Greenback to Strengthen to Best Amid US Recovery Signs

By HY Markets Forex Blog

Economist are forecasting the greenback to strengthen to its best since 2010 against its peers, as investors are expecting  reports to show the world’s largest economy increased its spending for an eighth month.

Meanwhile, the Japanese yen added monthly gains against a basket of its major peers while stocks for the country declined and reports revealed inflation increased. The 18-block euro was seen hovering for its biggest monthly decline since March before the Central Bank policy meeting scheduled for February 6.

The dollar index, which monitors the strength of the greenback against a basket of 10 major currencies, came in at 1.030.62. The US dollar traded at $1.3536 per euro from $1.3555. The Japanese yen rose 0.2% higher to 102.49 per dollar, heading for a 2.7% monthly gain.

US Economy Recovery

While the market awaits reports from the Commerce Department report later in the day, analysts forecast to see a rise in the US consumer spending by 0.2% in December, compared to the 0.5% advance seen in November.

Figures from the Commerce department revealed the world’s largest economy expanded by 3.2% in the fourth quarter, meeting analysts’ estimates.

Following the Federal Reserve’s two day policy meeting, Fed policymakers concluded the meeting by deciding to reduce the central bank’s stimulus further by $10 billion to $65 billion, showing signs that the world’s largest economy is expanding.

The US data surprise index for Westpac Banking climbed to its highest this month since June. “The recent improvement in U.S. growth sentiment is living on borrowed time,” New-York based chief currency strategist Richard Franulovish wrote in a note.

“We would expect the trend in growth differentials to continue to shift in the USD’s favor over the medium term,” he wrote. “However, there will be setbacks and if anything we could be on the cusp of one.”


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Forex Technical Analysis 31.01.2014 (EUR/USD, GBP/USD, USD/CHF, USD/JPY, AUD/USD, GOLD)

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Analysis for January 31st, 2014


Euro is still moving inside descending correction. We think, today price may form reversal structure to break this correctional channel and then continue moving upwards to reach level of 1.3800.


Pound formed another descending structure. We think, today price may reach level of 1.6431 and then return to level of 1.6575. Later, in our opinion, market may continue moving upwards to reach level of 1.6680.


Franc formed another ascending structure, the same at the previous one; as a result, we have three-wave correction. We think, today price may fall down towards level of 0.8963 and try to form the fifth wave with target at 0.9070. Later, in our opinion, market may continue moving inside descending trend to reach main target at 0.8300.


Yen is still consolidating. We think, today price may expand this consolidation channel, first – downwards, to reach target level of 101.70, and then upwards, towards level of 103.80. Later, in our opinion, market may continue growing up towards level of 104.00 and then start new descending movement to reach level of 100.00.


Australian Dollar tried to start new ascending movement, but faced resistance from level of 0.8820. We think, today price may continue moving inside descending trend. Main target at level of 0.8400.


Gold completed the third descending structure of its correction. We think, today price may return to level of 1254 (at least) and then complete this correction by forming the fifth structure towards level of 1230. Later, in our opinion, market may start new ascending movement to reach level of at 1360.

RoboForex Analytical Department

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Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.





Fibonacci Retracements Analysis 31.01.2014 (EUR/USD, USD/CHF)

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Analysis for January 31st, 2014


Euro is still being corrected. Earlier price rebounded from level of 61.8% and right now is testing it again. If pair rebounds from this level again, market may start growing up. Otherwise, it will move towards level of 78.6%.

At H1 chart we can see, that there are two additional fibo-levels below level of 61.8%. According to analysis of temporary fibo-zones, price may rebound from these levels during Friday.


Despite current correction, main target for Franc is still near several lower fibo-levels. This is the reason why I expect price to break local minimum in the beginning of the next week. I’m planning to open additional sell order right after market starts moving downwards.

As we can see at H1 chart, price is moving at level of 50%. Pair has already reached one of temporary fibo-zones, that’s why it may rebound from the above-mentioned level in the nearest future. Later, instrument is expected to move towards several fibo-levels close to 0.8930.

RoboForex Analytical Department

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Forecasts presented in this section only reflect the author’s private opinion and should not be considered as guidance for trading. RoboForex LP bears no responsibility for trading results based on trading recommendations described in these analytical reviews.




375 Companies Prepare for the Guillotine

By Guillotine_featured

It’s Friday in the Wall Street Daily Nation!

That means the longwinded analysis is out. And instead, some carefully selected charts are in. After all, a picture is supposed to be worth a thousand words, right?

Without further ado, check out these snapshots on the annual disappearing act by S&P 500 companies, why Sunday’s big game really isn’t about the game and, lastly, how the White House could be to blame for the current stock market selloff.

Is “Buy and Hold” Dead?

When we hear the term “creative destruction,” we most often think about a new innovation coming along that destroys an existing technology.

