Thursday, March 31, 2011

Real Estate Crash Catches Up to U.S. Municipalities as Property Taxes Drop

The real-estate crash is catching up to U.S. municipalities.

Cities, counties and school districts had been sheltered from the full impact of the slump because of the lag between when realty prices fluctuate and values are reset by local tax assessors. That’s changing as property rolls are adjusted to the current market and residents push to have their taxes cut.

Local officials are now facing the consequences. Property- tax revenue dropped in the last three months of 2010 at the fastest pace since home prices slipped from their peak more than four years ago, the Census Bureau said yesterday. The decline may continue as values fall further, adding strains to cash- strapped localities that already fired workers, halted projects and cut spending because of the recession that began in 2007.

“The story had been a question about why property taxes weren’t declining,” said Christopher Hoene, research director for the Washington-based National League of Cities. “What the census is picking up is that’s been happening and it’s likely to keep happening for the next few quarters.”

The decline for local governments contrasts with a recovery for U.S. states led by income and sales taxes. Their collections in the fourth quarter climbed by $13 billion to $177.8 billion, the biggest jump since 2006, according to the census data released yesterday.

“Cities are by no means out of the woods,” Hoene said. “They have got another year or two of dealing with either declining revenues or pretty slow growth.”

Western Values

In Maricopa County, Arizona, the county assessor reported last month that values of all property dropped by 12 percent for the next tax year, the second straight double-digit decline. In Los Angeles, the second most-populous U.S. city, property taxes for the year ending June 30 are projected to fall 1.7 percent to $1.42 billion, according to a March 1 report by the controller.

The strain may mean credit-rating cuts this year for local- government debt, which trades in the $2.93 trillion municipal bond market, Moody’s Investors Service said in a report this month.

“This is the first year that most local governments are seeing a decline in their property-tax revenues,” said Julie Beglin, a vice president with Moody’s public finance group in New York.

Local and state property-tax revenue slid $5.3 billion, or 2.9 percent, in the fourth quarter from a year earlier to $177.1 billion, the Census Bureau said. All but $3.7 billion went to municipalities. The slump in the most-active period for real estate revenue outpaced a 2.5 percent drop in the first quarter of 2010, the only other significant decline since prices peaked in 2006.

Urban Decline

Residential real estate prices in 20 U.S. cities dropped by the most in more than a year in January, a report yesterday showed. The S&P/Case-Shiller index of property values fell 3.1 percent from January 2010, the biggest year-on-year decrease since December 2009. That’s prompting homeowners to seek reductions in the assessed value of their properties.

“One of the symptoms of a depressed real estate market has been a proliferation of successful tax appeals,” said William Dressel, executive director of the New Jersey State League of Municipalities. They’ve come “after a municipality has already assessed a property, collected taxes and made payments to local school boards and county governments,” he said.

Workers Let Go

Montclair, New Jersey, officials had to remake their budget when tax appeals reduced revenue to $51 million from an expected $53 million in the current budget year, Town Manager Marc Dashield said in a telephone interview.

“We were forced to stop providing additional books and periodicals in our library, abolish community pre-kindergarten and lay off 12 municipal workers,” he said.

Only 15 percent of counties raised property taxes to make up for the lost revenue, according to a survey by the National Association of Counties.

Such a strategy can draw voters’ ire, as Carlos Alvarez, the former mayor of Miami-Dade County, Florida, found out. He was thrown out in a recall election on March 15 after he boosted property-tax rates last year to make up for a drop in home values.

“We’re hearing from many government officials they feel this isn’t a time when they can raise tax rates on their citizens,” said Beglin, the Moody’s analyst.

Anticipatory Cuts

Hoene, the National League of Cities analyst, said local governments have been anticipating the revenue slide and cutting budgets to compensate. They’ve eliminated 377,000 jobs, or 2.7 percent of payrolls, since employment peaked in September 2008, according to the U.S. Labor Department.

“They’ve been making a whole series of significant cuts to balance their budgets,” said Hoene.

In Florida, after four years of falling property values, cities are cutting into core services like police, said Ken Small, a finance and tax analyst at the Florida League of Cities.

“It’s not, ‘We’re going to cut travel.’ That was already done,” Small said in a telephone interview from Tallahassee. “It’s eliminating departments or making serious cuts to services.”

Hoenig Blames Fed for Higher Commodity Prices; Urges Tightening

The Federal Reserve’s “highly accommodative” monetary policy is partly to blame for rapidly increasing global commodity prices, said Kansas City Fed President Thomas Hoenig, who called on colleagues to raise the benchmark interest rate toward 1 percent soon.

“Once again there are signs that the world is building new economic imbalances and inflationary impulses,” Hoenig, the central bank’s longest-serving policy maker and the lone dissenter at Fed meetings last year, said in a speech today in London. “The longer policy remains as it is, the greater the likelihood these pressures will build and ultimately undermine world growth.”

Fed policy makers, who affirmed plans on March 15 to buy $600 billion in Treasury securities through June, disagreed this week over whether to curtail the purchases, end them early or keep the program in place. St. Louis Fed President James Bullard said the program may need to be cut by about $100 billion. The Boston Fed’s Eric Rosengren said that high unemployment and low core inflation mean it’s still too soon to withdraw record monetary support for the economy.

The Federal Open Market Committee “should gradually allow its $3 trillion balance sheet to shrink toward its pre-crisis level of $1 trillion,” Hoenig, 64, said in his remarks at the London School of Economics and Political Science. “It should move the U.S. federal funds rate off of zero and toward 1 percent within a fairly short period of time.”

Improving Trends

“Policy should acknowledge the improving economic trends and begin to withdraw some degree of accommodation,” he said. “If this is not done, then the risk of introducing new imbalances and long-term inflationary pressures into an already fragile recovery increase significantly.”

Other Fed officials, including Chairman Ben S. Bernanke, have rejected the idea that Fed policy has fueled gains in commodity prices, pointing instead to rising demand among emerging-market economies and disruptions in supplies.

Bernanke, in testimony to Congress on March 1, said commodity prices “have risen significantly in terms of all major currencies,” and not just the dollar.

As of yesterday, crude oil jumped 35 percent over six months as turmoil in the Middle East threatened to disrupt supplies. Corn rose 38 percent, and cotton climbed 89 percent.

In its March 15 statement, the FOMC said the economic recovery “is on a firmer footing.” It said the effects of higher fuel and commodity costs on inflation will be “transitory,” and officials “will pay close attention to the evolution of inflation and inflation expectations.”

Adding Workers

Companies in the U.S. added more workers in March, a sign the labor market may be strengthening, data from a private report based on payrolls showed today. Employment increased by 201,000 workers, according to figures from ADP Employer Services.

Other data released this week point to challenges for the recovery. Confidence among U.S. consumers dropped more than forecast this month as fuel costs surged to the highest level in more than two years, according to the Conference Board’s confidence index yesterday. Another report showed home prices in 20 cities fell in January by the most in more than a year, raising the risk that sales will keep slowing.

Fed officials have purchased $1.7 trillion of mortgage debt and Treasuries through March 2010 to pull the U.S. out of the recession. The Fed’s second round of purchases, announced in November, has come under fire from Republican leaders in Congress who say it risks inflating asset-price bubbles and stoking inflation.

As a voting member of the FOMC last year, Hoenig dissented against the Fed’s pledge to keep rates “exceptionally low” for “an extended period,” the decision to reinvest proceeds from maturing mortgage-backed securities, and the current round of bond purchases. His eight straight dissents tied former Governor Henry Wallich’s record in 1980 for most dissents in a single year.

Hoenig is retiring on Oct. 1 after a 20-year career as leader of the Kansas City Fed, one of the Fed’s 12 regional banks. The Kansas City has begun a search for his successor.

McAlvany Weekly Commentary

The Importance of Equal Weights and Measures

A Look At This Week’s Show:

-Treating the value of the dollar as a constant is a rookie mistake.
-Will QE2 end early only to be replaced later with “emergency” QE3?
-How inflation affects the four players of the economy: The Debtor, The Saver, The Creditor and The Consumer.
Who wins, who loses and why.

Moving Averages: March Month-End Preview

Here is a preview of the monthly moving averages before the market opens on the last business day of the month. All three S&P 500 monthly moving averages are giving the "invested" signal.

Note: The index updates are intended to illustrate the moving moving-average timing strategy. They also give a general sense of how US equities are behaving. However, followers of a moving average strategy should make buy/sell decisions on the signals for each specific investment, not a broad index. Even if you're investing in a fund that tracks the S&P 500 (e.g., Vanguard's VFINX or the SPY ETF) the moving average signals for the funds will occasionally differ from the underlying index because of dividend reinvestment.

