Tuesday, June 14, 2011

US Is in Even Worse Shape Financially Than Greece: Gross

When adding in all of the money owed to cover future liabilities in entitlement programs the US is actually in worse financial shape than Greece and other debt-laden European countries, Pimco's Bill Gross told CNBC Monday.

Much of the public focus is on the nation's public debt, which is $14.3 trillion. But that doesn't include money guaranteed for Medicare, Medicaid and Social Security, which comes to close to $50 trillion, according to government figures.

The government also is on the hook for other debts such as the programs related to the bailout of the financial system following the crisis of 2008 and 2009, government figures show.

Taken together, Gross puts the total at "nearly $100 trillion," that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won't find a solution overnight.

"To think that we can reduce that within the space of a year or two is not a realistic assumption," Gross said in a live interview. "That's much more than Greece, that's much more than almost any other developed country. We've got a problem and we have to get after it quickly."

Gross spoke following a report that US banks were likely to scale back on their use of Treasurys as collateral against derivatives and other transactions. Bank heads say that move is likely to happen in August as Congress dithers over whether to raise the nation's debt ceiling, according to a report in the Financial Times.

The move reflects increasing concern from the financial community over whether the US is capable of a political solution to its burgeoning debt and deficit problems.

"We've always wondered who will buy Treasurys" after the Federal Reserve purchases the last of its $600 billion to end the second leg of its quantitative easing program later this month, Gross said. "It's certainly not Pimco and it's probably not the bond funds of the world."

Pimco, based in Newport Beach, Calif., manages more than $1.2 trillion in assets and runs the largest bond fund in the world.

Gross confirmed a report Friday that Pimco has marginally increased its Treasurys allotment—from 4 percent to 5 percent—but still has little interest in US debt and its low yields that are in place despite an ugly national balance sheet.

"Why wouldn't an investor buy Canada with a better balance sheet or Australia with a better balance sheet with interest rates at 1 or 2 or 3 percent higher?" he said. "It simply doesn't make any sense."

Should the debt problem in Greece explode into a full-blown crisis—an International Monetary Fund bailout has prevented a full-scale meltdown so far—Gross predicted that German debt, not that of the US, would be the safe-haven of choice for global investors.

Short Interest Ratio Update: Interesting Rotation

The short interest reports come out every two weeks. The positioning on 5/13/11 was curious as it was showing a great deal of overall complacency. That data showed that it was primarily the consumer discretionary sector which was seeing an noticeable uptick in bearish activity. At that time, we concluded that there was the potential for a drop in equities on any disappointing news.

Now the short sellers have stepped it up a bit. As of the end of May, here are the chart of the short interest ratio (SIR) for the overall S&P 500 index:

Of particular note should be the short covering of the sectors that have been beaten up and the laying out of new short positions on those that have had the trend in their favor. Looking back, this was obviously not a good move and is probably one of the reasons that the same sectors that had seen a decrease in short interest in the May 31st report, have been punished during the June downturn.

Fuel Up On Oil Service Stocks: BP, DRQ, IEZ, IO, PBR, PXJ, SLB

Despite the fact that oil prices have risen to more than $100 a barrel, long-term energy demand is still rising. The Energy Information Administration (EIA) estimates that totalworld-wide energy consumption will increase 49% by 2035. Driven by new sources of demand in the emerging world, non-OCED nations will use 63% more energy than their developed counterparts by 2035. While alternative and renewable energy sources will increase in acceptance and use, traditional energy sources with still form the backbone of consumption. With much of the world's "easy" oil already found, one sub-sector stands to benefit immensely.

Still More Needed
The global economy currently requires about 90 million barrels of crude oil a day. However, according to a report by analysts at Schlumberger (NYSE:SLB), the world will require nearly 126 million barrels of oil a day by the end of the next 2 decades. This 36 million barrel difference according to Schlumberger "still needs to be developed or even found". With many mature oil fields showing signs of declining production, new technologies will need to be created in order to squeeze more barrels out of these wells. In addition, about half of all the new oil and gas fields recently discovered have been made offshore, specifically in deep waters.BP's (NYSE:BP) recent "mishap" in the Gulf of Mexico helped underscore that new deeper offshore wells come with added risks and responsibilities. Finding new sources of supply, new deepwater wells, hydraulic fracking and safety initiatives constitute long-term demand for the oil services sector.

