Archives for November 2011

November 2011 - Page 7 of 9 - Money Morning - Only the News You Can Profit From

What I Learned From My Lunch with Vikram Pandit

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I've long been bearish on bank stocks and financials – but something happened last week that made me rethink my position.

I was having lunch with Citigroup Inc. (NYSE: C) Chief Executive Officer Vikram Pandit, and he had some interesting points.

According to Mr. Pandit, providing money and financial services to business is still a pretty attractive undertaking on a global scale.

Of course, he was also quick to mention that top quality risk controls and much higher liquidity are absolute necessities.

"Banks need to realize they are in a new reality," he said.

He couldn't be more right.

I warned you back in August that bank stocks were headed for a "catastrophic decline," and that proved to be true.

Since that article's Aug. 17 publication, Bank of America Corp. (NYSE: BAC) has tumbled 12.7%, Goldman Sachs Group Inc. (NYSE: GS) fell 9.9%, JPMorgan Chase & Co. (NYSE: JPM) is down 5.5%, and Morgan Stanley (NYSE: MS) is down 2.1%.

In fact, the MSCI US Investable Financials index is down 12.6% on the year and has achieved a less-than-stellar return of -12.6% per annum over the last five years.

And it's not hard to see why.

Third-quarter bank earnings were mediocre at best, and some of the special protections offered to banks are being wound down. Additionally, banks are in popular odium and demonstrations against them are erupting in every major U.S. city. And the effects of increased regulation are yet to come fully into view.

Still, for the first time since the stock price "bounce" of 2009, bank stocks are beginning to look somewhat attractive and the time to start bottom fishing may be at hand.

Banks Worth Buying

For those few banks with genuine global networks, international banking remains on a growth curve as globalization intensifies and more emerging market companies diversify outside their own country and region. Domestically, retail banking remains a good business. Credit card losses are beginning to decline while spreads remain at record levels.

Consequently, there are very good bargain-buying opportunities at large.

Remember, though, that any investment should be made gradually over time, because while the chances of a repeat of 2008 are remote — at least in the United States — there is still a great deal of risk and uncertainty in the banking sector.

You should avoid banks with large exposures to problems of the past. That means staying away from Bank of America and Wells Fargo & Co. (NYSE: WFC). Both of these banks remain heavily exposed to West Coast real estate, and in BofA's case, to the mortgage-backed securities disaster, as well.

However, the following financial firms are worth looking at:

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Stalling German Economy Will Throw Gasoline on Eurozone Debt Fire

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Germany's economy is slowing dramatically, an unwelcome turn of events that will put even more strain on existing fractures in the European Union (EU) as it struggles to cope with its ongoing sovereign debt crisis.

Last month a consortium of eight leading economic institutes slashed their forecast for German economic growth in 2012 by more than half, from 2% to 0.8%.

That decision was validated yesterday (Monday) when Germany reported a 2.7% drop in industrial production for September. That's the biggest drop since February 2009, and triple the decline that analysts had expected.

Worse, such a decline will make it even tougher for Germany, which has supplied the bulk of the bailout money that's prevented the Greek debt crisis from triggering a global financial meltdown, to play the role of hero in the European debt crisis.

"This is very, very serious on a lot of levels," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "If Germany drops into recession the pressure on German banks will be extreme."

Fitz-Gerald said that the banks, as well as the German people, most likely would want to "bring their money home" to address Germany's own economic needs.

Of course, the loss of its greatest benefactor will have dire consequences for the Eurozone.

Fitz-Gerald thinks the situation could even reach a point where Germany would opt out of the common euro currency to save itself.

"Everyone's been talking about Greece leaving the euro," Fitz-Gerald said. "But Germany leaving is a real possibility, depending on how bad it gets. It's no longer inconceivable."

Catching the Contagion

Germany's economy is faltering mainly because of the problems plaguing its Eurozone partners. A report last week showed that orders for German industrial goods from other Eurozone members fell 12.1% in September following a 1.4% drop in August.

"German industry has finally caught the crisis virus," Carsten Brzeski, an economist in Brussels for ING Groep NV (NYSE ADR: ING), wrote in a research note. "The financial turmoil and the economic slowdown in other Eurozone countries have obviously spoiled the appetite for goods made in Germany."