The Ivy Portfolio

The top table previews the 10-month SMA timing signals for the five asset classes highlighted in The Ivy Portfolio. It should come as no surprise to anyone following my recent focus on Treasury yields that IEF, the Treasury ETF, is only one teetering on the buy/sell threshold.

I'm also included the 12-month SMA timing signals for the Ivy ETFs in response to the many requests I've received to include this slightly longer timeframe.

After the end-of-month market close, I'll update the monthly moving average feature with charts to illustrate.

The bottom line, as we've pointed out earlier, is that these moving-average signals have a good track record for long-term gains while avoiding major losses. They're not fool-proof, but they essentially dodged the 2007-2009 bear and thus far have captured significant gains since the initial buy signals after the March 2009 low.

Note: See the Timing Updates for interim updates throughout the month.

12 Warning Signs of U.S. Hyperinflation

One of the most frequently asked questions we receive at the National Inflation Association (NIA) is what warning signs will there be when hyperinflation is imminent. In our opinion, the majority of the warning signs that hyperinflation is imminent are already here today, but most Americans are failing to properly recognize them. NIA believes that there is a serious risk of hyperinflation breaking out as soon as the second half of this calendar year and that hyperinflation is almost guaranteed to occur by the end of this decade.

In our estimation, the most likely time frame for a full-fledged outbreak of hyperinflation is between the years 2013 and 2015. Americans who wait until 2013 to prepare, will most likely see the majority of their purchasing power wiped out. It is essential that all Americans begin preparing for hyperinflation immediately.

Here are NIA's top 12 warning signs that hyperinflation is about to occur:

1) The Federal Reserve is Buying 70% of U.S. Treasuries. The Federal Reserve has been buying 70% of all new U.S. treasury debt. Up until this year, the U.S. has been successful at exporting most of its inflation to the rest of the world, which is hoarding huge amounts of U.S. dollar reserves due to the U.S. dollar's status as the world's reserve currency. In recent months, foreign central bank purchases of U.S. treasuries have declined from 50% down to 30%, and Federal Reserve purchases have increased from 10% up to 70%. This means U.S. government deficit spending is now directly leading to U.S. inflation that will destroy the standard of living for all Americans.

2) The Private Sector Has Stopped Purchasing U.S. Treasuries. The U.S. private sector was previously a buyer of 30% of U.S. government bonds sold. Today, the U.S. private sector has stopped buying U.S. treasuries and is dumping government debt. The Pimco Total Return Fund was recently the single largest private sector owner of U.S. government bonds, but has just reduced its U.S. treasury holdings down to zero. Although during the financial panic of 2008, investors purchased government bonds as a safe haven, during all future panics we believe precious metals will be the new safe haven.

3) China Moving Away from U.S. Dollar as Reserve Currency. The U.S. dollar became the world's reserve currency because it was backed by gold and the U.S. had the world's largest manufacturing base. Today, the U.S. dollar is no longer backed by gold and China has the world's largest manufacturing base. There is no reason for the world to continue to transact products and commodities in U.S. dollars, when most of everything the world consumes is now produced in China. China has been taking steps to position the yuan to be the world's new reserve currency.

The People's Bank of China stated earlier this month, in a story that went largely unreported by the mainstream media, that it would respond to overseas demand for the yuan to be used as a reserve currency and allow the yuan to flow back into China more easily. China hopes to allow all exporters and importers to settle their cross border transactions in yuan by the end of 2011, as part of their plan to increase the yuan's international role. NIA believes if China really wants to become the world's next superpower and see to it that the U.S. simultaneously becomes the world's next Zimbabwe, all China needs to do is use their $1.15 trillion in U.S. dollar reserves to accumulate gold and use that gold to back the yuan.

4) Japan to Begin Dumping U.S. Treasuries. Japan is the second largest holder of U.S. treasury securities with $885.9 billion in U.S. dollar reserves. Although China has reduced their U.S. treasury holdings for three straight months, Japan has increased their U.S. treasury holdings seven months in a row. Japan is the country that has been the most consistent at buying our debt for the past year, but that is about the change. Japan is likely going to have to spend $300 billion over the next year to rebuild parts of their country that were destroyed by the recent earthquake, tsunami, and nuclear disaster, and NIA believes their U.S. dollar reserves will be the most likely source of this funding. This will come at the worst possible time for the U.S., which needs Japan to increase their purchases of U.S. treasuries in order to fund our record budget deficits.

5) The Fed Funds Rate Remains Near Zero. The Federal Reserve has held the Fed Funds Rate at 0.00-0.25% since December 16th, 2008, a period of over 27 months. This is unprecedented and NIA believes the world is now flooded with excess liquidity of U.S. dollars.

When the nuclear reactors in Japan began overheating two weeks ago after their cooling systems failed due to a lack of electricity, TEPCO was forced to open relief valves to release radioactive steam into the air in order to avoid an explosion. The U.S. stock market is currently acting as a relief valve for all of the excess liquidity of U.S. dollars. The U.S. economy for all intents and purposes should currently be in a massive and extremely steep recession, but because of the Fed's money printing, stock prices are rising because people don't know what else to do with their dollars.

NIA believes gold, and especially silver, are much better hedges against inflation than U.S. equities, which is why for the past couple of years we have been predicting large declines in both the Dow/Gold and Gold/Silver ratios. These two ratios have been in free fall exactly like NIA projected.

The Dow/Gold ratio is the single most important chart all investors need to closely follow, but way too few actually do. The Dow Jones Industrial Average (DJIA) itself is meaningless because it averages together the dollar based movements of 30 U.S. stocks. With just the DJIA, it is impossible to determine whether stocks are rising due to improving fundamentals and real growing investor demand, or if prices are rising simply because the money supply is expanding.

The Dow/Gold ratio illustrates the cyclical nature of the battle between paper assets like stocks and real hard assets like gold. The Dow/Gold ratio trends upward when an economy sees real economic growth and begins to trend downward when the growth phase ends and everybody becomes concerned about preserving wealth. With interest rates at 0%, the U.S. economy is on life support and wealth preservation is the focus of most investors. NIA believes the Dow/Gold ratio will decline to 1 before the hyperinflationary crisis is over and until the Dow/Gold ratio does decline to 1, investors should keep buying precious metals.

6) Year-Over-Year CPI Growth Has Increased 92% in Three Months. In November of 2010, the Bureau of Labor and Statistics (BLS)'s consumer price index (CPI) grew by 1.1% over November of 2009. In February of 2011, the BLS's CPI grew by 2.11% over February of 2010, above the Fed's informal inflation target of 1.5% to 2%. An increase in year-over-year CPI growth from 1.1% in November of last year to 2.11% in February of this year means that the CPI's growth rate increased by approximately 92% over a period of just three months. Imagine if the year-over-year CPI growth rate continues to increase by 92% every three months. In 9 to 12 months from now we could be looking at a price inflation rate of over 15%. Even if the BLS manages to artificially hold the CPI down around 5% or 6%, NIA believes the real rate of price inflation will still rise into the double-digits within the next year.

7) Mainstream Media Denying Fed's Target Passed. You would think that year-over-year CPI growth rising from 1.1% to 2.11% over a period of three months for an increase of 92% would generate a lot of media attention, especially considering that it has now surpassed the Fed's informal inflation target of 1.5% to 2%. Instead of acknowledging that inflation is beginning to spiral out of control and encouraging Americans to prepare for hyperinflation like NIA has been doing for years, the media decided to conveniently change the way it defines the Fed's informal target.

The media is now claiming that the Fed's informal inflation target of 1.5% to 2% is based off of year-over-year changes in the BLS's core-CPI figures. Core-CPI, as most of you already know, is a meaningless number that excludes food and energy prices. Its sole purpose is to be used to mislead the public in situations like this. We guarantee that if core-CPI had just surpassed 2% and the normal CPI was still below 2%, the media would be focusing on the normal CPI number, claiming that it remains below the Fed's target and therefore inflation is low and not a problem.

The fact of the matter is, food and energy are the two most important things Americans need to live and survive. If the BLS was going to exclude something from the CPI, you would think they would exclude goods that Americans don't consume on a daily basis. The BLS claims food and energy prices are excluded because they are most volatile. However, by excluding food and energy, core-CPI numbers are primarily driven by rents. Considering that we just came out of the largest Real Estate bubble in world history, there is a glut of homes available to rent on the market. NIA has been saying for years that being a landlord will be the worst business to be in during hyperinflation, because it will be impossible for landlords to increase rents at the same rate as overall price inflation. Food and energy prices will always increase at a much faster rate than rents.