With billions needed to be spent to find and extract oil in harsh environments, the oil services sector is poised to benefit. Capital expenditures by oil and gas industry are expected to increase 15% throughout 2011. Brazilian energy giant, Petrobras(NYSE:PBR), will be among the global leaders on spending for drilling rigs and other equipment, as they develop fields off Brazil's coast. Globally, day rates for mid-water depth semi-submersibles have been increasing and rates for ultra-deepwater rigs have also risen. In the more mature Gulf of Mexico, much is needed in the way of repair and updating as the subsea infrastructure is decades old.

Betting on the Service Sector
With the continued need for more energy, the oil services sector will undoubtedly benefit. Providing the technological innovation in the energy sector, these picks and shovels plays make an excellent focus for an energy portfolio. Both the iShares Dow Jones US Oil Equipment Index (NYSE: IEZ) and SPDR S&P Oil & Gas Equipment & Services(NYSE: XES) provide investors with easy access to the energy sub-sector and have performed well over the last year. Individually, investors have plenty of options for adding the sector to a portfolio. Here a few picks:

Finding those new oil deposits falls upon the seismic contractors. These companies use seismic data and map potential and recognized hydrocarbon formations. French companyCGG VERITAS (NYSE: CGV) is one of the largest independent firms in the sector, but investors may want to bypass it and stick with the smaller fries. Both small caps, ION Geophysical (NYSE: IO) and OYO Geospace (NASDAQ: OYOG) have seen their bottom lines grow as well as their shares prices. Both are small enough to acquisition targets as well.

Drilling in new environments requires new advances in drilling technology. Dril-Quip(NYSE: DRQ) manufactures all the drill bits, valves, risers and a host of other equipment needed for every oil well. Shares of the company have surged nearly 70% over the past five years and analysts predict that this trend will continue throughout 2011 as energy demand maintains its upward trend. Similarly, competitor National Oilwell Varco (NYSE: NOV) has seen its star shine as well.

Bottom Line
As global energy demand continues to trend higher, more pressure is being placed on finding new sources of supply. While alternatives will take more market share, traditional energy will continue to be a dominate force in the future. The oil services sector offers investors a way to play the advances in new technologies that will be required to extract these resources. Funds like the PowerShares Dynamic Oil & Gas Services (NYSE:PXJ) make excellent long-term additions.

3 Signs of a Dysfunctional Portfolio

Is your investment portfolio helping you or hurting you? The only way to know is conduct a brief exam of your holdings.

All dysfunctional portfolios have unwanted attributes that you should avoid. What are they? In this article, we'll look at three signs of a dysfunctional portfolio.


What if your investment portfolio (as a whole) has consistently underperformed major stock (NYSEArca: DIA - News) and bond (NYSEArca: BND - News) markets? It's probably the tell-tale sign of a dysfunctional investment portfolio. Official confirmation of this disorder is if the portfolio has displayed the tendency to underperform over various market cycles.

To find out if your portfolio's performance is sub-standard, you'll first need to do some performance comparisons.

You can use two methods; 1) Evaluating the portfolio's entire performance versus a blended benchmark of passive indexes that closely replicates your portfolio's asset mix or 2) Evaluating each of the portfolio's individual holdings versus a corresponding passive index.

Which comparison method is better? I prefer the first, because it gets gives you a fast bottom line answer. The second method is OK, however, it's easy to get distracted by individual holdings and to ignore the rest of the portfolio. The second method can also be problematic if the person doing the comparative work is using inappropriate measures, like peer group analysis, which is quite common in the analysis of mutual fund managers. 'The best way to measure a manager's performance is to compare his or her return with that of a comparable passive alternative,' said Nobel Prize winning economist, William F. Sharpe.

Here's an example of how you would execute the second method: If you own small cap funds, start comparing their historical performance versus ETFs following key small cap benchmarks like the Russell 2000 (NYSEArca: IWM - News), S&P Small Cap 600 (NYSEArca: IJR - News) and the MSCI US Small Cap 1750 Index (NYSEArca: VB - News). Always compare apples to apples and always compare performance over identical time frames.

