Thursday, June 9, 2011

If you're bearish on China, read this now

While the rest of the world is transfixed by the latest pocket change bailout of the Eurozone, China has stealthily conducted an economic rescue bigger than than one and a half TARPs. Dylan Grice's latest note focuses on the key news out of China from last week which oddly received very little media attention, namely the onboarding by the Local Government Financing Vehicles (LGFV) of $463 billion in bad loans made to various infrastructure and development projects as part of the Chinese stimulus package. This is nothing short of a bailout the likes of TARP when Paulson transferred billions of toxic debt to the government's balance sheet. The reason why this is actually a much bigger deal than perceived is that as Grice notes, a "bail-out of $463bn is half the size of the TARP, introduced by Paulson at the nadir of the 2008 crisis, for an economy which is only one-third the size of the US. So adjusted for GDP, China has just announced an emergency bail out of one and a half TARPs!! If we calibrate the magnitude of the economic crisis with the size of the bail-out, one and a half TARPs implies a financial crisis one and half times the order of magnitude of 2008." In other words, China very quietly and stealthily buried a massive bailout with just one passing Reuters mention. And nobody cares... Or more specifically, those who have long held a very bearish view on China, should certainly care, as what happened is that the unwind catalyst, so critical for most China bearish theses, was just pushed back by several years. And since China is full to the gills with excess dollars, all that happened was that the government effectively diverted money that would have been otherwise recycled to purchase US paper, in the form of a government fund to bail out it own. Crisis averted as another centrally planned regime managed to do what the Fed and the ECB have been doing so well for nearly 3 years now.

From SocGen's Dylan Grice:

Last week saw perhaps the starkest example yet of China's "Great Suppression." Reuters reported that China's central government was taking on responsibility for up to $463bn of bad loans made to Local Government Financing Vehicles (LGFV) which had been made to fund various infrastructure and development projects as a part of the stimulus package. It's not clear yet how this will be done, but I suspect the template will be similar to that used during the recapitalisations of Chinese banks in the 1998-2005 period. Asset management companies buy the bad assets, which they pay for with non-tradable government guaranteed bonds which don't show up in the official measures of government debt. Maybe this is why the story didn't get much attention: China's government throws money at a problem - problem goes away - boring story - move on.

But the problem hasn't gone away. Think carefully about what's just happened. A bail-out of $463bn is half the size of the TARP, introduced by Paulson at the nadir of the 2008 crisis, for an economy which is only one-third the size of the US. So adjusted for GDP, China has just announced an emergency bail out of one and a half TARPs!! If we calibrate the magnitude of the economic crisis with the size of the bail-out, one and a half TARPs implies a financial crisis one and half times the order of magnitude of 2008.

"The critical issue in both cases is the artificial suppression of volatility - the ups and downs of life - in the name of stability. It is both misguided and dangerous to push unobserved risks further into the statistical tails of the probability distribution of outcomes and allow these high impact, low-probability "tail risks" to disappear from policymakers fields of observation. What the world is witnessing in Tunisia, Egypt, and Libya is simply what happens when highly constrained systems explode."

This is all China has done with its bail-out of local governments. It has upped the ante. While we can't predict where complex systems will go, we know that the longer their volatility is artificially suppressed, the more emphatic will be its release when it does come. It is more likely that China has one and a half times (and counting) the 2008 financial crisis ahead of it.

A Not-So-Marginal Risk in Silver

By EconMatters

Our research analyst John Gray was interviewed by Carolyn Cui from Wall Street Journal regarding why we believe CME should have raised margins on silver earlier and had missed the best opportunity to do so.

Below are excerpted from Carolyn's article--Tripped Up by the Margin--dated June 8, 2011 along with some more of our thoughts:

Commodity investors have long been used to wild market swings driven by wars and hurricanes. But recently a new risk has been added to their list: margin requirements.

