New China Trader http://www.newchinatrader.com Identifying the best performing stocks in the world's fastest growing major economy. Thu, 19 Aug 2010 20:19:29 +0000 en hourly 1 http://wordpress.org/?v=3.0.5 The Fed’s Treasury Purchase Plan is Just Further Proof That It’s in the Denial About the Dollar http://www.newchinatrader.com/archives/treasury-purchase-plan-is-just-further-proof-that-it%e2%80%99s-in-the-denial-about-the-dollar/ http://www.newchinatrader.com/archives/treasury-purchase-plan-is-just-further-proof-that-it%e2%80%99s-in-the-denial-about-the-dollar/#comments Thu, 19 Aug 2010 20:19:29 +0000 Keith Fitz-Gerald http://www.newchinatrader.com/?p=9168
This week’s decision by the U.S. Federal Reserve to buy Treasuries in an effort to prop up borrowing is further proof that the economy is worse off than policymakers would have us believe. But more than that, the Fed’s Treasury purchase plan is just one more reason for investors to anticipate inflation and take steps to protect their money from it.

In case you missed the news, here’s what happened…

The Federal Reserve on Tuesday announced that instead of allowing proceeds from maturing mortgage bonds to disappear from its balance sheet, the central bank would take the “modest” step of using them to invest in new Treasuries.

In plain English, that means that the Fed is reinvesting into U.S. Treasuries the money it would otherwise bank from maturing mortgages.

Its goal is very simple: to keep long term interest rates from rising.

Many economists have pointed out that the consequences of the Fed’s Treasury purchase plan will be minimal. And I agree. A mere $200 billion or so in such securities – out of the Fed’s $2.3 trillion portfolio -mature yearly as homeowners pay off or retire their mortgages. So we’re only talking about 8.69% of the total here.

But it’s the Fed’s read-between-the-lines implication that is really scary.

By taking this step, U.S. Federal Reserve Chairman Ben Bernanke hopes to reassure global traders, and presumably the American public, that he is prepared to take even more drastic steps should the recovery grind to a halt. Chief among the Fed’s options would be to buy more mortgage debt, which Bernanke believes would help keep down inflation.

Bear in mind, though, that at the height of this financial crisis, the Fed purchased a staggering $1.42 trillion in mortgage securities and some $300 billion in Treasuries to prop things up. And mortgage rates fell less than half a point. So much for that theory.

Something stinks here.

Bernanke either knows something about the state of the recovery that he’s not telling the public, or he’s trying to telegraph something he believes is inevitable.

Maybe it’s both. But this isn’t good news either way.

I have got to believe that it’s finally dawning on Helicopter Ben that deficit spending and the Keynesian formula for consumer stimulation – upon which the Fed has based its entire recovery plan – don’t work. (Something I argued in a recent report to Money Map Report subscribers – click here to sign up and get your copy.)

The housing market still stinks, mortgage rates are still falling despite being the lowest they’ve been in decades, and consumers have no money. Furthermore, the consumers that do have money are facing tighter credit standards and don’t want the debt.

Frankly, I think that’s actually a good thing because it represents a huge psychological change in our nation’s reckless spending habits. However, from the Fed’s point of view, it’s a problem because its policies presuppose that government spending makes up the difference in consumer demand until demand can once again overpower the deficits induced in the effort.

But here’s the real problem with the Fed’s policy: By propping up the mortgage market, and by implication Treasuries, the Fed is only temporarily staving off inflation, while further selling out the dollar long-term.

The fact is that inflation is as inevitable as the sun rising tomorrow and there are now some $12.4 trillion reasons why. And so the problem isn’t the mortgage market or even the manipulation of rates, but the eventual evisceration of the dollar.

Regardless of government statistics that suggest inflation is under control, the reality is that inflation is already well underway to the tune of 10% or more in this country. You know that as well as I do by what happens with your wallet every day. The costs of education, medicine, and groceries are all up, up, up. Apparently, the government bean counters are the only ones who aren’t feeling the squeeze.

The other thing to consider is that by propping up Treasuries in an effort to keep inflation low, the Federal Reserve is undermining any semblance of a strong dollar policy. Bernanke and Treasury Secretary Timothy Geithner may talk a good game, but the reality is that money flows to where it is treated best. And that doesn’t bode well for the dollar in the long-term.

Once the dust starts to settle, i nternational traders will move away from the greenback absent higher interest rates that compensate them for their investment. In fact, they’ve already begun doing just that. I know the dollar rose overnight following Tuesday’s announcement but that’s more in reaction to a short term flight to quality than a long term reflection or judgment of the dollar’s staying power.

If it were, we would not have seen the dollar fall below 85 to the Japan Yen – a 15-year low – at the same time.

And don’t forget about China. By propping up U.S. treasuries in an effort to keep interest rates from rising, the U.S. government may be trying to force the Chinese to revalue their Yuan more quickly than that government wants. This will go over like a lead balloon in Beijing, which holds nearly a $1 trillion of U.S. government paper in the form of short-term obligations.

So what we can do to profit from the situation?

Action to take: There are three ways to capitalize here:

  1. Buy treasury indexed inflation securities or “TIPS” as they are commonly known. Because U.S. Treasuries remain one of the most liquid investments on the planet, it’s very easy to participate in this trade. Inflation will get here – the only question is when. Now is the time to start hedging against it. My favorite choice is to begin averaging into a vehicle like the iShares Barclays TIPS Bond ETF (NYSE: TIP). The duration is a relatively short one-10 years, so most of the volatility that’s going to plague long bondholders is avoided, but the potential return remains. I also like the 3.59% dividend yield, which compensates investors for the risks they take by holding this fund.
  2. Short the Japanese Yen: This trade is a bit more subtle. If the United Stats is once again openly diluting the dollar, we can reasonably expect the Japanese to react – though not immediately, because things take time in Japan…lots of time. Think about it this way: Japan’s economy is largely export based and there is almost no domestic consumption growth. A more expensive yen versus other currencies makes Japanese exports less attractive, so the Japanese government is under intense pressure to reverse this trend by weakening the yen. My expectation is that this will happen by the end of 2010, when the pain threshold reaches a crescendo and companies like Toyota Motor Corp. (NYSE ADR: TM) begin losing sales the way the German companies did years ago on the back of a super strong Deutsche marke. Spot FX or futures are your best bet here.
  3. Buy Chinese Yuan: I’ve often referred to buying Chinese yuan as the closest thing to a no-brainer on the planet. The only question, given the Fed’s shenanigans, is whether or not you have the patience to sit it out. Revaluing the Chinese yuan is in China’s best interest, but doing so is hardly in Washington’s, especially now. I believe this will make for a potent combination when the timing is finally right and one of the easiest ways to participate is through the WisdomTree Dreyfus Chinese Yuan ETF (NYSE: CYB).

Of course you could also take the easy way out and simply short the U.S. stock market as a whole…but then you risk fighting a government that rightly or wrongly doesn’t know when it’s been beaten and refuses to give up.


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]]> http://www.newchinatrader.com/archives/treasury-purchase-plan-is-just-further-proof-that-it%e2%80%99s-in-the-denial-about-the-dollar/feed/ 0 Ignore the “Experts”: 7 Reasons Not to Invest in Japan http://www.newchinatrader.com/archives/ignore-the-%e2%80%9cexperts%e2%80%9d-7-reasons-not-to-invest-in-japan/ http://www.newchinatrader.com/archives/ignore-the-%e2%80%9cexperts%e2%80%9d-7-reasons-not-to-invest-in-japan/#comments Sat, 10 Jul 2010 15:44:19 +0000 Keith Fitz-Gerald http://www.newchinatrader.com/?p=9162
KYOTO, Japan – Now that Japan’s Nikkei 225 is half the relative price of the S&P 500 – and the cheapest it’s been in three decades, investors are flocking to invest in Japan.

But, I don’t "buy" it – and you shouldn’t, either.

