forest for the trees. They've been making one bad call after another.
A few months ago, for example, Buckingham Research estimated that Bear Stearns had $35 billion in liquid assets and borrowing capacity, enough to operate for 20 months. Turns out it had enough for three days. This is one of dozens of examples I could cite.
There's so much uncertainty in the investment world that we can no longer fall back on our long-held ideas of what makes a safe investment.
Munis? Sorry. Thanks to the shaky status of the monoline insurance companies (which insure munis), they're no longer the safe investments they used to be.
Money market funds? They've been hit too. Some brokerages are covering losses with their own money rather than pass them on to those who invested in these supposedly safe havens.
Good move. I don't blame them.
What's left? Oh, yes. How could I forget U.S. government bonds? Okay, they're still safe... but are they really investments? I mean, can anything you get a negative return on be considered an "investment"?
I don't think so - and that's exactly what you're getting with them. A 10-year Treasury note would give you a 4.01 percent yield. Meanwhile, inflation is running at 4 percent, and that excludes food and energy prices. The real rate of inflation would be much higher.
Investing in U.S. bonds is worse than giving the government a free loan. Instead of the government paying you for the loan, you pay the government for the privilege of loaning it your money.
Do you feel honored? Or cheated? Well, I can't speak for you. But this is the kind of honor that could land me in the poorhouse. I'd say cheated.
So... is there any investment that is truly safe?
There sure is. Australian government bonds have never looked better than they do right now. And this is the perfect time to jump into them...
Not only because Australia has one of the strongest economies in the world. Unemployment is at a 33-year low. And prices of its two big exports - coal and iron ore - are at historical highs. It doesn't hurt that around 66 percent of Australia's exports are commodities.
And not only because Australia is effectively shielded from the problems we're having in the U.S. They trade mostly with fast-growing Asia. In fact, 60 percent of their exports go to Asia.
The biggest reason the timing couldn't be better is because the Aussie government has been raising its key interest rate to stave off inflation. They've raised it all the way to 7.25 percent. They're at or near the top of their rate-raising cycle.
Other interest rates, including bond rates, feed off this basic government rate. If this rate is more than twice as high as the U.S. benchmark interest rate, then most of the other rates will be too - including Australia's government bond rates.
Sure enough, the Queensland 10-year government bond pays a nice 6.99 percent interest. That's not quite twice as high as the equivalent U.S. government bond rate, but it's close.
What's more, you can buy these bonds for a discount. And the discount isn't going to get any better. Here's why...
The Australian government paused its key interest rate hikes three months ago. That means, for now, interest rates have peaked in Australia. The only way they would go higher is if the Reserve Bank of Australia resumed rate hikes. That's possible, but unlikely.
And if you don't want to tie up your money for 10 years? There's another group of Australian bonds that could be perfect for you. I'm talking about corporate bonds, including bonds issued by GE - one of the biggest companies in the world.
These GE bonds are triple-A rated - the highest rating bonds can get - which means they come with very little risk. Usually, the lower the risk the lower the yield. But these highly rated bonds offer high yields of 7.97 percent. (Ask your broker for 8.5 percent coupon February 2011 maturity bonds from GE in Australia.)
Or you might prefer Australian bonds from Nestle, the huge Swiss firm. Its bond is double-A rated and offers a yield of 7.0 percent. (Ask your broker for 7.25 percent coupon January 2011 maturity bonds from Nestle in Australia.)
Because these bonds mature in 2011, they would tie up your money for less than three years. To get in before prices go higher (and yields go lower), you should buy Australian bonds NOW.
Buying international bonds is pretty easy... as long as you go to the right place. You can always go to a full-service brokerage specializing in international bonds. But many of the bigger brokerages are able to trade them, too, so call a few and find out.
You could also call up your broker. Ask him to recommend someone who does overseas bonds.