Many economists now are worried that the entire Eurozone is heading into a recession, which will make it harder for countries like Germany and France to help struggling Portugal, Ireland, Italy, Greece and Spain (PIIGS).

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Brent Crude vs. Light Sweet Crude: A Nice Pair For A Weaker Euro

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Economic Global Intersection Article of the Week Last weekend, a good friend who manages money at Bank of America inspired me to think about the Euro currency. He asked if this is a good time to time to short the Euro currency (or EUR/USD)? What follows are my conclusory thoughts on the matter. Follow up: […]

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Moribund IPO Market Won't Get Much Help from Groupon

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With stock market volatility suppressing initial public offerings in recent months, many were hoping Groupon Inc.'s (Nasdaq: GRPN) splashy IPO on Friday would spark a revival.

But analyst skepticism over Groupon's long-term prospects and lingering fears over the European debt crisis, as well as the tepid U.S. economy, mean that the dry spell for the IPO market will stretch on into next year.

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Niska Gas Storage Partners LLC (NYSE: NKA) Can No Longer Afford Its High Payout

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Niska Gas Storage Partners LLC (NYSE: NKA) at one time was a great way for investors to play the natural gas market.

The company is designed to pay back a high percentage of its cash flow, as its stock pays a $1.40 dividend that equates to a whopping 12% yield.

Unfortunately that won't be the case much longer. Niska's cash flow has stalled, and the company doesn't expect to generate enough cash in this fiscal year to maintain its dividend.

The problem simply is that the price for natural gas currently is cheap and it won't be headed higher anytime soon.

You see, to cover its basic costs, Niska needs the price difference, or spread, between current natural gas prices and January future prices to be about $1.00. Those spreads right now are around 47 cents – quite a fall from the January 2010 spreads of $1.50.

"[W]e anticipate weaker financial results of the full fiscal year ending March 3, 2012 due to continued deterioration in market conditions," Interim Chief Executive Officer Simon Dupéré told investors Nov. 3. "[W]e expect low seasonal storage spreads, combined with reduced volatility, to have a more pronounced negative impact on our financial results through the third and fourth quarters."

The stock is down 45% so far this year. It could rise again, when natural gas prices increase and improve the cost of storage – but that doesn't look like it's going to happen in the near-term.

Still, with the share price so low, it's not an ideal time for investors who are long on the stock to sell it.

That's why investors should hold Niska Gas Storage Partners LLC (**) – until U.S. natural gas prices rise again, making storage business models more attractive.

Natural Gas Storage a Tough Business – For Now

The United States has the largest natural gas storage facilities in the world. This allows it to easily capture cheap natural gas produced in the summer and store it for the peak winter months, when increased demand exceeds production and prices climb.

Niska Gas Partners provides over 204 billion cubic feet (bcf) of storage facilities, with an estimated additional 12 bcf of future storage being brought online in the near term.

But natural gas storage investments aren't very profitable – right now.

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Obama's Housing Plan: Subsidizing the Terminally Stupid

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President Obama on Oct. 24 announced yet another housing bailout.

This time, borrowers who are underwater by more than 25%, are on time with their payments, and have Fannie Mae/Freddie Mac mortgages dating before March 2009 will be allowed to refinance their home mortgages at cheaper rates.

That looks to me like subsidizing the terminally stupid.

Housing loans are non-recourse in most states. So if you're underwater on your home loan by more than 25% and you're paying an above market interest rate of say 6% on your loan, you're paying around 10% of the value of your house to the bank every year (including principal) while being unable to move. Since rental yields are in the 4% to 6% range, you'd be much better off walking away from the house, taking the hit to your credit rating, and renting for a few years.

The problem with all these federal schemes to assist underwater homeowners is that they prevent the market from clearing. That leaves an overhang of properties with owners who either cannot pay the mortgage or have a mortgage hugely larger than the value of their home.

In a free market, a tsunami of foreclosures would have occurred by now, and buyers could be sure that a price bottom had been reached. But in today's market, even though the S&P/Case-Shiller 20-city home price index has shown signs of bottoming out, buyers know there is a lot of artificial support being applied and have no assurance that the market won't lurch downwards again after they have bought.

Yet, economically, conditions are right for the housing market to bottom out.

