Archives for February 2012

February 2012 - Page 4 of 11 - Money Morning - Only the News You Can Profit From

Apple's (Nasdaq: AAPL) Meteoric Rise is Distorting Everything

It happened almost a year ago, and it's happening again.

The meteoric rise in Apple Inc.'s (Nasdaq: AAPL) stock price is distorting the major benchmark indexes, including the Nasdaq-100, the Nasdaq Composite, and the S&P 500.

That is still true even though the Nasdaq executed a "special rebalancing" of its Nasdaq-100 tech-heavy index to reduce Apple's 20% weighting down to 12% last April.

With Apple's impact on the Nasdaq 100 now approaching 17% (that's greater than Google Inc. (Nasdaq: GOOG), Amazon.com Inc. (Nasdaq: AMZN) and Intel Corp. (Nasdaq: INTC)…combined), it's only a matter of time before another rebalancing takes a bite out of Apple's influence on this important index.

The problem isn't that Apple's share price has been so strong.

It's that investors may be unaware that the Nasdaq 100's rise and the Nasdaq Composite's jump to new 10-year highs wouldn't have been remotely possible without Apple's 60%+ gain since last summer.

Instead, investors need to understand Apple's impact on these market barometers and pay more attention to the core movements in those markets, not just the shine of a single stock.

Apple's Gigantic Impact

Apple's outsized impact on the Nasdaq-100 (NDX), which is a 100-stock index of the largest domestic and international non-financial companies listed on the Nasdaq, impacts in equal measure the popular $32 billion PowerShares QQQ Trust (Nasdaq: QQQ). The QQQ is an ETF based entirely on the NDX.

Apple's nearly 17% weighting in the NDX causes the NDX and the QQQ ETF to be closely correlated to Apple's stock whenever it makes a big move up or down.

The NDX (and by extension the QQQ ETF) is also a sub-set of the Nasdaq Composite Index.

The Nasdaq Composite Index (COMP) measures all of the domestic and international common stocks listed on The Nasdaq Stock Market. The COMP is one of the most widely followed and quoted major market indices.

Apple's weighting in the Nasdaq Composite is 10.6%. Thanks in no small part to this heavy weighting, the COMP is now approaching 3,000 – a level it hasn't seen since November 17, 2000.

But it's not just the tech-heavy NDX and COMP where Apple has an impact.

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Why Chimps Throw Poop... And 17 Other Examples of Government Waste

Never mind the $15 trillion national debt; the government blew $592,000 on a study last year to figure out why chimpanzees throw poop.

That's just one example of government waste described in a recent book by Sen. Tom Coburn, R-OK. His "Wastebook 2011" features 100 examples of needless or ill-advised government spending.

It adds up to $6.9 billion that America can't afford. And while such waste is just a fraction of the federal government's $3.8 trillion budget, a country that needs to borrow 36 cents of every dollar it spends should not be throwing money away on non-essential research.

Like why chimps throw poop.

Here are 17 other things the government wasted tax dollars on last year:

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The Dow Hit 13,000 - Will it Stick?

The Dow Jones Industrial Average climbed to above 13,000 briefly today (Tuesday) for the first time since May 2008. Now investors wonder if the gain will last – and possibly soar even higher.

The Dow touched above 13,000 around 11:30 a.m., pulled back then crossed the line again just after noon.

The market has climbed despite concerns surrounding Greece as well as the continued U.S. economic recovery. The gain represents about a 25% increase since the Dow touched its 2011 low of 10,404 in October. The Dow at 13,000 is only 8.9% from its all-time high of 14,174.53, reached on October 9, 2007.

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Android@Home, Project X, and Other Secrets of Google Inc. (Nasdaq: GOOG)

Lately, Google Inc.'s (Nasdaq: GOOG) Mountain View, CA-based headquarters have looked more like the clandestine lair of a Bond villain than a business center.

The company has poured more than $120 million dollars into construction projects that are fit to house testing labs and top-secret initiatives with names like "Project X."

One theory about what's going on at the Googleplex involves the development of a driverless car.

And that may well be true – but the more immediate and practical use for the renovation would be to expand the base from which the company competes with rival Apple Inc. (Nasdaq: AAPL).

Google's war with Apple continues to escalate as the two companies fight for ground in three major consumer markets: mobile devices, Internet search and digital media.

Google fired its first salvo at Apple with the introduction of its Android operating system, which has come to dominate the smartphone market.

Apple recently retaliated by introducing Siri – the voice-activated search engine that has been a major selling point for the latest iPhone.

Still, the biggest clash is set to take place in your living room.

Google and Apple are fighting to be the company that supplies your media at home, stores it for you in a cloud drive, and then distributes it to your wireless devices.

Google has even expressed interest in bringing other appliances into the fold, connecting things like lighting, heating, and air conditioning via the Android operating system – a seamless integration dubbed "Android@Home."

The goal is to let you control every electronic device in your home through a smartphone or tablet.

This is a battle for what futurists call the "digital living room."

And it's just getting started. Here's a sneak peak at what's in store.

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Why the Volcker Rule is a Cop-Out and a Joke

Right now everyone's talking about the Volcker Rule.

For heaven's sake! What's the big deal? After all is said and done, there is only one real problem with it (and I'll get to that in a minute)…

The 300-page draft Rule, named after its champion architect, former Federal Reserve chairman and inflation-fighting icon Paul A. Volcker, is an addition to the ever-evolving masterpiece of legislation (yes, I'm being sarcastic) known as the Dodd-Frank Act.

Now, draft SEC rulemaking and regulatory actions are first submitted to the public for "comment." The SEC collects all comment letters and posts them on their website.

Well, wouldn't you know it, this draft (some might call it "daft") Volcker Rule has caused a flurry of letter writing; letters were due to the SEC by no later than this past Monday evening.

All in all, this august (not the month) regulatory body received 241 detailed comment letters (that's a lot of comment letters) and an astounding 14,479 mostly form letters, as well.

Almost all of the form letters to the SEC, many of which were "personalized" by submitters, were strongly in favor of the Volcker Rule and called for strengthening it and not watering it down by allowing any exemptions.

How do I know that? (No, I didn't read them all.) They resulted from an e-alert campaign to activist supporters of the Americans for Financial Reform group and Public Citizens, who posted appeals on their websites.

Other notable comments in favor of the Rule, and weighing-in in more detail, came from Paul Volcker himself and Senators Carl Levin (D-MI) and Jeff Merkley (D-OR), who championed the Volcker Rule in the Dodd-Frank legislation and in their comments called the draft too "tepid."

The lengthiest comment letter in favor of the Rule (and of tightening it significantly) came in the form of a 325-page love letter from the Occupy Wall Street movement.

However, of those 241 detailed comment letters, most of them came from detractors.

Detractors like individual banks (who normally let their dogs and lobbyists do their biting) and industry groups, such as the Securities Industry and Financial Markets Association (Sifma) and the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.

Powerhouse law firm Davis Polk was itself drafted by several banks and Sifma to help draft at least 10 letters on behalf of the cause ("cause" banks want to keep making big bonuses).

Detractors of the Volcker Rule warned of dire consequences for American capital markets, American corporations, the American economy, the world, and the universe beyond even our own little constellation, if the Rule is allowed to curtail their most coveted and conscientious shepherding of their clients' best interests.

Prop Trading, Market Making and the Volcker Rule

The Volcker Rule comes down to this:

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Apple Inc. (Nasdaq:AAPL): When to Buy the World's Hottest Stock

Shares of Apple Inc. (Nasdaq: AAPL) are taking a breather, leaving many investors wondering if they've made an iBoo-Boo.

The hottest stock on the Nasdaq has fallen more than 4.6% as I write this since hitting a new intraday high of $526.29 on February 15, 2012.

Does that mean it's time to sell?

Perhaps, but first you should ask yourself why.

If you're a long-term investor, there's a lot to look forward to. Apple is much more than a brand; it's a lifestyle. People tattoo the company's iconic brand on their rear ends for crying out loud.

Always the innovator, Apple has barely scratched the surface with regard to new devices and has hardly tapped into ways to use them.

People line up thousands-deep to buy newer versions of the company's most basic products every year -whether they need them or not.

That is something no other tech company has figured out how to do.

Plus Apple's market share is growing overseas, with a particular emphasis on the Asian Rim.

In China alone, for instance, there's the potential for another 30-50 million iPhone sales in the next 12 months that could add another $4-6 in EPS to Apple's bottom line.

I remain convinced that Apple could be the world's first trillion-dollar company and I'm not alone in my thinking. Since I first voiced that highly controversial opinion a few years ago, many other firms and analysts have joined me.

How to Play the Short-Term Apple Top

But in the short term, Apple's chart now looks like a classic blow-off top- and technically speaking it is.

Last Wednesday, we saw the stock close near the lows of the day after making a quick run up and a high volume, hi-speed failure midday.

The chart tells the story.

Take a look

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John Paulson Says Now's the Time to Buy Gold

Billionaire hedge-fund manager John Paulson wrote a letter to investors saying now is the time to buy gold, as prices are going to soar this year.

Paulson said government spending will trigger inflation, and investors should stock up on gold as protection.

"By the time inflation becomes evident, gold will probably have moved, which implies that now is the time to build a position in gold," Paulson wrote in a letter at the end of 2011 obtained by Bloomberg News.