Investors are still crying foul over CME Group Inc.'s decision to raise margins five times over just eight trading days. Between April 25 and May 5, the exchange operator increased silver margins to as much as 12%, or $21,600 per contract, from 6%. Silver tumbled 25%.?
Chart Source:

The lack of disclosure riles John Gray, a researcher at, a website dedicated to economic and market analysis.
"They need to be more transparent," Mr. Gray said, adding that margins should be a consistent percentage of the contract price, and that exchanges should give more warning of any moves.
Mr. Gray is among market participants who say the CME should have raised silver margins earlier. CME increased once in March, but didn't make any changes until a month later. Silver prices gained about 30% to $47.151 an ounce between those moves.
"It should have been a red flag to CME when silver crossed the $40 threshold that they needed to raise margins significantly," Mr. Gray said.

EconMatters additional comment:

Compounding the problem is that brokers also raised their in-house margins on top of the ones CME implemented. Carolyn's article noted Interactive Brokers "overstepped the exchange twice" in hiking silver margins, while MF Global is another broker, had also charged more margins on silver than what was required by exchanges at the time. That set off a mass liquidation spilled over even to the other asset classes as well with investors scrambling to cover the newly raised margin requirements.

Ideally, margin requirement should be set by the criteria the Exchange deems proper based on experience and historical pattern, and preferably at a fixed percentage at all time, instead of jumping all over the place as illustrated in the chart above. So as the price of the underlying commodity goes up or down, a consistent percentage of margin requirements is maintained--i.e. more real-time mark-to-market.

This will help reduce market volatility as traders won't be caught off guard and be forced to liquidate large positions in order to meet the sudden raised margin requirements. A fixed percentage also will increase the transparency while keeping the risk of over-leverage in check.

Note - Carolyn's full article is available here at

Gerald Celente : Economic Marshall Law coming soon

Gerald Celente : Alex you are talking about Marshall law I am urging everyone to consider economic Marshall law because that's what is going to happen next , just like 9/11 happened whether it was real or whatever the facts is two buildings came down and the Pentagon was whacked how did it happen forget it , the issue is they closed Wall Street if you had certificate of deposits you couldn't cash them I know because I tried , what I am doing and I am only speaking for myself , I urge those that can think for themselves to consider making sure you do not have a lot of money in the bank because you ain't gonna get it out and if you have your gold stored there or somewhere else in one of those federal institutions kiss it goodbye , and if they let you get your money out that dollar won't be worth a dime it is already worth a dime now look at what it is doing against a basket of currencies because they are going to devalue it and do not worry you won't be able to get it out ....

7 Undervalued, Big-Name Stocks To Consider For Your Dividend Portfolio: CL, MSFT, MCD, PG, INTC, WMT, ABT

The concept of fair value is really quite simple. Given a few select inputs such as dividends, dividend growth, holding period, discount rate and few others, one can easily calculate the fair value of a stock. As with most simple things, the devil is in the details – the inputs must be correct to calculate a reasonable fair value, otherwise, garbage in, garbage out.

As mentioned in last week's article, most Dividend Growth Stocks are currently trading on the pricey side based on their historical metrics and on their dividend fundamentals. A bull market is not the friend of an investor that is in the accumulation mode. Advancing stocks makes us feel good today, while cheap stocks will make us feel good in the future.

That is not to say that all dividend stocks are overvalued today. There are still bargin-priced dividend stocks available. However, to find them we may have to dig and scratch more to uncover them. A little time and diligence will reward the patient investor.