To be sure, there are still world-class businesses here and many Japanese companies are in the best competitive positions they’ve been in for years. And yet, bluntly speaking, I’ve never seen a more-nightmarish situation. And here’s why:

  1. Japan’s domestic market is a demographic disaster that’s characterized by a rapidly aging population and an impossibly low birth rate – neither of which suggest that domestic consumption will improve anytime soon.
  2. Modern Japan is almost entirely reliant on exports. If exports can’t take up the slack caused by the domestic disintegration I’ve just mentioned, the Nikkei will fall further – as will corporate profits, lending and payrolls. To bridge the gap, Japanese corporations and Japanese companies will have to repatriate assets that are already under pressure abroad, further strengthening the yen at a time when the opposite is actually needed to spark growth. This repatriation is already happening to a small degree; but the real risk is that it becomes a self-perpetuating, self-defeating cycle – instead of the byproduct of the global financial crisis that it’s been up to now.
  3. Nominal gross domestic product (GDP) has not expanded meaningfully in 30 years, and the country’s debt as a percentage of GDP is nearly 200% – the highest on the planet. Even Greece – the poster-child for the ill effects of an over-reliance on government debt – has a debt-to-GDP ratio of "only" 115%. (For a look at the countries with the biggest debt-to-GDP ratios – and for some insight on the trouble all that debt can cause – check out the accompanying chart.)
  4. So far, Japan has been able to finance its debt internally, drawing its huge pool of domestic savings. By 2015, however, this Asian giant could be forced into the external financial markets (just like the United States) as a means of funding this domestic debt. That’s when Japan’s aging population is projected to begin consuming more assets for retirement than its work force is saving. This will likely double Japan’s long-term debt costs, and it will likely cause the stock markets to deflate further in response to interest rates that may actually triple to accommodate the increased risks of external financing. Japan’s largely internally financed 10-year note late last week touched 1.16%, the lowest level in 18 months. The comparable externally financed 10-year U.S. ended the week at 3.11%.
  5. Government reform here has bogged down, the victim of controversy and political mediocrity. Japanese Prime Minister Naoto Kan – elected in early June – is the fifth person to hold that post in the last four years. The story is even worse when it comes to cabinet-level posts: Kan’s choice as the new minister of finance – the conservative Yoshihiko Noda – became the ninth finance minister in the past four years. Many Japanese I know have simply turned apathetic, believing that nobody in the Japanese Diet is going to stick around long enough to make any meaningful changes.
  6. Even now, after 30 years of stagnation, Japanese firms still have some of the highest manufacturing costs on the planet, and remain generally inflexible when it comes to adaptation. Worse still, it’s my belief that Japan’s "old guard" still doesn’t fully understand the competitive threats their country faces from Korea and China – despite the fact that China, and not the United States, is now Japan’s single-largest trading partner.
  7. Prices at supermarket chains have fallen for 13 straight years, according to the Japan Chain Stores Association, and wages have been largely stagnant for decades. Neither is a harbinger of better times to come.

Time to Short Japan?

With such a negative outlook on Japan, you’d think that "shorting" Japan – or even abandoning it altogether – would be the investment strategy that I advocate. But that’s not the case. For me, in fact, this is quite problematic.



For one thing, years of living and working in Japan has demonstrated time and again that the Japanese have an admirable, intangible quality they refer to as kesshin – which loosely translates to "quiet resolve," or "determination." Americans might refer to it as "guts," or "true grit," but this quality or spirit actually runs much deeper than that and reflects a Japanese person’s innate refusal to give up or give in – no matter the odds.



There’s also some reason for hope in the corporate realm. Many Japanese companies – especially the bigger, more-established ventures – have cut their ties to the U.S. market, and have consciously focused their sales efforts on China, even if they don’t yet fully understand the nature of the competition they are unleashing in the process. In doing so, these Japanese companies hitched their horse, however hobbled it might be, to a stronger wagon.

Where to Invest Now:

Personally speaking, I’d rather invest in the stronger wagon (China) because the path to profits is more direct. But if you just can’t bring yourself to "give up" on Japan – for whatever reason – here’s where I suggest that you look for the best potential profit opportunities. Consider:

  • Japanese companies that are selling into China’s infrastructure boom, which include players in the heavy-machinery, construction-equipment and green-energy. Companies such as Fujitsu Ltd. (OTC ADR: FJTSY), Mitsubishi Corp. (PINK ADR: MSBHY) and Komatsu Ltd. (OTC ADR: KMTUY) have all experienced solid gains thanks to China even though their stock prices do not yet reflect the growing trade there. Those are almost more a "China" story than a "Japan" story.
  • Industrial materials suppliers that supply the bigger Japanese companies producing end-use products in the industries I’ve just mentioned to China. Pay special attention to such areas as industrial ceramics and solar manufacturing.
  • And think about Japanese shipping companies. After all, the stuff China needs has to get from ‘Point A’ to ‘Point B.’ Most shippers – such as Mitsui O.S.K. Lines Ltd. – have suffered deep losses as a result of the global financial crisis and could logically benefit as the need to move goods north resurfaces. That means you may be able to snap them up at a bargain even if you are early to the party.

If you do decide to invest in Japan, do so with this Japanese proverb in mind: "Ishi no ue ni mo san nen" – which loosely warns us that you have to sit on a rock for three years in order to break it.

Action to Take: As the markets are wracked by volatility, there’s never been a better time to make your investment portfolio "bulletproof." Go here now to find out how to slap on the "financial Kevlar" and move into safe pockets of near-guarantees 300% gains. Become a "Kevlar Investor" – Free Guide here.

]]> http://www.newchinatrader.com/archives/ignore-the-%e2%80%9cexperts%e2%80%9d-7-reasons-not-to-invest-in-japan/feed/ 0 The Real Housewives of Japan: Shopping for Bargains … Driving Deflation? http://www.newchinatrader.com/archives/the-real-housewives-of-japan-shopping-for-bargains-%e2%80%a6-driving-deflation/ http://www.newchinatrader.com/archives/the-real-housewives-of-japan-shopping-for-bargains-%e2%80%a6-driving-deflation/#comments Thu, 08 Jul 2010 15:43:34 +0000 Keith Fitz-Gerald http://www.newchinatrader.com/?p=9161
KYOTO, Japan – Could 70,000 Japanese housewives tip this Asian giant into a deflationary spiral?

As farfetched as that sounds, it’s become a major cause for concern in this nation of 128 million, which has been in an economic funk for two decades. These "real housewives" are part of a user-driven, social-networking site called Mainichi Tokubai, which delivers the best prices on specific grocery-store items to the fingertips of Tokyo-region consumers.

To hear frustrated Japanese policymakers and retail executives tell it, these bargain-minded consumers and their equally frugal social-networking site is almost-single-handedly undercutting the Japan‘s economy.

"We understand consumers want the best deals," Japan Chain Stores Association executive Shoichi Ogasawara groused to CNN‘s Kyung Lah. "And we understand that the social-networking site is a natural extension of consumer behavior in the Information Age. But supermarket prices have fallen for 13 years in a row in Japan," and sites such as this are making it difficult to reverse that trend.

Don’t make the mistake of believing that something similar couldn’t happen here in the U.S. market. Given that Japan’s consumer technology tends to be anywhere from 18 months to two years ahead of U.S trends, this could be a preview of what’s to come for the badly troubled U.S. economy.

Let’s Make a Deal

Japan‘s much-ballyhooded “Lost Decade” is actually now entering its third decade. Mainichi Tokubai, which means “every day best deal,” is a social networking site “staffed” by more than 70,000 Japanese housewives who, after nearly 30 years of flat wages and an increasingly dicey Japanese economy, simply want to stretch each yen in their quest to take care of their families.

From our home here in Kyoto, where my family and I live for part of each year, I’ve had a courtside seat to this economic drama. Even my wife Noriko uses the site: She estimates she can save at least 5,000 yen (roughly $50 a month) using the site. That’s a heck of a return on investment (ROI), given that a monthly subscription is about 105 yen (about $1.05).

Here’s how it works.

Each day, local housewives – called “regional correspondents” – upload the daily specials from their local newspapers to the site. Then, armed with their “keitai,” or smart phones, they go shopping for the best deals in neighborhood markets. If getting those “best deals” means buying a handful of items from three or four different markets, so be it.

It’s that resolve to find those “best deals” that’s threatening to further drive down prices – which could be deflationary.

It’s a great way to do things for a couple of reasons. First, we already receive the daily flyers from neighborhood merchants, so we’re able to instantly compare prices with other stores instead of having to plow through a half a dozen flyers a week. Second, we’re able to do it on our schedule and when we’re ready to go shopping. Third, we don’t really worry about getting the short end of the stick any longer from notoriously inflexible Japanese merchants who, for hundreds of years, have held the upper hand here.

The other day, for example, our family bought pork, eggs, pumpkin squash, ice cream and frozen foods – including peas, beans and blueberries – all on sale at our local stores and all at deep discounts that ranged from 10% to 50%.

Those bargains are akin to the “doorbusters” that U.S. retailers offer on weekends and holidays, and the strategy is the same: Japanese retailers offer those deeply discounted goods, figuring that, once in the door, the shoppers will then buy “iro iro,” or various things – and not merely the heavily advertised “loss-leaders” that got them into the store.