8) Record U.S. Budget Deficit in February of $222.5 Billion. The U.S. government just reported a record budget deficit for the month of February of $222.5 billion. February's budget deficit was more than the entire fiscal year of 2007. In fact, February's deficit on an annualized basis was $2.67 trillion. NIA believes this is just a preview of future annual budget deficits, and we will see annual budget deficits surpass $2.67 trillion within the next several years.

9) High Budget Deficit as Percentage of Expenditures. The projected U.S. budget deficit for fiscal year 2011 of $1.645 trillion is 43% of total projected government expenditures in 2011 of $3.819 trillion. That is almost exactly the same level of Brazil's budget deficit as a percentage of expenditures right before they experienced hyperinflation in 1993 and it is higher than Bolivia's budget deficit as a percentage of expenditures right before they experienced hyperinflation in 1985. The only way a country can survive with such a large deficit as a percentage of expenditures and not have hyperinflation, is if foreigners are lending enough money to pay for the bulk of their deficit spending. Hyperinflation broke out in Brazil and Bolivia when foreigners stopped lending and central banks began monetizing the bulk of their deficit spending, and that is exactly what is taking place today in the U.S.

10) Obama Lies About Foreign Policy. President Obama campaigned as an anti-war President who would get our troops out of Iraq. NIA believes that many Libertarian voters actually voted for Obama in 2008 over John McCain because they felt Obama was more likely to end our wars that are adding greatly to our budget deficits and making the U.S. a lot less safe as a result. Obama may have reduced troop levels in Iraq, but he increased troops levels in Afghanistan, and is now sending troops into Libya for no reason.

The U.S. is now beginning to occupy Libya, when Libya didn't do anything to the U.S. and they are no threat to the U.S. Obama has increased our overall overseas troop levels since becoming President and the U.S. is now spending $1 trillion annually on military expenses, which includes the costs to maintain over 700 military bases in 135 countries around the world. There is no way that we can continue on with our overseas military presence without seeing hyperinflation.

11) Obama Changes Definition of Balanced Budget. In the White House's budget projections for the next 10 years, they don't project that the U.S. will ever come close to achieving a real balanced budget. In fact, after projecting declining budget deficits up until the year 2015 (NIA believes we are unlikely to see any major dip in our budget deficits due to rising interest payments on our national debt), the White House projects our budget deficits to begin increasing again up until the year 2021. Obama recently signed an executive order to create the "National Commission on Fiscal Responsibility and Reform", with a mission to "propose recommendations designed to balance the budget, excluding interest payments on the debt, by 2015". Obama is redefining a balanced budget to exclude interest payments on our national debt, because he knows interest payments are about to explode and it will be impossible to trul y balance the budget.

12) U.S. Faces Largest Ever Interest Payment Increases. With U.S. inflation beginning to spiral out of control, NIA believes it is 100% guaranteed that we will soon see a large spike in long-term bond yields. Not only that, but within the next couple of years, NIA believes the Federal Reserve will be forced to raise the Fed Funds Rate in a last-ditch effort to prevent hyperinflation. When both short and long-term interest rates start to rise, so will the interest payments on our national debt. With the public portion of our national debt now exceeding $10 trillion, we could see interest payments on our debt reach $500 billion within the next year or two, and over $1 trillion somewhere around mid-decade. When interest payments reach $1 trillion, they will likely be around 30% to 40% of government tax receipts, up from interest payments being only 9% of tax receipts today. No country has ever seen interest payments on their debt reach 40% of tax receipts without hyperinflation occurring in the years to come.

Rare Earths Have Officially Gone Ballistic

The prices of major rare earth metals have just gone through the roof! Below is a chart of Cerium, Lanthanum, and Neodymium, all of which basically doubled in price in just this month alone. Is this due to reduced exports from China, exploding demand worldwide, or a speculative frenzy fueled by the Wenzhou? Perhaps all of the above. Either way, this doesn’t bode well for the price of any good that uses rare earths as an input, i.e. electronics, batteries, hybrids, etc.

rare earths

On the news front, China just released a report today saying that a massive rare earth deposit was discovered containing 70 tons worth of scandium, an element that is on average four times the price of gold and has traded as high as 10x. More details below:

Extraordinary Rare Earth Deposit Discovered In Zhejiang

The Zhejiang Provincial First Geological Team has discovered a mammoth scandium-polymetallic deposit in northwestern Zhejiang that has proven scandium reserves of 70 tons worth about 70 billion yuan, according to an announcement made by the Zhejiang Provincial Geology and Exploration Bureau on March 29.

The rare earth deposit contains 17 types of metallic elements. Of them, scandium is mainly used in national defense, spaceflight, nuclear power, superconductor and other cutting-edge technological sectors and is one of the elements included in national strategic reserves.

Yang Xiaochun, head engineer of the Zhejiang Provincial First Geological Team, said that the market price for scandium is normally four times higher than that of gold and at one point in history it was 10 times more valuable.

The deposit is also accompanied by a large-scale silver-polymetallic deposit with 800 tons of silver and 130,000 tons of lead and zinc. The silver-polymetallic deposit contains 3,000 tons of cadmium, which is equivalent to the reserves of a large-scale cadmium deposit. There were also medium-scale deposits found containing 7,000 tons of tin, 400 tons of gallium and 5.5 tons of rhenium.

This was the first time to discover not only an enormous scandium deposit in China but also so many types of precious, non-ferrous and rare metals all with reserves above a certain scale in the same deposit.

These rare earth metals are all highly priced. The market price for tin stands at about 200,000 yuan per ton. The market price for gallium is similar to that of sliver, standing at about 6 million yuan per ton. The price for rhenium is 60 million yuan per ton, which is 10 times higher than that of silver.

Although this may alleviate some of the supply concerns for China’s domestic use, it doesn’t mean much for countries outside of China since, of course, finding a huge pile of gold in your own backyard doesn’t necessarily mean you’re going to share it with others.

Five of Ten Sectors Back to Overbought

Below we provide our six-month trading range charts of the S&P 500 and its ten sectors. For each chart, the blue shading represents the sector's "normal" trading range, which we consider between one standard deviation above and below the 50-day moving average. The red shading and above is considered "overbought" territory (more than one standard deviation above the 50-DMA), while the green shading and below is considered "oversold" territory (>1 standard deviation below the 50-DMA).

After trading into oversold territory for the first time since last August, the S&P 500 has quickly recovered since its recent low on March 16th. While the index has yet to take out its prior highs and reconfirm the bull market, it is already right back at overbought territory as of this morning.

Below is a table that essentially summarizes what you'll see in the sector trading range charts. As shown, five of ten sectors are now back into overbought territory, while just one (Energy) was overbought last week at this time.

Four sectors have now rallied enough to take out their February highs -- Energy, Health Care, Consumer Staples, and Telecom. Based on its chart pattern, Telecom (which includes the surging VZ) has had the most impressive run in recent days. Eight of ten sectors are back above their 50-day moving averages as well. The only two sectors that remain below their 50-days are Financials and Technology. Both have bounced off of their lows, but neither look particularly attractive.

Interested in incorporating our trading range charts into your investment analysis? Subscribe to Bespoke Premium today!

Neal Dingmann: Genuine Growth Still Lives in E&Ps

The Energy Report: Are you bullish on companies that have exposure to natural gas?

Neal Dingmann: To a degree, I am bullish. The market has changed in the last couple of years. When you're talking natural gas, you have to distinguish between dry gas and what they call the "wet gas" or natural gas liquids (NGLs). There are a lot of good companies out there that have both. One might not be all that bullish in the near term on dry gas, which is currently around $4.37 per thousand cubic feet (Tcf). But if those same companies have exposures to liquids, they can still make a tremendous return. I like companies in regions that have exposure to the liquids but, at some point, I believe the natural gas comeback may be sooner than many think.

TER: Do you have a forecast for oil and gas (O&G) commodities?

ND: For natural gas, our estimates are $4.38 per million cubic feet (Mcf) this year and $5.05/Mcf next year. For oil, $97.06/bbl this year and $97.76/bbl next year; so, you could see a little bigger move in natural gas given where it is today.

TER: But do you believe that the margins are there for growth?

ND: Absolutely. As long as companies have liquids or oil exposure to any extent, I think margins can be extremely good.

TER: Why do the liquids have greater margins than the dry?

