Chief Investment Strategist Keith Fitz-Gerald joined Fox Business' "Varney & Co." to talk about where global markets could be in a week depending on what Europe does about its escalating debt crisis. He outlined what to expect from European leaders, and how markets will react – something every investor must be prepared for. Watch this […]
Archives for December 2011
December 2011 - Page 6 of 8 - Money Morning - Only the News You Can Profit From
How the "New Cold War" with China Will Change America's Future
Few things push the frontiers of the future more than an army's desire to defeat its enemies.
Just look at what happened to America after World War II. Our need to counter Soviet power delivered a tidal wave of innovation.
Defense spending led to the Internet, microwave ovens and GPS devices – not to mention millions of jobs from one of the great tech booms in history.
Now comes the "New Cold War" – one that will also prove a boon to a wide range of tech industries.
This time the United States is racing against China.
You see, the Pentagon recently announced plans to check Chinese ambition with a wide range of responses. They fall under a new program called "Air Sea Battle."
It has U.S. President Barack Obama's backing. The president told our Pacific Rim allies the U.S. will provide a safety net in the region. It's a clear signal to the Pentagon to get cracking on key research and development (R&D).
This certainly comes at an awkward time. The U.S. faces a daunting debt crisis. With Washington's failure to reach a budget compromise, big defense cuts loom.
That will hurt in the short run, no doubt. But over the long haul, as it has done several times in post-war history, the Pentagon will find ways to push new technology in an era of tight-money.
Forced to do more with less while challenging the Chinese, the Department of Defense (DoD) will invest in high-value technology.
Here are a few examples of what I'm talking about.
Virtual Battleground
Consider the impact this will have on cybersecurity and warfare. China tries to hack our defense computers and steal our most sensitive secrets almost daily.
Needless to say, we want to put an end to that. But we also want to learn how to shut down China's computer networks so we can defeat them without firing a single shot.
Consider what happened to Iran's nuclear program in late 2010.
Used as a cyber weapon, the Stuxnet virus crippled Iran's computers, putting the country's plan for atomic weapons at least two years behind schedule.
Of course, there's a civilian spinoff, which along with countless other viruses, poses a threat to average Americans, as well as U.S. corporations.
Making networks more secure would help banks, hospitals, and other firms protect sensitive data from hackers. It also will aid the fast-growing world of mobile commerce, which will soon become a major target for crafty cyber thieves.
That's not all.
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Jim Rogers: "The Fed is Lying to Us"
Despite statements to the contrary, the U.S. Federal Reserve has continued to pump money into the economy, says investing legend Jim Rogers.
The resulting low interest rates and creeping inflation, he says, are destroying the wealth of millions.
"[Federal Reserve Chairman Ben] Bernanke said last August he was keeping interest rates artificially low," Rogers told Yahoo! Financeon Tuesday. "The only way you can do that is to go into the market."
As proof, Rogers pointed to the rise in the broad M2 measure of the U.S. money supply, which has increased more than 5% since the Fed's second quantitative easing program (QE2) ended on June 30, and 20% since November 2008.
"Since August – well, this whole year – the M2 has jumped up," Rogers said. "They're in the market. They're lying to us."
A well-known critic of the Fed who has called for it to be abolished, Rogers warned that the central bank's policies would lead to disaster.
"Right now what the Federal Reserve is doing is ruining an entire class of people in America," Rogers said. "The people who saved and invested for the past 10, 20, 30 years are now being ruined because interest rates are [too] low."
He added that if he were Fed chairman, he'd raise interest rates to slow down inflation.
In a separate interview with The Streetyesterday (Wednesday), Rogers said he considered the Fed to be the greatest risk to the U.S. economy in 2012.
"They don't seem to understand economics or finance or currencies or much of anything else except printing money," Rogers said.
Painful Remedies
The other major concern that Rogers has is the soaring federal debt, which recently passed $15 trillion.
"We are the largest debtor nation in the history of the world and the debts are going higher and higher by trillions, every two or three years," Rogers said. "We're all paying the price for it. And wait till 2013 – we're really going to pay the price."
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Why the Economics of the Airline Industry are Hopeless
American Airlines (NYSE:AMR) filed for Chapter 11 bankruptcy Nov. 28, and the move reinforced once again what many have learned the hard way: The airline industry is an incredibly disappointing investment.
Previous airline flops like this prompted an old saying – possibly untrue – remarking that the airline industry has lost money since the Wright Brothers first flew.
