As the chart below shows, which is a ranking of global banks by tangible common equity, lowest first, of the banks with a TCE ratio of under ~4% a whopping 30% are those situated in Canada, the same place where nobody thinks anything can go wrong, and which has been completely spared from the retribution of the bond vigilantes. Something tells us Canadian sovereign CDS, not to mention Canadian bank CDS, are both about to go quite a bit wider...
Friday, August 19, 2011
“During the second quarter of this year,” says a new report from Marlmont, “shares of precious metals companies behaved strangely, actually going down in value when gold appreciated.”
“This negative correlation has never existed in the data that extend as far back as we could access, to 1992. There have been very short bouts when the movement of miners and the metal did not move well in unison, but never this.”
Their conclusion: “We frankly could not conjure up a more convincing case for owning companies that search for and produce precious metals — especially now that in recent decades these have underperformed gold bullion as dramatically as only seen in the meltdown of 2008.”
While the housing bubble has imploded, there may be other bubbles that haven't yet been hit by the economic downturn of the past few years. While these bubbles have held up fairly well so far, what happens if poor economic conditions continue or get even worse?
The U.S. economy is currently being propped up by annual deficits of about $1.1 trillion, almost 10% of reported GDP. That represents a substantial portion of total government spending, and is being used to cover expenses ranging from national defense to Social Security. What would happen if lending to the U.S. government stopped because the U.S. was no longer viewed as a viable credit risk? What would happen if the Federal Reserve could no longer print money (quantitative easing) because of rampant inflation or a crashing dollar?
There is a variety of scenarios that could cause other bubbles to burst, some in a very big way. Here are a few that may be sitting ducks. (Bubbles are deceptive and unpredictable, but by studying their history we can prepare to our best ability. See 5 Steps Of A Bubble.)
Commercial Real Estate (CRE)
CRE will face multiple challenges this year including new rules adopted under the Wall Street Reform and Protection Act. A new accounting standard for leases is also under consideration that would affect the refinancing process. These issues, along with higher interest rates, could exacerbate existing market conditions and high valuations in many markets.
Since CRE relies heavily on consumer demand, the demand for CRE is directly impacted by unemployment and prevailing wages. Service sector industries and businesses are particularly sensitive to changes in disposable income. Consumer Reports publishes a monthly index that measures overall sentiment as a function of five factors: Retail Index, Employment Index, Trouble Tracker Index, Stress Index and Sentiment Index. The August reading was down 5.1 to a 20-month low of 43.4. That's the biggest drop for one month in the last two years. (more)
True, a fad can make lots of money for investors, but when consumers lose interest, the results can be horrendous.
In fact, we may be seeing this play out with SodaStream (Nasdaq:SODA), which sells a way for consumers to make their own carbonated soft drinks. It’s definitely cool, but might it be easier – and cheaper – to just drink Coca-Cola (NYSE:KO) or Pepsi (NYSE:PEP)?
Since the start of August, the shares have plunged from $77.68 to $38.90 — now that’s a real buzz kill.
What are some other stocks that may be vulnerable to the perils of a fad? Here’s a look at four candidates:
LinkedIn (NYSE:LNKD): New IPO stocks can be a great source of fads, and this may be the case with one of this year’s hottest offerings. The company operates a popular social networking site for professionals, and there’s no doubt has benefited from the halo effect of Facebook.
Yet LinkedIn is trading at nosebleed levels. In fact, two of its lead underwriters, JPMorgan and Morgan Stanley, have issued negative reports.
In addition, a big portion of LinkedIn’s revenue comes from employer recruiting services. Might there be some pressures as the economy weakens?
Chipotle Mexican Grill (NYSE:CMG): There’s little doubt that this company has developed a compelling concept in the fast-casual Mexican food segment.
But there are some danger signs: The valuation is at a pricey 52 times earnings, and there is likely to be deterioration of margins because of rising commodities prices. In fact, the company has been increasing prices, which will probably reduce foot traffic.
It will also get tougher to keep up the top-line momentum. Interestingly enough, Chipotle is already moving beyond its core to find growth, such as by offering breakfast meals as well as launching its new concept, ShopHouse Southeast Asian Kitchen.
