Archives for July 2011

July 2011 - Page 2 of 8 - Money Morning - Only the News You Can Profit From

U.S. Debt Default Would Be Worse Than Lehman Brothers Collapse

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Each day that passes without a deal to prevent a U.S. debt default brings the United States closer to a financial calamity that would be more severe than the failure of Lehman Brothers in 2008.

Dueling speeches from U.S. President Barack Obama and Speaker of the House John Boehner, R-OH, Monday night did nothing to resolve the impasse between Republicans and Democrats over how to reduce budget deficits and raise the debt ceiling past the $14.3 trillion limit by Aug. 2.

The contentious rhetoric of recent days has raised concerns that lawmakers will fail to reach a compromise by the deadline – with disastrous consequences.

"I've never, never seen a breakdown like this," Paul Light, a U.S. government scholar, told Reuters. "This is a defining moment in America's inability to act."

Should the deadlock over avoiding a U.S. debt default endure past Tuesday's deadline, it will trigger a financial crisis of vast proportions:

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The Debt-Ceiling Debacle: Three Investments to Make Before Washington Disfigures Your Portfolio

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One night at dinner a few years back, my Dad, Greg Fitz-Gerald, explained exactly why the "tax-takers" in Washington think that recoveries, bailouts, negotiations and stimulus packages are a good idea – while the taxpayers believe just the opposite.

"When you rob Peter to pay Paul, Paul generally thinks this is a good idea," he said.

When we look at the debt-ceiling debacle that's unfolding in Washington, you can see exactly what my Dad was saying. That's why I'm not going to mince words here: The debt debate is a complete sham and an utter disgrace. A costly reckoning is headed our way.

The country can't avoid the fallout.

But you can.

In fact, I'm going to show you three moves that will help you dodge the worst of the damage – and perhaps even profit.

Appalled and Disgusted

That our tax-taking leaders would play political chicken with our national wealth and our future is appalling and disgusting.

The sad thing is "they" could fix this in a New York minute if they really wanted to. It wouldn't be pretty nor would it be the "best solution," but it would be a start – especially when it comes to the bond markets, which are blithely going about their business.

Evidently somebody has forgotten to tell the traders who run this $3 trillion party that their world is about to change. The very notion that we should have stability flies in the face of everything we know about the political incompetence that now threatens it.

Moreover, Lipper Inc. notes that bond market inflows are about $4.46 billion a week – and that's just the taxable stuff. There's another $99 billion worth of two-year notes on the block this week, and they're all likely to be purchased by investors seeking "safe-haven" investments.

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Second-Quarter Earnings Prove "Glocal" Companies are the Best Investments

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The second-quarter earnings season has delivered some healthy activity, but the true standouts are the big U.S. companies that have learned to profit from emerging markets.

These are what Money Morning Chief Investment Strategist Keith Fitz-Gerald refers to as "glocal" companies – firms that have a global and local presence. And they offer investors a way to profit from emerging-market growth, while also safeguarding against turbulence at home.

Indeed, as U.S. debt issues continue to weaken the U.S. dollar, "glocal" companies are profiting from increased exports, selling to markets like China and India and their growing middle class.

So, let's look at some of the most promising prospects.

Earnings Season Shows Boost in Profit from Emerging Markets

So far this season, earnings at companies in the Standard & Poor's 500 Index are the highest they've been in four years, according to S&P analyst Howard Silverblatt. About 75% of companies that have reported have exceeded analysts' expectations, and many raised earnings' forecasts for the rest of the year.

Earnings per share are up 19% from a year earlier for the 122 S&P companies that reported earnings as of July 22. And much of the increase is from companies with strong exposure to emerging markets.

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Money Morning's Debt-Crisis Survival Guide

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In The Wall Street Journal today (Tuesday), the lead story begins with the statement: "Financial markets on Monday began taking seriously the prospect of a downgrade of the U.S.'s triple-A credit rating, which it has held for nearly a century."

Unfortunately, that's a true statement: Many investors are just now starting to take seriously the possibility of a downgrade on the federal government's credit rating.

But I'd be willing to wager that this group of newly panicking investors includes very few Money Morning readers. After all, we've been warning you about this fallout for quite some time.

Not only that, we've been detailing moves investors can make to defend themselves – and in some cases, even profit.

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Brace for the Worst as Debt Ceiling Crisis Deadline Nears

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If Washington lawmakers don't beat the debt ceiling crisis deadline, we'll see plummeting stocks, soaring interest rates, a slumping dollar and a severe shock to the weak economy.

All of which will hit you in the wallet – and hard.

Most investors are not prepared for the consequences of the failure of U.S. lawmakers to agree on a plan that will raise the federal debt ceiling before the Aug. 2 deadline.

Few believed it even possible, but with only a week to go Congressional leaders and U.S. President Barack Obama are no closer to a deal than they were several months ago.

"We may have a few stressful days coming up – stressful for the markets of the world and the American people," William M. Daley, President Obama's chief of staff, admitted on the CBS program Face the Nation on Sunday.

Until recently, the markets have kept a cool head – most analysts have assumed government officials would reach a compromise in time.

But when negotiations between President Obama and Speaker of the House John Boehner, R-OH, broke down over the weekend, the possibility of a U.S. default suddenly grew frighteningly real.

"There has been this expectation that at some point, they'd come up with a deal, but given the failure this weekend, I think market confidence is eroding," John Canavan, a market analyst at Stone & McCarthy Research, told The New York Times.

