Friday, June 29, 2012

Capital Controls Coming

For the past few months depositors have been emptying their Greek and Spanish bank accounts and moving the funds to safer places like Germany and Switzerland. This is not surprising. What is surprising is that anyone still has accounts in Greek and Spanish banks.

This is a trend with a limited lifespan. Either sentiment stabilizes and capital starts flowing back into peripheral eurozone countries (possible but unlikely), or the slow-motion bank run continues until the Greek and Spanish banks are empty, or the trickle becomes a torrent as everyone heads for the exits at once, thus crashing those countries’ banking systems.

In the second and third scenarios, the result will be capital controls ranging from bank closures (like FDR’s 1933 bank holiday), to expropriation of bank accounts (as when Argentina converted dollar-based accounts to pesos in 2002), to restrictions on the movement of wealth across borders. Planning for such capital controls is well under way: (more)

Survey: More Than 25% of Americans Have No Emergency Savings

While nearly half of Americans don't have enough money saved to cover emergencies, one-quarter don't have any money saved, according to's Financial Security Index survey.

The general rule of thumb is to have enough cash saved to cover at least six months of expenses.

However, only 25 percent of Americans have saved that amount and 17 percent have three to five months' expenses saved, while 28 percent have no emergency savings and 21 percent have less than three months' expenses saved.

Those earning more than $75,000 annually have higher odds of saving six months of expenses. Only 9 percent of these high earners don't have emergency savings versus 52 percent of those earning less than $30,000.

Among retirees, 41 percent have enough money saved to cover at least six months' expenses, while 26 percent have less than six months' expenses saved and 18 percent have no savings.

In addition, 41 percent of college graduates report having emergency savings compared with 14 percent of those with a high school education.

According to race, 23 percent of white Americans have no emergency savings compared with 38 percent of nonwhite individuals.

Further, 28 percent of Democrats and 31 percent of Independents have no emergency savings versus 19 percent of Republicans.

"Incomes are largely stagnant, so it's difficult for people to make significant headway on savings when household expenses are creeping higher but incomes are not," Greg McBride, senior financial analyst for, tells CNNMoney. "Prolonged unemployment has also depleted the savings of many people who at one time had a more appropriate cushion.

"The biggest barrier to saving is not being in the habit of saving," McBride says. "By establishing that habit, even if an unplanned expense comes up and wipes out what you've accumulated, you're only one paycheck away from restarting the saving process."

The telephone survey was conducted June 7 through June 10 among 1,000 U.S. adults.

Sell Paper, Buy Bricks


“The world has much to fear,” James Grant declares in a recent issue of Grant’s Interest Rate Observer, “However, it seems to us, not the least of these perils are the alleged safe havens themselves.” Therefore, says Grant, “In general, this publication is bullish on things certified to be unsafe, bearish on things certified to be safe (assuming always that the respective prices are right).”

Specifically, Grant is bearish on one of the very “safest” of safe things: highly rated government bonds. “The times may be troubled (they often are),” he says, “and people may be desperate (someone usually is), but that doesn’t mean that low-yielding sovereign debt is the last word in safety and soundness.”

Grant does not assert that top-tier government bonds are necessarily unsafe, merely that they are undesirable…and potentially unsafe. At current yields, many government bonds offer what Grant has termed, “return-free risk.”

As the nearby chart clearly shows, the yields provided by the marquee AAA government bonds of the US, Germany, Switzerland and the UK have been in a freefall for several years. As recently as four years ago, a 5-year bond from the Swiss government yielded about 3%. Today, the 5-year yield is negative! That’s right; an investor must pay the Swiss government for the privilege of lending it money.

The Miniscule Yields Provided By a Sampling of AAA-Rated 5-Year Government Bonds

The 5-year yields provided by the other AAA issuers in this chart are at least positive, but just barely. All of them yield less than one percent per year.…Read more…

Dillard's Inc. (NYSE: DDS)

Dillard's, Inc., together with its subsidiaries, operates as fashion apparel, cosmetics, and home furnishing retailer in the United States. The company offers fashion apparel for women, men, and children, as well as accessories and other consumer goods. Its merchandise selections comprise lines of brand merchandise, such as Antonio Melani, Gianni Bini, Roundtree & Yorke, and Daniel Cremieux. It also sells its merchandise on-line through its Web site, In addition, the company operates as a general contracting construction company. As of January 28, 2012, it operated 304 retail department stores located primarily in the southwest, southeast, and midwest regions of the United States. The company was founded in 1938 and is based in Little Rock, Arkansas.

To review Dillard's stock, please take a look at the 1-year chart of DDS (Dillard's, Inc.) below with my added notations:

DDS had been consolidating within a small Rectangle pattern over the last (2) months. A Rectangle pattern forms when a stock gets stuck bouncing between a horizontal support and resistance. A minimum of (2) successful tests of the support and (2) successful tests of the resistance will give you the pattern. With DDS, the Rectangle pattern formed a $70 resistance (black) and a $65 support area (red), a support that was also a strong resistance prior. Yesterday the stock broke its $65 support and should be moving lower overall from here.

Chart patterns can also provide price targets. Simply take the height of the overall pattern and add or subtract that amount to or from the breakout or breakdown point to get the minimum price objective. For example, since the Rectangle pattern for DDS is $5 high ($70 - $65), the stock should fall to a minimum of $60 ($65 - $5) now that it has broken support. Chart pattern price targets are certainly not guarantees, but they are often fulfilled.

