Saturday, July 2, 2011

This chart has been predicting the stock market for three years

As we’ve been discussing here for the last month, Treasury Bonds and Stocks have been trading inversely to one another for years now. The big question last time we addressed this was whether Bonds would find resistance at this multi-year downtrend line or breakout and cause havoc in the stock market? Here is what it’s looking like today:

This inverse correlation between stocks and bonds has been very consistent. The 12% rally that we just saw in bonds, however, only brought the market down 8% from the peak and just 6.5% from the February highs that kicked off the 2011 bond rally. A question we had last time we discussed this issue was whether bonds were warning us of something bigger for stocks, or whether the relative performance of the Stock Market was a sign of strength. In other words, without a big drawdown in the stock market, was the upcoming stock market rally going to start from a higher point?

These are all questions that we are trying to answer right now. Look at how powerful this stock market rally has been with Treasuries having just three bad days. If $TLT continues to sell-off, this bodes very well for US Equities. Look at how RSI has been rolling over as $TLT fails to breakout to new highs:

This is a chart we want to watch folks. Most of my readers have equities in their portfolios. I manage equities for clients. If we’re not watching Treasury Bonds, I think we’re missing out on some solid information. From a risk management point of view, we clearly want to keep an eye on the recent highs for $TLT. If last week’s highs are taken out and you start to see 98 on $TLT, then stocks are probably in bigger trouble than we think. Meanwhile, we also want to keep an eye on the recent support levels on the S&P500. These two breaks would probably occur within a couple of days of each other and all bullish bets would be off.

This is all positive for stocks, while bearish for Bonds. These levels hold, and we’re going to have a nice little stock market rally in July.

Economic Armageddon and You


Swiss Franc and the possibility of huge mortgage defaults in Central Europe

Ordinary people don’t think in such terms, and definitely did not hedge that exposure. With the ever increasing strength in the Swiss Franc, people with mortgages in Swiss Francs are starting to feel the currency effect big time. Since such a big proportion of the mortgages are taken out in non domestic currencies, people are squeezed. Could the Swiss Franc increase the debt repayments of the mortgages, and ultimately cause huge defaults in these countries? Exotic Currency risk by retail…..Courtesey Stratfor.
Historically low interest rates on loans in Swiss francs have led consumers in major Central European countries such as Poland, Slovakia, Hungary and the Czech Republic to acquire substantial loans, particularly mortgages, in francs. Currently, 53 percent of outstanding mortgages in Poland and about 60 percent of those in Hungary are denominated in francs.

The franc’s perceived stability amid growing eurozone troubles has strengthened it considerably in comparison to the euro and Central European currencies. This is not only worrisome to the consumers in the countries with significant franc-denominated debt, who now struggle to service their increasing debt load, but also for financial institutions that hold significant assets in Central Europe, such as that of Austria.

While new homeowners in Poland and Hungary have shied away from franc-denominated loans since the franc’s strengthening in the wake of the beginnings of the eurozone sovereign debt crisis in early 2010, the franc has traditionally been considered a stable currency with low associated interest rates and therefore a good alternative to the euro. The majority of Polish and Hungarian mortgage purchasers before 2008 took out their loans in francs at a time when, due to the economic dynamism of the emerging Polish and Hungarian economies, the zloty and forint were relatively strong in relation to the Swiss franc. The franc traded for 160 forints before the crisis; it currently trades for 224, a 40 percent increase. Similarly, the franc traded for 2.1 zlotys in July 2008 before jumping 57 percent to currently trade at 3.3. Moreover, the fluctuation in the zloty or forint value of the Swiss-denominated loan proportionally increases the debt repayment value. The compulsory nature of making a mortgage payment (the failure to pay one’s mortgage will eventually result in losing one’s home) means that debtors are unlikely to default despite the increase in monthly mortgage payment value. However, debtors are also likely to drastically cut all other spending when faced with the risk of default, thus undercutting domestic consumption — a major driver of the Polish economy in particular.

