Archives for December 2011

December 2011 - Page 5 of 8 - Money Morning - Only the News You Can Profit From

The "New" Biggest Threat to the Energy Industry

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The energy industry has a dangerous enemy that is getting stronger and more motivated to damage companies' operations and wreak havoc on global oil prices.

This new threat comes from the growing trend of cybercrime, and the criminals have become more focused on disrupting large industrial systems, like those operating in the energy industry.

Indeed, oil companies are reporting more frequent, better organized attacks on their systems. With most of the world's energy production and distribution controlled by computers, this puts the industry in an incredibly vulnerable position.

Executives say the repercussions of an attack that isn't stopped in time could be massively harmful.

"If anybody gets into the area where you can control opening and closing of valves, or release valves, you can imagine what happens," Ludolf Luehmann, IT manager at Royal Dutch Shell PLC (NYSE ADR: RDS.A, RDS.B), said at the World Petroleum Congress in Doha, Qatar. "It will cost lives and it will cost production, it will cost money, cause fires and cause loss of containment, environmental damage – huge, huge damage."

Crime Targets the Energy Industry

Cybercrime used to focus on hacking into systems to retrieve people's personal financial information. But now it's become more sophisticated and hackers more skilled, targeting more complex and protected systems to get highly classified information.

"The scene used to be dominated by speculative attacks – people being at the wrong place at the wrong time, but it was nothing personal," security researcher David Emm told BBC News. "But we certainly are in a different world than where we were 18 months ago. What we're starting to see is an increase in targeted attacks. We know critical systems, like those in oil production, are vulnerable to attack."

Shell's Luehmann told Reuters hackers are now unleashing attacks over longer periods of time, collecting more information than before to create more complex and resilient infections.

While other businesses can more easily shut down their information technology systems to update software security, the energy industry cannot simply turn off the oil and gas supply for long stretches of time. Any long disruption – from an attack or from trying to prevent one – wouldn't just affect one company, but the entire global oil market.

"Oil needs to keep on flowing," Riemer Brouwer, head of IT security at Abu Dhabi Co. for Onshore Oil Operations, told Reuters. "We have a very strategic position in the global oil and gas market. If they could bring down one of the big players in the oil and gas market you can imagine what this will do for the oil price – it would blow the market."

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Out of Answers, Federal Reserve Can Only Offer Empty Rhetoric

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The Federal Open Market Committee (FOMC) is scheduled to issue a statement at 2:15 pm. today (Tuesday), but don't expect anything other than more empty rhetoric.

Indeed, with few options remaining, the Fed is expected to produce little more than a statement designed to reassure the markets following today's meeting.

"If the Fed were smart, they would use this meeting to take decisive action," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "Sadly, though, I think they'll lay low and issue yet more hollow statements filled with information that at this point constitutes less than fluff."

At this point, few bullets remain in the Fed's chamber; interest rates have been near-zero for almost three years, and two programs of "quantitative easing" over the past two years have pumped $2.3 trillion into the U.S. economy.

In an attempt to show it was doing something to help the economy, the central bank said last summer that it would maintain rates at that level until mid-2013.

And while the Federal Reserve is not expected to announce immediate plans for more quantitative easing – QE3 – many believe some sort of accommodation, probably directed at the housing market, is coming next year.

"There is a 75% chance the Fed will buy mortgage-backed securities in the first half of the year, possibly by January," Lou Crandall, chief economist at Wrightson ICAP LLC, told MarketWatch.

A series of relatively positive economic reports in recent weeks – unemployment recently dropped to 8.6%, while consumer spending and manufacturing have edged upward – has eased the pressure on the Fed to take any more action this year.

As part of its strategy to maintain optimism in the markets, the FOMC will likely promise to pump more money into the U.S. economy at some point next year.

"The numbers are getting better, but not enough to keep [the FOMC] complacent," Crandalltold MarketWatch.

Word Games

Recognizing that its options are limited, the Federal Reserve instead will focus today on the one thing it can provide in near-limitless supply – words. Today's meeting is expected to focus on a new communications strategy that will offer more details on the Fed's goals for inflation and unemployment – its dual mandate – and how it plans to meet them.

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BubbleOmiX Predicts US Employment Will Climb By 5-Million Over Next 18-Months

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EconIntersect article of the week The essential theory of BubbleOmix is that Ying follows Yang or in other words What Goes-Around Comes Around. Putting aside all the doom and gloom about the recently released unemployment figures, there may be a silver line…tarnished but silver all the same. The important number is employment, that’s the demand […]

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No Debt and High Yield Make Automatic Data Processing Inc. (Nasdaq: ADP) a "Buy"

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Most people aren't incredibly familiar with Automatic Data Processing Inc. (Nasdaq: ADP), but it's a company every investor should know.

