The Fed Lets The Market Fall--Finally!

Even the Fed's non-stop POMO could not prevent stocks from falling today, as major markets declined 1.7% across the board. This is in contrast to the never ending POMO melt-up over the last 4 months where the markets churn higher by 0.2-0.4% on ever decreasing volume.  It looks like we may finally have Marc Faber's anticipated correction (about 2 months late but I will take it). All it took to scare markets was an S&P downgrade of Spanish debt (not surprising) and some chatter about riots and demonstrations in Saudi Arabia. Not to mention the fact that Portugal, the soon to be EU welfare recipient, watched its CDS trading to 500 bps--signaling that a EU bailout is not only guaranteed, but that a debt restructuring is almost a given sometime in the next few years.

The only real surprise during today was the decline in gold and silver. Contrary to what your hear on garbage TV channels like CNBC, precious metals are not part of the risk trade, like other commodities. Gold and silver are the anti-currency fear trade. They are your go to currencies when you do not trust fiat paper money to retain its value. Gold, in particular is a safe haven because demand is not correlated to economic growth, while silver is somewhat more sensitive to global growth. So why on earth is gold and silver down more than 1 and 2% respectively? Fears in Saudi Arabia should be bullish as investors digest the potential for a crisis in the world's largest producer of crude oil. No doubt JP Morgan and HSBC (the largest holders of short positions in the metals) played some role.

Despite the fact that the market is likely headed for a 5-10% correction, I am not shorting the market. The risk/reward is not on your side as the government along with the all-powerful Federal Reserve are doing everything they can to pump stocks--even if it means destroying the dollar in the process. So with that in mind I am getting a list of stocks to buy during the correction

Here are a few stocks and plays I have my eyes on:

1. 3D Systems(TDSC)--leader in 3d printing--promising growth story despite high valuation. Volatile stock!

2. Allana Potash---I am still long this name and will continue to add on weakness. Drill results have dramatically increased their Ethiopian potash deposit. This is probably one of the largest potash reserves outside of Canada.

3. Manas Petroleum--oil exploration company with interests in Albania, Mongolia, and Kyrgyzstan. It is a gamble play with big potential and high risk. This is one of those plays that either goes up 500% or goes to 0. It like these types of plays because if you are right you make a huge profit. On the downside you know exactly how much you can lose (100%). So treat it like an option. (2% of my portfolio is in this stock)

4. Gold/Silver--Have to agree with Faber that you should always be adding to gold and silver on weakness. On the gold stock side, be very careful as they have been lagging bullion for a while. Just look at GOLD, AEM, etc. Looking at these pathetic charts, one would falsely conclude that gold must be plunging. This is the problem with owning gold stocks--they are not necessarily correlated with the gold price. There are management problems, production difficulties, and other mining risks. Another reason to avoid gold stocks is the rising price of oil which, hurt margins. For gold stocks to really outperform bullion, you would need to see a prolonged period of rising gold (to say $1800-2000) and stable to declining oil to help margins. Seeing $2000 gold is of no benefit to the gold producers if oil is at $185.

5. Uranium--While it is hard to be bullish on commodities after their huge run-up over the last two years, uranium stands out as the most attractive energy commodity. Here is a good article on why uranium has a good future. In short, by 2013/2014 there will be a large uranium shortage worldwide as Russia stops converting nuclear warheads into uranium. This is a simple suppl/demand situation where the price of uranium has to rise.

Because you cannot buy uranium directly, you have to focus on the stocks. In particular, I like the small exploration plays with marginal deposits, which are highly leveraged to the price of uranium. One I am looking at is Bannerman Resources. It has a large, low grade deposit with high production costs. The mine is not economical at $50-$70 uranium, which is why the stock is cheap. But if uranium continues to go up (as I think it will) Bannerman's deposit will look much more economical.

6. Emerging Markets-- Most of the EM complex has already sold off over the last few months due to inflation fears, etc. These markets should continue to fall along with the developed markets. This in my opinion, provides a good entry point for adding new positions. Favorite emerging markets are India (INP), Russia (RSX), and Chile

7. Short Volatility (XIV)--this is a relatively new and more efficient way of shorting volatility. If the VIX got to around 30, I would be willing to go long XIV. This is a product that trades inverse to the VIX. Because the VIX is mathematically guaranteed to go down thanks to the nature of volatility (short upward spikes followed by prolonged periods of declining volatility.) Furthermore, volatility futures are almost always in contango, which benefits XIV. To me, XIV is superior to shorting VXX and other volatility products because you do not have to short it (and get the borrow), which can be very expensive. All you have to do with XIV is go long. The only time you will lose is during brief spikes in volatility.

