Subscribe to Money Morning get daily headlines subscribe now! Money Morning Private Briefing today's private briefing
Category

Keith Fitz-Gerald

What I Wish Ben Bernanke Knew About Japan

I've called Japan my "other" home since 1989 and in that time I've seen it change in ways that ought to scare the pants off you.

I say that not to ruin your day, but because I fear we are headed down the same exact road as long as Ben Bernanke and his central banking buddies think it's easier to print money than actually stimulate real growth.

In doing so, they are re-creating Japan's "Lost Decades" here at home with years of smoldering, piss-poor growth as our destiny.

Yet it doesn't have to be that way. We can still choose a different path.

Here are 10 lessons from Japan I would share with Chairman Bernanke right now if I sat down with him:

1) All the cheap money in the world won't matter if banks hoard it and customers don't want it. You could lower interest rates to zero and it won't make a difference. Japan tried this to no avail. At this point, low rates are hardwired into the Japanese business system to the extent that any increase whatsoever is likely to cause a massive wave of corporate and personal bankruptcies. Don't let that happen here. You still have a chance to prevent this.

2) At some point somebody has to take the loss. You cannot pretend that the debt you've advanced is performing any more than the Japanese have. No matter how much money you inject into the system, the deleveraging process will continue until excess credit is bled out of the system one way or another. Defaults happened with alarming regularity before Central Banks tried to stave them off. There have been literally hundreds in Eastern Europe, Africa, Asia, and Latin America over the centuries. Spain and France failed six and eight times each in the 16th century alone.

3) Trying to manage any singular crisis will only result in a much bigger one down the road. The longer you prop things up, the worse they're going to get and the more consolidation you will see. Five of the 10 largest banks in the world were Japanese in 1990. Today the only bank to make the cut is 5th on the list (the Japan Post Bank Co. Ltd according to Bankers Accuity).

4) When politicians find it easier to borrow money than make hard policy decisions, they will because they prefer their short term re-election prospects over the long-term economic interests of the country. Japan has had 15 Prime Ministers in the last 12 years. Granted, their system works a little differently than ours, but continual reshuffling diminishes the effectiveness of any solution. Take advantage of the situation and act decisively before our elections risk a reset. You're supposedly apolitical. Prove it by acting with conviction instead of giving us more FedSpeak.

To continue reading, please click here...

8 Reasons Why Mimi Would Sell Microsoft (Nasdaq:MSFT) and Dump Steve Ballmer

One day in 1983, my dad asked me a question over dinner after a long day at work.

He wanted to know what I knew about a little computer company called Microsoft. It was the brainchild of the son of one of his partners at Bogle & Gates, William H. Gates, Sr.

"Not much," I replied.

But I did tell my dad that I loved using MS-DOS in the computer lab with my friends. I was a card-carrying member of the nerd herd back in the day, so I spent a lot of time there and knew Microsoft's fledgling PC-based software pretty well.

My grandmother Mimi, though, had a different point of view. You've heard me mention her before.

She's the one who was widowed at an early age and became a savvy global investor long before people ever thought to look at the bigger picture.

Mimi didn't care that the buzz was about the MS-DOS language or even about computers. Having grown up in the Depression, she believed that what people would do with the technology was far more valuable.

She said she had confidence that Sr.'s son, Bill Gates Jr., understood this — which is why she invested heavily in the Microsoft IPO in 1986. Enough said.

Today, though, I think she'd voice an equally strong opinion about Microsoft (Nasdaq: MSFT) CEO Steve Ballmer. In fact, I think she'd fire him. Here's why….

8 Reasons Why Steve Ballmer Must Go

  1. Ballmer took over Microsoft 12 years ago when the stock was about $60. Now it struggles to maintain $30. Microsoft has $58.16 billion in cash and this is the best Steve Ballmer can do?
  2. Office and Windows are dying. Once the business world's de facto standard, both are being replaced by cheap, easy-to-operate software, much of which is actually free as well as compatible. This is a big problem considering that, according to the Wall Street Journal, roughly 85% of Microsoft's revenue is coming from just two products: Windows and Office.
  3. The company isn't innovating fast enough or aggressively enough. What's more, it's attempting to compensate for its own shortcomings with increasingly ill-conceived acquisitions. For instance, Microsoft forked over $605 million for 18% of the Barnes and Noble Nook e-reader and still has no real ability to compete with Amazon's Kindle. It also couldn't seal the deal with Yahoo. Despite a sizable head start using Yahoo's core search technology, Bing has a mere 15% of the search market today. Ballmer waited nearly four years to respond to the iPad and his "Surface" tablet was ho-hum when it could have been jaw dropping. One more: Microsoft paid $8.5 billion in cash for Skype. Apparently the fact that Skype was not profitable didn't matter. Ballmer's track record suggests to me that he buys businesses that nobody else "must have."
  4. Microsoft's Internet offerings remain wannabes and are highly priced at that. Take Yammer. Microsoft just paid $1.2 billion through the nose to acquire a company that was valued at $600 million last fall when it raised $85 million in a venture offering. Team Ballmer plans to integrate it into Office on the assumption that somehow the Microsoft marriage will endear the brand to customers anxious to socialize business. I think they're delusional. Most Microsoft users I know, including myself, are actively planning to move away from the legacy software we've used for years the first instant we can in favor of software we actually like to use!

