InvestMacro Forex News

By Carla Pasternak, globaldividends.com

My Best Income Advice for This Market

Your portfolio isn’t the only one that’s taking a beating right now…

U.S. equities across the board have sold-off in the past month. The S&P 500 fell 9% in May alone. That kind of volatility makes it hard for income investors to navigate the market.

But before you give up and empty your portfolio, remember that it’s times like this that present us income investors with the opportunity to pick up high-yield stocks at bargain prices…

But before I get into that, let’s take a look at what’s going on.

After starting the year off strong, the market has taken a turn for the worse. Europe’s debt wars, slowing growth in China and high unemployment in the U.S. have incited fears of another a global recession.

While it’s clear that there is no quick fix to these issues… fears of another financial crisis like the Great Recession of 2008 may be overblown.

Investor confidence is at the lowest level in 20 months and the S&P 500 is now valued at a forward price-to-earnings P/E ratio of 12 — substantially below a long-term average of 16. These metrics could be signaling we’re nearing the bottom of a cycle.

Still, what really matters to investors is how the crisis of confidence is affecting our portfolio positions.

In the past month, investors have dumped speculative growth stocks in favor of the perceived safety of U.S. debt. Ten-year Treasury yields, which move inversely to price, hit an all-time low of 1.44% on June 1. Meanwhile, risk-aversion and a strengthening dollar saw commodities trading at their lowest levels in more than a year. It’s no accident, then, that commodity-related shares are being pummeled as well.

So what’s an income investor to do?

You could sell your holdings. The months of May through October for the last 60 years do have a track record of poor stock returns. But do you really want to lose six months of income?

Sit Tight and Keep Collecting Your Dividends

During a sell-off like this, select dividend stocks may offer some of the best places to park your money.

I have seen a similar pattern numerous times. After the market bottoms, dividend stocks with high-yields supported by steady cash flow rebound with a vengeance.

I am waiting for confirmation of a bottom in the overall market before I commit too much capital… but meanwhile, I’m prepared to sit tight with my existing investments until I see clear evidence that fundamentals have changed or the dividend is endangered.

Good Investing!

Carla Pasternak’s Dividend Opportunities

Disclosure: In accordance with company policies, StreetAuthority always provides readers with at least 48 hours advance notice before buying or selling any securities in any “real money” model portfolio. Members of our staff are restricted from buying or selling any securities for two weeks after being featured in our advisories or on our website, as monitored by our compliance officer.

By MoneyMorning.com.au

Last weekend, on a sunny afternoon in the Victorian suburb of Bayswater, two men on a dirt bike smashed the glass window of a jewellery store. In 90 seconds they stole about $90,000 of gold jewellery. And then rode off.

The shop was open for business and a staff member and the owner were out the back. They weren’t sure what the ‘banging’ sound was.

But these dirt bike bandits aren’t the only ones pinching gold.

On five separate occasions a Perth man walked into a store to try on a gold necklace. Once wearing the necklace, he’d bolt out the door. Police reckon his stealing binge netted him $70,000 of gold jewellery. The cops only caught him this week.

Before you get a little cynical and cry ‘insurance job’, hear this. The Victorian jeweller didn’t insure his gold. The owner claimed that at the current price, insuring his gold was an expense he couldn’t afford in this economy.

This is an odd risk to take. In New South Wales alone, jewellery store thefts are the fastest rising store robberies. Up 35% since 2008. Even pinching booze has only increased 25%.

How times have changed. Rather than rob a store and demand cash from the till, thieves prefer a real asset. Something with real value.

And why wouldn’t they? With all those ‘gold buyer’ stores in shopping centres, it’s pretty easy to turn the stolen loot into cash. Sure they won’t get the spot price of gold…but hey, they stole it, remember?

Right now, the Perth bandit is yet to face the judge and see how much trouble he’s in. But if the dirt bike bandits are reading this, we recommend they hold onto their ill-gotten gold a little longer.

Because the price of gold is going up…

Central Banks Still Driving Gold Demand

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The shiny metal is yet to return to its mid-2011 highs, but there’s a suggestion that it has found a floor price.

As reported on a self-confessed goldbugs website, 24hourgold.com, ‘…there are rumors circulating the market of Asian central bank purchases on any drop into the $1500 to $1550 range — a gold call of sorts that puts a floor under the price.’

This tells you central banks are trying to buy up when gold reaches a ‘cheap’ level. And they view $1500–$ 1550 as a cheap level!

Dr Alex Cowie, editor of Diggers & Drillers, has been encouraging his readers to watch central bank gold buying for over twelve months.

On Monday, he told readers about another round of purchases. He said ‘…as a group they [central banks] are huge buyers. Last month central banks from 12 countries, including Russia, Mexico and Turkey, bought 57 tonnes of gold. In reality, China’s central bank should be on that list too — they just don’t declare how much they buy.’

How huge is huge? Less than ten years ago, central banks sold 545 tonnes of gold. And last year, they bought about 440 tonnes. That’s nearly a 1000 tonne swing in a decade.

Even though investment and jewellery make up the largest demand group, central banks now account for 7% of all gold demand.

Gold Demand

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It might not sound like much, but it actually reflects a very important shift in attitude towards the metal.

You see, the biggest central bank buyers of gold aren’t from Western economies like America, or the UK. It’s the smaller, emerging and developing economies like Mexico, China and Russia.

As the crisis continues to play out, central banks are stocking up on gold for the same reasons we do.

In spite of the volatile prices, gold is one of the few assets that goes up in value when things go wrong. Another is US Treasuries, but we know which we’d rather own.

But there’s a bigger reason why central banks are moving into gold. They’re preparing for the bigger role gold will play in reserve assets. Rather than hold cash, US Treasury bonds or foreign currencies, central banks could choose to load up their balance sheets with something of real value.

So, consider this the time to stock up, or take the big leap of buying in for the first time.

As Alex said recently ‘The one thing I’d say about gold is that it’s not a get-rich-quick scheme. It’s a long-term alternative to holding cash in a portfolio. The trick to making it work hardest for you is buying at the right time.’

And when is that right time?

Now. The gold price is still around $1600 which is a great entry point. Take advantage of buying when the gold price dips down.

If you’re keen to get started in buying some bullion, check out Alex’s tips on how to buy gold.

Shae Smith
Editor, Money Weekend

The Most Important Story This Week…

In 1989 it was perceived wisdom that Japan would overtake the United States as the largest economy in the world. Tokyo was famous at the time as the most expensive city in the world. The Japanese share market was at a huge high. However, that was the peak for Japan. It has suffered a long bear market ever since. The share market has been falling for twenty years.

Investors have often thought the Japanese market couldn’t fall any further along the way. It did. Everyone kept waiting for a recovery that has never come. Most investors think a stock market falls but will rally higher at some point in the not too distant future. The Japanese experience says this is wrong. Australians have been waiting five years already for the share market to head higher than it was in 2007. The question is, will the ASX go up? Or will Australia suffer the same fate as Japan? Kris Sayce give his opinion in How This Bear Market Could Last Another 18 Years… Just Like Japan’s

Other Recent Highlights…

Nick Hubble on Best Investment Strategies For the Times Ahead: “If you think that investing in times like these is difficult, you’re right. Recognising that these events happen regularly is a helpful step to sorting out your investment strategy. Do you simply wait for a lost decade to pass by before jumping into the stock market again?”

John Stepek on Why the Chinese Economy is On the Slide: “Growth in China’s manufacturing sector is slowing rapidly, according to official data. In May, the purchasing managers’ index hit a five-month low, worse than analysts had expected. A separate survey sponsored by HSBC…suggests it is already shrinking.”

Dr. Alex Cowie on The Banking Plan That Could Be A Game-Changer for Gold: “The Basel Committee of Bank supervision, who dream up the rules that govern banks, are looking at turning gold into a ‘Tier One’ asset. This means the banks can carry gold as capital at 100% of its market value – instead of the current 50%. This gives gold a huge increase in status, and effectively turns it back into money at the top level…That’s a pretty incredible thought.”

Martin Hutchinson on Inside JPMorgan’s Magical Fun Palace: “The financial system wasn’t fixed after 2008, and it won’t be fixed anytime soon. The unexpected $2 billion – or is it $5 billion? – loss incurred by JPMorgan Chase “whale” trader Bruno Iksil shows only too clearly the flaws in Dodd-Frank and other regulatory activity. Big banks are still taking risks they simply don’t understand. Worse, there’s no reason to believe the regulators understand them, either.”

When Dirt Bike Bandits and Central Banks Demand Gold

By MoneyMorning.com.au

The gold market is an incredibly complex beast, so I’m going to try and simplify things as much as possible.

To get you in the right frame of mind, consider that the history of gold and humanity has a span of 6,000 years. Think about that. It is a long time. The history of the US paper dollar — and the global financial system that it underpins — spans just 41 years.

Right now, I want you to consider this. ‘But, this game of gold, it is not only hard, but will cost anyone dearly if they try it without all the facts!’

That quote was believed to be written by a banking insider who went by the pseudonym of ‘Another’. The background to Another’s ‘thoughts’ is a long one…it’s a fascinating story that I’ll endeavour to write to you about at some other time.

Think about what that quote means. This person had a profound understanding of gold’s monetary function.

Investing in gold without knowledge of the facts will indeed cost you dearly.

The thing to understand about gold is that it is absolutely crucial to the functioning of the global financial system. In times of market stress and liquidity crises, gold is one of the few assets that can be used as collateral (security) for US dollar loans.

For example, if a bank needs US dollars in a hurry, putting up gold as security is the cheapest and easiest way to obtain the loan. That’s because physical gold has no counterparty risk. And it’s why in times of a liquidity crisis (2008 for example) gold falls in price…because gold is sold short term to obtain dollars to meet short term liquidity commitments.

Paper Gold, Real Gold

But here’s the crucial thing. The London gold market (where most of the world’s ‘physical’ gold trading takes place) doesn’t always deal in physical gold. Unallocated gold — also known as paper gold — features heavily in this market.

Unallocated gold is gold that you think you have ownership of, but really don’t. It’s your asset but the bank’s liability. Unlike physical bullion, there is counterparty risk with unallocated gold. That is, the risk that a party won’t be able to make good on their promise and get your gold when you need it most.

No one really knows for sure, but informed opinion estimates that most gold trading that takes place in London is unallocated, or paper gold trading. As I mentioned, during a liquidity squeeze or crisis the market sells gold to obtain US dollars. As you can see from the USD index below, since the start of March the USD has been in strong demand.

USD — Rising as Liquidity Tightens

Click to enlarge

The swapping of gold for USD is more prevalent post the 2008 credit crisis because of the dwindling pool of decent collateral in the world. As more governments succumb to credit downgrades because they have too much debt, there is less collateral that can be used as security for short term dollar loans.

Although the price action doesn’t show it, the US dollar and gold  will be the last two currencies standing by the time this rolling crisis finally plays out.

In a cruel twist, gold falls in US dollars precisely because of its strength as bullet proof collateral. Other players who don’t know the ‘game’ see this gold price ‘weakness’ as a sign of some sort of inherent weakness and begin selling too. As a result more gold, both paper and physical, comes onto the market causing a PRICE rout.

The irony is that a great deal of gold collateral is simply unallocated (paper) gold. Physical gold exists to satisfy those who want to convert to allocated, but certainly not enough to satisfy everyone. A rush to convert to allocated would send gold soaring.

The important point to note here is that the gold price you see quoted is essentially a paper gold price. Sure, you can buy physical gold at that price too, but it is the high volume of paper gold that gives the impression of greater supply than there actually is.

When liquidity crises cause selling of paper and physical gold, the gold price gets too low and sophisticated players who know the rules of the game come in and buy. When physical gold starts to leave the banking system, the gold price MUST RISE to entice some of the gold back.
You see, the western financial system relies on the circulation of physical gold to function. It doesn’t matter what Warren Buffett or Ben Bernanke think. The ‘system’ needs gold.

The Gold Market is Massive

But I can show you that the size of the gold market is much bigger than you think. For such a ‘fringe’ investment, it’s certainly massive. If it wasn’t so important, it wouldn’t be so huge. According to the World Gold Council (WGC), the size of the gold market is third only to the US and Japanese debt markets. Not bad for a ‘small’ market.

The WGC says all the gold ever mined in history amounts to 170,000 tonnes. In US dollar terms, that’s around US$9.6 trillion (at US$1,600 an ounce).

Of that amount the WGC reckons around 60,400 tonnes is private investment and official sector holdings. That’s the equivalent of US$3.4 trillion. With official sector holdings of around 31,000 tonnes, that leaves just under 30,000 tonnes in private sector hands – about 1 billion ounces, or US$1.6 trillion.

In a recent report, QB Asset Management tells us that all the gold and silver ETF’s (exchange traded funds) combined hold just 90 million ounces (around 2550 tonnes) – or around US$145 billion (at US$1,600). That’s tiny in the scheme of things.

The question is, just where does all this gold reside? How much privately owned gold actually resides inside the banking system? My guess is it’s not much. My hunch is that much of the world’s privately held gold is tightly held…outside the Western banking system. I’m not talking just about individuals owning physical outside the system…I’m talking about sovereign nations (like oil producers, China etc) who have accumulated gold slowly but surely — and held it regardless of PRICE.

Less gold held outside the banking system means less gold that the bankers can sell and turn into ‘paper’ gold. If physical gold exited the market entirely, the game would be over.

To keep the game going, the London Gold market needs physical metal. For many years central banks have supplied the metal via outright sales and leasing operations (this is the practice where central banks leased gold to bullion banks). It is unclear whether these leasing operations are still in effect.

I would guess that the gold bull market itself reflects lower central bank sales and leasing. As such, the role of PRICE has come to the fore. By this I mean the London gold market needs constantly high prices to entice a steady stream of physical gold into the market. If this is the case, lower prices have the opposite effect.

At some point, lower gold prices will lead to a drain of physical metal from the market as sophisticated players take advantage of the weakness. Higher gold prices are the only thing that will keep the game going.

I know this analysis will sound like a house of mirrors to some of you, and to be honest it is. The gold market is as complex as they come. Very few people in the world understand it. I don’t pretend to be one of them.

But I do know this:

‘The game’ is not over. Do not leave the arena. When it is, you’ll know. ‘Another’ knew the endgame 15 years ago…

‘For ones of simple thought, such as I ‘gold will be repriced once in life, and that will be much more than enough’.’

Greg Canavan
Editor, Sound Money. Sound Investments.br>

From the Archives…

How Bad Monetary Policy Will End the Welfare State
2012-06-01 – Dan Denning

The Setting Sun of the Japanese Economy
2012-05-31 – Greg Canavan

The US Dollar – The “Strongest of the Weak”
2012-05-30 – Kris Sayce

Europe’s Energy Resource Puzzle
2012-05-29 – Kris Sayce

The Market Has Crashed, But This Graphite Stock Has More Than Doubled
2012-05-28 – Dr. Alex Cowie

Why Lower Gold Prices Won’t Last

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.

Canadian pipeline company Enbridge is in the hot seat for an oil spill from a ruptured line in southern Michigan. Crews in Marshall, Mich., are still working to clean up contaminated areas nearly two years after Line 6B burst open, dumping about 20,000 barrels of so-called tar sands oil into the Kalamazoo River and surrounding waters. A report from the NTSB suggests operators in Canada interpreted the pressure drop associated with the spill incorrectly and continued pumping oil through the line after it broke open. Last month, Enbridge said it was spending billions of dollars to upgrade its pipeline networks in the region. Some of that effort won’t require new pipe at all, however, opening the door to questions about its operational safeguards.

Line 6B of the Lakehead oil pipeline system burst open in the early evening of July 26, 2010. Enbridge didn’t recognize the leak until 17 hours had passed. The pipeline was set for a 6pm shutoff and a 6.5 foot tear appeared in Marshall two minutes prior to the closure. Alarms that began to sound, according to the National Transportation Safety Board, were indicative of zero pressure at the section of Line 6B in Marshall and, minutes later, a leak. Operators, however, interpreted the alarms as a response to column separation, a depressurization that normally occurs when a pipeline is getting drained, as was the case with Line 6B. Operators decided to continue pumping oil, however, to get oil through to the next station. More or less the same thing happened when the next shift came in because, according to the NTSB account, operators were “never told of the alarms.”

A few shifts later, it appears operators were still debating what happened with Line 6B. A manager had suggested that “something else” was going on, possibly with the “computer or the instrumentation.” If it was a rupture, the manager said, “someone is going to notice that and smell it.”  At 11am on the morning of July 27, a utility company employee reported Talmadge Creek “was black” and got a call in to Enbridge. Residents in Marshall, however, had called the police to report odors at 9 pm on July 26, but nobody bothered to call Enbridge.

Enbridge later defended its procedures to local media, saying the operators “were trying to do the right thing.” And it appears that they were. The NTSB said column separation is “typically corrected” by increasing the pipeline pressure and that’s what the operators did – more than once.

The company announced plans to upgrade Lakehead and replace several hundred miles of Line 6B, which was built in the 1960s. Some of the upgrades, however, mean more horsepower to pump more crude oil through these pipeline systems, which likely won’t sit well with residents along the lines. The NTSB investigation is ongoing. At the onset, it appears that operators, at the very least, weren’t willfully ignoring the issue. But if these pipelines are the economic life-lines that backers say they are, pipeline companies like Enbridge, TransCanada and Enterprise Product Partners need to ensure not just the public, but safety regulators as well, that all systems are in check because, at 20,000 barrels a pop, there’s a lot at stake.

Source: http://oilprice.com/The-Environment/Oil-Spills/Michigan-Oil-Spill-Highlights-Need-for-Safety-Overhaul.html

By. Daniel Graeber of Oilprice.com

Article by Investment U

It’s hard to know who is disliked more, Tiger Woods or Goldman Sachs (NYSE: GS) and Facebook (Nasdaq: FB).

As you may have heard, golfer Tiger Woods won his second tournament in three months, after having not won an event since before his personal life went over a cliff in 2009.

We’ll have to see if the old Tiger is back, but regardless, it’s a strong comeback for an athlete and a man who seemed completely lost just a short time ago.

Stocks can act the same way.  Sometimes a stock is enormously popular, only to crash and burn.  And if you can find the ones that will rise from the ashes, there is a lot of money to be made.

Let’s look at a few stocks that have had a rough go of it over the past few years, but seem poised to rebound.

Goldman Sachs (NYSE: GS)  – Goldman’s stock is a disaster, trading at about 1/3 of its all-time high of $250, back in 2007.  Main Street despises Wall Street right now and that will likely only increase as we head into a particularly nasty election where the Obama campaign will attempt to position Mitt Romney as everything negative about the industry.

And although Goldman’s reputation doesn’t shine as brightly as it once did, it is still one of, if not the 800 pound gorillas in the business.  With J.P. Morgan Chase’s (NYSE: JPM) CEO Jamie Dimon seeing his formerly beloved status evaporate due to uncontrolled trading losses, Goldman is still arguably the king of Wall Street.

It’s stock isn’t trading like that though. Near its lowest level in three years, the stock is trading at just 7.6 times this year’s expected earnings.  In 2013, earnings per share are projected to grow 11%, increasing to 12% over the next five years.  On a trailing basis, Goldman is surprisingly trading well below its peers at 13.3 times earnings versus the industry average of 18.5

There are all kinds of regulatory reforms aimed at Wall Street firms, which make them out of favor with investors.  But nobody has done it better than Goldman for years and when the group comes back into favor, Goldman Sachs will likely lead the way.

Facebook (Nasdaq: FB) – Facebook hasn’t had a long history as a publicly traded company, but could anything be more out of favor?  On Monday, an analyst was on CNBC saying Facebook wasn’t going to be around in five years.

I’m going to bet he’s wrong.  Facebook might not have lived up to the hype that was generated in order to get the masses to pump up the stock price, but that doesn’t mean there isn’t a real business here that can grow by leaps and bounds.

Facebook has more of its users’ personal information than any company on the planet.  As it begins to figure out how to monetize that information, revenue and earnings will grow significantly.

Keep in mind that internet users spend three times as much time on Facebook than on any other website.

And don’t underestimate Mark Zuckerberg.  Just because he’s soft spoken and a little awkward, don’t mistake him for being complacent.  He is one of the most driven CEOs around.  He wants to be the next Bill Gates. He has the intelligence and the product to get him there.

It’s still in the early stages with Facebook, but I think long-term investors will be just fine with this stock.

It’s hard to know who is disliked more, Tiger Woods or Goldman Sachs and Facebook.  But Tiger appears to be back and I expect Goldman and Facebook to help investors be at the top of their game in the near future too.

Article by Investment U

Article by Investment U

Discover how Siemens' expert networking system, TechnoWeb, is creating value while Facebook (NYSE: FB) scrambles to make money.

I must confess, I feel like I’m personally responsible for Facebook (Nasdaq: FB) not being worth more. I’m about to mark the eighth year when people will wish me a happy birthday on Mark Zuckerberg’s social network, but I’ve never clicked an ad (in fact, I rarely notice them) and I think the iPhone app is unreliable.

Don’t get me wrong, social networking sites are a part of my life. But they’re not something I’d invest in – at least not yet.

I’m much more excited about a trend I discovered in my MBA coursework this past year. It’s called expert networking, and it’s creating value at the roots of some of the world’s biggest firms.

For instance, let’s take a look at German conglomerate Siemens (NYSE: SI). The company is an innovation hotbed. It has around 30,000 R&D workers and holds around 60,000 patents. And that base is only getting bigger and stronger with a network they recently implemented.

Keeping Knowledge In-House

TechnoWeb is a network platform that lets Siemens workers share questions and answers.

Imagine you’re an engineer in the U.S. working for Siemens. You hear from a salesperson that a potential customer needs a device that could win a multi-million dollar contract. If you can come up with a solution, you’ll land a big fish for your division and maybe get a promotion.

But unfortunately you’ve got a hole in your research that no one near you can fill.

Now you, an American engineer, can run your questions by hundreds of thousands of Siemen’s employees worldwide using the TechnoWeb.

After a multi-billion dollar bribery scandal broke in 2006, Siemens steered its pool of global talent away from networking based on corruption. It was time to harness the innovative power of Siemens employees.

It turns out that around 20,000 employees had been chatting about Siemens work topics on other social networks (such as Facebook). Not only is that not secure, it also doesn’t let Siemens get a bird’s eye view of what’s going on in-house.

The motto for this new internet-based knowledge networking was, “If only Siemens knew what Siemens knows…” The idea being that the most valuable knowledge is within the vast global network of Siemens employees – totaling more than 400,000.

Knowledge-Based Networking

Unlike Facebook, which puts individuals and their info at the center, and Wikipedia, which revolves around research topics, TechnoWeb links knowledge to people. That means that with each answered question, a new expert is acknowledged or reinforced, and great ideas are rising to the top.

In its first year 10,515 people used TechnoWeb, beating a target of 8,000. Not many people attended “how-to” webinars, which was actually a good sign… they knew how to use it right off the bat.

The nice thing is that TechnoWeb is a hybrid – open innovation and knowledge-sharing give way to executive command and control when implementation and strategy are needed. This encourages everyone in the organization to get involved in innovation, and solutions come from the people with the best knowledge.

Through this expert networking, people are working efficiently by working together.

As few as 3 in 10 TechnoWeb users have to be active for the model to work. The other 7 still reap the benefits, just as investors do when new products come to life. You don’t even have to be logged in. It’s a sort of dynamic yellow pages that gets big problems solved, quickly.

This “Social Network” is Already Being Monetized

Here’s just one story that points to TechnoWeb’s success…

A Siemens information technology worker in Munich posted an urgent request in TechnoWeb for info that would help a customer… Within five days, he received 15 responses from eight different business units in eight countries.

One response hit it right on the nose. The employee said he saved multiple working days and improved quality – all because of Siemen’s TechnoWeb.

So while Facebook struggles to find the value in its vast network and information database, Siemens is already monetizing on its own version of a social network. Investors should keep their eyes not only on Siemens but on other companies that look to take advantage of this new revelation.

Good Investing,

Sam Hopkins

Article by Investment U

By The Sizemore Letter

Lest I be labeled a doom monger, I want to be clear on a few things. I do not believe that the Eurozone will break up. Greece could—and probably will—be asked to leave sometime this summer, but most would agree that this would be addition by subtraction.

The other problem countries—most notably Spain—have shown the political resolve to do what is needed to stay in the Eurozone. And the sovereign debt crisis is, first and foremost, a political problem with political solutions.

So again, the Eurozone will survive.

But what if it doesn’t?

As investors, we have to ask ourselves uncomfortable questions. We also have to accept the limitations of our knowledge. Sometimes, no matter how rational or well-research we are when forming an opinion, we are wrong. Good investors realize this and hedge their bets accordingly.

So what if I’m wrong? What if events spiral out of control and the euro as we know it ceases to be?

Today, I’m going to lay out a set of scenarios that investors could expect to see in the event that the Eurozone breaks up and its member states resurrect the old currencies:

1. All former Eurozone currencies would fall relative to a new German deutschmark—even the currencies of relatively healthy economies such as the Netherlands and Finland—with the currencies of the “PIIGS” countries falling significantly harder and faster. Currency collapse and hyperinflation would almost certainly follow, barring massive intervention by world central banks. And frankly, if relations between Eurozone member states were to sink low enough to make dissolution a possibility, I wouldn’t see coordinated intervention happening. Europe would become a collection of little Argentinas, minus the juicy steaks and tango.

Currencies of non-Euro European countries—such as the UK, Norway, and particularly Switzerland—would instantly soar to export-killing levels that would prompt their central banks to intervene. Major non-European currencies—particularly the U.S. dollar and Japanese yen—would also soar as potential havens from the storm. U.S. Treasuries and the dollar would soar to new all-time highs as investors had nowhere else to go.

2. Markets hate uncertainty, and in the post-dissolution chaos we would likely see stock market volatility on par with the 2008 meltdown—or worse.

We’ve all seen currency crises before; it was only a little over a decade ago that we had the emerging market currency and debt crisis that brought Long-Term Capital Management to an unceremonious death. When investors flee the capital markets, they do so in a hurry.

But remember that the European Union is collectively the largest economy in the world; if the likes of South Korea and Thailand could wreak havoc on world markets in 1998, imagine how much disruptive a euro dissolution would be. It would be the mother of all stock market crashes.

3. On a fundamental level, the story is more complicated. The economic dislocations would likely cause the worst recession since the Great Depression, which would devastate earnings and keep them depressed for years.

And good luck trying to value a European stock. The basic ratios that value investors use—price/earnings, price/sales, price/book value—would all be impossible to accurately calculate until the dust settled. This would be complicated further by the fact that most European blue chips have assets and sales across the European Union. I would pity the poor accountants tasked with assigning a fair market value—or even a historical value—to any of it.

I have no doubt in my mind that investors find incredible bargains, once some sort of equilibrium was reached. But for months—and maybe years—investors would be better off staying away from Europe in the event of a euro collapse.

4. U.S. stocks wouldn’t fare much better. As we saw in 2008, national boundaries mean very little during a panic. Correlations among normally diverse asset classes converge to 1.

Looking at the fundamentals, U.S. companies would be facing nightmares of their own. Let’s throw out a couple examples. Coca-Cola Enterprises ($CCE) gets nearly two thirds of its revenues from Europe, and Philip Morris International ($PM) roughly a third. Across the broader S&P 500, nearly 15% of revenues come from Europe.

5. In past currency crises, the countries affected eventually benefitted from having a lower currency through more competitive exports. This would not be the case in Europe, at least not for a long time.

Think about it. Who are they going to export to? Europe’s export partners depend on European demand for their own exports. The EU is China’s biggest trading partner. But what condition is China’s economy going to be in if European demand grinds to a halt?

And the United States? The U.S. economy is already fragile; expecting robust American demand to boost European exports is simply not realistic.

6. What about commodities? Think back to 2008 and what happened to most commodities then.  When the markets went into “risk off” mode, the raging commodities bull market went into a stark reverse.

When priced in the new European currencies, commodities might actually rise. That’s what happens in a hyperinflationary meltdown. But in terms of dollars and other non-European currencies, you would be looking at a major, multi-year bear market.

7. What about gold?

I could see gold going either way. I would prefer to hold gold rather than the new European currencies, of course, but I couldn’t say with any certainty if gold would be a better haven than the U.S. dollar. Consider that gold’s 2012 price declines have come even as the Eurozone roils in crisis, and you’ll get my point. Gold is a great crisis hedge…sometimes. At other times, it’s no hedge at all and falls in sync with everything else.

I’ll repeat again, I do not see the Eurozone splitting apart, aside from a possible Greek ejection. But if it were to happen, you would want to be prepared. You wouldn’t want to own anything from the European continent save maybe Swiss francs or British pounds.

Love it or hate it, the U.S. dollar would likely be your best option as a safe haven. Though canned goods and shotgun shells might not be such a bad idea either. I’m kidding (sort of).

Disclosures: Sizemore Capital is currently long PM—and quite a few European stocks as well.

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By TraderVox.com

Tradervox.com (Dublin) – The south pacific currencies have gained after China decreased its interest rate to 3.25 from 3.5 percent which was sent in 2008. The Australian currency increased beyond parity against the US dollar in three weeks as demand for riskier assets was boosted by this change in monetary policy. However, its advance was limited after the Federal Reserve Chairman Ben S. Bernanke refrained from indicating whether the Fed would add stimulus during his testimony yesterday before US lawmakers. The New Zealand currency also increased against the yen the as Asian stock continued to advance for the fourth day.

According to Omer Esiner, the south pacific currencies have been short in the last couple of weeks and the current rally was expected. This has also been facilitated by the less bullish sentiments from the Fed Chairman Ben Bernanke. The People’s Bank of China reduced its benchmark for one-year deposit rate by 0.25 percent which will take effect tomorrow. The bank is also expected to cut the one-year lending rate by the same margin later in the year. The New Zealand dollar which has increased since the beginning of the week has been propelled by positive sentiments from euro area as well as the rising Asia Pacific Index of shares which has advanced by 1.3 percent. This has also boosted the demand for riskier assets hence strengthening commodity related currencies.

Other factors that buoyed the Australian dollar include the nation’s payrolls which increased unexpectedly by 38,900 in May according to a report released by statistics bureau. Australia’s Gross Domestic Product data also has been influential in the current surge of the Aussie.

The Australian dollar increased  by 0.8 percent against the US dollar to trade at $1.0003 before dropping by 0.3 percent to trade 98.94 US cent. The Aussie was up against the Japanese yen by 0.2 percent to exchange at 78.79 yen.  The New Zealand currency also increased against the dollar before dropping by 0.5 percent to trade at 76.72 US cents. It increased by 0.1 percent against the yen to trade at 61.09 yen.

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The US Defense Department consumes more energy than any other department or sector in the country, spending around $20 billion annually by some estimates; but ambitious plans to make it the nation’s green leader have been swept under the rug over budgetary concerns that smack of campaign politics.

It is an inauspicious development for US energy independence, and indeed a contradictory one. The Defense Department is reeling under higher fuel costs already, which have left it short some $3 billion. A stronger focus on alternative fuels will cost more in the immediate and near-term, but in the longer-term, it is a smarter strategy.

Last week, the Senate Armed Services Committee in a vote dampened the military’s green ambitions, refusing to allow a major shift to alternative fuels if they end up costing more than fossil fuels. They have also nixed the idea of the Pentagon building its own biofuels refinery or other biofuels facilities.

The Senate Armed Services Committee is largely divided right down the middle, as demonstrated by the 13-12 vote in favor of putting the brakes on green defense efforts.

Senator John McCain, the top Republican on the Committee, opposes what he sees as overly ambitious and expensive green initiatives (in the current political climate, that is). “In a tough budget climate for the Defense Department, we need every dollar to protect our troops on the battlefield with energy technologies that reduce fuel demand and save lives,” he told the Committee.

The White House objects to the vote as it would reduce the Pentagon’s capability to “procure alternative fuels and would further increase American reliance on fossil fuels, thereby contributing to geopolitical instability and endangering our interests abroad”.

This long-term vision was in part laid out in the Energy Independence and Security Act of 2007, but also in the Energy Policy Act of 2005, section 203, which lays out a plan for the US Army’s contribution of renewable energy to an installation’s total electricity consumption.

The Armed Forces are very much on board for greening up. Both the Navy and the Air Force are interested in creating a stronger reliance on biofuels with the overall goal of reducing dependence on foreign oil.

Cutting the Pentagon’s investment potential in renewable energy is unaccountably short-sighted, and the cost-benefit analysis less than comprehensive.

The Pentagon’s renewable energy initiative, “Operational Energy Strategy”, was specifically intended to render its energy needs independent. After all, dependence on foreign oil ends up costing the Pentagon about $20 billion annually. Arguably, that dependence also leads to conflict and death, so the cost is enormous beyond the realm of paper currency. In addition, this dependence means that US forces are constantly guarding fuel convoys that come under attack from enemy forces.

It also pays to look at some of the Pentagon’s clean energy successes. For instance, the DoD has successfully developed hybrid tank batteries that allow them to go farther without fueling. Portable solar power has also been useful on the front lines in Afghanistan and reduces the frequency of fuel convoys that risk attack. (Keeping in mind that the US military goes through goes through more than 50 million gallons of fuel monthly.)

Marines use GREENS solar power, first used in Iraq in 2009, to provide continuous electricity in remote locations, and then in Afghanistan beginning in 2010.

“Better fuel economy for our aircraft means we can extend the range of our strike missions enabling us to base them farther away from combat areas. Being more efficient and more independent, more diverse in our sources of fuel improves our combat capability both strategically and tactically,” Tom Hicks, the Navy’s deputy assistant secretary for energy, said in 2011.

According to the Government Accountability Office (GAO), the DoD was the leader in 2010 of solar energy initiatives, accounting for more than 20 percent of all government solar initiatives. (It is also the lead polluter). Renewable energy sources could help the Pentagon “achieve its mission by, among other benefits, expanding and securing necessary energy supplies to reduce dependence on foreign oil.”

So why the short-sightedness in the vote to reduce the Pentagon’s clean energy ambitions? Undermining the Pentagon’s alternative energy plans can only be political, and specifically a Republican attempt to undermine the largely energy-focused campaign of President Barack Obama. After the elections, it should regain lost traction the next time it comes around for a vote.

Source: http://oilprice.com/Alternative-Energy/Renewable-Energy/Short-Term-Politics-Stifles-Pentagons-Green-Energy-Ambitions.html

By. Jen Alic of Oilprice.com