Search results matching tag 'Federal Reserve'

A Gold Standard?

JohnMauldin — Sat, 28 Apr 2012 21:56:32 GMT

A Piece Of My Mind, by Jim Grant
A Gold Standard?
Carlsbad, Tulsa, Chicago, and Atlanta

There are times, my friends Michael Lewitt and Dr. Lacy Hunt agreed today at lunch, when the study of economics is best informed by a sound knowledge of history. Indeed, Michael's son wants to follow his father into the finance world, and Michael is starting him off in history. I have spent hours listening to Lacy stroll through economic history, detailing the path of economic thought from Fisher to Kindleberger to Minsky. The last few days have been one of those times when I realized how much I don't know and how much more there is to learn. Not only Lacy and Michael are here in Florida, but a long list of bright minds to learn from. James Rickards, who has recently written the tour de force book Currency Wars, Harry Dent, Doug Casey, Porter Stansberry, Greg Weldon, and John Williams of Shadow Stats, with whom I look forward to meeting (do I have questions for him!). And so many more.

And it is because I simply have to stop, listen and learn (and visit with friends) that this week I will kind of take the weekend off and instead send you one of the more remarkable essays I have read in a long time. It is a speech by Jim Grant to the New York Federal Reserve. The always erudite Grant takes us back in time to the very beginnings of the Federal Reserve, to show us how far we have strayed from the original intent. I really think you should read this. I have perused it several times and intend to read it yet again – and then some more.

Grant argued for a return to the gold standard in the very halls of fiat money! It seems the New York Fed is asking some of its critics to come and speak. I have read some of the speeches, but this is the best so far for several reasons, not the least of which is that it contains some very funny lines. If you find yourself invited to the lion's den, Grant seems to think it is best to make fun of their teeth! You really do have to admire his courage. I think I would be a little concerned that I might be on the menu!

I will make a few comments at the end of his speech and then note some upcoming speaking events in Atlanta and Philadelphia. But let's jump straight away into today's main event.

A Piece Of My Mind

By Jim Grant

My friends and neighbors, I thank you for this opportunity. You know, we are friends and neighbors. Grant's makes its offices on Wall Street, overlooking Broadway, a 10-minute stroll from your imposing headquarters. For a spectacular vantage point on the next ticker-tape parade up Broadway, please drop by. We'll have the windows washed.

You say you would like to hear my complaints, and, on the one hand, I do have a few, while on the other, I can't help but feel slightly hypocritical in dressing you down. What passes for sound doctrine in 21st-century central banking—so-called financial repression, interest-rate manipulation, stock-price levitation and money printing under the frosted-glass term "quantitative easing"—presents us at Grant's with a nearly endless supply of good copy. Our symbiotic relationship with the Fed resembles that of Fox News with the Obama administration, or—in an earlier era—that of the Chicago Tribune with the Purple Gang. Grant's needs the Fed even if the Fed doesn't need Grant's.

In the not quite 100 years since the founding of your institution, America has exchanged central banking for a kind of central planning and the gold standard for what I will call the Ph.D. standard. I regret the changes and will propose reforms, or, I suppose, re-reforms, as my program is very much in accord with that of the founders of this institution. Have you ever read the Federal Reserve Act? The authorizing legislation projected a body "to provide for the establishment of the Federal Reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper and to establish a more effective supervision of banking in the United States, and for other purposes." By now can we identify the operative phrase? Of course: "for other purposes."

You are lucky, if I may say so, that I'm the one who's standing here and not the ghost of Sen. Carter Glass. One hesitates to speak for the dead, but I am reasonably sure that the Virginia Democrat, who regarded himself as the father of the Fed, would skewer you. He had an abhorrence of paper money and government debt. He didn't like Wall Street, either, and I'm going to guess that he wouldn't much care for the Fed raising up stock prices under the theory of the "portfolio balance channel."

It enflamed him that during congressional debate over the Federal Reserve Act, Elihu Root, Republican senator from New York, impugned the anticipated Federal Reserve notes as "fiat" currency. Fiat, indeed! Glass snorted. The nation was on the gold standard. It would remain on the gold standard, Glass had no reason to doubt. The projected notes of the Federal Reserve would—of course—be convertible into gold on demand at the fixed statutory rate of $20.67 per ounce. But more stood behind the notes than gold. They would be collateralized, as well, by sound commercial assets, by the issuing member bank and—a point to which I will return— by the so-called double liability of the issuing bank's stockholders.