You see, ADP, which provides payroll and human resources services to businesses, has two important traits that investors need in their portfolios right now.

First, it has virtually no debt. Its unleveraged balance sheet has made it one of the few U.S. companies with a AAA credit rating from Standard & Poor's. It also has a perfect credit rating from Moody's Corp. (NYSE: MCO).

Companies with such a high rating from S&P are rare, and the number of countries with that rating is dwindling. Even the United States is no longer in the AAA group. But this isn't the only special category in which ADP belongs.

It's also a "Dividend Aristocrat." This is the title Standard & Poor's gives companies that boast a AAA rating and have a history of raising their dividends for at least 25 years. There are currently only three U.S. stocks that are both "Dividend Aristocrats" and have a AAA rating from S&P – two things investors should look for in this volatile environment.

That's why it's time to buy Automatic Data Processing, a debt-free, steady dividend payer with a solid future. (**)

Automatic Data Processing Inc.: Safe and Profitable

The once-deep list of U.S.-listed AAA companies has dwindled to a small group of four. I've recommended a couple of them before –Microsoft Corp. (Nasdaq: MSFT) and Exxon Mobil Corp. (NYSE: XOM). Johnson & Johnson (NYSE: JNJ) is the fourth.

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Latest Eurozone Debt Crisis Plan "Another Grand Illusion"

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As European leaders celebrated a tentative agreement to accept tougher budgetary rules among its members, critics expressed doubts the plan would cure the two-year-old Eurozone debt crisis.

Last week's highly anticipated two-day summit resulted in 26 of the 27 European Union (EU) nations – the United Kingdom objected – agreeing to create a new treaty that would require members to keep budget deficits to within 0.5% of gross domestic product (GDP) in good economic times and within 3% of GDP in bad times.

EU governments would need to submit their budgets to a central fiscal authority, and violations would carry automatic penalties. The nations agreed to hammer out the details by March of next year.

World stock markets reacted positively, but many experts remain unconvinced that the EU has finally delivered the silver bullet needed to slay its monstrous debt crisis.

"They needed to create grand plan that's really workable and not another grand illusion," said Money Morning Chief Investment Strategist Keith Fitz-Gerald. "I'm afraid what we're getting is just another grand illusion."

In fact, last week's meeting was the fifth summit called to deal with the European debt crisis since 2009. Each has produced its share of optimistic rhetoric, but no concrete solutions.

European leaders from France, Germany, the European Central Bank (ECB) and the International Monetary Fund all hailed the summit agreement as a major step toward getting the debt crisis under control.

"This is the breakthrough to the stability union," said German Chancellor Angela Merkel at the end of the summit. "We are using the crisis as an opportunity for a renewal."

"It's a very good outcome for the euro area, very good," added ECB President Mario Draghi "It is going to be the basis for much more disciplined economic policy for euro-area members."

Fitz-Gerald said Europe's leaders mean what they say, but ultimately the latest summit will do little more than spark a brief rally in the markets.

"These government officials still don't get it," Fitz-Gerald said. "They're still not addressing the underlying problems. We'll be having this conversation again next year."

A Tough Sell

Although enforcing budgetary austerity would help prevent current debt problems from getting worse, it's unlikely the citizenry of most EU member nations will allow it to happen.

"Their proposal is preposterous," writes Brett Arends of MarketWatch, likening the EU plan to the United States allowing its largest creditors, Japan and China, control over the federal budget.

"How would you feel if you opened the paper to be told that the new Sino-Japanese "Fiscal Stability Commission' in Washington had just slashed your grandma's Social Security checks by one-third, scaled back federal highway repairs, and that it would impose a 10% national sales tax?," Arends said. "That is, after all, effectively what is being offered to the people of Greece, Italy, Spain, Portugal and Ireland."

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The BRICs Will Be Dead Weight in 2012 - Invest in These Five Emerging Markets Instead

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Don't let the headlines fool you, there's lots of money to be made in global investing in 2012.

You're just going to have to be careful – more so than in years past – because right now the line drawn between successful markets and markets that are in danger of collapse is treacherously thin.

Take the fashionable growth markets, the BRICs – Brazil, Russia, India and China – for example.

