InvestMacro FX

Speculation that the European Central Bank will be forced to slash interest rates has intensified in light of the most recent manufacturing data. The Markit Purchasing Manager’s Index (PMI) shows that for the second straight month, manufacturing in the Eurozone contracted due to weaker domestic demand and plunging export sales.

For the month of September, the index recorded a score of 48.5 compared to 49.0 in August. An index reading of less than 50 indicates a retrenchment meaning that for the second straight month, manufacturing in the Eurozone contracted.

This alone should be sufficiently alarming for Eurozone officials, but what the latest index reveals about the state of Germany’s manufacturing status, should be absolutely terrifying. Germany’s individual PMI reading for August was 50.9 – for September, the reading fell to just 50.3. While still indicating expansion, the PMI result is down considerably from the previous month and barely within the positive range.

Germany’s manufacturing sector is by far the largest manufacturing center within the Eurozone and is touted as the “engine” that will help power the Eurozone to recovery. If that is indeed the case, a tune-up is badly needed.

Until being surpassed last year by China, Germany was the world’s largest exporter with nearly $1.4 trillion (1.05 trillion euros) in sales estimated for 2010. If German manufacturing continues to decline, there will likely be two immediate outcomes. Firstly, Eurozone unemployment will worsen as German manufacturing firms reduce worker headcount to address declining demand for manufactured goods. Secondly, this could very well serve as the catalyst that forces the European Central Bank to slash interest rates.

The combination of job losses and weaker export sales will bring pressure on the ECB to do more to boost economic activity within the debt-stricken Eurozone. In the wake of the last recession, the ECB initially resisted interest rate cuts and lagged behind the other major Central Banks in reducing lending rates. Starting in the final quarter of 2008, the Bank finally began implementing a series of quarter point rate cuts reducing the benchmark rate to 2.0 percent by January, 2009, and eventually to 1.0 percent by May.

The Bank then held the line on interest rates for almost two years before implementing two rate hikes increasing rates to 1.5 percent by July, 2011. With the exception of Australia and New Zealand, European interest rates remain well above the rest of the major economies, but the manufacturing data update may force the ECB to once again consider slashing interest rates.

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

Oct. 3 (Bloomberg) — Neil Corney, head trader at the Tel Aviv unit of Citigroup Inc., talks about the performance of and outlook for Israeli stocks. He speaks from Tel Aviv with Francine Lacqua on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)

Tired Of Waiting on Keystone XL? Here Comes Wrangler

by Justin Dove, Investment U Research
Monday, October 3, 2011

Activists and politicians continue to delay any action on the proposed Keystone XL pipeline from the Alberta oil sands to refineries in Illinois and Oklahoma.

Even the Dalai Lama has spoken out against the darned thing…

Environmentalists are weary of the TransCanada (NYSE: TRP) pipeline traveling over sensitive areas, such as the Ogallala Aquifer in Nebraska.

According to the Vancouver Sun, Keystone XL “would run through 411 kilometers of the Cornhusker State, crossing the eco-sensitive Sand Hills and the vast Ogallala Aquifer, which provides 80 percent of Nebraska’s drinking water.”

But proponents say the proposed line would create much-needed jobs and economic growth throughout the Midwest. It may also lower gas prices in the United States and curb foreign dependence.

The U.S. Department of State claims it’s committed to making a final decision by December 31, 2011, but there’s no guarantee.

Wrangler in the Pipeline

Investors banking on the Keystone XL are undoubtedly tired of waiting for the ordeal to play out. But for those tired of waiting, there are plans for another big pipeline that likely won’t face the same opposition.

The proposal for the Wrangler pipeline includes:

• It will transport bubblin’ crude from the oversupplied hub at Cushing, Oklahoma to the Gulf Coast refining complex in Texas.

• It will initially have capacity to transport up to 800,000 barrels of crude oil per day.

• It will accommodate the medium-to-light crude oil currently stranded in Oklahoma and priced at a discount to the oil imports being used by Gulf Coast refiners.

• The pipelined will be designed to be easily expanded.

• It will originate in Oklahoma and extend approximately 500 miles south. It would closely follow existing pipeline corridors, making the environmental impact slight. It would conclude at a storage facility in Harris County, Texas.

Two JV Energy Players With Solid Dividends

The proposed Wrangler pipeline is a joint venture between Enbridge Energy (NYSE: EEP) and Enterprise Products Partners (NYSE: EPD). Enbridge owns the terminal in Cushing where the line will originate and Enterprise owns the storage terminal in Texas where it will conclude.

Enbridge is also involved in the Northern Gateway project, which will take crude from the Alberta oil sands to the British Columbian coast. From there, tankers will carry it to the ever-growing Asian markets. That 1,100-kilometer, $5.5-billion pipeline will enter regulatory hearings in January and has been backed by Chinese oil companies Sinopec (NYSE: SHI) and MEG Energy (OTC: MEGEF.PK).

In 2010, Enbridge incurred a $611-million non-recurring expense, which kept it from being profitable. However, the Houston-based company has reported a profit in the first two quarters. Assuming Enbridge has similar results in the third and fourth quarters, it should carry a P/E ratio of approximately 16.

Enbridge also has a strong record of paying dividends. It’s currently yielding just over $2 a year (7.7 percent) and has raised its dividend every year since it went public in 1992.

Enterprise has a market cap of more than $33 billion, about five times that of Enbridge. It’s paying a slightly higher dividend of $2.42 a year (six percent). Enterprise has also raised its dividend consistently since it went public in 1998. However, its P/E of 22.96 isn’t quite as attractive as Enbridge.

The Bottom Line: Keystone and Wrangler’s Future

The future of the Keystone XL pipeline is very much in question, with so much high-profile opposition. If it does in fact get the nod to commence, it will likely be great news for TransCanada. If not, TransCanada will likely take a dip, considering it’s somewhat priced to include the proposed pipeline.

In the meantime, Wrangler may have a much better chance at survival and could create a great opportunity for investors. The added advantage of solid dividend yields from both concerned parties sweetens the pot a bit.

Good investing,

Justin Dove

Article by Investment U

Oct. 3 (Bloomberg) — Philipp Baertschi, chief strategist at Bank Sarasin & Cie AG, talks about the prospect of a European Central Bank interest rate cut at its meeting on Oct. 6. Baertschi, speaking from Zurich, also discusses European bank liquidity and his investment strategy with Francine Lacqua on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)

Oct. 3 (Bloomberg) — Martin Abbott, chief executive officer of the London Metal Exchange, says the bourse will make money no matter which way prices move. Olivia Sterns and Owen Thomas report on Bloomberg Television’s “Countdown.”

By Chris Vermeulen, thegoldandoilguy.com

Oct. 3 (Bloomberg) — David Wilson, director of metals research at Societe Generale SA in London, talks about the outlook for copper and gold. Wilson also discusses Chinese copper demand and the impact of the European debt crisis on metals markets with Owen Thomas on Bloomberg Television’s “On the Move.”

These Investors Are About to Get Slaughtered

by Alexander Green, Investment U‘s Chief Investment Strategist
Monday, October 3, 2011: Issue #1613

When the market turns rocky, it’s understandable that some investors run to safety. But these are unusual times. And many of these investors are running straight into a buzz saw.

If you’re one of them, you need to take preventive action immediately. Let me explain why…

While attending my daughter’s choral concert at her school the other night, I overheard two fathers chatting during the break.

“I finally threw in the towel on the stock market,” the first said.

“Me too,” said the other. “I’ve tucked everything away into Treasury bonds instead. I’m not earning much but at least I can sleep at night.”

He’s in for a nightmare instead. Nothing is more devastating to investors than when they plow huge amounts of money into a seemingly safe investment and their world gets turned upside down.

That’s the risk now with Treasury bonds.

Please understand, I’m not suggesting that the United States is a poor credit risk. No one lends money to a deadbeat at 1.9 percent for 10 years or three percent for 30 years. (That’s the current yield on 10- and 30-year Treasuries.)  But the good times for Treasuries – which began way back in the hyperinflationary early 80s when the prime rate hit 21.5 percent and long bond yields topped 16 percent – are almost certainly coming to an end.

Welcome to The Treasury Bubble

In the last 12 years, we’ve experienced the technology stock bubble, the real estate bubble and the gold bubble. Now… welcome to the Treasury bubble.

Let’s start with the basics. Bonds work like a seesaw…

• When interest rates come down, bond prices go up.
• When interest rates go up, bond prices go down.

Yields on Treasury bonds have plunged in recent weeks, thanks to fear of recession, chaos in the Eurozone and assorted other unsavory news. That buying has driven 10-year yields sharply lower – from 3.25 percent to less than two percent just in the past few weeks. Investors, of course, aren’t buying these bonds for their potential return. They’re buying them for the perceived safety.

Yet their statement values will plunge in the months (and years) ahead.

Don’t get me wrong. Despite our $14.5-trillion budget deficit, tens of trillions more in unfunded liabilities, this year’s political brinksmanship and the recent Standard & Poor’s downgrade, the creditworthiness of Uncle Sam isn’t an issue. If our government doesn’t have the cash to meet its obligations, it can do something no private borrower can: Crank up the printing presses.

Why Treasury Bonds Are Still a Big Risk

I hope it doesn’t come to that because it would likely be inflationary. Yet aside from any inflation risk down the road, Treasury bonds are still a big risk. And most investors don’t understand why. For example, the other day a friend told me he had recently plunked for the Vanguard Long-Term Treasury Fund (VUSTX).

“Why?” I asked.

“Well, because Treasuries are safe and the fund has returned 8.3 percent annually since its inception 28 years ago.”

Never has the boilerplate “past returns are no guarantee of future results” been more apropos. It isn’t just unlikely that this fund will generate this kind of return over the long haul. It’s mathematically impossible. And the only way it could generate a decent return in the short term is if the United States enters a full-blown deflationary depression, a long shot at best.

U.S. Treasury bonds are priced for calamity. Granted, times aren’t the best right now. We may get a double-dip recession. Perhaps even a nasty one. We may see Greece default on its sovereign debt. (In fact, I hope we do. That would be the first step toward cleaning up the mess in Europe.) But – despite the many Chicken Littles out there – we’re not on the verge of economic Armageddon. That means Treasury bonds will soon start to fall. Hard.

Short-term Treasury notes and bills aren’t terribly risky. (Although they pay almost nothing.) But Treasury bonds (and Treasury bond funds) are an extraordinarily poor bet for the short to medium term.

If you own them – and prefer not to learn the hard way – do yourself a favor and get out of them.

Now.

Good investing,

Alexander Green

Article by Investment U

Oct. 3 (Bloomberg) — Michael Lewis, managing director and head of commodities research at Deutsche Bank AG, discusses the outlook for precious metals, oil and corn. He speaks with Francine Lacqua on Bloomberg Television’s “Countdown.” (Source: Bloomberg)