If Glass had the stronger argument, Root had the clearer vision. One can think of the original Federal Reserve note as a kind of derivative. It derived its value chiefly from gold, into which it was lawfully exchangeable. Now that the Federal Reserve note is exchangeable into nothing except small change, it is a derivative without an underlier. Or, at a stretch, one might say it is a derivative that secures its value from the wisdom of Congress and the foresight and judgment of the monetary scholars at the Federal Reserve. Either way, we would seem to be in dangerous, uncharted waters.

As you prepare to mark the Fed's centenary, may I urge you to reflect on just how far you have wandered from the intentions of the founders? The institution they envisioned would operate passively, through the discount window. It would not create credit but rather liquefy the existing stock of credit by turning good-quality commercial bills into cash—temporarily. This it would do according to the demands of the seasons and the cycle. The Fed would respond to the community, not try to anticipate or lead it. It would not override the price mechanism— as today's Fed seems to do at every available opportunity—but yield to it.

My favorite exposition of the sound, original doctrines is a book entitled, "The Theory and Practice of Central Banking," by H. Parker Willis, first secretary of the Federal Reserve Board and Glass's right-hand man in the House of Representatives.

Writing in the mid-1930s, Willis pointed out that the Fed fell into sin almost immediately after it opened for business in 1914. In 1917, after the United States entered the Great War, the Fed set about monetizing the Treasury's debt and suppressing the Treasury's borrowing costs. In the 1920s, after the recovery from the short but ugly depression of 1920-21, the Fed started to implement open-market operations to sterilize gold flows and steer a desired macroeconomic course.

"Central banks," wrote Willis, glaring at the innovators, "...will do wisely to lay aside their inexpert ventures in half-baked monetary theory, meretricious statistical measures of trade, and hasty grinding of the axes of speculative interests with their suggestion that by doing so they are achieving some sort of vague 'stabilization' that will, in the long run, be for the greater good."

Willis, who died in 1937, perhaps of a broken heart, would be no happier with you today than Glass would be—or I am. The search for "some sort of vague stabilization" in the 1930s has become a Federal Reserve obsession at the millennium.

Ladies and gentlemen, such stability as might be imposed on a dynamic capitalist economy is the kind that eventually comes around to bite the stabilizer.

"Price stability" is a case in point. It is your mandate, or half of your mandate, I realize, but it does grievous harm, as defined. For reasons you never exactly spell out, you pledge to resist "deflation." You won't put up with it, you keep on saying—something about Japan's lost decade or the Great Depression. But you never say what deflation really is. Let me attempt a definition. Deflation is a derangement of debt, a symptom of which is falling prices. In a credit crisis, when inventories become unfinanceable, merchandise is thrown on the market and prices fall. That's deflation.

What deflation is not is a drop in prices caused by a technology-enhanced decline in the costs of production. That's called progress. Between 1875 and 1896, according to Milton Friedman and Anna Schwartz, the American price level subsided at the average rate of 1.7% a year. And why not? As technology was advancing, costs were tumbling. Long before Joseph Schumpeter coined the phrase "creative destruction," the American economist David A. Wells, writing in 1889, was explaining the consequences of disruptive innovation.

"In the last analysis," Wells proposes, "it will appear that there is no such thing as fixed capital; there is nothing useful that is very old except the precious metals, and life consists in the conversion of forces. The only capital which is of permanent value is immaterial—the experience of generations and the development of science."

Much the same sentiments, and much the same circumstances, apply today, but with a difference. Digital technology and a globalized labor force have brought down production costs. But, the central bankers declare, prices must not fall. On the contrary, they must rise by 2% a year. To engineer this up-creep, the Bernankes, the Kings, the Draghis—and yes, sadly, even the Dudleys—of the world monetize assets and push down interest rates. They do this to conquer deflation.

But note, please, that the suppression of interest rates and the conjuring of liquidity set in motion waves of speculative lending and borrowing. This artificially induced activity serves to lift the prices of a favored class of asset—houses, for instance, or Mitt Romney's portfolio of leveraged companies. And when the central bank-financed bubble bursts, credit contracts, leveraged businesses teeter, inventories are liquidated and prices weaken. In short, a process is set in motion resembling a real deflation, which then calls forth a new bout of monetary intervention. By trying to forestall an imagined deflation, the Federal Reserve comes perilously close to instigating the real thing.