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Safe-Haven Currencies: If You Want to Flee the U.S. Dollar, Here Are Four Places to Hide

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As a young British banker in the inflation-ridden 1970s, I got used to carrying large amounts of German deutsche marks, Swiss francs and Japanese yen in my wallet – to have some security against the lousy performance of the British pound sterling.

While paying for a pizza in London with this foreign cash was difficult, having those "safe-haven" currencies in hand helped me sleep at night.

We've reached that point again. In light of the escalating debt-ceiling debacle that's unfolded in Washington, the potential for a U.S. credit-rating downgrade no matter the outcome, and the likelihood that a long stretch of dollar-killing stagflation is headed our way, it's time to take refuge in today's safe-haven currencies.

And I'm going to show you the safest of those safe havens.

The Battle-Damaged Greenback

I know that many of you are extremely worried about what will happen if Standard & Poor's downgrades U.S. Treasury debt from its top-tier AAA credit rating.

But I'm telling you that there's a much bigger cause for concern. While I concede that having our federal debt lose its top-tier credit rating wouldn't be good, the bigger cause for concern is what happens to us if the U.S. dollar stops being regarded as AAA – meaning it's no longer good for settlement of all international transactions.

If that happens, you have to ask yourself two questions:

  • What would be the impact on the U.S. and world economies?
  • And, even more importantly, what would investors like us need to do?

The answer to the first question is clear: The fallout will be worse than you imagine. And that means that, even now, you need to be searching for refuge in the very best of the world's safe-haven currencies.

With the Aug. 2 deadline for raising the debt ceiling approaching fast, the U.S. dollar took another beating and fell against safe-haven currencies yesterday (Monday), after Washington failed to reach agreement on the nation's $14.3 trillion debt ceiling. The Swiss franc actually reached an all-time high against the dollar, which has slipped 25% against that currency in just the last 12 months.

What a lot of folks don't realize is that the fate of the U.S. dollar is closely tied to that of U.S. Treasury bonds. If U.S. inflation takes off to serious levels – as I'm almost certain it will – both Treasuries (except Treasury Inflation Protected Securities, or TIPS, which are inflation-protected) and the dollar will tank simultaneously.

After all, the United States has been running balance-of-payments deficits of $500 billion or more for almost a decade now – much longer than the country has been running $500 billion budget deficits.

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Don't Miss the Chance to Profit from the Silver Price Rebound

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Anyone who thought the silver bull-run ended with the metal's recent price slip should think again, because there's a silver price rebound about to take off.

Silver prices dipped more than 20% in May after testing $50 an ounce, but Washington's lack of progress on the debt ceiling debate has rattled investors, sending them once again to the safe havens of gold and silver.

Silver futures for September delivery closed yesterday (Tuesday) at $40.361 an ounce on the Comex division of the New York Mercantile Exchange (NYMEX).

"Silver is obviously on the move," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Thanks to continued fiscal follies, it has come screaming out of the proverbial hole it dug for itself a few weeks ago. In fact, barring some sort of massive financial reckoning in Washington, I have absolutely no doubt in my mind that silver will hit $60 an ounce in the near future."

But interested investors can't hesitate if they want make the most of the silver price rebound, as the metal has started climbing back toward its record high of $50 an ounce.

"If [silver] is something that interests you, don't dilly-dally…you may be running out of time," said Fitz-Gerald.

Silver's safe-haven investment appeal hasn't just attracted investors, but also foreign economies that are losing faith in the U.S. dollar and are now trying to diversify from the greenback.

"Don't forget, it's not just our debt that matters, it's what other people think about our debt," Fitz-Gerald said last week during a guest appearance on FoxBusiness' "Varney & Co." program.

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USA Debt Crisis: Is There Any Truth?

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Global Economic Intersection article of the week This morning the NY Times covered the division within the economic community over the way out of the USA's overspending / balance budgeting. "Reasonable people can sit down and, apart from any political or policy motivations, come up with different answers," said Robert S. Chirinko, a finance professor […]

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Microsoft, Intel and Cisco Follow Path Predicted in 'Leaders to Laggards' Series

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Money Morning subscribers who read our Leaders to Laggards series on the flagging fortunes of Microsoft Corp. (Nasdaq: MSFT), Intel Corp. (Nasdaq: INTC) and Cisco Systems Inc. (Nasdaq: CSCO) weren't surprised by subsequent developments, since we told you exactly what to expect.

The Leaders to Laggards articles described how each company's failure to anticipate changes in their markets undermined their ability to grow revenue. Consequently, their stocks – which many investors rode to massive profits in the 1990s – have languished for the past decade.

Those tribulations have continued since the publication of our series. Microsoft and Cisco have struggled mightily, and as predicted, only Intel has managed to make headway.

Why Intel Is Still a 'Buy'

Intel surprised Wall Street with better-than-expected earnings last week – its standout divisions pointing the way to the future growth that for years had eluded the company.

Profits were up 2%, while revenue jumped 21% year-over-year. And gross margins edged up to 64% from 61% in the previous quarter.

Revenue from data centers, which provide the infrastructure for the cloud-computing trend that is now beginning to dominate mobile devices such as tablets and smartphones, was up 15.2% and accounted for nearly 20% of total sales.

Intel sees data centers as a major source of growth. The company expects sales to rise to $10 billion this year and to $20 billion within five years.

An even bigger surprise was the strength in the chipmaker's PC business, which accounted for 64% of Intel's revenue. Sales of the PC division rose 11% despite sluggish growth of about 2.5% in the overall PC market.

"We knew that there would be strength in the servers, but to see double-digit growth in their PC unit is great," Michael Shinnick, a money managerat Wasatch Advisors Inc.,told Bloomberg News.

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