Month: February 2012

By MoneyMorning.com.au

Let’s talk Japan.

Every year some analyst comes out with a variation of the story that Japan’s economy is about to rebound.

Usually the argument goes something like this: Japanese markets are impossibly cheap and the central bank will be there to prevent a catastrophe.

Or sometimes there is another variation of the Cinderella story.

Either way, don’t hold your breath. Japan’s economy posted its first trade deficit since 1980 last year and the big trade surpluses needed to drive the Nikkei back to its glory days are over.

At best, Japan’s economy is going to see balanced trade figures or a small surplus in the years ahead. It won’t be enough.

If you’re not familiar with what a trade deficit is, here’s what you need to know: Japan imported $32 billion worth of stuff more than it exported for the first time in 31 years.

Critics say there are mitigating factors behind the figures and they’re right.

Against the backdrop of one of the world’s fastest aging populations, one of the lowest birth rates on the planet, a renewed reliance on foreign energy, and a yen that is so expensive that Japanese corporations are offshoring production, it won’t be long before the country eventually plows through its savings.

So $32 billion is just the beginning…

In fact, we are more likely to see Godzilla walk out of Tokyo Bay than we are to witness a return to Japan’s halcyon days.

Worse, I believe that within the next five years, Japan’s economy will long for the good old days when the trade deficit was merely $32 billion, instead of $100 billion, $200 billion or worse.

Not one of the things I’ve just mentioned – that the critics cite as short-term influences – are anything but continuations of much longer-term trends. Nearly all of them are being driven by Japan’s declining population.

You may not know this, but Japan’s population is projected to shrink by 30% by 2060. That means the total population will go from 128 million people today to only 87 million people in less than 50 years.

That’s hard to imagine since Japan is one of the most densely populated countries on the planet. But the effects are already visible.

In my neighborhood in Kyoto, for example, we see abandoned houses that fall in on themselves after people die and there are no longer any other family members to live there. We see schools that are shut down in the region because there are no kids to attend them.

We’re also seeing companies shuttered because there are no markets for their products, including my wife’s family kimono business, which closed after 300 years in existence.

Simply put, you just can’t grow a population or its stock markets without people.

Japan also has no immigration policy to speak of, so there is no means of replacing the “silvers,” or senior workers, who are leaving their productive years behind them.

By 2060 the number of people who are 65 or older is going to double. At the same time, the number of people in the workforce between 15 and 65 is going to shrink to less than 50% of the total population.

By 2050, there will be 75 retirees for every 100 workers. By comparison, in the United States in 2050 there will be about 32 retirees per 100 workers.

You’d think Japan could get “busy” and produce more children but even that’s problematic. The country has one of the lowest birthrates on the planet. Many young Japanese simply don’t want romance — let alone children.

In fact, many Japanese don’t even want sex.

As reported by CNBC, one AFP study reported that 36.1% of teenage boys between the ages of 16 and 19 have no interest in sex. That study in 2010 reflected results that were double the 17.5% reported only two years earlier. Girls are even worse, with more than 59% in the same age group reporting no interest.

Things are so bad according to one study I’ve seen, that at the current birth rate the last Japanese person will be born 953 years from now.

Critics challenge this assumption, arguing that somehow Japan’s hyper-aged will reinvigorate the economy in an orgy of retirement spending and consumption.

That depends on generous pensions and an intact financial system – neither of which Japan has at the moment.

Japan’s debt stands at 200% – 253% of GDP, depending on which studies you read, and is headed in the wrong direction. In fact, it looks like a ski jump that’s three times our own debt burden. Senior citizens I know are doing everything they can to hang onto their jobs for as long as they can.

As a result, there is literally nowhere for younger workers to go… except into low value “arubaito” or part-time work with no benefits, no promotions and very little economic value to contribute to Japan’s recovery.

My nephew, for example, struggled for years in such a job before getting training and finding work as a mechanic for Mazda.

To be fair, Japanese citizens purchase approximately 95% of Japanese debt. That’s why the country has been able to hang on and has not had its own Greek holiday.

By contrast, we borrow about 50% of our money as a nation from overseas, and we’re dangerously close to our own version of Greece’s meltdown.

But as the number of retirees rises and the number of workers falls, the Japanese government is going to have challenges maintaining this internal funding capacity.

At some point – either because there are not enough debt buyers or rates rise too high – they’ll have to turn to external creditors and interest rates that could easily be double the 1.5% the Japanese government pays lenders now.

At that point, debt payments would consume more than half of all government revenue according to The Atlantic.

And then it’s game over.

So what’s an investor to do? Well for one thing, I sure as hell wouldn’t invest in Japan on anything other than an extremely short-term basis.

Despite the fact that trade deficit numbers may ping-pong back into positive territory in the months ahead, there’s no reversing the current long-term trend.

The notion that the Nikkei is somehow undervalued is naïve if you do not take the population and its effect on debt into account.

While it is true there may be short bursts of growth, there’s no ignoring the fact that the bellwether index is trading at 8,802.51, or 77% below the high it achieved in 1990 and 12% below where it started in 1984.

With very few exceptions, money invested in Japan’s economy is going to get trapped there.

That’s why, unless you’ve got money to burn, you can say “sayonara” to Japan.

Keith Fitz-Gerald
Chief Investment Strategist, Money Morning (USA)

Publisher’s Note: This article originally appeared in Money Morning (USA).

From the Archives…

Is There a Reason You’re Not Using the 90/10 Strategy?
2012-01-27 – Kris Sayce

In the Market or Under the Mattress?
2012-01-26 – Keith Fitz-Gerald

What if the Australian Dollar Was a Stock?
2012-01-25 – Kris Sayce

Why Tungsten and Other Strategic Metals Could Prove Good Investments
2012-01-24 – Dr. Alex Cowie

Will These Commodities Help You Claim The Best Investment Gains Of 2012?
2012-01-23 – Dr. Alex Cowie

Godzilla Will Come Out of Tokyo Bay Before Japan’s Economy Rebounds

By MoneyMorning.com.au

Whatever you think of Facebook (our old pal, Dan Denning says Facebook “diminishes the quality of your thought…”) there’s no arguing it’s a great example of free market entrepreneurialism.

For an eight year old company, it has come a long way.

According to the Form S-1 filed with the U.S. Securities & Exchange Commission, Facebook made a USD$1 billion profit in 2011. That’s the third year of profits in a row. It made USD$229 million in 2009 and USD$606 million in 2010.

Make a note. That’s profit. Facebook has more cash coming through the door than it has cash going out the door.

That sets Facebook apart from one of last year’s most-watched public offerings, Groupon Inc., [NASDAQ: GRPN]. In its last annual report Groupon lost USD$389 million in 2010.

And for the first nine months of last year it lost USD$214 million.

One Internet company makes a billion… another loses hundreds of millions.

But here’s the thing: just because Groupon loses money, it doesn’t make it any less entrepreneurial than Facebook.

Both guys behind the firms had an idea. They both figured they could make a bucket load of money from it. So they took a risk and got investors to back them.

The thing for investors, looking at both companies, is which is the better investment?

Should you buy Groupon while it’s still making a loss… but with potentially years of growth ahead of it? Or should you buy Facebook, which is set to trade at a premium? (Meaning that investors have built future profit growth into today’s price.)

Or maybe you should buy both.

Well, let’s look at Groupon first. We’ll straight out say we wouldn’t buy it.

Simply because we don’t see it as a viable business. The company approaches businesses to convince them to offer discounts. Groupon then splits the revenue with the business customer.

For instance, if a restaurant offers a 50% discount off a $100 meal, it splits the remaining $50 with Groupon. That’s great for Groupon. But not so great for the business – effectively, discounting its product by 75% with no guarantee of repeat business.

To us, that seems a costly way to get customers. And it seems as though while Groupon and the end consumer win, the business loses.

That’s no way to build a viable business. For a company to succeed, each side (the company and consumer) needs to believe they’re getting a good deal. That’s the beauty of free market capitalism. Each side of a deal walks away thinking they’ve come out ahead.

We’re not convinced that happens with Groupon.

Compare that to Facebook, where everyone gets something of perceived value: Facebook makes money. Advertisers pay comparatively cheap ad rates to get in front of hundreds of millions of people. And consumers get to network, show off and play silly games.

Everyone’s a winner.

So, does that mean we’d buy Facebook? Let’s see…

Even though everyone’s a winner, it doesn’t make Facebook a slam-dunk trade. As we say, investors have built profit growth into the current price.

Estimates are Facebook will list with a market capitalisation of USD$75-100 billion. That’s huge. It’s more than 100-year old technology company, Hewlett Packard [NYSE: HPQ], which has a USD$56.6 billion market cap.

And more than dot-com darling, Amazon Inc. [NASDAQ: AMZN], which has a market cap of USD$82.7 billion.

Not only that. If Facebook has a market cap of USD$75 billion, that would value it at 20-times sales, and 75-times earnings. That’s compared to Google Inc’s. [NASDAQ: GOOG] 20-times earnings.

In other words, investors figure Facebook still has plenty of growth. And maybe it has. But with a big premium priced in, investors have big expectations.

For example, let’s assume over time Facebook’s value will move closer to Google’s of 20-times earnings. In order to justify a market cap of USD$75 billion, Facebook will need to grow profits to USD$3.75 billion.

That’s a 275% increase on today’s profits.

But that doesn’t mean the Facebook share price would go up. As we say, the share price already reflects future growth. And if it doesn’t achieve the profit growth… oh boy, the share price of Facebook would soon take one heck of a beating.

And of course, investors won’t want the Facebook share price to stay still. Investors will want the share price to go up. For that to happen it needs profits to keep growing… USD$5 billion, USD$7 billion, even USD$10 billion or more.

In other words, it has to follow the same earnings growth as Internet giant, Google. That’ll be tough… but not impossible.

Online advertising is growing at more than twice the rate of non-online advertising. For instance, a report at the start of last year by MagnaGlobal projected the following ad growth rates:

As you can see, every single “new media” ad channel is outgrowing the four “old media” ad channels.

Of course, some of the “new media” is growing from a low base. Such as online video, which only received USD$2.2 billion in ad dollars in 2009 compared with USD$109.5 billion for network television.

But the point is, online ads have plenty of room for growth. You can’t say the same for print advertising. You only have to look at revenues for the big media companies such as Southern Cross Media Group [ASX: SXL] to see how sales and profits have stagnated for the past five years.

So, yes, Facebook does “diminish the quality of thought”. And it is a vacuous, inane and shallow media. And the shares are likely to begin trading for an obscene premium over current profits. But…

It’s also a great company.

It’s the perfect example of how a free market gives consumers a service they didn’t know they wanted. Remember, when businesses such as Facebook (and just a year before it, MySpace) were created, there was no guarantee of success.

It took guts by the company’s owners and investors to put time and money on the line.

Today, Facebook is a success. And the share price will reflect that.

The only dilemma for potential investors is whether Facebook will follow Google’s lead and gain 588% in eight years. Or whether it will follow MySpace down the toilet (Ed note: News Corp paid USD$580 million for MySpace in 2005… and sold it for USD$35 million in 2011 for a 93.9% loss!)

As a punter, we like Facebook as a red hot gamble. You wouldn’t want to bet your retirement fund on it, because there’s little doubt to us the shares will either soar or slump.

Facebook is a high-risk punt. It isn’t a stock for investors. It’s a stock for crazy speculators.

If that sounds like you… we’d say, go ahead, buy some.

Cheers.
Kris.

P.S. Facebook isn’t the only punt I recommend investors make in 2012. At an exclusive gathering of investors next month, I’ll explain which stocks to buy this year for maximum gains. You can reserve your seat to this event by clicking here…

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USDCHF traded in a narrow range between 0.9114 and 0.9249 for several days. The price action in the range could be treated as consolidation of downtrend from 0.9594. Key resistance is at 0.9350, as long as this level holds, downtrend could be expected to resume, and one more fall towards 0.8900 is still possible. However, a break above 0.9350 will indicate that the downward movement from 0.9594 had completed at 0.9114 already, then the following upward move could bring price back towards 0.9594 previous high.

Forex Signals

Bargain hunters are wise to pay careful attention to insider buying, because although there are many various reasons for an insider to sell a stock, presumably the only reason they would use their hard-earned cash to make a purchase, is that they expect to make money. Today we look at two noteworthy recent insider buys.

Eight years after it was launched from a Harvard dorm room, Facebook is expected to take its first major step to being a publicly traded company Wednesday, according to the Washington Post. The filing is the first step toward what’s shaping up to be one of the highest-buzzed market debuts in history.Facebook has made no secret about it plans to go public, and rumors have been circulating for months that the company would raise as much as $10 billion for the initial public offering — giving it a valuation of $75 billion to $100 billion — though reports Monday from the International Financing Review and the New York Times revised that number down to $5 billion. That number could continue to rise as Facebook measures demand for the stock, which is expected to have its market debut late this spring.

Since the early days of the Eurozone debt crisis, insiders have identified China and its $3.2 trillion in foreign reserves as a potential contributor to a Eurozone bailout fund. Today, Premier Wen Jiabao gave markets reason to believe this may yet be the case when Wen suggested that China is considering the options for how it may contribute to keeping the Eurozone together.

The original European Financial Stability Fund (EFSF) is scheduled to be superseded by the European Stability Mechanism (ESM) later this year. The ESM is expected to provide 500 billion euros ($656 billion) to the establishment of a bailout fund. Wen did not confirm whether  China would contribute to the ESM directly, but this does seem to be the most logical way China could help support the region.

China Desires a Stable Euro and Eurozone

It is in China’s interest to help stabilize the Eurozone. It is estimated that up to one quarter – or roughly 620 billion euros – of China’s foreign exchange is held in euros. Shielding this investment from further decline is obviously of vital importance to China.

However, China also wants to see prosperity return to the region as quickly as possible to protect its export interests.  The wider European Union is China’s largest export market with 282 billion euros worth of goods exported in 2010. Sales for 2011 continued to increase but at a slower pace and there is a growing worry that sales could soon start to decline.

German Chancellor Angela Merkel arrived in China today to kick off a three-day visit aimed largely at reassuring China that European leaders have a handle on the debt crisis.

Scott Boyd is a currency analyst and a regular contributor to the OANDA MarketPulse FX blog

Speaking before the House Budget Committee in Washington today, Federal Reserve Chairman Ben Bernanke said that the U.S. economy appeared to be gaining in strength.

“Fortunately, over the past few months, indicators of spending, production, and job-market activity have shown some signs of improvement,” Bernanke testified. “The outlook remains uncertain, however, and close monitoring of economic developments will remain necessary.”

Despite the more positive tone, Bernanke reaffirmed a continuance of the Fed’s near-zero interest rate policy. Last month, the Fed extended its pledge to hold the line on interest rates for an additional year, stating that rates would likely remain at the record low cap of 0.25 percent until late 2014.

To offset fears that low lending rates could lead to inflation, Bernanke told the Committee that the Federal Open Market Committee (FOMC) still considered 2 percent growth to be the ideal target. Given  the current conditions, the FOMC expects inflation to remain “subdued”.

U.S. Consumer Confidence Falls Sharply in January

Bernanke’s testimony comes less than a week after the release of the January Consumer Confidence Index. The January result was a sharp decline in confidence, falling to 61.1 percent from 64.8 percent after two consecutive months of significant gains. The downturn in the index suggests consumers are increasingly worried that rising costs will take a greater bite out of household budgets.

There is hope that confidence will rise should the employment outlook continue to improve. For the final quarter of 2011, unemployment fell by half a percent to 8.5 percent and momentum appears to be gathering steam with claims for unemployment benefits falling more than expected for the week ending January 21^st.

Scott Boyd is a currency analyst and a regular contributor to the OANDA MarketPulse FX blog

Right now, a lot of investors and business news junkies are incensed by Freddie Mac’s move to profit by intentionally giving their customers bad service.

And they should be. They just shouldn’t be surprised…

Because this is merely the latest of many examples of the government sponsored enterprise (GSE) behaving badly.

Freddie Mac, first formed in 1970 as the Federal Home Loan Mortgage Corp., was allegedly designed “to stabilize the nation’s residential mortgage markets and expand opportunities for homeownership,” as its website claims. But as recent history has clearly shown, it and its partner in crime, Fannie Mae, have done anything but that.

One of the first publicly recognized signs of its history of corruption came in 2003, when Freddie was fined $125 million for essentially cooking its books between 2000 and 2002. But other than the measly penalty, the scandal led to nothing more than a small round of management layoffs.

No new regulations were slapped on the mortgage investment company. It was largely allowed to go about its business as usual, despite a few congressional and presidential attempts to reform the financial reprobate.

Congress Loves Freddie Mac

There’s an easy reason for why Freddie Mac got away with so much and continues to do so today: its incestuous relationship with Congress. As Politico reported on July 16, 2008:

“Over the past decade, they [Fannie Mae and Freddie Mac] have spent nearly $200 million on lobbying and campaign contributions… The two government-chartered companies run a highly sophisticated lobbying operation, with deep-pocketed lobbyists in Washington and scores of local Fannie- and Freddie-sponsored homeowner groups ready to pressure lawmakers back home. They’ve stacked their payrolls with top Washington power brokers of all political stripes…”

Put bluntly, they own key members of Congress, who know they won’t have nearly the same spending power come election time if they don’t make Freddie and Fannie very happy. Not that Congress seems all that broken up about being owned though, considering the significant investments many of them made into the companies before they both went all but belly-up.

Massachusetts Representative Barney Frank even dated a Fannie Mae executive in the 1990s, leading many to speculate whether the two were mixing business with personal gain. And it’s a documented fact that Frank, among others, fought long and hard to maintain that neither institution had any “safety and soundness problems.”

With those kinds of relationships going on, it’s no wonder that Fannie Mae’s former chief credit officer, Edward Pinto, went on to speculate that both GSEs were purposely misrepresenting their actions for years before either of them ever got caught.

The Financial Crisis and Beyond

With heavy government backing, government financing and government excuses, Freddie Mac and Fannie Mae essentially did whatever they wanted to do… which was make money by jeopardizing and ultimately wasting billions of taxpayer dollars to help push the housing market right into a dangerous position.

And that bubble eventually burst, as all of them eventually do.

As Bloomberg’s Jonathan Weil pointed out last month, they are hardly the only institutions to blame for the lingering financial crisis of 2008. The Fed, with its prolonged low interest rates and “worthless regulators or banks with excessive leverage,” deserves censure, as well.

But Fannie and Freddie still played an enormously significant part in the mess, and they did so of their own free and well informed will. So this latest round of overwhelming greed is just another example of Freddie Mac conducting business as usual.

Was it wrong that they purposely barred a majority of Americans from refinancing their homes in the midst of falling mortgage rates… then capitalized on their unethical actions by trading on that knowledge?

Of course!

Just don’t expect anything to change anytime soon. As evidenced by its past and present actions, Freddie Mac is one company that can – possibly quite literally – get away with murder in the future.

Good Investing,

Jeannette Di Louie

Article by Investment U

Source: ForexYard

Fresh concerns regarding Greece’s debt negotiations sent investors to safe-haven assets during the beginning of today’s trading session. The news resulted in the US dollar recouping some of its recent losses against the euro. The EUR/USD dropped to the 1.3085 level before staging a correction during the evening session. The greenback was not as fortunate against other riskier currencies. The AUD/USD range traded for much of the day, maintaining its recent bullish trend around the 1.0725 level.

Turning to tomorrow, traders can expect significant volatility in the marketplace as the US Non-Farm Employment Change figure is set to be released. Wednesday’s ADP Non-Farm figure, which is widely considered an accurate predictor of today’s news, came in below expectations and resulted in some bearish movement for the US dollar.

At the moment, analysts are predicting that the US added 150K jobs in January. Should the final figure come in significantly below that number, the greenback may extend its losses. At the same time, traders will want to note that the employment statistic is notoriously difficult to predict. A better than expected figure is entirely possible, and could result in dollar gains ahead of markets closing for the weekend.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

This morning, UBS raised its price target on shares of Franklin Resources (BEN) to $113 per share as funds are flowing in at a faster rate that previously expected. With the higher price target, UBS maintained its neutral rating.