September 2011 Archives - 3/10 - Money Morning - Only the News You Can Profit From
How to Buy Silver Stocks: Buy Silver Stocks
Right now, Silver investment prices are on a major tear. They are poised to break even higher by the end of the year.
And this report shows why that's not about to end any time soon – and exactly how far silver is expected to run.
In fact, silver could be the most lucrative precious metal of 2011.
Two Protective Currency Plays to Make Ahead of the Looming Recession
There's a hurricane headed for the U.S. economy, one that'll send stocks tumbling and rip gains out of your portfolios – especially if you aren't ready with some protective currency plays.
The "hurricane" I speak of is the looming recession.
You see, the U.S. gross domestic product (GDP) annual growth rate has fallen for the past four quarters. The last time that happened, in 2008, growth fell to a negative rate for the following six quarters.
So when the rate of growth starts to slope downward, and then stays in place for a couple of quarters, you can bet a recession is on the way.
Much like no one can prevent a hurricane, you as an individual investor can't prevent a recession. But you can calmly prepare for it well in advance, so you're ready for the worst – and that's exactly what we're going to do.
How to Defend Your Portfolio
There are four easy moves to make now to protect your investments from the looming recession:
To continue reading, please click here…
From Rogues to Riches: How ETFs are Lining Wall Street's Pockets – While Picking Yours
Maybe you didn't know that the rogue trader at UBS AG (NYSE: UBS) who lost $2.3 billion last week was trading exchange-traded funds (ETFs). Or that Jerome Kerviel, another rogue trader at Societe Generale SA (PINK ADR: SCGLY) who lost $7.2 billion in 2008, was trading ETFs.
Maybe you didn't know that ETF trading accounts for 35% to 40% of all exchange volume, according to Morningstar Inc. (Nasdaq: MORN).
Maybe you didn't know that the U.S. Securities and Exchange Commission (SEC), the U.S. Commodity Futures Trading Commission (CFTC), the Financial Stability Board (FSB) and the Bank of England (BOE) are each concerned that ETFs pose potential systemic risks.
Maybe what you don't know can actually hurt you.
ETFs: Growing Popularity, Growing Danger?
Just when you thought that exchange-traded funds were a simple, smart and safe way to diversify out of underperforming stock-and-bond mutual funds, along comes reality.
What these regulators and financial- stability oversight agencies are increasingly worried about is whether Wall Street's presumed good intention in creating these hugely popular investment vehicles is being undermined by unintended consequences.
But, let's not forget, we're talking about Wall Street, where unintended consequences are a rarity. The reality is that ETFs were originally conceived – and are increasingly being engineered – to ratchet up trading for the Street's own benefit.
And while you may not think that affects your investing or trading of ETFs, or your portfolio-diversification plans, you'll be surprised – and maybe even alarmed – to learn that you're wrong.
Let me explain …
Instruments of Diversification … Or Disaster?
ETFs started out as tradable alternatives to mutual funds. Initially, product portfolios consisted of stocks, or baskets of stocks, that replicated such key indexes as the Dow Jones Industrial Average, the Standard & Poor's 500, or the Nasdaq Composite Index.
The idea was to offer products that mirrored benchmarks – and that traded all day, like stocks. The tradability of these instruments offers effective liquidity that conventional mutual funds lack , with the added benefit that ETFs would also be easy to short.
Product offerings multiplied quickly. In addition to exchange-traded funds based on stocks, product sponsors created ETFs that replicated oil-and-gas, gold-and-silver and diversified-commodities portfolios – all of which were based on futures contracts.
A lot of ETFs started out as a cheaper alternative to futures trading. Futures traders must cover high initial-margin deposits. And positions are marked-to-market daily, which requires immediate additional margin coverage when losses arise. The upshot: f utures trading is too expensive and too volatile for investors who are used to traditional stock market investing.
Today, investors can find exchange-traded funds that offer exposure to all kinds of risk instruments – from currencies and bonds, to thin slices of the yield curve and volatility. And there are even "leveraged" and "inverse" ETFs that multiply risk exposure and allow traders to make all kinds of directional bets.
Now is the Season for Investing in Gold-mining Stocks
If you're not investing in gold-mining stocks now, you should be.
Analysts at TIS Group reminded me last week that not only are gold-mining stocks very cheap now versus gold bullion, but this also happens to be the best time of the year to buy the stocks.
The gold miners' cycle usually bottoms in August and peaks in March, putting us just a bit after the start of the strong period.
That makes it buying season for gold-mining stocks.
Play Gold's Rise by Investing in Gold-Mining Stocks
The rise in gold miners during last year's buying season was fairly dramatic.
From Aug. 31 last year through the following 14 weeks, the Market Vectors ETF Trust(NYSE: GDX), which is comprised of the larger miners, was up 28%, while Market Vectors Junior Gold Miners(NYSE: GDXJ), comprised of smaller producers, was up 48%.
Members of my service captured a bunch of those gains. That was at a time when gold itself was up only 20%, but looking back that was when gold started its trajectory from $1,300 in November to almost $1,900 now.
Gold-mining stocks then went sideways in anticipation of the end of the U.S. Federal Reserve's second round of quantitative easing (QE2) at the end of June, but have now broken out again, as the accompanying chart shows.
Why would the miners improve?
- Double Silver ETF
Why Traders Booed the Fed's "Operation Twist' – And You Should, Too
With "Operation Twist," U.S. Federal Reserve policymakers are attempting to use an old strategy to launch a new attack on the wheezing U.S. economy.
