Europe Headed for a 'Lehman Moment'
With credit drying up across Europe we may finally see the Eurozone experience its "Lehman moment" – a replay investment banking collapse that triggered the 2008 financial crisis.
Indeed, European banks are having a harder time getting money – part of the fallout from the Eurozone debt crisis – and the resulting credit crunch could freeze business activity, cause bank runs and plunge Europe into a deep recession that would badly damage the global economy.
"The Continent is headed towards deflation if there's not enough money circulating throughout their financing and banking systems," said Money Morning Capital Waves Strategist Shah Gilani. "This all becomes self-fulfilling at some point. It's a very dangerous situation, not just for Europe, but for the whole world."
A global financial crisis would derail the struggling U.S. recovery and pinch the profits of many multinational corporations.
Fresh data this week from the European Central Bank (ECB) showed the M3 Eurozone money supply actually shrank in October by 0.6%, its steepest drop since January 2009 – the height of the Lehman Brothers crisis.
A shrinking money supply is one of the early warning signals that credit availability is drying up, making it difficult or impossible for banks, businesses, and consumers to obtain loans.
"This is very worrying," Tim Congdon from International Monetary Research told The Telegraph. "What it shows is that the implosion of the banking system on the periphery is now outweighing any growth left in the core. We are seeing the destruction of money and it is a clear warning of serious trouble over the next six months."
Signs of capital draining from European banks abound.
The bank bond market is already frozen. European banks in the third quarter were only able to sell bonds worth 15% of what they sold in the same period in the previous two years, according to Citigroup Inc. (NYSE: C).
In the past six months, U.S. money market funds have withdrawn 42% of their money from European banks. And loans to French banks have fallen 69% since the end of May, according to Fitch Ratings.
Even retail customers have started to pull their money out.
"We are starting to witness signs that corporates are withdrawing deposits from banks in Spain, Italy, France and Belgium," an analyst at Citigroup wrote in a recent report. "This is a worrying development."
An Early Look at Things to Come
I made it back late Saturday night from my meetings in Germany.
While I was there, the German Central Bank (the Bundesbank) was unable to sell its full complement of bonds… for the first time ever.
That resulted in an immediate market dive in both Europe and the United States. Thus far, investors have regarded Germany as a "safe haven" and the Continent's strength amidst an ongoing debt crisis.
Now fears have emerged that even the strongest of the European economies has begun to feel the pressure.
This sets the stage for a shaky upcoming week of discussions about Spanish and Italian bailouts, the future of the euro, and the eroding power structure in Brussels.
The impact of the credit situation also took center stage during my meetings in Frankfurt.
The topic of my meetings centered on how to fund an expanding number of energy projects in Poland.
Not just any projects, remember, but the exploitation of major unconventional shale gas basins that could literally change the energy face of Europe.
Unconventional gas includes gas from shale deposits, coal bed methane, and tight gas (fuel reservoirs locked in impermeable, hard rock).
As I've said before, access to shale deposits has transformed the North American energy picture in less than five years. Now, Poland has committed to the rapid development of its own shale formations.
In fact, in September, Polish Prime Minister Donald Tusk interrupted one of my presentations to a government commission meeting in Krakow to make this policy announcement! Still, it is one thing to announce an intention and another to see it through.
The Challenge: Making It Happen
In this case, fields need to be identified and geological exploration must take place.
These stages are followed by seismic readings, test holes being spud, data collection and interpretation, pad construction, and well completion. And all this needs to happen before the gas even begins to flow.
At that point, an entire network of compressor stations, processing facilities, and pipelines need to be available for companies to bring the gas to market.
This will likely be the most expensive single infrastructure project ever attempted in Poland. Some of the technology and know-how is already there domestically. But most needs to be financed and imported.
Now some of the work is underway. A few international majors, such as Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX), along with a range of middle- and smaller-sized U.S., U.K., Polish, and other European companies, are already taking stakes in what should be a high-risk and high-return undertaking.