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The Fed Lets The Market Fall--Finally!

Surging Oil Wil Not Stop Zimbabwe Ben From Printing More Money-QE 3 Next?

In a world of surging oil prices, one would think that inflation would be the chief concern of central bankers around the world. That would be true if we had a responsible Fed Chief, but, alas, we have a criminal-megalomaniac in the person of Comrade Ben Bernanke. Don't take my word for it. Let's take a look at one of Bernanke's research papers titled "Systematic monetary policy and the effects of oil price shocks," which argues that high oil prices are not inflationary. This is false: recessions are not caused by the oil shock, but rather, the monetary response by central banks is to blame. By raising rates to counteract the perceived inflation threat, monetary policy makers are the ones responsible for depressing the economy--not oil.

The general conclusion from Bernanke's long-winded paper is that central bankers should not tighten monetary policy in response to oil prices shocks. Of course! What else would you expect from Zimbabwe Ben? In the Zimbabwe School of Economics, interest rates should remain at zero forever to "encourage economic growth." Inflation, you may say? Inflation is a myth, according to the Zimbabwe school, created by evil people who want responsible monetary policy. The Zimbabwe school believes prudent monetary policy is responsible for recessions, unemployment, and world wide suffering. Unlimited amounts of liquidity will solve all of these problems with no negative consequences. Insanity personified!

This ludicrous paper from Bernanke completely ignores oil's impact on businesses and consumers. This is what leads to the eventual economic downturn. Rising oil prices hurt companies by substantially increasing raw materials costs across the board. Companies have two choices: They can either try to pass through the higher costs to consumers and sustain margins or eat the cost themselves and watch margins contract. The US consumer has been destroyed over the last three years with the implosion of the housing market. Unemployment, and, more importantly, underemployment remains in the high double digits. Under these economic conditions, companies will find it very hard  fully to raise prices (especially brand names). If they are unable to pass the costs to consumers, businesses quickly see margins (and therefore profits) shrink. When margins are contracting, businesses are less likely to increase capital spending, which reduces business investment. In fact, most companies will start to downsize and lay-off workers to counter the effect of  falling margins. This is where we see how oil could lead to a serious recession. Rising oil prices reduce corporate profitability, severely hampering consumer spending. This is what causes recessions.

Bernanke's thoughts regarding oil and the economy makes QE 3 much more likely. If the market falls 10-20% over the next few months and other central banks raise rates (as the ECB recently threatened), Bernanke's natural reaction would be to print more money to stimulate the economy. He would be justified as he wrote a 65 page paper about this exact possibility and has a fancy computer model which shows he is correct. Bernanke will not doubt leak his policy shift through Jon Hilsenrath at the WSJ. You will start to read articles in the press about how oil is deflationary and that the Fed has to print money to counter this effect. This is the exact same way the Fed communicated QE 2 to the market back in Aug 2010. In fact, we have already seen Fed President Lockhart mention that the Fed may have to ease in response to high oil prices. Let's see if other Fed presidents start to say similar things and refuse to rule out further money printing after QE 2 concludes. We may see QE 3 by the third quarter of 2011. The Fed is succeeding in its mission to destroy the dollar. The scary part is how quickly they are accomplishing their task. Between 1913-2008 the dollar lost approx. 95% of its value. Does anyone want to see whether the Fed is going to break that record much sooner? I bet they could easily devalue the dollar by 95% over the next 10 years at the current rate of money printing. The Fed is becoming more efficient! Got Gold?

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Surging Oil Wil Not Stop Zimbabwe Ben From Printing More Money-QE 3 Next?

What Ron Paul Should Have Said to Bernanke

It is a shame that Ron Paul, the only decent person in Congress, always gives Bernanke a pass during his Q &A session. Oh sure, Ron Paul will go through long, rambling statements regarding the virtues of the gold standard and the monetary history of the late 1800's, but it stops there. Ron Paul fails to expose Bernanke as a dangerous terrorist who is deliberately stealing the wealth of the American public and handing it directly to the major banks. I wish Ron Paul would say something like:

Hello Mr. Chairman, thanks for appearing. You are doing a great job of destroying the American middle class through your criminal money printing, while simultaneously giving free money to the banks by manipulating interest rates. You are nothing more than a nefarious thief who works on behalf of the banks, bailing them out  whenever they want with monopoly money you create with a keyboard. Sure, the dollar's purchasing power plummets, increasing food and energy prices, which has resulted in millions of people around the world starving (including Americans) to death. And when seniors freeze to death in their homes because they cannot afford heat, their last thoughts should be of you and your gang of tyrants on the Fed Board. Hats off, Mr. Chairman; you are the envy of every third world dictator who wants to steal the wealth from their citizens. And best of all, you carry out your insidious task almost in complete secrecy.

