Should You Worry About Europe's Back Door Bank Run?
On Wednesday, Fitch Ratings Inc. downgraded its credit ratings on five of Europe's biggest banks, and while that decision made headlines, it's not the most important story to come out of Europe this week.
The real story, which the mainstream media is neglecting, is that there are signs of an underground run on Europe's banks.
Almost nobody's talking about it, but there are indications money is already moving out of the European Union (EU) faster than rats abandoning a sinking ship.
Not through the front door, mind you. There are no lines, no distraught customers and no teller windows being boarded up – not yet, anyway.
For now the run is through the back door, and there are four things that make me think so:
- Italy's planned ban on cash transactions over 1,000 euros, or about $1,300.
- French, Spanish, and Italian banks have run out of collateral and are now pledging real assets.
- Swiss officials are preparing for the end of the euro with capital control measures.
- Europe's CEOs are actively preparing for the end of the euro despite governmental reassurances.
Signs of a Run
Let's start with Italy and Prime Minister Mario Monti's plans to restrict cash transactions over 1,000 euros (down from the current limit of 2,500 euros, or about $3,200).
Ostensibly the move is about reducing tax evasion by prohibiting the movement of large sums of cash outside the official transactional system, but I think it speaks to something far more sinister – namely that the Italian government knows things are going to get far worse than they're publicly admitting.
Consider: Cash is a stored value mechanism. There's not a lot of it because at any given point in time, most of it is on deposit with banks in any country. That's as true in Italy as it is here in the United States when real interest rates are positive during "healthy" times.
But when real interest rates turn negative, people are likely to withdraw cash and stuff it quite literally under mattresses or in coffee tins. (Real interest rates are the official lending interest rates as adjusted for inflation.)
In such an environment, holding cash in a bank becomes nothing more than an imputed tax and a disincentive for deposits. It's also a significant thorn in the side of central bankers who want to control their country's money supply, because cash can operate outside the system and, specifically, logjam reform efforts.
The reason is really pretty simple. If you have negative real interest rates, and cash transactions are largely restricted or removed altogether, then the only way to effectively use cash is to withdraw it and spend it… immediately.
In other words, by limiting cash transactions to 1,000 euros or less, Italy is putting into place a punitive financial control fully intended to keep money moving in a system lest it become worthless or worse – hoarded and worthless.
Now let's move on to banks.
Many investors have never thought about it before, but there are really only three sources of funding for a bank:
- Money that's effectively "lent" to the bank by customers placing their assets on deposit;
- Short-term money market funds;
- And long-term bonds or securitized products based on long-term paper sold to bond investors.
Together, the three funding sources are like the legs on a stool – lose any one of them and the stool will topple over because it is no longer balanced. Cut the legs down and the stool collapses – that's what is happening now.
A Tech IPO Bellwether: What to Watch as Zynga Stock Starts Trading
Social-gaming giant Zynga Inc. starts trading today (Friday), capping off a rocky year for tech initial public offerings (IPOs). A strong performance from Zynga stock today and into the New Year would shed the "bubble" reputation surrounding the sector in 2011.
Here's what you need to know about this latest tech IPO:
- Zynga will set the tone for 2012: The tech IPO market this year has fizzled, and could use a spark. Zynga could provide one. Scott Sweet of IPO Boutique told clients in an e-mail Wednesday morning there was more investor interest in Zynga than available shares. A strong debut for Zynga stock would be a good lead-in for Facebook Inc., which is expected to debut in the second quarter of 2012. It might also help Yelp! Inc., the business review site that filed for an IPO on Nov. 17. Finally, it might even subdue talk that tech is doomed for a second dot-com bubble.
- It's Facebook-dependent: Zynga's growth is tied directly to Facebook. It generates a whopping 95% of its revenue through the social networking site, and that's not going to change anytime soon. While the relationship is an incredible revenue boost for Zynga, it's also a huge investor concern. If the business relationship soured, Zynga's revenue stream would dry up immediately.
Still, this dependence could give Zynga stock a boost, in that investors eager to profit from Facebook's growth can do so with the social gamer.
Zynga's contract with Facebook isn't up for review until 2015, giving Zynga three years to develop new revenue sources and decrease its Facebook dependence – if it proves detrimental. The company plans to push its product toward high-growth Asian markets.
- It could mark the end of drastic tech-IPO overpricing: Zynga has drastically scaled back its initial pricing by more than 50% since July, when it was valued at $20 billion. Tech IPOs priced earlier in the year received a barrage of criticism for overpricing, but there's been much less of the same talk surrounding Zynga's adjusted range.
BTIG analyst Richard Greenfield recommended participating in the IPO in the $8.50 to $10 range, and said even at the higher end he thinks it could yield up to a 50% return for investors within a year. Greenfield said the lower IPO price range favors investors and expects the company's revenue to grow by about 45% over the next two years.