After today, though, I want you to think about it in terms of actual companies.

By analyzing 100 years’ worth of stock market data, Innosight’s Director, Richard N. Foster, found that the average company in the S&P 500 Index in 1958 remained there for 61 years. By 1980, the average tenure plummeted to 25 years. Today, a company’s lifespan rests below 20 years.

Bottom line: At the current churn rate, 75% of companies in the S&P 500 will be replaced by 2027. Here’s hoping we’re not caught holding onto any of these stocks when they’re “creatively” destroyed.

Or as Foster concluded, “You must embrace creative destruction rather than wait to become a victim of this unstoppable force.” Indeed!

A Super Bowl for Advertising

Peyton Manning is in the Super Bowl this year. Ironically, he’ll be squaring off in his little brother Eli’s house.

As a New York Giants fan, you can probably guess that I couldn’t care less which team wins. But it’s not really about the game, anyway. It’s all about the advertising – increasingly so, too.

Here’s the graphic proof…

Bottom line: Forget trying to bet correctly on the winner to score some extra spending cash from your office mate. Prepare your mind to defend against the onslaught of advertisements so you don’t inadvertently spend your cash on something you definitely don’t need.

The Two-Year Curse

To say the stock market stumbled out of the gates in 2014 would be an understatement. As I write, the S&P 500 is down 4% for the year, with most of the losses coming in the last week.

Many people want to blame it on emerging markets, the Fed, even Leonardo DiCaprio.

Turns out, it’s all the presidents’ fault. (Notice I said, “presidents” – as in, not just Obama.)

As LPL Financial’s Chief Market Strategist, Jeffrey Kleintop, shared on Twitter (TWTR) recently, the S&P 500 typically struggles in year two of the election cycle.

Specifically, stocks drop to start the year, rally briefly, stumble again for most of the year, and then finish strong. And, so far, we’re following the pattern like clockwork.

Obviously, the past is no guarantee of the future. But it’s the best thing we have to evaluate.

Bottom line: Election cycle curse or not, it appears that we’re in store for a volatile year for stocks. So load up on Tums and get ready to do battle with us in the trenches.

Whether the market heads up, down, or sideways, we’re committed to uncovering the best ways to protect and increase your net worth.

That’s it for today. Before you go, though, let us know what you think of this weekly column – or any of our recent work at Wall Street Daily – by going here.

Ahead of the tape,

Louis Basenese

The post 375 Companies Prepare for the Guillotine appeared first on Wall Street Daily.

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Original Article: 375 Companies Prepare for the Guillotine

GBPUSD’s downward movement extended to 1.6445

GBPUSD’s downward movement from 1.6668 extended to as low as 1.6445. Deeper decline to test the support of the lower line of the price channel on 4-hour chart is possible. As long as the channel support holds, the fall from 1.6668 could be treated as consolidation of the longer term uptrend from 1.5854 (Nov 12, 2013 low), one more rise towards 1.7000 could be expected after consolidation. On the downside, a clear break below the channel support will indicate that the uptrend from 1.5854 had completed at 1.6668 already, then the pair will find support around 1.6000.


Daily Forex Forecast

Angola holds rate but cuts reserve requirement to 12.5%

    Angola’s central bank maintained its policy rate at 9.25 percent but cut the reserve requirement ratio for local currency deposits to 12.5 percent from 15.0 percent to “increase the financial resources available for lending to the economy, as well as continue to influence the reduction of the costs of financial intermediation.”
    The National Bank of Angola, which cut rates by 100 basis points in 2013, kept the reserve requirement for foreign currency deposits unchanged at 15.0 percent.
    The central bank’s monetary policy committee, which met on Jan. 27, said the latest estimates indicate real Gross Domestic Product growth of around 7.4 percent for the country’s economy in 2013, up from 5.2 percent in 2012, with an emphasis on the continued growth in the non-oil sector.
    Angola’s inflation rate eased to 7.69 percent in December from 7.94 percent in November and 9.02 percent in December 2012, as inflation continues to drop since hitting a recent high of 16.08 percent in October 2010.
    The central bank also said Angola’s international reserves fell by 5.73 percent to US$ 33.17 billion in December from November. It did not give any reason for the decline.


Get Ready For a Resource Stock Rally


Gold stinks.

Iron ore stinks.

Copper stinks.

What commodity doesn’t stink?

Everyone hates commodities. Everyone hates resource stocks.

Well, nearly everyone.

Your editor is a stubborn old fool. When we read everywhere about the death of resource stocks, it tells us one thing — you better get ready for one heck of a resource stock rally…

We’ll admit we’re facing a tough opposition. As Bloomberg Businessweek reports:

‘Banks led by Goldman Sachs Group Inc. and Citigroup Inc. say commodities are heading for losses in 2014 as rising supplies and slowing demand compound slumps that led to bear markets last year in gold, copper and corn.’