I wonder, Mr. Chairman, how much you will charge for your consulting services when you retire from the Fed? After illegally giving your bankster overlords trillions in bailouts, so they can continue to pay themselves $100 million a year bonuses, your next step should be to work for the major banks like your predecessor did. It must be great knowing that you are making your future bosses happy by keeping interest rates at 0% so that the banks can then turn around and charge 23% on credit cards. Immoral? Sure, but don't let that stop you and your bankster oligarchs who run the USA as their personal fiefdoms. Whenever someone questions your actions, just reply that we had to give the banks all of our money or the world would have collapsed, and everyone would have died. Proof? Highly organized criminal mafias don't need facts or evidence to bank up their conclusions-- fear and empty threats do nicely..

Finally, I would like to praise you, Mr. Chairman, for your perspicacity. The mere fact that you still have your job after the whole 2008-2009 financial crisis is evidence that the bankster elite are in complete control of our Congress and government (Democrat and Republican). This is the only logical conclusion considering the fact that you were personally responsible for creating the crisis by keeping interest rates low from 2003-2007. This created a nightmarish bubble in housing, but at least it brought some temporary profits to your bankster overlords. They were able to make billions packaging fraudulent mortgages and selling them to incompetent pension funds and other institutions. When the cracks in the ponzi scheme started to appear as in the case of the sub-prime scandal, you purposely disregarded facts and reason by stating it was all "contained." In fact, Mr. Chairmen, you went as far as to say that there was no such thing as a housing bubble! Assuring the dumbed-downed masses that all was well, you lied just to keep the debt-ponzi scheme going a few months longer. After completely missing the most severe financial crisis since 1929-1930, you still have the temerity to lecture others on monetary and economic policy. It is incredible that a miserable piece of filth like you still has any credibility left. God Help America! Guards, please arrest the Chairman in the name of the American People.

But instead of really challenging Bernanke, Ron Paul politely said the following:

  


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What Ron Paul Should Have Said to Bernanke

Marc Faber's March Outlook: Falling Stocks, Wicked Inflation, and Middle East Turmoil

Marc Faber is out with his latest issue of the Gloom, Boom and Doom Report, which is always a must read for serious investors. This month's report covers his outlook for the stock market, gold, oil, and the future for the US and global economy. Here are some of the highlights:

1. Stock Market--Still bearish in the short-term. Faber cautions against being bearish longer-term as long as the world is printing money, which will continue to inflate nominal stock prices. That said, technical indicators suggest a market correction. In particular, Faber notes the declining number of new 52 week highs, overly optimistic sentiment, and breakdowns in major stocks like Hewlett-Packard and Wal-mart. Furthermore, corporate insiders are selling stocks at a furious pace (855-1), indicating that they believe now is time to take profits, not risks.

2. Emerging Markets---Faber is still bearish on emerging markets in the short-term, and he expects world markets to correct further. However, emerging markets should be bought on the decline, especially since many of them are already down from their November 2010 highs. He notes that many institutions have been rotating out of EM and into developed markets, despite EM having better fundamentals. Some EM stocks have fallen 20-30%, which makes them a good value compared to US stocks. EM markets with the lowest forward PE ratios are Russia, Hungary, Turkey, and Brazil, which are good places to invest. Other markets to consider are Malaysia, Thailand, and Singapore where you can get good dividend yields.  

3. Gold---To Faber the risk concerning gold is not whether it goes up or down, but the risk lies in not owning any of it in your portfolio. Gold could face a correction, but this does not bother him. He advises people to continue to accumulate gold and silver by dollar cost averaging every month. Strong fundamentals favor gold long term--not just because of money printing by central banks, but also because demand from emerging markets like China are increasing at an extraordinary rate. In 2010 China and India accounted for 50% of total gold demand in 2010. This number will only increase, providing strong support to the gold price. 

4. Oil and Energy Stocks--The price of oil will remain high for the foreseeable future because of the unrest and likely further deterioration in the Middle East, along with inflationary policies by the world's major central banks. Faber postulates that Pakistan could be the next domino to fall which would be a catastrophe for the world as it has nuclear weapons. While oil has spiked to $100 recently (WTI Crude), Faber thinks it will remain above $90 due to these these factors. Regarding energy stocks, they have a had a nice run, and investors should take profits or wait for a pull back before initiating new positions. Favorites are Chesapeake Energy and Suncor Energy.