The situation is not necessarily as alarming as some reports from Poland and Hungary claim. Central European governments have begun implementing stabilization measures to reduce the risk to mortgage owners. The Hungarian parliament approved a legislative package June 10 that included fixing the exchange rate on franc-denominated mortgage repayments at 180 forints. Hungary is also considering implementing a program that would buy back a defaulting property and take in its owners as tenants. Poland has thus far taken a passive role on the issue but has declared itself willing to intervene should mortgage defaults become imminent. Moreover, Switzerland itself has an incentive to devalue its currency, mainly to ensure that its large export sector remains competitive. To a certain extent, the Swiss government can mitigate the rise of the franc by purchasing foreign currency, particularly euros, driving down the demand for francs. The problem is that Switzerland has already been undertaking such an effort since the start of the eurozone crisis and yet the franc has still appreciated considerably.

However, a major economic event in the eurozone — such as a Greek default, Spanish banking problems, or the brewing political crises in Italy and Spain — could cause the franc to skyrocket in relation to both the euro and currencies such as the zloty and the forint. Such an increase could be so large that even the Hungarian and Polish governments would be unable to avoid massive domestic defaults on mortgages and Switzerland would be powerless to offset its strengthening currency. Homeowners with mortgages denominated in Swiss francs would find themselves unable to repay the value of the appreciated loan in their domestic currency and would be forced to defau

This certainly would not bode well for Europe, especially Austria. The 2008 financial crisis started in Europe when the collapse of Lehman Brothers triggered a massive capital flight away from Central Europe, and a mortgage crisis in Hungary or Poland could potentially replicate these triggers, leading to contagion across the Continent. Austria, could act as the gateway for the crisis into the eurozone. The Austrian financial sector would have to incur these losses, potentially forcing Vienna to bail out its banks, focusing the markets and investors on Austria itself.

Why Small Retirement Savings Count

You've probably read that you'll need a million dollars to retire - maybe more. Does that figure seem so daunting that you haven't even started saving for retirement or you feel like you aren't saving nearly enough? Don't be discouraged - we'll show you why small retirement savings count. (Keep saving when mortgages, marriages and debt demand your attention.

TUTORIAL: Budgeting Basics

1. Compound Interest Makes Your Money Work for You
No matter how little money you have invested, if you leave the account alone and let it earn interest, you'll end up with more money than you started with. Let's say you have $500 and it earns 5% interest a year. In year one, you have $500. In year two, you will have $500 + $25 interest, for a total of $525. In year three, you have $525 + $26.25 interest = $551.25. With no additional effort on your part besides depositing the money and investing it in something that earns interest, your money will grow. Anything extra you can contribute to the account, even if it's only $10 a month, will help your balance grow even faster.

2. Old Habits Die Hard
If you're in the habit of putting some of your money toward your retirement savings, you've developed a good habit. With the right savings mentality and behavior already in place, you'll be perfectly positioned to increase your savings rate in the future if your circumstances allow for it. Just having a retirement account set up, understanding how it works and knowing how to invest and what to invest in can benefit you even if you have little or nothing to save right now. When you do have the money to contribute, there will be nothing standing in the way of putting your money to work.

3. Saving for Retirement Can Lower Your Tax Bill
Saving for retirement might be more within your reach than you realize. That's because certain types of retirement accounts allow you to contribute pre-tax dollars. This means that you don't have to earn as much money now to contribute more to your retirement today. You'll pay the tax bill many years down the road when you withdraw the money.

Let's say you want to put $100 a month toward retirement savings, but after all is said and done, you only have $75 a month leftover. Let's also say that your marginal tax rate is 25%, meaning that on the last $100 you earn, the government takes $25. If you didn't have to pay tax on that last $100, you'd have $100, not $75. You can put that $100 toward your retirement if you invest it in a 401(k) through your employer or a traditional IRA on your own. If you'd rather pay the taxes now, however, you can put the $75 in a Roth IRA.