It’s a brave investor who bets against Goldman Sachs. Remember, these are the guys whose trading divisions typically have no more than one or two losing days each quarter.

That tells you they get something right every now and again!

But let’s get one thing clear — don’t under any circumstances confuse natural resources with natural resource stocks.

The Rising Resource Tide That Lifted All Ships

We won’t pretend to know where commodity prices are heading.

There are so many variables involved. That’s true whether it’s oil, natural gas, copper or iron ore. Political unrest, labour disputes, weather; you name it, they can all impact the supply, demand, and price of any given commodity.

Even the supply, demand and price can impact the supply, demand and price of a commodity…if you get what we mean.

But note one thing. Commodity prices and resource stock prices don’t have to move together. A commodity price doesn’t always have to be high for a resource stock to make money. And it doesn’t have to be high in order for a resource stock price to go up either.

The fact is that from 2003 to 2007, and again from 2009 to 2011, investors were spoiled. Resource stocks rose on little more than the smell of a successful drill result.

All it took was for the share price of one resource company to take off, and others would follow. Companies looking for the same commodity would go up. Companies with exploration permits nearby would go up.

Companies looking in completely different areas for completely different resources would go up because they would suddenly claim that they too had found rare earths, graphene, nickel, or whatever resource was the flavour of that month.

In that market, the rising tide of commodity prices lifted all ships. Unfortunately, the tide went out on the resource sector in 2011. And as the tide receded it revealed the true state of the resources sector.

And it wasn’t a pretty sight.

Gun Analyst Hunting For Winning Resource Stocks

That boom period is over. It ended three years ago. But it’s wrong to think that the entire resource sector is dead, because it isn’t.

The main difference is that now rather than the rising tide lifting all ships, only the good ships will reap the benefit of this rising tide. That’s because many of the other ‘ships’ have holes in them.

In other words, you can’t just invest in any old resource stock. You’ve got to choose each investment carefully. Because while there is a lot of negativity around the resource sector, there are also a lot of great opportunities.

That’s why this year we hired a gun resource analyst to look into these great opportunities. We were looking for someone who was just as excited about the Aussie resource sector as we are.

His name is Jason Stevenson, and he has already produced some outstanding work for our flagship resource investment advisory since he joined the team last year. You’ll get an opportunity to see some of Jason’s work for yourself in the coming days. Keep a look out for it.

The way we see it is that opportunities to invest in an entire beaten down sector don’t come around that often. This is one of those rare times.

Right now we can think of few better places for investors to make money than the Aussie resource sector.

But how can that be possible when the likes of Goldman Sachs say commodity prices are heading down the toilet? Simple…

Has Economic Growth Really Ended?

Sometimes investors just can’t see the wood for the trees. They’re so busy looking for some complicated rationale that they can’t see what’s staring them in the face.

The fact is there’s really only one statistic you need to look at for proof of the bullish case for commodities. It’s this: China’s economy, at the current growth rate, will double in less than nine years.

It’s impossible to properly put that in perspective. But to put it simply, it means that China will produce and consume roughly double the amount of resources and consumer goods that it consumes today.

And that’s just China. Assuming the US, Europe and South East Asian economies continue to grow, you’re looking at economies that could be 20 — 30% bigger (or even bigger than that) than they are today.

Is it credible to think that this won’t cause a huge demand for resources? Is it credible to think that this won’t lead companies to explore for new resources? Is it credible to think that a company’s stock price won’t go up if it discovers a new resource?

Everyone hates resource stocks, and yet slowly but surely the market is beginning to recover. If ever there was an opportunity for stock pickers to make a killing while prices are dirt cheap, this is it.

Analysts at banking giant JPMorgan say the market is at the mid-point in the resources ‘super cycle’. If your portfolio doesn’t contain resource stocks in 2014, you’re in danger of missing out on what could be the trade of the decade.


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It’s Time to go Hunting for Emerging Market Bargains


Emerging markets have had a rotten time in the last few days. Shares and currencies have fallen pretty much across the board.

And many of the concerns that have driven the current slide are justified.

China’s financial system has looked shaky after a high-yield bond hit serious trouble. And in the US, any further tapering by the Federal Reserve will encourage more investors to pull money out of emerging markets and invest it in what they view as safer assets, closer to home.

However, it’s at times like these that calm, ruthless investors get to pick up attractive assets on the cheap.

So where should you be looking?

Not All Emerging Markets Are The Same

It’s easy to lump all emerging markets together. That’s certainly what investors have been doing over the last few days — we’ve seen pretty much uniform falls across the sector.

But that may not last. When problems start, it’s not unusual to see this sort of reflex, panic selling. But the fact is that not all emerging markets are the same. There are vast differences, both economic and political.