As a starter, here is a list of several dividend growth stocks that are trading below my calculated fair value:

Colgate-Palmolive Company (Colgate) is a major consumer products company that markets oral, personal and household care, and pet nutrition products in more than 200 countries and territories.
Fair Value: $95.10 | Recent Price: $84.11 | Yield: 2.7%

Microsoft (MSFT) is the world's largest software company, develops PC software, including the Windows operating system and the Office application suite.
Fair Value: $27.44 | Recent Price: $23.91 | Yield: 2.7%

McDonald's Corporation (MCD) is the largest fast-food restaurant company in the world, with about 32,500 restaurants in 117 countries.
Fair Value: $94.95 | Recent Price: $80.54 | Yield: 3.0%

The Procter & Gamble Company (PG) is a leading consumer products company that markets household and personal care products in more than 180 countries.
Fair Value: $80.22 | Recent Price: $65.43 | Yield: 3.0%

Intel Corporation (INTC) is the world's largest manufacturer of microprocessors, the central processing units of PCs, and also produces other semiconductor products.
Fair Value: $28.47 | Recent Price: $21.73 | Yield: 3.6%

Wal-Mart Stores, Inc. (WMT) is the largest retailer in North America and operates a chain of discount department stores, wholesale clubs, and combination discount stores and supermarkets.
Fair Value: $70.69 | Recent Price: $53.66 | Yield: 2.7%

Abbott Laboratories (ABT) is a diversified life science company and is a leading maker of drugs, nutritional products, diabetes monitoring devices, and diagnostics.
Fair Value: $68.81 | Recent Price: $51.08 | Yield: 3.7%

I calculate Fair Value weighing The Mid-2 Price and the NPV MMA Price. The weight depends on where we are in the cycle. The Mid-2 Price considers four fair value calculations, Avg. High Yield Price, 20-Year DCF Price, Avg. P/E Price and Graham Number, the highest and lowest fair values are excluded and the remaining two calculations are averaged to calculate the Mid-2 price. The NPV MMA Price is where the NPV MMA value equals the NPV MMA target. See Fair Value for more detailed information.

The above list is a starting point for additional due diligence. A successful dividend growth investor is not solely focused on valuation. We must also consider dividend fundamentals and dividend growth sustainability. When a stock appears to be under-valued it could mean the market has lost confidence in it. If the market is wrong and we are not too fearful to buy, a handsome reward is likely to come our way.

3 Stocks Set for a Boost from Apple’s iCloud: AAPL, RAX, VMW, FTNT,

Over the past few years, the “cloud” has been a fast-growing technology — it essentially allows people to access software applications via the Internet. Often, this is more convenient and cheaper than traditional approaches.

However, if you ask most people to describe the cloud, they probably wouldn’t know it is actually a technology. This is going to change — because of Apple’s (Nasdaq:AAPL) Steve Jobs. His cool new offering, which is called the iCloud, is a hub that allows people to store all forms of media, which can be accessed from any device or platform. According to Jobs, this will be a transformation for millions of people. “We are going to demote the PC to just be a device,” he said.

And it will likely boost the fortunes of top-notch cloud companies as well. Hey, if Jobs says the cloud is the real thing, it must be true.

So which companies should investors have on their radar screen? Here’s a look:

Rackspace Hosting (NYSE:RAX): The company provides hosting services for companies and organizations of all sizes. There are more than 130,000 customers.

Rackspace is in a fiercely competitive business with operators like (Nasdaq:AMZN). Yet it has a strong infrastructure and a solid customer-support system.

An interesting strategy for Rackspace is to provide its core software technology for free. Known as OpenStack, it is getting adoption from major players like Dell (Nasdaq:DELL) and Citrix(Nasdaq:CTXS). Basically, if OpenStack gets traction, it could lead to even more hosting business.

VMware (NYSE:VMW): The company is the leader is virtualization, which helps to greatly improve the performance of servers and applications. This is critical for data centers, which are at the core of the cloud.

Despite its large size, VMware is growing like a scrappy startup. In the latest quarter, revenue surged 33% to $844 million. Operating cash flow was $477 million, up 35%. In all, there is $3.7 billion in the bank.

Thus, VMware is in an ideal position for deal-making. To this end, the company has been snapping up cloud application companies like SlideRocket and Socialcast (which is a Facebook for the enterprise).

Fortinet (NASDAQ:FTNT): While the cloud has many advantages, there are still some risks. One of the most important is security. What if there is a breach? As seen in the case of Sony’s(NYSE:SNE) PlayStation, the consequences can be devastating.

