Ultra ETFs: The Ultimate Addition To Your Portfolio?

Ultra ETFs can be an extremely valuable trading tool for a nimble investor, but a lot of risk is packaged with the returns. These ETFs can be very beneficial for investors who are short on capital, but they are also unpredictable due to the high amount of leverage and the way in which they can diverge from long-term expectations.

What Is an Ultra ETF?
An ultra ETF, sometimes referred to as a leveraged ETF, is simply an exchange-traded fund (ETF) that uses leverage. These ETFs often utilize derivatives, options or futures to offer an investor an instrument that produces double, triple or another multiple of the returns of the underlying index or benchmark on a daily basis.

ProShares offered one of the very first ultra ETFs in 2006, with the introduction of its Ultra ProShares. As an example, ProShares Ultra S&P 500 (ARCA:SSO) is an ETF that is designed to double the performance of the S&P 500 on a daily basis. So, if the S&P increases 1% on the day, SSO would typically be up around 2% on the day.

When they were initially introduced, the basic index ETFs provided investors with instant diversification and an incredibly convenient tool to get immediate market exposure, without having to create a portfolio of individual stocks. Since their launch, their popularity has grown tremendously. ETFs are also extremely liquid trading instruments with expense ratios ( annual operating expenses divided by average annual net assets) that are usually fairly low. Because of their success, many ultra ETFs were then launched to give investors and traders more tools and options to take advantage of market volatility.

Advantages
Leverage – Ultra ETFs allow an investor the potential to generate higher returns with the same amount of capital. This makes them an excellent tool, particularly for short-term traders. A trader with limited capital can now take a relatively small amount of capital and generate substantial percentage returns with an ultra ETF, especially in a volatile market environment, where 3 to 5% returns in a single day are commonplace. A 3% return in the market would equate to a 6% return for a holder of an ultra double ETF.

IRA Benefits - Ultra ETFs are somewhat beneficial for IRA accounts, as they can duplicate the leverage of margin trading where trading in margin is typically banned. Although these ETFs can reproduce the margin effects, it is generally not advisable to use volatile leveraged ETFs designed for day trading inside your retirement account.

Easy Short Exposure - The inverse are short ETFs, which allow an easy method to short the market without margin or the requirement to get short approval, which is often the case for stocks.

An Array of Options - There is now a broad selection of ultra ETFs that continues to grow. Ultra ETFs exist for the major indexes, S&P 500 sectors, oil, gold, bonds etc. Every major market (stocks, bonds, commodities, currencies) typically has a corresponding leveraged ETF. In addition, the more leveraged three times ultra ETFs give traders daily returns that are about three times the daily returns of the underlying benchmark.

Hedging – Ultra ETFs can allow a portfolio manager or investor to hedge their portfolio with a single instrument. For example, an investor that is holding a large portfolio of stocks short can simply buy an ultra long ETF if he or she feels that a rally may be approaching, and wants to offset the short exposure without covering his or her positions. They add a lot of flexibility and muscle to an investor's portfolio. Ultra ETFs may only be suitable for hedging for very short time horizons such as one day. However, non-leveraged ETFs are usually better suited if hedging for periods greater than one day.

Disadvantages
Leverage - It is a double-edged sword, as the volatility in some of these instruments can produce not only large gains, but tremendous losses in a short amount of time. For example, ProShares UltraShort Financials ETF (ARCA:SKF), the inverse ETF for the financial sector, hit a high of $303.82 on November 21, 2008, and wildly swung to about $100 just 10 trading days later. Trading these instruments requires constant attention and a strict trading discipline because the losses can be devastating.

Imperfect Tracking - Over longer periods, ultra ETF returns don't match the underlying index. They are only designed to track one-day performance, so holding a leveraged ETF for periods of greater than one day will almost guarantee results that will not mirror the underlying benchmark returns.

Timing Issues - Because timing is critical, leveraged ETFs are more suited for day trading rather than long-term investment.

Cost Issues - The ultra expense ratios tend to be much higher than regular ETFs, so they have a disadvantage on the cost side.

