Keith Fitz-Gerald
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Why Mark Mobius is Betting Millions on this Acronym
You may be surprised to learn that some of the world's best investors are buying heavily right now – not because they think we've hit a bottom, or even the bottom, but because they're setting themselves up for the next big run.
Take Mark Mobius, for example.
Long regarded an emerging markets pioneer, Mobius is in charge of more than $50 billion worth of assets on behalf of Franklin Templeton. Lately, he's snapping up Romanian real estate, Nigerian banks, Kazakhstani oil companies and more.
Why?
There are many reasons, but basically it comes down to this: Despite the fact that emerging markets returned almost 250% from 2001 to 2010, the old playbook no longer works.
And I have to be careful when I say that because many investors will blithely assume that emerging markets are dead. They're not – it's just time to redraw the map because the best opportunities are no longer where you'd expect.
It's no longer about the BRICs (Brazil, Russia, India, and China), for example. Sure these countries remain great places to stake your claims on the wealth of newly found purchasing power and consumerism, but it's the so-called MINTs (Mexico, Indonesia, Nigeria, and Turkey) that may offer a faster route to riches.
Or the Next 11, or N-11, as Jim O'Neill, the economist who coined the term "BRICs" a decade ago, calls them. The N-11 is basically the MINTs plus Bangladesh, the Philippines, and Pakistan plus a few more countries on the fringe of "civilized" thinking.
Then there's the VISTA (Vietnam, Indonesia, South Africa, Turkey, and Argentina) nations and the CIVETS (Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa).
Seriously?
Yes. For the first time in modern history, emerging markets are no longer completely dependent on Western economies nor demand, a point you've heard me make repeatedly in the past. At the risk of sounding like a broken record, this gives them an unprecedented range of options largely independent of the political, financial, and economic swamp the developed markets have become.
This is not the kind of thing you're going to pick up on in the mass media, but every single one of those nations is set for a runaway investment boom because they are advancing faster than almost everybody expects.
In fact, many of the big investing houses like Goldman Sachs Group Inc. (NYSE: GS), Fidelity, HSBC Holdings PLC (NYSE ADR: HBC) and others feel the same way I do – that the MINTs and N-11 have the potential to be every bit as profitable over the next 10 years as the BRICs were over the past 10 years.
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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.
Banking Breakdown
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.
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Maverick Judge Jed Rakoff Stares
Down The Street
One of the biggest problems with Wall Street's malfeasance is how the ruling elite view legal settlements – as little more than an acceptable cost of doing business.
Well, no more.
Thanks to Judge Jed Rakoff we may see some real regulatory action leading to good old-fashioned investigations, perp walks, and even jail for the guilty.
I'm not talking just about the Bernie Madoffs or the Raj Rajaratnams either. I'm talking about potentially CEOs and even entire corporate boards.
Judge Rakoff recently rendered a 15-page decision rejecting the U.S. Securities and Exchange Commission's (SEC) $285 million settlement with Citigroup Inc. (NYSE: C) over toxic mortgages, calling it "neither reasonable, nor fair, nor adequate, nor in the public interest."
This is important because settlements like these have been a farce for years – little more than the financial equivalent of a parking ticket and having about as much impact.
In fact, in a world where banking secrecy is paramount and investment firms like Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM), Bank of America Corp. (NYSE: BAC) and others rule the roost, they're little more than obfuscations of the truth.
The investigations into these banks are toothless or highly secretive at best. Rarely does the public see anything even remotely resembling full disclosure.
Instead we're supposed to be placated by headlines insinuating that the SEC, the National Futures Association (NFA) and more than 20 other regulatory agencies are looking out for our best interests.
Who are they kidding?
A Drop in the Bucket
Remember the $550 million fine Goldman was forced to pay for its role in toxic credit default swaps (CDOs)? At the time it was the largest ever levied.
SEC officials couldn't stumble over themselves fast enough nor get enough sound bites. I recall lots of PR shots with earnest-looking people evidently proud of themselves for having made Goldman pony up at the time.
And the mainstream press loved it. But there was one tiny problem.
The firm booked $13.3 billion that year. Paying off the SEC in a settlement that neither admitted nor denied wrongdoing was an acceptable cost of doing business that amounted to a mere 4% of revenue.
The proposed Citi settlement was much the same. It would have required Citi to give up $160 million of alleged ill-gotten profits, $30 million of interest, and a $95 million kicker for negligence.
Bear in mind, Citi reported full-year net income of $10.6 billion on revenue of $60.5 billion in 2010 which means that, like the Goldman fine, the settlement is a drop in the bucket at a mere 1.50% of net income.
I think Judge Rakoff's ruling has been a long time coming. [To continue reading, please click here...]
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Why the Fed's Latest Rescue Effort is Doomed
World markets got a nice tailwind yesterday (Wednesday) on news that the U.S. Federal Reserve is stepping into the fray along with other central banks to boost liquidity and support the global economy.
Of course it's nice to see stocks get a hefty boost, but to be honest I'd rather see them rising on real news.