It doesn’t actually work out that way, however – thanks to Mainichi Tokubai. Take consumer Hiroe Ishimoto, who passed – as we did – on goods the Web site told her she could buy for less at other stores.

“I live with the comfort of knowing I never get a bad deal,” she told CNN.

At the other end of the spectrum are politicians and businessmen – like the chain store association’s Ogasawara – who worry that this small-but-determined army of consumers will tip Japan into a deflationary spiral.

Japan’s Lost Decade(s)

Unfortunately, Japanese retailers and politicians don’t seem to understand what the real problem is here. Consumers are feeling squeezed and have taken matters into their own hands, because Japan’s government won’t – or can’t – solve the problems they face.

And the pain has been intense.

For three decades – in what was known as the “Japanese post-war economic miracle” – Japan posted stellar growth. In fact, it averaged 10% growth during the 1960s, 5% in the 1970s and 4% in the 1980s – enough to vault right behind the United States and make it the world’s second-largest economy.

However, following the September 1985 Plaza Accord, a steep appreciation in the yen really torpedoed Japan’s export sector. Japan’s economic growth rate skidded from 4.4% in 1985 to 2.9% the next year. In an effort to offset the stronger yen, the Bank of Japan sought to ease monetary policy: Between January 1986 and February 1987, the BOJ slashed the discount rate from 5% to 2.5%. Asset prices – primarily stocks and real estate – skyrocketed, creating one of the biggest speculative bubbles in modern history, and setting Japan up for a classic crash.

The government tightened credit, raising rates five times in 1989 and 1990. By the time rates reached 6%, Japan’s stock was poised for a full-blown retreat. From an all-time high of almost 40,000 in 1989, the Nikkei 225 plunged more than 60% by 1992, dropping below the 15,000 level. The real-estate market was also crushed: Prices plunged 80% between 1991 and 1998.

It would have been bad enough had that been the extent of the damage, but it was actually just the start. Japan’s government rolled out 10 stimulus programs during the 1990s, and none did the trick. The Nikkei dropped below 12,000 by March 2001, and has continued to decline (it closed Tuesday at 9,338,04 – a full 77% below the all-time high reached in 1989).

Japan’s economy has been stagnant ever since: Real GDP rose just 1.5% per annum during the 1990s and 0.8% a year in the 2000s. The extremes experienced during the most-recent decade exacerbated the longstanding pain. After a major global slowdown in 2000-2001 hit Japan particularly hard, a resurgence of global trade and the policies of Prime Minister Junichiro Koizumi sparked a rebound that saw Japan’s economy advance at a 2.1% annual clip from 2003 to 2007.

But the global financial crisis brought about another reversal of fortune, causing the Japanese economy to shrink 1.2% in 2008 and a full 5.0% last year.

Fast-forward to 2010 and we find that the outlook hasn’t improved a bit. Unemployment is up once again and household spending is down, according to May data – most likely in response to lower Japanese factory production data and industrial output during the same month.

Note to Obama: Beware Mr. President

Japan’s got 30 years in this game and its leaders have tried everything from zero-interest-rate policies to cramming more capital into banks and other short-term lenders. The government has also purchased commercial debt and stock outright – all under the assumption that “lending” supports the very foundations of economic growth because it translates into “productive” investments.

Japanese companies are now so weakened by the multi-decade grind that there are literally not enough of them left to take on newly available capital even if they could.

If this all sounds vaguely familiar to you U.S. readers, your mind isn’t playing tricks: The Bush and Obama administrations have called some of the same plays – and we’ve already seen some similar results. Give it time and the parallels will become even more clear.

Washington would be wise to take heed: U.S. consumers aren’t going to put up with Washington’s malfeasance and mismanagement forever. Eventually, U.S. consumers, too, will take matters into their own hands, much like Japan’s housewives have done.

And when that happens in the United States, watch out.

Once consumers get that fed up – or that scared – they will take matters into their own hands … just to survive. Once that happens, consumer actions become the kind of hard-to-factor-in wildcard that transforms any new policymaking push into three parts guess/one part projection.

If you don’t believe me, just ask the housewives of Mainichi Tokubai – the “Real Housewives” of Japan.

[Editor's Note: Keith Fitz-Gerald knows Asia. For more than two decades, the noted author, investor and commentator has worked in, traveled throughout and actually lived in the Asian markets that so many others now claim to be "experts" on.



But as the preceding essay underscores, having immersed himself in the Asian investing and business venues that he now writes about and invests in for more than 20 years, Fitz-Gerald not only has insights that few others possess, he has the kind of contacts that few others can rival.

Investors can benefit from these insights. In his advisory service, The New China Trader, Fitz-Gerald makes those years of insights and global contacts available to his readers. For more information, please click here.]



News and Related Story Links:


]]> http://www.newchinatrader.com/archives/the-real-housewives-of-japan-shopping-for-bargains-%e2%80%a6-driving-deflation/feed/ 0 “Experts” Grow Bullish on Japan …But We See Reasons For Caution http://www.newchinatrader.com/archives/experts-grow-bullish-on-japan-%e2%80%a6but-we-see-reasons-for-caution/ http://www.newchinatrader.com/archives/experts-grow-bullish-on-japan-%e2%80%a6but-we-see-reasons-for-caution/#comments Tue, 29 Jun 2010 15:42:41 +0000 Keith Fitz-Gerald http://www.newchinatrader.com/?p=9160
KYOTO, Japan – Japan’s Nikkei 225 is half the relative price of the U.S. Standard & Poor’s 500 and is the cheapest that it’s been in nearly three decades. This has led many Western analysts to conclude once again that it’s “time to invest” in Japan.


I don’t “buy” it – and you shouldn’t, either.


To be sure, there are still world-class businesses here and many Japanese companies are in the best competitive positions they’ve been in for years. And yet, bluntly speaking, I’ve never seen a more-nightmarish situation. And here’s why:

  • Japan’s domestic market is a demographic disaster that’s characterized by a rapidly aging population and an impossibly low birth rate – neither of which suggest that domestic consumption will improve anytime soon.
  • Modern Japan is almost entirely reliant on exports. If exports can’t take up the slack caused by the domestic disintegration I’ve just mentioned, the Nikkei will fall further – as will corporate profits, lending and payrolls. To bridge the gap, Japanese corporations and Japanese companies will have to repatriate assets that are already under pressure abroad, further strengthening the yen at a time when the opposite is actually needed to spark growth. This repatriation is already happening to a small degree; but the real risk is that it becomes a self-perpetuating, self-defeating cycle – instead of the byproduct of the global financial crisis that it’s been up to now.
  • Nominal gross domestic product (GDP) has not expanded meaningfully in 30 years, and the country’s debt as a percentage of GDP is nearly 200% – the highest on the planet. Even Greece – the poster-child for the ill effects of an over-reliance on government debt – has a debt-to-GDP ratio of “only” 115%. (For a look at the countries with the biggest debt-to-GDP ratios – and for some insight on the trouble all that debt can cause – check out the accompanying chart.)
  • So far, Japan has been able to finance its debt internally, drawing its huge pool of domestic savings. By 2015, however, this Asian giant could be forced into the external financial markets (just like the United States) as a means of funding this domestic debt. That’s when Japan’s aging population is projected to begin consuming more assets for retirement than its work force is saving. This will likely double Japan’s long-term debt costs, and it will likely cause the stock markets to deflate further in response to interest rates that may actually triple to accommodate the increased risks of external financing. Japan’s largely internally financed 10-year note late last week touched 1.16%, the lowest level in 18 months. The comparable externally financed 10-year U.S. ended the week at 3.11%.
  • Government reform here has bogged down, the victim of controversy and political mediocrity. Japanese Prime Minister Naoto Kan – elected in early June – is the fifth person to hold that post in the last four years. The story is even worse when it comes to cabinet-level posts: Kan’s choice as the new minister of finance – the conservative Yoshihiko Noda – became the ninth finance minister in the past four years. Many Japanese I know have simply turned apathetic, believing that nobody in the Japanese Diet is going to stick around long enough to make any meaningful changes.
  • Even now, after 30 years of stagnation, Japanese firms still have some of the highest manufacturing costs on the planet, and remain generally inflexible when it comes to adaptation. Worse still, it’s my belief that Japan’s “old guard” still doesn’t fully understand the competitive threats their country faces from Korea and China – despite the fact that China, and not the United States, is now Japan’s single-largest trading partner.
  • Prices at supermarket chains have fallen for 13 straight years, according to the Japan Chain Stores Association, and wages have been largely stagnant for decades. Neither is a harbinger of better times to come.