They've also inspired tall tales of time-traveling bankers from the future having been seen at Kitty Hawk on Dec. 14, 1903 trying to shoot down Wilbur Wright and prevent the whole economic disaster from taking place.
Yet, investors keep putting money into these operations.
For anyone who hasn't yet learned to avoid airlines, let me give you this look into the industry's hopeless economics. You'll see there's no change of fortune ahead – and no confident signs of profitability for investors.
The Odd Economics of Transportation
The airline business has peculiar economics.
It is very high in fixed cost, both for initial operation and per flight, but the marginal cost of an additional passenger is almost zero. Pricing can be infinitely arcane, but service is very difficult to differentiate. Labor costs tend to be very sticky downwards – especially in unionized operations like AMR Corp.
This dismal economics is not unique. Two other industries have shared it: railroads and shipping.
With railroads, the initial railroad construction boom was when fortunes were made. This is largely because the revenue available from a sound railroad when completed was more than able to amortize the railroad bonds used to construct it.
But once the U.S. railroad network was substantially complete by 1890, shippers found they could play competing railroads against one another to hold down freight rates. In single-railroad "monopoly" areas, the Interstate Commerce Commission prevented the monopoly railroad from raising rates. With the marginal cost of shipping an additional passenger or additional ton of freight being so low, tariffs were forced down towards this marginal cost, preventing railroads from servicing their debt or providing an adequate return on their stock.
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The Simple Ways To Put More Cash in Your Pocket
Money Morning's Global Investing Strategist Martin Hutchinson joined Fox Business to discuss this high-yielding, tax-advantageous investment and the best ways to play it. Watch this video to discover Hutchinson's favorite ways to get more profit out of your portfolio. Loading the player …
Get Ahead of Semiconductor Industry Growth with These Seven Investments
The semiconductor industry struggled to maintain growth in 2011 – but that's starting to change.
The industry this year was stunted by slow global economic growth, reduced consumer demand, and supply-chain disruptions due to the Japanese earthquake and tsunami. Industry revenue was down 2.5 percentage points in the second quarter, mostly due to Japanese semiconductor companies that suffered facility damage.
While the industry's third-quarter performance was weaker than predicted, it was an improvement over previous quarter numbers. According to estimates released Nov. 17 by market researcher IHS iSuppli, semiconductor industry revenue in the third quarter grew by 3.5% to just over $78.5 billion.
Forecasts for the next two years offer an even brighter outlook.
The Semiconductor Intelligence blog compiled forecasts from eight industry research organizations and found growth estimates for 2012 ranging from 4.0% to 10.4%.
Industry executives expressed similar optimism at an investor conference Nov. 15 in Barcelona, Spain. They forecast a "return to normal business conditions in the second quarter of 2012," once inventories of unsold chips stemming from the slowdown in consumer spending are cleared.
And IHS predicted a much stronger growth rebound in 2013.
Intel Corp. (Nasdaq: INTC) President and Chief Executive Officer Paul Otellini said that, while economic conditions and consumer demand will always be a factor, innovation is driving renewed growth in the semiconductor industry.
"Computing is in a constant state of evolution," Otellini told this fall's Intel Developer Forum in San Francisco. "The unprecedented demand for computing from the client devices to the cloud is creating significant opportunity for the industry."
Investing in the Semiconductor Industry
While the semiconductor industry's top performers have shown modest gains from a year ago – Intel's 14.3% rise being one example – bigger declines elsewhere have offset the winners. That inconsistency within the broad semiconductor sector – Google Finance lists 189 companies on its industry roster, divided into roughly a dozen subsectors – is why some chip stock investors are frustrated.
The good news for investors is there's an increasing need for semiconductor companies that's not going away. Chips are now essential to virtually every product that uses power, from mainframes, PCs and laptops to TV sets, video-game consoles and mobile phones. Without chips, modern cars won't run, airplanes can't fly and many now-routine medical procedures would be impossible.
The key for investors is to focus on companies in the most in-demand subsectors, as well as industry leaders best positioned to profit from renewed growth in 2012 and 2013.
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The Three Must-Own Currencies of 2012
If 2011 taught us one thing, it's that currency investing can be a dangerous business.
For instance, the euro – the simplest of hedges against a declining dollar and the U.S. Federal Reserve's expansive monetary policy – has run into difficulties, losing billions for even the most sophisticated Wall Street banks.