The economist Hyman Minsky laid down the paradox that stability is itself destabilizing. I say that the pledge of a stable funds rate through the fourth quarter of 2014 is hugely destabilizing. Interest rates are prices. They convey information, or ought to. But the only information conveyed in a manipulated yield curve is what the Fed wants. Opportunists don't have to be told twice how to respond. They buy oil or gold or foreign exchange, not incidentally pushing the price of a gallon of gasoline at the pump to $4 and beyond. Another set of opportunists borrow short and lend long in the credit markets. Not especially caring about the risk of inflation over the long run, this speculative cohort will fund mortgages, junk bonds, Treasurys, what-have-you at zero percent in the short run. The opportunists, a.k.a. the 1 percent, will do fine. But what about the uncomprehending others?

I commend to the Federal Reserve Bank of New York Financial History Book Club (if it doesn't exist, please organize it at once) a volume by the British scholar and central banker, Charles Goodhart. Its title is "The New York Money Market and the Finance of Trade, 1900-1913." In the pre-Fed days with which the history deals, the call money rate dove and soared. There was no stability—and a good thing, Goodhart reasons. In a society predisposed to speculate, as America was and is, he writes, unpredictable spikes in borrowing rates kept the players more or less honest. "On the basis of its record," he writes of the Second Federal Reserve District before there was a Federal Reserve, "the financial system as constituted in the years 1900-1913 must be considered successful to an extent rarely equaled in the United States." And that not withstanding the Panic of 1907.

My reading of history accords with Goodhart's, though not with that of the Fed's front office. If Chairman Bernanke were in the room, I would respectfully ask him why this persistent harking back to the Great Depression? It is one cyclical episode, but there are many others. I myself draw more instruction from the depression of 1920-21, a slump as ugly and steep in its way as that of 1929-33, but with the simple and interesting difference that it ended. Top to bottom, spring 1920 to summer 1921, nominal GDP fell by 23.9%, wholesale prices by 40.8% and the CPI by 8.3%. Unemployment, as it was inexactly measured, topped out at about 14% from a pre-bust low of as little as 2%. And how did the administration of Warren G. Harding meet this macroeconomic calamity? Why, it balanced the budget, the president declaring in 1921, as the economy seemed to be falling apart, "There is not a menace in the world today like that of growing public indebtedness and mounting public expenditures." And the fledgling Fed, face to face with its first big slump, what did it do? Why, it tightened, pushing up short rates in mid-depression to as high as 8.13% from a business cycle peak of 6%. It was the one and only time in the history of this institution that money rates at the trough of a cycle were higher than rates at the peak, according to Allan Meltzer.

But then something wonderful happened: Markets cleared, and a vibrant recovery began. There were plenty of bankruptcies and no few brickbats launched in the direction of the governor of the New York Fed, Benjamin Strong, for the deflation that cut an especially wide and devastating swath through the American farm economy. But in 1922, the first full year of recovery, the Fed's index of industrial production leapt by 27.3%. By 1923, the unemployment rate was back to 3.2%. The 1920s began to roar.

And do you know that the biggest nationally chartered bank to fail during this deflationary collapse was the First National Bank of Cleburne, Texas, with not quite $2.8 million of deposits? Even the forerunner to today's Citigroup remained solvent (though for Citi, even then it was a close-run thing, on account of an oversize exposure to deflating Cuban sugar values). No TARP, no starving the savers with zero-percent interest rates, no QE, no jimmying up the stock market, no federal "stimulus" of any kind. Yet—I repeat—the depression ended. To those today who demand ever more intervention to cure what ails us, I ask: Why did the depression of 1920-21 ever end? Given the policies with which the authorities treated it, why are we still not ensnared?

If you object to using the template of 1920-21 as a guide to 21st-century policy because, well, 1920 was a long time ago, I reply that 1929 was a long time ago, too. And if you persist in objecting because the lessons to be derived from the Harding depression are unthinkably at odds with the lessons so familiarly mined from the Hoover and Roosevelt depression, I reply that Harding's approach worked. The price mechanism is truer and enterprise hardier than the promoters of radical 21st-century intervention seem prepared to acknowledge.

In notable contrast to the Harding method, today's policies seem not to be working. We legislate and regulate and intervene, but still the patient languishes. It's a worldwide failure of the institutions of money and credit. I see in the papers that Banca Monte dei Paschi di Siena is in the toils of a debt crisis. For the first time in over 500 years, the foundation that controls this ancient Italian institution may be forced to sell shares. We've all heard of hundred-year floods. We seem to be in a kind of 500-year debt flood.

