InvestMacro Forex News

By MoneyMorning.com.au

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.

Cheers,
Kris

Special Report: Retirement Security Ladder

Join Money Morning on Google+

By MoneyMorning.com.au

By MoneyMorning.com.au

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.

Join Money Morning on Google+

By MoneyMorning.com.au

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

http://www.theenergyreport.com/pub/na/porter-stansberry-are-you-playing-the-right-energy-trend

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 Amazon.com is?

TER: Twenty?

PS: One hundred and fixty six. Do you have any idea what Amazon.com’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.

Want to read more Energy Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

DISCLOSURE:

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.

4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.

5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.

6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise – The Energy Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part.

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Energy Report. These logos are trademarks and are the property of the individual companies.

101 Second St., Suite 110

Petaluma, CA 94952

Tel.: (707) 981-8204

Fax: (707) 981-8998

Email: [email protected]

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 (InvestorsIntelligence.com). 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:

BACK TO THE VANISHING POINT FOR TECH
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 >>

Source: George S. Mack of The Life Sciences Report  (1/30/14)

http://www.thelifesciencesreport.com/pub/na/two-companies-follow-unmet-needs-to-biotech-profits-echo-he

Disease progression and drug resistance mean that very sick patients ultimately run out of options. In the case of orphan diseases, patients often run out of alternatives immediately after they are diagnosed. In this interview with The Life Sciences Report, Echo He of the Maxim Group discusses her focus on how patients with unmet needs might ultimately get a fighting chance. To that end, she has selected two names that could produce both welcome cures and stunning share price results for investors who understand the value proposition of last-resort therapies.

The Life Sciences Report: I understand you attended the annual JPMorgan Healthcare Conference in San Francisco in January. Was there anything there that caught your eye?

EH: Basically, companies were updating their ongoing efforts in clinical development and their timetables for near-term catalysts. Some results were announced, but I was there to look at early-stage drug development in disease areas with higher unmet medical needs.

TLSR: A lot of companies these days are talking about and seeking U.S. Food and Drug Administration (FDA) breakthrough therapy designation for drugs in development. Did you notice that at the conference?

EH: Yes. I noticed more companies talking about breakthrough designation, but that doesn’t mean they are getting it. I don’t have data on that yet. It seems like the trend at the FDA is toward more flexible approval of drugs—even those with only phase 2 data, and most especially those in areas where patients are running out of options.

TLSR: The FDA approved fewer new molecular entities in 2013 than it did in 2012, but it seems to be acting quickly on products that are innovative. Have you noticed that pattern?

EH: I don’t believe FDA is approving these drugs because the mechanisms are innovative. It’s because these drugs are targeting disease populations where there are inadequate treatments.

TLSR: Is that your theme for the coming year? Is it about unmet needs in patients who are running out of choices?

EH: Yes, I’m thinking that way. I think drug approval is disease-demand-driven instead of mechanism-driven.

TLSR: Could we talk about a couple of companies, please?

EH: Yes. Let’s first talk about a small company called Catalyst Pharmaceutical Partners Inc. (CPRX:NASDAQ). Its market cap is only around $105 million ($105M), and it’s an orphan drug developer. The company’s lead drug candidate is Firdapse (amifampridine), targeting a neurological disorder called Lambert-Eaton myasthenic syndrome (LEMS).

LEMS patients gradually lose muscle strength over time, and become severely disabled. It’s a disease of low prevalence, with just more than 3,000 patients in the U.S. and a few more in Canada. These are just the ones who have been diagnosed. The drug has both orphan drug status and breakthrough designation. Amifampridine is approved in Europe for LEMS, but there are no FDA-approved therapies for LEMS in the U.S. However, some compounding pharmacies provide the drug to physicians and patients in the U.S. right now. When a product gets approval, the compounding goes away.

TLSR: That brings up a question. The company says Firdapse would address a $100M market opportunity in the U.S. I’m aware that children are automatically covered under Medicaid when catastrophic disease strikes, but this is not just a childhood syndrome, and drug companies must accept what Medicaid will pay. How do you derive that much revenue from that few patients?

EH: We are estimating that there are 3,500 cases in the U.S. and Canada. Assuming a year of treatment costs $50,000–60,000M and that eventually 60% patients are treated with Firdapse, that suggests peak sales of about $100M.

TLSR: Echo, as far as you know, did Catalyst complete enrollment of its 30-patient, phase 3 trial (NCT01377922) with Firdapse in LEMS by year-end 2013? I haven’t seen a press release to that effect.

EH: It has not. The company is actually planning to enroll 36 patients, but that’s probably not in the clinicaltrials.gov database yet. It will probably complete enrollment sometime in Q1/14.

TLSR: Your target price on Catalyst Pharmaceutical Partners is $4, which represents an implied return of almost 100%, a double from current levels. What is the timeframe on that target price?

EH: It’s a 12-month target price, which I published on Jan. 8. That’s supported by catalysts/milestones, which include completion of phase 3 enrollment, a phase 3 efficacy data report in Q3/14, completion of safety studies and the new drug application (NDA) submission early in 2015. The cardiovascular toxicity study was reported on Jan. 8 in human subjects. The reproductive toxicity will be reported from animal data, and that is required for the NDA.

TLSR: Do you imagine that we’re looking at a 2016 launch for Firdapse in LEMS?

EH: Yes. It wouldn’t take that long for a larger company, but Catalyst needs some time to get everything in place to submit a complete NDA. Probably that will stretch to 2015. Then I give the FDA a full year for approval. Then we’re looking at the drug’s launch.

TLSR: I noted an interesting data point coming from the company. Half of LEMS cases are associated with small cell lung cancer, rather than the autoimmune etiology. Antibodies bind to the tumor cell antigens and to calcium channels in nerve cells, thereby creating this muscle weakness. I’m thinking that there may be several diseases involving muscle weakness where Firdapse could be helpful to patients.

