Archives for July 2011

July 2011 - Page 5 of 8 - Money Morning - Only the News You Can Profit From

The 2012 Election and the Truth Behind the Debt Ceiling Debate

At this point, there can't be anyone left who truly believes that the debt ceiling debate taking place in Washington is really about what's good for America.

The truth is it's about the 2012 election – and the party that wins the debt ceiling debate will be the party that comes out on top next year.

It's politics – pure and simple.

Republicans and Democrats have their own respective agendas heading into the 2012 election. And with 16 months to go, there's just enough time for actions taken now to work their way through the system and swing the economy in one direction or the other.

Now, I'm not a believer in conspiracy theories, but I am a firm believer in Public Choice Theory. That means I believe we can make clear statements about what economic conditions each party would like to see 16 months from now – considering their own selfish political points of view.

The Democrats would like to see rapid growth, with unemployment coming down sharply. They don't care so much about whether inflation is ticking up a bit, or whether an over-large budget deficit may cause trouble in the future. If they get elected in November 2012 they figure they will sort out any problems after the fact – particularly if they can recapture the House.

Conversely, the Republicans would like growth to be sluggish, with unemployment stubbornly high. They also would like to make the painful decisions that bring long-term growth now, so that they can benefit from the growth and not suffer the political cost of the pain if they capture the Presidency and ideally both Houses of Congress in November 2012.

Both parties, of course, have strong beliefs about what policies work better, about what policies are better for the interest groups that support them, and about what policies are best suited to their ideology. But at this stage of the electoral cycle, they're pragmatists.

Here's how the election cycle breaks down:

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Avoid Financials: Bank Earnings Are Set to Slide

Flat or falling revenue will plague major bank earnings as second-quarter results are reported this week – delivering yet another blow to battered financial stocks.

Most of the big banks are expected to report a profit, but a falloff in equity trading volume, weak demand for loans, and costly legal headaches all ate into revenue, which will be a prime concern for already-skeptical investors.

All of the big bank stocks are down since the beginning of the year, several more than 20%.

"To say the least, it has been a challenging quarter for the universal banks, as concerns over a disappointing spring housing market, slowdown in the global economy and concerns over counterparty risk to European banks have all worked in concert to cause underperformance," Keefe, Bruyette & Woods analysts wrote in a note to clients.

JPMorgan Chase & Co. (NYSE: JPM) kicks off two weeks of big bank earnings later today (Thursday) followed by Citigroup Inc. (NYSE: C) tomorrow (Friday). Wells Fargo & Co. (NYSE: WFC), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS) are all slated to report Tuesday, with Morgan Stanley (NYSE: MS) expected next Thursday.

Analysts are expecting an average drop in big bank revenue of between 6% and 8%.

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Beware, Taxpayers: The Days of U.S. Bank Bailouts Might Not Be Over

The U.S. government has spent more than $12 trillion to prop up large financial institutions since the 2008 financial meltdown, but more taxpayer money could still be used for U.S. bank bailouts.

A Standard & Poor's report Tuesday said that despite the government's efforts at financial reform through the Dodd-Frank Wall Street Reform and Consumer Protection Act, the U.S. Treasury, U.S. Federal Reserve and Congress could still bail out a "too-big-to-fail" bank if it felt it necessary to contain risk.

"We believe the government may try to avoid contagion and a domino effect if a Sifi [systemically important financial institution] finds itself in a financially weakened position," the S&P wrote in a research note.

S&P acknowledged that policymakers have been trying to make it clear that bank bailouts are over, but that the government's track record says otherwise.

"Time and time again, the U.S. government has found ways, many times reluctantly, to contain systemic risk and limit economic fallout when large financial institutions are on the brink of failure," said S&P.

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Keith Fitz-Gerald on the Jack Bouroudjian Radio Show

Keith Fitz-Gerald recently appeared on the Jack Bouroudjian Show to discuss, among other things, the shifting global wealth picture. Most importantly he named several companies that are poised to profit from this evolving trend. You can listen to the full interview below.

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How to Find the Best Market for Rental Real Estate Investing

The weak U.S. housing market and high inflation, despite their negative effects on the economy have actually created a promising opportunity for rental real estate investing.

Truth be told, we're not going back to 69% homeownership rates anytime soon. With mortgages steadily harder to obtain, more would-be homeowners are renting.

This heightened rental property interest has given landlords more power – which means rent prices are going up and are likely to continue doing so. The national average rate for home and apartment rentals has climbed 6.7% from June 2010, according to housing search engine HotPads.com, and analysts expect another 3% jump in 2012.