Dead Weight

It's been 10 years since Chairman of Goldman Sachs Group Inc. (NYSE: GS) Asset Management Jim O'Neill coined the BRIC acronym. His recommendation was certainly effective – one of the best of all time, even. But today, all four BRIC countries face problems, and their troubles illustrate the dangers of following investment fashions.

Just take a look:

  • China appears the least troubled of the four BRICs. However, it looks to be facing a recession, inflation is approaching double digits and there is a massive bad debt problem in the banking system. Too much money has been invested in uneconomic rubbish – "malinvestment" as the Austrian school of economics calls it. My own guess is that China will do fine long-term but you probably don't want to invest until the size and shape of its problems is clear.
  • India has a government that can't stop spending, inflation over 10% and huge corruption. Furthermore, its stock market is still pretty inflated. I wouldn't put much money there until the government changes. Contrary to what you read in the media, almost all the real liberalization progress came under the Vajpayee government of 1998-2004, which the Indian electorate then ungratefully threw out. I'd want an Indian government without the corrupt socialist Congress Party before I'd invest; only then could I be sure that Indian gains would not be poured down a rat hole.
  • Brazil has been run by big-spending socialists since 2002 and has been immensely lucky to benefit from the commodities boom. Now the boom has topped out (probably temporarily) but its government is still overspending and has begun to harass foreign investors. Brazil is in big trouble if commodities prices fall.
  • In Russia, Vladimir Putin will become President again next March. Need I say more? Like Brazil, Russia has benefited immensely from the commodities boom (in its case, primarily the run-up in oil prices). However, it treats foreign investors even worse than Brazil does, it is even more corrupt and it appears to be running out of money.

MM Outlook 2012
If the BRIC's prospects are bad, those of much of Europe are even worse.

The Eurozone's debt problem could have been solved early on by throwing Greece out of the euro (a much deserved punishment). However European authorities have now thrown so much money about in such unproductive ways that it's doubtful whether the euro is even salvageable anymore.

A recession in 2012 seems unavoidable, although Germany may benefit from the problems of its trading partners (if it is not forced to bail them out). Well-run European Union (EU) members that are not part of the Eurozone, such as Poland, may also benefit from the chaos, although Poland's current foreign minister Radek Sikorski doesn't seem to think so.

Japan has done so badly for so long that it may be impossible to revive. If public debt were still at the level of a decade ago, Japanese shares would be a screaming buy, as the market is at a quarter of its 1990 peak. However, with debt around 220% of gross domestic product (GDP) and no sign of the country's budget problems being solved, it may be nearing the point of no return and eventual debt default. On the whole, it's best avoided.

Apart from the United States, that leaves one obvious rich-country market, []

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China's Economy 2012 Report:
Here's Why (And Where)
Your Money Should Be In China

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Despite the recent downturn in China's stock market, investors need to remain focused on the profit-generating long-term growth potential of the Asian powerhouse.

The Shanghai Composite Index is down about 10% on the year, compared to a drop of less than 1% year-to-date for the Standard & Poor's 500 Index.

Chinese exchange-traded funds (ETFs), a popular way for U.S. investors to dip their toes into the Chinese stock markets, were off an average of more than 21% for 2011. That's a big shift from 2010, when the average China fund gained 13%, or 2009, when the average gain was an eye-popping 64.5%.

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The Hidden Lesson in U.S. Gas Exports

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It's the sort of headline that drives the barflies at my family's bar in Baltimore just crazy.

See, to them, it defies logic…

In September, the U.S. exported 430,000 more barrels of gasoline than it imported. The country is now on track to become a net exporter of refined oil products for the first time in 62 years.

Meanwhile, domestic prices at the gas pump are poised to rise to record levels.

Combine those two facts, and it appears you have a paradox.

The barflies blame government… oil companies… even the bartender… (we do have to factor shipping costs into beer prices).

"How," they ask, "can we export so much gasoline, but gas prices are going through the roof?"

After suggesting an answer, I explain they need to ask another question…

They should consider this: "Why aren't they investing in companies poised to profit from this situation?"

You see, while consumers and politicians will spend all this time pointing fingers over this story, a real lesson on the energy markets continues to emerge…

And it's a lesson that savvy investors and readers of OEI have heard before: Where and how to profit when news like this breaks.

Nothing New to See Here…

Since the inception of Oil & Energy Investor, Kent has written at length about the new age of domestic energy production taking place in the United States.

And why?