But while the prospects look promising, this optimism is based on fewer than 10 test wells and very spotty geological data. Most of the heavy lifting will have to be done from the beginning. That means billions upon billions of euros (and dollars, and zlotys, and pound sterling) are required in investment.
And that's where my meetings this past week in Frankfurt come into the picture.
It's Time to Overhaul the Fed
The average American has no idea how protected the big banks in this country really are.
For the most part we don't even blink when we are lied to publicly by their CEOs.
Maybe that's because the biggest bank in the world, the U.S. Federal Reserve, which happens to be a creation of and 100% beholden to the banks that it is a master shill for, also lies to us and covers up Wall Street's misdeeds.
How else can you explain the Federal Reserve's practice of secretly feeding billions of dollars to big banks, and then looking the other way while those same banks lie to the public about their strength so they can raise desperately needed equity and borrow in the debt markets?
Why else would the Fed prop up Bear Stearns long enough for JPMorgan Chase & Co. (NYSE: JPM) to buy it, and then prop up JPMorgan? Why else would the Fed prop up Merrill Lynch for the benefit of Bank of America Corp. (NYSE: BAC), and then prop up Bank of America as Merrill dragged it down. And why else would the Fed prop up Wachovia just so it could be taken over by Wells Fargo & Co. (NYSE: WFC) – yet another bank that would come to need even more help?
Power and Ponzi Schemes
The pat answer from the Fed is that propping up failed banks long enough to be taken over by "healthy" institutions is better for the system than letting them fail. On the surface that's true, but it's what's under the surface that's destroying America's free market foundation.
Here's what's come as a result of the Fed's actions: The "Super-Six" – JPMorgan, Bank of America, Citigroup Inc. (NYSE: C), Wells Fargo, Goldman Sachs Group Inc. (NYSE: GS) and Morgan Stanley (NYSE: MS) – which held $6.8 trillion, or about half the industry's assets in 2006, had increased their holdings by 39% to $9.5 trillion as of September 2011.
So what's really going on is that the country's biggest banks, which weren't healthy when their CEOs lied to us (as they still do), have gotten even bigger.
With size comes power – the power to pay lobbyists, the power to pay for legislators, and the power to change regulations.
These banks don't always get what they want exactly when they want it, but they do eventually get what they need to make money hand over fist.
The whole thing reminds me of a Ponzi scheme.
The Federal Reserve might as well be Bernie Madoff and the banks "feeder funds" in this nationalized scheme to perpetuate the channeling of depositor money into banks and investor money into bank stocks and debt securities.
For the chain to be broken the Federal Reserve is going to have to be overhauled – seriously overhauled – and big banks are going to have to be broken up, once and for all.
Don't Wait Until January To Play the January Effect
A lot of investors have pocketed big gains from the so-called "January Effect." In fact, the January Effect – which refers to the historical tendency for stock prices in general, and small-caps in particular, to rise during the first month of the year – has better than an 80% success rate since the mid-1920s.
Of course, based on recent performance, the phenomenon may soon require a new name – and some new timing guidelines for traders hoping to profit from it.
The January Effect was first recognized in the 1940s, but its actual strength wasn't quantified until 1982 when Donald B. Keim, now a finance professor at the University of Pennsylvania's Wharton School of Business, presented research detailing the market's January performance superiority dating back to 1925.
Since then, studies by several other groups have verified Keim's results – both in terms of positive overall January performance and the extra strength of small-cap stocks. Some of the findings include:
- Stephen Ciccone and Ahmad Etebari, professors at the University of New Hampshire's Whittemore School of Business and Economics, reviewed stock market performance from 1926 to 2006 and found that January produced "the highest returns of any month of the year." Their study determined January posted positive returns 81.48% of the time, fueled by "outstanding small-firm performance."
- Research by The Wall Street Journal, reported in early 2010, found that from 1900 through 2009, the Dow Jones Industrial Average rose 62% of the time in January, while the Nasdaq Composite Index was up in 67% of the years studied, affirming the small-cap advantage.