ND: Because most NGLs are priced as a percentage of oil. Propane, for instance, is probably the lowest at around 25%–30%, all the way up to some natural gasoline at about 90% of the price of oil. So, unlike dry gas, which is going to be at a relatively low price right now, ethane, propane, butane and natural gasoline are essentially priced off the price of a barrel of oil today, which is much higher, marginally speaking.

TER: Why do companies even look for dry gas now?

ND: Obviously, it's tough for a public company to announce today that it's going to do an acquisition for purely dry gas. Private companies can afford to buy and wait until prices come back; public companies can't.

TER: So, public companies producing dry gas are doing it as a byproduct of some other commodity?

ND: That's most of what we're seeing today. The two key geographic areas with a fair number of associated liquids are the Marcellus Shale play in the East, or the Appalachian side, and the Eagle Ford Shale close to San Antonio.

TER: What should an investor look for today, in terms of a balance between oil and gas in a company?

ND: I like companies that are a little more than 50% when you combine the oil and liquids exposure. I believe dry gas should come back in one to three years. If a public company has enough oil/liquids exposure, it will have economic activity and drilling over the next two years to provide sufficient cash flows until gas comes back.

TER: What companies do you see with this balance?

ND: One of my top recommendations would be SandRidge Energy, Inc. (NYSE:SD), which is pretty unique with two primary oil plays—one in the Permian Basin and another in northwest Oklahoma. The company also has a very large conventional gas property in Texas, which could be a huge asset when prices come back. SandRidge is ramping-up production about 15%–20% this year and owns its drilling rigs. Because it is in the Permian and the Oklahoma area, service costs are much lower than in most unconventional areas. The company has some very high hedges, locked in with very economical prices, along with two solid oil plays and an incredibly large gas play.

Another is Magnum Hunter Resources Corp. (NYSE.A:MHR), which is in three of the hottest plays in the U.S.—the Marcellus around the Appalachian, the Eagle Ford in Texas and the Bakken in northern North Dakota. The company controls its own infrastructure, which is a key issue with a lot of small companies. The Marcellus acreage has a very high liquid content, but the company has several hundred-thousand-gas acres, which should do well when gas prices come back.

Magnum Hunter recently acquired NuLoch Resources Inc. (TSX.V:NLR), which has a very experienced team up in the Bakken. NuLoch has the potential to see production go from around 2,000 to 4,000 barrels per day (bpd) in a couple of years. That would be nearly all oil. The Eagle Ford has seen not only great liquid content from the wells, but also decreasing costs due to improved drilling practices. So, I expect not only the results to stay as high, or maybe go higher, but also anticipate the cost of those wells coming down, thus enhancing returns.

TER: Should investors be looking for data points or catalysts from the NuLoch projects?

ND: Absolutely, that acquisition hasn't officially closed yet. NuLoch is a good, but small, company with limited financial resources but a solid operational team. When combined with a company like Magnum, which has a much larger budget, it could really see explosive results.

TER: What other companies should investors consider?

ND: Chesapeake Energy Corp. (NYSE:CHK). People talk about Chesapeake being one of the largest gas producers in the U.S. The company still has a lot of gas going forward. But this year, Chesapeake has focused on more liquids plays with leading positions in the Bakken. It also has big acreage in Niobrara, the Marcellus and Eagle Ford and tends to be one of the lowest-cost producers in all those plays.

Investors are becoming more and more convinced that Chesapeake will follow through with its 25/25 mandate, which means growing production by 25% while simultaneously reducing debt exposure by 25%. It's a nice combination of a large company ramping-up production intelligently and, concurrently, decreasing its debt exposure on a percentage basis. There are other large companies out there that might be as good with similar production upside but, generally, when you have this production upside, you have a debt level that is continuing to expand on a percentage, or debt-to-cap basis. In the case of Chesapeake, we should see debt going down. Also, the company has been very good at putting its operational team expertise to use by finding these plays early, and then partnering with the right financial partner.

Another company is Swift Energy Company (NYSE:SFY). It was known mostly as a Gulf Coast company around the Lake Washington area. But it has more than 70,000 acres in Eagle Ford, which, as mentioned previously, is a very high liquid-concentrated area. Swift has a mandate and overall production should be up to about 25%–30% this year, sequentially—one of the highest in the industry. On top of that, Swift is able to keep its costs down with strong extended frack contracts with Weatherford International Ltd. (NYSE:WFT) on the wells. Also, the company has been in this play and around the Gulf Coast for some time and its acreage prices are a fraction of what some of the newer entrants have paid. Not only does Swift have the big advantage of having high growth, but also exceptionally low costs because it got in these plays early.

I think it is also important to highlight a small company, called Miller Petroleum Inc. (NASDAQ:MILL). Until a year ago, this Tennessee company was predominantly a small gas company with a little bit of associated oil. Miller Petroleum then came to the Cook Inlet in Alaska and bought some very attractive assets out of bankruptcy for a very, very cheap price. The company has tremendous running room, given its thousands of acres up in Alaska, where production could double or potentially triple in the next several quarters. Miller owns its own infrastructure in Alaska, and the state offers tax credits that could amount to as much as 60%–65% of capital invested. What's unique in Alaska is that oil prices have little to no differential to West Texas Intermediate (WTI) prices. So, with WTI at over $100/bbl, oil prices are extremely attractive. It's a very unique small company with tremendous assets—oil, plus natural gas in Alaska.

TER: But MILL has really lagged and is considerably lower than its peer group. Is that because its market cap is so small that the bigger mutual funds are unable to buy it?

ND: I believe that's a good bit of it. Its market cap is only about $200 million. Generally, for a lot of the mutual funds to get in, it has to have a minimum of a $500-million market cap. I believe that in the coming quarters, as we begin to see some production upside, you should start to see the stock price go in sync with that.

TER: What about international companies?

ND: We do have one that I think is very exceptional—TransAtlantic Petroleum Ltd. (TSX:TNP, NYSE:TAT), which has more than 1 million acres in Turkey. The commodity prices are very positive in that region. Gas is between $7 and $8, and oil is right around $100–$115. What's interesting is that TransAtlantic owns all of its services—not just rigs but frack trucks, completion trucks and seismic equipment. With that, the company's costs will stay well under what they would be if relying on foreign companies to provide those services. But clearly, it takes this company longer to set up operations because it still needs to bring in many services from the U.S.

TransAtlantic recently closed on a couple of large acquisitions. The company has two primary areas. One is Thrace Basin, northwest of Istanbul, which is predominantly natural gas. A number of wells are starting to be drilled and fracked there and it is taking off exponentially. Another area is southeast Turkey, almost on the Iraqi-Syrian border, where a fair amount of oil drilling is expected. Between the combination of Thrace and southeast Turkey, we believe production is somewhere around 5,000 bpd. We believe production could reach 10,000 bpd this year and 20,000 bpd next year. Compared to domestic companies, its production model could be one of the leaders.

TER: You forecast that TransAltantic could ramp-up production by more than 200% this year. Is that correct?

ND: Absolutely. Most people would probably agree that the reserves are in the ground on the massive acres the company holds. Obviously, the questions are always: Can the company get it out of the ground? And how soon can it get it out of the ground? We believe that because the services are all there and most of the processes are in place, we should now see the benefit of all that. You saw production begin this year somewhere around 4,000 bpd, and we could see an exit rate well north of 10,000 bpd.

TER: You mentioned that TransAtlantic has its own infrastructure. Does that all come under the heading of Viking International?

ND: It does. Viking International is a subsidiary of TransAtlantic, which is trading at about $2.87/share or about a $1 billion market cap. Some might argue that one-third or even more of that market cap is comprised of the book value of Viking International.

TER: Has the stock lagged thus far because it hasn't begun the growth part of its production?

ND: That's likely the reason. Usually, most mutual or hedge funds are able to come in and acquire a company like this at $1 billion. The plan would be to ramp-up that production to somewhere around 20,000–40,000 bpd. That would put it on the radar of a lot of the majors and some of these other large foreign players looking for a large oil or gas play. At that point, the company would probably sell to one of the large E&P companies, which would be very positive for shareholders.

TER: Could Turkey be considered a geopolitically risky area, and is there a risk discount trading in this stock currently?

ND: You've brought up a good point. With any company not primarily a domestic, there is always going to be some discount in the stock price for potential geopolitical risk. The objective for investors is to determine the appropriate discount. Today, due to potential turmoil in parts of the Middle East and other areas, there may be some over discounting of TransAtlantic's stock price. When some of this other turmoil starts to die down again, you may start to see investors come back in a larger way.

TER: Thank you for your time.