But that's not all. The Brazilian real, which was one of the best performing currencies of 2010, has dropped back sharply in 2011.
Still, if you harness the lessons of 2011, you can take advantage of the new opportunities set to emerge in 2012. In particular there are three currencies every investor should own.
I'll get to those in a moment. But first, I'd like to fill you in on what currencies to avoid.
This is just as important – maybe even more so.
Currency Traps
Obviously, the euro is not to be trusted. If its problems were confined to Greece and Portugal, they would be surmountable.
But they're not.
The extension of problems to Italy and Spain, which are both too large to bail out, makes the Eurozone liable to explode, split in two, or simply witness a mass default of several of its countries and much of its banking system.
Certain individual European shares may be a good buy. And German government bonds may be a good buy, since the German currency would explode upwards if the euro split.
But the euro itself? No thanks.
The Japanese yen isn't safe either.
Unlike most other currencies, the yen has risen more than 50% against the U.S. dollar since 2007 and is up another 6% since the beginning of 2011. In short, it has done what President Obama would like China's yuan to do.
Needless to say, Japanese exporters are suffering at these levels, and the country's government debt, over 200% of gross domestic product (GDP) and all denominated in an appreciating yen, has become a serious worry. While the yen could rise further, it must be regarded as very unsafe.
The pound sterling is equally unsafe, but for different reasons.
The British government is running a budget deficit as large as that of the United States, while the British economy is highly dependent on the very unstable and overblown financial services sector.
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S&P to Eurozone: Fix It or Else...
By timing its downgrade threat to the same week as a key European Union (EU) summit on the debt crisis, Standard & Poor's is essentially telling Europe's leaders to "Fix it or else."
The ratings agency said late Monday that it had put the credit of 15 Eurozone countries, including AAA-rated Germany, on a 90-day watch. The move means each affected country has 50% chance of a downgrade.
European leaders are scheduled to meet in Brussels Dec. 8 and 9 to discuss EU treaty changes that would mitigate the debt crisis, such as restrictions on budget deficits. German Chancellor Angela Merkel and French President Nicolas Sarkozy unveiled an outline of the plan Monday.
The timing of the S&P warning "could hold leaders' feet to the fire and force them to go through with a comprehensive solution," Peter Jankovskis, co-chief investment officer at OakBrook Investments, told Reuters.
Reaction of the world's stock and bond markets was muted, with investors apparently looking ahead to the summit.
Money Morning Capital Waves Strategist Shah Gilani said it was "about time" the ratings agencies started to get serious about credit ratings in the Eurozone, saying they were behind the curve on such problems as mortgage-backed securities.
"Now they're pushing their new "ahead of the tsunami' PR campaign," he said. "Their PR agenda aside, they're right to be knocking these credits down to reality."
They Had it Coming
S&P listed several reasons for its warning.
"After a good two years of trying to manage the crisis, the political efforts have not been able to arrest matters," Moritz Kraemer, head of European sovereign ratings at S&P, told the Financial Times. "It is our view that this is a systemic stress, a confidence crisis that affects the Eurozone as a whole."
Those "stresses" include tightening credit, rising government bond yields, squabbling among Eurozone leaders about how to cope with the crisis and the rising risk of a Eurozone recession next year.
"We are approaching a very important moment where the crisis could take a very significant turning point for the worse and we want to warn investors," Kraemer told The FT. "Considering how the crisis has deepened and the challenges that they are facing, [the summit] is the last good opportunity that policymakers have."
Although the S&P said it would take the results of this week's summit into consideration, no one should doubt the agency's resolve. This past summer S&P followed through on a similar threat to cut the credit rating of the United States to AA+ from AAA following the debt ceiling crisis debacle.
"S&P's view is that the political outcome will also drive creditworthiness, and I don't think anyone in their right mind would dispute this point," Ashok Parameswaran, an emerging-markets analyst at Invesco Advisers Inc., told Bloomberg News.
More Turmoil Ahead
Should this week's Eurozone summit fail to go far enough to please the S&P, the real fireworks will begin.
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Cheap Natural Gas Has Made This 85-Year-Old Technology Profitable
Although natural gas has become plentiful and cheap in the United States, using it in ways that would make it a practical alternative to petroleum, such as vehicle fuel, has proven challenging.
It's not that it can't be done. German scientists figured out how to convert natural gas to liquid petroleum products back in the mid-1920s.