5. Retail Stocks--Faber thinks retails stocks are vulnerable right now as rising food and oil prices reduce consumer spending. Wal-Mart is the classic example of difficult conditions for retails stocks, after the retailer reported another decrease in same store sales. If you want a real proxy for how the economy is doing, follow Wal-Mart's stock price which has been flat for the past 2 years.  Faber even advises people to short the Retail Index (RTH) with a tight stop-loss.

Side Note: Faber is strangely a fan of self-help guru Tony Robbins, the man insomniacs like myself constantly see on late night infomercials. Faber writes at great length about Robbins, extolling how he is an excellent speaker and helps build people's self-esteem. Faber is a big fan!

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Marc Faber's March Outlook: Falling Stocks, Wicked Inflation, and Middle East Turmoil

Will High Oil Prices Derail the Global Economy?

Scotiabank is out with a good research report on the impact of surging crude prices on the global economy. In particular, the report states that the effects are being dramatically underestimated by market participants. This is despite the last time crude went parabolic back in 2008, which led to a worldwide recession. The reason the global economy is so susceptible to higher oil prices is because consumers are facing a combination of rapidly rising oil and food prices, creating a double whammy, which automatically decreases available discretionary income. It is estimated that increased food and oil prices have cost consumers an extra $225 billion (compared to late 2008 levels). Furthermore, US households are severely budget constrained. thanks to high unemployment (U-6 16%), no wage growth, and little to no home equity, which has been the traditional cash cushion of the American consumer. Without access to home equity, consumers are less able to whether the impact of increasing oil prices, even for a short period of time. This dynamic will have a severe impact on consumer spending, hence depressing economic growth in an economy, which is still reliant on government life support.

One last thing I need to address. Some analysts and financial pundits have declared that rising oil is actually deflationary. At first glance, I thought this was some kind of bad joke from the likes of Fed-payroll operatives like Steve Leisman on CNBC. But as it turns out, a few serious commentators like Ambrose Evans-Pritchard have argued that same thesis, arguing that rising oil causes central banks to react, which in turn slows the economy resulting in deflation. The idea that rising oil prices leads to deflation is a concept so stupid and misguided that it must have originated from the Federal Reserve Board! After all, in the mind of our dear leader Zimbabwe Ben, anytime asset prices fall it means deflation, which requires more money printing. SP 500 futures down 0.4% pre-market must give Bernanke and Co. a real scare as this is the deflationary spiral coming around the corner to kill us all! Don't buy into this garbage from the same simpletons who told you  in 2007-2008 that the US economy was "sound" and that sub-prime was "contained." Inflation results from an increase in the money supply and has nothing to do with consumer prices. An increase in money supply (through money printing and excessive credit creation) pushes up prices as there is more money chasing the same amount of goods and services. Take a look at the chart below of M2 (best measure of the money supply since M3 was discontinued) and tell me if it is contracting (deflation). Not a chance with the Fed printing trillions of dollars.

Here is the report regarding oil:

The Potential Oil Impact On Growth Is Being Under-Estimated
5 reasons why the impact of higher oil prices on GDP growth is likely to be greater than the oft-cited lower bound of estimates.
The backdrop against which an oil price shock is occurring is not as severe as it was in 2008-09 when global deleveraging was commencing as jobs were being rapidly destroyed. But the effects of an oil shock on the economy are likely to be greater than the long-run average estimated effects for five key reasons that we explore.

Indeed, the conventional view that oil would have to rise much further for a long period of time before the economy incurs painful effects understates downside risks.

1. Uncertain Growth Effects

First, those long-run effects of a spike in oil prices on growth are highly uncertain as estimates vary widely. At the low end of the estimates, every $10 rise in oil prices tends to shave 0.2-0.3% off US GDP growth. Since WTI oil has risen by US$40 a barrel since early 2009, this estimated effect would shave GDP growth by about one percentage point lower than it would be otherwise.

Half of that shock has arrived since September, thereby concentrating much of the effect on a shorter interval. Indeed, higher oil prices since last Fall chop a half point off US GDP growth, and thus largely offset the possible positive impact of President Obama’s stimulus extension — assuming that US consumers would spend such stimulus to begin with (versus hoarding it), which we doubted.