And once the initial knee-jerk sell-off is done, I think investors will start to pay more attention to these differences. Research group Capital Economics reckons you can split emerging markets up into five different categories.

The first category is countries where the economy has been seriously mismanaged. In all of these nations, there is a real danger of economic meltdown — Argentina, Ukraine and Venezuela all fall into this category.

In the second group are countries that have lived beyond their means. Both consumers and governments have borrowed too much. That’s meant high consumption and plenty of imports. Examples include Turkey, South Africa, Indonesia and Chile. These countries are at risk of currency crises as overseas investors pull their money out.

Thirdly, we have countries whose banking systems remain vulnerable following the financial crisis. This category includes Hungary and Romania.

The fourth category is the largest. These are the emerging markets where governments need to make big changes to the way things are done, because their old growth models are reaching their limits. Here we’re talking mainly about China, Brazil and India.

Finally we have a group of countries where the outlook is much brighter. Economic reforms are already going ahead, and export markets are growing. Examples include South Korea, Philippines and Mexico.

Now I’m not saying there aren’t opportunities in the first three categories. But for now, I’m only tempted to invest in the final two categories.

Two Markets With Huge Potential

Let’s start with South Korea and Mexico where Capital Economics is most upbeat.

As I said last month, we’re seeing real economic reform in Mexico now, including the abolition of the monopoly held by the state-owned oil company, Pemex. These reforms mean Mexico can more effectively exploit the advantage of living next to Uncle Sam.

As for South Korea, you could argue that its economic success means it’s moved beyond emerging-market status. But whatever the country’s status, it looks attractive. As one very successful fund manager put it recently: ‘There is hardly any country in the world with so many undervalued shares.’

After recent falls, South Korea’s benchmark index, the Kospi, is trading on a multiple of nine times next year’s earnings. That’s too low for a country with many high-quality companies and a business-friendly government.

With both of these nations, you have the chance to buy into economies with huge growth potential, and at relatively low risk. Just to stress, when I say ‘relatively’, I mean lower risk that you’d normally expect from an emerging market. You can still expect plenty of ups and downs compared with the FTSE 100.

Why I’ve bought into China

As for Capital Economics’ fourth category — countries that need to implement major structural reform — I’m most drawn to China. The risk level is high, no doubt about it. It’s not just problems with Chinese banks — we could also see a big political flare-up with Japan.

However, I was really impressed by the results of China’s ‘Third Plenum’ last November. At this party meeting, it became clear that China’s leadership understood the need for reform and was determined to push through major structural changes.

It’s that determination which marks out China from Brazil or India, and that’s why I’ve invested in China in the last month. I may be too early. There’s a good chance that there will be further emerging market ‘panics’ over the next couple of years, especially as the Fed wrestles with how to end its money-printing scheme. But right now, valuations look reasonable and in many cases — such as China — downright cheap. So I’m happy to buy now and wait it out.

Ed Bowsher,
Contributing Editor, Money Morning

Ed Note: The above article was originally published in MoneyWeek.

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Porter Stansberry: Are You Playing the Right Energy Trend?

Source: Karen Roche of The Energy Report (1/30/14)

Are you cashing in on America’s free energy source? Porter Stansberry of Stansberry & Associates is more bullish than ever on what he calls America’s “free energy,” natural gas. He’s stocked the model portfolio of his newsletter, Stansberry’s Investment Advisory, with natural gas companies as well as the companies packaging it and moving it. His energy position was by far the highest-producing segment of his model portfolio over the past two years, some of those holdings even having doubled. In this interview with The Energy Report, Stansberry discusses the macroeconomic climate facing North American investors and how to take advantage of a building natural gas trend.

The Energy Report: Let’s start with something that was published in the S&A Digest Jan. 3. The headline was “Porter Stansberry: Why I now disagree with Steve Sjuggerud and Doc Eifrig,” who are associates with Stansberry & Associates. Porter, in that article, you state that you’re bearish on the market, citing that when the U.S. Federal Reserve stops quantitative easing (QE), interest rates will go up. Rising interest rates could be a catalyst for a stock market crash. Your colleagues feel that short-term interest rates will allow the market to continue to run. To what extent are you in disagreement?

Porter Stansberry: We are in disagreement because I think the timing is important. Steve in particular believes that the “Bernanke boom,” which is the ongoing inflation of the credit market, will continue for much longer. He forecasts that, before this credit market bubble bursts, stocks will reach much higher valuations, 25 or 35 times earnings. That’s a lot different than my outlook.

I believe stock multiples, the price that stocks are trading as a multiple of their annual earnings, are going to decrease substantially as the Fed begins to taper and interest rates rise. Stock price multiples are negatively correlated with real interest rates. As interest rates rise, the market multiple will fall. I see stocks getting less expensive. Steve sees stocks becoming much more expensive. I can’t tell you who will be right.