Not that this isn't a good development in terms of stock values – but come on, guys. When things are so bad that the Fed has to step into global markets and bail out the other bankers in the world who can't wipe their own noses, we have serious problems.
Think about it.
The Fed is going to collaborate with the European Central Bank (ECB), the Bank of England (BOE), the Bank of Japan, the Swiss National Bank and the Bank of Canada (BOC) to lower interest rates on dollar liquidity swaps to make it cheaper for banks around the world to trade in dollars as a means of providing liquidity in their markets.
Put another way, now our government is directly involved in saving somebody else's bacon at a time when, arguably, we don't have our own house in order.
The Fed is cutting the amount that it charges for international access to dollars effectively in half from 100 basis points to 50 basis points over a basic rate.
The central bank says the move is designed to "ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credits to households and businesses and so help foster economic activity."
Who writes this stuff?
Businesses are flush with more cash than they've had in years. The banks are, too. But the problem is still putting that cash in motion — just as it has been since this crisis began.
From Bad to Worse
I've have written about this many times in Money Morning. You can stimulate all you want with low rates, but if businesses cannot see a reason to spend money to turn a profit, they won't. And there's going to be little the government can do to encourage them to spend the estimated $2 trillion a Federal Reserve report estimates they're sitting on.
Similarly, if banks cannot see a reason to lend with reasonable security that loans will be repaid, they won't. And there's nothing the central bank can do about it, either. Neither low interest rates nor low-cost debt swaps will change the fact that companies and individuals are shedding debt as fast as they can despite the cost of borrowing being almost zero.
If anything, the Fed's newest harebrained scheme is going to make things worse. Absent profitable lending, many banks are already turning to bank fees and – like the airlines that are widely perceived to be nickel-and-diming passengers – this is understandably irking customers. Many are changing banks as a result, further fueling a negative feedback loop.
To continue reading, please click here…
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Why Warren Buffett Is Buying – And You Should Be Too
Legendary investor Warren Buffett recently made news with his purchase of International Business Machines Corp. (NYSE: IBM), though I can't say I'm surprised.
Despite criticism that he's buying into a top-heavy market, that IBM is at a premium, and that he's losing his touch, chances are Buffett knows exactly what he's doing.
And guess what, it's exactly what I've been counseling investors to do since this crisis began – bolster defenses by putting money to work in companies that are backed by trillions of dollars in tailwinds, and have solid defensible businesses (Buffett calls these "moats").
According to a Berkshire Hathaway Inc. (NYSE: BRK.A, BRK.B) filing made Monday but dated Sept. 30, 2011, Buffett also waded into General Dynamics Corp. (NYSE: GD), DirecTV (Nasdaq: DTV), CVS Caremark Corp. (NYSE: CVS), Intel Corp. (Nasdaq: INTC) and Visa Inc. (NYSE: V).
In the third quarter, Buffett funneled $10 billion into Berkshire's IBM stake, which now stands at 5.5%. Of course, Berkshire maintains a $13.5 billion stake in The Coca-Cola Co. (NYSE: KO) that remains the firm's largest.
Buffett Pulls the Trigger
As a long time Buffett watcher, I am somewhat surprised that he picked up Intel and IBM, if only because the Oracle of Omaha has a well-documented aversion to tech.
Still, I can see the logic. Both companies are global giants poised to profit from the whirlwind of growth set to take place thousands of miles from our shores in the decades ahead.
There are technical similarities, too.
For instance, IBM's price has risen more than 29% this year. As a result, at least five analysts have removed their buy recommendations because they believe the stock may have run its course, according to Bloomberg News and YahooFinance . At the moment, less than 50% of the analysts who cover IBM recommend buying the stock.
Back in 1988, it was much the same situation. Coke had more than doubled in size and analysts had much the same reaction when it came to doubts about further growth. Many openly bashed the stock's prospects and completely ignored the global growth potential that today is Coke's mainstay.
Coke is up tenfold since then. Enough said.
Here's what I think Buffett sees:
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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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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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How Much Cash Should You Hold?
As you might imagine, I receive a lot of questions from readers around the world and right now the question I'm being asked most frequently is, "How much cash should I be holding?"
There's no right answer, but given the extraordinary times we're living in, I think the more interesting thing to consider is "what to do with it?"
But first things first. Let's talk about how much cash may be appropriate, then address what to do with it.
Traditional Wall Street thinking holds that cash is a drag that actually holds you back. The argument, particularly in a low interest rate environment, is that cash actually produces a negative real return because it really isn't "earning" anything while it burns a hole in your pocket and gradually loses ground to inflation.
I have a problem with this argument in that it's based primarily on the assumption that there's nothing better down the road.
I believe cash is key when it comes to providing the flexibility needed to safeguard wealth or capitalize on new opportunities – even now.
Not to make light of the current situation in Europe or our woes here in the United States, but the way I see things you can either ignore the problems and hope they go away in which case your cash is a dead asset, or you can learn how to deal with the uncertainty and profit from it in which case your cash is an asset.