4. Your Employer Might Help You Save
Many employers will contribute to their employees' 401(k) accounts, but only if the employee chips in first. A common plan is for an employer to match an employee's contribution up to a maximum of 5% of the employee's salary. Suppose you make $50,000 and your employer offers this matching incentive. Here's how much free money you could get from your employer by contributing to your 401(k):

You Contribute

Your Employer Contributes

Total Annual Contribution

0.0%, $0 a year


$0 + $0 = $0

0.5%, $250 a year


$250 + $250 = $500

1.0%, $500 a year


$500 + $500 = $1,000

2.0%, $1,000 a year


$1,000 + $1,000 = $2,000

3.0%, $1,500 a year


$1,500 + $1,500 = $3,000

4.0%, $2,000 a year


$2,000 + $2,000 = $4,000

5.0%, $2,500 a year


$2,500 + $2,500 = $5,000

6.0%, $3,000 a year


$3,000 + $2,500 = $5,500

When you break these annual contributions down into 26 biweekly pay periods, you'll see that you can start getting free money from your employer just by putting $9.62 per paycheck into your 401(k). You don't even have to pay taxes on that $9.62 (for now!).

5. Small Savings Really Do Add Up
If your employer doesn't offer a matching contribution, you can still take an important lesson from the previous tip: it only takes a little bit of money, set aside on a regular basis, to make a significant difference in your savings. Saving that $9.62 per paycheck gives you $250 at the end of the year. At the higher end, $192.31 per paycheck would give you $5,000 by the end of the year, which is the maximum you can put in a traditional or Roth IRA for 2011. If you have the money automatically withdrawn from your checking account and placed into your retirement account, you'll probably get used to meeting your monthly expenses without it and saving for retirement will seem easy. (Be sure to consider the tax benefits and the eligibility requirements of the Roth IRA. Check out An Introduction To Roth IRAs.)

The Bottom Line
Maybe you can't afford to put much of your income toward retirement savings right now, but don't let that hold you back. Even if you can only save 0.5%, you'll still be making progress toward your goal.

What some of the world's greatest investors are doing now

The CIO/CEO Leaders in Investing Summit took place on Tuesday at The Metropolitan Club of New York and featured presentations from numerous high-profile hedge fund managers.

The summit is a peer-only event only open to those investing third party capital. We're pleased to present notes from the event concerning specific investment ideas and/or commentary on the economy:

Leon Cooperman (Omega Advisors): The legendary hedge fund manager's talk centered on equities as the best house in the financial asset neighborhood. He argued that you need to believe four issues in order to have a positive view on today's market:

1. The U.S. is not another Japan and will not suffer a lost decade.
2. The European Central Bank (ECB) will act to stabilize Europe.
3. President Obama will move to the center.
4. The Middle East's turmoil leads to democracy and oil stays below $135.

Cooperman continued to voice his concern over employment. He also pointed out that the yield curve is quite steep and that the Federal Reserve is trying to inflate the country out of debt. Cooperman says inflation is not bad for stocks (see the best investments during inflation).

He argues that stocks are cheap trading at 13.6x relative to bonds and history. The Omega Advisors founder also thinks that bonds are 'screaming' to be shorted. Other hedge fund managers have also advocated shorting bonds. Don't forget that you can also hear Cooperman's latest investment ideas at the Value Investing Congress in October (click here for a discount).

Larry Robbins (Glenview Capital): Formerly of Cooperman's Omega Advisors, Robbins founded Glenview Capital. His presentation yet again focused on Life Technologies (LIFE). The company trades at a 11x P/E and is likely to grow EPS 20% over the next few years as they were able to grow EPS throughout the slowdown and 95% of their business grows with research spending. (more)

A Brief History of the Corporation: 1600 to 2100

On 8 June, a Scottish banker named Alexander Fordyce shorted the collapsing Company’s shares in the London markets. But a momentary bounce-back in the stock ruined his plans, and he skipped town leaving £550,000 in debt. Much of this was owed to the Ayr Bank, which imploded. In less than three weeks, another 30 banks collapsed across Europe, bringing trade to a standstill. On July 15, the directors of the Company applied to the Bank of England for a £400,000 loan. Two weeks later, they wanted another £300,000. By August, the directors wanted a £1 million bailout. The news began leaking out and seemingly contrite executives, running from angry shareholders, faced furious Parliament members. By January, the terms of a comprehensive bailout were worked out, and the British government inserted its czars into the Company’s management to ensure compliance with its terms.