Hedge funds and money managers have increased their bets this year on higher gold prices.
Paulson's hedge fund, Paulson & Co., is the biggest investor in the SPDR Gold Trust ETF (NYSE: GLD) with a $2.9 billion stake. The fund is up 24% in the past year and more than 10% this year alone.

Paulson: It's Time to Buy Gold

With the U.S. Federal Reserve leaving interest rates near zero until 2014, more investors will buy gold as an inflation hedge.

"The appalling state of fiscal finances of most industrial nations does lead to concerns about the possibility of inflation," Mark O'Byrne, executive director of brokerage GoldCore Ltd., told Bloomberg. "Gold is a crucial diversification given the various risks out there."

The European debt crisis and its uncertain effects on the markets have also pushed investors into gold. China this week pledged to help the region resolve its fiscal issues by investing in Europe's bailout funds.

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Silver Prices to Hit $200 in 2012: Here Are 4 Ways to Profit

Silver had a dramatic run during the first few months of last year, surging almost $20 per ounce to briefly surpass its prior all-time high of $49.45.

Now, after seven months of playing second fiddle to gold, backing and filling price-wise, silver could be poised for an even stronger surge in 2012.

In fact, the "other precious metal" should easily crack the $50 barrier in the coming year – and possibly move much higher.

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The Heart of a China Bull Still Beats Strong

My debate with Gordon Chang on China's future at the Vancouver Resource Investment Conference was a stimulating, intellectual exercise.

A healthy market needs a compromise between the bid and ask, and discussions between people who strongly disagree is a great way to promote critical thinking.

Critical thinking is vital to our investment process as a means to ensure that we question assumptions.

A lack of critical thinking sometimes leads to bubbles, such as the one taking place in the parabolic rise in the number of articles foretelling China will experience a "hard landing."

Last fall, more than 1,000 articles questioned the possibility of a "China crash," according to data from BCA Research. This is twice as high as the number in 2004, when fear articles reached 500.

Gordon's bearish pronouncements only added to the extremely negative groupthink surrounding China's economy.

Money Morning Chief Investment Strategist Keith Fitz-Gerald, a long-time friend of mine, wrote an excellent article comparing today's doomsday sentiment of China to the naysayers who forecast the demise of the U.S. during the market bottom of March 2009.

Throughout the past century, U.S. stocks went through many secular bear markets.

Keith points to the 1929-1932 period when the Dow Jones Industrial Average declined by nearly 90%, along with pointing out the Dow's loss of more than 52% from 1937 to 1942.

Also, in 1901, 1906, 1916 and 1973, there were four "40-plus% declines," says Keith.

Americans have also endured two world wars, the Great Depression, presidential assassinations and the deadliest terrorist attack ever seen on U.S. soil. What's important for investors to remember was that each significant market decline presented a "great buying opportunity" with U.S. stocks rising double-, or in some cases, triple-digits, writes Keith.

And, over the past 100 years, the Dow gained an outstanding 24,000%.

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One Reason Obama's Refi Program Won't Work: The FHA is Insolvent

In his State of the Union address last month, President Barack Obama outlined a plan to let homeowners, especially those underwater, refinance older mortgages to take advantage of today's low rates.

While serious political impediments stand in the way of the Obama refi plan, one reason it won't work is that it relies 100% on the Federal Housing Administration (FHA).

The problem is that the FHA is technically insolvent.

That "minor" issue could make the president's plan a non-starter.

The FHA doesn't originate mortgages. It is a government agency that insures 100% of the principal and interest on residential mortgages to the benefit of mortgage lenders.

The president's plan is to have the FHA insure all "eligible" borrowers' loans so lenders have a guarantee that refinanced mortgages will be paid back.

That incentivizes lenders to make loans they otherwise wouldn't make.

Why the FHA is Insolvent

Borrowers pay an upfront mortgage insurance premium (MIP) of 1% and modest monthly fees into the FHA's insurance fund. That's the FHA's only source of income and capital.

The fund has to maintain certain reserves and a cushion against the total obligations it has amassed based on the insurance it has in force, which currently exceeds $1 trillion.

The FHA is technically insolvent because it is already below the minimum 2% "economic value," or capital ratio it's required to maintain by law.

In fact, according to an American Enterprise Institute "Outlook" report, the FHA has only $1.2 billion in "economic value" supporting over $1 trillion on loan guarantees.

In other words the FHA's leverage ratio is close to 1,000 to 1 and its capital ratio is 0.12% — nowhere close to 2%.

For some perspective on how far the FHA has slid in reverse, in 2006 its capital ratio was 7.38%.

Things aren't getting any better for the FHA either, they're getting worse.

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