Poor Asset Mix

Asset allocation is an exercise that attempts to obtain the correct investment mix for the end user. Serious investors understand that having the right mix of investments produces desirable results. On the other hand, having the wrong brew of investments is another sign of a dysfunctional investment portfolio.

Here's an example of what I mean:

Joe Investor is a 65 year old retiree with a $500,000 investment portfolio. His main goal is for the portfolio to generate income so he can supplement his other income sources. But one gander at Joe's portfolio reveal's some serious problems.

He's got 20 percent invested large cap growth stocks (NYSEArca: IWF - News), 20 percent in gold (NYSEArca: IAU - News), 10 percent in silver (NYSEArca: SLV - News), another 10 percent scattered among commodities (NYSEArca: GSG - News) and the remaining portion is in his money market account. Were you able to identify what's wrong with Joe Investor's portfolio?

Joe's portfolio owns investments that are incompatible with his main goal of generating income. In fact, none of his holdings generate any significant dividend income or cash flow. His portfolio is clearly dysfunctional.

Many people are making the same mistake as Joe Investor and as a result they have dysfunctional portfolios. What about you?


Most investors are so preoccupied with trying to pick the best investments they overlook the tax consequences of their decisions.

A study conducted by Lipper found that buy-and-hold investors with mutual funds in a taxable account surrendered between 1.13 percent to 2.13 percent of their annual returns over a 10-year period because of hyper-active fund managers buying and selling securities. Where's the financial benefit of holding investments that sack you with a totally avoidable tax bill every single year?

Poor asset location is another contributing factor to dysfunctional portfolios. For instance, people that stuff their taxable brokerage accounts with tax inefficient investments like REITs (NYSEArca: ICF - News) and high yield bonds (NYSEArca: JNK - News) are hurting their bottom-line. By simply re-locating some of these assets into a tax-deferred account, it could save them a significant bundle.

Sino Support Levels

The China story is under pressure and weighing on the markets. We shall soon find out if Jim Chanos is correct and how robust the Asian economy is as credit driven bubbles begin to burst. Watch these important weekly levels for the Shanghai Composite and Hang Seng.

The #1 Tip For Investors Right Now

The biggest problem with investing the markets today, is that we’ve entered a period in which not one country, but most of the developed world is entering a currency Crisis.

Of the countries that back major currencies the Europe, the US, and Japan all face major debt restructuring issues. In different terms, we are witnessing the slow-motion collapse of the entire paper-money based financial system, as well as the unbridled credit growth such a system fosters.

What this means is that we will be witnessing extreme volatility both to the downside and the upside as these currencies “race to the bottom.” The reason for this is currencies all move in relation to one another. So if the Dollar takes a hit, the Euro will rally regardless of the latter currencies problems. The same situation applies across most asset classes as every major currency move is tightly correlated to stocks, commodities, and bonds.

Tip #1: So the primary attitude to take in trading these markets is to stay alert and be nimble. Follow the trend, but when it changes, get out. And don’t be too married to a particular forecast.

However, be aware that maintaining this attitude will result in a lot of accusations from others. Case in point, I have forecast that the Fed will be unveiling QE 3 or some other liquidity program in the future.

However, my timeline changed on this when Bernanke and the Fed failed to hint at this in his recent speeches and FOMC meetings. In fact, I warned that we may indeed see another round of deflation before the Fed unleashes another round of QE.

I took a lot of flak for this because many people believed that I had completely betrayed my earlier forecast and was flip-flopping. However, it was clear based on the Fed’s statements (and the lack of hints of additional liquidity) that the Fed was going to ease back on the money printing at least temporarily.

With those market props out of the way, the stage is set for a sharp correction in stocks and commodities. We’ve already seen some major drops in the latter group. However, stocks still have plenty of room to “catch up.”

So if you’re not prepared to profit from the market’s correction, you NEED To download my FREE report devoted to showing in painstaking detail how to make SERIOUS money from a stock market collapse.