- The Chicago Board Options Exchange (CBOE) found that from 1980 through 2006, small-cap stocks as measured by the Russell 2000 Index averaged a return of 2.5% in the month of January. That compared to respective January returns of just 1.7% and 1.6% for the Standard & Poor's 500 Index and the Dow.
- A 2003 study by Ibbotson Associates, now a part of Morningstar Inc. (Nasdaq: MORN), found that, from 1926 through 2002, the smallest 10% of U.S. stocks outperformed the largest 10% of U.S. stocks by an average of 9.35 percentage points during the month of January. That included both up and down years, though the broad market lost ground in January only seven times during that period.
All of that would seem to be a fairly strong endorsement for playing the January Effect – but there's one small problem: In recent years – most likely due to an increased awareness of the pattern and more traders trying to play it – the upward move in the market that typifies the January Effect has actually started in December.
In fact, since January 2000, the broad market (as measured by the S&P 500) has shown a decline from Jan. 1 to Jan. 31 on seven occasions – in 2001, 2002, 2003, 2005, 2008, 2009 and 2010.
However, if you move the beginning of the January Effect time period back to December and look for a top in mid-January, the success rate returns to near its historical norm, with only two years – 2002-2003 and 2005-2006 – showing broad market declines.
Small stocks, as measured by the Russell 2000 (which currently has a median capitalization of $473 million), also continued to outperform larger ones in all but two years – 2004-2005 and 2001-2002 (when the two indexes were virtually even). However, in a few years, like 2002-2003 and 2008-2009, the advantage came in the form of smaller losses.
The exact starting date of a December-January Effect move isn't precisely identified by the newer studies, but a quick glance at the numbers indicates the smartest approach may be "the-sooner-the-better":
Growth of Online Retailers Makes Internet the New Shopping Battleground
While online retailers have celebrated the growth of online shopping, conventional retailers determined not to lose customers have been ramping up their Internet efforts.
Forrester Research Inc. (NYSE: FORR) estimates that online shopping will increase by 15% to $59.5 billion this holiday season. And more Americans said they were planning to shop online yesterday, "Cyber Monday," this year – 122.9 million, according to a survey conducted by BIGresearch for Shop.org, up from 106.9 million in 2010.
Cyber Monday spending last year exceeded $1 billion for the first time.
"Last year [Cyber Monday] was the biggest day of the year, and as retailers know that, they compete," Mitch Spolan, senior vice president for national sales at LivingSocial, a daily deal Website that had set up offers with over a dozen retailers, told The New York Times. "It's a sport. We're expecting a record-breaking day."
In an environment of weak consumer spending, retailers of all kinds need to fight for every dollar.
This year online retailers encroached on Black Friday, the traditional day brick-and-mortar retailers launch the holiday shopping season, while conventional retailers returned the favor on Cyber Monday.
Black Friday online sales were up 26% over last year according to comScore, while the number of people visiting online retailing sites was up 35%. Meanwhile, foot traffic in stores was up 5.1% and overall retail sales were up 6.6%.
The robust turnout helped markets soar on Monday, with the Dow Jones Industrial Average climbing 291 points, or 2.59%, to close at 11,523.01.
"With brick-and-mortar retail also reporting strong gains on Black Friday, it's clear that the heavy promotional activity had a positive impact on both channels," comScore Chairman Gian Fulgoni told Reuters.
An Edge for Online Retailers
Nevertheless, Web-only retailers, led by the titanic Amazon.com Inc. (Nasdaq: AMZN), have experienced more growth and have several advantages over their conventional rivals, even though most, such as Target Corp. (NYSE: TGT), Wal-Mart Stores Inc. (NYSE: WMT), and J.C. Penney Company Inc. (NYSE: JCP) have embraced online retailing themselves.
The most significant advantage Web-only retailers have is the lack of overhead expenses to maintain large numbers of physical locations. Web-only retailers also don't collect state sales tax unless they have a physical presence in that state.