With such a negative outlook on Japan, you’d think that “shorting” Japan – or even abandoning it altogether – would be the investment strategy that I advocate. But that’s not the case. For me, in fact, this is quite problematic.



For one thing, years of living and working in Japan has demonstrated time and again that the Japanese have an admirable, intangible quality they refer to as kesshin – which loosely translates to “quiet resolve,” or “determination.” Americans might refer to it as “guts,” or “true grit,” but this quality or spirit actually runs much deeper than that and reflects a Japanese person’s innate refusal to give up or give in – no matter the odds.



There’s also some reason for hope in the corporate realm. Many Japanese companies – especially the bigger, more-established ventures – have cut their ties to the U.S. market, and have consciously focused their sales efforts on China, even if they don’t yet fully understand the nature of the competition they are unleashing in the process. In doing so, these Japanese companies hitched their horse, however hobbled it might be, to a stronger wagon.



Personally speaking, I’d rather invest in the stronger wagon (China) because the path to profits is more direct. But if you just can’t bring yourself to “give up” on Japan – for whatever reason – here’s where I suggest that you look for the best potential profit opportunities. Consider:

  • Japanese companies that are selling into China’s infrastructure boom, which include players in the heavy-machinery, construction-equipment and green-energy. Companies such as Fujitsu Ltd. (OTC ADR: FJTSY), Mitsubishi Corp. (PINK ADR: MSBHY) and Komatsu Ltd. (OTC ADR: KMTUY) have all experienced solid gains thanks to China even though their stock prices do not yet reflect the growing trade there. Those are almost more a “China” story than a “Japan” story.
  • Industrial materials suppliers that supply the bigger Japanese companies producing end-use products in the industries I’ve just mentioned to China. Pay special attention to such areas as industrial ceramics and solar manufacturing.
  • And think about Japanese shipping companies. After all, the stuff China needs has to get from ‘Point A’ to ‘Point B.’ Most shippers – such as Mitsui O.S.K. Lines Ltd. – have suffered deep losses as a result of the global financial crisis and could logically benefit as the need to move goods north resurfaces. That means you may be able to snap them up at a bargain even if you are early to the party.

If you do decide to invest in Japan, do so with this Japanese proverb in mind: “Ishi no ue ni mo san nen” – which loosely warns us that you have to sit on a rock for three years in order to break it.



[Editor's Note: Keith Fitz-Gerald knows Asia. For more than two decades, the noted author, investor and commentator has worked in, traveled throughout and actually lived in the Asian markets that so many others now claim to be "experts" on.



But as the preceding essay underscores, having immersed himself in the Asian investing and business venues that he now writes about and invests in for more than 20 years, Fitz-Gerald not only has insights that few others possess, he has the kind of contacts that few others can rival.


The upshot: When other "experts" are saying to "Buy Japan," Fitz-Gerald is saying to "stand clear."



Who are you going to listen to?



Investors can benefit from these insights. In his advisory service, The New China Trader, Fitz-Gerald makes those years of insights and global contacts available to his readers. For more information, please click here.]



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]]> http://www.newchinatrader.com/archives/experts-grow-bullish-on-japan-%e2%80%a6but-we-see-reasons-for-caution/feed/ 0 Is it Time to Bet Against the U.S. Dollar? http://www.newchinatrader.com/archives/is-it-time-to-bet-against-the-u-s-dollar/ http://www.newchinatrader.com/archives/is-it-time-to-bet-against-the-u-s-dollar/#comments Sat, 26 Jun 2010 14:37:57 +0000 Keith Fitz-Gerald http://www.newchinatrader.com/?p=9159 The U.S. dollar has been one of the world’s strongest currencies in the first part of 2010.

And it’s no wonder. The Greek debt crisis continues to threaten Europe’s overall health, and could unleash an entirely new contagion on the rest of the global economy. Then there’s China, – the engine of world growth during much of the financial crisis – which now appears to face the near-term triple threat of slowing growth, accelerating inflation and workplace unrest. Add in concerns about commodity prices and global debt levels and it’s easy to see why currency investors have sought the safe haven of the U.S. dollar.

But is the greenback really the best choice for safety, quality and security?

Currency Market Currents
To me, the dollar is looking more and more like a colossal short that could wind up being one of the biggest moneymakers of the year for traders gutsy enough to take a stand.

Read on to find out why it’s time to bet against the dollar… I’ll show you the best ways to do it.

From Leader to Laggard?

Given that the dollar soared 11% since the beginning of the year, I’m sure some experts will call me crazy for going against the dollar at this point in history. But here’s my thinking:

  • Our $14 trillion fiscal hangover, weaker-dollar policies and increased spending will lead to additional dollar weakness in the immediate term. Longer-term, this is a foregone conclusion: The high debt load relative to U.S. gross domestic product will erode growth – studies prove this – and all the extra money that we’ve printed will fuel inflation, as always happens..
  • Foreign central bankers – especially China – are actively diversifying away from dollar reserves and dollar-denominated securities. They can’t and won’t “dump” the dollar in a wholesale manner. But this shift away is nothing less than a long-term decrease in demand for the dollar – and we all know that when demand for an asset declines, so does its value.
  • The Organization of the Petroleum Exporting Countries (OPEC) – and what’s left of the non-OPEC nations – are still pressing for non-dollar-denominated oil deals. Expect some of those deals to take place in the wake of the BP PLC (NYSE ADR: BP) Deepwater Horizon disaster, which will bring about major regulatory changes and cause onshore reserves to command a major premium. This group, incidentally, isn’t to be dismissed, given that it contains such heavyweights as China, Japan, Russia, most of the Arab nations and, of course, France.
  • If you look at the chart titled “Dour Days For the Dollar?”, you can see that appears to be forming a perfect “rising wedge,” a technical formation and a bearish signal that frequently precedes rollovers. That’s the opposite of a “falling wedge,” a bullish signal that presages reversals to the upside.

Dour Days

How to Play the Dollar’s Reversal

It’s worth noting here that this wager against the U.S. dollar should be viewed for just what it is – a highly speculative trade. This means it’s only for aggressive traders.

Keep in mind, too, that the dollar won’t shed its reputation as the currency of last resort without a struggle. Negative events abroad could send investors back into the currency for short stretches, making the dollar prone to short, rapid increases in value, despite its highly flawed underpinnings.

Position traders and everyday investors will probably want to wait for confirmation that the dollar’s trend is, indeed, reversing. You’ll miss out on some returns but that’s the way the game is played – you have to act on your convictions or else you’re simply another wannabe in this business.

My suggestion is that any speculative trade be limited to 2% of investable capital. That way, if we’re wrong and the dollar doesn’t cooperate, the risk to your portfolio is minimized.

As for suitable ways to play this dour-dollar prediction, I can think of three:

  1. Go for the Gold: This is so obvious that I’m almost deterred from suggesting it, especially since the yellow metal is once again trading near its all-time highs. Generally speaking, I don’t like buying anything at all-time highs, meaning that pullbacks are the key here. I expect $2,000-an-ounce gold within the next couple of years – and possibly sooner – depending on how central bankers choose to deal with the EU and how the U.S. Federal Reserve handles the recovery bailout “exit” strategies it’s alluded to in recent months.
  2. Take “The Natural” Approach: By “natural approach,” I’m referring, of course, to natural resources. The BP situation – coupled with new drilling restrictions and increasing Third World demand – is going to push the price of oil and other resources much higher. It’s not clear which one pulls or pushes lately – the U.S. dollar or oil – but when one moves the other generally heads in the opposite direction immediately. So watch the relationship between the two carefully to spot when this trend gets under way. Be prepared for some volatile trading, though. Silver, gold and other resources can move 5%, 8% and even 10% in a single day.
  3. Cash in on Currency Funds: It used to be that the dollar and the euro were the world currency market’s “dynamic duo” – when one went, you could count on trading the other. But I think that relationship is long gone. The money has now shifted across the Atlantic, headed through the U.S. economy, and headed straight for Asia. As a result, instead of shorting the euro, I’m now inclined to short the dollar, while being generally long on the Hong Kong dollar, the Australian dollar and even the Chinese yuan.

