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Out of Answers, Federal Reserve Can Only Offer Empty Rhetoric
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.
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.
No Debt and High Yield Make Automatic Data Processing Inc. (Nasdaq: ADP) a "Buy"
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.
Latest Eurozone Debt Crisis Plan "Another Grand Illusion"
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."
China's Economy 2012 Report:
Here's Why (And Where)
Your Money Should Be In China
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%.
The Hidden Lesson in U.S. Gas Exports
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.
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.
Don't Let Uncertainty Scare You Out of the U.S. Stock Market
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%.
"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
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.
How the "New Cold War" with China Will Change America's Future
Few things push the frontiers of the future more than an army's desire to defeat its enemies.
Just look at what happened to America after World War II. Our need to counter Soviet power delivered a tidal wave of innovation.
Defense spending led to the Internet, microwave ovens and GPS devices – not to mention millions of jobs from one of the great tech booms in history.
Now comes the "New Cold War" – one that will also prove a boon to a wide range of tech industries.
This time the United States is racing against China.
You see, the Pentagon recently announced plans to check Chinese ambition with a wide range of responses. They fall under a new program called "Air Sea Battle."
It has U.S. President Barack Obama's backing. The president told our Pacific Rim allies the U.S. will provide a safety net in the region. It's a clear signal to the Pentagon to get cracking on key research and development (R&D).
This certainly comes at an awkward time. The U.S. faces a daunting debt crisis. With Washington's failure to reach a budget compromise, big defense cuts loom.
That will hurt in the short run, no doubt. But over the long haul, as it has done several times in post-war history, the Pentagon will find ways to push new technology in an era of tight-money.
Forced to do more with less while challenging the Chinese, the Department of Defense (DoD) will invest in high-value technology.
Here are a few examples of what I'm talking about.
Needless to say, we want to put an end to that. But we also want to learn how to shut down China's computer networks so we can defeat them without firing a single shot.
Consider what happened to Iran's nuclear program in late 2010.
Used as a cyber weapon, the Stuxnet virus crippled Iran's computers, putting the country's plan for atomic weapons at least two years behind schedule.
Of course, there's a civilian spinoff, which along with countless other viruses, poses a threat to average Americans, as well as U.S. corporations.
Making networks more secure would help banks, hospitals, and other firms protect sensitive data from hackers. It also will aid the fast-growing world of mobile commerce, which will soon become a major target for crafty cyber thieves.
That's not all.
Jim Rogers: "The Fed is Lying to Us"
Despite statements to the contrary, the U.S. Federal Reserve has continued to pump money into the economy, says investing legend Jim Rogers.
The resulting low interest rates and creeping inflation, he says, are destroying the wealth of millions.
"[Federal Reserve Chairman Ben] Bernanke said last August he was keeping interest rates artificially low," Rogers told Yahoo! Financeon Tuesday. "The only way you can do that is to go into the market."
As proof, Rogers pointed to the rise in the broad M2 measure of the U.S. money supply, which has increased more than 5% since the Fed's second quantitative easing program (QE2) ended on June 30, and 20% since November 2008.
"Since August – well, this whole year – the M2 has jumped up," Rogers said. "They're in the market. They're lying to us."
A well-known critic of the Fed who has called for it to be abolished, Rogers warned that the central bank's policies would lead to disaster.
"Right now what the Federal Reserve is doing is ruining an entire class of people in America," Rogers said. "The people who saved and invested for the past 10, 20, 30 years are now being ruined because interest rates are [too] low."
He added that if he were Fed chairman, he'd raise interest rates to slow down inflation.
In a separate interview with The Streetyesterday (Wednesday), Rogers said he considered the Fed to be the greatest risk to the U.S. economy in 2012.
"They don't seem to understand economics or finance or currencies or much of anything else except printing money," Rogers said.
The other major concern that Rogers has is the soaring federal debt, which recently passed $15 trillion.
"We are the largest debtor nation in the history of the world and the debts are going higher and higher by trillions, every two or three years," Rogers said. "We're all paying the price for it. And wait till 2013 – we're really going to pay the price."