The Tale of the Tape: DDS formed a common Rectangle pattern and the stock broke the support created by that pattern. The ideal trading opportunity would be a short trade on a rally back up to $65. A break back above $65 would provide a long trading opportunity instead.

Looming Foreclosures = House-Price Obstacle

David Wilson of Bloomberg takes a crack at the Housing turnaround story:

Persistently high foreclosure rates show the U.S. housing industry is “bouncing along the bottom” even though sale prices are recovering.

The chart above, via strategist Pierre Lapointe of Brockhouse & Cooper, shows the percentage of foreclosed home loans little changed from the 4.3% average for 2009. (Data source: Mortgage Bankers Association).

A spate of recent positive data following the usual seasonal pattern continues to give false hope to homeowners, banks and REO buyers. The front page of the NYT today was the latest to declare the recovery was at hand.

The problem is that the Banks had voluntarily stopped their foreclosures while negotiating the robo-signing settlement. They are now poised “to flood the market with foreclosed homes.” Their distressed sales are likely to pressure prices.

A meaningful and sustained increase in house prices is still several years away. In other words, it is still too early to get excited.”

Where in the World is Risk Today?

by Russ Koes­terich, Chief Invest­ment Strate­gist, iShares

With the sov­er­eign debt cri­sis cen­tered in the devel­oped world, the tra­di­tional notion that all devel­oped mar­kets are less risky for investors than all emerg­ing mar­kets doesn’t hold up anymore.

Today, while devel­oped mar­kets cer­tainly top the list of the least risky coun­tries and vice versa for emerg­ing mar­kets, some devel­oped mar­kets are now just as risky as emerg­ing mar­kets. At the same time, some emerg­ing coun­tries are now just as safe as their devel­oped mar­ket counterparts.

It’s no won­der, then, that deter­min­ing how var­i­ous devel­oped and emerg­ing mar­kets cur­rently stack up in terms of risk­i­ness can be tough, espe­cially given today’s highly volatile markets.

Fig­ur­ing out the risk­i­ness of a coun­try, how­ever, is very impor­tant for investors. In “risk-off” envi­ron­ments, the val­u­a­tions of high risk coun­tries tend to suf­fer more than the val­u­a­tions of lower risk coun­tries. Sim­i­larly, val­u­a­tions of higher risk coun­tries tend to ben­e­fit more in “risk-on” environments.

David Wang, a researcher on my Invest­ment Strat­egy Group team, recently per­formed an analy­sis that can help investors deter­mine where in the world risk is today. Using a com­bi­na­tion of coun­tries’ macro­eco­nomic char­ac­ter­is­tics and one-year mar­ket index volatil­ity, David devel­oped a rank­ing of coun­tries’ riskiness.

Here’s his list of the top 15 riski­est coun­tries today, i.e. the coun­tries whose val­u­a­tions are most sen­si­tive to “risk-on” and “risk-off” sen­ti­ment shifts:

1.) Hun­gary

2.) Italy

3.) Aus­tria

4.) Swe­den

5.) Poland

6.) Fin­land

7.) Spain

8.) Ger­many

9.) France

10.) Rus­sia

11.) Nor­way

12.) South Korea

13.) Turkey

14.) Nether­lands

15.) Brazil

So how did David come up with his rank­ing? He started with four hypotheses:

1.) Coun­tries exposed to the Euro­pean sov­er­eign debt cri­sis should be clas­si­fied as higher risk.

2.) Devel­oped mar­ket coun­tries with sta­ble cur­ren­cies dur­ing volatile peri­ods should be clas­si­fied as lower risk.

3.) Emerg­ing mar­ket coun­tries with more cycli­cal sec­tor expo­sure may be higher risk.

4.) Emerg­ing mar­ket coun­tries with bet­ter fis­cal and growth sit­u­a­tions should be clas­si­fied as lower risk.

He used these hypothe­ses to come up with a rough rank­ing of coun­tries’ risk­i­ness and then con­firmed that list with one-year volatil­ity mea­sures of coun­try MSCI indices.

To be sure, a country’s risk­i­ness can shift over time with chang­ing eco­nomic con­di­tions. For instance, if the Euro­pean sov­er­eign debt cri­sis were solved tomor­row, the risk rank­ing above would cer­tainly change. But for now, the coun­try risk rank­ing above can poten­tially help investors adapt their port­fo­lios to today’s macro­eco­nomic landscape.

Source: iShares Invest­ment Strat­egy Group research

Chart of the Day - Wisconsin Energy (WEC)

The "Chart of the Day" is Wisconsin Energy (WEC), which showed up on Wednesday's Barchart "All-Time High" list. Wisconsin Energy on Wednesday posted a new all-time high of $39.70 and closed up +1.46%. TrendSpotter just turned long again on Tuesday at $39.01 after taking a profit last week on a 2-month long trade. In recent news on the stock, Wells Fargo on May 15 downgraded Wisconsin Energy to Market Perform from Outperform with an unchanged target of $38-29, but a day earlier RW Baird upgraded Wisconsin Energy to Outperform from Neutral and raised its target to $40 from $35. Wisconsin Energy Corp, with a market cap of $8.9 billion, serves electric and natural gas customers in Wisconsin and Michigan's Upper Peninsula through its primary utility subsidiaries Wisconsin Electric, Wisconsin Gas and Edison Sault Electric. Its non-utility subsidiaries include energy services and development, pump manufacturing, waste-to-energy, and real estate businesses.