Editor’s Note: Of course, there is one other way to protect your portfolio from inflation. Gold Dollars. Using a secure transaction from your own computer that takes just minutes, you can convert your dying dollars into U.S. Treasury-approved “gold dollars.” Use them as you would regular cash – except as the price of gold goes up, you’ll be able to buy more with 1 “gold dollar” than you could with an old George Washington! It’s so simple; we’ll tell you how to do it for free. Just go here. ]]> http://www.newchinatrader.com/archives/is-it-time-to-bet-against-the-u-s-dollar/feed/ 0 What Does Germany’s Credit-Default-Swap Ban Mean for You? http://www.newchinatrader.com/archives/what-does-germany%e2%80%99s-credit-default-swap-ban-mean-for-you/ http://www.newchinatrader.com/archives/what-does-germany%e2%80%99s-credit-default-swap-ban-mean-for-you/#comments Mon, 21 Jun 2010 17:01:02 +0000 Keith Fitz-Gerald http://www.newchinatrader.com/?p=9151 Germany did something on Tuesday that I’ve been hoping would happen for three years: It outlawed naked short-selling and speculation on European government bonds with naked credit default swaps.

The financial institutions that have been profiting from this type of speculation immediately went on the offensive.

German officials justified the surprise, unilateral move by financial regulator BaFin by stating that the “exceptional volatility” in government debt – if accompanied by massive short-selling and naked CDS trading – could result in excessive price movements that would actually “endanger the stability of the entire financial system.”

Wall Street Responds

To hear Wall Street’s reaction, you’d think that Germany was hiding something “that the market’s not aware of,” said Michael O’Rourke, managing director and chief market strategist at BTIG LLC, an institutional trade services provider, told Bloomberg News.

And Mark Grant, managing director of Southwest Securities, said Germany’s actions make it clear the European stalwart is engaged in an “obvious attempt to control financial market across the globe.”

Wall Street may not approve, but I certainly do.

I’m only sorry that our own feckless leaders didn’t make the tough decision to take the same actions several years ago when they had the chance to fix this mess – instead of taking the easy way out with trillions in bailouts that we can’t possibly pay back.

What the public doesn’t understand about naked credit default swaps is that they are not the effective insurance policies Wall Street has everybody believing them to be.

Simply put, buying a naked credit default swap is like taking out fire insurance on your neighbor’s house. Now you have an incentive to burn it down so that you can get paid off, which is precisely what global investment bankers have been doing – generating billions of dollars in profits and costing taxpayers similar amounts in the process.

The Self-Fulfilling Prophecy

The key to this whole mess lays in something called an “insurable interest.” In the old days, you had to actually own the underlying assets to obtain insurance, because having an ownership stake meant that you had property that required protection.

But the “naked” credit default swaps that are causing such big problems right now are an entirely different animal. They’re “insurance policies” written on assets where there is no ownership interest.

Thanks to this financial voodoo, financial firms all over the world are being allowed to bet on the probabilities of an event occurring – the failure of a financial institution or an entire country, for instance. The trouble is that by placing these bets, they have a vested interest in seeing that event come true.

They also have the financial firepower to accelerate the process, which is precisely what appears to have happened with insurance giant American International Group Inc. (NYSE: AIG), Lehman Brothers Holdings Inc. (OTC: LEHMQ), and a whole host of other institutions around the world.

That’s why Germany has taken these actions. Today’s naked credit-default-swaps market is played by relatively few participants, accounts for trillions of dollars and has the potential to nuke the global financial system – which is why investing icon Warren Buffett so astutely described derivatives such as credit-default swaps as “financial time bombs.”

While I believe there is a role for these and other types of derivatives, that role clearly isn’t being fulfilled as they are being used right now.

The Vested Interests

Needless to say, the financial heavyweights that have been profiting from this global gambit aren’t happy about Germany’s decision because they are like a bunch of party happy people who see a 24-karat punch bowl filled with their favorite libation being whisked away while the party’s still rocking.

But that’s not the worst part.

Financial giants like Goldman Sachs Group Inc. (NYSE: GS), JPMorgan Chase & Co. (NYSE: JPM) and dozens of the most powerful financial-trading firms in history aren’t above tanking the markets so long as they can rake in billions in profits from these financial instruments.

It doesn’t matter which direction the markets are headed (although, as we’ve seen, it’s even better when they can influence that direction): These firms profit as long as there’s “action” in the markets. And that “action” can be described with one word: Volatility.

Germany’s push to add some regulatory muscle is designed to calm the markets, and decrease that volatility. Based on the way the investment-banking brethren are already reacting, I think it’s pretty clear that Germany’s finally struck a nerve.

Personally, I think Germany should take things a step further and require that any foreign firm doing business in Germany, or with German institutions, should comply with German rules worldwide. New York State already does this with insurance companies, so this is not without precedent.

The way today’s global financial firms operate – and the financial instruments they employ – are so complex that there’s no single agency anywhere on earth that can police their actions. That’s why I’ve pushed for unified global action since the global financial crisis began.

And by “unified global action,” I’m not talking about bailouts, either.

Those have been a complete waste of time from Day One, and have done nothing to address the fundamental issue: Wall Street – and the financial instruments that it has engineered – is out of control and answerable to no one.

And Wall Street firms know this, which is why they are reacting so vehemently to Germany’s regulatory riposte. These rules could strip away a lucrative revenue stream, so you can rest assured they and their lobbyists will do everything they can to nip this in the bud.

So far it appears to be working if for no other reason than Germany stands alone. At least for now.

If you’re not of the same opinion, ask yourself why Wall Street lobbied so strongly leading up to the Commodity Modernization Act of 2000, in which derivatives and swaps like the ones in question were made exempt from official financial reporting. The latest estimates of the total value of credit default swaps written worldwide range from $30 trillion to $75 trillion – or more. In the world of estimates, that’s quite a disparity. And the reality is that nobody really knows, because the swaps market is completely unregulated and reporting requirements are largely voluntary.

Wall Street likes it that way: After all, you can’t regulate what you can’t see.

Then ask yourself why LIBOR (the London Interbank Offered Rate) and credit default prices have skyrocketed since Germany’s announcement. overnight. The LIBOR rate is supposed to represent the lowest possible interest rates banks charge to each other because, theoretically, they are each other’s best customers. If the banks were clean and not dealing in these things, rates should be falling, especially with the announcement of the $930 billion (nearly 1.0 trillion euros) European bailout package now on the table.

However, the reality that rates spiked signals that the banks increasingly don’t trust one another – perhaps because they all have financial skeletons in their closets.

It appears that Germany is the first to really see the light on this issue and that it’s going to take other key economies awhile to do so. Denial can be a powerful emotion, particularly when elections are just around the corner, as they are in the United States.

And that means we’re going to see credit default swaps shift to other markets in the days ahead because the political will to implement a concerted and coordinated global response simply doesn’t exist.

Moves to Make Now

The bottom line is that we need to do one of two things worldwide:

  • Either outlaw these financial instruments entirely.
  • Or require them to be brought into the light of day – and onto regulated exchanges – in a very short period of time.

Expect Wall Street to do what it has always done: Pull out all the stops – and pull in all the lawyers and lobbyists – to avoid a regulatory renewal that would take away the party punchbowl and the dry up their profits.

Granted, as individual investors, we have limited influence on that outcome (although I encourage you to write to your representatives, and let them know how you feel … print out this commentary and send it along with your letter or e-mail).

But we can absolutely take steps to protect ourselves – and even profit – from the situation at hand.

So no matter what your investing style or preference and whether you agree with me or not:

  1. Cover your assets: Make sure that you have protective “stops” in place or have deployed options that help hedge your risk.
  2. Take out insurance of your own: Purchase your own credit default swaps in the form of such “inverse” funds as the Rydex Inverse S&P 500 Strategy Fund (RYURX) or the Rydex Inverse Government Long Bond Strategy Fund (RYJUX), which profit when markets go haywire; these will provide important stabilizing influences on your portfolio that allow you to stay in the game even as others watch their financial futures get vaporized.
  3. Create a shopping list: Get your “Buy list” ready; if we get even half the storm I think is possible based on how the markets reacted yesterday (Wednesday) to Germany’s CDS ban, the massive declines waiting in the wings could create some truly legendary buying opportunities.

[Editor's Note: Money Morning's Keith Fitz-Gerald is still perfect.

With his latest trade, Fitz-Gerald is a perfect 23 for 23 with his Geiger Index advisory service. A veteran trader, skilled analyst and noted market tactician, Fitz-Gerald is able to see through the confusing haze of today's quickly changing markets, which enables him to visualize and understand what the future holds. This ability to see into the future -predicting looming changes while also divining the profit opportunities those changes will create - is one of Fitz-Gerald's greatest strengths.