The Basics of Currency Investing
Right now, the money in your wallet is losing its value.
And worse, there's nothing you can do to stop the U.S. dollar from utter freefall because…
- The Federal Reserve's expansive monetary policy is flooding the banking system with cash, diluting the dollar's value.
- The U.S. government is intentionally devaluing the dollar to make its exports more affordable.
- China is recruiting a host of other countries in its drive to stamp the dollar out of international trade.
(To learn more about the death of the dollar – and find out specific ways to protect your retirement – take a look at our new U.S. dollar report, right here.)
But, you don't have to just sit on the sidelines and watch your money lose value. Instead, you can look to investments in foreign currencies.
This isn't an investing plan for the feint of heart. Currency investing is one of the riskiest monetary gambles you can make.
But, if you have a little "play money" burning a hole in your bank account, currency investing could be a great way to try for sky-high returns.
Here's your quick guide to currency investing…
2012 Oil Price Outlook: How to Profit From $150 Oil
2011 was an up-and-down year for oil prices, but don't expect that pattern to repeat in 2012.
No, next year, the trajectory for oil prices will be far more linear – and it's pointed up.
In fact, we could even see $150 oil by mid-summer.
There are two key reasons why:
- Despite the economic crisis in Europe, oil demand proved resilient in 2011. It is poised to remain steady in 2012, and then escalate drastically for the foreseeable future.
- Supplies will once again be constrained, and the potential for political upheaval in major oil-producing nations has increased.
These are the principal reasons oil prices have surged about 30% since dipping below $80 a barrel in early October. They're also why the world's upper-echelon of energy forecasters has oil prices building a floor above $90 a barrel and rising from there.
Indeed, Goldman Sachs Group Inc. (NYSE: GS) recently recommended that traders buy July 2012 Brent crude futures in anticipation of a rally to $120 a barrel. It was one of the bank's top six trades for 2012 published in its "Global Economics Weekly" report.
Barclays Capital agrees.
"Even in the worst case scenario, the downside to oil prices is unlikely to be anything as severe as during the 2008-2009 cycle," Barclays analysts Roxana Molina and Amrita Sen wrote in a report earlier this year. "As a result, we maintain our price forecast of $115 per barrel for Brent in 2012 and expect $90 per barrel to hold as a sustainable floor even under gloomy macroeconomic conditions."
As for West Texas Intermediate (WTI) crude the Energy Information Administration (EIA) expects it to average nearly $94 a barrel next year.
And even that's a conservative estimate.
"Given the oil volume constriction oncoming and the continuing increase in global demand – this drives the price, not North America or Western Europe – we will reach $150or beyond by July 4," said Money Morning Global Energy Strategist Dr. Kent Moors.
Don't Be Fooled by Gold's Recent Dip – We'll Still See $2,000 an Ounce in 2012
If you're concerned about where gold prices are headed after yesterday's (Wednesday's) bear-market buzz, don't be. This is just a brief pit-stop in what continues to be an epic bull-run for the yellow metal.
Gold prices fell below $1,600 an ounce Wednesday for the first time since October, settling down nearly 5% at $1,586.90 an ounce Comex division of the New York Mercantile Exchange (NYMEX). That's below the closely-watched 200-day moving average for the first time since January.
There are a few reasons for this slump: Panic over the Eurozone and its weakening currency, banks' need for cash, and year-end profit-taking have all taken their toll on gold this week.
Still, while gold prices may be stumbling right now, they are not headed for a long-term bear market – not even close. In fact, it's something our own gold and global resources specialist predicted months ago.
Money Morning Global Resources Specialist Peter Krauth said as far back as August that gold prices were due for a pull-back, so this minor blip isn't surprising – and it definitely isn't permanent.
"This is something I saw coming," said Krauth. "Back in late August, as gold was pushing $1,900, I told my subscribers it was due to pull back, and likely to trade in a range between $1,600 and $1,800, and that's exactly what we've seen so far. We could see a bit more weakness, but I think we're much closer to a bottom at this point."
A Weak Euro and the Scramble for Cash
One of the biggest factors contributing to lower gold prices is the Eurozone and its increasingly weak currency. The euro fell Wednesday to $1.2998 against the dollar, its lowest level since January. That forced many traders into the dollar.
"As investors flee the euro, the "risk off' trade means they're falling back on the U.S. dollar," said Krauth. "A higher U.S. dollar, in turn, means lower gold because gold is priced in U.S. dollars."
Krauth said Europe's economic turmoil has forced the region's banks to hunt for more cash, which has led to more gold leasing transactions, further pressuring the precious metal's price.
"European commercial banks are desperate for cash," said Krauth. "They could well be "borrowing' central bank or other sourced gold to lend out simply to raise cash temporarily. Interestingly, gold lease rates just spiked back up on Dec. 7, the very same day we started that recent bout of gold price weakness."