To continue reading, please click here...

Three Reasons Why the U.S. Dollar is Really Rising

By all accounts, the U.S. dollar should be the functional equivalent of a Zimbabwean bill.

The Fed has pumped trillions into the worldwide financial system as part of misguided stimulus efforts that should be incredibly inflationary.

Yet, instead of a disastrous repeat of the Weimar Republic, the U.S. dollar has strengthened considerably.

This despite rising unemployment, slowing economic growth and a debt debate that's about to begin anew.

Since last July, the U.S. dollar has risen against all 16 major currencies while the Intercontinental Exchange Dollar Index is up 12%, according to Bloomberg.

In fact, the greenback is now higher than it was when the Fed engaged in Operation Twist in late 2011 as part of a plan to keep the dollar low by buying bonds.

So much for Club Fed's plans…

As usual, they don't really have a clue about how real money works — let alone why it flows and where it's going.

Taking the Mystery Out of the U.S. Dollar

Here are the three reasons why the U.S. dollar is really rising:

1. Institutions are unloading gold to raise cash against anticipated margin calls, redemption requests, or both. They are parking that money in treasuries and in dollars, creating additional demand. There are simply more buyers than sellers at the moment, so prices for dollars and treasuries are rising. And not just by small amounts, either.

2. Institutional portfolio managers and traders are required to maintain specific classes of assets under very specific guidelines. These guidelines dictate everything from the amounts being held to the quality of specific investments.

Many, for example, are required to hold only AAA-rated bonds, or invest in stocks meeting certain income, asset size and volatility criteria.

Imagine you're Jamie Dimon and you have to hold reserves against trading losses or you're Mark Zuckerberg and you've got to build up a large legal settlement fund for the Facebook IPO.

Or, perhaps you're Tim Cook of Apple and you're sitting on $110 billion in cash for future investments.

Chances are you're going to want to buy things that are as close to risk-free as possible to ensure your assets hold their value.

A year ago, you could choose from eight currencies in the G10 that met internationally accepted "risk-free" ratings criteria as measured by the cost of credit default swaps priced under 100 basis points.

Now, there are only five to choose from. A year from now, there might only be two or three.

To continue reading, please click here...

Five Ways to Avoid the Next Facebook IPO Fiasco

On the heels of the Facebook IPO fiasco, many investors are wondering how they can find the next best thing and avoid getting "facebooked" in the process.

Tall order? Not really.

First, look for companies with ideas that can be applied across a wide variety of industries.

If I had said this five years ago, you'd be looking for Internet- related startups or companies that can do "it" better, faster or cheaper.

Going forward however, I think the true innovation will be exponential progress that's made linking living systems with their digital counterparts. Everything from synthetic biology to computational bioinformatics will grow a lot more rapidly than the broader markets.

So will key markets related to healing human illness, solving hunger and figuring out how to deliver potable water to broad swathes of the planet.

No doubt there will be tremendous ethical challenges along the way, but I believe we will see the line blur between what's needed to live and how we actually live our lives.

Though it's hard to imagine given the state of the world at the moment, I believe a fair number of the best up- and- coming investments will be outside the traditional first- tier markets of the United States, Europe and Japan.

In fact, I'd bet on it.

Second, don't confuse the ability to organize or share information with the ability to generate revenue

One might lead to the other but they are not the same thing.

The way I see it, Facebook is a classic example of everything you don't want in a business. It is 900 million users who spend an average of $1.32 a year. Compare that to Amazon.com, which clocks in at a much more valuable and consistent $36.52 per person.

Call me crazy, but I don't think Facebook stock will see the bottom for a while. As I wrote last Friday, at best Facebook is worth $7.50 a share.

Revenue is slowing. Facebook doesn't dominate the mobile markets that are becoming the preferred consumer channel for tens of millions of people. And, in what is perhaps the death knell, startups are already cannibalizing Facebook's user base.

The ability to "like" somebody is really no different than signing their yearbook in high school –only you're using a computer and the Internet to do it.