If you're retired, holding something on the order of two to five years of living expenses is prudent. That way you can plan for regular expenses like insurance, medical bills, a mortgage if you've got one, and investing. Especially investing.
Now, if you're still working and have a regular paycheck, you can take some risks and hold less cash on the assumption that future income will offset the risks associated with a lower cash "buffer" on hand. A generally accepted rule is six months, but I think given today's economy 12-months worth of expenses is more appropriate.
Either way, the goal is the same – to have enough cash on hand that you don't have to spend money you don't want to at an inopportune time nor sell something when you don't want to.
For somebody in my situation, I think having about 20% of my investable assets in cash is about right.
If that strikes you as low in today's markets with all the risks they harbor, bear in mind I also use trailing stops religiously and I'm prepared to go to cash if things roll over. If you aren't disciplined or aren't prepared to be as nimble as the markets require, perhaps a more conservative 40% to 60% is appropriate. Maybe more.
Once you've decided what level of cash is appropriate for your particular situation, you can get to the bigger question of what to actually do with it.
This is where things get really interesting because even cash can be tweaked for better performance.
Bonds can be a Cash Alternative (For Now)
As long as interest rates remain low, core bond funds may make more appropriate "bank" accounts. At the very least, they can make good complements to the usual savings, checking and money market funds most Americans have already established.
Now, I can already sense the snarky e-mails heading this way telling me I have lost my mind or don't understand the risks associated with rising rates.
I haven't. Rising rates will make bonds tumble, and bond funds – with very few exceptions – will lose money.
But consider this: The chronic state of economic misery that we live in now may be with us a while. That's going to help keep interest rates low because the government believes – wrongly I might add – in stimulative economics that don't work and have never worked in recorded history.
More to the point, the U.S. Federal Reserve, for example, has announced that it's going to keep rates near zero through 2013. To me this is a near picture perfect repeat of the "Lost Decade" in Japan, which now is actually entering its third lost decade. We're on the same path.
The uncertainty could drive investors to bonds and actually make rates fall still lower from here, as hard as that is to imagine.
Inverse Funds: How To Profit From Inverse Funds – Without Losing Your Shirt
So-called "inverse funds" are widely misunderstood and can be tricky to use, but these specialized investments have a place in most portfolios.
In fact, with U.S. stocks having zoomed more than 80% off their market lows, now could be the ideal time to add inverse exchange-traded funds to your portfolio.
But there's definitely a right way and a wrong way to use them.
So it's worth taking a closer look.
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The Market's Next 1,000-Point Move
Stuart Varney, host of the aptly named and very highly rated "Varney & Co." program on Fox Business, put the following question to me in his usual direct style: "Will we have an agreement on Wednesday out of Europe and what will that mean for the markets?"
Yes, I began, we probably will – but for all the wrong reasons, and it will never last.
There are three reasons why:
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1. You have 27 nations that now have to agree to review what, in effect, is the treaty that holds the European Union (EU) together. That's not conducive to anything even remotely resembling quick decision-making.
2. What's happening in Europe is much the same thing happening here, in that the debt situation has become government at the people rather than for the people or even by the people. That means politicians are still smoking in bed while the house is burning.
3. They have to say something to avoid contagion but that's already baked into the cake if you examine the cost of credit-default swaps (CDS). The data suggests traders are now turning their crosshairs on Italy, Portugal and Spain even as leaders work towards a solution. So recapitalizing the banks to the tune of a few hundred million euros is but a one-shot deal; the continued thing to focus on is the near-complete lack of fiscal discipline at the government level.
The bottom line: This is not over by a long shot. In fact, I expect it to drag on well into next year.
Still, in the short-term, the next 1,000 points the market moves in either direction are going to be the direct result of whatever "solution" comes out of Europe tomorrow (Wednesday).
The better we understand this situation as a nation and as investors, the better off we'll be.
A Misguided Mission
At issue is the very nature of the "recapitalization." The fact is Europe's debt has gotten to the point that it can no longer be sustained.
Much like our own debt situation here in the United States, there are many causes, including completely incompetent government, irresponsible decision-making, feckless leadership and paltry economic growth.
Citizens on both sides of the Atlantic understandably have had enough.
But the problem is that the policies that led Europe to this point were decades in the making. So it's unreasonable to expect them to go away any time soon even if the EU announces a solution on Wednesday.
Furthermore, the use of comparatively healthy public balance sheets to shore up irresponsible banks and speculative trading houses is a big mistake that removes the free hand of risk that is a required element of capitalism.
Now, this could come to a quick resolution – if the politicians would stop their meddling. Yes, companies would fail, banks would fail, and the markets would take the brunt of it on the chin.
But – like Iceland, which fabulously ignored international advice and undertook a complete reboot – the sooner we take our medicine, the sooner we can begin healing.
It's not too late, but whether it becomes too late is a question for the world's central bankers and policymakers who have yet to become serious enough about what's needed.
The Downward Spiral
Barring any sort of massive economic growth, neither the EU nor the U.S. can make a dent in the debt cycle and the stuff eventually will hit the fan.
When it does, there are four ways out:
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