Subject Banks to the Free Market or Turn Them into Utilities
Let's face it. Banking is a protected industry. It's a government-coddled industry.
The problem with that is, banks really aren't subject to free market forces that would naturally eliminate insolvent and inefficient institutions. The result is more bad banking.
If we ever want to free ourselves from the yoke of czarist money-changers and free up capital to flow into and throughout the economy, we must subject all banks, and all financial institutions, to free market forces so the weak ones fail and the strong survive.
How do we that?
It's easy. We remove the rocks under which banks hide by making all banks' (including the U.S. Federal Reserve) books and records transparent with a one-month lag. While we're at it, why not legislate the same rule for all regulatory bodies? They are supposed to be protecting us, after all, so what's there to hide?
(Speaking of transparency, it wouldn't be a bad idea to stop members of Congress from trading stocks that are directly affected by pending legislation. More on that here.)
And, if that's not a palatable option for bankers used to being sheltered, we should give them the ultimate protection they demand and simply turn them into utilities, along with the transparency that comes with it.
Let me make this simple.
If banks get into trouble and have to borrow huge amounts from each other, or have to borrow from the Federal Reserve – either from its discount window, through swap lines, or through any of the other central bank liquidity provision programs currently available – we should know about it. I suggest a one-month lag before that information is released because that's all the time they should be given to fix themselves.
If the banks are so important to the economy that they have to be given massive liquidity and regulatory cover to right themselves when they are in danger of sinking, then the financial system is nothing more than the clever rhetoric of an ensconced oligopoly manifesting its power.
If we had "one-month transparency," and faltering institutions were clearly identifiable, their stockholders would jump ship, their debt holders would man lifeboats, and unless the institution could be saved from free market destruction by the free market intervention of risk-takers willing to saddle themselves with personal exposure, they would fail.
Look through the bankers' rhetoric that they need protection and cover from public scrutiny, and what do you see? You see inefficient institutions that leverage themselves for profit, get bailed out, merged, and recapitalized by an unsuspecting public that's been duped into believing bank CEOs, regulators, and the Fed that everything is fine — or will be with time.
Who cares if banks fail before they get too big to have to be bailed out, or too big to be systemically threatening? We all should care. They should be allowed to fail.
And the sooner the better.
When Fund Managers Sell, It's Time to Go Bargain Hunting
You may not realize it, but the annual practice of "window dressing" – a process through which fund managers dump their worst-performing stocks and replace them with high flyers – can create some real bargains for retail investors.
The sleight-of-hand does actually little to improve the fund's performance, but it does keep a fund manager's biggest mistakes of the year out of the annual reports sent to investors. For that reason, most fund managers do some window dressing every December. And in years that the overall stock market has struggled – as it has this year – they're busier than usual.
Indeed, managed funds have actually fared worse than market averages this year. The Merrill Lynch composite index of hedge funds is down more than 7% on the year, and many mutual funds are hovering below such benchmarks at the Standard & Poor's 500 Index. The S&P 500 itself is down more than 1% on the year and more than 2% over the past six months.
In fact, this year's third quarter was the fourth-worst performance in hedge fund industry history.
Playing the Rebound
Even though the types of stocks fund managers sell in December tend to be major dogs, the extent of the selling is so severe that many of them rebound come January.
"Ideally, you're buying these stocks now when the selling pressure is still there and selling them in the middle of January," Pankaj Patel, an analyst at Credit Suisse Group AG (NYSE: CS), told Reuters.
Patel has found that large-cap stocks with prices close to their 52-week lows in November outperform the S&P 500 through the following January. Last year Patel developed a list of downtrodden stocks that beat the S&P 500 by 5.8% over that time frame.
It's a pattern other investing experts have noticed as well. George Putnam, editor of The Turnaround Letter, has for 24 years published a list of downtrodden stocks he believes fund managers have punished disproportionately.
Last year Putnam's picks gained more than 15% on average just from mid-December to mid-January, while the Dow Jones Industrial Average gained only 2.7% and the S&P 500 4.26%.
The carnage left fund managers selling heavily out of some of the worst-hit sectors. Bank of America Corp.-Merrill Lynch (NYSE: BAC) strategist Mary Ann Bartels told the Chicago Tribune that hedge fund managers have dumped 50% of their holdings in financial stocks and 49% of their holdings in industrial stocks.
But the best way for investors to use the annual window dressing dance to their advantage is to peruse the list of abused stocks.
The Changing Nature of Global Gas Projects
I wrapped up my recent trip to Russia at 4 a.m. last Friday in a Moscow airport.
One thing is certain about my trips to Russia – the time schedule is always off.
But I can't complain; the weeklong visit provided many benefits.
As I told you two weeks ago the primary purpose of my trip was to evaluate natural gas projects in northern Russia. It's becoming increasingly necessary to estimate global-wide gas prospects in order to determine effective price levels.