Thus, the cloud should mean more business for top-notch security providers. And one of the best is Fortinet, which has a suite of offerings that includes things like intrusion protection, Web filtering and firewall protection.

In the latest quarter, revenue spiked 34% to $93.3 million, with $36.5 million in free cash flow. The company also saw a strong 48% increase in product revenues to $40.2 million.

McAlvany Weekly Commentary

An Interview With Bert Dohmen: Being Prepared for the Possibility of Impossibility 06.08

-Sometime in the next 5 years the government will shut down the futures markets.
-This current bull market in gold could last another 20 years (according to Bert’s technical analysis.)
-The next financial tsunami will be in China.

    Strong Stocks Worth Sticking To: ENTG, ESL, LAD, VVTV

    While it’s probably a good idea for the majority of traders to remain on the sidelines until the market's mood improves, many traders will nevertheless attempt to catch the bottom of this pullback. The markets likely need more time to consolidate before any realistic stabs at a lasting bottom can occur. However, the possibility of a near-term bounce is reasonable right now, despite the fact it may not last more than a few days. This creates an opportunity for aggressive traders who are willing to accept the higher chance of a failure.

    However, I would caution all traders to stick with the stocks that have remained healthy, rather than attempting to catch any former high fliers at a perceived discount. Stocks that remain in a healthy pattern can often stay uncorrelated to the markets for a given time depending on their individual story. They can also participate in any market strength that may occur simply by remaining in a good position after withstanding general selling pressure.Esterline Technologies Corporation(NYSE:ESL), for instance, has remained above its prior base despite the market pullback we have seen over the past several weeks. If the markets can stabilize, it could lead to a continuation move higher for ESL, which happens to be just a couple of points from its all-time highs. (For more, see The Anatomy Of Trading Breakouts.)

    A stock doesn’t have to be within spitting distance of all-time highs to show relative strength either. Entegris (Nasdaq:ENTG) has continued to consolidate in its base and has remained near the top of the base throughout the recent market weakness. This reveals an underlying bid that refuses to let go of the stock, even in the face of market pressure. These are the kinds of stocks that can experience a powerful breakout once the markets stabilize. A move above $9.50 would certainly catch my attention in ENTG.

    Lithia Motors (NYSE:LAD) has certainly been volatile day to day, but generally speaking, it has continued to trade in a base-on-base pattern. It cleared a base on a powerful gap late in April, and has settled into a secondary consolidation above the prior base. This action is certainly stronger than the general markets, which have been steadily falling for several weeks. Traders should keep an eye on the $16 level, which has been holding on any pullbacks.


    While ValueVision Media (Nasdaq:VVTV) hasn’t cleared its base, it has been showing some relative strength by rising gradually over the past two months - in direct opposition to the general markets. Overall, it has been basing between $5.50 and $7.50; traders should be watching for a move to either side of the channel. If the market situation improves, it is likely that VVTV will attempt a breakout. (For more, see Channeling: Charting A Path To Success.)


    The Bottom Line
    The current environment is certainly difficult at best. The markets have been fairly weak over the past month and are starting to get oversold. While the markets will likely need more time to stabilize, the chances of a near-term bounce have increased. Most traders should stay put and wait for higher probability chances, but for those who want to take a shot here, they should definitely stick with strength rather than buying weakness. Stocks that have withstood recent selling pressure are more likely to continue their strength than those that have been decimated over the past few weeks.

    Mobius Looks to Consumer, Commodity Stocks

    Templeton Asset Management’s Mark Mobius says he’s high on consumer and commodity stocks because they can survive another financial crisis — which he says is inevitable because the causes of the 2008 crisis haven’t been addressed. “The problem in talking about another crisis is that no one knows when it will happen,” he says. “It could happen next year, it could happen five years from now. So we have to be invested. So what we have to do … is invest in stocks that we think can survive such a crisis.” Mobius says another crisis wouldn’t be a terrible thing — in fact, it would offer opportunities for investors. He also offers his take on China’s investment prospects.

    Oil Gains for Third Day as OPEC Fails to Agree Quotas; U.S. Supplies Drop

    Oil rose for a third day in New York after OPEC failed to reach an agreement on production targets for the first time in at least 20 years and U.S. crude inventories fell more than analysts forecast.

    Futures gained as much as 0.7 percent after climbing 1.7 percent yesterday. The Organization of Petroleum Exporting Countries will maintain its current output for now, said Mohammad Aliabadi, the acting Iranian oil minister and OPEC president. A Gulf delegate said June 7 that the group would increase production targets. A U.S. government report showed crude supplies dropped the most since December.

    “You may start to see higher oil prices as the question mark over future supply grows larger,” said Ben Westmore, a minerals and energy economist at National Australia Bank Ltd. in Melbourne, who predicted oil will average $113 a barrel in the third quarter. “There is now some question arising as to how willing OPEC is to step in and fill the breach.”

    Crude for July delivery rose as much as 73 cents to $101.47 a barrel in electronic trading on the New York Mercantile Exchange and was at $101.46 at 11:12 a.m. Sydney time. The contract yesterday climbed $1.65 to $100.74, the highest settlement since May 31. Prices are up 36 percent the past year.

    Brent crude oil for July delivery was at $118.16 a barrel, up 31 cents, on the London-based ICE Futures Europe exchange. The contract yesterday climbed $1.07, or 0.9 percent, to $117.85. It was the highest settlement since May 4.

    Proposed Increase

    The European benchmark contract traded at a premium of $16.73 a barrel to U.S. futures today. The difference between front-month contracts in London and New York reached a record $19.54 on Feb. 21. It averaged 76 cents last year.

    Saudi Arabia, OPEC’s biggest producer, Kuwait, Qatar and the United Arab Emirates were ready to supply more oil to the market, according to Saudi Arabian Oil Minister Ali Al-Naimi. The four nations proposed a 1.5 million barrel-a-day increase from the current 28.8 million, he said.

    Libya, Angola, Ecuador, Algeria, Iran and Venezuela were opposed to higher limits, according to Naimi. Iraq is exempt from the targets. The 11 members subject to quotas produced 26.22 million barrels a day last month, 1.375 million more than pledged, according to Bloomberg News estimates.

    IEA ‘Disappointed’

    OPEC’s failure to agree shows that some members have limited spare capacity, JPMorgan Chase & Co. analysts including Lawrence Eagles wrote in a note yesterday. It will be a “stretch” for Saudi Arabia alone to add the 1.9 million barrels a day needed to meet the 30.87 million barrels in third- quarter demand OPEC forecasts for its oil, the analysts said.

    The International Energy Agency is disappointed that OPEC failed to agree on an increase in output, it said in an e-mailed statement. “Ongoing supply disruptions, as well as the fragile state of the global economy, call for a prompt increase in supply,” the Paris-based group said.

    Brent has advanced 24 percent this year as unrest in the Middle East and North Africa toppled leaders in Tunisia and Egypt and spread to Libya. The fighting in Libya has removed about 1.5 million barrels a day of output from market.

    U.S. crude stockpiles decreased 4.85 million barrels to 369 million last week, the biggest decline this year, according to the Energy Department. A 1.38 million-barrel drop was forecast, according to the median of responses in a Bloomberg News survey of 14 analysts.

    Gasoline supplies climbed 2.21 million barrels to 214.5 million, according to the Energy Department. They were forecast to rise 1.1 million barrels, the Bloomberg News survey shows.

    Global oil demand will climb to 89.18 million barrels a day during the third quarter, the highest level of 2011, the U.S. Energy Department said June 7.

    Prices declined for options betting on lower oil. The most- active contract yesterday was the July $95 put, which fell 30 cents to 38 cents. The most-active call option, a bet that prices will rise, was the July $105 call, which climbed 10 cents to 41 cents.