Dear Occupy Wall Street Demonstrators, Let me start by saying that I applaud your initiative. Grassroots protests are the essence of democracy. And as we've seen with the Tea Party movement and the Arab Spring, nonviolent protests are a powerful way to effect meaningful change. Yet even though I'm 100% behind you in spirit, I […]
Archives for November 2011
November 2011 - Page 4 of 9 - Money Morning - Only the News You Can Profit From
Rising Government Bond Rates Push Eurozone Debt Crisis to the Precipice of Collapse
Rising government bond rates are making it increasingly costly for several key Eurozone nations to borrow money, stoking fears that the sovereign debt crisis has reached a critical stage.
Yields on 10-year Spanish Treasury bonds rose to 6.8% during yesterday's (Thursday's) auction – uncomfortably close to the 7% level at which many experts feel is unsustainable. When the 10-year bond yields of Portugal, Ireland, and Greece passed 7%, each was forced to seek a bailout.
Just last week the 10-year bond yields of Italy crossed the 7% threshold. Though yields dropped back below 7% after Italian Prime Minister Silvio Berlusconi stepped down, the respite proved short-lived. The Italian 10-year bond yield fell back to 6.84% yesterday but is expected to stay in the danger zone for the foreseeable future.
Perhaps more worrisome is the rise in French bond yields. While France is not one of the troubled PIIGS (Portugal, Ireland, Italy Greece and Spain), it has deep financial ties to those nations. French 10-year bonds now yield 3.64%, twice that of equivalent German bunds despite both nations having a top-tier AAA credit rating.
The cost of borrowing is rising even for nations that until now had been outside of the fray, like the Netherlands, Finland, and Austria.
"Momentum is building," Louise Cooper, market strategist at BGC Partners, told MarketWatch. "Ten-year French borrowing costs are now around [two percentage points] greater than Germany, Spanish borrowing costs are rocketing and 10-year Italian debt is yielding over 7%. The hurricane is approaching. Time to batten down the hatches."
Economic Damage
As the Eurozone debt crisis deepens, many analysts worry that the rising government bond rates could put the brakes on lending and lead to a credit crunch such as the one experienced during the 2008 financial crisis.
In the short term, however, the steady stream of scary news is taking a toll on the stock markets. The British FTSE 100 was down 1.58% and the French CAC 40 was down 1.78% yesterday, while the Dow Jones Industrial Average fell 134.79 points, or 1.13%.
"Investors keep thinking that the powers that be in Europe are getting in front of this – only to be disappointed when additional bad news emerges," observed Money Morning Capital Waves Strategist Shah Gilani. "That's why we're seeing these whipsaw trading patterns that are so frustrating to retail investors who've been schooled to buy and hold. The reality is that this will get much worse before it gets better."
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Dangerous Liaisons and Dirty Laundry
Have you seen the six-month price chart for the Dow Jones Industrial Average, the Standard & Poor's 500 Index, the NASDAQ Composite, the U.K. FTSE 100, the German Xetra (DAX), the Hong Kong Hang Seng Index, the French CAC 40, the Milan FTSE MIB, the Australian S&P ASX 200, or the Shanghai Composite Index?
I'll make it easy for you.
If you haven't seen any of them lately, check out one of them – any one.
It doesn't matter which one, because – really frighteningly – they all look remarkably alike.
Talk about dangerous liaisons!
Fitch Ratings warned Wednesday that contagion from Europe's debt hangover could seriously impact U.S. banks. That's amazing. How did they ever figure that out? And so quickly!
Of course, that's not new "news." So why did U.S. equity markets, which were enjoying a reasonably positive day, turn tail and sell off hard into the close?
Because the truth is, regardless of incipient talk of some U.S. decoupling from global equity markets (yeah… good luck with that), we are all in this dirty, messed-up bed together.
The bottom dirty sheet is the Eurozone (okay, it's really all of Europe). The top dirty sheet is the United States. And the contaminated "comforter" that's been keeping us all somewhat cozy since the markets hit their Great Recession lows back in March 2009 is, collectively, the emerging markets. (As an aside, I hate calling them "emerging." They have arrived.)
Let me explain.
I call Europe the bottom sheet because it's like a fitted sheet. You know, the kind where the corners come together and hug the mattress so it doesn't fall off. That's Europe. Its debt problems are intractable. The only way the European Union can get its dirty sheet to the laundry is by pulling the corners of the Union apart.