EH: If there is a possibility to expand the drug to new therapeutic areas, I would think it’s in other neurodegenerative diseases, or in calcium channel disorders that cause neurological disease. The company previously suggested that if other diseases share the same symptoms as LEMS, it could expand this drug to those diseases. The FDA may require some new trials.

TLSR: When you think about it, a phase 3 trial with 36 patients is very inexpensive and can be done very rapidly. The idea, obviously, is to get the drug approved, and then the company can expand its indications. If and when Firdapse is approved, it might be used on an off-label basis for some of these other disease indications. What do you think?

EH: Your assumption may be correct. In the U.S. market, doctors tend to use drugs on an off-label basis if the clinician believes it could help a patient. But the company definitely is not allowed to promote it in other indications—only for what is on the drug’s label. If the physician prescribes it without promotion from the company’s representative, that’s usually allowed in this market.

TLSR: The problem here is obviously reimbursement. Would that work with the drug being used on an off-label basis?

EH: If doctors can justify the drug’s cost by documenting symptom relief or other patient benefits, the payers would pay for that. We have seen that in quite a few cases in the U.S., even if the drug is used off label.

TLSR: Go ahead to another company, please.

EH: Rexahn Pharmaceuticals Inc. (RNN:NYSE.MKT) is also a small company, with a market cap of about $150M right now. It’s a cancer drug development company, and its lead product is Archexin (antisense RNA inhibitor of Akt1), targeting a signal transduction pathway in cancers. Right now, the drug is in a phase 2a trialin renal cell carcinoma (RCC); this is the most advanced development program for this company.

Rexahn also has two early-stage compounds: supinoxin (phosphorylated-p68 RNA helicase inhibitor) in phase 1 and RX-3117, which entered the clinic in phase 1 at the end of 2013. These phase 1 drugs are interesting, but Archexin is the value driver right now because it’s in phase 2.

TLSR: Is Archexin partnered with anyone?

EH: Rexahn has 100% rights to this compound, but the company is working to get development partners in North America, as well as ex-U.S. My discounted cash flow (DCF) model 10 years out is based on the company having a partner and taking a royalty on this drug, and that DCF model is what supports my current price target of $1.50.

TLSR: Recently Rexahn was trading at $1/share, so I’m thinking that you must not be looking for any near-term catalysts.

EH: I did talk to management recently. The company will probably report some data on its two phase 1 candidates during 2014, but not on the phase 2 trial for Archexin. One catalyst might be a partnership with a big pharma on the two oral compounds in phase 1. There is a possibility on that front.

TLSR: But your target price is based on Archexin as the value driver.

EH: Archexin is my main driver. I have not placed any valuation on the other molecules, mainly because I don’t believe the company has specific disease indications for them as yet. It is just saying solid tumors at this point. It will probably test these drugs—RX-3117 and supinoxin (RX-5902)—in multiple solid tumors, but after the phase 1 trials, the company will have a better sense of which solid tumor to go after. Then I can build my assumptions.

TLSR: RCC is a difficult indication, and the company’s phase 2 trial is even more difficult because Rexahn is testing Archexin in metastatic RCC. The company says this is a $6 billion ($6B) market. How much of that market could Rexahn carve out with this drug?

EH: First of all, Rexahn is not targeting the entire RCC patient population. It’s just the metastatic, as you say. Also, Archexin will come in after a first-line treatment fails. The indication is second-line metastatic RCC, which is probably a small portion of the total population. I would not factor in $6B. My assumption is going to be for a very limited eligible patient population.

TLSR: Thank you so much, Echo.

EH: Thank you, too.

Echo Yinghui He, M.D., Ph.D, joined Maxim Group LLC in 2009 as a senior vice president in equity research. Prior to joining Maxim Group, Dr. He was a director at Oppenheimer & Co (formerly CIBC World Markets), where she was an equity analyst covering U.S.-listed Chinese stocks. Prior to Oppenheimer & Co., Dr. He served as a vice president at CRT Capital Group, where she conducted equity and credit analysis on Chinese and U.S. biotechnology companies. Earlier in her career, Dr. He served as a research scientist at the National Institutes of Health (NIH), where she participated Human Genome Project aimed at interpreting diseases and their risks by genetic patterns. Prior to the NIH, she worked as a post-doctoral research fellow at Indiana University Medical Center, where she investigated gene therapy for pulmonary diseases and potential drug targets of human HIV infected cells. Dr. He received a M.D. in clinical medicine from Beijing University Medical School, a Ph.D. in medical sciences from the Medical College of Ohio and a master’s degree in business administration from the University of Chicago Booth School of Business.

Want to read more Life Sciences Report interviews like this? Sign up for our free e-newsletter, and you’ll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Interviews page.

DISCLOSURE:
1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report:Catalyst Pharmaceutical Partners Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Echo He: 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: Maxim Group has received compensation for investment banking services from Rexahn Pharmaceuticals Inc. in the past 12 months. Maxim Group expects to receive or intends to seek compensation for investment banking services from Rexahn Pharmaceuticals Inc, in the next three months. Maxim Group makes a market in Rexahn Pharmaceuticals Inc. Maxim Group managed/co-managed a public offering of the securities for Catalyst Pharmaceuticals Partners, Inc. in the past 12 months. Maxim Group expects to receive or intends to seek compensation for investment banking services from Catalyst Pharmaceuticals Partners Inc. in the next three months. Maxim Group received compensation for investment banking services from Catalyst Pharmaceuticals Partners Inc. in the past 12 months. Maxim Group makes a market in Catalyst Pharmaceuticals Inc. 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.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts’ statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports’ terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

Streetwise – The Life Sciences Report is Copyright © 2014 by Streetwise Reports LLC. All rights are reserved. Streetwise Reports LLC hereby grants an unrestricted license to use or disseminate this copyrighted material (i) only in whole (and always including this disclaimer), but (ii) never in part..

Streetwise Reports LLC does not guarantee the accuracy or thoroughness of the information reported.

Streetwise Reports LLC receives a fee from companies that are listed on the home page in the In This Issue section. Their sponsor pages may be considered advertising for the purposes of 18 U.S.C. 1734.

Participating companies provide the logos used in The Life Sciences Report. These logos are trademarks and are the property of the individual companies.

101 Second St., Suite 110
Petaluma, CA 94952

Tel.: (707) 981-8204
Fax: (707) 981-8998
Email: [email protected]

By Jeff Clark, Senior Precious Metals Analyst, Casey Research

Bear markets always end. Has this one?

Evidence is mounting that the bottom for gold may be in. While there’s still risk, there’s a new air of bullishness in the industry, something we haven’t seen in over two years.

An ever-growing number of industry insiders and investment analysts believe the downturn has come to a close. If that’s true, it has immediate and critical implications for investors.

Doug Casey told me last week: “In my lifetime, the best time to have bought gold was 1971, at $35; it ran to over $800 by 1980. In 2001, gold was $250: in real terms even cheaper than in 1971. It ran to over $1,900 in 2011.

“It’s now at $1,250. Not as cheap, in real terms, as in 1971 or 2001, but the world’s financial and economic state is far more shaky.

“Gold is, once again, not just a prudent holding, but an excellent, high-potential, low-risk speculation. And gold stocks are about to create a whole new class of millionaires.”

Just a couple of months ago, you would have had a hard time finding even one analyst saying something positive about gold and gold stocks—even some of the most bullish investment pros had gone silent.

But that’s changing. Case in point: When Chief Metals & Mining Strategist Louis James and I attended last week’s Resource Investment Conference in Vancouver, we witnessed quite a few very optimistic speakers.

Take Frank Giustra, for example, a self-made billionaire and philanthropist who made his fortune both in the mining sector and the entertainment industry. He’s the founder of Lionsgate Entertainment, which is responsible for blockbuster movies like The Hunger Games, but he was just as heavily involved with mining blockbusters such as Iamgold, Wheaton River Minerals, Silver Wheaton, and others.

“I’m telling you, you’ve seen the bottom of the gold market,” he told the rapt audience at the conference, offering a bet to the Goldman Sachs analyst who claimed gold is going to $1,000.

The stakes: Whoever loses has to stand on a popular street in downtown Vancouver dressed in women’s underwear.

Tom McClellan, editor of the McClellan Market Report, stated in a recent interview on CNBC: “The commercial traders are at their most bullish stance since the 2001 low, and they usually get proven right. It’s a hugely bullish condition for gold, and I’m expecting a really large rebound.

“The moment we see a major gold producer announce that it’s curtailing production or it’s going out of business,” McClellan continued, “that’ll be the moment we mark the low in gold. I expect to have one of those announcements any minute. We’re getting down to the production price of gold right now, and they won’t continue producing gold at that level for very long.”

Are they just guessing? To answer that, first consider the historical context of this bear market—it’s getting very long in the tooth:

• The current correction in gold stocks is the fourth longest since 1879. The decline of 66% ranks in the top 10 of recorded history.

• In silver, only two corrections have lasted longer—the ones that ended in 1936 and 1983.

Some technical analysts have pointed to positive chart formations, most notably the powerful “double bottom” that can portend a strong upward move. Based on intraday prices…

• Gold formed a double bottom last year, hitting $1,180.64 on June 28 and $1,182.60 on December 31, a convincing six-month span.

• Silver formed a higher low: $18.20 on June 28 vs. $18.72 on December 31, a bullish development.

• Gold stocks (XAU) formed a slightly lower low: $82.29 on June 26 vs. $79.73 December 19, 2103, a difference of 3.2%. However, as our friend Dominick Graziano, who successfully helped us earn doubles on three GLD puts last year, recently pointed out…

• The TSX Venture Index, where most junior mining stocks trade, has stayed above its June low. In fact, it recently soared above both the 50-day and 40-week moving averages for the first time since 2011.

Meanwhile, Goldcorp (GG) sent a huge bullish signal to the market earlier this month. It decided to pounce on the opportunities available right now, launching a takeover bid of Osisko Mining for $2.6 billion. The company wouldn’t be buying now if it thought gold was headed to $1,000.

As Dennis Gartman, editor and publisher of The Gartman Letter, says, “It’s time to be quietly bullish.”

The smart money, like resource billionaire Rick Rule, is not just quietly bullish, though—they are actively buying top-quality junior mining stocks at bargain-basement prices to make a killing when prices rise.

To make sure that you can invest right alongside them, we decided to host a sequel to our 2013 Downturn Millionaires event, titled Upturn Millionaires—How to Play the Turning Tides in the Precious Metals Market.

Back then, we made a strong case for this once-in-a-generation opportunity—but it was still undetermined when the bottom would be in. It looks like that time is now very near, and we believe it’s time to act.

On Wednesday, February 5, at 2 p.m. EST, resource legends Frank Giustra, Doug Casey, Rick Rule, and Ross Beaty, investment gurus John Mauldin and Porter Stansberry, and Casey Research resource experts Louis James and Marin Katusa will present the evidence and discuss the possibilities for life-changing gains for investors with the cash and courage to grab this bull by the horns.

How do we know the absolute bottom is in? I’ll answer that with a quote from a recent Mineweb interview with mining giant Rob McEwen, former chairman and CEO of Goldcorp:

“I’d say we’re either at or extremely close to the bottom, and as an investor I’m not prepared to wait to see if the bottom’s there because it’s very hard to pick it. Because … if you’re not taking advantage of it right now, you’re going to miss a big part of the move. And when you look at the distance these stocks have to travel to get to their old highs, there’s some wonderful numbers in terms of performance that I think we’re going to see.”

Granted, these voices are still in the minority—but that’s what makes this opportunity wonderfully contrarian. After all, once “Buy gold stocks” is investor consensus, we’ll be approaching the time to sell.

Our Upturn Millionaires experts believe that our patience is about to be rewarded. And when that happens, gold stocks will be easy doubles—and the best juniors potential ten-baggers.

Don’t miss the free Upturn Millionaires video event—register here to save your seat. (Even if you don’t have time to watch the premiere, register anyway to receive a video recording of the event.)

By CentralBankNews.info
    Moldova’s central bank maintained its basic policy rate at 3.5 percent, along with its other main rates, saying monetary policy continues to be affected by the complex balance of the risk of inflation and the risk of deflation.
    The National Bank of Moldova, which last cut its rate by 100 basis points in April 2013, said the disinflationary pressure is arising from low aggregate demand and a depreciation of the currencies of its trading partners while the recovery of European economies and a sharp rise in food prices could offset this pressure.
    The bank said its board had approved the first inflation report of 2014, which will be presented on Feb. 6, in which it forecasts inflation in 2014 and 2015 within the central bank’s target range of 5.0 percent, plus/minus 1.5 percentage points.
    Moldova’s inflation rate rose to 5.2 percent in December, up from 4.9 percent, the central bank said, adding that inflation has remained within the bank’s range for the last 23 months.
    Moldova’s Gross Domestic Product grew by an annual 12.9 percent in the third quarter, up from a growth rate of 6.1 percent in the second quarter, mainly due to a significant increase in the value of agricultural products after a year of drought, which resulted in higher exports and a modest rise in imports.

    http://ift.tt/1iP0FNb

By John Mauldin

Last week Greg Weldon made the case for rising interest rates on US treasuries. This week Lacy Hunt offers us the case for a continued low-interest-rate environment for long-term treasuries. This is one of the most fascinating tugs-of-war in the investment world today. I’ve made the argument that we are in a deflationary deleveraging world for quite some time to come, or at least until the velocity of money turns around. Lacy makes that point, too, and offers some insights into the velocity of money. This is a fascinating Outside the Box, and I won’t spoil it by stealing any more of Lacy’s thunder.

I write from a sunny, if cold, Dallas. The thermostat has been a topic of conversation in my apartment lately, and not just because we need to keep turning it up. By now, the entire world knows that Google bought the thermostat company Nest for $3.2 billion, a good 50% more than the valuation Nest was trying to raise money on just a month earlier. I was rather surprised at the price, but I was also surprised that Google paid $1.65 billion for YouTube. Now, six years later, the YouTube franchise produced almost $6 billion in revenues last year. Clearly, the founders of Google saw something that much of the world did not see at the time. My suspicion is that Nest will end up ranking in the same category of return on investment for Google.

I have installed the cool new Nest thermostats in my new apartment. Having bought and installed thermostats on my own for various homes in the past, I was thoroughly surprised at the value of the Nest thermostat. Just a few years ago it would’ve cost some three to four times more to buy the same functionality that the Nest thermostat has. And this little toy does so much more. It actually adjusts itself to my personal habits and preferences and allows me to change everything from my iPad when I go to bed in the evening or get up in the morning, with a thoroughly programmable slate of settings. It even senses when I come close to it. It is just one element in what will soon be the Internet of Things that Cisco CEO John Chambers says will rapidly come to be worth $20 trillion.

I’m enjoying all the new technology that we’ve installed in the apartment, and we’ve designed and wired it to be able to adapt to what we think will be the direction of further change. I’m just hoping I don’t have to buy antivirus software for my oven.

Have a great week.

Your thinking about mortgage interest rates analyst,

John Mauldin, Editor
Outside the Box[email protected]

Stay Ahead of the Latest Tech News and Investing Trends…

Click here to sign up for Patrick Cox’s free daily tech news digest.

Each day, you get the three tech news stories with the biggest potential impact.

---

Hoisington Investment Management – Quarterly Review and Outlook – Fourth Quarter 2013

In The Theory of Interest, Irving Fisher, who Nobel Laureate Milton Friedman called America’s greatest economist, created the Fisher equation, which states the nominal bond yield is equal to the real yield plus expected inflation. It serves as the pillar of macroeconomics and as the foundational relationship of the bond market. It has been reconfirmed many times by scholarly examination and by the sheer force of historical experience. Examining periods of both low and high inflation offers insight into how each variable in the Fisher equation affects the outcome.

From 1871 to 1948, a period of relatively low inflation, the Treasury bond yield averaged 2.9%, with the inflation rate 1.0% and the real yield 1.9%. From 1948 to 1989, a period of higher inflation, the Treasury bond yield increased to 6.0%, inflation jumped to 4.3% on average, but the real yield remained close to historical levels at 1.7% (Chart 1). In more recent times, the inflation rate has changed, but the real rate has remained close to historical averages. The significant point is that while average inflation and bond yields were volatile, the average real yield was far more stable. Over these longer stretches the average real yield was never far from the post 1871 average of 2.2%. Thus, over long periods of time, bond yields fluctuated in response to rising and falling inflation. However, the real bond yield steadily reverted to its mean indicating that inflation was the driving force in determining the bond yield over time.

Inflation

A host of different factors caused inflation to vary in the aforementioned periods, but two points of significance are identifiable. First, the seventy-year plus span between 1871 and 1948 (excluding the World War years) was an extended global market era. It began about the time of uninterrupted transcontinental railroad travel and the completion of the Suez Canal and resulted in a period of rapidly expanding global trade. By 1871, 10% of U.S. railroad traffic carried goods that were traded globally. This era produced increasing returns to scale and minimized price pressures. Second, the 1871-1948 period encompassed two episodes of high indebtedness: the 1870s and then the 1920s until the mid-to-late 1940s. Both severely destabilized economic activity and produced minimal inflation, which in turn led to bond yields that eventually reached slightly less than 2%.

From 1871 to 1948, there were two, twenty-year periods when the total return on long- term Treasury bonds exceeded the total return on the S&P 500: one from the 1870s to the 1890s and another from 1928 to 1948. Additionally, the traditional vibrancy in demographic trends in the United States ended during the 1930s as both the birth rate and total increase in population slowed dramatically.

The period from 1948 to 1989 differs markedly. By 1948, a global market did not exist, and the excessive indebtedness of the 1920-1930s had been eliminated. In the late 1940s, the Iron and Bamboo Curtains imposed by Russia and China removed roughly 50% of the world’s population from global trade, reducing economies of scale. During the war years, from 1933 to 1948, the U.S. ratio of public and private debt to GDP dropped from 295% to 139%, as the personal saving rate jumped from below zero to 28% (Chart 2). With normal and sustainable debt levels the U.S. entered the post-war boom, a period of rapidly rising prosperity that produced greater returns in the S&P 500 than on long-term Treasury bonds. Additionally, the abysmal demographics of the 1930s gave way to the post-war baby boom as households became more positive about their economic prospects.

Today, conditions resemble the 1871-1948 period. Global trade is once again less inhibited and public and private debt is high and rising. The saving rate is also greatly depressed. In this modern era of high indebtedness, there have been long periods of negative risk premium which have lasted over a decade. Demographics have also soured. The birth rate in 2013 fell to the lowest level on record, and the population increase was the slowest since the depression era year of 1937. Thus, fundamental conditions are now conducive for an inflation rate averaging 1% or less. Based on the Fisher equation, long-term bond yields should be comfortable trading at 3% or lower.

The global inflation rate is influenced by many factors, but the current bout of low inflation and the insufficiency of demand are both symptoms of extreme over-indebtedness. Weakness in prices is evident in various price indices. Over the twelve months ending in November, the price of goods in the CPI actually decreased 0.5%, while the more accurately measured durable and nondurable components of the U.S. personal consumption deflator fell by 2.0% and 0.6%, respectively. Prices of imported goods fell 1.5% over the same period; excluding oil the decline was nearly as large. Facing weak domestic demand, foreign producers cut prices on goods headed toward the U.S. market, and this forced domestic producers to match those lower prices.

A lack of pricing power is likely to continue in 2014. First, the global economy continues to incur more indebtedness. Both public and private debt in the major economies of the world continue to move further above the levels that create a sustained negative impact on economic activity. Second, monetary conditions moved in the wrong direction last year, partially as a result of misguided policy efforts at quantitative manipulation of reserves. Third, although the sequester of government expenditures will be less in 2014 than in 2013, fiscal policy in the broadest sense is not supportive of economic growth.

Indebtedness

Academic research has shown that a public and private debt to GDP ratio above the range of 260-275% has a depressing impact on economic growth. In 2000 the U.S. debt level exceeded this range. Since then, the bond yield has averaged 4.6%, with inflation 2.1% and the real yield 2.5%. By comparing growth and debt figures prior to 2000 with those afterward, the magnitude of the problem and likelihood of its persistence can be assessed. From 1871 to 1999, private and public debt averaged less than 165% of GDP (well below the 260-275% critical level), and the trend growth in real GDP was 3.8%. From 2000 through 2013, growth has faltered to just 1.9%. Based on the latest 2013 figures, total private and public debt amounted to $58.2 trillion or 344% of GDP (Chart 3). If the debt to GDP ratio were currently the same as the average from 1871 to 1999, total debt should only amount to $30.5 trillion, or almost half of the existing level. The debt to GDP ratio declined since peaking in 2009 but not sufficiently to re-enter the normal range. Moreover, the ratio resumed its upward trend in 2013. Thus, the U.S. appears to be following the Japanese example of trying to cure an indebtedness problem by accumulating more debt.

Scholarly research conducted in the U.S. and Europe over the past three years indicates that existing levels of government debt relative to GDP have reached the point that historically have produced a deleterious effect on economic growth. In the past this effect has lasted two decades or longer. As termed by European researchers, the current levels have reached the “non-linear zone”. This means that the negative effects on growth are likely to intensify as this debt ratio moves higher. Ignoring this research is ill advised, especially since the debt levels are advancing. Although the U.S. budget deficit was smaller last year, the more critical debt ratio continued to rise.

According to the Organization for Economic Cooperation and Development (OECD), General U.S. Government Gross Financial Liabilities as a percent of GDP reached 104.1% in 2013, the highest level since the early 1950s (Table 1). (Gross, rather than net, government debt is the appropriate measure; netting out the government debt held in other government accounts is not appropriate since the social insurance trusts have far greater liabilities than they have government securities to fund those future commitments.) By the end of 2015 the OECD projects this figure to jump to 106.5%. Over the next twenty-five years the Congressional Budget Office projects government debt to GDP to move dramatically higher.

Since European fiscal policies mirror those in the U.S., it is not surprising that growth prospects there remain dismal. According to the OECD, General Government Gross Financial Liabilities in the Euro area reached 106.4% of GDP in 2013, up from 95.6% in 2011, an even faster rise than in the United States (Table 1). New research shows that the world average of total public debt, expressed as a percent of global GDP, is approximating its highest level since 1826 (IMF Working Paper WP/13/266, “Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten”, December 2013, by Carmen M. Reinhart and Kenneth S. Rogoff). Private debt to GDP in the Euro currency zone and the UK (and interestingly, in Japan) are all higher than in the U.S. and even further above the levels that research has identified as being detrimental to growth.

Monetary Conditions

As discussed in our last quarterly letter, three academic papers presented at the Jackson Hole conference determined that the present approach of quantitative easing by the Federal Reserve has actually slowed economic activity. Three considerations – real interest rates, the money multiplier and the velocity of money – indicate that monetary policy is working against economic growth.

First, monetary policy works primarily through price effects. The level of real interest rates determines the price of credit. In 2013, long-term Treasury bond yields rose 100 basis points, or 1.0%. The inflation rate, measured by the year-over-year change in the Fed’s targeted core personal consumption expenditure deflator, dropped 50 basis points. This pushed the real yield on the thirty-year bond to nearly 3% at the close of 2013. Thus, real yields currently carry a significant premium to the long-term average. The effects of this rising price of credit are visible in the high frequency housing data. Pending and existing home sales in November were below year ago levels. Mortgage applications for home purchases in December were at their lowest level in more than a decade.

Second, the money multiplier, which reflects the conversion of bank reserves into deposits (money) by the banking system, fell to a new 100 year low of less than 3 in late December 2013. This is an indication that the Fed’s Large Scale Asset Purchases (LSAP) are not currently producing real, tangible economic effects and are not likely to in the future. Since 1913, $1 of high-powered money has, on average, resulted in an increase of $8.20 of M2 (Chart 4). The current multiplier constitutes an unprecedented historical gap. To begin the process of accelerating economic growth from a monetary perspective, an increase in the multiplier would be necessary. The best indicator of whether this process is working would be the expansion of bank credit, which includes bank investments and bank loans. Unfortunately, the expansion of total bank credit is only 2.0% higher than a year ago, and bank loans have expanded by only 1.9%. In spite of the Fed’s massive LSAP, M2 expanded at a slightly slower pace in the latest twelve months than it did in 2012.

Third, the even more important velocity of money (V) rejects the argument that monetary policies are gaining traction. Velocity, or the speed at which money turns over, links M2 to the level of nominal economic activity. With the money supply expanding at 5.6% in the latest year, it would be reasonable to expect the same growth rate in nominal GDP if V were stable. Unfortunately, since 1997 velocity has been falling, and in the last twelve months it has dropped by 3% to 1.57, the lowest level in six decades (Chart 4). While velocity is influenced by a myriad of factors, the rate of change of financial innovation and lending for productive purposes affect its direction. If debt generates an income stream that repays principal and interest and creates other activities, it will tend to expand economic activity and cause V to rise. Student, auto and other loans for consumption (which represent the bulk of the increase in consumer credit in 2013) do not meet the necessary criteria, so debt is merely an acceleration of future consumption. This will tend to inhibit the borrower’s ability to increase consumption in the future. Further, new regulations on our financial industries are discouraging financial innovation, and this will bring further downward pressure on velocity. In 2014, if velocity continues to erode at a 3% pace and money supply continues to grow around 6%, it is reasonable to anticipate that nominal GDP will expand at about a 3% growth rate.

Fiscal Issues

Based on scholarly research, only half of the negative economic impact emanating from the $275 billion 2013 tax increase has been registered. Due to the recognition and implementation lags, the remaining drag on growth from the tax increase will occur this year and again in 2015. Carrying a negative multiplier of 2 to 3, this impact far outweighs the sequester (which is expected to be slightly less in 2014 than in 2013) since the multiplier for government expenditures is zero, if not slightly negative.

An important fiscal policy event for 2014 is the Affordable Care Act (ACA). Healthcare is the largest U.S. industry, comprising 17.2% of the economy in 2012. This is more than twice as large as residential construction, oil and gas exploration and the automotive sectors combined. The scope and scale of ACA may divert energy and activity away from more productive endeavors. The ACA’s employer mandate was waived in 2013, as were similar obligations of labor unions and others, but these waivers expire this year. Firms may have to cut some full time employees to part time, reduce total employment or cut benefits since they lack pricing power to cover these costs. As such, this will place the burden of adjustment on consumers. On January 1, health insurance premiums that target small businesses and individuals were raised. These groups create jobs and are vital for growth, thus even though the amount of the increase is small, this is still a net drag for economic growth. While the ACA is an unprecedented event for which no historical point of comparison exists, history does confirm that substantial increases in government regulation are not a springboard for innovation, the lifeblood of economic activity.

The slow nominal growth rate anticipated for 2014 should continue to put downward pressure on the inflation rate as the insufficiency of demand continues to create highly competitive markets. With slower inflation, lower long-term interest rates are a probable outcome.

Van R. Hoisington
Lacy H. Hunt, Ph.D.

Like Outside the Box?
Sign up today and get each new issue delivered free to your inbox.
It’s your opportunity to get the news John Mauldin thinks matters most to your finances.

© 2013 Mauldin Economics. All Rights Reserved.
Outside the Box is a free weekly economic e-letter by best-selling author and renowned financial expert, John Mauldin. You can learn more and get your free subscription by visiting www.MauldinEconomics.com.
Please write to [email protected] to inform us of any reproductions, including when and where copy will be reproduced. You must keep the letter intact, from introduction to disclaimers. If you would like to quote brief portions only, please reference www.MauldinEconomics.com.
To subscribe to John Mauldin’s e-letter, please click here: http://www.mauldineconomics.com/subscribe
To change your email address, please click here: http://www.mauldineconomics.com/change-address

Outside the Box and MauldinEconomics.com is not an offering for any investment. It represents only the opinions of John Mauldin and those that he interviews. Any views expressed are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest and is not in any way a testimony of, or associated with, Mauldin’s other firms. John Mauldin is the Chairman of Mauldin Economics, LLC. He also is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states, President and registered representative of Millennium Wave Securities, LLC, (MWS) member FINRA, SIPC, through which securities may be offered . MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB) and NFA Member. Millennium Wave Investments is a dba of MWA LLC and MWS LLC. This message may contain information that is confidential or privileged and is intended only for the individual or entity named above and does not constitute an offer for or advice about any alternative investment product. Such advice can only be made when accompanied by a prospectus or similar offering document. Past performance is not indicative of future performance. Please make sure to review important disclosures at the end of each article. Mauldin companies may have a marketing relationship with products and services mentioned in this letter for a fee.

Note: Joining The Mauldin Circle is not an offering for any investment. It represents only the opinions of John Mauldin and Millennium Wave Investments. It is intended solely for investors who have registered with Millennium Wave Investments and its partners at http://www.MauldinCircle.com (formerly AccreditedInvestor.ws) or directly related websites. The Mauldin Circle may send out material that is provided on a confidential basis, and subscribers to the Mauldin Circle are not to send this letter to anyone other than their professional investment counselors. Investors should discuss any investment with their personal investment counsel. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments. John Mauldin is the President of Millennium Wave Advisors, LLC (MWA), which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS), an FINRA registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. Millennium Wave Investments cooperates in the consulting on and marketing of private and non-private investment offerings with other independent firms such as Altegris Investments; Capital Management Group; Absolute Return Partners, LLP; Fynn Capital; Nicola Wealth Management; and Plexus Asset Management. Investment offerings recommended by Mauldin may pay a portion of their fees to these independent firms, who will share 1/3 of those fees with MWS and thus with Mauldin. Any views expressed herein are provided for information purposes only and should not be construed in any way as an offer, an endorsement, or inducement to invest with any CTA, fund, or program mentioned here or elsewhere. Before seeking any advisor’s services or making an investment in a fund, investors must read and examine thoroughly the respective disclosure document or offering memorandum. Since these firms and Mauldin receive fees from the funds they recommend/market, they only recommend/market products with which they have been able to negotiate fee arrangements.

PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN MANAGED FUNDS. WHEN CONSIDERING ALTERNATIVE INVESTMENTS, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER. Alternative investment performance can be volatile. An investor could lose all or a substantial amount of his or her investment. Often, alternative investment fund and account managers have total trading authority over their funds or accounts; the use of a single advisor applying generally similar trading programs could mean lack of diversification and, consequently, higher risk. There is often no secondary market for an investor’s interest in alternative investments, and none is expected to develop.

 

 

 

By Andrey Dashkov

Business Development Companies (BDCs) are publicly traded private debt and equity funds. I know that description isn’t terribly sexy, but keep reading and you’ll find there’s a lot to be excited about.

BDCs provide financing to firms too small to seek traditional bank financing or to do an IPO, but at the same time are too advanced to interest the earliest-stage venture capitalist. These companies are often near or at profitability and just need extra cash to reach the next milestone. Filling this void, BDCs provide funds to target companies in exchange for interest payments and/or an equity stake.

BDCs earn their living by lending at interest rates higher than those at which they borrow. Conceptually, they act like banks or bond funds, but with access to yields unlike any you’ll see from a traditional bond fund. The interest rate spread—meaning the difference between their capital costs and interest they charge their clients—is a major component of their business.

Oftentimes, a BDC will increase its dividend when market interest rates have not changed. Like a bank, the more loans it has in force, the more it profits. Increasing its dividend payout will generally have a very positive effect on its share price.

Unlike banks or many other traditional financial institutions, however, BDCs are structured to pay out more than 90% of their net profits to the shareholders. In return, BDCs don’t pay any income tax. In essence, their profits flow through to the owners. Many investors like to own BDCs in an IRA to create tax-deferred or tax-free income. The opportunity to use them for tax planning purposes, access to diversified early-stage financing, and the impressive dividend yields they deliver make them a perfect fit for the Bulletproof Income strategy we employ at Miller’s Money Forever.

The Clients

As a business model, BDCs emerged in response to a particular need: early-stage companies needed funding but couldn’t do it publicly due to their small size. At the same time, these companies didn’t match the investment criteria of so-called angel investors or venture capital providers. Enter the Business Development Company.

BDC teams, through expertise and connections, select the most promising companies in their fields and provide funds in return for a debt or equity stake, expecting gains from a potential acquisition scenario and a flow of interest payments in the meantime. The ability to selectively lend money to the right startup companies is paramount. It makes little difference how much interest they charge if the client defaults on the loan.

With limited financing options, BDCs’ clients may incur strict terms regarding their debt arrangements. The debt often comes with a high interest rate, has senior-level status, and is often accompanied by deal sweeteners like warrants which add to the upside potential for those with a stake in the borrowing company.

In return for these stringent terms, the borrower can use the funds to:

•Increase its cash reserve for added security;

•Accelerate product development;

•Hire staff and purchase licenses necessary to advance R&D, etc.

•Invest in property, plant, and equipment to produce its product and bring it to market.

Turning to a BDC for funds allows a company to finance its development and minimize dilution of equity investors while reaching key value-adding milestones in the process.

What’s in It for Investors?

In addition to the unique opportunity to access early-stage financing, we like BDCs for their dividend policy and high yield. The Investment Act of 1940 requires vehicles such as BDCs to pay out a minimum of 90% of their earnings. In practice, they tend to pay out more than that, plus their short-term capital gains.

This often results in a high yield. Yields of 7-12% are common, which makes this vehicle unique in today’s low-yield environment. The risk is minimized by diversification—like a good bond fund, they spread their assets over many sectors. This rational approach and the resulting income make the right BDC(s) a great addition to our Bulletproof Income strategy.

BDCs and the Bulletproof Income Strategy

In short, BDCs serve our strategy by:

• Providing inflation protection in the form of high yields and dividend growth;
• Limiting our exposure to interest-rate risk, thereby adding a level of security (some BDCs borrow funds at variable rates, but not the ones we like);
• Maintaining low leverage, which BDCs are legally required to do;
• Distributing the vast majority of their income to shareholders, thereby creating an immediate link between the company’s operating success and the shareholders’ wellbeing… in other words, to keep their shareholders happy, BDCs have to perform well.

How Should You Pick a BDC?

Not every BDC out there qualifies as a sound investment. Here’s a list of qualities that make a BDC attractive.

• Dividend distributions come from earnings. This may sound like common sense, but it’s worth reiterating. A successful BDC should generate enough quarterly income to pay off its dividend obligations. If it doesn’t, it will have to go to the market for funds and either issue equity or borrow—or deplete cash reserves it would otherwise use to fund future investments. An equity issuance would result in share dilution; debt would increase leverage with no imminent potential to generate gains; and a lower cash reserve is no good either. We prefer stocks that balance their commitments to the shareholders with a long-term growth strategy.
• The dividends are growing. This is another characteristic of a solid income pick, BDC or otherwise. Ideally, the dividend growth would outpace inflation, in addition to the yield itself being higher than the official CPI numbers. This growth can come from increasing the interest rate spread and also having more loans on the books.
• Yields should be realistic. We’d be cautious about a BDC that pays more than 12% of its income in dividends. Remember, gains come from the interest it receives from the borrowers. Higher interest indicates higher-risk debt on a BDC’s balance sheet, which should be monitored regularly.
• Fixed-rate liabilities are preferred. We need our BDC to be able to cover its obligations if interest rates rise. Fixed rates are more predictable than floating rates; we like the more conservative approach.
• Their betas should be (way) below 1. We don’t want our investment to move together with the broad market or be too interest-rate sensitive. Keeping our betas as low as possible provides additional opportunities to reduce risk, which is a critical part of our strategy.
• They are diversified across many sectors. A BDC that has 100 tech companies in its portfolio is not as well diversified as a one with 50 firms scattered across a dozen sectors, including aerospace, defense, packaging, pharmaceuticals, and others. Review a company’s SEC filings to see how many baskets its eggs are in.

Wrap-up

Right now, BDCs look very interesting to income-seeking investors. They provide excellent yields, diversification opportunities, and access to early-stage companies that previously only institutions enjoyed. They also fit in with Miller Money Forever‘s Bulletproof Income strategy, the purpose of which is to provide seniors and savers with real returns, while offering maximum safety and diversification.

Catching a peek our Bulletproof portfolio is risk-free if you try today. Access it now by subscribing to Miller’s Money Forever, with a 90-day money-back guarantee. If you don’t like it, simply return the subscription within those first three months and we’ll refund your payment, no questions asked. And the knowledge you gain in those months will be yours to keep forever.

See original article: Business Development Companies

By OilPrice.com

Iraq’s Deputy Prime Minister for Energy Affairs firmly stated the central government will take action, “including fiscal measures,” if Kurdistan begins exporting oil without coming to an agreement with Baghdad. The remarks came as Minister Hussain al-Shahristani spoke at a conference in London on January 28. The Kurdish Regional Government (KRG) announced in mid-January that oil had begun to flow through a pipeline towards Turkey and that exports would officially start by the end of the month.

Shahristani argues that Kurdish oil must be exported through the State Oil Marketing Organization (SOMO), a government-owned entity responsible for marketing Iraq’s oil. He reiterated that oil extracted from any region of Iraq, including Kurdistan, is the “property of the Iraqi people,” meaning that it is owned by the central government.

The tough statement follows similar threats from other Iraqi government officials in recent weeks as the Kurds prepare to export oil to Turkey. On January 17 Iraqi Oil Minister Abdul Kareem Luaibi said Iraq will take legal steps to punish Turkey, Kurdistan, and the international oil companies involved in exporting oil. And on January 12 Iraqi Prime Minister Nuri al-Maliki promised to cut KRG’s share of the national budget if it begins exports without approval from the central government.

The conflict escalated when Baghdad followed through on Maliki’s threat. It released a draft national budget on January 15 that completely cut off funding for Kurdistan, a move meant to put pressure on the KRG to heed the central government’s demands. Kurdish ministers walked out of the cabinet session when the budget was released.

The central government has been angling to prevent Kurdistan from unilaterally exporting oil to Turkey, but that does not mean Baghdad doesn’t want Kurdish oil to flow. Indeed, according to the budget, the central government is requiring 400,000 barrels of oil from Kurdistan to be exported, and any shortfall will be made up by deducting from Kurdistan’s share of national revenues. Kurdistan is entitled to a 17% share of revenues collected as part of Iraq’s revenue sharing arrangement. The KRG argues that those funds are often not delivered.

Yet it also appears that Kurdistan is pushing for much more than merely to export oil on its own terms. Ali Balu, a former head of Iraqi parliament’s oil and gas committee recently stated that within a few years “Kurdistan is going to be rid of its status as a region within Iraq,” according to an article in Rudaw, a Kurdish news web site. Balu went on, “a plan is underway for Kurdistan to be an independent state in the near future.”

Exporting oil from Kurdistan is a key step in the KRG’s plan to eventually declare independence from Iraq. Clearly, Baghdad is not oblivious to this fact, seeing which way the winds are blowing. This is why the central government is so adamant about centralizing the oil export process. Both sides may be unwilling to give in, but the situation appears to be coming to a head, as Kurdistan expects to initiate exports within days.

Source: http://oilprice.com/Geopolitics/Middle-East/Iraqi-Government-Threatens-Action-Against-Kurds-as-Oil-Exports-Set-to-Begin.html

By. Nick Cunningham of Oilprice.com