I call it The Financial Crisis “Round Two” Survival Kit. And its 17 pages contain a wealth of information about portfolio protection, which investments to own and how to take out Catastrophe Insurance on the stock market (this “insurance” paid out triple digit gains in the Autumn of 2008).

Again, this is all 100% FREE. To pick up your copy today, go to http://www.gainspainscapital.comand click on FREE REPORTS.

Good Investing!

Graham Summers

4 Brazilian Stocks To Watch: BRFS, CIG, CPL, TSU

Brazil, just like other emerging BRIC markets, seems to be well positioned for new growth opportunities. Brazil, Russia, India and China will likely have years, if not decades, of tremendous growth in their futures when compared with the developed markets. (For background reading, see Investing In Brazil 101.)

Brazil has a few key things going for it: It is is one of the few countries in the world that is self-sufficient in oil; it is a leader inalternative energy sources; it produces more ethanol than Asia and Europe combined; it is also the second-largest producer of iron ore in the world. So, all things considered,investors interested in Brazil should focus on commodities, infrastructure, and even housing. After all, as the nation changes its focus from rural to urban living, the basic demands of a growing middle class will need to be met.

Investors can generally invest in Brazil by holding sector ETFs. The most notable of these include iShares MSCI Brazil Index Fund (NYSE:EWZ), WisdomTree Dreyfus ETF BZ Real Fnd (NYSE:BZF) and Market Vectors Brazil Small Cap ETF(NYSE:BRF). For those who are interested in buying individual stocks, check out the following list of four Brazilian stocks.


Market Cap

YTD % Gain

TIM Participacoes S.A. (NYSE:TSU)



BRF - Brasil Foods S.A.(NYSE:BRFS)



Cia Energetica de Minas Gerais (NYSE:CIG)



CPFL Energia S.A. (NYSE:CPL)



Bottom Line
Brazilian equities are not cheap. As such, they could easily suffer a pullback even as the Brazilian economy grows. However, Brazil is set to enjoy years of prosperity, and investors seeking direct emerging market exposure may want to keep Brazil on a close watch list.

The Brazilian economy is the 10th largest economy in the world. Despite losing half its value at the end of 2008, Brazil's stock market index, the Bovespa, has already recovered back to its pre-recessionary highs.

Indicators Flashing Extreme Signals – What To Watch This Week

A few interesting readings on important indicators. At the end of last week’s client update, we mentioned that there is a potential for a short-term bounce for markets. While any one indicator can not provide a clear picture of the markets and the overall sentiment, these are a few that are recently flashing a distinctly “overly bearish” statement by investors.

The AAII Bullish Index is often a contrary indicator. Some say that the retail investor is “dumb money” and a good contrarian indicator. Notice that the low points of bullish sentiment often occur at market bottoms. Also notice that that high bullish readings occur at key market tops. We see this as a gauge of short term sentiment, used in conjunction with other extreme readings that can “call” a short-term top or bottom.

The McClellan Oscillator is also driving below the level considered to be oversold. It is very important to note that this is by no means a guaranteed indication that there will be an immediate turn. It does help to see when selling may be exhausted and again a short-term top or bottom. The fact that the reading has been creating a pattern below the zero line is negative. Back in March, the level moved as low as -275, one of the lowest readings seen in years. Sharp moves above or below zero are also indicative of mass selling by institutions. They have the power to unload or buy shares that become market moving events. However, institutions are usually patient and will allow markets to cool before they step in again as they have no desire to sink their entire portfolio before they can sell out their positions.

The Put/Call Indicator has reached a point that there are more than 100% put buyers than call buyers. In other words, bets on a decline are not only in the majority, they are overwhelming. This has a similar result as the short interest rising to high levels. Once (if) a bounce occurs, it can be furious to the upside.

Now, looking at the news, the story count for the words SOFT PATCH has been peaking. This shows that stories published on the Bloomberg system are becoming more consistent with an economic downturn. It also means that many analysts and economists are starting to become more bearish. Often times, this will provide for earnings downgrades and economic assumptions to be cut. The more this occurs, the greater the chance for upside surprises. This is one of those oddball areas that we actually like. Since estimates are often too far ahead of themselves on both sides, the opportunity for surprises when downward revisions are occurring are more likely – although not absolute. To make this clear, estimate revision are NOT good, but if they move too far in either direction, it provides some additional wiggle room for the actual numbers to beat or miss.