If this sounds eerily familiar, it shouldn’t. The year was 1772, exactly 239 years ago today, the apogee of power for the corporation as a business construct. The company was the British East India company (EIC). The bubble that burst was the East India Bubble. Between the founding of the EIC in 1600 and the post-subprime world of 2011, the idea of the corporation was born, matured, over-extended, reined-in, refined, patched, updated, over-extended again, propped-up and finally widely declared to be obsolete. Between 2011 and 2100, it will decline — hopefully gracefully — into a well-behaved retiree on the economic scene.

In its 400+ year history, the corporation has achieved extraordinary things, cutting around-the-world travel time from years to less than a day, putting a computer on every desk, a toilet in every home (nearly) and a cellphone within reach of every human. It even put a man on the Moon and kinda-sorta cured AIDS.

So it is a sort of grim privilege for the generations living today to watch the slow demise of such a spectacularly effective intellectual construct. The Age of Corporations is coming to an end. The traditional corporation won’t vanish, but it will cease to be the center of gravity of economic life in another generation or two. They will live on as religious institutions do today, as weakened ghosts of more vital institutions from centuries ago.

It is not yet time for the obituary (and that time may never come), but the sun is certainly setting on the Golden Age of corporations. It is time to review the memoirs of the corporation as an idea, and contemplate a post-corporate future framed by its gradual withdrawal from the center stage of the world’s economic affairs.

Framing Modernity and Globalization

For quite a while now, I have been looking for the right set of frames to get me started on understanding geopolitics and globalization. For a long time, I was misled by the fact that 90% of the available books frame globalization and the emergence of modernity in terms of the nation-state as the fundamental unit of analysis, with politics as the fundamental area of human activity that shapes things. On the face of it, this seems reasonable. Nominally, nation-states subsume economic activity, with even the most powerful multi-national corporations being merely secondary organizing schemes for the world. (more)

The Economist - 2nd July-8th July 2011

The Economist - 2nd July-8th July 2011
English | 84 Pages | HQ PDF | 77.00 MB

How to Declare Your Financial Independence

The current job market doesn't make it easy for young adults to start out on sound financial footing, and their failure to assert their financial independence goes beyond the nation's high unemployment rate.

"Millenials are more dependent on their parents than any generation before them," says Joseph Templin, author of The Financial Mistakes of New College Grads and The Psychology of the Millennial Client. He explains that young adults have come to rely on parents not just for a place to live, but also as the source of funding for their phone bills, car insurance, health care, student loan debt and a slew of other miscellaneous expenses that prevent them from developing any real sense of how much it costs to live these days.

The current job market doesn't make it easy for young adults to start out on sound financial footing.

The severe (and at times, subconscious) financial attachment may have a lot to do with the relationship parents have with their own mom and dad.

According to Laura Scharr-Bykowsky, a certified financial planner with Ascend Financial Planning, the parents of Generation Y were largely raised by people who grew up during the Great Depression. Well aware of financial struggles, these grandparents were more likely to require their children to work for what they wanted. But the pendulum has swung the other way.

"Baby boomers had an adversarial relationship with their parents," Templin agrees. "To compensate, they've become much friendlier with their children and also more protective."

This altered mindset, coupled with advancements in technology that have turned luxuries such as TVs and cellphones into household staples, has made young adults used to an ever-present monetary safety net that has prevented them from learning some valuable life lessons.

"Many parents bubble-wrapped their children," Templin says, adding that when it comes to their finances, "they haven't learned to fall down and get scrapes."