Conclusion

Ultra ETFs can prove to be very valuable if you're a flexible and diligent investor, and they can help create leverage in an account that otherwise could not. But, because of their volatility and correlation issues, they are best suited to short-term traders rather than investors.

Gold House Price Ratio Falls To Historic Low

In gold terms, an average single family home in the United States can now be purchased for only 18% of its pre-bubble price in 2001. The term "pre-bubble" merits emphasis: the average house can be purchased at an 82% discount (in ounces of gold) not from the peak real estate values of 2006, but the much lower home prices of 2001, before the real estate bubble began.

These numbers are based upon the Gold / Housing ratio, which is a measure of relative value between gold and real estate. When we take the $171,900 current median national price for an existing single family home (per the National Association of Realtors) and divide by the $1,785 price per ounce of gold as of November 15, 2011, we come up with a Gold / Housing ratio of 96, meaning it takes 96 ounces of gold to purchase an average single family home.

The graph below shows the Gold / Housing ratio for the entire modern era in the United States, from when gold investment was legalized on December 31, 1974 through current prices. This graph of relative value between the two investment classes shows how many ounces of gold it took each year to purchase an average single family home (adjusted for constant 2011 home size).

(Sources: For 1975-2010 the graph above uses annual average London price for gold as reported by Kitco, and the 2011 Q2 single family median home price (National Association of Realtors), modified by the annual average Freddie Mac House Price Index, which attempts to account for changes in average home size. 2011 numbers are November 15, gold, and Q2 house price (most recent available ) with the corresponding June house price index.)

In other words: let's net the dollars out, and go for direct comparisons.

People often buy gold and real estate as alternative investments, either because they are concerned about inflation, or they are seeking fundamental diversification from financial assets such as stocks and bonds.

However, while real estate and gold are each tangible assets and powerful inflation hedges - they don't tend to move together in real terms. When we adjust for inflation, both investments separately oscillate up and down around long term averages, and if you can buy gold "cheap" while real estate is relatively "expensive", then on an asset price basis over the long term, gold is likely to strongly outperform real estate as an investment and inflation hedge.

Conversely, when real estate is "cheap" and gold is "expensive" relative to their long-term averages - and each other - then it is real estate that is likely to powerfully outperform gold as an investment and inflation hedge over the long term, all else being equal.

But what exactly is "cheap" and what is "expensive"? Answering that question is where the Gold / Housing ratio graph above comes in.

The long-term average is represented by the blue line on the graph. Over the 37 years that gold has been a legal investment in the modern United States, it has taken an average of 289 ounces of gold to purchase an average single family home, meaning the current price of 96 ounces is only one third (33%) of the long term average.

As shown at "Point A", on an average annual basis, there was a previous modern ratio low of 99 ounces of gold to buy a house when gold reached its financial crisis peak valuation in 1980. Real estate was remarkably cheap relative to gold - and real estate investment would outperform gold by a huge margin over the 21 years to come.

"Point B" occurred in 2001, with the Gold / Housing ratio reaching a high of 543 ounces of gold being needed to buy a single family home. Gold was remarkably cheap relative to real estate - and gold asset prices would outperform real estate asset prices by a huge margin over the 10 years to come.

The current price of gold (as of November 15, 2011) is reflected in "Point C", which shows a Gold / Housing ratio of 96 ounces of gold being needed to buy the average single family home. This is only 18% of the 543 ounces required in 2001. Real estate is once again remarkably cheap, when compared to gold.

("Point C" is different from any of the other points in that it reflects currently available data for the price of gold, housing index and median single family housing price. It is therefore not an annual average ratio, and when in 2012 all the data eventually becomes available for 2011 the annual ratio will likely be lower, because gold spent most of the year at lower price levels. This means the annual average passing below 100 will likely not occur until 2012 - assuming current price levels remain, which is a big assumption in the current volatile times. Calculating a ratio that includes current market gold prices late in the year requires this necessary compromise, or else it becomes a lagging ratio with an annual update, with the full impact of the current price levels possibly not being available until early 2013.)