That's a big reason that Fitz-Gerald - Money Morning's chief investment strategist and the editor of the New China Trader advisory service - has maintained a perfect record with the Geiger Index.

If you would like more information about the Geiger Index, please click here.]

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]]> http://www.newchinatrader.com/archives/what-does-germany%e2%80%99s-credit-default-swap-ban-mean-for-you/feed/ 0 The 50-40-10 Investment Strategy Pays Off in Profits, Protection & Potential http://www.newchinatrader.com/archives/the-50-40-10-investment-strategy-pays-off-in-profits-protection-potential/ http://www.newchinatrader.com/archives/the-50-40-10-investment-strategy-pays-off-in-profits-protection-potential/#comments Mon, 21 Jun 2010 16:59:39 +0000 Keith Fitz-Gerald http://www.newchinatrader.com/?p=9152 What’s more important: Having an investment strategy that performs strongly when the overall market is up, or having an investment strategy that guards against downside risk when the overall market is trending down, while keeping you in the hunt for inflation-beating, long-term profits?

Before you answer, consider the following:

  • If you invested $1,000 in the Standard & Poor’s 500 Index in 1950, it would have grown to $613,013 by December 2007.
  • If you had tried to “time” the market and missed the 30 best months in that 57-year period, the value of your initial $1,000 investment would have risen to just $35,404 – a difference of $577,609.
  • But if you tried to time the market and missed the 30 worst months in that time, your $1,000 would have grown to $9,509,094!

That’s right – more than $9.5 million! (Obviously the study is a little dated given recent events but the net effect isn’t all that different)

So, which is more important? Being there for the gains, or missing the worst the markets have to offer?

Picking stocks that skyrocket in good markets – but are vulnerable to wrenching plunges when markets roll over …

Or holding positions that generate profits in good markets and that protect you in bad ones?

I don’t know about you, but I’ll opt for the latter every time.

There’s a reality about investing and here it is: While the occasional quick hit long does pay off, investors are far better off building a well-balanced portfolio that protects them from sporadic stock market plunges than they are packing a portfolio with speculative stocks that have more downside than they do upside.

Think you already have a well-diversified portfolio? Think again.

Diversification, as promoted by Wall Street, is a perfect recipe for failure when everything goes wrong. Simply taking your assets and spreading them out among some stocks, a few bonds, a little real estate, a dollop of precious metals and a splash of cash isn’t enough. That’s like ordering a variety of meals at a fast-food chain – some parts may be better for you than others, but the whole is hardly healthy.

So what’s the solution?

The true answer lies not in how you spread your money around, but in how you concentrate it. You must first invest to ensure the security of your returns and second to maximize your profits relative to the risks you do decide to take.

Defensive Investing
That’s why I recommend – and personally use – what’s known as the “50-40-10 Pyramid” strategy. This is a portfolio structure I developed many years ago and have advocated ever since – and is one that ensures I always have both minimum risks and a “positive expectancy” in my investments wherever and whenever possible.

If you’re not familiar with the term “positive expectancy,” it simply means the investment offers a return greater than the amount of money that’s actually put at risk. Always remember: Successful investing isn’t about winning all the time…it’s about winning over time. picking more winning stocks than losing stocks; it’s about making more money than you lose over time.

That’s why To that end, I constantly harp on consistent risk management . is more important than profits over long periods of time. So, i I f you control the risks, the returns will come – and that’s what the 50-40-10 Pyramid does.

Here’s how it works:

  • The “50″ refers to what I call “base-builder investments” and should generally account for 50% of your portfolio holdings. The base-builders make up the “safety-and-balance” portion of the portfolio. They consist of defensive positions that will hold their value better than other choices in nearly all market conditions, which will protect you from severe economic declines such as the ongoing European debt contagion. Of course, that doesn’t mean these investments are immune to loss. But they will generally take much less of a beating and be much less volatile than other investments when the going gets tough.

    This 50% of your portfolio should be generally focused on income and dividend-paying issues. Many people are dismissive of income investments, but in good times they can produce annual gains of 20% or more. Plus, the value of dividends can never be understated: Some studies show that Since 1871, dividend payments and reinvestments have been responsible for the dominant portion of total stock market returns – in some cases 90% or more.

  • The “40″ is the percentage of the portfolio devoted to “global growth and income positions.” These holdings are the “Global Titans” – companies with dominant market positions around the world. They’re firms poised to benefit the most from rapidly emerging economies in Asia and elsewhere (with a focus on China). In that role, these holdings will derive their strength from riding one or more of the major developing global trends. The most dynamic growth will likely come in the energy, commodity, environmental and infrastructure sectors. Increasing dividend payouts are an added attraction, boosting returns and safety.
  • The “10″ comprises accounts for what I call the “rocket riders.” These investments – which often involve initial public offerings (IPOs), takeover targets, aggressive stocks in special situations, or even the buying or selling of options and other more speculative vehicles – offer spectacular upside potential and can lift overall portfolio performance well above market averages during good times, even though they constitute, at most, 10% of your holdings.

A 10% return on your entire portfolio can be exactly matched by a 100% return on just 10% of your portfolio – and the consequences of being wrong are far less severe.

In fact, that’s the single most important benefit of adopting the 50-40-10 Pyramid structure for your portfolio – you preserve all the upside potential of your investments while still retaining the freedom to make an occasional misstep. With only 10% on the speculative line, a single miscalculation won’t devastate your entire portfolio. It frees you from the pressure of having to be perfect.

You have the freedom to screw up!

Adhering to the Pyramid also helps keep emotions out of your investing equation. If you structure your holdings according to the 50-40-10 formula – and adjust them regularly to reflect shorter-term gains and losses – you’ll be positioned for the optimum upside at all times, even as you protect yourself against major trouble when the markets decline.

[Editor's Note: Keith Fitz-Gerald is the chief investment strategist for Money Morningand The Money Map Report.Fitz-Gerald has pulled all his best thoughts together in his new book, "Fiscal Hangover: How to Profit From the New Global Economy." The reviews are excellent. Investors interested in ordering the book can save $10 off the cover price at Amazon.com. Just click here.]

]]> http://www.newchinatrader.com/archives/the-50-40-10-investment-strategy-pays-off-in-profits-protection-potential/feed/ 0 From Leader to Laggard: Is it Time to Bet Against the U.S. Dollar? http://www.newchinatrader.com/archives/from-leader-to-laggard-is-it-time-to-bet-against-the-u-s-dollar/ http://www.newchinatrader.com/archives/from-leader-to-laggard-is-it-time-to-bet-against-the-u-s-dollar/#comments Mon, 21 Jun 2010 16:56:56 +0000 Keith Fitz-Gerald http://www.newchinatrader.com/?p=9153 The U.S. dollar has been one of the world’s strongest currencies in the first part of 2010, posting double-digit gains through the end of May.And little wonder. The Greek debt crisis continues to threaten Europe’s overall health, and could unleash an entirely new contagion on the rest of the global economy. Then there’s China, – the engine of world growth during much of the financial crisis – which now appears to face the near-term triple threat of slowing growth, accelerating inflation and workplace unrest. Add in concerns about commodity prices and global debt levels and it’s easy to see why currency investors have sought the safe haven of the U.S. dollar.

In short, it appears that “everybody” knows the greenback is the best choice for safety, quality and security.

But is that really the case? To me, the dollar is looking more and more like a colossal short that could wind up being one of the biggest moneymakers of the year for traders gutsy enough to take a stand.

From Leader to Laggard?

Given that the dollar soared 11% through the end of May (see accompanying graphic), I’m sure some experts will call me crazy for going against the dollar at this point in history. But here’s my thinking:

  • Our $14 trillion fiscal hangover, weaker-dollar policies and increased spending will lead to additional dollar weakness in the immediate term. Longer-term, this is a foregone conclusion: The high debt load relative to U.S. gross domestic product will erode growth – studies prove this – and all the extra money that we’ve printed will fuel inflation, as always happens..
  • Foreign central bankers – especially China – are actively diversifying away from dollar reserves and dollar-denominated securities. They can’t and won’t “dump” the dollar in a wholesale manner. But this shift away is nothing less than a long-term decrease in demand for the dollar – and we all know that when demand for an asset declines, so does its value.
  • The Organization of the Petroleum Exporting Countries (OPEC) – and what’s left of the non-OPEC nations – are still pressing for non-dollar-denominated oil deals. Expect some of those deals to take place in the wake of the BP PLC (NYSE ADR: BP) Deepwater Horizon disaster, which will bring about major regulatory changes and cause onshore reserves to command a major premium. This group, incidentally, isn’t to be dismissed, given that it contains such heavyweights as China, Japan, Russia, most of the Arab nations and, of course, France.
  • If you look at the following chart of the U.S. dollar, you can see that appears to be forming a perfect “rising wedge,” a technical formation and a bearish signal that frequently precedes rollovers. That’s the opposite of a “falling wedge,” a bullish signal that presages reversals to the upside.