Speculators led oil prices up and now – just as quickly – they’re leading prices down

Even at my favorite neighborhood bar in Maryland, where you can order chicken wings “old bay” style, I couldn’t get away from chatter about Iran and high gas prices.Two guys were going at it right next to me. Then one of the guys suddenly stood up and walked out. He departed in such an agitated state that he left his credit card behind. The aggressor in the discussion looked at me and said, “Hi, I’m Joe and I’m a Republican.” “Hi,” I replied. “I’m Wolex and I’m a Red Sox fan.” In the heart of Orioles territory, I knew those were fighting words – much worse than declaring fealty to Obama. But instead of backing away in disgust and disdain, he asked, “You local?” And that was it. My plans to chill that evening were shot.We talked for the next two hours and we didn’t agree on much. His biggest belly-laugh came when I talked about the auto companies. How they had to start making small gas-sipping cars right now ... how the huge number of Americans buying big cars and trucks was a thing of the past ... how “affordability” went from killing the housing sector to killing the retail sector to killing the auto sector.“’Less is more...’ something right out of the hippie sixties is making a comeback,” I said. And the guy just laughed. “You just wait,” he said. “Once gas prices go lower, we’ll be back buying our muscle cars and pickup trucks again.”He has history on his side. Small cars (all of them from Japan) grew popular in the 1970’s as expensive gas changed our point of view – just like what’s happening now. But as gas prices crept lower ... and lower ... and lower still, our love affair with spacious and powerful cars slowly but surely returned. Could it happen again? If prices head lower like last time, why not? But that’s a big “if.”First of all, it’s jumping the gun to assume we’re at the beginning of a “demand destruction” phase. We’re not. Oil and gas may be more expensive than it was during the last spike in prices – which topped out in 1980. But as a percentage of wage income, we’re at about six percent. In 1980 it was 7-8%. And back then – coming at the end of a decade of stagflation – people were hurting more than they are now.We’re driving about three percent less than we were last summer. So there’s no doubt that high prices are driving gas consumption down. But we’re still driving much more than we did five years ago when gas prices were much cheaper. I think prices still have at least one more leg up before demand gets curtailed in a serious way.Then we’ll see prices fall again. As rational consumers, that should put us right back in the driver’s seat in droves. What’s going to stop us?“An Inconvenient Truth” isn’t that the environment is in trouble. It’s that we respond to prices. Could it be that GM and Chrysler will be rewarded for hanging on to their big gas-guzzling cars?If the oil and gas market were only domestic, I’d say yes. But the energy market is global.Do you think coal prices are so high because demand in the U.S. has spiked? No, the spike is mostly coming from China, not the U.S.Do you think jet-fuel costs so much because carriers in the U.S. have upped their usage? No, Just the opposite has happened. U.S. airlines have cut back on their number of flights.Let’s attack the issue of price from a different angle. Do you think the price of oil costs less now because demand in the U.S. has gone down by a few hundred thousand barrels a day?No. It’s part of the story and not even the most important part.Crude simply went up too fast and was due for a correction. Oil’s chart looked a lot like China’s stock chart before it suffered a 50 percent decline. And, yes, the speculators have something to do with the oil market’s frothiness. They led oil prices up and now – just as quickly – they’re leading prices down.

Monday, July 28, 2008

The tiny hungarian oil company that taught me the essence of dividends

I started my job at Citigroup in London in April 2000... a month after the Nasdaq bubble burst and the beginning of the worst bear market in stocks since 1973-1974.
As a junior accountant, my first job was dividend control. I made sure hundreds of Citigroup stock traders received the correct dividend payments on the positions they held. And when investors didn't get what they were owed, I contacted Citigroup's clearing department and made the claim.
I remember one trader, Nick Rubeiro. He ran an emerging-market high-yield strategy from a desk in New York. He had the most obscure companies in his portfolio, and they always tripped up the computer systems.
"Mol Magyar pays tomorrow," he'd say about the Hungarian oil company. "I'm holding 100 million shares."
Then I'd find out he actually owned 125 million shares. That's a $7.5 million dividend.
I saw dozens of traders come and go on the trading floor that summer. The market was an absolute bloodbath. But every week, I'd get the same call from New York Nick chasing his missed distributions.
Nick's quarterly dividend payments became something of a symbol for me that summer... like a pillar of strength amidst all the carnage of the stock market. They pulled me off dividend control later that year and sent me to fixed income. But I never forgot about Nick's dividends...
Economists define a bear market as a 20% drop in the S&P index. The S&P is the index of the 500 largest companies in America. So it's the best way to determine how American stocks are behaving. In 2008, the S&P entered bear-market territory for the first time since 2002. As I write, the S&P is down 20% since October 2007... but it was down more than 25% two weeks ago. This is only the fifth time in last 100 years we've seen a 25% or greater decline in the S&P 500.