But the assault, announced after the central bank's Federal Open Market Committee (FOMC) meeting concluded yesterday (Wednesday) afternoon, isn't expected to have much long-term success.
"The way [Fed policymakers] handled this proves that the Fed doesn't have much power left," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "It tried to use big sweeping statements, and careful language … and it still didn't work – the market sold off … and traders [on the trading floor in New York] actually booed. They don't want this … they know it's bad."
As many expected, the central bank will use a derivation of a 1960 s initiative that's designed to "twist" the interest-rate "yield curve" by flattening it out. Between now and the end of June, the Fed will buy $400 billion worth of bonds with six-year to 30-year maturities while selling an equal amount of shorter-term debt with three -year maturities.
The Fed intended to rally markets with a sign of reassurance, but stocks failed to reverse their declines. The Dow Jones Industrial Average nose-dived 284 points, or 2.49%, the Standard & Poor's 500 Index skidded 2.94%, and the tech-laden Nasdaq Composite Index slumped 2.01%.
The market consensus: "Team Bernanke" has again made a move that will do more long-term harm than good to the U.S. economy.
Goldman Sachs Says Oil Prices Will Soar to $130 in 12 Months … We Told You That Weeks Ago
Wall Street heavyweight Goldman Sachs Group Inc. (NYSE: GS) is now predicting that oil prices will soar in the next 12 months, with London-traded Brent crude reaching $130 a barrel and U.S.-traded West Texas Intermediate (WTI) crude reaching $126.50.
The fact that oil prices will soar wasn't a surprise to readers of Private Briefing – we made a similar prediction to the charter subscribers of our new premium investment-advisory service six weeks ago.
Furthermore, we showed subscribers how to profit.
Goldman analysts really believe that oil prices will soar: From Monday's closing prices ($110.30 for Brent and $86.92 for WTI), the heavyweight investment bank's 12-month target prices for oil would represent an 18% gain for the London-traded crude and a 46% gain for its U.S.-traded counterpart.
Worries that the U.S. malaise and Eurozone debt crises would sap global demand have caused oil prices to fall from higher levels back in the spring. In its forecast, Goldman echoed some of the same points that we have made repeatedly to Private Briefing readers since it debuted back on Aug. 11 – namely that demand in China, India and other emerging markets would compensate for weak growth in the developed economies.
The bottom line: There's little doubt oil prices will soar. That makes oil-related stocks – and energy investments in general – "must have" portfolio holdings.
The only question is: How do you play it?
Here at Money Morning, and also in Private Briefing, our experts have said this time and again: The time to make energy-related investments is when energy prices are low. Although Private Briefing has been around for just a bit more than a month, subscribers who have followed our energy-related recommendations have already logged some nice returns of as much as 18%.
And there's plenty of upside to come.
Some of the energy-related columns that we've already published include:
Don't Get Stung by President Obama's Deficit-Reduction Plans
In the last 10 days, U.S. President Barack Obama has unveiled three distinct deficit-reduction plans to solve the nation's economic problems.
While all three have their good points, each has its own set of problems, too – including the time-consuming political firestorm we can expect to see as the plans are debated in Congress.
We can make some educated guesses about how this will all play out – and how the final plans will help or hurt the American economy. But the bottom line is that you as an investor can't wait to see how the deficit-reduction saga ends: You need to take action now.
So let's take a look at the proposals, the likely outcomes – and the moves you need to make immediately.
A Trio of Deficit-Reduction Plans
President Obama has unveiled three overhaul plans for the U.S. economy – a "jobs" plan, an "offset" plan and a "deficit-reduction" plan.
Of the three, the "offset plan" that calls for reductions in tax deductions is clearly the best. But there are some good ideas in the other deficit-reduction plans, too – not to mention a couple of real stinkers.
Here's a look at each of the three plans – the good, the bad … and the downright ugly.
The "Jobs" Plan: President Obama's jobs plan is a mix of spending on infrastructure and providing aid to state and local governments, both of which were tried in 2009 and didn't work.
Government infrastructure spending is appallingly expensive in the United States – in fact, it costs more than twice as much here as anywhere else – because of the additional restrictions on its design and labor usage.
However, the Obama jobs plan also included a 3% reduction in employees' Social Security contributions (expanding and extending the current one-year reduction of 2%). Finally, it included a 3% reduction in employers' Social Security contributions, but only for wage bills up to $5 million.
For me, it's the last provision that made most sense and should be extended. Reducing employers' Social Security contributions by 3% reduces the cost of labor – which should expand the demand for it.
Look at it this way: If the "price elasticity" of labor is 50% (estimates for this piece of economic jargon are all over the place, but 50% is about the midpoint), then a full 3% reduction in labor costs should increase demand for labor by 1.5%, or about 2.2 million jobs.
That would reduce the unemployment rate by about 1.2%, taking it from 9.1% to 7.9%. To me, that's well worth doing.
Naturally, the Social Security trust fund can't afford to do this every year, but it should certainly be done for two years, because employer-hiring decisions take time to implement (and because U.S. unemployment still will be higher than we'd like in 2013).
But that's not all. There should be no "Mickey Mouse" restrictions to $5 million payrolls – it's just as important to encourage hiring at McDonald's (NYSE: MCD) or Wal-Mart (NYSE: WMT) as it is to promote hiring at the local corner store.
The cost of this would be about $300 billion, and would be evenly split between 2012 and 2013.
This alone is such a good idea that you could probably abandon the rest of the so-called "stimulus."