Inflation is here and likely to increase, which will also push rents higher.

Overall home ownership cost is exceptionally favorable – even if home prices have a little further to fall – since long-term interest rates are currently near all-time lows. Prices in many markets have already dropped far enough that rental yields are quite juicy, especially compared with interest rates.

When choosing where to invest in rentals, my first recommendation – unless you know a local agent in whom you have great confidence – is to focus on the area in which you live. As I have discovered (to my cost), rental real estate can be a mass of minor crises and costs, which are very difficult to deal with for a small investor who is not on-site.

However, that's not always possible, like for those unlucky enough to live in big-city California or Detroit, two areas where rental real estate is unattractive. I would say there are three main criteria you must evaluate when selecting an area to invest in:

  • Employment.
  • Price trends.
  • And rental yields.

Looking at each we can narrow down the best rental real estate market in the United States.

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Dropping Expectations Point to Rocky Earnings Season

With more companies issuing warnings about their results in recent weeks, investors may see more than a few disappointments in the second-quarter earnings season.

Companies faced many sources of pressure on their bottom lines over the last quarter, including persistent unemployment, the disruption of the global supply chain from the Japanese earthquake and tsunami, and high commodity and energy costs.

"This is where we can get down to the fundamentals of this market and finally see how companies are actually doing in this economy," Jack Ablin, chief investment officer at Harris Private Bank, told CNN Money.

Once-lofty expectations for the second quarter have been slipping for weeks. The Standard & Poor's 500 share-weighted earnings estimate has dropped four weeks in a row, from $232.5 billion on June 9 to $222.9 billion last week.

Of greater concern is that 84 companies – 17% of the S&P 500 – have given negative preannouncements, while just 33 have given positive preannouncements, according to Thomson Reuters data.

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Does the Eurozone Have Its Own Lehman Bros?

Does the Eurozone have its own American International Group Inc. (NYSE: AIG), or worse, its own Lehman Bros. when it comes to Greece?

I believe it does.

Why else would the European Union have bent over backwards to "save" a member nation that: A) Accounts for 2.01% of the EU by trade volume; and B) Would essentially be like letting Montana go out of business – no offense to Montanans or Montana!

More to the point, if things really were under control, why would European Central Bank President Jean-Claude Trichet say that risk signals for financial stability in the euro area are flashing "red" as he did following a meeting of the European Systemic Risk Board in Frankfurt?

The short answer: Because he knows what the European banks are desperately trying to hide from the rest of the world – that there are still enormous risks and they're even more concentrated now than they were in 2008 at the start of the financial crisis.

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The Mortgage Fraud Whitewash is Nearing Completion

Global Economic Intersection Article of the Week

Shahien Nasirpour has an article at the Huffington Post today (July 11) that really has me steaming. He writes about state and federal prosecutors moving toward a proposed settlement with major home loan companies. Nasirpour reports the estimate is that the settlement of abuses is expected to come in at about $30 billion, without any admission of wrongdoing.In other words, all the criminal activities from origination, through misrepresented securities to mortgage processing and registration fraud would be absolved for a sum of money.

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Merger Mania Returns to Natural Gas

Today we're going out into the Moroccan desert to evaluate shale gas fields here. It's early morning, and I am now awaiting my "ride."

They tell me his name is Saad, which means "happiness" in Arabic. Seems a strange name for what I'm still hoping is a Jeep.

Nonetheless, I have a few moments before he shows up to reflect on my government meetings in the capital city of Rabat.

This is an impressive city, with large areas of greenery and beautiful gardens. It also boasts one of the largest palace grounds I have ever seen.

Our meetings dealt with setting the legislative and regulatory agenda for shale gas development in the country. Morocco has been exploiting shale oil for more than a decade, but the gas is new. And it's creating some problems for the existing Oil Law.

If all goes according to schedule, the first evaluation wells will be spud over the next few months. That means there is little time left, before drilling starts, to establish the production, environmental, and royalty/profit ground rules.

One thing, however, is already apparent – both here and elsewhere internationally: Having a known volume of gas in the ground is one thing; being able to provide the working structure necessary to exploit it is quite another.

Without Infrastructure, Field Development Will Languish

Yesterday I traveled some 1,250 kilometers round trip, between Agadir in the south and the capital city of Rabat (north of Casablanca).

It's a 16-hour train ride, all told. But the trip would have been much more difficult only a year ago. That's because the new 250-kilometer extension of the motorway between Agadir and Marrakech is barely one year old.

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