Many now call for more regulation—more such institutions as the Treasury's brand-new Office of Financial Research, for instance. In the March 8 Financial Times, the columnist Gillian Tett appealed for more resources for the overwhelmed regulators. Inundated with information, she lamented, they can't keep up with the institutions they are supposed to be safeguarding. To me, the trouble is not that the regulators are ignorant. It's rather that the owners and managers are unaccountable.

Once upon a time—specifically, between the National Banking Act of 1863 and the Banking Act of 1935—the impairment or bankruptcy of a nationally chartered bank triggered a capital call. Not on the taxpayers, but on the stockholders. It was their bank, after all. Individual accountability in banking was the rule in the advanced economies. Hartley Withers, the editor of The Economist in the early 20th century, shook his head at the micromanagement of American banks by the Office of the Comptroller of the Currency—25% of their deposits had to be kept in cash, i.e., gold or money lawfully convertible into gold. The rules held. Yet New York had panics, London had none. Adjured Withers: "Good banking is produced not by good laws but by good bankers."

Well said, Withers! And what makes a good banker is more than skill. It is also the fear of God, or, more specifically, accountability for the solvency of the institution that he or she owns or manages. To stay out of trouble, the general partners of Brown Brothers Harriman, Wall Street's oldest surviving general partnership, need no regulatory pep talk. Each partner is liable for the debts of the firm to the full extent of his or her net worth. My colleague Paul Isaac, who is with me today—he doubles as my food and beverage taster— has an intriguing suggestion for instilling the credit culture more deeply in our semi-socialized banking institutions.

We can't turn limited liability corporations into general partnerships. Nor could we easily reinstate the so-called double liability law on bank stockholders. But what we could and should do, Paul urges, is to claw back that portion of the compensation paid out by a failed bank in excess of 10 times the average wage in manufacturing for the seven full calendar years before the ruined bank hit the wall. Such a clawback would not be subject to averaging or offset one year to the next. And it would be payable in cash.

The idea, Paul explains, is twofold. First, to remove the government from the business of determining what is, or is not, risky—really, the government doesn't know. Second, to increase the personal risk of failure for senior management, but stopping short of the sword of Damocles of unlimited personal liability. If bankers are venal, why not harness that venality in the public interest? For the better part of 100 years, and especially in the past five, we have socialized the risks of high finance. All too often, the bankers who take risks don't themselves bear them. By all means, let the capitalists keep the upside. But let them bear their full share of the downside.

In March 2009, the Financial Times published a letter to the editor concerning the then novel subject of QE. "I can now understand the term 'quantitative easing,' wrote Gerald B. Hill of Stourbridge, West Midlands, "but . . . realize I can no longer understand the meaning of the word 'money.'"

There isn't time, in these brief remarks, to persuade you of the necessity of a return to the classical gold standard. I would need another 10 minutes, at least. But I anticipate some skepticism. Very well then, consider this fact: On March 27, 1973, not quite 39 years ago, the forerunner to today's G-20 solemnly agreed that the special drawing right, a.k.a. SDR, "will become the principal reserve asset and the role of gold and reserve currencies will be reduced." That was the establishment— i.e., you—talking. If a worldwide accord on the efficacy of the SDR is possible, all things are possible, including a return to the least imperfect international monetary standard that has ever worked.

Notice, I do not say the perfect monetary system or best monetary system ever dreamt up by a theoretical economist. The classical gold standard, 1879-1914, "with all its anomalies and exceptions . . . 'worked.'" The quoted words I draw from a book entitled, "The Rules of the Game: Reform and Evolution in the International Monetary System," by Kenneth W. Dam, a law professor and former provost of the University of Chicago. Dam's was a grudging admiration, a little like that of the New York Fed's own Arthur Bloomfield, whose 1959 monograph, "Monetary Policy under the International Gold Standard," was published by yourselves. No, Bloomfield points out, as does Dam, the classical gold standard was not quite automatic. But it was synchronous, it was self-correcting and it did deliver both national solvency and, over the long run, uncanny price stability. The banks were solvent, too, even the central banks, which, as Bloomfield noted, monetized no government debt.