4 Value Menu Stocks to Buy The list is very short, but there are some bargains out there

It seems that authentic bargain stocks are once again becoming an endangered species. Two weeks ago, when the blue-chip market indexes hit bottom for this recent “correction,” we had a pretty good menu of cheap stocks and mutual funds to choose from. But the Dow’s wicked 666-point rally since then has sharply narrowed the buy list.

Lest you think I may be sifting with too fine a screen, I should add that I’m not alone in my complaint. On Friday, Ben Inker, the well-regarded asset-allocation specialist at GMO in Boston (a money-management firm with $107 billion under its wing) gave a sobering talk at an investment conference sponsored by Babson College.

According to Inker’s calculations, the market as a whole would have to drop 29% to bring it back to fair value. He estimates fair value by using a formula that incorporates 10 years’ worth of earnings and a desired “real” (inflation-adjusted) return of 5.7%.

At current levels, Inker says, the market is priced to deliver only a 3.8% annualized real return — including dividends and capital appreciation — over the next seven years.

If the broad market is overvalued, as Inker and others (such as Yale Professor Robert Shiller) argue, it follows that relatively few investments will pass muster as cheap stocks to buy at today’s prices.

There’s a silver lining in this cloud, though: A select group of very high-quality companies continue to be unusually cheap. I’m referring to cheap stocks such as:

  • Bank of New York Mellon (NYSE: BK) — Buy below $31
  • Johnson & Johnson (NYSE: JNJ) — Buy below $62.50
  • Microsoft (NASDAQ: MSFT) — Buy below $28
  • Procter & Gamble (NYSE: PG) — Buy below $64

Over the next 12 months, I project that an equal-dollar package of these four will generate a total return of 15%-25%. And over the next decade, I’m confident this quartet will leave the major market indexes behind in a cloud of dust.

Jim Rogers: High Oil Prices, Nuclear Energy Are Here to Stay

Japan's nuclear disaster is going to increase demand for oil and natural gas and despite concerns surrounding nuclear energy, it's not going to disappear, says commodities investor Jim Rogers. Uranium and nuclear power stocks will be good buys again in a couple of years, and oil will be strong for a decade.

"Unless we find something to replace oil and coal, we have to have nuclear… whether we like it or not," Rogers tells CNBC.

Japanese stocks, meanwhile, are good buys as the country will recover from the earthquake and nuclear disaster.

Jim Rogers
"It's going to cause slowdown in the Japanese economy … eventually though they are going to have to rebuild and they will rebuild," Rogers says.

"I don't think Japan is going to fall off the face of the earth and I own Japan."

Oil prices have been high lately due to concerns that demand will rise due to the disaster in Japan as well as to ongoing unrest in the Middle East.

OPEC countries could report oil export revenues of over $1 trillion 2011, according to the International Energy Agency, the Financial Times reports.

For that to happen, oil prices would have to average over $100 a barrel for this year.

Oil prices are trading around $104 a barrel and are starting to chip away at consumer confidence in the U.S., which had been improving until March.

"Consumer confidence is starting to erode and high oil prices probably have something to do with it," says Olivier Jakob of Petromatrix in Switzerland, according to the Associated Press.

Gerald Celente on the Alex Jones Tv 30 March 2011

Gerald Celente : as we are looking to the war it is what we have said is going to be , The First Great War of The 21st Century Has Begun and there could be no doubt about it , the global Ponzi scheme is collapsing , when the bailouts begun in 2008 we said when the bailout bubble burst next they will take us to war it's history repeating itself the song is the same the tune is different , figure it out 1929 the panic of 08 , the Great Depression , the great recession , the only reason the recession hasn't turned worse in the United States is because of all that digital money they keep pumping into the system to keep the banks afloat and then you look at the currency wars going on today the next thing is trade wars and then real wars ...what's going on in the middle east and north Africa is actually going on in the UK

Bullish Technicals for Natural Gas

Apart from whether or not President Obama actually lays out a natural gas program in today's speech, my technical work on iPath DJ-UBS Natural Gas TR Sub-Idx ETN (GAZ) is "warning" me to expect higher prices regardless.

Let's notice that the March upleg from 6.85 to 9.05 has returned to its 50% support plateau (this morning), where it pivoted to the upside into a potent rally to 8.35 so far. Right now, my near-term work in natural gas futures, the U.S. Natural Gas ETF (UNG), and GAZ indicates that a new upleg likely started at this morning's lows.

A climb that sustains above 8.40 will be the first confirmation that a new upleg is in progress.

By Mike Paulenoff

Wednesday, March 30, 2011

11.4% of all U.S. homes are vacant

High residential vacancies are killing many housing markets, as foreclosed homes sit on the market and depress sale prices and property values.

The national vacancy rate at 11.4% according to a release Tuesday from the Census Bureau.

"Vacant homes equal more downward pressure on home prices," said Brad Hunter, chief economist for Metrostudy, a real estate information provider.

Maine had the highest proportion of empty housing stock, at 22.8%. Other states with gluts of empty houses included Vermont (20.5%), Florida (17.5%), Arizona (16.3%) and Alaska (15.9%).

The way the census calculates the vacancy rates, however, is problematic. It includes properties such as ski lodges, beach houses and pied-à-terres that many real estate statisticians would not.

These are often summer homes or second homes, but census lumps them together with homes that have been sold but not occupied, empty homes for sale or rent, and homes used by migrant workers. Basically, anything other than a primary residence is considered vacant.

"You can only live in one home," said William Chapin of the Census Bureau's Housing Statistics Branch. "If you own five homes that you occasionally live in, four of them will be counted as vacant."

But Paul Bishop, the vice president for research for the National Association of Realtors, countered that these properties aren't vacant in the usual sense of the term. "A vacation home is hardly the same situation as a foreclosed home that has been taken back by the bank," he said.

In Maine, more than two-thirds of the 160,000 vacancies were vacation homes in 2009; Vermont had a similarly high concentration.

Compare them with Connecticut, which has a vacancy rate of just 7.9%, the lowest of all the states. If you back out the vacation properties from the statistics, the states have very similar vacancy rates: 6.1% for Connecticut and 7% for Maine.

Some states have high vacancy rates even after backing out the second homes: Florida's is about 10%; Arizona's is 10.7%; and Nevada's 11.4%.

Besides Connecticut, the other states with lowest vacancy rates are California, Iowa, Illinois, Virginia and Washington, all at 9.2% or lower.

Rare Earth Stocks Breaking Out

Not too long ago in our national history, mining for rare earths (Market Vectors Rare Earth/Strategic Metals (REMX)) was an American enterprise. As in so many other areas, such as nuclear power, automobiles and technolgoy, it was decided that the US would shut down industries and farm the work out. The Chinese took the lead and became the world’s supplier of over 97% of these crucial rare earth elements. Now it is the Americans coming, hat in hand, to petition Beijing a la Oliver Twist with a “Please… may I have some more?”

Consequently, it is an exciting time for people positioned to profit from the most promising stocks in the rare earth market. Demand is soaring skyward in the face of a serious shortage. An immediate global call for action and solution is required. It’s already too late.

The prices of rare earths are reaching new heights. This swift ascension is all the more notable as China increasingly curtails the exports of these rare ores. Now Beijing has revised downward by 50% what they would allow for sale abroad, in the January to June 2011 period. China has also raised taxes and has cut down on illegal smugglers. It is a game of chess and China is forcing the West to make the next call. Will the West develop their rare earth assets? If the West doesn’t, I expect the Chinese will make an acquisition. Already Molycorp (MCP) is on the record that China may import certain heavy rare earths and may look for targets abroad. China would be making a strong case that even they are strapped for critical heavy rare earths such as dysprosium and neodymium.

Such regulation of this critical area continues to stoke profitable activity in this sector. It is well known that rare earths are essential to this vital modern industrial nation. For example, Japan, the world’s third-largest economy, depends on rare earths, especially their top-notch automobile maker such as Honda (HMC) and Toyota (TM). Lanthanum is used in their batteries, cerium is in the windshields, dysprosium and neodymium are used in the hybrid engines. These hybrid vehicles are large users of rare earths. Car companies are increasing the amount of rare earths used to raise the fuel efficiency of the newer designs.

Recently China claimed that they had to place quotas to protect their own industries and environment. China professes they had to exercise self-protection and were not being draconian. In essence, they advised other nations to expedite their own mining permitting processes so that new prospects could be brought to fast-track fruition.