But studies have shown that the magnitude, lag and duration of the impact of an oil price shock on the real economy is dependent on a number of factors, including the duration (temporary vs. permanent), nature (demand- vs supply-side) and origin (domestic vs. exogenous) of the shock, the type of economy (developed vs. developing, oil-importing vs. oil-producing) and the state of the economy at the time of the shock. For instance, OECD and ECB research tends to argue that the three-year effect of a $10 rise in oil prices involves a cumulative hit to US GDP of about 1%, and less for other countries.

Thus, the $40 rise in oil prices since 2009 would involve a 4% cumulative hit to US GDP over three years. Increasingly more research — particularly in the post 2007-era — focuses on the nature of the shock [1] [2] [3].

While findings agree that higher oil prices due to supply shocks could have a large, adverse impact on global growth, conclusions vary on the effect of the demand shocks. Some believe that they have had limited influence on real GDP [4], while others suggest a more persistent hit [5].

Part of the explanation might be embedded in the dual causality that exists between oil demand and economic cycles [6], but the acuteness of the response also depends on whether the demand shock is domestic or exogenous [7] — particularly in the case of the United States and China — whether the study looks at the short- or long-term impact on the economy in question as well as the size of the shock (1% vs. 10%). Finally, it is worth paying attention to the time period examined by the study, since sensitivity of GDP to oil price shocks seems to have decreased over time [8] [9]. With economies adopting more transparent and credible monetary policies, becoming less reliant on oil in both manufacturing and consumption and reducing real wage rigidity the pass-through effect of oil price shocks to import, producer and consumer prices has diminished over time — particularly since the 1990s — reducing their second-round effect on the real economy.

Due to the factors discussed above, the magnitude — and sometimes even direction — of the impact depends on individual countries and scenarios studied. The negative impact seems to be the biggest on the United States and the smallest on Canada, although oil price shocks seem to contribute positively to Norway’s and Japan’s economies. Digging below the aggregate impact on real GDP, findings suggest that the negative effect of oil price shocks is relatively bigger on household spending and business investment [12] [13], and that their respective price elasticities are likely to get larger with time [14].

2. A Coincidental Oil And Food Shock

Second, historically, oil shocks often occurred in isolation of other consumer-oriented commodity price shocks, until recent years. As chart 2 demonstrates, global household budgets are being strained by the twin oil and food price shocks. In chart 2, we have indexed the trade-weighted UN Food and Agriculture Organization’s index of 55 food prices to the start of 1990, and done likewise for WTI oil. For instance, the early 1990s spike that more than tripled oil prices occurred while global food prices were flat. Indeed, for much of the period until the mid-2000s, food was dirt cheap to much of the world, and prices were going nowhere. Since 2003, however, this index of food prices has risen by a whopping 120%. Growth in emerging market demand for food as tastes broaden out with income growth, rich-world environmental policies oriented toward diverting crop production toward bio-fuel production, financial speculation that treats some commodities and alternative investments interchangeably in increasingly liquid markets, and global government actions toward blocking grain exports and stockpiling food have all combined to drive food prices to record high levels in recent years. If ever there were a time to resurrect the Doha round of global trade talks, developments in recent years offer a compelling case of the need to strike to the heart of trade distortions across developed and developing countries alike.

The combined largely non-discretionary spending categories that are focused on food and energy spending compete for share of wallet against discretionary spending. What American consumers are spending on food and energy as a share of their incomes is not far off 2008 levels. Americans are now spending an extra $225 billion on food and energy now versus after prices had collapsed by late 2008. Food and energy spending had peaked at US$1.497 trillion in 2008Q2, sat just $36 billion below that level as at the end of 2010 and is likely higher now. As a share of incomes, food and energy spending now sits at 12.6% versus the 13.5% peak in mid-2008. This share has risen by taking away over one-and-a-half percentage points of income since the 2009 trough in oil prices.

3. Household Budget Constraints

Third, historical growth sensitivities to oil prices assume historical levels of access to credit and income growth that are unlikely to apply today following a global banking crisis that still leaves credit much tighter than prerecession conditions. This is still a credit-constrained environment marked by trivial job and income growth.

Without stronger income growth or credit to back into, a commodity shock still crowds out discretionary spending and, in our opinion, is disinflationary for much of the rest of the consumer basket — a key argument we advanced in 2008. This crowding-out effect on discretionary spending is likely to raise the estimated impact of higher energy prices on growth — we just don’t know by how much. But the greater the commodity shock, the even greater likelihood that US consumers will save rather than spend stimulus. If they spend it, it’s likely to cover here-today and gone-tomorrow consumption of essentials, while other spending categories suffer.