And online retailing, despite its rapid growth in recent years, still accounted for just 4.6% of total U.S. retail spending as of the third quarter, according to the U.S. Department of Commerce. That means online retail has huge potential to keep taking an ever-larger slice of the consumer spending pie.
As a result, the Web-only retailers have become formidable competition, particularly during the critical holiday shopping season, which is make-or-break for many retailers.
"Web retailers are better-positioned than store retailers," Forrester analyst Sucharita Mulpuru told Bloomberg News. "They in many cases can have better offers because their economics are more favorable."
Are You Outraged Yet?
Happy Thanksgiving, America!
If you're not feeling very "happy," remember, no matter how bad things are, they could always get worse (and we may be going there). So, whatever you have now, be thankful for that.
Speaking of thanks and of things getting worse, here's a shout out to the so-called "Super Committee":
What a bunch of losers.
Hmmm, speaking of losing… I wonder if anyone on the Supercilious Committee shorted the market before their announcement that they had nothing to announce. Hey, maybe they waited until the end of the day on Monday – when it was already known that they had sold America short – to break the news, so they could add to their shorts as stocks broke support levels.
No "maybe" about, it in my book.
Oh, you don't think they would do that – short the market? You think that would be unethical? You think that would be illegal? You think that's insider trading?
If you're about to sit down to your big Thanksgiving dinner and are scared you'll eat too much, don't worry. You're about to lose your appetite, and probably get sick, too.
- Shah Gilani on What's Moving Markets Now
- Is MF Global the Tip of a Titanic Iceberg?
Master Limited Partnerships: A Simple Way to Put More Cash in Your Pocket
These days, high-yielding investments are a must-have for investors.
It's nonnegotiable. This market is simply too volatile to be taking long shots. You have to be prepared for the next potential market dip, and that means having a steady stream of "bonus" cash coming in on a regular basis.
Unfortunately, interest rates right now are absurdly low, junk bonds are too risky, and high-yielding stocks are few and far in between.
That leaves just one place to look for serious income: Master Limited Partnerships (MLPs).
MLPs, for those not familiar, are tax-advantaged limited partnerships whose units are traded on exchanges just like common shares of stock.
However, a key difference between MLPs and stocks is that MLPs pay very high yields – typically 5% to 12%. This is because U.S. law mandates that they pass most of their income on to unit holders.
Still, being limited partnerships, their ordinary shareholders do not suffer unlimited liability (as they would in a regular partnership) and so can treat their investment as if it was in an ordinary company.
However, because their income is not taxed at the partnership level, the government limits the kinds of businesses that can use the MLP structure. It's restricted primarily to operations engaged in the extraction, storage, and transportation of energy commodities, which are deemed essential to the U.S. economy and national security.
As a result, MLPs derive 90% of their income from natural resources – primarily oil, natural gas, and coal production and transportation.
Two especially attractive businesses for the MLP structure are pipelines and ownership of existing oil resources. Pipelines generally charge a fixed fee per unit of product carried, so they earn a steady return that can safely be paid out to investors. Existing oil and gas fields incur no exploration costs and only limited production costs. Meanwhile, their exposure to oil and gas prices can be hedged in the futures market, so they, too, can safely pay a fixed dividend to investors.
MLPs economically bear more resemblance to fixed income investments than to regular shares. However, the drawback is generally very little upside potential, except through variation in oil and gas prices.
Additionally, if the MLP is invested in a finite pool of oil or gas, there is a finite lifetime to it, and the income to investors may be accompanied by a gradual loss of principal. Fortunately, MLP tax treatment accounts for this, and so a large portion of each year's dividends is considered a return of principal. That may have advantages to some investors holding MLPs in taxable accounts.
MLPs are generally not very risky, and bear a strong resemblance to each other, so even though there are two exchange-traded funds (ETFs) that invest in MLPs – the Alerian MLP ETF (NYAE: AMLP) and JP Morgan Alerian MLP Index ETN (NYSE: AMJ) – there does not seem to be much advantage.
Instead, you're better off investing in one of the following three high-yielding MLPs: