InvestMacro Forex News

Article by Investment U

Gather some patience and begin following the legendary Templeton strategy full circle back to Japan by adding some DXJ and SCJ to your global portfolio.

Sir John Templeton’s strategy was simple and forward-looking. He searched for deep value worldwide, particularly in markets that were greatly out of favor.

“It’s not easy,” Templeton stated, “but if you’re going to buy the best bargains, look in more than one industry, and look in more than one nation.”

Templeton was way ahead of his time. For example, he plunged into the Japanese market just as it was emerging from the rubble of World War II. He bought just about every share he could get his hands on, and at one point 60% of his flagship fund was in Japanese equities. He did the same thing in Peru in the early 1980s, buying across the board when the country was going through political upheaval.

Though simple, Templeton’s strategy requires two attributes in short supply amongst investors: nerve and patience.

You need a bit of nerve to take action at a time when a company, industry, or country is despised. You also need patience to search for bargains, and then wait for markets to recognize the value and growth prospects.

Where would Templeton be looking right now? He might well have gone full circle back to Japan.

During the last five years, Merrill Lynch reports that global investors have underweighted Japan to a significant degree. Reflecting this skepticism, the Japanese Nikkei 225 stock Index has lagged world markets by more than a third during this period with a cumulative return of negative 5%.

Apathy by both Japanese and international investors, weakness in key European and Chinese export markets, and an overvalued yen have combined to push Japan’s stock market to rock bottom prices.

About 75% of the stocks in its broad TOPIX Index are now trading below break up (book) value and, until last week, the market was down eight weeks in a row.

This is despite signs that Japan’s economy is showing some vitality. Corporate profits are expected to be up 60% in 2012, and GDP growth in the first quarter topped 4%.

And in the first five months of 2012 alone, according to Dealogic, Japanese companies were on the march, spending $35.4 billion on foreign acquisitions. Last year, a record $83.7 billion in deals was inked, including $25 billion on Chinese companies. A lot of these deals were significant but quietly executed. Earlier this month, Marubeni’s $5.6-billion bid for Gavilon, a large U.S. grain trading company, was typical.

This flurry of deals is being fueled by a super strong yen that has put foreign companies on sale. But this window is closing, since the Japanese yen is significantly overvalued. And a weaker yen is the catalyst to drive stock prices higher in the face of Japan’s well-known debt and demographic headwinds.

Any weakening of its currency will spark a rally in Japan’s export-heavy market. But a weaker yen will also unfortunately cut into the performance of just about every Japanese ETF with one exception. The WisdomTree Japan Hedged ETF (NYSE: DXJ) takes currency completely out of the equation.

Next, let’s turn to Japanese small-cap stocks, which are even cheaper than Japan’s leading multinationals. Japanese small caps are trading at only one third of their total sales compared to 1.2 times sales for Nasdaq. The dividend yield for Japanese small caps is also 2.6%, while it’s less than 1% for Nasdaq.

What an opportunity.

Smaller Japanese stocks also have scant research coverage, cash-rich balance sheets and are growing fast by targeting Asian markets outside of Japan.

Unfortunately, very view of these small caps trade on U.S. exchanges, so your best bet is the Small-Cap Japan ETF (NYSE: SCJ).

I understand that making a lot of money in a short time is the goal of many investors but history makes clear that this attitude is unlikely to build wealth. Gather some patience and begin following the legendary Templeton strategy full circle back to Japan by adding some DXJ and SCJ to your global portfolio.

Good Investing,

Carl Delfeld

Article by Investment U

By Central Bank News

By Central Bank News

By Central Bank News

By MoneyMorning.com.au

Allen Stanford is a bad man.

A US court this week sentenced him to 110 years in prison for running a USD$7 billion Ponzi scheme.

Just how bad is he?

According to the US District Court, Southern District of Texas, Houston Division, it recommended an even heavier sentence:

‘Robert Allen Stanford is a ruthless predator responsible for one of the most egregious frauds in history, and he should be sentenced to the statutory maximum sentence of 230 years’ imprisonment.’

But what did he do that was so bad?

We’ll get to that in a moment. Before we do, in yesterday’s Money Morning we missed out a key part of a quote that renders the quote meaningless. The missing piece was in a quote from Bank of England governor, Mervyn King’s speech in 2007.