How to Play the Dollar’s Reversal

It’s worth noting here that this wager against the U.S. dollar should be viewed for just what it is – a highly speculative trade. This means it’s only for aggressive traders.

Keep in mind, too, that the dollar won’t shed its reputation as the currency of last resort without a struggle. Negative events abroad could send investors back into the currency for short stretches, making the dollar prone to short, rapid increases in value, despite its highly flawed underpinnings.

Position traders and everyday investors will probably want to wait for confirmation that the dollar’s trend is, indeed, reversing. We’ve seen some of that in the past two days but more is probably on the way. You’ll miss out on some returns but that’s the way the game is played – you have to act on your convictions or else you’re simply another wannabe in this business.

My suggestion is that any speculative trade be limited to 2% of investable capital. That way, if we’re wrong and the dollar doesn’t cooperate, the risk to your portfolio is minimized.

As for suitable ways to play this dour-dollar prediction, I can think of three:

  1. Go for the Gold: This is so obvious that I’m almost deterred from suggesting it, especially since the yellow metal is once again trading near its all-time highs. Generally speaking, I don’t like buying anything at all-time highs, meaning that pullbacks are the key here. I expect $2,000-an-ounce gold within the next couple of years – and possibly sooner – depending on how central bankers choose to deal with the EU and how the U.S. Federal Reserve handles the recovery bailout “exit” strategies it’s alluded to in recent months.
  2. Take “The Natural” Approach: By “natural approach,” I’m referring, of course, to natural resources. The BP situation – coupled with new drilling restrictions and increasing Third World demand – is going to push the price of oil and other resources much higher. It’s not clear which one pulls or pushes lately – the U.S. dollar or oil – but when one moves the other generally heads in the opposite direction immediately. So watch the relationship between the two carefully to spot when this trend gets under way. Be prepared for some volatile trading, though. Silver, gold and other resources can move 5%, 8% and even 10% in a single day.
  3. Cash in on Currency Funds: It used to be that the dollar and the euro were the world currency market’s “dynamic duo” – when one went, you could count on trading the other. But I think that relationship is long gone. The money has now shifted across the Atlantic, headed through the U.S. economy, and headed straight for Asia. As a result, instead of shorting the euro, I’m now inclined to short the dollar, while being generally long on the Hong Kong dollar, the Australian dollar and even the Chinese yuan.

[Editor's Note: Money Morning's Keith Fitz-Gerald is still perfect.

With his latest trade, Fitz-Gerald is a perfect 23 for 23 with his Geiger Index advisory service. A veteran trader, skilled analyst and noted market tactician, Fitz-Gerald is able to see through the confusing haze of today's quickly changing markets, which enables him to visualize and understand what the future holds. This ability to see into the future -predicting looming changes while also divining the profit opportunities those changes will create - is one of Fitz-Gerald's greatest strengths.

That's a big reason that Fitz-Gerald - Money Morning's chief investment strategist and the editor of the New China Trader advisory service - has maintained a perfect record with the Geiger Index.

If you would like more information about the Geiger Index, please click here.

And if you'd like to check out Fitz-Gerald's portfolio-strategy story, which appears elsewhere in today's issue of Money Morning , please click here.]

]]> http://www.newchinatrader.com/archives/from-leader-to-laggard-is-it-time-to-bet-against-the-u-s-dollar/feed/ 0 Why the Government Wants to Hijack Your 401(k) http://www.newchinatrader.com/archives/why-the-government-wants-to-hijack-your-401k/ http://www.newchinatrader.com/archives/why-the-government-wants-to-hijack-your-401k/#comments Wed, 19 May 2010 20:46:29 +0000 Keith Fitz-Gerald http://www.newchinatrader.com/?p=9094 It’s bad enough that we’ve been forced to bail out Wall Street. But now the Obama administration is hatching plans to raid our retirement savings, too.

To say that I’m "outraged" doesn’t come close to describing the emotions I experience every time I think about the government’s latest hare-brained scheme.

According to widespread media reports, both the U.S. Treasury Department and the Department of Labor plan are planning to stage a public-comment period before implementing regulations that would require U.S. savers to invest portions of their 401(k) savings plans and Individual Retirement Accounts (IRAs) into annuities or other "steady" payment streams backed by U.S. government bonds.

Folks, there’s only one reason these agencies would do such a thing – the nation’s creditors think that U.S. government bonds are a bad bet and don’t want to buy them anymore. So like a grifter who’s down to his last dollar, the administration is hoping to get its hands on our hard-earned savings before the American people realize they’ve had the wool pulled over their eyes … once again.

It’s easy to understand why.

Facing a $14 trillion fiscal hangover, the Treasury can no longer count countries such as Japan and China to be dependable buyers of U.S. government debt. Not only have those nations dramatically reduced their purchasing of U.S. bonds, most of our largest creditors are now actively diversifying their reserves away from greenback-based investments in favor of other reliable stores of value – like oil, gold and other commodities.

This growing reluctance couldn’t come at a worse time. Just yesterday (Tuesday), in fact, the Congressional Budget Office estimated that the U.S. budget deficit would hit $1.35 trillion this year. And that’s not the only shortfall the Treasury has to address. The U.S. Federal Reserve is supposed to stop buying Treasury bonds for its asset portfolio, a program the central bank put in place last year.

The upshot: The Obama administration has to find other ways sell government debt – without raising interest rates, a move that would almost certainly jeopardize the country’s super-weak economic recovery.

Facing an uphill battle and increasingly skeptical buyers, the government is changing tactics and targeting the biggest pile of money available as a means of dealing with its fiscal follies – the $3.6 trillion sitting in U.S. retirement plans, including 401(k) plans.

The way I see it, the Obama administration can see the financial train wreck that’s going to occur. So it’s rushing to crack open the safe that holds our retirement money before anyone realizes that they’ve been robbed.

And if this plan becomes reality, that’s just what it will be – robbery. American retail investors didn’t sign up for the financial-crisis roller-coaster ride we’ve been on since 2008. We didn’t approve the nation’s five-fold increase in lending capacity. And we certainly didn’t volunteer to help pay down a national debt that’s doubled.

Few people realize that the federal government spent an estimated $17,000 to $25,000 per U.S. household in 2009 (the final figures haven’t been calculated, yet). But that’s no surprise: "We the people" didn’t approve it.

At a point where it’s spending money like a drunken sailor, Washington seems more interested in appropriating and redistributing our retirement savings than it is in fixing a system that’s badly broken. If you add in all the stimulus spending that the taxpayers must now repay, the average government-agency-spending tab has zoomed more than 50% in the last couple of years. That’s right – 50%.

So it’s only logical that the administration would go after our 401(k) and IRA savings plans.

Disgusting, but logical.

Here’s how the argument is likely to be framed.

The system we presently have in place is what’s commonly called a "defined contribution plan." Under such a plan, the benefits we enjoy during retirement aren’t determined in advance. Instead, those benefits are determined by how much money we contribute while working, and by the performance of the investments that we choose. The 401(k) is almost exclusively a defined contribution plan.

Years ago, Americans depended more upon "defined benefit plans" that promised a steady stream of income at a future date – with the actual amounts determined by our years of service or our earnings history. Old-fashioned company pension plans and even U.S. Social Security are examples of defined benefit plans.

By laying claim to our retirement assets in exchange for 30-year Treasury bonds, annuities or other payout streams, the government will try to persuade us that we’re not capable of managing our own money, that the stock market is too risky a place for most Americans, and that we need Big Brother to hold our hands and protect our futures.

What we need, the administration is going to tell us, is a defined benefit plan.

So expect a big snow job. But here’s the problem.

Defined benefit plans are great only as long as they are well funded. Unfortunately, most aren’t.

In fact, according to various studies, pension funds could already be underfunded by as much as $5.3 trillion. Add that to the $14 trillion we’ve already got on the table and we’re talking a staggering $19.3 trillion – and that’s with no escalators, no cost-of-living adjustments and no interest-rate increases. And that’s assuming we don’t need another round of stimulus.