Such products, particularly diesel fuel and synthetic engine oil, can be used in today's cars, trucks and jet planes today with virtually no modifications – a huge advantage over other natural gas fuel alternatives, such as compressed natural gas (CNG).
But the natural gas-to-liquid (GTL) process is expensive and requires large and costly facilities. Relatively cheap oil throughout the 20th century made GTL uneconomical for decades.
However, as the price of oil has risen in recent years, and as vast new reserves of natural gas have been discovered, interest in GTL technology has rekindled.
"With high crude prices, the economics of gas-to-liquid fuel have started to look much better," Sander Cohan, principal at energy-analysis firm ESAI Inc., told The Wall Street Journal.
It should be noted that GTL technology has nothing to do with the more familiar liquefied natural gas (LNG) process, which simply chills the gas into a liquid state for transport. GTL actually converts the natural gas into petroleum-like products, which would help reduce U.S. dependence on imported oil.
"The real prize is using natural gas to power our own vehicles," said Money Morning Global Energy Strategist Dr. Kent Moors.
Shell as Pioneer
Royal Dutch Shell PLC (NYSE: RDS:A, RDS.B) began production at its $18.5 billion Pearl GTL plant in Qatar earlier this year, with the first shipment of GTL base oil destined for lubricants arriving in Houston last month.
Shell estimates the plant will reach full production next year, converting 1.6 billion cubic feet of natural gas a day into 140,000 barrels of liquid fuels like kerosene and base oil in addition to 120,000 barrels of other products, such as condensate and liquid petroleum gas.
It already has at least one marquee customer: Qatar Airways has announced it will transition to GTL-based fuel in all of its aircraft next year.
Shell says the Pearl plant will account for 8% of its total production next year, making it the company's single biggest engine of growth. Last year Shell projected the plant would generate $6 billion a year in profit assuming oil prices at $70 a barrel. West Texas Intermediate (WTI) oil is now trading at over $100 a barrel.
Meanwhile, the price of natural gas has declined from between $6 and $7 per thousand cubic feet to less than $4 per thousand cubic feet. The more the prices of oil and natural gas head in opposite directions, the more profitable GTL becomes.
Just yesterday (Monday) Shell said it was considering building a GTL plant in the United States.
"We are looking for places where gas is cheap and [oil] products are expensive," Andy Brown, the managing director of Shell's Pearl project, said at a press briefing at the World Petroleum Congress in Doha, Qatar's capital. "Clearly the U.S. is something we're looking at."
That spread has other energy companies looking at GTL opportunities now.
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The Other CPI: What the Christmas Price Index is Telling U.S. Consumers
U.S. consumers can get a glimpse of what to expect in price changes this holiday shopping season – especially if you get your gift ideas from an old song.
The PNC Christmas Price Index, released by PNC Wealth Management (NYSE: PNC) measures the total cost of presents listed in the classic tune, "The Twelve Days of Christmas." This year, the price tag for an ambitious gift-giver buying all 364 presents hit $101,119.84, a 4.4% gain over last year's index.
This is the first time ever the total cost – which PNC calls the "True Cost of Christmas" -has risen to six digits.
Just supplying the 12th day alone, with one round of all 12 presents, would cost $24,263.18, a 3.5% increase from last year. That's almost twice as much as the 1.8% gain from 2008 to 2009, when the country was nearing the end of the recession, but not as drastic as last year's 9.2% leap.
The index is a light-hearted way to examine pricing trends; it's doubtful many shoppers are overly concerned with the price of birds and hired performers. The gifts might not be on most shoppers' lists, but what the index does represent is the various price fluctuations in our economy.
"Typically we see parallels between our index and the Federal government's," James Dunigan, managing executive of investments for PNC Wealth Management, wrote in the Index release.
The U.S. government's consumer price index in October was up 3.5% from last year, the same increase the Christmas song's shopper would see for one day's worth of presents. PNC also calculates a "core" index like the Federal government does. While the official core CPI is 2.0%, PNC's Christmas core, which excludes the volatile price of swans, is only up 0.7%.
The bird-heavy gift list in the song made for some double-digit price increases due to this year's rising feed costs. The biggest gainers: A 25% jump in the cost of two turtledoves, and a 14.2% increase to buy a partridge in a pear tree.
Higher commodity prices have led to higher food costs for U.S. consumers – not just bird shoppers – and along with energy have been the main cause of overall inflation this year. Food inflation will continue next year, with global food prices expected to increase 4%.
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