That can be done only one of two ways.
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Free Briefing: Invest in the One Technology That Will Dominate the Planet
When you think of "mobile" or "connected" devices, you probably picture that new smartphone you just bought, and maybe your Apple Inc. (Nasdaq: AAPL) iPad2.
Well, I'm here to tell you that you're thinking too small.
Way too small.
By 2020, there will be 50 billion connected devices in use worldwide.
That's not a typo. And it's not a "hyped" estimate that we came up with internally. In fact, the estimate was made by Telefonaktiebolaget LM Ericsson (Nasdaq ADR: ERIC), one of the largest telecommunications companies on the planet, in the research report "More Than 50 Billion Connected Devices."
That creates a lot of significant risks.
But for savvy investors, it creates one hellacious profit opportunity. And – as you'll have the opportunity to see in a free investment briefing on Monday, there's one company in particular that's poised to profit.
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Rare Earth Metals Stocks Heavy With Potential Profits
Despite a severe pullback in the prices of many rare earth metals mining stocks, constricting supplies and rising demand eventually will bring big profits to the select few companies sitting on rich deposits.
Prices for rare earths skyrocketed over the summer, but have since fallen – though nowhere close to where they were in 2010. That volatility was reflected in the prices of many mining stocks.
For example, one of the most heavily produced of the 17 rare earth metals, lanthanum oxide, was $5 a kilogram in early 2010. Lanthanum hit $140 a kilogram in July, then dropped 56% to $62 a kilogram in November.
"The rare earth prices were definitely in a bubble," John Kaiser, a mining analyst and editor of Kaiser Research Online, told The Critical Metals Report.
Meanwhile, the stock of companies like Molycorp Inc. (NYSE: MCP), the second-largest producer of rare earth metals outside of China, went from about $13 in mid-2010 to a peak of $79.16 in May, but has since fallen 58% to about $33.
The reason for the volatility is China, which mines 95% of the global supply of rare earth metals. When China announced it would cut rare earth exports by 40%, buyers panicked and prices spiked.
Meanwhile, the end-users of rare earths, which include smartphone makers, auto manufacturers and oil refiners, began to search for alternative materials while mining companies stepped up their efforts to locate and extract rare earth metals from deposits outside China.
Those efforts led to the recent price pullback. But with prices for the metals still much higher now than they were two years ago, mining rare earths is far more lucrative than it used to be.
Better yet, Kaiser said he sees market forces stabilizing with rare earth prices not far below current levels.
"That normalized pricing could make a lot of mining projects more economic than three years ago and technologies more practical than they are right now," Kaiser said.
Why Rare Earths?
Rare earth metals are suddenly in high demand for several reasons. For one thing, though they actually aren't all that rare, finding deposits concentrated enough to profitably mine is.
Add to that the complexities of extracting rare earth metals from the ore – it's difficult and requires costly processing equipment.
On the demand side, rare earth metals have unique qualities of immense benefit to manufacturers. In particular, rare earths have made it possible to shrink the size of many gadgets, such as smartphones. Without rare earths, smartphones would be the size of a brick.
As the world builds more and more things that rely on rare earth metals – from hybrid car batteries to tablet computers to fiber optics – uses for them will continue to multiply.
"Because of technologies discovering more applications for rare earths, it's very likely that demand will increase," Malcolm Gissen, portfolio manager at the Encompass Fund, which holds strategic-metal miners, told MarketWatch. "At the same time, the challenges in finding the metals and getting them into production are so enormous that prices will remain high. This is a good place to be invested."
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While the Middle Class Suffers, Congress is Getting Richer - With Help From Legal Insider Trading
While many Americans continue to struggle to save money, members of Congress are getting richer.
A Roll Call analysis of Congress members' financial disclosure forms showed their collective net worth was more than $2 billion in 2010 – a 25% leap from 2008. Minimum net worth in the House of Representatives rose to $1.26 billion, with minimum Senate net worth at $784 million.
With a median net worth of $891,506, Congress members are nine times wealthier than the average American household – and some Congressional leaders are exceedingly richer.
About 11% of Congress has net worth of more than $9 million, landing them in the top 1% of America's wealthy.
And these numbers aren't even the whole picture. They don't include members' homes and other non-income-generating property, which could add hundreds of millions of dollars to total net worth.