Here’s what the government isn’t going to tell you. When pension funds transition from defined contribution plans to defined benefit plans, the only backing they have is the underlying assets themselves and the company or entity that’s responsible for the plans – which in this case would be the U.S. government.

If the prospects of your entire future being placed in the hands of the federal government doesn’t scare the daylights out of you after all we’ve experienced so far, I suspect that nothing will.

Our elected leaders, appointed government guardians, and Wall Street have together demonstrated a total inability to manage what they already control. There’s no reason on the planet why they should be allowed to get their hands on our hard-won savings. All that will do is punish the thrifty, disciplined and far-sighted investor, while rewarding – or at the very least protecting – the inept politicians and career bureaucrats who allowed this crisis to occur in the first place.

By backing their plan with 30-year Treasuries, government backers of this plan are betting that you and I won’t notice that the trouble with annuities and long bonds is that they tend to get annihilated by inflation. That’s why even the most jaded professionals will tell you that investing in such instruments right now when interest rates are being artificially held down near 0.00% is bad juju: Interest rates have only one direction to travel – up, which tends to crush bond prices.

Right now, Americans are apparently smarter than the administration believes. In fact, a survey by the Investment Company Institute found that more than 70% of all households disagreed with the idea of requiring a retiree to buy an annuity with a portion of their assets. And it didn’t matter whether the annuity was offered by an insurance company or by the government.

Let’s hope that the full-court press that the administration is getting ready to deploy doesn’t snow American investors. If the government succeeds, we’ll look back and see that they pulled a pretty slick trick to get our support.

Unfortunately, it won’t be the last trick they play with our retirement money. That last trick will come after they have control of our savings – when they make our retirements disappear.

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]]> http://www.newchinatrader.com/archives/why-the-government-wants-to-hijack-your-401k/feed/ 0 With This Options Strategy, Investors Can Snap Up Global Stocks at Discount Prices http://www.newchinatrader.com/archives/with-this-options-strategy-investors-can-snap-up-global-stocks-at-discount-prices/ http://www.newchinatrader.com/archives/with-this-options-strategy-investors-can-snap-up-global-stocks-at-discount-prices/#comments Wed, 19 May 2010 20:44:20 +0000 Keith Fitz-Gerald http://www.newchinatrader.com/?p=9093 Everyone likes getting a bargain, especially on high-quality products. But when it comes to the stock market, that search for bargains can be a long one. That’s especially true right now – after the rally that started in mid-March has propelled so many stocks to new yearly highs.

But here’s what most investors don’t realize: While it may be hard to find truly undervalued stocks, there is a way to buy perfectly valued shares at a substantial discount to their market price.

At times, that discount can equal 20% or more.

What’s more, this strategy can be utilized in virtually any market environment: It doesn’t matter whether the bulls are running the show, as they have been recently, or if the market is suffering from a "fiscal hangover," as it was in early 2009.

The technique is known as "selling cash-secured put options" – and, while trading options is viewed as complex and scary by many investors, this particular play is both simple in execution and relatively low in terms of risk.

Here’s how it works.

Assume you’ve decided you want to increase the international exposure in your portfolio, but only under two conditions:

  • You don’t want some obscure foreign stock.
  • And you’d also like some added dividend income.

You’ve looked at several companies and you think Kraft Foods Inc. (NYSE: KFT), a leading producer, packager and distributor of quality food products meets both of those requirements.

After all, the Kraft brand is quite well respected worldwide. The company, in its last full fiscal year, got 42.8% of its $41.93 billion in revenue from international sales, with $8.24 billion (45.8%) of that coming from developing countries. Sales from those fast-growing markets are likely to rise sharply in the months and years to come as the global economy continues to recover and the growing ranks of middle-class consumers in those nations demand more modern grocery stores and food products.

Kraft shares also pay an annual dividend of $1.16, a yield of roughly 4.18%.

But here’s the thing. With Kraft’s proposed buyout of Cadbury still creating some uncertainty, you feel the stock might be a bit overvalued at a recent price of $27.72 a share. You believe that $26.00 a share represents "fair value." But how can you get the stock at that price?

Let’s assume you were planning to buy 300 shares (the minimum I recommend for this strategy), and thus have at least $8,316 in available cash. Rather than using that to buy KFT stock at $27.72, you post it as security for the cash-secured sale of three KFT June put options with a "strike price" of $26.00 a share. (Each standard option represents 100 shares of the underlying stock, so three puts would equate to 300 shares.)

As the seller of three June $26.00 KFT puts, you give the put buyer the right to sell to you 300 shares of Kraft Foods stock at a price of $26.00 per share any time up until the expiration date, which in this case would be June 18, 2010. In exchange for selling this right, you receive a "premium" (payment) from the option buyer of $1.00 per share – or $300), as quoted yesterday (Monday) – which you can either take out or use to reduce the $8,316 security deposit on the "cash-secured" transaction.

Now what happens?

For you, there are three possible outcomes:

  • If Kraft’s stock price rises before mid-June, the puts you sold expire worthless and you get to keep both your $8,316 and the $300 premium you received. You don’t get the shares, but you’ve made a 3.61% return on your money in just under five months – without owning the stock. Plus, you can repeat the put sale in June, using options that expire in September or December of 2010.
  • If Kraft’s stock price stays flat or falls slightly, but remains above $26.00 a share – the puts you sold also expire worthless and you again get to keep both your $8,316 and the $300 premium. You still don’t get the shares, but you’ve made a five-month return of 3.61% – and, once again, you can repeat the strategy.
  • If Kraft’s stock falls below $26.00 a share – say to $25.00 – the person who bought the options can "put" 300 shares of KFT to you at $26.00 per share, or $7,800 total. The money to pay for the stock comes from the $8,316 you put up to secure the original sale. Since the price is now $25.00 a share, you have an immediate loss of $1.00 per share, or $300 – but, remember, you still have the $300 premium you received, plus $516 of your original stake. So, you’re actually $516 ahead (a 6.20% return on your money, or roughly 14.9% annualized) – and you got the stock at a discount of 6.2% off the price you would have paid had you bought this week.

You can use this strategy with any stock on which listed options are traded. There’s only one real drawback: If the stock rises sharply, you’ll miss out on the gain because you didn’t buy the actual shares. But, you’ll still have the premium you received – and you can continue selling puts on the stock every two to four months until its price does fall back and you finally get to buy it. Plus, if you decide at some point you no longer want to own it, you just stop selling new puts.

You can adjust this strategy in a number of ways:

  • If you want faster results and lower time risk, you can sell shorter-term options. In the Kraft example, you could sell March $26.00 puts at 45 cents, shortening the time frame by three months – but also cutting your return a bit. I advise selling puts that have at least 45 days remaining until expiration and a minimum premium of 50 cents. I also suggest trying to enter this transaction on days when the market is sharply lower because the bears get excited and push up the premiums of the puts you’ll be selling.
  • If the stock does pull back in that shorter time frame and you wind up buying it at the striking price, your effective discount (including the put premium) will usually equate to 15%-20% from the present selling price – plus, you’ll also start collecting that ripe dividend as a bonus. (You can also begin selling "covered call" options against your new stock position … but that’s another story).

As for other caveats, there’s only one: Employ this strategy only with stocks you know and really want to own. The options textbooks give lots of formulas and figures, but they don’t mention the fundamentals, causing many option investors to get creamed when a stock they don’t really understand unexpectedly moves against them.

If you’re like the Kraft investor – looking for stocks with more international exposure and a decent dividend that you can buy at a discount – here are two others I recommend for this strategy:

  • ABB Ltd. (NYSE ADR: ABB) – $18.47 – This Zurich-based company provides power-generation and automation equipment to customers worldwide, and should grow nicely with the global economic recovery and continued modernization in developing countries, especially Asia. Market cap: $42.2billion; dividend: $0.43; yield: 2.30%.
  • Paychex Inc. (Nasdaq: PAYX) – $29.50 - This Rochester, N.Y.-based firm provides outsourced payroll and human-resources servicesto small and medium-sized businesses in the United States and Germany. It should prosper as American and European economies recover and new businesses are formed, needingaccounting and benefits programsthey can’t yet afford toprovide in-house. Market cap: $10.66 billion; dividend: $1.24; yield: 4.20%.

[Editor's Note: Twenty picks. Twenty winners. For the past year, Money Morning's Keith Fitz-Gerald has maintained a perfect record with his Geiger Index advisory service. Every trade turned a profit. That's remarkable in any market, but given the current circumstances, the service offers unparalleled security and profit opportunities. To find out what other investors have to say about the service, as well as the secret ingredient that makes the Geiger Index go, read on.]

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