The correlation of the VIX and the U.S. Dollar continues. This spills over to the the equity markets as well. But, even though the U.S. markets have corrected 8%, there is still a good deal of either complacency or embedded optimism. As the VIX is still well under 20 at this stage, there is minimal fear developing in the markets. Even as the put/call ratio is peaking, the overall VIX has not come close to levels we saw in March. This one could go either way, but the idea that government will not let the economy fail is well implanted in investors minds at this point.

In a note to clients today, David Kostin of Goldman Sachs had this to say:

Discussions with clients this week focused on the risk/reward balance for US equities. Our forecasts reflect a 2:1 upside/downside return profile through year-end 2011. S&P 500 has declined by 5% from its April 29th closing high of 1364. Our year-end 2011 index target remains 1450 representing 12% upside from current levels. A downside scenario suggests an index value of approximately 1210 or roughly 6% below current levels. During the pull-backs the median length time for the market to reach bottom equaled 27 days. Six of the episodes took 20-40 days and on four occasions the decline occurred in less than two weeks. The current sell-off has lasted 41 days and counting. The historical episodes we analyzed had a median time to recover of 41 days. Recoveries during 2003-07 typically took longer than the speedy rebounds since 2009.

That report also noted that there have been a spat of economic disappointments that have set the tome for this correction, yet earnings estimates and outlook have changed little:

Earnings: S&P 500 consensus 2011 and 2012 earnings estimates are up during the past month. The same is true for six of ten S&P sectors. Our earnings revisions sentiment indicator, which measures the balance of positive and negative revisions, is also positive for eight sectors. Broadly speaking, earnings estimates have risen for the market and most sectors, providing support for fundamental investors ahead of the 2Q earnings.

If true, then this correction has all the makings of providing a similar pattern to others that will cause stocks to snap back two weeks or so prior to the beginning of the next earnings season – which begins on July 11. So, that would mean that the remainder of June could be choppy and a run-up into earnings starts in July. Something to consider.

It is going to be a busy week for economics. Both in the U.S. and on a global basis.

A Dark Shadow Lights Up the Gold Market

There is a dark shadow hovering over the US dollar and the ability (or, rather, inability) of the US federal government to pay its way in the future. Below is a chart that shows the percentage of US government income that goes to pay interest on the national debt. It also shows the historical price of gold in real terms.

Before 2010, the chart uses historical data for both gold and the percentage of revenues going to pay interest. In the years ahead, the interest payments are an estimate based on known outstanding US debt and the anticipated rates. It’s just following the math.

As you can see, in the immediate future, interest on the debt will eat up more and more of the overall federal revenue stream. That’s because national debt and interest on that debt are growing far faster than taxable GDP. What does chart this mean to you, as an investor? It means that within the investment horizon of every Outstanding Investments subscriber age 12-92, we’re staring at the potential for utter economic devastation. If you’ll grant me a bit of artistic license in all this…life as we know it in the US could come to a crashing halt.

From the standpoint of investing, the chart also gives us every reason to anticipate even higher prices for gold, and, by association, silver. So if you don’t have some gold and silver, get some.Historically, the gold price rises when there’s an increasing percentage of federal revenues going to pay interest on the national debt. And historically, the gold price declines when US interest payments move down as a percentage of federal revenues.

So if you follow the correlations on the chart, the forecast for the price of gold is simply up, up and away. That is, by 2020, we may be living in a country where the government is chronically insolvent, due to interest payments, and gold is going stratospheric. We’ll enter into an era when the government won’t pay its day-to-day bills on time, if it pays them at all. Eventually, we may see the US currency in free fall, if not collapse. That’s why your ONLY real long-term hope in all of this is to invest in “real” assets – things that will retain value over time. Energy and minerals come to mind, certainly to include physical gold and silver.

Greece Receives Lowest Credit Rating by S&P

Greece was branded with the world’s lowest credit rating by Standard & Poor’s, which said the nation is “increasingly likely” to face a debt restructuring and the first sovereign default in the euro area’s history.