1980 & Gold As Investment

This next graph shows the average annual price of gold in inflation-adjusted (CPI-U) terms between when investing in gold bullion was legalized in the United States on December 31, 1974, and October 31st, 2011. The blue line is the average price of gold over that period, which is $730 in 2011 dollars. The yellow line is the average annual price of gold during each year (except for 2011, where it is the value as of November 15).

It is worthwhile to consider the situation in 1980. Inflation was soaring. Unemployment was high. An economic "malaise" gripped the nation, and pessimism about the future of the United States was rampant. The stock market was moving between flat and down. The real estate market was in terrible shape.

The one glittering exception was gold, which was soaring upwards in a spectacular bull market and reaching unprecedented levels - and which many people believed would only be a beginning point, as the dollar continued to fall and the economy continued to worsen. There was a new gospel of gold investing as an inflation hedge that would bring great wealth.

However, from that point forward - gold did not perform or meet expectations. In nominal dollar terms, the average price of gold fell from $613 in 1980 to $271 in 2001, a loss of 56%.

What is worse is that although the theory was that gold would be the perfect inflation hedge, in practice over the long term, gold failed spectacularly as an inflation hedge, at least from the perspective of gold purchased in the three peak years of 1979-1981. The inflation didn't stop after 1980 - the official rate of inflation was 10.5% in 1981, the 3rd highest rate of the modern era in the US - but gold investors still lost 32% in that first year after the peak, in inflation-adjusted terms. Gold gave up all of its gains relative to its long term modern average of $730 per ounce by 1985, five years after its peak.

Between 1980 and 2001, the time of the next Gold / Housing inflection point, the dollar would lose half of its value to inflation. Gold did not keep up, however, collapsing from $1,687 down to $347 per ounce (2011 dollars) over 21 years as it lost 80% of its value in inflation-adjusted terms.

(It should be noted that the $730 per ounce modern era average price is based on a relatively short 37 year period of time, which included a purely paper US dollar and two major crises, and is itself unusually high by long term standards. As an example of a longer term, multi-century measurement, gold averaged $458 an ounce (in 2009 dollars) between 1791 and 2009, although inflation measures grow increasingly unreliable the farther back in time one goes.)

1980 & Real Estate As Investment

The graph below shows the average price of a single family home in inflation-adjusted (CPI-U) terms from 1975 through the 2nd quarter of 2011, with a mean (average) price of $179,820 in 2011 dollars. As noted in the Freddie Mac index discussion at the end of the section, this is based upon an average size existing house for 2011, which is considerably larger than the average existing house in 1975, but this adjustment is necessary if we are to accurately compare "like to like" in tracking real estate values.

In the mind of the general public in 1980, real estate was a total "dog" of an investment and had been so for years. Some people were turning down promotions if they involved a move, because the raise associated with the promotion often wasn't high enough to offset the radically higher mortgage payments. Many people who would have ordinarily bought homes were renting instead, fearful of how much worse conditions might be when they tried to sell. The combination of recession, high unemployment and inflation-induced high interest rates had created a moribund real estate market, with low sales and greatly reduced new home construction.

These highly negative market conditions created a pricing situation in which real estate was only being valued at 34% of its long-term average value relative to gold, meaning real estate was extremely "cheap" in comparison - and ready to move the other way.

Indeed, from this base of near universal disdain came a remarkably healthy and sustained long-term environment for building wealth via buying investment real estate. Using single family homes as a proxy (investment real estate overlaps, but is not the same thing), in nominal or normal dollar terms, the average price for a single family home in the United States rose every year for the next 21 years from $60,408 to $147,102 (no inflation adjustment). This 144% increase occurred between points A & B in our Gold / Housing ratio graph, and therefore did not include any benefit from the housing bubble.

Inflation was the largest component of this rise, and unlike gold, housing performed as a powerful inflation hedge for the next two decades. Even after adjusting for inflation, during the same period that gold fell 80%, housing rose from $166,342 to $188,467, an increase of 13%. (The decline shown from 1980-1982 in the graph does not exist if we use nominal dollars, which is the norm, it only appears when we adjust for inflation.)