Third, hunt for fringe thinkers working in their garages.

It's not enough to think differently. The next big things will come from those thinkers operating on the fringes of what the rest of us consider normal.

To continue reading, please click here...

Election 2012: Forget Bailouts, We Need a Shakeout

The markets rallied Monday on news that global leaders favor additional stimulus. The hope is that additional spending will induce growth and put the world back on track.

Don't hold your breath.

Big government robs the economy of wealth, strips it of initiative and further undermines our recovery.

So why, then, do our leaders continue to throw good money after bad?

Try this on for size.

In 1958, a man named Cyril Northcote Parkinson published a series of essays in book form called Parkinson's Law: The Pursuit of Progress. In it, he postulated a mathematical equation that describes how bureaucracies expand over time and why.

I don't know if he had a wicked sense of humor or a dramatic flair for irony but the equation at the core of his argument relied on something he termed the "coefficient of inefficiency."

The coefficient of inefficiency says the size of a committee or government decision-making body is determined by the point at which it becomes completely inefficient or irrelevant. Or both – hence the name.

Parkinson determined that the minimal effective size for a decision-making body is about five people, and the optimal size is somewhere between three and 20.

Last time I checked, we had 548 people inside the beltway – 535 voting members of Congress, nine Supreme Court justices, one president, one vice president, one treasurer and one Fed chairman – who are responsible for making decisions on behalf of 330 million citizens.

Combine that with nearly 2.8 million total Federal employees (excluding our military) and we're waaaaay beyond anything even remotely resembling workable decision making.

Now here's the thing. Parkinson also observed that bureaucracies grew by about 5%-7% a year, "irrespective of any variation in the amount of work (if any) to be done."

In other words, the larger bureaucracies become, the more ineffective they get even if additional people are hired to do work that doesn't exist.

And to think, all this time I thought our government ran on the Peter Principle!

Parkinson attributed this to two things:

To continue reading, please click here...

Five with Fitz: What I See When I Look Over the Horizon

When you've been working the markets as long as I have, you learn that the biggest dangers are always found in a place just over the horizon.

It's why I spend my time hunting for stories, news items and opinions that in the old days were considered far "below the fold."

Invariably, what I am looking for is the stuff that everybody else has missed.

Because I believe that's where the real information is — especially when it comes to uncovering profitable opportunities others don't yet see or understand.

It's the story behind the story that interests me. To find it, you need to go beyond the headline news.

In that spirit, here's my take on five things that I'm thinking about right now.

To continue reading, please, click here...

High Oil Prices: The Truth About Obama's Misguided Witch Hunt

It has been less than a month since President Obama declared war on those evil oil speculators.

Standing in the Rose Garden on April 17th, the president laid out a $52 billion initiative to increase federal supervision of oil markets in an effort to crack down on oil price spikes.

At the time, oil was trading at $117.41 a barrel and $5 a gallon gas seemed all but inevitable.

According to the p resident, evil speculators had been working behind the scenes to screw the rest of us while engorging themselves on riches beyond our wildest dreams.

I said it then and I'll say it again…the president is chasing a ghost he'll never catch. Spending $52 billion on additional oversight is a complete waste of money and a misguided witch hunt.

I mean, think about it. If speculators are the same ones responsible for high oil prices, ask yourself why they're the ones getting raked over the coals these days as oil prices fall.

The short version: It's because speculators don't control oil prices and never have.

The Real Culprits Behind High Oil Prices

Pricing inputs – for better or worse – are driven by geopolitics, supply constrictions, war, tyrants with spigots and buyers who will only purchase as long as the prices are low enough.

This is not complicated. Any time there are more buyers than sellers, prices go up. When there are more sellers than buyers, prices go down.

Whether or not what's happening now turns out to be short- term noise or a long- term trend remains to be seen.

As I noted in a widely read article on April 20th, legitimate speculation has a valuable and essential role in the markets. It's very different from the already illegal manipulation that the president seems to confuse with speculation.

Oil prices are driven by two groups of participants – hedgers and speculators.

The former are typically producers or suppliers with a vested interest in securing as high a price as possible for their output. They can also be manufacturers who depend on procuring as low a price as possible for their raw materials. Both parties are interested in delivery as a function of pricing.

Speculators don't care about delivery and, in fact, go to great lengths to avoid it.

They profit from price changes that would otherwise hold hedgers apart while also providing liquidity to other market participants.

Here's an example that may help bring this to life.

To continue reading this, please click here...

What U.S. Consumer Spending Data Is Telling Us

The markets slid yesterday on news that U.S. consumer spending increased by 0.3% in March, while income rose 0.4% over the same time frame. This is the first time since December we've seen income rise faster than spending.