This is why we doubt the line of reasoning that says an oil price shock must be long lasting in order to negatively impact consumer spending in a material manner. Historically, consumers backed into home equity or credit or income growth to smooth out fluctuations. Now, however, household budget constraints are so tight that the cumulative impact of repeated shocks to household finances — even if short lived — is likely to have a seriously destabilizing impact on consumers and businesses.

4. Limited Impact From Higher Production Levels

The fourth key reason why the actual impact on growth is likely to be materially greater than the lower bound of estimates on the historical effects concerns whether Saudi Arabia and other producers can react swiftly to bring more supply into the market, and thus contain further price upsides. Just because they have more spare capacity to draw upon now than they did when oil prices were high in 2008 doesn’t necessarily mean they will be able to contain upward pressure on prices. Supply-side price elasticities are stickier than this assumption of an automatic reaction implies, and a game theoretic approach to changing quotas within OPEC and across non-OPEC producers makes it unclear whether enough other producers would follow suit — or even contravene possible actions by Saudi Arabia. Further, commodities are notorious for overshooting short-run supply and demand dynamics, and concern over instability in the Middle East would not be swept away by simply raising oil production levels. We simply don’t know what kind of regimes will ultimately dominate the region, but the early signs from countries like Egypt’s military government are not encouraging by way of musing over opening the Gaza border, allowing Iranian naval ships to pass through the Suez canal for the first time in years on their way to Syria and off the coast of Israel, among other moves more radical than generally permitted under the Mubarak regime. One must be extraordinarily cognizant of the potential for developments across the Middle East to unfold in potentially much more destabilizing ways than is thus far apparent — the risk premium in oil will therefore reflect this uncertainty.

5. The Policy Response

How policy makers react to the surge in commodity prices is also key. This is a generalized commodity shock that is focused upon consumers that risks policy responses that could further aggravate the risks. An example is talk of raising rates at central banks like the ECB, just as they did in the midst of the last commodity shock in 2008 when its main refi rate rose to 4.25% in July of 2008 on frankly legitimate fears of a commodity shock sparking rising wage demands, but also on what turned out to be the eve of the severe deterioration in markets and the economy. The policy response to a relative price shock that risks demand destruction may well be materially different from the policy response to generalized inflation pressures.

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Will High Oil Prices Derail the Global Economy?

Time To Get Back Into Emerging Markets Again?

So far in 2011, emerging markets as an asset class have underperformed developed stock markets like the US and Western Europe. Numerous reasons have been given by analysts and pundits for the reason. Worries about overheating economies, rising inflation, and the anticipated slowdown from rising interest rates. While these area all possible reasons, the questions remains if now is the time to begin accumulating them after the recent sell-off. After all, emerging markets certainly have the fundamentals on their side with rising incomes contributing to a better standard of living for hundreds of millions of people.

Just because this secular trend is expected to continue for the foreseeable future, does not necessarily make these stocks a lock as we have seen recently. Brazil (EWZ) down 4%, Chile -12%, China (FXI) -5%, and India (INP) -17%. This despite ample global liquidity thanks to wordwide money printing by the world's major central banks.   

The recent lagging in emerging markets should be no surprise to readers of this blog as we have covered Marc Faber's suggestion that this would occur. See here: Marc Faber's "Crack-Up Boom" Could Be Ruinous for Emerging Markets. Faber, as usual has been proven correct so far this year.

The chart below is courtesy of JP (We Stole Taxpayer Money and got away with it) Morgan. It shows the global positioning of investors with respect to emerging markets. You can see that the euphoria we saw for emerging markets in 2010 has quickly faded. This just shows the schizophrenic type market we have where risk on positions (long emerging markets, commodities, etc) can be dumped in days by the hot money momentum crowd, chasing returns. It is evident that emerging markets are no longer that favored by global investors despite promising fundamentals and only a modest sell-off from recent highs.

Click chart for larger image

For bulls on emerging markets. this should be considered a contrary signal as it means that the market is working off any froth we saw in emerging market stocks last year. It is hard to have a bubble in an asset class when large institutional investors are not heavily overweight sector.

My only concern for emerging markets right now is that I expect a general sell-off in developed markets, which will likely hit emerging stocks. I would want to wait to establish new positions until this correction occurs. But after this, it looks like emerging markets may have a good 2011 after all, despite current concerns by investors.

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Time To Get Back Into Emerging Markets Again?