If we take the long term perspective of real estate investments generating steady performance, where cash flows increase every year as rental payments coming in steadily rise relative to mortgage payments going out, even as equity increases every year as overall property prices steadily rise while the mortgage slowly falls - then the years between the turning points of 1980 and 2001 were a wonderful time to be a long term real estate investor. Sure, there were dips and rises and crises as happens with almost any investment category over the long term, but the years between 1980 and 2001 were a great time to accumulate wealth as a long-term real estate investor.

Going back to the relationships underlying the Gold / Housing ratio, as each inflation hedge separately moved up and down around their long term averages, and real estate went from being relatively very cheap compared to gold, to being very expensive, then we would expect real estate to radically outperform gold over that time. Indeed, that is exactly what happened, and the 21 years (1980 - 2001) following the last time the ratio was at 99, real estate asset prices outperformed gold by 448%.

(The house price is calculated using the median national price of a single family home for the 2nd quarter of 2011 of $171,900, as reported by the National Association of Realtors. This price is then adjusted backwards using both an inflation index and a housing price index. The inflation index utilized is the Consumer Price Index (CPI-U), as reported by the Bureau of Labor Statistics. The housing index used is the Freddie Mac House Price Index, rather than the more commonly used S&P / Case-Schiller Index. Like the S&P / Case-Schiller index, the Freddie Mac index uses a "pairs" methodology to account for changes in average house size and amenities over the years; however, the Freddie Mac index uses more widely distributed geographic data.)

Gold & Real Estate In 2001

By 2001, the relationship between gold and real estate had entirely reversed, as the Gold / Housing ratio reached a historic high of 543 ounces of gold to buy an average home.

Gold was a total dog of an investment. Real estate was hot. The overwhelming market sentiment, and what most financially savvy people believed, was that real estate was a far superior investment to gold.

It was precisely the overwhelming consensus of opinion among intelligent, knowledgeable investors, and some of the most respected financial experts in the nation, which created the situation where real estate was very "expensive" relative to gold.

In contrast, if we take the long term perspective of relative value, with real estate far above its historic average value relative to gold, meaning it took 543 ounces to buy a house in 2001, one would expect gold to then powerfully outperform housing - and that is exactly what happened over the following ten years, from 2001 to 2011.

Over the next ten years, gold would rise from $271 an ounce to $1,785 an ounce, even while real estate rose from about $147,102 to about $171,900 for a single family home. Adjusting for inflation, gold rose from $347 an ounce to $1,785, while housing fell from $188,467 to $171,900.

This serves as another confirmation of the central premise of the Gold / Housing ratio, which is that if you can buy an inflation hedge "cheap", then over the long term you are likely to widely outperform an inflation hedge bought "expensive", given that both gold and real estate move up and down around long-term average values.

There are also a couple of other fascinating features of the 2001 peak. The bottom price for gold in inflation-adjusted terms in the modern era occurred in 2001, when the Gold / Housing ratio peaked. The peak price for gold in inflation-adjusted terms in the modern era occurred in 1980, when the Gold / Housing ratio bottomed.

There is an exact correspondence when we look at the peak and bottom values for gold in inflation-adjusted dollar terms, and the peak and bottom values when we view gold in real estate terms.

It is also worthwhile to note that the Gold/Housing ratio did not call the peak in the real estate bubble, far from it. Instead, this ratio of relative values said that real estate was starting to get historically expensive compared to alternative investments right at the very time that the bubble was just starting to make an appearance. So the value of the ratio was not speculative timing within a bubble - but rather was a signal to long-term investors to sit out the bubble altogether.

Market Sentiment & Generational Buying Opportunities, A Powerful Case For Gold, Reconciling The Opportunities

The second half of this article can be read at the link below. Highlights include: 1) assessing the true usefulness of the Gold / Housing ratio and whether it can identify generational buying opportunities; 2) the compelling case for gold in the event of currency meltdown, which may make temporarily obsolete the recent modern history of the ratio; and 3) how to reconcile these two sides of contrarian investing, when "buy low & sell high" is in such powerful conflict with possible financial meltdown.