To read the full article again, including the missing section, click here…

Back to Stanford. Where do we start…? Put simply, Stanford operated a bank that, like most banks, sought to attract savers. Savers deposited cash and were told they would get a 3-4% return on their money.

This return was higher than other banks ‘supposedly because of low taxes and the bank’s low overhead.’

According to court files, Stanford claimed his bank ‘invested in highly liquid, safe, conservative stocks, bonds and precious metals; made no loans unless they were secured by an equal amount in cash, and therefore incurred no credit risk.’

But what actually happened to investor money is completely different. And it led the US District Court to call him a ‘ruthless predator’.

According to the court files…

‘Prior to 1990, Stanford began diverting depositor funds into various speculative real estate ventures he personally owned. By late 1990, at least half the bank’s reported assets did not exist…

‘By February 2009, Stanford had sunk over $2 billion in depositor funds into various failing businesses he owned, including, among other things: restaurants, regional airlines, a newspaper, and a host of companies which were not even actual businesses but which existed solely to hold title for tax purposes to Standford’s fleet of jets and boats.’

The files continue…

‘By 2008, Stanford was stealing $1 million a day from the bank to keep his failing personal businesses open.’

And…

‘When a potential depositor wanted to confirm the existence of the purported issuer of the insurance policy, Stanford admitted to Davis that the policy was fake and had Davis fly to London for a day to fax a false confirmation of the insurance company’s existence from a cubicle which Stanford rented.’

What else did Stanford do with the money he stole? The court files state…

‘He purchased suits from Bijan, a private Beverly Hills clothier that advertised itself as the world’s “most expensive” mens clothing store…He used his planes to fly a tailor from Bergdorf Goodman to his Miami and Antigua homes for measurements, regularly flew bottled artesian water to his home in St. Croix, flew fish for his koi pond…

‘In Antigua, he became a one-man stimulus package, eventually becoming the largest employer after the government. He developed a massive complex adjacent to the airport, constructing large, impressive buildings to headquarter his various businesses, complete with their own water treatment facility. Stanford also became a leading patron of cricket, building an enormous stadium and sponsoring the Stanford 20/20 cricket tournament with a $20 million prize.’

The list goes on. And you get the idea.

The thing is, like Bernie Madoff, if it wasn’t for the 2008 financial meltdown and investors redeeming investments for the safety of cash, Stanford’s Ponzi scheme wouldn’t have unravelled.

And they would probably still be taking investor money now.

If the court files are right, Stanford started swiping money from investors in 1990. So he had gotten away with it for 18 years before he was rumbled.

But this is more than just a crook taking savings from innocent people. It’s an extreme example of how any large deposit-taking institution works.

Look, we’re not saying the banks take your savings and use it to line their own pockets. That they buy private jets, boats and $10,000 suits with your savings.

But at the heart of the Stanford Ponzi scheme is one incontestable fact: investors couldn’t get their hands on their money when they asked for it.

And that’s no different to any large bank anywhere in the world. If too many customers try to withdraw their savings, the bank will run out of cash, simply because the money won’t be there…

Banks take deposits, create new money and then lend it out so borrowers can buy a house, car, boat or expensive suit.

But when it comes down to it, a typical bank holds less than 5% of its depositors’ obligations in the form of cash or cash-like instruments. In other words, if savers try to withdraw in cash 6% of the total savings held by a bank, the bank would have to close its doors.

The bank wouldn’t have the cash to cover its obligations.

So, even though we agree that Stanford is a crook for swiping $7 billion of savers money to fritter away on trinkets, we still can’t help think that Stanford’s business model isn’t a million miles away from most banks’ business models…

Luring investors with higher interest rates and then divvying the cash out to those who would like to spend it. In Stanford’s case, he divvied it out to himself…in the case of banks, the cash goes to the millions of borrowers, with no guarantee the loans will ever be repaid.

Madoff and Stanford were caught out because investors wanted more safety for their money. As the markets remain volatile and the solvency of financial institutions is questioned worldwide, it’s only a matter of time before more mainstream banks go to the wall.

You’re seeing that happen in Europe right now. And if there are a string of bank collapses there, it could have a knock-on effect and put a question mark over the entire global banking system.

Don’t assume your money is safe in any bank when that happens. So make sure you hold assets outside the banking system if you want to avoid a complete wipe-out when the global financial system breaks down.

Cheers,
Kris.

The Most Important Story This Week…

Money Morning editor Dr. Alex Cowie has written recently about the market for the strategic metal graphite. This is in short supply. Investors who took positions in graphite stocks have made lucrative returns recently as the market scrambled to buy into the latest hot sector. A similar shortage exists in the tungsten market. Tungsten is a vital metal but China produces 80% of the world’s supply.

The Chinese officials have imposed strict export quotas to shut out most foreign buyers. The crunch in supply is sending the tungsten price higher and higher. It’s another signal that the bull market in tungsten is set to get very hot in the near future. That means the hunt is on for explorers to find resources elsewhere. Get the full story in Why Warren Buffett is Loading Up on Tungsten

Other Recent Highlights…

Kris Sayce on Australian Housing – How to Avoid This Pauper’s Retirement Trap: “In fact, if The Australian and Fitch Ratings are right, Aussie sub-prime lending was or is only slightly lower than US sub-prime lending levels. So rather than the banks being more prudent with borrowing standards, they were knee deep in dodgy loan applications.”

John Stepek on The Hidden Cost of the Spanish Bailout: “By bailing out the banks this way… private sector lenders have been pushed down the line for payback. In other words, lending to Spain has just become even more risky. And by extension, so has every other European sovereign that might potentially need a bailout.”

Dr. Alex Cowie on Why Graphite is One of the Few Places For Savvy Investors to Make Money: “People are being very quick to brush graphite off as a bubble. The quick assumption is that it is ‘the new rare earths’. Some similarities are there: both are obscure strategic minerals, both are controlled by China, and both sectors went off like a rocket. There is one very important difference.”

Greg Canavan on Why You Should Wish For a Falling Market: “This obviously matters for Australians. Every time Europe flashes red, global markets swoon. Our market and economy – perched on the edge of the world, open and exposed – seem to cop the brunt of the fallout. That won’t change anytime soon.”

The Financial Tale of a Ruthless Predator

By MoneyMorning.com.au

On Monday, I warned Money Morning readers how the ‘…Spanish Bank ‘Bankia’ is the poster child for this banking sickness. Formed in December 2010 from the consolidation of seven regional ‘cajas’, the Spanish government initially injected €4.5 billion into the bank. That amount predictably evaporated and Bankia is now subject to a massive recapitalisation plan.’

Let’s look at the Bankia deal in more detail. The government’s initial rescue plan was to take a €19 billion equity stake in the company by issuing its own debt to itself and giving it to the bank. Bankia would then use the debt as collateral to borrow cash from the European Central Bank (ECB) for a term of three years. The cash would count as equity and help recapitalise the bank.

In this way the Spanish government tried to create tangible equity by conjuring up debt from nothing. Thankfully, even for the ECB that was a step too far, and they knocked it on the head.

Before I go any further, I want to explain what bank equity is.

Every company, including banks, has a ‘capital structure’. The capital structure is really just a way of explaining how companies finance their assets. Assets are the things that generate a company’s revenue and profits, but they don’t just magically appear. The assets must be purchased (financed) with either debt or equity (combined, debt and equity represent a company’s liabilities on the balance sheet).

As you probably know, debt is borrowed money, usually with a fixed cost and a fixed term. The cost of equity is indeterminate, as is its term. You, as an investor in the ‘equity’ market, always invest in a company’s equity.

The other thing to remember is that in the ‘capital structure’ equity sits below debt…it is less secure. So if a company’s assets shrink for whatever reason (like a property downturn), so must the liabilities. Equity takes the first hit, followed by the different levels of debt holders.

The Difference With Banks

Banks differ from ordinary companies in that they are highly leveraged. That is, they have a lot of debt and not much equity financing their assets. So it doesn’t take much of a fall in asset values to wipe out the equity holders, i.e. a share price going to zero. When that happens the bank would go into bankruptcy and restructuring.

Debt holders would take a hit to absorb any further losses. These debt holders may only get back 50 cents in the dollar in a bankruptcy. With the balance sheet cleaned up, the bank could then relist and get on with business…presumably with a new, more risk-averse management team and board.

But in the modern world, where banks are Too Big To Fail (TBTF), that doesn’t happen. And it’s why this market continues to be so fragile…and why economies are not, and won’t recover from this crisis.

Let me explain…

The Spanish government wanted to inject €19 billion of equity into Bankia. That is, it wanted to protect bondholders and put taxpayer funds at risk from further writedowns. If the bank is in such bad shape, why not just wipe out existing equity holders, let the bondholders absorb other losses, and inject taxpayer funds after a restructure?

So why doesn’t this happen?

In my view, it’s because the global banking system is interconnected via a web of deceit. Banks issue pieces of paper (debt, to fund their assets) and other banks, insurance companies, and money market funds buy that paper. Many banks then bet on the TBTF/bailout theme by buying derivatives of that paper.

It sounds confusing, I know. That’s because it is. Global financial markets have turned into a massive casino where the banking system is the house. Governments are just the croupiers.

Why You Should Be Worried

The problem with this cosy little arrangement is that as more and more bad debt piles up in the banking system, it clogs up activity in the real economy. Economic growth grinds to a halt. The growth that authorities crave to pull nations out of the debt-dynamic hole becomes impossible to achieve. You can mask something all you like on the books, but in reality the situation deteriorates.

This failure to clean up the banks – which encourages even more speculation in the derivatives market – is going to eventually lead to a huge bust.

Share prices will plummet and the derivatives market will be in disarray. If you were at our After America conference in March you might recall the title of Satyajit Das’ presentation – ‘The Great Re-set’.

Perhaps that is what we will see…a re-setting of the system…the forces of Mother Nature to be denied no longer. When that happens, THAT will be the signal to buy with your ears pinned back. Falling share prices really are a good thing, because it increases the future return from long-term investments.

Or perhaps the spivs and charlatans who pass for leaders these days may have a few more rabbits left in the hat, to be conjured when things seem at their most bleak.

No one knows how this will play out. But I feel very uneasy about this market action. I know there are many who are sanguine, based on the promise of more bailouts and more money printing. But that just seems too easy… the default, hopeful belief.

Some things are bigger than central bankers, politicians and Jamie Dimon. The global credit market and the mountain of derivatives rising behind it certainly are.

Greg Canavan
Editor, Sound Money. Sound Investments.

From the Archives…

Why You Should Wish For a Falling Market
2012-06-08 – Greg Canavan

Why the U.S. Dollar is Really Rising
2012-06-07 – Keith Fitz-Gerald

How This Bear Market Could Last Another 18 Years… Just Like Japan’s
2012-06-06 – Kris Sayce

The Banking Plan That Could Be A Game-Changer for Gold
2012-06-05 – Dr. Alex Cowie

Best Investment Strategies For the Times Ahead
2012-06-04 – Nick Hubble

Understanding Banking Alchemy

Article by Investment U

With just a little bit of work, you’ll make more money and pay less in fees than you would with even the best dividend-paying mutual funds.

It’s not breaking news that dividends are hot. With bonds paying next to nothing, income-starved investors are increasingly pouring money into dividend-paying stocks.

Last year, while $178.2 billion was removed from equity products, $26.8 billion were invested into dividend-focused funds.

And mutual funds that specialized in dividends saw net inflows (more money invested in than taken out) every week for 44 weeks, according to EPFR Global.

I’m not a huge fan of mutual funds in general, and especially not those that are dedicated to dividends. You can do much better yourself.

For example, Columbia Dividend Opportunity I (RSOIX) is rated five stars by Morningstar. It has a current yield of 3.79% and an expense ratio of 0.75%. Since March of 2004, $10,000 invested turned into $16,915 versus $13,426 for the S&P 500.

Those are some pretty solid stats. If I were looking for a mutual fund that invested in dividend payers, this one would be near or at the top of my list. It’s beaten the S&P 500 and its peers since its inception, the yield is solid and the expense ratio is reasonable.

Its largest holdings are Lorillard (NYSE: LO), J.P. Morgan Chase (NYSE: JPM) and Pfizer (NYSE: PFE) – not exactly a low-risk group. Most of the rest of the portfolio are large cap names like Microsoft (NYSE: MSFT), AT&T (NYSE: T) and General Electric (NYSE: GE).

That’s because a $3.9-billion fund has to buy a lot of stock in order for any one position to be meaningful. A large fund is able to go into the market and purchase two million shares of AT&T or Microsoft.

But if there are better opportunities in smaller names, a mutual fund is going to have a tough time buying enough shares to make a difference.

For example, if you invested in some of the smaller-cap names that are in The Ultimate Income Letter’s Perpetual Income Portfolio, you could do significantly better at an even lower cost.

For instance, let’s say you invested $2,500 each into Community Bank System (NYSE: CBU), Omega Health Investors (NYSE: OHI), Main Street Capital (NYSE: MAIN) and Genuine Parts (NYSE: GPC). During the same eight-year period as the mutual fund’s 69% increase, your $10,000 would have become $19,862 – a significant difference over the $16,915 this very good mutual fund returned.

Community Bank System is not a stock that a mutual fund manager would likely buy. It’s a great little bank with a 3.9% yield, but it only trades 200,000 shares a day. It would be hard for a fund to accumulate enough shares to make a difference in the fund’s returns. Perhaps more importantly, it would also be tough to sell a lot of shares if the fund manager no longer wanted to hold the stock. Omega Health and Main Street have yields approaching 8% and Genuine Parts’ yield is 3.2%, but the company has raised its dividend every year for 56 years.

All of the stocks mentioned above trade less than one million shares per day, although Genuine Parts has a market cap of over $9 billion.

And don’t forget that 0.75% expense ratio. While that is on the low side for mutual fund fees, your return is still being impacted by that 0.75% every year.

If you bought the four stocks listed above with a discount broker, it would cost you about $10 per trade or $40. That comes out to 0.4% of your initial investment. However, that’s a one-time cost, not an annual expense. The only time you’ll incur another fee is when you go to sell. So if you sold it today, you’d have incurred a total expense of 0.8% ($80/$10,000) over eight years rather than 0.75% every year. When you pay that 0.75% every year for eight years, you end up impacting your return by 6%.

I don’t know about you, but I prefer to keep the 6% for me, rather than pay it to a mutual fund manager who can’t do as good a job as I can.

It’s not that the fund managers aren’t smart. They are. But the size of their funds limits their flexibility. As an individual investor, you can use that flexibility to your advantage by owning smaller cap stocks that have higher yields and better growth potential.

Stay invested in dividend paying stocks. They’re the best way that I know of to grow your wealth and generate increasing amounts of income over the long term. But do it yourself. With just a little bit of work, you’ll make more money and pay less in fees than you would with even the best mutual funds. Because this is one area where the little guy has the advantage.

Good Investing,

Marc Lichtenfeld

P.S. The four quality dividend plays I listed above are just the tip of the iceberg. There are 17 more dividend positions I’m currently recommending in my Perpetual Income Portfolio. As I write this, our 21 open positions are scoring an average gain – including dividends – of 25.40%. And my portfolio is just one of the many resources The Oxford Club provides to help out the little guy.

For more information on how to access our Club’s full repertoire of portfolios along with the rest of our expert connections and financial intelligence, click here.

Article by Investment U

By Central Bank News
    Here’s today’s Central Bank News link list, click through if you missed the previous central bank news link list.  Remember, if you want to submit links for inclusion in the daily link list, just email them through to us or post them in the comments section below. 

By The Sizemore Letter

Question: When looking at cheaply-priced stocks, how do you know which ones are solid value stocks and which ones are dreaded value traps?

Answer: The value stocks eventually recover, whereas the value traps do not.

I realize that my answer is no more useful than Will Rogers’ advice to “Buy stocks that go up; if they don’t go up, don’t buy them,” and that is precisely my point. There is no systematic way to recognize a value trap.

Some sectors are more prone to value traps than others, and this is something I’ll elaborate on later in the article. But first I’ll give an example of a value trap that ensnared yours truly—BlackBerry maker Research in Motion ($RIMM).

When I first started considering RIMM last July, it was one of the cheapest companies in the world. At one point in time it traded for just 3 times earnings and barely half its book value.

My thinking when I bought RIMM was straightforward enough. While the company was losing the smart phone war to Apple ($AAPL) and Google ($GOOG), it had a strong and growing services business with sticky revenues, a strong and growing presence in emerging markets, and a rock-solid balance sheet. Yes, the company was losing market share, but its sales were still growing and a decent clip. At the price at which it traded, RIMM didn’t have to win the smart phone war in order to be a good investment; it merely had to survive.

In most industries, this would have been sound thinking and the makings of a great contrarian investment. But in technology, where platforms are everything, it doesn’t hold. Much like the Game of Thrones, with technology platforms you win or you die

Shrinking market share for your platform begets further shrinking market share. Retailers don’t want to take up shelf space better used for more popular products. Carriers don’t want to offer incentives. Programmers don’t want to write applications for a shrinking platform. Rather than a gentle decline, you get a sudden collapse.

Case in point RIMM. With the BlackBerry, RIMM invented the smartphone as we think of it today and quickly rose to dominance. After conquering the corporate and government markets, the success of the BlackBerry spilled over into the consumer market. BlackBerries became known as “CrackBerries” for their addictiveness. As recently as 2010, RIMM held nearly half of the smartphone market, only to see that market share shrink to single digits today.

Believe it or not, I do believe that RIMM has a future. But its future lies as a software and services company, providing enterprise e-mail, messaging and security, and not as a hardware maker. A slimmed down services-only RIMM would be worth owning at the right price. But before that happens, management will likely destroy quite a bit more value attempting to salvage their hardware and operating system.

Not all cheap tech companies are value traps, of course. Microsoft ($MSFT) and Intel ($INTC) have both been cheap for years, though both have strong underlying businesses nearly impervious to competition and both have been rewarding shareholders with a high and growing dividend.

As much as we would like for it to be, this is not an exact science, and you’re not going to get it right every time. In the end, the best defense against a value trap is emotional discipline. Look at your investments critically and don’t make excuses when they fail to perform. Use stop losses when appropriate. And be honest with yourself when you ask the question, “If I didn’t already own this stock, is this something I would want to buy today, knowing what I know?”

Oh, and follow Will Rogers advice about avoiding stocks that don’t go up.

Disclosures: Sizemore Capital is long INTC and MSFT. Alas, we were formerly long RIMM.

Bad U.S. jobs number, bad news from Europe… So why did stocks rally?
June 11, 2012

By Elliott Wave International

Think back to Friday, June 1. The DJIA closed down almost 300 points that day, and pundits blamed it on a bad U.S. employment report and even worse news from Europe.

The expectations for the next week were so bearish that CNBC held their Opening Bell segment on Sunday night (June 3) instead of Monday morning. (Robert Prechter was invited to speak; hope you got to see that interview.)

But the crash never showed up. “Fundamentally,” nothing had changed — but stocks not only “refused” to fall further, they rose. Odd, right?

Not really — if you look at it from an Elliott wave perspective. This is an excellent example of how the news doesn’t shape price trends — the market’s collective psychology does. What’s more, market mood will shift before the news, as in this case. Yet those shifts are not random — they unfold in Elliott wave patterns.

That’s how our U.S. Intraday Stocks Specialty Service (FreeWeek starts June 14) knew of the week’s rally ahead of time. Take a look at this S&P 500 chart the Service posted pre-open, at 9:11 AM, on June 5 — a day before the huge rally on June 6.

US Stocks Overview (Intraday)
Posted On: Jun 5 2012 9:11AM ET / Jun 5 2012 1:11PM GMT

Market Overview: Good morning. … the initial pressure should be on the downside for the indices. The Elliott wave interpretation remains that price action is in a 4th wave [rally] of a larger 5th [wave]. The immediate bullish alternate is that [the June 4] low completed the final 5 within a 5-wave decline.

As you can see, before the open on Tuesday, June 5, there were 2 two viable short-term Elliott wave counts for the S&P. The preferred forecast called for a rally in wave 4. The alternate (or less likely) forecast suggested that the 5-wave decline had already ended, and rally was due. Both agreed on one thing: a rally was next.

Want to try Elliott wave analysis in your trading? You can — here’s how:

EWI’s U.S. Intraday Stocks FreeWeek Starts on June 14!
Get FREE forecasts for the Dow, S&P 500 and the Nasdaq as the market trades

During FreeWeek, you get full, unrestricted — and 100% free — access to one of Elliott Wave International’s premier services for traders: U.S. Intraday Stocks Specialty Service.

Learn more about the June 14-21 FreeWeek and sign up now — IT REALLY IS FREE >>