But while it's certainly easy to rely on a parent to pay the bills, it's also a recipe for long-term financial failure. Study after study has indicated that most Americans are woefully underfunded for retirement, including this one that found 20-year-olds were experiencing serious trepidation about their own long-term financial investments (or lack thereof). At the same time,another study has suggested that young people are not nearly as worried as they should be about their debt.

With all of these factors at play, we consulted some personal experts to find out the best ways young adults can wean themselves off the Bank of Mom and Dad, once and for all.

Set a budget
Nobody looking to assert financial independence will ever be able to if he or she has no idea what the monthly expenses actually cost. Rett Dean, a certified financial planner with Riverchase Financial Planning in Lewisville, Tx. suggests usingbudgeting software, websites or even an Microsoft(MSFT) Excel spreadsheet to add up all your expenses so that you can compare it to what you clear on you bimonthly paychecks.

"Most young adults spend more than their net income," he says, explaining that this is partially because they have a distorted perception of the cost of living. "You need to go into it with your eyes open."

Remember to save
Dean reiterates that being truly financially independent means being able to support yourself in worst-case scenarios, such as losing a job or falling victim to a disaster such as a fire.

"Young people today need to learn early how to pay themselves first," he says. "That means looking at what they are bringing home in income and determining what they can reasonably afford to put in savings, and doing that first and then living off the rest."

Scharr-Bykowsky says that new grads should be looking to put about 10% of each paycheck into a savings account or retirement fund.

One thing you shouldn't do is rely on credit cards as part of your available cash flow.

"This almost always ends with the person having a giant debt hole to dig out of later, and in some cases sadly the hole is just too deep, without credit ruining steps being necessary," Denn says.

Wean yourself slowly
Any young adult who tries to cut himself or herself off from mom and dad cold turkey is essentially setting his or herself up to fail. Dean compares it to going to the gym: "If you work out too hard on your first day, you'll be insanely sore and not want to go back again," he says. He recommends picking a small bill, such as your cellphone or auto insurance payments, to start paying on your own and then adding others to your budget over time as your salary allows.

The one item all experts agree you should not be in a rush to get rid of is health insurance.

"Health insurance is not something you want to play with," says Ornella Grosz, author of Moneylicious: A Financial Clue For Generation Y, noting that young adults should only get off their parent's health care if their job is providing them with their own.

Don't add new expenses until you can pay off old ones.

Recent grads may be in a rush to move out, but they should only do so if they can afford to pay all the other bills they rack up each month.

"Rent should almost come last," Scharr-Bykowsky says, explaining that you should be able to pay off your own phone bill, insurance bill, student loans, or even buy groceries before you head out looking for a swanky new pad.

Similarly, Grosz cautions against returning to graduate school just because you haven't found a job right away or without understanding what the cost associated with continuing your education will be. While she acknowledges that grad school could be the right choice for some, it does require taking on additional debt that can leave you in the same place later on.

"You might be almost 30 and forced to move back in with your parents," she says.

Keep your parents involved -- for now
The key is to not rush the process of financial independence, and one way to do this, Dean says, is to rely on parents ... as the middleman.

"Families can approach it as a joint venture," he says, suggesting that parents initially let their child pay them for their share of the monthly bills. Once the child has proven he or she can handle it, these bills can then be transferred to them in their name.

It's important that the child pay the parent directly to get a true sense of his or her financial obligations, though, Dean says.

"You can't just say 'I'll pay off my part' by buying some groceries this week," he says. "You need to physically write the check or move the money online from one account to the other."

Once prosperous Greeks now forced to sell family treasures...

A smartly dressed woman waits as a young man behind a glass screen weighs her gold earrings, bracelets and rings and counts out 1,600 euros.

"I'll see you again soon," she says, slipping the bills into her purse. Behind her, a grey-haired man shuffles towards the counter. "Do you buy gold teeth?" he asks.