Link to 2nd half of article

By Daniel R. Amerman, CFA

9 Reasons Europe's Crisis is Worsening

Although people around the world are focused on holiday shopping and vacations, the global financial epidemic of too much public debt isn't taking a break.

Since the beginning of Europe's financial crisis, its corporate and political leaders told us the problem was contained. But each step of the way, they've been wrong. And today, all signs indicate that Europe's financial crisis is spreading like gangrene. This is not a scare tactic, but an honest evaluation of the facts. Let's analyze some of the reasons behind this.

1) Europe's banks are undercapitalized. European banks are facing a liquidity crisis, even though they've already received an emergency cash infusion from a coalition of world central banks. The International Monetary Fund (IMF) in its 'Global Financial Stability Report' estimates $408 billion in bank's risk exposure to toxic government debt from countries like Greece, Ireland (NYSEArca: EIRL - News) and Portugal. Because Europe's crisis is moving so rapidly, even IMF is having trouble estimating the true liabilities for European banks. In August, IMF said it would take only $272 billion to cover banks' capital shortfall.

2) Borrowing costs have jumped. Italy paid almost 7 percent to auction 8 billion euros ($10.6 billion) in six-month bills. A month ago, Italy paid just 3.525 percent. The same thing is happening in France, who's now paying around 1.60% more on its ten-year bonds compared to Germany. Why is France's debt not trading like a AAA-rated country? What, besides everything, does the credit market know that credit rating agencies don't? Rising borrowing costs are a worst case scenario for already over indebted borrowers.

3) Banks are clueless on managing risk. Why is the global banking system a mess? Banks are incapable of properly underwriting and managing financial risk. The fact that European banks are overexposed to toxic sovereign debt is proof enough. Furthermore, UBS AG (NYSE: UBS - News) is the latest poster child for incompetence when it comes to supervising its trading desks. It's never a good time to announce $2.3 billion in losses from bunk trades because of a 'rogue trader,' but doing it during the middle of a credit crisis is surreal. How many other banks are at jeopardy for this same kind of nonsense?

4) Credit downgrades, everywhere. We don't advocate putting implicit faith in credit ratings, because history has taught us they are nothing more than financial opinions and frequently, not very accurate ones. Still, a gander at the latest downgrading trend is troublesome. Intuitive observers will note, this is not an isolated phenomenon, but a global trend. Sovereign debt from Greece and Portugal, after several downgrades, is now rated junk, Ireland has been downgraded, Italy has been downgraded, and Japanese along with U.S. debt was lowered in August. The pace at which government debt is being downgrade is accelerating and reversing this trend won't be easy.

5) Too many cooks in the kitchen. One of Europe's (NYSEArca: FXE - News) problems in solving its crisis is its magnificent bureaucracy. Between the Economic and Monetary Union (EMU), European Banking Authority (EBA), and EU finance ministers everyone has an opinion on how to fix things but nobody can execute. Layered on top of this melting pot, are individual countries within the eurozone, each with its own distinct set of financial regulators with their own viewpoints. It's a conglomeration of confusion and the perfect recipe for getting nothing done.

6) Ineffective financial regulation. Financial regulators are prodigious at inventing new rules but much less proficient at enforcing them. In many ways, Europe's crisis is just like the U.S.' - a colossal failure by regulators to regulate. Rules are of no protection if they are selectively enforced or not enforced at all.

7) Over-concentration of financial power. The Oscar winning documentary film 'Inside Job' was too angry of a film for me and badly missed at articulating the 4th grade antics of Wall Street's elite. Nonetheless, it explained how U.S. financial services industry (NYSEArca: XLF - News) became too large too fast. What's changed since then? More assets and power have been concentrated in fewer surviving firms, which has increased everyone's risk should one of these institutions fail. The problem of 'too big to fail' still hasn't be solved domestically or internationally.