These actions are not without repercussions. Several US senators threaten to bar Chinese miners from the United States unless they can increase rare earth supplies abroad. Importantly, the World Trade Organization is mobilizing to exert pressure on China to increase their exports through trade sanctions. There is also legislation pending to require the American military to stockpile rare earths. Concerted global action is required that goes beyond protectionism. Governments must accelerate the entire permitting and financing process. Such a combined effort is immediately called for.

Many of my rare earth recommendations have huge potential and should be followed as I expect many of these heavy rare assets to gain significantly. Last week, I sent out a report showing increased institutional interest in rare earth stocks as the crisis intensifies in Washington and Beijing. Recently rare earths moved from a rapidly rising market at the end of 2010 to a sideways consolidation so far in 2011. Some fear the US will retaliate against China by forcing the WTO to threaten trade sanctions. The profit-taking appears to be coming to an end and there is a lot of money flowing back into this space.

I sent out last week an update on the break of the 50 day moving average and falling wedge to the upside in Molycorp. Molycorp is the leading light rare earth developer in the Western Hemisphere and I believe that this enthusiasm will spread to the other rare earths as this sector looks ready to take off again. This appears to have similar characteristics as the breakout in December where the rare earth sector soared on export cuts from the Chinese. Right before the December breakout many of the rare earths showed similar technical characteristics with a break of the 50-day moving average followed by a reversal higher.

The fact remains that both the US and China realize that they need each other. The US has provided China with a large market and China has afforded the US cheap labor and cheap rare earth commodities, which is crucial to the latest and most innovative technology products.

Recently, China and the US had a special dinner announcing a myriad of deals across several industries. The theme of the deals was that China would help devalue the dollar to keep up the equity markets if the country could have access to North American resources and financial companies. China needs to hedge their large positions in the US dollar (PowerShares DB US Dollar Index Bullish (UUP)) and long-term US debt (iShares Barclays 20+ Year Treas Bond (TLT)). China has opened an office in Toronto to look for acquisitions and is encouraging investments in commodities to supply the rapidly developing Chinese market. Molycorp recently announced that China may be looking for rare earth targets and may be an importer by 2015.

China announced yesterday that a rare earth tax will be imposed. This will significantly elevate production costs for companies operating in China. There is significant pressure being put on lawmakers in Washington on developing a domestic supply of rare earths.

The rare earth sector is experiencing an explosion of investment interest as China continues to place restrictions and raise taxes on Rare Earth Oxides (REO), causing soaring prices. Sojitz, a major Japanese trading giant, has already made a deal with Lynas and Hitachi (HIT) and Sumimoto (SMFG) has signed agreements with Molycorp, the only near-term producer outside China. Japan and South Korea invested $1.8 billion in a Brazilian mining group a few weeks ago that is the largest producer of niobium. (Niobium is used to make a hard, lightweight steel that is increasingly being used to make vehicles that are lighter and more fuel-efficient.)

I believe as the crisis intensifies there may be more strategic acquisitions for assets whose projects will come online further down the road. Companies in North America with the crucial heavy rare earth assets should be followed. Many do not realize that even China may make bids in 2011 on heavy rare earth assets. Stay tuned.

Daily Market Commentary: Bullish Engulfing Patterns

Markets opened weak but were able to make back lost ground and then some. The S&P confirmed a breakout from the downward channel on heavier volume (but light volume compared to what's gone before).



The Nasdaq offered a sizable bullish engulfing pattern, without the higher volume accumulation, but with enough juice to outperform the S&P (on a relative basis).



Nasdaq Breadth continued to improve with a MACD trigger 'buy' and a rise in stochastics from oversold conditions.



While the Percentage of Nasdaq Stocks above the 50-day MA shifted technicals net bullish after stochastics crossed the bullish mid-line.



Small Caps also cracked out a bullish engulfing pattern as it hugged former support higher. Since early February Small Caps have been outperforming Tech, and Large Caps since mid-May. As the leading index it should be favoured by buyers.



With a number of bullish engulfing patterns appearing in different markets - albeit weakened by the lack of an oversold market (so they are not a slam dunk) - there is a good chance for some upside follow through tomorrow. As for support, the Nasdaq and Nasdaq 100 were able to lean on 20-day MAs following morning weakness. While the S&P defended its 50-day MA. Stops can be trailed on a break of these key averages.

What Do Oil Insiders Know That You Don’t? Producers, refiners selling crude futures at a breakneck clip

If you own a lot of energy stocks, you’re not going to like what I have to say, but I suggest you hear me out. I think we’re getting close to a significant downward reversal for crude oil, which obviously would not bode well for oil stocks.

Heresy! How can oil prices fall with fighter jets screaming over Libya and pro-democracy uprisings in petroleum-producing countries like Yemen and Bahrain?

Well, think about the other side of the story. Why do you suppose crude has soared from $85 to $105 a barrel in the span of just a month? Isn’t it precisely because of all those suspenseful geopolitical events?

Let’s imagine for a moment, a world without Khadafi. It may not be that far off. With the colonel out the door, and a democratic Libyan government in place, I could easily envision a $20-plus drop in oil since Japanese energy demand has fallen off sharply in the wake of the earthquake/tsunami. If crude were to buckle, oil stocks, currently at the top of the standings for year-to-date gains, would take a header, too.

Technically, the oil market is ripe for some kind of “correction.” In recent weeks, the insiders of Big Oil — producers , refiners and other commercial interests — have been selling crude futures at a breakneck clip.

As of last week, the commercials were net short 310,000 contracts. Before this year, that figure had never exceeded 200,000. So the big boys are unloading at a rate far above normal. Do they know something the frantic “energy experts” on CBNC don’t?

I’m not advising you to dump all your oil stocks. However, I think it’s a good time to reassess your holdings and trim those of marginal quality.

One oil stock I recommend selling is Russia’s Lukoil (OTC: LUKOY). LUKOY has more than doubled from its lows during the October-November 2008 panic. Yet operations have stagnated, with production down almost 10% in the past four years. Thanks to the ebullient oil market, investors can now make a graceful exit.

In addition to LUKOY, I would sell Chesapeake Energy (NYSE: CHK), which has soared almost 60% since last November — an unsustainable move, in my judgment. However, I don’t recommend selling the conservatively managed, dividend-paying titans of the industry, such as Chevron (NYSE: CVX), ExxonMobil (NYSE: XOM) or Royal Dutch Shell (NYSE: RDSA).

These low-volatility stocks are unlikely to fall far if the price of crude backtracks $10 or even $20. Hold them. My sell advice is directed at the industry’s more speculative players.

Should you be concerned about your master-limited partnerships? Probably not. MLPs are primarily “toll takers,” collecting a fee for transporting, storing or processing fossil fuels. This business is largely insulated from fluctuations in energy prices.

Finally, peculators might consider shorting the United States Oil Trust (NYSE: USO) at $42.80 or higher. USO is an exchange-traded fund (ETF) that tracks the price of oil by investing in futures contracts and other derivatives. However, because of the costs built into the fund’s structure, it has badly lagged its benchmark (West Texas intermediate crude) for more than two years. That’s exactly what you’re looking for in a good short. Set a stop 10% above your entry point.

One last thing: I understand that some retail brokerage firms are reluctant to make USO shares available for short selling. If your broker is in that category, you might consider buying the U.S. Short Oil Fund (NYSE: DNO) at $36 or less.

However, this is really a second-best solution, because trading volume in DNO averages less than 1 million a day. I prefer more liquidity, particularly in a whippy market like oil.

Unmanipulated US "Misery Index" Hits All Time High

While everyone knows that the CPI in the US is manipulated beyond repair (a topic far too broad to be discussed here suffice to say that as disclosed previously true inflation in the US is currently runrating at over 8%), inflation as actually represented by US consumers and reported by Zero Hedge earlier, in the form of the 1 year inflation expectation index of the Conference Board lack of confidence index, is near all time highs. So if one takes this data series and adds to it the narrow unemployment definition (U3) one would get an adjusted Misery Index for US citizens (using inflation expectations instead of manipulated CPI). As the chart below shows, the Misery Index, which is merely inflation plus unemployment, constructed as such, would now be at an all time high. Hardly in keeping with Bernanke's wealth effect prerogative, but surely in line with record food stamp usage reported month after month. That said, the silver lining to that particular mushroom cloud is our confidence that as the bulk of Americans live in record "misery", they will be comforted to know that their 20 shares of NFLX are trading at a four digit EPS multiple. And the other good news is that we have the Brits beat again: whereas the US is at a record, the UK is merely at a 20 year high, proving once again that only the US never does anything half-assed.