Congressional leaders' presence in the top 1% is one of the catalysts that angered citizens enough to start the global "Occupy Wall Street" movement. It also has prompted a closer look at how these elected representatives are gaining such riches, especially on an annual salary of $174,000.
According to a CBS News "60 Minutes" segment that aired Nov. 13, congressional "insider trading" might be a key factor in their financial success. Congress members may be using information gained from their "insider" positions to make highly profitable trades in the stock market.
This form of insider trading may be unethical, but it's also legal.
"This is a venture opportunity," Peter Schweizer, a fellow at Stanford University's conservative think tank the Hoover Institution, told "60 Minutes" correspondent Steve Kroft. "This is an opportunity to leverage your position in public service and use that position to enrich yourself, your friends, and your family."
Congressional "Insider Trading"
Schweizer has extensively reviewed Congress members' financial disclosure records for his book, "Throw Them All Out," released this week. He wanted to know how our elected representatives manage to accumulate so much wealth while in office.
Schweizer found that congressional representatives were trading stocks related to hot topics being discussed and debated in Congress before information had been disclosed to the public.
"We know that during the health care debate people were trading health care stocks," Schweizer said to Kroft. "We know that during the financial crisis of 2008 they were getting out of the market before the rest of America really knew what was going on."
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European Bond Traders Are Going For the Jugular
If you look at the crisis in Europe, the key questions to ask are clear: Will this crisis continue to spread? And will the United States get singed by the fallout?
In both cases, the answer is a very clear "Yes."
Whereas traders once were content to play around the edges by trashing Greece, Ireland and Portugal, now they're going for Europe's jugular vein. What I mean is that traders now are dumping the debt associated with so-called "core" European Union (EU) nations.
French and Austrian bonds, for example, sank to near record lows Tuesday, as yield premiums over German debt rose to 192 basis points and 184 basis points respectively according to Bloomberg.
Yields and prices run in opposite directions. If yields are rising, that means prices are falling and vice versa.
At the same time, Italian yields again sliced through 7%, the level at which debt is regarded as unsustainable. That's the second time in a week that's happened.
Meanwhile, the Spanish premium over German debt hit 482 points, which is above the 450 point spread at which both Ireland and Portuguese banks were forced into bailout status.
As measured by a combination of credit default swaps, correlation, and systemic risk, things are now worse than they were in 2008 at the depths of the financial crisis.
The way I see it, the EU debt market has become a two-way street, much the way our financial markets have become addicted to U.S. Federal Reserve funds. If the European Central Bank (ECB) is buying debt as part of a bailout, the markets rally. If the ECB is not, the markets fall.
There are no real EU debt buyers.
There are four reasons why this matters to us:
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What Happens To The U.S. If Europe Defaults?
The EU debt crisis is yanking around the U.S. markets – with yet another 200-point stock market plunge today. But Money Morning Chief Investment Strategist Keith Fitz-Gerald says this is small potatoes compared to what’s coming. If the EU starts defaulting on loans, it could spell the beginning of a new recession back here in […]
Three Psychological Stumbling Blocks That Kill Profits
Face it, the past 12 years have been horrible for most investors.
This is not necessarily because the markets have been rocky, but rather because the vast majority of investors are hardwired to do three things that kill returns.
You can blame Washington, the European Union, debt, high unemployment, or half a dozen other factors if you want to, but ultimately, the person responsible is the same one staring back at you from your bathroom mirror in the morning.
That's why understanding the bad habits you didn't know you had can be one of the quickest ways to improve your financial wealth.
Here's what I mean.
Dalbar, a Boston-based market research firm, produces annual research that compares the returns of stock and bond markets with those of individual investors. The latest, covering the 20-year period ended last year, shows that the Standard & Poor's 500 Index returned an annualized gain of 9.1%. That stands in sharp contrast with the measly 3.8% gain individual investors averaged over the same timeframe.
Fixed income investors didn't do any better. According to the Dalbar data, t hey gained a mere 1% a year versus an annualized return of 6.9% for the Barclay's Aggregate Bond Index.
In other words, investors' self-defeating decisions contributed to an underperformance that was 58% below what it could have been for stocks and 85.5% below what it could have been for bonds.
Why?
Three reasons: recency bias, herd behavior, and fear.
It's All About Perspective
Recency bias is what happens when short-term focus trumps long-term planning and execution.