Lululemon (NASDAQ:LULU): The company is a fast-growing yoga retailer, but its shares are selling at 57 times earnings. What’s more, competition is becoming an issue, with rivals like Nike (NYSE:NKE), Adidas, Gap (NYSE:GPS) and Limited Brands (NYSE:LTD).
It also seems inevitable that the economy will become a big problem. It is definitely easy to hold off on some purchases of high-priced apparel, right?
Skullcandy (NASDAQ:SKUL): The company develops high-priced headphones for devices like Apple’s (Nasdaq:AAPL) iPhone. The brand has been powerful – but how long can it last? After all, the “millennial” crowd can be fickle. And there may also be saturation — you can find Skullcandy’s products at mainstream retailers like Best Buy (NYSE:BBY) and Target (NYSE:TGT).
The company continues to grow at a rapid pace as shown by its second-quarter revenue spiking 46% to $52.4 million.
Some people criticize the way the unemployment rate is measured, since it doesn't include Americans who have left the workforce temporarily, but ultimately will want or need to get a job. If you include these people in the calculation, the labor market picture has worsened since last November, as I explained on Saturday. So Federal Reserve economists can't pretend that the unemployment picture has improved since their last intervention. But what if we went all the way back to January 2007?
At that time, the labor participation rate was 66.4%. In July 2011, it hit a new recessionary low of 63.9%. That 2.5% might not seem like a lot, but it would have meant nearly 6 million more people in July's labor force. If you add those people into the workforce, then the unemployment rate last month would have hit a new high of 12.5%, which is much higher than the official 9.1% reported. Here's how this alternative measure for unemployment would have evolved over the past couple of years:
It is possible that some of those who have left the workforce over the past few years will not return. The primary reason for that possibility would presumably be if older Americans who were laid off simply decided to retire earlier than anticipated, in light of the tough job market. This possibility, however, can be quickly discarded by looking at the employment change for various age groups. So if early retirement is occurring, it isn't having a significant impact on labor market participation. Indeed, the opposite is more likely true: older Americans are probably working for longer due to the hard times.
The implication here is important: even as hiring begins to speed up eventually, the unemployment rate will face a headwind of previously discouraged Americans reentering the workforce in the hopes that they can finally find a job. This is yet another reason we can expect the unemployment rate to remain very high for an extended period.
TIPS—short for Treasury Inflation-Protected Securities—offer investors the closest thing Uncle Sam has to a sure bet these days. These bonds have the full backing of the U.S. government and provide investors with returns that will keep pace with future rates of inflation, as measured by the U.S. Consumer Price Index. You can buy them directly from the government, but it's easier—and a better investment decision in many cases—to buy low-fee investment funds that hold TIPS.
Many advisers are recommending TIPS, both for their safety and because of widespread concern about the inflationary implications of record government deficits. Investors burned in last year's market declines have become more cautious about their holdings and are particularly wary of risky investments as they near or reach retirement age.
The U.S. Treasury says the public held $512.8 billion in outstanding TIPS at the end of March, up about $40 billion over the previous 12 months. About 8 percent to 10 percent of this total is held by individuals in investment funds. There is no accurate measure of direct consumer purchase of TIPS at auctions but the closest measure—noncompetitive bids at TIPS' auctions—would total only $15 to $20 billion.
How they work. TIPS are sold at auction several times a year in maturities of 5, 10 or 20 years. They pay a fixed rate of interest, but that rate is applied to a fluctuating principal amount of a TIPS bond which rises with inflation or falls with deflation. Interest payments are made every six months. Although TIPS are generally touted as protection against inflation, they also offer some protection against deflation. That's because TIPS guarantee to pay at least their original principal at maturity. Put another way, if prices double during the life of a TIPS bond, a $1,000 TIPS would automatically rise to a principal value of $2,000. If prices fall by 50 percent, however, that $1,000 bond would still have a principal of $1,000. Find more details about TIPS at Treasury Direct.
Taxes. Income from TIPS comes in the form of interest payments as well as any annual inflationary increase in the principal value of the bond. These gains are exempt from state and local taxes but not federal taxes. For most people, this means TIPS should be held in a tax-advantaged retirement account. (more)
With the United States and European economies having slowed markedly according to the latest data, and with global growth continuing to disappoint, a reasonable question increasingly arises: Are we in another Great Depression?
The easy answer is "no" - the main features of the Great Depression have not yet manifested themselves and still seem unlikely. But it is increasingly likely that we will find ourselves in the midst of something nearly as traumatic, a long slump of the kind seen with some regularity in the 19th century, particularly if presidential election-year politics continue to head in a dangerous direction.
The Great Depression had three main characteristics, seen in the United States and most other countries that were severely affected. None of these have been part of our collective experience since 2007.
First, output dropped sharply after 1929, by over 25 percent in real terms in the United States (using the Bureau of Economic Analysis data, from its Web site, for real gross domestic product, using chained 1937 dollars). In contrast, the United States had a relatively small decline in G.D.P. after the latest boom peaked. According to the bureau's most recent online data, G.D.P. peaked in the second quarter of 2008 at $14.4155 trillion and bottomed out in the second quarter of 2009 at $13.8541 trillion, a decline of about 4 percent.
Second, unemployment rose above 20 percent in the United States during the 1930s and stayed there. In the latest downturn, we experienced record job losses for the postwar United States, with around eight million jobs lost. But unemployment only briefly touched 10 percent (in the fourth quarter of 2009; see the Bureau of Labor Statistics Web site).
Even by the highest estimates - which include people discouraged from looking for a job, thus not registered as unemployed - the jobless rate reached around 16 to 17 percent. It's a jobs disaster, to be sure, but not the same scale as the Great Depression. (more)
“Goldman Sachs is running Washington, look at the fingerprints, they are all over the place,” he said. “It is disgusting; they are robbing the nation blind. In fact, this is what we are writing about in the autumn issue of the Trends Journal. This is the greatest heist in US history, happening in broad day light.” "We want to make it very clear that the policies leading to the decline of ‘Empire America’ have been long in the making,” he said. “What has happened in the Obama Administration is that they have taken policies far beyond even what Bush took with the TARP program; for example, with his stimulus package, with the buyouts, with the bailouts, the rescue packages, these are unprecedented in American history.” “When this bubble bursts, unlike the financial/real estate bubble that burst, the dot-com bubble before that, and the ’87 stock market bubble before that” US taxpayers will now be on the hook for trillions in losses as our “government is [a major] equity holder in private corporations. That never existed before. Clearly, the people running this nation are “out of control,” Celente continues, noting that as economic conditions further deteriorate “people are going to start losing it,” he said. “But, they are going to lose it in different ways: our greatest fear for the future [is] rampant crime, and the society breaking down.” He pauses briefly, and then offers a truly frightening thought. “When we say food riots, it’s going to people rioting just to eat.”
With options traders — as well as anyone else playing the stock market — still nervous about making short-term calls, a move away from choppiness and toward betting on longer-term trends is increasingly attractive.
With Long-Term Equity Anticipation Securites, or LEAPS, investors can use options to position themselves for a profit that might ordinarily be too risky in the short term.
Below are two strategies for investors betting that, over the long term, a move higher in precious metals and a decline in options volatility will pay off.
Typically, investors look to invest in precious metals for a few different reasons. First, they usually fall into favor as a flight to quality when the economy is weakening or inflation concerns are rising. On the other hand, copper and other basic material metals see increased demand when investors sense that economic growth will spur demand for industrial goods. With the market writhing between the prospects of economic slowdown and growth at the same time, it would be nice to grab exposure to both sides of the metal markets.
Here’s how you do it:
As the name implies, Freeport-McMoRan Copper & Gold (NYSE:FCX) primarily mines for gold and copper, among such other metals as silver and cobalt. The fact that FCX crosses between basic material and precious metals is attractive, given that both commodities continue to see increased demand. This is why FCX is one of the few precious metal miners that has kept pace with increasing gold prices.
Despite the dual role that FCX plays, analysts are far from overly optimistic, as 73% of covering analysts currently rank the stock as a buy or better. We expect to see additional upgrades given the economic backdrop and the stock’s positive technicals over the longer term.
A great way to leverage this metal master is to buy the January 2013 50 Call for around $7.50.