Because it's the biggest energy story to hit our shore in decades…

New oil and gas shale plays across the rural United States have provided access to a wealth of new supplies once considered unattainable. The levels of production will allow the U.S. to export more natural gas within the next few years, thanks to large-scale projects like Cheniere Energy's Sabine Pass terminal in Louisiana.

And then, over the weekend, we learned that the U.S. refiners are producing excess levels of gasoline on our shores, even as overall demand for the fuel has dropped.

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Don't Let Uncertainty Scare You Out of the U.S. Stock Market

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Compared to its foreign counterparts, the U.S. stock market is one of the best performers this year – even though some nervous investors may find that hard to believe.

The Standard & Poor's 500 Index is basically flat so far this year, but that's a far better performance than the double-digit losses in other markets.

The French and German stock markets are down about 18% and 21%, respectively. Japan has plummeted nearly 15% in the aftermath of the crippling earthquake and tsunami, and China's Shanghai Composite Index has plunged about 17%.

Even emerging markets, where growth is not as stunted as some major developed economies, have struggled. India's index is down about 18%, and Brazil's 16%.

"The U.S. is the best house in a bad neighborhood," James Dailey, manager of the TEAM Asset Strategy Fund, told CNN. "A lot of it has to do with the policy decisions and politics around the world and that's very discomforting."

A major factor in weak market performance has been the Eurozone debt crisis. The lack of resolution has been rattling investor nerves for months, and will not go away in the New Year.

"The real structural problems facing Europe are going to require wholesale lifestyle changes that won't get done in a year or two," said Money Morning Capital Waves Strategist Shah Gilani. "European Central Bank meddling will only serve to extend the problem while they pretend things will sort themselves out."

Another year of Europe's problems plaguing economies has created a market environment filled with too much uncertainty for many investors to be comfortable.

"That's led to a lot of paralysis," said TEAM fund's Dailey. "Investors are walking away from stocks and raising cash."

A weak U.S. economic outlook for 2012 is also steering investors away from markets.

The Organization for Economic Cooperation and Development (OECD) estimates U.S. growth will slow to 2% next year, down from a 3.1% estimate in May. Of course, these forecasts are contingent upon Congress finding a way to stimulate the economy and tighten fiscal policy – not an easy balance to achieve. Without such action, U.S. economic growth next year could be as slim as 0.3%, and only hit 1.3% in 2013.

What investors need to know despite this dismal forecast is that the lack of growth does not mean a lack of profit opportunities. There are still investments that will boost your portfolio – if you know where to look.

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Gold Price Outlook 2012: Miners Will Shine as Prices Soar

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Despite a pullback from its all-time high of about $1,920 an ounce set in September, gold is still trading in the $1,750 range. In fact, the glittering metal has gained 22% in the past 12 months.

What's more is that I believe gold prices will eclipse $2,200 an ounce next year, and shoot beyond even $5,000 an ounce after that.

So there's obviously still time to get in on this once-in-a-lifetime bull-run, if you haven't already.

Of course, every investor should at least have shares of a gold-based exchange-traded fund, but if you really want to profit from the price surge, you ought to look at gold mining companies.

Let me explain.

A Golden Opportunity

While gold prices have surged 22% over the past year, gold mining stocks have lagged curiously behind over that period.

The Amex Gold Bugs Index, a weighted benchmark made up of 16 of the world's largest gold and silver mining companies, began the year at 540, and after numerous troughs and peaks, we're back near those same levels.

Normally, gold stocks will leverage gold on a 2-for-1 basis, but in this case, we've seen miners move sideways as gold has advanced.

Yet with gold's price powering skyward, the gold miners have seen their margins expand, making them very profitable at current levels. That makes them absolute steals at these prices.

You don't have to take my word for it, either. Just look at what industry insiders are saying.

"A substantial disconnect has developed between the price of gold and the mining companies," said David Einhorn of Greenlight Capital. "With gold at today's price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk-adjusted returns even if gold does not advance further. Since we believe gold will continue to rise, we expect gold stocks to do even better."

Portfolio managers Michael Bowman and Allan Meyer of Wickham Investment Counsel Inc. concur.

"We are now finding a large number of gold stocks are hitting our value screens, something that has been unheard of in the past," said Meyer.

What else are experts noticing?

Well, as gold prices have risen and stayed high, the price/earnings (P/E) ratios of gold miners have been cut in half. That means the sector as a whole is at as compelling a value as it's been in three years. And with the price of gold set to rise still higher on the back of incessant money printing in the United States and Europe, these miners are only going to get more profitable.

How high is gold likely to go?

My own research tells me we should expect gold to easily reach $2,200 in 2012.

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