The move to CCC from B reflects “our view that there is a significantly higher likelihood of one or more defaults,” S&P said in a statement yesterday. “Risks for the implementation of Greece’s EU/IMF borrowing program are rising, given Greece’s increased financing needs and ongoing internal political disagreements surrounding the policy conditions required.”

Greece’s government, which plans to sell 1.25 billion euros ($1.8 billion) of 26-week Treasury bills today, said that the downgrade overlooked “intense” talks between European officials to address the nation’s financing needs. Credit- default swaps on Greece, Ireland andPortugal surged to records yesterday on concern governments’ struggles to resolve the turmoil will threaten their ability to pay their debts.

“Greece will default -- it’s a question of when, rather than if,” said Vincent Truglia, Managing Director at New York- based Granite Springs Asset Management LLP in New York and a former head of the sovereign risk unit at Moody’s. “It’s a basic solvency issue rather than a liquidity issue. Only a debt writedown will do.”

Swaps on Greece jumped 47 basis points to an all-time high of 1,610 as of 5:30 p.m. yesterday in London after the S&P downgrade, according to CMA. Contracts on Ireland soared 27 basis points to 740, Portugal climbed 22 to 764 and the Markit iTraxx SovX Western EuropeIndex of swaps on 15 governments jumped 7 basis points to 218, approaching the record 221.75 set Jan. 10.

Greek Bonds

The yield difference, or spread, between 10-year German bunds and Greek securities of a similar maturity was at 1,402 basis points yesterday, close to a record.

No other sovereign nation is graded as low as CCC by S&P, a spokesman said by e-mail. Moody’s cut its rating on Greece to Caa1 on June 1, leaving only Ecuador as a worse sovereign risk.

“The ratings agencies are now playing catch-up with the market,” saidGianluca Salford, a fixed-income strategist at JP Morgan in London. “The market is pricing in a very high probability that there will be a credit event around Greece. The agencies are just catching up to the negativity that’s already priced in by the market, not the other way around.”

The downgrade comes as the European Central Bank and Germany battle over how to bail out Greece again and whether officials should push creditors to share some of the costs. ECB President Jean-Claude Trichet said yesterday that his advice to European governments is to “avoid what would be a compulsory concept” and “avoid whatever would trigger” a default.

ECB’s Hope

“The ECB wants governments to come to the aid of Greece and at the moment that doesn’t seem to be the case,” said Orlando Green, a fixed income strategist at Credit Agricole Corporate & Investment Bank in London. “We do think there’s a chance Greece will see some sort of adjustment of its debt profile. That’s what the politicians are looking to do, effectively adjust their debt situation without wrecking havoc, which could easily have a contagion effect.”

S&P said it has a negative outlook on Greece’s debt.

“Our negative outlook indicates that a downgrade to ‘SD’ could occur if Greece undertakes one or more debt restructurings or maturity extensions on terms that constitute distressed debt exchanges as defined by our criteria,” S&P said. SD is a “selective default.” A restructuring would likely “result in one or more defaults under our criteria,” it said.

Recovery Rating

S&P said that its recovery rating on Greece’s debt is ‘4,’ indicating it estimates bondholders would recover 30 percent to 50 percent of their investment.

A “financing gap has emerged in part because Greece’s access to market financing in 2012 and possibly beyond, as envisaged in the current official EU/IMF program, is unlikely to materialize,” the report said.

Greece’s finance ministry said in a statement that S&P’s decision “ignores” the “intense consultations” to resolve the nation’s crisis taking place between officials at the European Commission, European Central Bank and International Monetary Fund.

“The decision by Standard and Poor’s also neglects the determined efforts of the Greek government to avoid at any costs any possible violation of Greece’s contractual obligations, and the strong desire of the Greek people to plan for their future within the euro zone,” the statement said.

Granite Springs’s Truglia said that European officials should prepare for the fallout from a Greek default.

“What Europe’s governments should do now is look at the knock-on effects that will have for other markets and pressure that will exert on banking system,” he said. “But the problem is that governments always leave it too late.”