Sunday, July 27, 2008

Alternatives like solar, wind, and geothermal simply couldn't compete with coal, oil, and natural gas on cost. But that's all starting to change...

I've just spent the past few days in Vancouver at the annual Agora Financial Investment Symposium. It's always an interesting conference.
This year, Jim Rogers, of Investment Biker fame, spoke at the conference. Rogers, as usual, predicted the bull market in commodities has much further to run. He likes cotton, sugar, and coffee – all are 60% to 80% off their all-time highs. He advised attendees to pocket those little sugar packets that hotels have lying around for coffee and tea.
I spoke as well. The big theme to cover was "Seeking Profits in a Time of Risk and Scarcity," which is something I focus on all the time in my advisories. We own a number of scarce assets – everything from water rights out West, to oddball industrial metals, to office space in Tokyo.
Energy, though, is always the big subject at conferences right now. I think we've reached a point in this investment cycle where the focus will now shift to ideas that ease the high cost of energy through new energy-efficient products and materials.
Alternatives to hydrocarbon fuels also get a lot of attention. Wind, for example, is getting a lot of ink lately thanks to T. Boone Pickens' forceful editorials supporting it. Pickens, who made billions in the oil and gas patch, has focused his latest efforts on water and wind.
To tell you the truth, I haven't closely investigated clean energy since I started investing two decades ago. Alternatives like solar, wind, and geothermal simply couldn't compete with coal, oil, and natural gas on cost. But that's all starting to change...

Saturday, July 26, 2008

CHIMERICA companies are better bets right now than ordinary U.S. stocks

Well, one of the things that's so appealing about Chimerica companies is that they are growing by as much as 40% to 80% a year. (That's ten times faster than America's top businesses.)
This gives you the potential to make absolutely incredible gains, in a very short period of time...
»For example, a CHIMERICA company called Jinpan International (JST) has seen its net income soar 66% over the last several months – even as the global economy has slowed down. Why? Because these guys make electricity equipment in China, which the Chinese economy desperately needs – no matter what's happening in the financial markets
Not surprisingly, Jinpan's share price (the stock trades in America) has also SOARED. If you bought shares of Jinpan (JST) in March 2007, you could have seen as much as a 175% return on your investment.
Even better, if you'd bought shares five years ago, you'd have made as much as 21-times your money. That turns a $5,000 stake into $105,000.
As you can see, these "CHIMERICA" companies are China's high-growth superstars of tomorrow – available to you and me on U.S. exchanges today.
But these stocks businesses have long-term plans too. They're not out to make a quick buck and pack it in. They're literally the future Walmarts, Verizons, and Best Buys of China.
That's why Fortune 500 companies like Microsoft, Intel, GlaxoSmithKline, Panasonic, DaimlerChrysler, and close to 50 other business heavyweights are already doing business deals with "CHIMERICA" companies.
Microsoft, for instance, just formed a business partnership with Comtech Group – a "CHIMERICA" company that's quickly cornering China's lucrative video display market. If you'd invested $5,000 in Comtech's stock in 2002, you could be sitting on as much as $125,000 in profit today.
You probably get the point — CHIMERICA companies have incredible growth potential.
So it's pretty clear why these CHIMERICA companies are better bets right now than ordinary U.S. stocks.

Within the edible oil industry, the Chinese olive oil market is now the focus of global attention