That's because the age of "spot" market prices in the gas sector is rapidly approaching.
And it's about to change the way the markets operate for everyone involved.
On the Spot
Spot markets allow for a very short-term exchange of volume (usually 72 hours) and serve to undergird longer-term contract pricing.
The spot markets tend to offset longer contract terms by providing volume at what is usually a discount to the contracts, which are more properly futures contracts on natural gas.
This is different than crude oil, which can be moved by tankers to virtually anywhere there is a decent port, allowing the establishment of local spot markets. Gas, on the other hand, has been limited by how far pipelines extend.
But the acceleration of liquefied natural gas (LNG) trade – in which gas is cooled to a liquid state, transported by tanker, and then "regasified" on the other end – has altered the picture.
Indeed, with more than 90 new terminals set to open, under construction, or in the final stages of approval worldwide, LNG is one of the most decisive changes to hit the energy sector in decades.
LNG imports are essential to meet energy needs in parts of the world where there's little domestic supply. Exporting LNG also provides a new outlet in those regions where new unconventional gas volume strains local demand and threatens adequate price levels for producers.
This latter consideration affects all major shale gas production basins in North America, from the Horn River and Montney in Western Canada to the Marcellus, Barnett, and Fayetteville in the United States.
And, as I have noted on several occasions, the rise of LNG trade can serve as a major excess production drain off for the United States.
What LNG does not do, however, is address a growing global concern.
See, it is one thing to provide an end market for additional production. It is quite another to integrate the production assets into the equation.
Let me explain.
Those "New" E.U. Fiscal Rules Aren't
Very soon we will see if the old market adage "Buy the rumor, sell the news" is true.
While rumors of Europe's impending demise were momentarily shot down by an array of silver bullets, the actual news out of Brussels of a grand bargain wasn't… exactly… honest.
Let's call the half-measures agreed to by European leaders "Brussels sprouts," because they're more like "green shoots" than a cabbage patch panacea.
The leaders agreed to agree that they needed an agreement on how to more closely integrate their fiscal and monetary interests.
Yeah, that's what they said. I say good luck with that.
Actually, they made some other moves, too.
They moved up the date for the European Stability Mechanism to get funded (yeah, right), and promised to revisit the European Financial Stability Facility's financing so they could have twin facility spigots.
And – this one's my personal favorite – they winked at having European central banks make bilateral loans up to $264 billion (€200 billion) to the International Monetary Fund so the IMF could back Europe's central banks and the European Central Bank.
You just can't make this stuff up.
Seriously, there's nothing like a crisis to consolidate your power – which is what the Northern Europeans are angling for.
But for the life of me, I can't imagine a bunch of sovereign nations subjecting themselves to forced austerity, being taxed by technocrats (who, of course, will be non-partisan, non-xenophobic, nonplussed objectivists), and dictated to as occupied territories by the machinery that ground them down in the first place… and wants to keep them there.
What… You don't get that?
Here's a newsflash for you: The "new" rules about maintaining strict debt to GDP ratios and other my-way-or-the-highway fiscal demands are not new at all.
The same metrics for fiscal discipline that were lauded last week were already in place – it's just that no one followed them.
Everybody cheated… starting with the Germans themselves.
It's Time to Brace for a Repeat of 2008
If you think the global economy is out of the woods now that the European Union (EU) has expanded its effort to solve the sovereign debt crisis, then I'm afraid you're sorely mistaken.
No doubt, the European crisis is far from being solved – but that's hardly the only potential economic catastrophe looming on the horizon.
Indeed, two successive articles in the Financial Times last week warned of a new disaster approaching: They forecast 25% declines in financing volume for both commodities finance and aircraft purchases in 2012.
Now that would be truly bad news.
You see, the most job-destroying feature of the 2008-09 recession was a 17% decline in world trade that was caused by the financial crash and the disruption to the world's banks. That decline intensified recessionary conditions and caused millions of job losses worldwide. Some 700,000 jobs were being lost each month in the United States alone for a period in early 2009. That's more than double the previous worst monthly losses since World War II.
And now we could be in for a repeat.
In fact, it's hard to see how one can be avoided.
In today's distorted world financial system, a combination of over-loose monetary policy, intractable budget deficits, and tightening regulation seems to have made a credit crunch more or less inevitable.
So if you're smart, you'll take a moment to examine exactly why, and then figure out who the winners and losers are going to be.
A Disruptive Disconnect
When you look at bank lending, it's clear that the link between the huge amount of world money growth and the meager supply of lending to productive enterprise is broken.
U.S. Federal Reserve Chairman Ben S. Bernanke and his international colleagues can hand as much money as they like out to banks, but if the banks don't lend it, that money will be wasted. And right now the banks aren't lending to trade and private businesses for three reasons: