Financial Crisis Investing
Forget the Doom-and-Gloom, Now Is a Time to Be Bullish
A little girl named Carol Anne became famous for saying "They're h-e-r-e" in the 1982 movie Poltergeist.
She was talking about the "TV people," and they ended up being from way out of town.
Well, we have our equivalent digital denizens, and they're also returning in force. Except ours are largely from the investment shadows, awaiting the next opportunity to brandish heavy fear tactics to convince you the energy market is about to collapse…again.
It makes me want to shout, "They're b-a-a-c-k!"
It is enough to prompt a recall of that old saw about market analysts.
You know, the one that says they have correctly predicted eight of the last three recessions.
At issue this time is the latest financial obstacle the market must overcome: the sequestration scheduled to hit a week from today. Now the draconian cuts will occur automatically, although it will also take some time for them to have any impact.
Most will not result in anything significant for at least a month.
Of course, the markets are not going to wait that long. For the past two days, the first wave of nail biting started. It will get worse as our darling Congressmen return from their well-earned (satire here folks, satire) vacation to play politics instead of reaching an agreement.
After this, we will get back to business. We can ignore those talking heads for one major reason.
QE3 is on Its Way – Here's How to Prepare
Federal Reserve Chairman Ben Bernanke spoke to the U.S. Senate Tuesday and yesterday (Wednesday) in his two-day biannual meeting with Congress – and failed to make any promise to institute more stimulus measures.
He did leave the door open for the Fed to do something – even if it won't commit to what that will be.
The markets rallied, although investors were disappointed that the Fed chief couldn't deliver a bigger commitment.
But make no mistake – quantitative easing, or QE3, is coming.
That is assured for one simple reason.
The U.S. government can find few buyers for its debt at current low interest rates. And as Bernanke has stated publicly, low interest rates will remain in place until at least 2014.
That means the Fed will have to continue its role of financing the budget deficit of the U.S. government through the inflation of its balance sheet.
How to Avoid the Approaching Bond Market Debacle
If you're an income investor, you probably feel like you're in one of those nightmares where you're trying to run like hell – but aren't getting anywhere.
Martin Hutchinson and I were talking about this predicament last week.
As editor of the Permanent Wealth Investor, Martin is our income guru here at Money Map Press. His advice on how to thrive in this lousy-income environment was so good that I had to pass it along to you – along with one of his favorite income plays.
Traditionally, bonds – especially U.S. Treasury bonds – are the favored holding of income-seekers. But bonds face two big challenges right now – and we have the U.S. Federal Reserve to thank for both of them.
First, thanks to the ultra-low-interest-rate policies of the nation's central bank, Treasury bonds are yielding next to nothing. When I looked Friday afternoon, the 10-year was yielding 1.94% and the 30-year 3.12%.
Now, according to the latest federal figures, the U.S. consumer price index (CPI) fell to 2.7% in March from 2.9% in February. The CPI is the "official" gauge of U.S. inflation. But as we explained back on March 2, this is a bogus number.
The American Institute for Economic Research (AIER) says everyday prices – the ones that matter most to working Americans – are up a good 8% over the past year.
So income investors who stick to traditional tactics are actually losing ground to inflation. And you absolutely don't want to outlive your money.
If that were the only problem, it would be pretty bad. But there's a second challenge – and it's a doozy.
You see, the central bank's Federal Funds rate – the benchmark that helps determine most borrowing rates that American consumers and businesses pay – remains down near zero. And while no one can predict with certainty when rates will change, there is one thing you can bank on: When rates do change, they can only go up.
And since bond prices move opposite interest rates (bond prices fall when rates rise, and vice versa), those fixed-income securities will take a beating when rates increase.
And so will the investors who hold them.
How the European Debt Crisis Could Smother Fiat S.p.A. (PINK: FIATY)
To profit from this debacle, I told you to short Fiat. Since then, the stock has tumbled 76%, from $19 a share to yesterday's (Wednesday's) closing price of $4.66.
Fiat is a perfect example of how an unstable home market – like Italy – will kill a struggling company's stock. Fiat is Italy's largest private sector employer, and the past year's market performance mirrors the weakness unleashed by the European debt crisis.
Sadly, Fiat won't be the only company whose shares will plunge.
TheEuropean debt crisis has grown from a problem on the edge of Europe to a problem inside the region's core. You only have to look at the series of bank stress tests that Europe has rolled out to see that things are getting worse, not better.
In fact, the European Central Bank (ECB) announced yesterday that it would provide $638 billion (489 billion euros) in three-year loans to more than 500 banks in the Eurozone. More than a dozen Italian banks borrowed $143.52 billion (116 billion euros).
But the solution is only short term, and the region's grim long-term outlook hasn't changed. We're heading toward a point of maximum pessimism – one I think we'll reach sooner rather than later.
So, it's time to thank the Eurozone, Italy, and Fiat S.p.A. for a great short trade and close it out. While the stock could go all the way to $0, the meat of the move is over, and we want to take profits before a major short-covering event gives the share price a temporary boost.
Fiat S.p.A.: Stung by the European Debt Crisis
The European Central Bank forecasts Eurozone growth will slow to a near standstill next year, with gross domestic product (GDP) only expanding 0.3%. The ECB said area-wide inflation will reach 2.7% in 2011.
This slow-growth, higher-priced environment won't bode well for the region's automakers, which are already feeling the effects.
Automobile registrations in Europe in November dropped 3% to 1.07 million vehicles from 1.10 million a year earlier. That's the biggest decline since June, according to the Brussels-based European Automobile Manufacturers Association. The Italian auto sales market led the region's declines, slipping 9.2%. France was close behind at 7.7%.
Hear the Latest Top 2011 Investing Strategies from Money Morning Financial Experts
As investors you are in one of the most uncertain periods in market history right now – and you want some clarity.
To shine light on how to navigate the rocky path ahead, Money Morning editors recently gathered in St. Petersburg, FL with other global financial experts for the Investment U Symposium. From March 23 to 26 they presented in-depth workshops, joined in panel discussions and mingled with investors like you to analyze the hottest and most pressing topics and investing strategies in the global economic landscape today.
Attendees were able to get detailed advice from our regular Money Morning contributors on a variety of topics.
We Want to Hear From You: How Do You As A Consumer Feel About the Financial Reform Bill?
With U.S. consumers still feeling the sting of the global financial crisis, consumer advocacy groups are claiming that they snagged a win with the financial reform measure approved last week by a joint House-Senate congressional committee.
The bill goes next to President Barack Obama, who is expected to sign the measure into law.
"It's historic legislation," Michael Calhoun, president of the Center for Responsible Lending, told ABC News. "It's a big win for consumers."
Four Ways to Profit From a Business-Driven Rebound
Last week we learned that the U.S. economy expanded by a whopping 5.7% annual rate in the 2009 fourth quarter – the biggest jump since 2003. This was well ahead of the 4.5% consensus estimate and solidly beats the 2.2% growth rate achieved in last year's third quarter. The turnaround is the largest in almost three decades.
The main driver of the performance was a big slowdown in the rate at which businesses were drawing down their inventories. This alone contributed 3.4% to overall growth in the quarter. Paul Ashworth at Capital Economics in London believes that inventory rebuilding will continue to boost gross-domestic-product (GDP) growth for another two or three quarters.
But what happens after that – especially after the stimulus spending out of Washington winds down later this year? Will this rate of growth continue?
Investors who know the answer to that question will be the best-positioned to profit.
Warning: This is Not Another Wall Street Conspiracy Theory, These are the Facts
Just last week, the House Committee on Oversight and Government Reform held a hearing on the U.S. Federal Reserve's decision to directly pay billions of dollars to banks as part of its scheme to bail out insurance giant American International Group Inc. (NYSE: AIG).
According to committee Chairman Dennis Kucinich, D-Ohio, the testimony that congressmen heard just didn't "pass the smell test."
What really stinks about the whole mess is not only the cover-up of what really happened and why, but the inability of anybody in Congress to actually do their homework and be able to frame pointed questions and get to the truth.
It's not complicated, but it is convoluted. Here are the facts and some questions that Congress needs to ask – and that the American people deserve straight answers to.
My Confrontation With Ben Bernanke: The One Question He Refused to Answer
The Secret Service agents watched me warily as I approached U.S. Federal Reserve Chairman Ben Bernanke.
I didn't waste any time. After introducing myself, I showed him a copy of the talk he gave at the American Economic Association (AEA) meetings in January 2007. I circled all the times he used the words "panic," "crisis," and "stress" in his speech, entitled "Central Banking and Bank Supervision of the United States."
A total of 36 occasions.
I asked him point-blank: "Did you know in advance that a financial crisis was headed our way?"
He looked nervous. I could tell he was uncomfortable with my question. He looked at me stoically and smiled.
And he refused to answer.
But there was no doubt in my mind what the correct answer was. I think he was worried about his job if he said, "Yes."
The High Cost of Greed …
Money Morning subscriber Ted Kubichek wrote and asked if one of our experts could comment on the underlying cause of the financial crisis whose fallout will affect the U.S. economy for years. Here's an edited version of that question, as well as the reply by Money Morning's Shah Gilani, an internationally recognized expert on the global credit crisis.