The first US president with a Yale B.A. and Harvard a M.B.A. has finally clarified what led to the country’s crippling bank bailout and credit crisis.
At a closed Republican fund-raiser in Houston last week – one at which video recording was banned, but one attendee captured on a mobile phone – President Bush described what caused the US’s current economic malaise this way:
“Wall Street got drunk – that’s one reason I asked you to turn off your TV cameras – it got drunk, and now it’s got a hangover. The question is, ‘How long will it sober up and not try to do all these fancy financial instruments?’”
On Monday the White House tried to clean up the President's statement.
A Bush spokesperson said,
“The markets were using very complex financial instruments that had grown up over the years, and when confronted with the shock of this housing downturn, they did not fully understand what the consequences were going to be.”
Oh baby, you know this one is right in my wheelhouse.
I can’t stop singing the chorus of The Band’s “Up On Cripple Creek.”
But, other than to reveal my new excuse for getting hammered – “The bartender and bar were using a very complex system of service and pricing while I failed to grow up over the years and when I was confronted with closing time I did not fully understand consequences of ordering three doubles…”
I will demure on this one.
Instead, I’ll just leave this one teed up for you.
On “Wall Street got drunk,” I eagerly await your comments via the exercise of your First Amendment guarantee of free speech – use it while you still have it – this White House still has six months left to work on that.
And, I promise, if you grip it and rip it; I’ll run a bunch of your responses next week.
Now, onto more oily thoughts.
Up, With Two Olives Please
I spent the past two weeks researching Iraq’s oil industry for a story I wanted to run today.
It’s a heck of a story.
Then every financial writer on the planet spent the same time writing, on alternating days, about oil or the failure of deregulation as expressed by federal mortgage lenders.
So, I am going to spike the Iraq piece and save it for a time when the financial media have moved onto to their next obsessions such as – gold that’s found in offshore oil wells that were purchased with loans from Freddy Mac… and about an ex Fannie Mae accountant who’s now a gas station attendant who refuses to let customers buy $4.50 gas with gold or bottles of first growth Bordeaux, because neither are legal tender.
Just like sticks aren’t money… just like birch bark isn’t money… just like yak poo isn’t money… just like gold is not money. Unless, that is you own a website or you write books about grand monetary conspiracies... that’s just pure gold.
Though, I do wonder how the customers of those websites’ manage to pay for the stuff they buy. It must be very time consuming to get all that the gold into the little wires that brings the Internet from house to house.
So, no oil this week, okay, maybe just a drop or two, later, down at the bottom – but nothing heavy like a discussion of Iraq’s geology. Like you, I am simply awash in oil stories.
Instead, this week, I want to share with you a story about outrageous consumption. You see, since 2005, China has been the world’s biggest consumer of oil… edible oils that is.
In fact, the Chinese now annually consume about 44 pounds of edible oil per person.
And, for the past six years that rate has risen at a steady 10% a year, which is a trend that should peak around 2111.
In the next couple of years, the country’s bean oil, palm oil, olive oil and grape seed oil imports will top a combined 350 million tons.
Within the edible oil industry, the Chinese olive oil market is now the focus of global attention.

Friday, July 25, 2008

Reasons why oil prices have pushed higher

I hope members of Congress are paying attention to this issue of IDE, because I’m about to reveal one of the biggest (and most ignored) reasons why oil prices have pushed higher… and exactly how to fix it.
The best way I can explain it is to compare Congress to a doctor.
When you’re sick and go to the doctor, you tell him how bad you feel.
Your doctor then determines – based on your symptoms – why you’re sick and how to make you feel better. Not only will he work on lessening your symptoms, but he’ll also give you medicine – be it an antibiotic or whatever – that treats the root cause of those symptoms.
Now imagine that you have a bacterial infection and instead of giving you those antibiotics, he simply told you to take some Tylenol for the temperature and some over-the-counter allergy medicine for the stuffy nose.
Sure you’d feel better, but if you stopped taking the medicine you’d feel sick again since the cause of the symptoms – the bacterial infection - was never treated.
This is exactly what’s going on in America. Congress spends too much time trying to eliminate symptoms without curing the underlying disease.
In the case of the oil market, what are the symptoms? Well, higher oil prices for one. And a growing amount of speculation is another.
This week Congress took a good, hard look at those symptoms, and they think that limiting speculation in the oil markets is the cure. But did Congress ever wonder what caused this excessive speculation in the first place?
If speculators see one investment rising 10 percent per month and another by five, they’ll buy the one that gives them the best return. So in reality, speculators are just reacting to higher oil prices by buying and looking for the return. They aren’t the cause of high oil prices, just a symptom.
So what caused higher oil prices? We know the obvious answer of more foreign demand from Brazil, India, Russia and China. But this isn’t the only reason why oil prices have gone up so much…
Considering a barrel of oil is priced in US dollars, wouldn’t the 40 percent devaluation of our dollar over the past eight years contribute to higher oil prices?
You bet it has.
My reasoning is very simple, too. As the devalued dollar pushes oil prices higher and higher, speculators look to the oil market as a place to make some decent gains. So they enter the oil market and make bullish bets. As investment increases and the dollar devalues further, prices move higher.
Now these speculators are getting bold. They’ve made good money in the oil markets and ramp up speculation… and you can see exactly where this is heading.
If it weren’t for Congress’ spending money like a bunch of irresponsible dolts, the value of the dollar may have never dropped by 40 percent and the price of oil would be much, much lower today.