Third-quarter gross domestic product (GDP) was up at a 2.5% rate, and, more importantly, private sector output rose at a 3% rate. That isn't a raging boom, but it shows that there is no immediate prospect of the economy sliding back into recession.

Interest rates are close to record lows. House prices, having returned on average to about 2002 levels, are now as affordable as they were at the bottom of the last downturn in the early 1990s.

The rental market also is showing considerable signs of strength. Economic recovery and an uncertain housing market are driving people into renting and pushed rents up. That, together with the overhang of pre-foreclosure homes, is now the principal obstacle to further housing recovery.
Of course, in the more economically vibrant areas of the country, such as the Mountain states and Texas, where unemployment is low, both home purchase and buy-to-rent deals are very attractive for those who can obtain mortgage finance.

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Bank Of America Settlement: The Latest News

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The Bank of America has not been having a good time. The recession pushed the bank down right down to its knees and its take a long time to get back again. But now it’s been hit hard with several whopping lawsuits that threaten to dent its bottom line and its reputation in the long run.

Lawsuits Galore In 2009-2010

In the shaky economy, the Bank of America had foreclosed on several homes all over the US due to non payment of dues. According to homeowners and recent disclosures, these foreclosures could have been illegal and carried out due to an automatic rubber stamping process that resulted in a huge subprime mortgage problem that resulted in a housing crash. The Attorney General has now filed suit against the Bank of America, JP Morgan Chase, Citi, Ally Financial and Wells Fargo, as well as the MERS corp alleging that they indulged in deceptive trade practices and fake documentation to push the foreclosures through. At present apart from the above mentioned banks, seventeen major banks are facing a lawsuit over the mortgage issues and the subsequent losses that were experienced by lending companies. A bank of america settlement might be possible but it still has to be negotiated through.h In a separate case, the US BANCORP association filed suit against the Bank of American stating that the Bank must buy back its present mortgages. They are currently arguing that the loans were made without proper documentation. The Bank of America had acquired Countrywide, a subprime lending giant in 2008 and most of these loans were theirs. The Association states in their suit that as soon as the loans were sold to US BANCORP, the loans started to default at an alarming rate and these loans where all set up by Countrywide. Countrywide cost about $4 billion to purchase but the subsequent losses from its acquisition have hit a mind boggling $30 billion.

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Gold Price Conspiracy: What Uncle Sam Doesn't Want You To Know

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Is it really so preposterous to believe the United States and Europe would conspire to keep pole position in the global financial system?

I don't think so – and neither does China.

That much was revealed in a diplomatic cable recently uncovered by Wikileaks.

According to the 2009 cable from the U.S. embassy, China believes the United States and Europe have, as a matter of policy, suppressed the price of gold to discourage its use as a reserve currency.

And there's a pretty compelling case to be made for a gold price conspiracy.

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Grow Your Personal Wealth By Piggy-Backing on Emerging Markets

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It may be hard to believe that people are getting wealthier these days, but they are – just not in the United States.

No, the growth in personal wealth that we're seeing today is taking place in emerging markets half way around the globe – far removed from the employment and debt problems plaguing the West.

Brazil, Chile, China, Colombia, India, Indonesia, Malaysia and South Africa over the past decade have all posted annual gains in individual wealth of more than 10% – and some well in excess of even that figure.

That compares to growth of just 5% in that period for the United States, Japan, and Europe.

What these growth ratessignal is a trend toward steadily increasing purchasing power – as well as consumption and investment – among the people in the world's emerging nations. That means growing markets and increased profits for businesses and financial institutions.

It also means more moneymaking opportunities for savvy investors with the foresight to ride the trends along with them.

Where's the Wealth Growing?

To uncover the best ways to profit, we must first find where the wealth is growing the most – and where it will keep rising.

The McKinsey Global Institute (MGI), a consulting firm specializing in management and economic research, maintains an index of the world's leading urban centers, known as the City 600. MGI reports the 600 cities in that group – 380 of which are in developed nations, including 190 in North America – currently generate just more than half of global gross domestic product (GDP).

However, by 2025, that percentage will increase to 60% of global GDP, and 136 new cities will move into the top 600. All 136 will be located in developing nations – with 100 from China alone – displacing North American and European cities.

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