Jay Taylor: Turning Hard Times Into Good times

Finding a Safe Haven in a Growing Totalitarian World.

click for audio hour #1 hour #2 hour #3

Comprehensive First Quarter FX Outlook From GTAA

Following the relase of its general equity market overview, GTAA has followed up by releasing the quarterly FX market analysis. In a nutshell, Cleusix sees the USD as the fulcrum security with substantial upside (we would agree...if Bernanke were to not pursue further debt monetization). "The USD is becoming increasingly undervalued against most currencies. It is at a 40 years low on a real broad trade-weighted basis. Sentiment is increasingly supportive for the USD. Speculators had their biggest USD net short position ever a week ago and have covered a third despite continued USD weakness (a positive divergence. Assets in the the Rydex Weakening Dollar have surpassed assets in the Rydex Strengthening Dollar fund but have yet to spike briefly higher as they usually do when the USD decline exhausts itself. There is a big global short USD position which is growing by the day as the increase in foreign central bank reserves can not be completely explained by their current account balance and the net foreign direct investments. Hot money is flowing to emerging markets and we are on the look out for canaries…" All this and much more in the full 56-page report enclosed.

Key Highlights:

The USD is becoming increasingly undervalued against most currencies. It is at a 40 years low on a real broad trade-weighted basis. Its economy is much more dynamic and has started to rebalance earlier than other developed economies. Companies have been cutting costs aggressively and are much more competitive in the international markets.

The big problem remains that the Fed is suppressing real government bond yields through quantitative easing. Ceteris paribus, the USD will have to be more undervalued on a PPP basis to be in equilibrium. Indeed, the deficit of interests payment foreigners are receiving has to be compensated by a lower price I.e. lower USD (this is another reason why emerging markets with negative real yields have very undervalued currencies on a PPP basis). At current levels we think the compensation is large enough.

The declining USD is pushing other Central Banks/Treasuries to become increasingly aggressive buyer of USD to weaken their own currencies. They then have to recycle their newly acquired USD and in so doing are exerting a downward pressure on real rates in the US and thus weakening the USD. This can not last forever. This will end by a radical redesign of our current monetary system and the sooner the better. The winner… Gold.

Sentiment is increasingly supportive for the USD. Speculators had their biggest USD net short position ever a week ago and have covered a third despite continued USD weakness (a positive divergence. Assets in the the Rydex Weakening Dollar have surpassed assets in the Rydex Strengthening Dollar fund but have yet to spike briefly higher as they usually do when the USD decline exhausts itself.

There is a big global short USD position which is growing by the day as the increase in foreign central bank reserves can not be completely explained by their current account balance and the net foreign direct investments. Hot money is flowing to emerging markets and we are on the look out for canaries…

A new “Homeland Investment Act” could be voted in the month to come which could offer some support for the USD as it did at the end of 2004, while oil price rising further might reach a level where its historical highly negative correlation with the USD turns positive as it does when oil price rise enough to break the back of the macro up cycle.

The Euro is 7-10% overvalued, after its recent rebound (more like 20-25% overvalued if you are leaving in Spain and much more if you are Greek). Yields spreads remain favorable and in synch (which is even more important) but the spread momentum has been faltering in the past 2 weeks despite M. Trichet "strong vigilance".

Sentiment is not supportive with Speculators having accumulated a large net long position and a short-term positive risk reversal divergence.
The Euro has been supported by the strong growth in emerging markets and the rapid inflows of hot money. Indeed exports to emerging markets are contributing strongly to the recent performance of the European core area and Emerging Central banks are busy rebalancing their currency holding toward greater diversification (even if they did not they would have to sell some USD to keep the mix stable). We should also remember that a big chunk of emerging markets credit expansion is and has been financed by European banks. So if emerging markets slow down is larger than most expect (our scenario) Europe and the Euro are likely to suffer much more than the US and its currency.

The trend is up but extended. We would exit long positions at least until we get an upside break. We would sell 1.5-3% OTM calls with 1-3 months maturity and would start to build an outright short position on a move below 1.39 and increase it if it moves below 1.375. We would use an initial stop at the high the Euro will make before it move below our trigger zone (so not 1.4248 but higher or lower depending where the current intraday rebounds stop).

Longer-term we maintain that the Euro could fall below 1. We think that it will bottom near 0.7 if it survives. Crazy? We met the same skepticism when we forecasted a rise above 1.5 when the ECB started to intervene when it was hovering near 0.85 almost 10 years ago. While supportive political decisions might be taken in the near future (but it seems they won't as is usual) , the problems won't disappear and will come back later to hunt them. The system, both political and financial has to be reformed but we will probably need a new crisis.
The Yen overvalued by at least 25%. And the authorities have now started to intervene again (this time jointly) putting an implicit floor below 80. The potential sterilization of the BOJ Yen selling and increase in the size of its balance sheet relative to other countries should push the Yen lower. With regard to repatriation, it is a myth. There are no data confirming it after the Kobe earthquake. Yields spreads are diverging negatively with price. This should ultimately leads to a lower Yen.

There is a big non-commercial net long position which is diverging with price (net long position not increasing on Yen strength). “Housewives” have a huge net short position against the USD, the AUD and most other currencies. Position that large have historically led to Yen weakness in the short-term.

There are/have been continued big inflows of hot money in the past 8 of months with the Yen rising despite the broad balance of payment registering a deficit of more than 5% of GDP.

We would need a break above 84.5 for a clear change in the cyclical trend. Until then, our strategy is to sell downside volatility (USD/JPY puts with strike from 80.5 and below and 1 to 3 months to expiry). We would get outright long (the USD/JPY) on a move above 84.5 with a stop at the rising 65 days exponential moving average or on a new move below 80.5. Our first target would be a move to 93.5-94 and then 100. We would totally hedge the Japanese equity holding of “gaijin” investors.

The British Pound is now slightly overvalued and deserve to trade at a bigger discount with lower real short-term yields than in the US. Many accidents are just waiting to happen with notably the residential real estate market. Authorities will use, among others, a depreciation of the Pound to support the British economy. Yields spreads are not confirming the recent Pound appreciation.

Speculators are net long but they have sold some on strength which is a bearish divergence. The risk reversal is still in synch with the cross.

The British Pound is in the middle of its up channel entering an important resistance zone. We might contemplate taking a short position on a move below 1.60. We are seller of upside volatility on a move above 1.65. We would sell 1.675-1.69 1-3 months to expiry calls.

The CHF is more than 50% overvalued. The SNB has its hands partly tied having been to early to the party. It has already intervened massively and is running out of options (we would not be surprised to see capital controls be introduced on further strength. They could take the form of a tax on foreign money entering the country or negative yields on CHF denominated deposit owned by foreign entity). Walls of money are still heading to Switzerland from European banks while many holders CHF-denominated mortgage in Eastern Europe are slowly but surely getting squeezed. As for the JPY the yields spreads have not confirmed the recent CHF strength.

Speculators have a huge net CHF long position.

The pair is very extended below its 200 and 50 days exponential moving average. This configuration has historically led to a “return to the mean”. The technical structure remains favorable to the CHF with no identifiable trend change. While we do not usually fight trends, we would take a short position at the current 0.8980-0.9015 level. If we can move above 0.935 and then 0.975, the move could extend to last years high.

Commodities currencies are overvalued… The AUD is probably more than 35% above fair value while the NZD is 15-20% overvalued. The CAD is more than 10% overvalued. They have profited from the "Chinese inventory build-up“, Emerging Markets boom, institutional love affair and more recently QE2 related commodity rally. We think that the latter rally is very long on its tooth so…

Speculators have a large AUD long position while there is a negative divergence building in the risk reversal.

The AUD might be in the process of forming a complex top. It looks distributive to us. Remember that when the AUD corrects, it tends to do have a waterfall shape. We can not recommend a long position at this juncture anymore. The level of overvaluation and the fragility of the foundation of its strength makes it to risky. We are seller of upside volatility on a move above 1.02 and would even take a tiny outright short position to profit from the probable RBA selling. We would have to wait for some technical deterioration before we are willing to fight against the carry with more commitment but a close below the recent 0.985 lows would be a move in the right direction.

On emerging currencies, we prefer to stay on the sidelines for now as valuation are not attractive and authorities seems to have decided, especially in Latin America, that their currency will not be allowed to strengthen. If we had to we would maintain a long position on the Taiwan Dollar and the Singapore Dollar. The more then Yen decline the less attractive the Won proposition will become so we are no longer recommending the South Korean currency for those who have to be long…We would not short, however, as the carry is too high for most of them. There will come a time were we will short emerging market currencies opportunistically, as we last did in 2008 but not yet.