In the Greek capital, gold is marking a divide between the "haves" and a growing number of "have nots".

Shops like this one have mushroomed in downtown Athens and are doing a brisk business. They offer cash for gold by weight and sell it to foundries.

Many ordinary Greeks who prospered after the Mediterranean country entered the euro a decade ago are now being forced to sell their family treasures just to make ends meet.

With the worst recession since the 1970s grinding into its third year, fresh belt-tightening measures to appease international lenders are driving many middle-class Greeks to desperation.

Unemployment has climbed to more than 16 percent and real wages are down by around a fifth since the global financial crisis struck three years ago.

With average salaries less than 1,300 euros ($1,900) a month and inflation running at more than 3 percent, many Greeks say they do not have enough money to pay for the basics.

"A lady came to me the other day crying because she needed to sell her gold jewels and didn't know what they were worth," said Alexandria Verykokaki, 55, whose family has owned a jewellery shop in downtown Athens since 1923.

"These are not poor folks. They are ordinary, middle-class Greeks: a woman with three kids who needs to sell her wedding jewellery just to send her kids to school."


That is one side of the coin. On the other, many wealthy Greeks, worried by the political paralysis gripping their country, are pulling money out of the bank and buying gold, regarded as the ultimate safe haven in times of uncertainty.

Burnishing its appeal, the price of the precious metal has climbed to record highs over the last year, driven in part by anxiety in financial markets over Greece's prolonged agony which has prompted a flight to stable assets.

Many international investors believe the eastern Mediterranean country, which makes up just 2.5 percent of the euro zone economy, cannot hope to service its enormous debt running at nearly 350 billion euros and rising.

Many in Greece appear to agree. Banks have lost around 8 percent of their deposits this year, with outflows accelerating in May and June as anxiety grew at the government's dwindling parliamentary support, according to credit ratings agency Moody's.

Roughly half the fall was due to individuals and companies burning through their savings to compensate for their lower income.

But the rest was due to wealthier Greeks, fearful of an impending financial collapse should the country default, sending money abroad, stashing it in safety deposit boxes, or buying gold coins, Moody's said.

"The people with money are no longer buying land, they are buying gold and silver," said Verykokaki. "Greeks are ignorant. It's stupid because if they take the money from the bank, the banks won't have enough to go around."

With capital flight compounded by a increasing number of loans turning bad, authorities have urged banks to explore merger possibilities to cope with the crisis.

The flow of capital from banks could become a flood if the government fails to implement the 28 billion euro austerity plan, demanded by the European Union and the International Monetary Fund as a condition for propping up its finances.

In a tight vote on Wednesday, parliament approved a law outlining tax rises, spending cuts and the sale of state companies.

But Greece's privatisation process, which stalled when the Socialists won power, may struggle to meet targets amid the political and economic maelstrom. Greece needs to sell 5 billion euros in assets by December to honour its commitments, but foreign investors may be wary faced with militant unions.

"The prime minister talks about privatisation, tax reforms, social reforms. He's talked about all that before," said political analyst Costas Panagopoulos. "The question is will he use this vote to move forward with these crucial reforms?"

Greece's debt is forecast to reach 1.6 times its economic output next year -- bigger than Argentina's when the South American country stumbled into a chaotic default in early 2002.

Many Greeks believe not only that it is not economically feasible, but it is not morally acceptable to pay a debt racked up by the political dynasties which have ruled the country for decades.

"I want to tear down the parliament building. We didn't waste all this money, they did, and they are not going to jail," said Dimitris Avramidis, 34, a bookstore employee.

"I've done nothing wrong. I've never taken out a loan in my life. So why should I pay now? I want people to take all their money out of the banks."

Why You've Never Heard of the Great Depression of 1920

Presented by Thomas E. Woods, Jr., at "The Great Depression: What We Can Learn From It Today," the Mises Circle in Colorado; sponsored by Limited Government Forum of Colorado Springs and hosted by the Ludwig von Mises Institute. Recorded Saturday, 4 April 2009.