I can't say I am entirely surprised.

As prices for "must haves" like gasoline and food continue to rise, consumers are digging into their savings to cope. This is not small potatoes, given that the average family saved a mere $38 out of every $1,000 in take home pay last month, according to the U.S. Commerce Department.

I can't help but have huge concerns about Team Bernanke's plan; no amount of stimulus is going to overcome the struggle most families are having – which is to boost savings and shed debt.

Here's the thing… if consumers can't save, then they can't buy. And if they can't buy, they can't build up the nation's wealth, which is predicated on consumer spending.

All three sets of figures in isolation really don't tell you much. But when taken together – spending, income, and GDP – they suggest our economy is too weak to put millions of Americans back to work, much less in jobs for which they are appropriately qualified.

To continue reading please click here...

What Magazine Covers Really Say About the Stock Market

Will Rogers once said that "good judgment comes from bad experience, and a lot of that comes from bad judgment."

If he only knew.

Then again, as one of America's famous humorists and social commentators, I suspect he "knew" all too well that history rarely works out the way people think.

Take the late 1990s, for instance.

As capital markets liberalized and the Internet Age began in earnest it was a time of great hope.

Companies that had very little other than a ".com" after their name suddenly became worth hundreds of millions of dollars. Boo.com, Pets.com, and Kozmo.com are a few that come to mind.

But were any of them worthy of all the hype?

I was one of the few who didn't think so. Many people considered me a Luddite because of it.

I wasn't trying to be difficult. I just reasoned that when everybody "knew something" that the end was near.

How did I know?

Well I didn't…exactly. But, I had a good idea thanks to something my grandmother, Mimi, used to call the "country club" test.

After being widowed at a young age Mimi was a seasoned, successful global investor in her own right. She reasoned that when an investment or a trend began making the rounds over drinks, it was time to move on.

And if she heard something around the poker table, she'd actually bet in the other direction.

One day, I asked what her secret was.

In no uncertain terms she told me to look carefully at the world around me and, in particular, at magazine covers.

According to Mimi, they were the next best thing to a crystal ball. Because whatever is all over the covers is what's on top of the mind on the cocktail circuit — not to mention fodder for the masses…who are usually wrong.

Frankly, I thought Mimi had consumed one too many martinis. She loved them. Then, as my own career progressed, I began putting two and two together.

It turns out it wasn't the gin talking. Mimi was right.

Magazine Covers and the Stock Market

I've never forgotten Mimi's advice and still study magazine covers intently to this day because they help me latch on to important market shifts and trends that others either miss or simply don't see coming.

I am not so much interested in the stories themselves as I am in reading into the implications of headline copy. Many times I find out that what's being said in the headline isn't as important as what's being left unsaid.

For example, do you remember this magazine cover touting the "death of equities" from Business Week's August 13, 1979 edition?

To continue reading, please click here...

Investment Advice: 5 Ways to Conquer Gambler's Ruin

The relationship between investing and profits seems simple enough. You buy low, sell high and your portfolio grows — or so goes the story.

In reality though, success comes down to something called "Gambler's Ruin."

Most investors have never heard the term but understanding its implications can mean the difference between heartache and success, especially now.

Gambler's Ruin is a mathematical principle that deals with the preservation of assets – or, more accurately, the probability that you'll lose them over time.

Here's how it works:

Imagine that Player One and Player Two each have a finite number of pennies, which they flip one at a time, calling "heads" or "tails." The player who calls the flip correctly gets to keep the penny.

Since a penny has only two sides, it would seem on the surface that each player has a 50% probability of winning – and that's indeed the case for each individual flip.

But, if the process is repeated indefinitely, the probability that one of the two players will eventually lose all his or her pennies is 100%.

In mathematical terms, the chance that Player One and Player Two (P1 and P2, respectively) will be rendered penniless is expressed as:

  • P1 = n2 / (n1 + n2)
  • P2 = n1 / (n1 + n2)

In plain English, what this says is that if you are one of the players, your chance of going bankrupt is equal to the ratio of pennies your opponent starts out with to the total number of pennies.

While there are wrinkles in the theory, the basic concept is that the player starting out with the smallest number of pennies has the greatest chance of going bankrupt.

In the stock market the player with the smallest number of pennies is you… and me…and any other individual investor, for that matter, who is up against the big boys.

Investment Advice: Playing to Win

If you've ever been to Las Vegas or Monte Carlo, chances are you understand this at some level, if for no other reason than that the longer you stay at the tables, the greater the probability that you will lose.

Investing is much the same.

To continue reading, please click here...