TER: What’s the catalyst for rising interest rates, as there wasn’t a reaction to the initial tapering?

PS: I studied what happened in the bond and the stock markets during previous periods when the Fed stopped manipulating the bond market. In every single case, the moment the Fed announced that there would be a cessation of intervention, stocks declined and interest rates went up. The Fed is still buying $75 billion ($75B) worth of U.S. Treasury debt. It is the world’s largest holder of Treasury debt, holding significantly more than the Chinese and the Japanese. The Fed is painting itself into a corner. If it does not continue to support the market, there is no doubt in my mind that prices for fixed income will go down. That means that yields will rise.

TER: What if the Fed very slowly tapers off the support?

PS: Let’s just be clear about what happened: 10-year rates have gone from 1.6% last May to about 3% recently. Interest rates have almost doubled in less than a 12-month period. That is an enormous move. That changes the value of bonds significantly. It reduces the price almost by 50%. Folks who bought bonds that were yielding 1.6% have gotten killed. The Fed’s buying is far more important to the market price of U.S. debt than any other economic variable. If the Fed stops buying, it doesn’t matter whether unemployment goes up or down. It doesn’t matter whether inflation is higher or lower. Its influence on the market is dominant. You can’t expect the market to have the same price when the guy who’s buying $1 trillion ($1T)/year of bonds steps away from the market.

TER: What’s going to cause the Fed to step away from the market?

PS: Two things: There is overwhelming evidence that QE is not solving the country’s economic problems. In particular, it is not increasing employment. There are 92 million (92M) Americans who aren’t working. There are 50M people on food stamps. That hasn’t improved from the Fed spending $3.5T on bonds. The rationale for this policy is nonexistent and the policy has been a failure. What the Fed is doing is economic suicide.

The Fed knows very well it’s going to be incredibly painful to unwind. It has a ticking time bomb in its hands. The Chinese are running balanced budgets. They’re running current count surpluses. They’re buying up all the gold that comes up for sale around the world, and they’re cutting bilateral currency agreements with every large economy in the world. All of this is laying the groundwork for making the yuan convertible in the capital account. What’s going to happen to the dollar’s role as the reserve currency around the world?

TER: Do you see a significant devaluation of the U.S. dollar in 2014?

PS: That’s a realistic scenario for this year. Time is slipping away from the Fed. If the Chinese make that step, the Fed is going to have a lot less flexibility. It has to get its house in order; it has to stop this wild experiment with the monetary base for the simple reason that our currency is in constant competition with others. We are at risk of alienating our partners who hold our currency in huge numbers. Ask yourself a simple question: Do I think it’s reasonable that the Fed will become the only global holder of Treasury bonds? That’s the course we’re on.

TER: If rates go up and markets go down in the U.S., to what extent does that also influence markets across the world?

PS: We’re already seeing some impact—emerging markets have gotten crushed over the last 12 months. More money is on the margin. A 3% yield is more reasonable to a banker than a 1.6% yield. As a result, money is coming out of markets where higher yields are available like Brazil, and that is influencing bond and equity markets around the world. If I’m right and the U.S. yields go to something like 5% or 6%, there will be an absolute catastrophe in emerging market stocks.

TER: Would that mean lower stock prices in the U.S, and if the yuan becomes a stronger currency, higher stock prices in China?

PS: There will definitely be higher prices for Chinese equities. There are other key factors in the pricing of Chinese equities that need to be resolved, mostly the issue of the rule of law and the amount of transparency. China’s equity markets have been badly damaged by the amount of accounting scandals the country has suffered during the past 18 months. I don’t think there will be a quick or easy solution to that reputational problem.

TER: Then there really is no viable alternative currency to the U.S. dollar in the short term?

PS: The yuan is actually a very attractive currency and will prove to be very reliable—much more so than the U.S. dollar. I think the Chinese are going to come out with a gold-backed yuan, whether that is done legally or simply a de facto gold backing due to the size of their treasury’s gold holdings. I think that they’re going to offer a very high real yield, and I think that they’ll do a good job, as they have done throughout the last 25 years in developing their economy. The problem, of course, is that the equity markets in China are not very well regulated and there has been a large amount of fraud.

TER: The newsletter writer Harry Dent believes the stock market will crash sometime between January and May. You expect a market correction. But where your views diverge is that Harry believes this crash will be followed by years of deflation. He points to the aging world population and a natural inclination for reduced consumption as you age. You believe there will be inflation as a result of the massive international QE. On the surface, that’s a demographic trend versus a monetary trend. In your view, how do these two factors play out?

PS: Harry, as much as I respect his long career as a publisher and as a pundit, is just completely off base. Inflation is always and everywhere a monetary phenomenon. I don’t care how much the population of Zimbabwe has aged or hasn’t aged, when you’re doubling and tripling your monetary base every year, you’re going to have runaway inflation sooner or later.

TER: So what’s an investor to do?

PS: The easy and simple thing is to own short-term, high-quality corporate bonds, so you could hold things that are going to mature in a year or two. If you’re getting 6% or 8% on those bonds, you’re going to be protected from inflation, and you’ll have the ability to roll them over at a higher rate so that you don’t have anything to worry about.

To protect yourself from loss of purchasing power, you can buy high-quality common stocks that are trading at a reasonable price, but with the ability to increase prices. In my newsletter, I just recommended the shares of Lorillard Inc. (LO:NYSE), which is a tobacco company that has the leading e-cigarette franchise. You can still buy that stock at about eight times cash earnings. It’s incredibly capital efficient. It pays about 60% of every $1 of revenue out to its shareholders in the form of cash dividends and buybacks.

Obviously, precious metals have long been a store of value in a period of inflation. You can buy gold and silver. You can buy real estate. I’ve been buying real estate pretty much continuously since 2010. I started out by buying slum apartments in South Florida. I then moved into trophy properties as the volume in the market picked up and properties began to change hands. Most recently, I bought a farm. I borrowed some money at 4% and bought a producing farm that will pay for itself. Assuming that interest rates in the U.S. go above 4%, I’ll get the money literally for free. Of course, I also expect farm prices to increase, so hopefully soybeans and corn give me a nice profit going forward.

I don’t think there’s going to be a crash, but I do think it’s going to be very difficult for people who are heavily invested in very expensive stocks. Do you have any idea what the earnings per share multiple on is?

TER: Twenty?

PS: One hundred and fixty six. Do you have any idea what’s operating margin is? It’s less than 1%, yet its shares are valued at 156 times earnings and more than 20 times book value. Investor expectations have become completely untethered to the reality of that business.

I’m not saying that Amazon is not a good business; it is. But at $180B and already dominating the U.S. retail industry, that company cannot grow fast enough nor can it possibly hope to increase its margins enough to justify investor expectations. The folks who are buying those companies are going to be very sorely disappointed.

TER: You have an interesting measurement that plays along with this concept called the S&A Blacklist. It includes companies with more than $10B in market cap trading at more than 10 times sales. You use this to determine if the market is getting frothy.

PS: Over the history of the equity markets, the number of companies that have been able to significantly increase and hold their value once they have been so highly overvalued is very small. Most companies that trade at these kinds of enormous valuations are never able to justify the valuations. Even if the earnings grow, the stock price declines.

Yes, some of these companies will turn into the next Facebook or eBay, but most of them will not. The ones that can’t are going to crash. We keep track of this list because at market bottoms there are fewer than five companies anywhere in the world that are trading for more than $10B and more than 10 times sales, while at market tops, the number of companies that meet those criteria can be more than 12. Today, there are 20 companies on that list, which is the highest number we have seen since the 2000 market top.

TER: To what extent is that number really just a reflection of having nowhere else to put your money?

PS: It’s a very big reflection of that. The Fed has driven people out of the bond market. People who were looking for reasonable, safe investments have been forced into things like master limited partnerships (MLPs) and real estate investment trusts. They have driven investors into riskier and riskier assets, and it’s increased the number of people who are willing to invest in stocks at insane prices.

TER: Last time we interviewed you, you were very bullish on natural gas. In fact, you said, “I’m more bullish on natural gas today than I’ve ever been in my life.” Is that still true?

PS: It absolutely is. I’m extremely bullish on the entire export energy complex in America: natural gas, propane, ethane, and everything that surrounds those industries like ships, pipelines and refineries. The entire complex is going to boom for a wonderfully logical reason that everyone can understand: In the U.S., natural gas and its other liquid components are free. Literally, this valuable energy source is being flared, is being burned into the air at lots of drill sites because we don’t have enough pipelines to collect it all yet. That is even though natural gas is going for $17/thousand cubic feet in Japan and even though propane is going for $100/barrel in Germany. These are very valuable energy sources that have lots of demand globally. The only thing we have to do to make huge profits is build pipelines, refineries and ships. This is going to be a very long, wonderful market for America.

TER: How are you playing that opportunity?

PS: I bought some very low-cost equity where reserves are very large. I like Devon Energy Corp. (DVN:NYSE)and Chesapeake Energy Corp. (CHK:NYSE). I like companies like ONEOK Inc. (OKE:NYSE) that own the collection and distribution pipelines. I’ve bought the refiners and the distributors, like Targa Resources Corp. (TRGP:NYSE), that take the propane and package it on the ships. I’ve also bought boat companies, like Teekay LNG Partners L.P. (TGP:NYSE), a tanker company that can transport liquefied natural gas (LNG). These have been very lucrative for us. My energy position was by far the highest-producing position in my portfolio during the last two years. We made more than 100% on several of these recommendations, including Chicago Bridge & Iron Co. N.V. (CBI:NYSE), which is building out LNG port facilities around the world. It’s a wonderful trend that still has a long way to go.

TER: The S&A Digest today said that “several of our analysts think gold is hitting a bottom, and gold stocks are one of the best values of the market today.” Is it time to think about going into gold equities or do we wait for the correction?

PS: I am recommending certain kinds of gold equities in my newsletter at the present time. I like NOVAGOLD (NG:TSX; NG:NYSE.MKT) because it has an absolutely ironclad balance sheet. Whether the price of gold goes up or down this year, there is no way that it can or will go bankrupt. It has around $200M in cash on its balance sheet, and it has two gold projects that have very high-grade ore that are very likely to become mines. I view the shares of NovaGold, which are still below $3, as essentially a call option on the price of gold. This company will certainly be solvent for the next two or three years, and if the price of gold were to go up in that period, the share price would probably go to $10 or $20. It’s a safe way to speculate on a higher gold price going forward.

But you have to understand that this is one position in a portfolio of probably 12 or 15 different recommendations. The allocation that I’m willing to commit to gold is still very small. That’s the way I prefer to be an investor in gold. I like to hold gold bullion and find these very reasonably priced call options that give me time to wait for a higher price.

TER: Have you found other gold equities that have that special call-option profile?

PS: Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) and Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) are great ways for investors to have exposure to gold without having the risk of shaky capital structures. The key is to have plenty of runway to wait for a higher price. Having said all of this, I want to be very clear: Gold had a 12-year bull market. It is unlikely, in my mind, that that bull market will be followed by a short and painless bear market. I do expect higher gold prices in the future. I don’t expect higher gold prices in the short term. I would be surprised if gold was more than $2,000/oz by the end of this year. I’m buying things that give me plenty of upside, but are extremely low risk and have no chance of bankruptcy. I still think you have to see a lot of bankruptcy in the sector. There are just too many shoddily financed junior mining companies.

TER: Is there anything else you’d like to share with our readers?

PS: My parting thought is that even if it is painful in the short term, it is incredibly important to the future of our country and to the future of our global economy that the Western governments get their monetary and fiscal houses in order. We cannot continue to run the world with fiat currency that comes spewing out of the printing presses at the rates we have seen over the last two years. The amount of malinvestment that will be caused by the dislocations of these prices and the bad economic decisions that entrepreneurs are going to make based on faulty assumptions about interest rates and market multiples will be very disruptive. The longer it goes on, the worse it will become. We have to get to a point where governments are able and willing to live within their means. We have to get to a point where people can once again count on currencies and market prices. Today, unfortunately, we’re nowhere near that position. Until that gets fixed, people have to be very conservative with their personal finances.

TER: Do you think it will get fixed in your lifetime?

PS: It will have to, because we’re on a collision course for a train wreck if we don’t do something urgently to put our fiscal house in order and to get the government out of the business of manipulating the currency and manipulating interest rates.

TER: Porter, thanks a lot for your time.

PS: Sure thing.

Porter Stansberry founded Stansberry & Associates Investment Research, a private publishing company based in Baltimore, Maryland, in 1999. His monthly newsletter, Stansberry’s Investment Advisory, deals with safe-value investments poised to give subscribers years of exceptional returns. Stansberry oversees a staff of investment analysts whose expertise ranges from value investing to insider trading to short selling. Together, Stansberry and his research team do exhaustive amounts of real-world independent research. They’ve visited more than 200 companies in order to find the best low-risk investments. Prior to launching Stansberry & Associates Investment Research, Stansberry was the first American editor of the Fleet Street Letter, the oldest English-language financial newsletter.

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1) Karen Roche conducted this interview for The Energy Report and provides services to The Energy Report as an employee. She or her family owns shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Energy Report:NOVAGOLD. Franco-Nevada is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Porter Stansberry: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. Please note: model portfolio refers to the recommendations Stansberry makes for his subscribers. He does not personally buy or hold shares of companies he recommends.

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Snapchat and the Disappearing Bears in the Stock Market

See what happens in the financial markets when the bears vanish

By Elliott Wave International

If Inspector Gadget or Maxwell Smart had lived in the digital age, their bosses would have used the smartphone app Snapchat to deliver their secret missions.

Snapchat is a popular app with about 8 million users that lets your smartphone send a photo that self-destructs seconds after your recipient views it. As of September 2013, users were sending about 350-400 million vanishing messages a day — which compares with the 127.5 million shares that changed hands in the Dow on Jan. 27, 2014.

But when Evan Spiegel, the Stanford student who came up with the idea, unveiled it to his product design class in 2011, his classmates gave it a thumbs-down. Disappearing photos? Who will use it? Little did his classmates know how the app, originally called Picaboo, would go on to capture the attention of teenagers and young adults. And even a few older folks who want to connect with them, such as 51-year-old Senator Rand Paul, who recently signed up to woo younger voters.

The idea of the disappearing photo applies beautifully to the situation in the stock market today. Pessimists on stocks are disappearing quickly. And so are bearish analysts. Not in 10 seconds, but they are still doing a version of a Snapchat disappearing act. Here’s how The Elliott Wave Financial Forecast describes it (emphasis added) in this excerpt from our just-released 2014 State of the Global Markets report:

Investor Psychology
From The Elliott Wave Financial Forecast, December 2013

Our list of rare optimistic extremes is growing. This chart shows that advisors are now more optimistic about the stock market than they’ve been in 26 years. The middle graph displays the bull/bear ratio from the Investors Intelligence weekly advisors’ survey ( Bullish advisors outnumber bearish ones by a four-to-one margin for the first time in over 2½ decades

And it’s not just advisors. Assets invested in bull funds in the Rydex family of mutual funds is 5.3 times the assets in bear funds, an all-time record ratio. The bottom graph shows the total assets in Rydex’s government money market fund, which just dropped to a new all-time low on a daily and 5-day basis. This record low in money fund assets indicates a record desire to own stocks and bonds and a record disinterest in investment conservatism. These measures are as bell-ringingly bearish as any we have shown in the 14-year history of this newsletter.

But what does it mean for the markets when most of the bears capitulate to bullish optimism? Not exactly what you might think. Here’s how the article continues:

The Nov. 11 issue of The Wall Street Journal delivered another key piece:

Stocks Regain Broad Appeal
Mom-and-Pop Investors Are Back
The buyers, many with investment portfolios that were scorched during the market meltdown, are climbing aboard a ride to new highs in the Dow Jones Industrial Average.

The article cites several “propelling” forces behind individuals’ re-entry that are actually classic by-products of a terminating mania. The main one is that a heightened state of optimism causes people to buy simply because prices are high and rising. The WSJ article cites the case of a 65-year old real estate appraiser who returned to stocks “when he saw a market pundit predict the Dow, up 167.80 on Friday, could hit 20,000 this year. ‘I still think there’s huge upside in the stock market,’ he said. ‘I don’t want to miss out.'”… A Citigroup corporate finance expert illustrates that professionals are not immune to the bullish vibes: “This year feels like it did earlier in my career, when I had the optimism to say, ‘I’m really going to have a retirement.’ It feels a lot better now.”

Of course it does; that’s what happens near a top. The former remorse and inexplicable negative feelings have completely vanished, which means the uptrend that started five years ago should be exhausted.

Is that what you expected to read?

Elliott Wave International has been sending out pictures (that is, charts) of a bearish market for a while now — and they do not self-destruct in 10 seconds, a month or a year. No Snapchats of a bear about to turn bullish here. And if you want to get EWI’s take on Snapchat itself, read on:

From The Elliott Wave Financial Forecast, December 2013

With the share price of mainstream technology companies such as Google, Netflix and Priceline hitting new all-time highs in November, the dot-com revival is closing in on its original late-’90s insanity. Among the many resurfacing symptoms of the old fever are reports of “eye-popping” “vanity metrics.” The term vanity metrics refers to late 1999 and early 2000 valuation methods under which the standard devolved from price/earnings to price/sales to price/click ratios.

Reuters reports that “valuations for high-flying startups” are once again “hitting nosebleed levels,” as “the obsession with ‘eyeballs,’ or raw numbers of website visitors that defined the dot-com boom of the late 1990s,” is back. Reuters cites Snapchat as a prototypical example. Snapchat is a startup company based on an app that allows smartphone users to send pictures that vanish after a few seconds. The company claims users are sending 400 million “snaps” a day, but it refuses to explain exactly what constitutes a snap. It also has no profits or revenues. Nevertheless, the company’s 23-year-old founder turned down a $3 billion buyout offer from Facebook “based on hypothetical revenue.” Financial writers said the decision made sense because Snapchat can get more from a Chinese e-commerce company or in an IPO.

We disagree and think this kid will be kicking himself for the rest of his life. The company may indeed get lucky, but we’ve been down this road before. The vanishing picture app may someday become a metaphor for Silicon Valley’s last hurrah.

You can get more of this kind of clear-eyed analysis in EWI’s new annual report, The State of the Global Markets — 2014 Edition. EWI is offering some of the choicest selections culled from the 50-page report to Club EWI members.

Sign up to get access to The State of the Global Markets — 2014 Edition >>

This article was syndicated by Elliott Wave International and was originally published under the headline Snapchat and the Disappearing Bears in the Stock Market. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.