Marc Faber's February Outlook--Still Looking for a Correction

Legendary investor Marc Faber is out with his latest issue of the Gloom Boom and Doom report. Here are a few highlights:

1. Stocks---Still cautious on US and developed markets and expects a short term correction. In particular, Faber points out that while the Dow made a new high, the transports have not yet confirmed the move, which is bearish. Another warning sign is the failure of the Russel 2000 small cap index to make a new high. This is important because it has until now lead the general market. Furthermore, the internal market breathe (NYSE new highs) has been steadily falling, despite a rising market. Longer-term, Faber is pretty constructive on the stock market as the Fed will simply not let the market decline very much.

2. Emerging Markets--Faber remains very bearish on emerging markets in general (Brazil, India, etc). He notes that many failed to make new highs in January, despite favorable market conditions, which could indicate a major top in some emerging markets. Faber thinks emerging markets could fall between 20-30%. In fact, this would be a great buying opportunity for investors.

3. Commodities--Faber is concerned about commodities, as they are currently very overbought by almost any measure. He goes on to say that commodities seem to have reached the parabola stage--going straight up, which is usually the very end of the move. Yes, it could last longer than anyone expects, but at some point prices will collapse again, as they did back in 2008. This cycle, Faber notes, always occurs as higher prices lead to an increase in supply, which eventually overwhelms the market causing prices to fall. The cycle is longer for industrial commodities compared to agricultural prices as it is harder to build a new copper mine than it is for a farmer to plant more soybeans. This cycle will play out even with the Fed's money printing. Investors should prepare for some downside volatility in commodity prices.

4. Gold and Silver--Long term Faber is still bullish on the metals, but he thinks they could fall in the short term with the general market. Gold could fall to the $1,100-1,200 area. For investors this should not cause any alarm because with the fiscal problems of the US and further monetization, the future for gold  is still bright. Faber would use any decline to add to his positions.

5. Real Estate--No, Faber is not calling a bottom in US real estate, but he points out that relative to other asset classes, real estate is cheap. He would consider buying a home as long as you are prepared to live in it for a while. Faber also postulates that if housing continues to decline, commodities and stocks may sell-off even more.

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Marc Faber's February Outlook--Still Looking for a Correction

Health Emergency--Will Be Back To Normal Posting Shortly

Please forgive the lack of new posts recently. I have had a serious health emergency. I will be back hopefully within the next few days. Thanks

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Health Emergency--Will Be Back To Normal Posting Shortly

Good News From Stans Energy

Position Sold 2/5/2011

As you know, I have owned Stans Energy since June 2010, and so far the investment has done well. Today we got some more good news from the company. Stans announced that it has optioned the chemical processing facility for $5,500,000. This represents a critical step for the company because the hardest part of mining rare earth elements is extracting the minerals from the ore. It can take a company years to solve all of the problems and refine the technique. Furthermore, the company also acquired a rail terminal which will allow it to ship the finished products to Asia. Stans made a point in the press release of mentioning South Korea and Japan as potential destinations for the final product. 

This follows recent news reports that South Korea is interested looking to invest in rare earth mines in Kyrgyzstan. I expect news of a financing agreement to be announced in the next few months, which should elevate Stans Energy into the top-tier of rare earth companies. No other company (except Molycorp) can boast having a past producing mine and a rare earth processing facility where the metallurgy has already been solved. More importantly, Stans Energy is a HREE play compared to Molycorp, which is heavily reliant on LREEs (low value). If you look at the pricing of rare earth elements you will know that HREEs is where the big money will be made.

Regarding the processing facility, it was used previously to process output from Stans' Kutessay II mine back in the days when the Soviets were still around. According to a independent study, most of the equipment (97%) is in either good or satisfactory condition. This means that Stans should be able to keep capital expenditures relatively low (always good for shareholders). However, Stans will need additional capital to get the processing facility ready for operations, especially because they intend to increase capacity.

The only knock against Stans Energy right now is that it still trades on the American pink sheets, which keeps US institutions away from the stock. I would encourage the company to try to get a listing on a US exchange such as the American stock exchange. In fact, I have looked at the listing requirements, and Stans is eligible, so it definitely could be done. This is the only way to open up Stans Energy to large US investors, which would further support the stock price. Currently, US investors only consider Molycorp, Rare earth elements, and Avalon. No one outside of Canada has even heard of Stans Energy, and this needs to change, considering the company's attractive fundamentals and promising future. The cost of listing on an exchange would be minimal compared to the increase in market cap achieved through greater exposure to the investment community. A higher market cap will also allow the company to finance operations while minimizing dilution to shareholders.

Overall, I still like Stans Energy and have no intention of selling my shares.