When event X takes place, gold soars

People buy gold for all kinds of nutty reasons... But Event X is what actually makes gold go up. Each time it's happened, gold has absolutely soared. So you simply look out for Event X, and then you buy.

It's really simple, as I'll show. It has nothing to do with end-of-the-World paranoia or complicated statistics...

Event X first happened in 1973-75, and gold tripled. Event X happened again in 1978-80, and gold had its steepest ascent ever, rising from $150 to peak at $850.

The only other time we've seen Event X is, well, now. And once again, gold has been soaring.
How high can gold go? Our two historical examples suggest that gold simply keeps going – almost infinitely. In short, as long as Event X is in place, gold just keeps going higher.

So what is Event X? It's simply when interest rates fall so low, they don't keep up with inflation. As long as we're in that situation, gold goes up. The logic is incredibly simple... As soon as people get paid less interest than the rate of inflation, they're willing to own gold (which pays no interest).

Thursday, July 24, 2008

If you catch just one biotech bull market, you will never have to work again

I've said that many times the average biotech bull market has been good for 566% gains in less than three years.

At the moment, biotech is looking incredibly bullish right now. Yesterday was the turning point...
Yesterday, shares of biotech giant Genentech shot up 13% as big pharmaceutical company Roche offered to buy it out completely. Roche will have to up its offer... likely valuing Genentech at over $100 billion.

If $100 billion Genentech can sell to a "Big Pharma" company, then every biotech stock has to be in play right now. And biotech just went from the back pages to the front pages... This is when you want to be a buyer.

Biotech has been the quiet performer this year... Oil, bank stocks, and real estate have garnered all the headlines. But biotech has been the stealth winner... Shares of XBI – the S&P Biotech Index Fund – have quietly hit new highs.

Consider the Rydex Biotech Fund (RYOIX), for example. Back in 2000, during the last biotech peak, this fund had $1.4 billion invested. Then, for eight years, biotech stocks did nothing. Assets in the fund absolutely collapsed... bottoming earlier this year at around $60 million – that's more than a 95% fall in assets.

But, what's this? In just the last few weeks, assets in the fund have more than doubled! Investors are quietly creeping in.
Biotechs are an exceptional bargain now, when you size them up on simple, traditional measures of biotech value (like price-to-sales, for instance).
In short, while the companies' stock prices have done nothing in eight years... their businesses have kept growing, so shares are a great value.

Now biotech meets our three criteria for buying:
1.
It's cheap. The businesses have grown for eight years while the share prices have done nothing.
2.
It's ignored/hated – as the 95% peak-to-trough fall in the assets of the Rydex Biotech Fund suggests.
3.
We're finally seeing an uptrend. The Rydex fund has doubled in size in no time. The XBI Biotech Index Fund is hitting new highs.

The trend toward gold is spilling into other financial areas

Of the hundreds of "inflation" stories I've heard of in the past year, the most incredible is the one coming out of Vietnam...

Vietnam is experiencing every problem that causes a rush into precious metals... inflation is an incredible 27%, interest rates are over 8%, the stock market was down every day in May, and unemployment has more than doubled (from 2% in '07 to 5.1% this year). Household wealth is drastically declining.

Now here's the interesting part: How are the Vietnamese people reacting to all of this? Did they buy stocks? Real estate? Maybe inflation-protected securities? Or did they just sit on cash?
None of the above.

Vietnam's economic and monetary problems have sent its people fleeing to gold. Not gold stocks... but physical gold bullion. They're hoarding it and hiding it from their government. Hard figures on the size of the local gold trade aren't available, but current estimates are that the public owns 16 million ounces, including 1.3 million ounces imported in the first quarter of 2008. Of this, only about 10% has been deposited into banks (which actually pay 2.5% interest on gold). The remaining 90% is likely under mattresses or hanging around the owner's neck.

The trend toward gold is spilling into other financial areas. After a long period of quoting land prices in Vietnamese dong (the nation's currency), landlords are now setting prices in gold in order to avoid the devaluation. Nguyen Trung Vu, general director of the Ky Moi Real Estate Co, said that while it is complicated, "I think that making transactions with payment in gold will become a trend."