8) Squandering public funds. Instead of letting troubled financial institutions or governments fail, regulators and quasi-regulators have thrown (and continue to throw) trillions of dollars trying to save them. In the U.S. it was a $700 billion bailout and in Europe (NYSEArca: VGK - News) it's already topped $1 trillion. These headline bailout figures, which are being funded largely by taxpayers, are probably much higher than reported. While financial bailouts in the name of saving humanity or even a country are excellent devices for delaying the inevitable reckoning day, they don't completely stop its arrival. Furthermore, the financial liabilities associated with massive financial bailouts have already begun destabilizing the financial condition of world governments previously determined as 'strong.'

9) Global flood into 'safe-haven' investments. Regardless of whether you believe in gold as an investment or not, its substantial rise has been fueled, in part, by the failure of governments to prudently manage their finances. As a result, money is flowing out of stocks (NYSEArca: VT - News) and into assets deemed 'safe' like U.S. Treasuries (NYSEArca: TLT - News), gold (NYSEArca: IAU - News), precious metals (NYSEArca: GLTR - News) and Swiss Francs (NYSEArca: FXF - News). As a side note, I grudgingly use the deceitful phrase 'safe-haven' because it suggests a false sense of security. In reality, no single investment security or asset class is technically 'safe,' no matter what persuasive marketers argue. Everything is subject to rises and falls at any given moment.

6 Stocks At 52-Week Lows: CS, PC, RY, TM, TRI, WAG

The stock market has new winners - and losers - every day. In some cases, losing companies are suffering from company-specific events, and these are being factored into the stocks' prices by the market. But this is not always the case; sometimes losing stocks are just being brought down by peers that are experiencing problems or feeling the pain of a poor economic outlook. As a result, some losing stocks are ripe for appreciation.

If you look at stocks that have hit 52-week lows, deciding which ones have potential requires an investigation of the economy, the company's industry and any company-specific issues. That said, any stock that hits a fresh 52-week low or one that is below 50% of its 52-week high is worth an initial look. Here we check out six stocks that are hitting rock bottom.

IN PICTURES: 8 Ways To Survive A Market Downturn

Company	Industry	Market Cap	52-Week Range	Current Price
Toyota Motor Corp. (NYSE:TM)	Auto Manufacturer	104.11B	$61.00-$93.90	$60.39
Royal Bank of Canada (NYSE:RY)	Banking	60.09B	$41.79-$62.20	$41.78
Walgreen Co. (NYSE:WAG)	Drug Stores	28.54B	$30.63-$46.33	$32.09
Credit Suisse Group (NYSE:CS)	Banking	25.66B	$21.71-$46.17	$21.25
Thomson Reuters (NYSE:TRI)	Technology	21.56B	$25.84-$40.66	$26.06
Panasonic Corporation (NYSE:PC)	Electronic Equipment	20.73B	$8.47-$14.66	$8.45

Conclusion
These stocks are hitting lows in their 52-week trading ranges. In some cases, this can mean big potential for investors, but it's up to you to analyze these companies' financials and decide whether they are ripe for appreciation or just falling knives. A fresh 52-week low is a good signal to screen potential investments, but it should not be the data on which investment decisions are based. (Value investing may seem fool-proof, but it carries more risk than you might know.

ZeroHedge: On Capital Flight And Forced Repatriation

There are some folks in America who will wake up this morning and read that Jefferies has been sued for its role in a bond deal with MF Global and they will vote with their feet (Zero hedge Link). They will close their accounts with JEF and move to a safer address. That’s an example of capital flight.

There are people all over the globe who have looked at the rapid un-gluing of the financial system and have bought gold as a safe haven. That’s another example of capital flight.

Every time that something stupid crosses the tape from one of the EU deep thinkers the US bond market catches a bid. Yet another example of capital flight.

I could go on for a bit with this. There are dozens of examples. All around the globe one can find evidence that money is moving around with the sole purpose of finding someplace “safe”.

Capital flight is a perfectly logical consequence in today’s world. Barely a day passes where we are not reminded that nothing is safe any more. Not our currencies, not our equities, not our bonds and certainly not our banks/brokers.

In Greece there are many example where capital flight is undermining stability. The most obvious is the capital flight from the Greek banks that has taken place over the past few years. This flow of money is also perfectly logical. There are many risks of leaving money in a Greek bank:

-The Bank could default. The principal in the account is at risk.The guarantee (up to E100k) is from the government. What’s that worth?

-The government could default. The chaos that would follow would result in a freeze of all bank balances.

-The government could announce one morning that it was re-establishing the Drachma. This would mean that any Euros in a Greek bank would be automatically converted into Drachmas at the old official rate. The value of those Drachma would be worth half (or less) as a result of the immediate devaluation that would occur.

Put yourself in the mind of a Greek who had some savings in a local bank. What would you do? You would do whatever you could to get your money to high ground. It would be perfectly reasonable for you to do that. And that is exactly what the Greeks have done. They’ve moved billions of Euros to Swiss banks in an effort to preserve their wealth. In the process they have crippled the Greek banks and have added to the downward spiral in Greece and the rest of the EU.

There was (IMHO) a very significant development on this front last week. A move is being made in Brussels to “force” the Swiss government/banks to transfer all of the assets of Greek citizens back to the Greek banks. For a Greek this means that your money is hostage. It has been functionally expropriated. It will be transferred into a banking system that is fraught with risk. Some portion of the money that goes back to Greece will certainly be lost.

I have talked with some who I know in Athens. They are out of their minds with this development.

Some thoughts/quotes:

- BRUSSELS—The European Commission is helping Greece negotiate an agreement with Switzerland to repatriate as much as $81 billion believed to be hidden in Swiss bank accounts, a high level European Union executive body official said Nov. 17.

$81 billion?? That’s massive. This is not the shopkeeper or pensioner. This is big bucks and that means the Greek shippers. It is a fact that the Greek government doesn’t tax the foreign earnings of the shippers. Call that a mistake, but that is the law. As a result, the shippers have held huge bucks in Switzerland. It’s not dirty money. Right or wrong, there was no legal tax on this.

The European Commission is working with Switzerland and Greece stop what it believes is an ongoing exodus of money from Greek bank accounts into Swiss and other offshore banking centers, the EU official said.

The only way to stop capital flight is to address the underlying causes of the flight. That can’t happen in Greece for years. The alternative is to trap the money, force it to go where it is at most risk. The owner of the money will have no choice. Any rights they might have to preserve their assets will be abrogated.

I’m amazed at this development. The Swiss government/banks are obligated to cooperate with EU tax authorities when there is evidence of tax fraud. But that is not what this is about. The people in Brussels and Bern know that. The fact is that the Greek tax system is so screwed up that there simply are no taxes levied on certain types of income/capital (the shippers). No doubt, some of the Greek cash that is in Switzerland is there because of tax avoidance. But the vast majority is simply safe haven money.

The word “Repatriation” sounds nice enough but really it means “Theft and expropriation”. There will be nothing voluntary about this. There will be little (if any) due process.

If this happens (the folks in Brussels are pushing hard) a very dangerous precedent will have been set. Flight capital will have been made illegal. Where might this go?

-It will go to Spain very quickly. After that it will go to Italy where there are truly huge fortunes outside the country. I see a development like that as being a lights out event.

-It will come to the USA. EU residents have tons of assets here.

-Money that is subject to forced repatriation back to countries with weak banks and bankrupt governments will seek the last remaining safe haven, gold. If governments go so far as to repatriate money, they would also not hesitate to make gold ownership illegal. That too would be a lights out event.

We have a situation developing where the technocrats in Brussels are trying to institute capital controls. They have put a gun to the Swiss government to achieve their objectives. They will likely succeed. The fear of broader capital controls and more repatriation will spread like wildfire. The fact is, capital flight is a very reasonable response in our current environment. Capital controls that either stop or reverse it will undermine confidence and create a panic.

Those officials in Brussels have no idea what they are unleashing.

Get Fired Up for Amazon’s Bargain Stock!: AMZN

Amazon (NASDAQ:AMZN[1]) is bringing the heat to the tablet market. The company is projected to sell 5 million Kindle Fire tablets[2] before the end of the year — impressive considering the device will only have been on sale for a month and a half.

However, that number looks more remarkable when you put it in context with the entire tablet market. While Apple (NASDAQ:AAPL[3]) sold 11 million tablets during this year’s third quarter, all other tablet makers combined sold just 1.2 million devices[4] between January and October — meaning the Kindle Fire might single-handedly have created a competitive tablet market.

Still, big time sales or not, Amazon is taking a hit[5] on every Kindle Fire sold. The device sells for $199 but costs $201.70 to build — and that loss doesn’t count any licensing or royalties Amazon pays on the tablet’s technology. Nor does it consider losses taken on the company’s free shipping offers. Amazon might burn a hole in its pockets with the Kindle Fire even if it’s a success.

And now’s not the time for Amazon to be burning cash, either. In the most recent quarter, AMZN net sales came to $10.88 billion[6], good for year-over-year growth of 44%. However, various costs including Kindle Fire development and manufacturing — as well as new licensing deals with Disney (NYSE:DIS[7]) and News Corp. (NASDAQ:NWS[8]) for streaming video rights — drove net income down. Way down. Net income was down 73% from last year at just $63 million, or 14 cents per share[9], which missed Wall Street expectations by a dime per share. Guidance for the fourth quarter wasn’t promising either, with a wide income forecast of between $250 million and a loss of $200 million.

AMZN shares tanked from a mid-October high above $240 to $195 by month’s end. As of Tuesday — despite a positive Kindle Fire debut week, rumors of a new Amazon smartphone[10] and massive holiday sales projections[11] — Amazon was trading just above $192. That’s still above its 52-week low of $160, but AMZN is heading for its support level of just below $186. All signs say sell and sell now[12].

Before moving those shares, though, it’s important to think about Amazon’s positioning going into 2012. Those millions of Kindle Fires represent more than just strong brand reinforcement, but increased sales for literally all of Amazon’s operations. That device is a handheld portal for Amazon’s core online retail business. Each Kindle Fire comes with a free trial to the Amazon Prime premium subscription service, which, for $79 per year, gives users access to streaming video, an e-book lending library and discount shipping.

It’s estimated that Amazon’s total annual revenue grows 1.5% for every 1 million new Amazon Prime subscribers[13]. Assuming the company sells 5 million Kindle Fires and just 20% of those new customers become paying Prime subscribers, that’s a significant bump in revenue. Even though net income projections for the fourth quarter don’t inspire confidence, sales projections should: Amazon expects Q4 sales of between $16.5 billion and $18.7 billion[14], representing YOY growth between 27% and 44%, respectively.

That uptick in revenue should fuel the company’s ambitions for a while to come. Digitimes reported Tuesday that the company already is preparing two new models of Kindle Fire[15] — 8.9-inch and 10.1-inch versions with enhanced capabilities over the current 7-inch model — for release in 2012.

Amazon is evolving in a powerful way. It is transforming from a retailer that relies on other company’s products, be they phones or PCs, to reach customers into one that reaches customers directly through its own devices.

The Fire is delivering on the promise Amazon’s Kindle business showed when it started in 2007. Amazon already leads online retail and is spending big to place a literal storefront in consumers’ hands under the guise of entertainment. It’s the reverse of what Apple has done with its devices, selling desirable technology first as a gateway to retail. With Kindle Fire on track to sell big in the near and long term, $192 ultimately might turn out to be a bargain for a piece of Amazon.

In Case You Were Wondering Why We Keep Bailing Out Wall Street..

Not that there was any mystery about why the government keeps shafting Main Street and bailing out Wall Street, but in case you had any doubts, this chart excerpt from XKCD should put them to rest.

More than anyone else, Wall Street has the power to hire and fire our elected officials.

So it's no wonder that those officials take care of Wall Street first.

(The Wall Street money, by the way, goes to both sides of the aisle. And that's to be expected. If you're a bank, there's no sense in picking a side when you can just own both teams.)

click here to view the chart