It's what happens when somebody yells "fire" and everybody runs for the same exit at once despite having entered through any of half a dozen doors in the auditorium. Simply put, recency is recent knowledge that overrides longer-term thinking and memory.
This is why momentum trading works, for example, or the news channels seem to cover the same stocks at nearly the same time – because a huge number of people are focused on exactly the same companies simultaneously. Logically, they then become the subject of increased attention and tend to move more strongly or consistently.
The question of why is the subject of much debate among human behaviorists, but I chalk it up to the fact that human memories tend to focus on recent events more emotionally than they do longer-term plans that are put together with almost clinical detachment.
And the more extreme the events or the news, the sharper our short-term focus becomes.
That's why, according to "Mood Matters," a book by Dr. John Casti, one of the world's leading thinkers on the science of complexity, "bombshell events are assimilated almost immediately into the prevailing [social] mood" where as longer-term cycles bear almost no witness to gradual change.
If that doesn't make sense, think about what happened on 9/11. Most of the world's major markets bottomed within minutes of each other on short-term panic and emotion. Then, when trading resumed days later, they began to climb almost in sync as highly localized events once again faded into the longer-term fabric of our world.
And that brings me to herding.
The Herd Mentality
We'd rather be wrong in a group than right individually so the vast majority of investors tend to make decisions, and mistakes, together en masse.
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Five Stocks That Will Thrive After the Solar Energy Industry Shakeout
With as much as two-thirds of the struggling solar energy industry expected to either fail or be acquired over the next three years, the table will be set for the survivors to capitalize on a market with enormous growth potential.
The process has already begun, with three solar companies – Evergreen Solar Inc. (Nasdaq: ESLR), Spectra Watt Inc. and the notorious Solyndra LLC – having declared bankruptcy this year.
Solar companies have struggled to keep their heads above water as the price for solar panels has fallen as much as 40%. The average operating margin in the solar energy industry plummeted to 0.1% in the third quarter from 13.7% a year earlier.
The stocks have been pummeled, as a result. The Claymore/MAC Global Solar Index (NYSEARCA: TAN) exchange-traded fund (ETF) is down 58% this year and the Market Vectors Solar Energy (NYSEARCA: KWT) ETF is down more than 60%. Several individual solar stocks have lost more than 70%.
"It's just a really difficult time," Morningstar Inc. (NYSE: MORN) alternative energy analyst Stephen Simko told The Globe and Mail. "The profitability of the industry has collapsed… Unless more bankruptcies happen and more production is shut down, this is a problem that is going to persist."
Few Will Be Left Standing
The tremendous pressure on margins has most people both outside and inside the solar energy industry predicting massive consolidation.
"This is the decade of mergers and acquisitions," Jifan Gao, chief executive officer of Changzhou, China-based Trina Solar Limited (NYSE ADR: TSL), told Bloomberg News. "From now until 2015 is the first phase, when about two-thirds of the players will be shaken out."
The Macquarie Group Limited (PINK ADR: MQBKY) agrees. In a recent report the Australia-based research firm said consolidation would claim 66% of the world's solar companies. Macquarie predicts that only four out of 35 solar companies in China will survive the next three years.
But in the aftermath of the carnage, the surviving solar companies will emerge stronger and in prime position to make the most of an exploding market.
In fact, the solar market has grown in 2011, but because capacity has exceeded demand, prices have continued to fall.
A Growing Market
According to the Solar Energy Industries Association, solar is the fastest-growing energy sector in the United States. The group says solar panel installations in June were up 69% over the previous year.
That pace of growth is expected to continue for an industry that supplies just 1% of the electricity in the United States. The U.S. Energy Information Agency projects installed solar energy capacity to increase 20 to 40 times 2010 levels over the next decade.
The primary reason for such optimism is the same reason the industry is suffering – falling prices that make solar competitive with traditional sources of energy like coal, oil, and gas.
First Solar Inc. (Nasdaq: FSLR), for example, says the solar panels it makes now can produce electricity for 14 cents to 16 cents per kilowatt – still significantly above the average cost of electricity in the United States of 11.6 cents per kilowatt.
But the solar energy industry has steadily improved panel efficiency, and expects the advances to continue. First Solar says that by 2014 its panels will produce electricity for 10 cents to 12 cents per kilowatt.
"At that point, there's a tremendous amount of interest," First Solar spokesman Alan Bernheimer told USA Today.
But which companies will survive to reap the benefits of the golden days of solar?
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