Could a Japanese U.S. Debt Selloff Trigger a Dollar Meltdown?

With the disaster in Japan being far from over, the question of how Japan will finance their reconstruction efforts has, for the most part, stayed out of focus. According to reports, the damage is estimated in excess of $300 billion, nearly four times higher than hurricane Katrina. This number will likely rise the longer the nuclear crisis remains unresolved. Karl Denninger of Market Ticker says there are several problems facing the Japanese:

(Video interview of Denninger on Fox Business follows excerpts and commentary)

The Tsunami did a tremendous amount of damage to the landscape and once they get that cleaned up they’re going to have to rebuild. And then you’ve got about 8 gigawatts of electrical generation that’s been taken offline and there’s no hope of restoring that anytime in the near future.

So, the capital flows that have gone into Japan from exports are going to turn into capital flows going the other direction because Japan has to buy the materials that it needs in order to rebuild its society.

The main issue in terms of rebuilding is one of funding. While the US may send foreign aid to help get Japan back on its feet, such measures are not very popular due to our already troubled debt levels and spending problems, so any support we provide will be limited. Japan can’t depend on international aid of any significance either, because, well, no one else gives like the US. Private donations may help people on the ground with food, clothing and shelter, but those are a drop in the bucket compared to what is necessary.

Considering that Japan is the third largest economy in the world, they will be left to come up with the money themselves.

Karl Denninger says that how Japan will come up with the money is “an open question.”

How they’re going to manage to do that without either printing more money, which at some point will cause problems over there, or selling some of their Treasuries is an open question.

Japan owns about 20% of all US debt. It’s safe to say that Japan’s regular purchases of US Treasuries are about to come to a screeching halt, or at least, be reduced significantly. This fact alone means someone is going to need to step in to buy up that excess debt. We can all guess, fairly accurately, who will end up with those new issues.

But even if the Federal Reserve were to buy up the new debt that Japan won’t, there is the question of how Japan is going to fund the $300 billion plus in recovery efforts. And given that there is no end in sight, we may be talking about double that amount – no one really knows.

So, the question is, will Japan need to sell off some of its US debt in order to pay for recovery and reconstruction efforts? And if so, could that be the black swan that could trigger the domino effect that will lead to a US debt sell off, and ultimately, a currency collapse? Until a month ago this was nowhere on the radar. Now, we have every reason to be concerned about this possible black swan event. Karl Denninger weighs in:

The obvious thing to do is to sell some of those holdings. The danger for the United States is not tomorrow, it’s a few months out. Right now, they’re still trying to clean up the mess. But once they actually start actively rebuilding they’re going to have to have a way to finance this.

And that’s where the danger comes from, because if Japan was to start unloading Treasuries, it would be reasonable to assume that the Chinese, who hold an even larger amount, would look at that activity and say ‘well, if we don’t sell now we lose even more. Maybe we want to be selling some ourselves.’ And, that puts quite an interesting squeeze into our budget picture for the United States.

In January, Treasury Secretary Tim Geithner confirmed that we are literally on the brink of a catastrophic debt collapse resulting from a need for money and raising of our debt ceiling. So, it is clear that we’re already in serious trouble as it is. If Japan were to stop buying our treasuries and actually start selling their existing US debt holdings, it could potentially accelerate the already destructive path on which we find ourselves.

As we’ve suggested previously, all it will take is for buyers and holders of US debt to say ‘no more’ and the jig is up. Mainly, we’re talking about China, and if they pull the plug on all of the credit they have thus far extended, then we could literally be talking ‘lights out’.

This may be a low probability event, but so was an earthquake driven Tsunami wiping out the generators that powered the fuel rod cooling stations in Fukuskima. Click below for video.

Warning Signals for Gold Investors

Precious metals market, gold in particular, has been highly influenced by economic indicators and currency market, historically. In our previous essay entitled No Breakout in Gold So Far, Strong Resistance Seen in Silver, we have analyzed the situation in metals, however since no market moves on its own, this essay will provide complementary information regarding other markets.

Relating general stock market and currency fluctuations with metal prices is a widely accepted gauge to measure the strength in precious metal market moves. To connect the relationship between economic scenario and metals fluctuations, let’s take an example.

We had been asked recently by one of our Subscribers "it would appear considerable rebuilding will be necessary in Japan. Any indications this will impact stocks of companies that export timber products?"

We agree that the rebuilding process in Japan will put positive pressure on commodities' prices, also on timber, if... there is money for that. And we know that there will be money for that based on the recent G-7 decision, so not only is this decision inflationary (in the end even if the powers that be decide not to simply print money at this time, they will most likely be forced to do so later on as they will not have enough cash left for other – domestic expenses), but particularly positive for commodities.

Now let's move to another question about the Japan: "has it not struck you that selling US treasuries will increase the price of Yen relative to US dollars which the Japanese Govt. does not want to see happen. More than likely the Japanese will print money over the rest of this decade to pay for most of the reconstruction caused by the Earthquake and Tsunami. Could be wrong but it makes more sense to me notwithstanding it is bad policy."

Actually that makes sense to us and could very well happen. The Japanese are very well acquainted with quantitative easing. They just about invented the concept. Japan was the first economy in recent times to have tried a full-scale version of quantitative easing for a significant period, well before Ben Bernanke. The Bank of Japan lowered the policy rate to zero in February 2001 and then went to quantitative easing the next month. It ended both quantitative easing and its zero interest rate policy only in 2006. Whether you call it “quantitative easing” or量的金融緩和, ryōteki kin'yū kanwa, we tend to think that it makes for bad policy in the end but is good for commodities.

To have a broader overview on precious metals and currencies/economic indicators, let’s see how stock market and currencies are performing at this moment. To do that, let’s turn to the technical portion with analysis of the USD Index. We will start with the long-term chart for the USD Index (charts courtesy by

On the long-term chart we can see a recent breakdown below the rising support line which is clearly in play. Its support has been invalidated and this level has now in fact become a resistance line. In short-term USD Index chart, the index levels have temporarily moved below the support line created by the November 2010 low.

Zooming in, we may see a positive sentiment, possibly a rally to the 78 level or so based on the rising resistance lines from the previous long-term chart, and the Fibonacci retracement levels on the short-term one. It is not clear at this time when this can be expected.

Moreover, the RSI level, which is near 30, is in the range of past local bottoms. Although the breakdown below previous important index lows has not been confirmed, we will find further confirmation based on the Euro Index performance.

The Euro Index has rallied to the declining resistance line formed by the 2008 and 2009 tops. The question now is “Will a breakout be seen?” Furthermore, “Will the index level move above this resistance line and then manages to stay there?” The answers to these questions will likely determine the direction of the next trend in both the USD and Euro Indices.

Overall, no breakout has been seen yet in Euro Index and the trend seems to remain down. With the situation in Portugal, the European debt crisis is still a factor that could stop the current rally in the European currency.

So, what does the above mean for Gold and Silver Investors? It suggests caution for bulls as the rally in the USD Index might ignite a decline in the metals. Please take a look below for details.

Gold and silver are currently negatively correlated to a great extent with the US dollar as far as short term is concerned. Please note the values of the correlation coefficient for gold/USD (-0.83) and silver/USD (-0.88).

As we discussed earlier, the breakdown below the rising support line has not been confirmed in the USD Index. No breakout has been seen in the Euro Index. All this points to a slightly bullish situation for the dollar, which does not signal strong support for precious metals overall at this moment.

Before summarizing we would like to let you know about the recent development in the GDX:SPY ratio.

The GDX:SPY ratio measures mining stocks’ performance against the general stock market. The important news is that we have just seen a spike high in volume.

The sell signal is generally given when we see a single spike high in the volume levels, meaning that the volume in gold and silver mining stocks has been much bigger than that seen in the general stock market. The quality of this signal is enhanced if the ratio encounters a resistance level as well. Such is the case here, as the 200-day moving average and the early March highs are both in play.

While this is not an overly important resistance level, it has stopped rallies in the past. With the recent spike high volume and these resistance levels in play, the outlook is not much promising in the near-term.

This is a big deal because this ratio has been quite reliable in the past in terms of giving a buy/sell signal for gold and silver mining stocks. Based on its previous performance we believe that it should not be ignored.

Summing up, the euro has reached a long-term resistance line and this suggests a likely rally in the USD Index. Based on the recent correlation between USD and precious metals, the above should make Precious Metals Bulls particularly cautious, especially that we have also seen a negative signals from the GDX:SPY ratio.

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Thank you for reading. Have a great weekend and profitable week!

P. Radomski