Black Swan Insights

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Another Update On Stans Energy

China's Plan To Use Rare Earths As A Weapon

Full Disclosure: I own stock in Stans Energy and am naturally talking my book.

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I am not an investment advisor and nothing on this site should be interpreted as investment advice. Please consult with your own financial advisor before investing in the stock market or any financial asset. This blog and its author are not responsible or liable for any misstatements and/or losses you might sustain from the content provided. (I know this is a stupid statement, but for legal purposes I have to say it. Thanks)

  

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Good News From Stans Energy

Bailout Near for Portugal?

The EU elite are patting themselves on the back right now after Portugal was able to sell some debt. They all follow the party line that all is well and that Portugal is financially healthy.  Portugal is certainly not Greece or Ireland. To anyone with a brain, these are, of course,  preposterous notions similar to Hank Paulson's statements back in early 2008 promising that the US economy was still sound or Bernanke's comment that sub-prime was contained. Whenever you get these kinds of false assurances by politicians, the smart money knows something big is going to happen. In this case, it is almost a guarantee that Portugal will soon be feeding on the EU bailout fund in order to survive.

But don't listen to me. Take a look at what the markets are saying. After today's "successful" debt auction, Portuguese 5 - year CDS is currently trading at 513 bps. Yes, it was down 4 percent for the day, but the number is telling us the market does not believe Portugal is going to make it without EU assistance. If you remember, back before Ireland collapsed, I mentioned that when you see sovereign CDS rise above 400 bps, bankruptcy is not far off. Portugal is well above this critical threshold, which already means the die has been cast---the only question is:When will Portugal be forced to beg for financial aid from the EU? Personally, I think it will occur within the next 3 months despite Portugal's recent bond offering.

Below is a chart of Portuguese CDS. How can you tell me everything is okay?

One thing to keep in mind is the news from the WSJ that Portugal was forced to initiate a 1.1 billion Euro private placement of debt with China last week. Does this sound like a economically viable and strong country? A private placement of government debt is what soon-to-be bankrupt countries do when the market loses confidence in their ability to repay their debts. Instead of holding an auction where people bid for your debt, in a private placement, the government goes out (with the help of a few investment banks) and actively looks for gullible fools to purchase their debt. The insinuation is that the Portuguese government had to take this action because they feared a failed bond auction.

So even though Portugal was able to see 1.25 billion Euros worth of debt today, it is more of a temporary stop-gap measure because it is a slap in the bucket to the 20 or so billion Euros that Portugal needs to finance itself in 2011. And don't forget there is 2012,2013, and so on. It is true that Portugal has a little more breathing room than the perennial basket case Greece because it starts with a lower debt-to-GDP ratio of around 80%. The problem for Portugal is an uncompetitive economy which lacks any real catalysts for growth. About the only hope for Portugal is to grow its way out of its problems (along with ECB induced inflation). But this is next to impossible for a country that is implementing harsh austerity measures to placate EU demands. This, along with a inefficient labor market and over regulation, leaves the Portuguese economy with no hope of strong growth. The Central Bank of Portugal was forced recently to cut its 2011 growth forecast from 0% to -1.3%, as a result of the austerity measures. Considering that this number comes from a government, we can expect it to be overly optimistic. The real number is likely to be much worse. So we have an economy, which is contracting, and yet at the same time continues to run chronic budget deficits (9% in 2009, and somewhere around 7% for 2010). It is a recipe for disaster as Greece and Ireland have already discovered. More, importantly for Portugal,  2011 does not look very promising either, with current forecasts predicting a 4.6% budget deficit. So much for Portugal taking tough measures.  

The combination of a permanently weakened economy with rising debts is exactly like what happened to Greece. Oh, the game continues as long as the country is able to constantly roll over its debts and issue new debt. But when the day comes when the bond market wakes up and pulls back the punch bowl, it is lights out for that insolvent country. The only question is: How long can the bond market continue to finance Portugal? In reality, the market has already abandoned Portugal and rates on Portuguese debt confirm this fact. 10-year government debt is trading around 7%, hardly a vote of confidence by the market--and this is with continual ECB monetization! Imagine if the ECB stepped away and let the market function freely. Do you think rates would be lower or higher? So as long as the ECB keeps up its purchases of EU peripheral debt, the ponzi game can continue indefinitely, saving Portugal from officially tapping the EU stabilization fund. But is this a real victory when it is predicated on an ECB stealth bailout financed with money printing? I don't think so.

Black Swan Insights    

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Bailout Near for Portugal?