The visible hallmark of the classical gold standard was, of course, gold—to every currency holder was given the option of exchanging metal for paper, or paper for metal, at a fixed, statutory rate. Exchange rates were fixed, and I mean fixed. "It is quite remarkable," Dam writes, "that from 1879 to 1914, in a period considerably longer than from 1945 to the demise of Bretton Woods in 1971, there were no changes of parities between the United States, Britain, France, Germany—not to speak of a number of smaller European countries." The fruits of this fixedness were many and sweet. Among them, again to quote Dam, "a flow of private foreign investment on a scale the world had never seen, and, relative to other economic aggregates, was never to see again."

Incidentally, the source of my purchased copy of "Rules of the Game" was the library of the Federal Reserve Bank of Atlanta. Apparently, President Lockhart isn't preparing, as I am—as, may I suggest, as you should be—for the coming of classical gold standard, Part II. By way of preparation, I commend to you a new book by my friend Lew Lehrman, "The True Gold Standard: A Monetary Reform Plan without Official Reserve Currencies: How We Get from Here to There."

It's a little rich, my extolling gold to an institution that sits on 216 million troy ounces of the stuff. Valued at $42.222 per ounce, the hoard in your basement is worth $9.1 billion. Incidentally, the official price was quoted in SDRs, $35 to the ounce—now there's a quixotic choice for you. In 2008, when your in-house publication, "The Key to the Gold Vault," was published, the market value was $194 billion. Today, the market value is $359 billion, which is encouraging only if you personally happen to be long gold bullion. Otherwise, it strikes me as a pretty severe condemnation of modern central banking.

And what would I do if, following the inauguration of Ron Paul, I were sitting in the chairman's office? I would do what I could to begin the normalization of interest rates. I would invite the Wall Street Journal's Jon Hilsenrath to lunch to let him know that the Fed is now well over its deflation phobia and has put aside its Atlas complex. "It's capitalism for us, Jon," I would say. Next I would call President Dudley. "Bill," I would say, pleasantly, "we're not exactly leading from the front in the regulatory drive to reduce the ratio of assets to equity at the big American financial institutions. Do you have to be leveraged 89:1?" Finally, I would redirect the efforts of the brainiacs at the Federal Reserve Board research division. "Ladies and gentlemen," I would say, "enough with 'Bayesian Analysis of Stochastic Volatility Models with Levy Jumps: Application to Risk Analysis.' How much better it would please me if you wrote to the subject, 'Command and Control No More: A Gold Standard for the 21st Century.'" Finally, my pièce de résistance, I would commission, staff and ceremonially open the Fed's first Office of Unintended Consequences.

Let me thank you once more for the honor that your invitation does me. Concerning little Grant's and the big Fed, I will quote in parting the opening sentences of an editorial that appeared in a provincial Irish newspaper in the fateful year 1914. It read: "We give this solemn warning to Kaiser Wilhelm: The Skibbereen Eagle has its eye on you."

A Gold Standard?

The Casey Research Conference I am speaking at this weekend is a hotbed of gold bugs who, like Jim Grant, argue forcefully for a return to the gold standard. And given the chaos and insistent inflation over time that the Federal Reserve and fiat currency have produced, it is hard to argue that the current system is one that should be encouraged. And I don't!

But neither do I have a starry-eyed yearning for the chaos of the gold-standard period. There was a reason that hard-money men like Glass helped formed the Federal Reserve. But the Federal Reserve did not do all that well in the aftermath of 1929, and I think we shall look back in 20 years and not be all that pleased with our own current version.

I think I tend to agree more with Irving Fisher, arguably the greatest economist of the last century, who, writing in the late '30s, after observing the Great Depression and the actions of the Federal Reserve, noted that the best and only way to deal with a credit bubble was to prevent it from happening. Once they develop, there is no easy, painless way back. "Good banking is produced not by good laws but by good bankers."

Carlsbad, Tulsa, Chicago, and Atlanta

Tonight I am in Fort Lauderdale with many old friends at the Casey Research Summit. David Galland runs a first-class conference with an A-list group of speakers and wonderful attendees, many of whom have been coming for years. Tonight I had the pleasure of slipping off with David and his business partner Olivier Garret, Doug Casey, Rick Rule, and Porter Stansberry. Porter made a very interesting prediction about $40 oil today, and there was a lively conversation about Peak Oil. I finish this letter basking in the aftermath of friendship, great conversation, and good food. I must admit that the travel does sometimes get a little hard, but days like today are a great pleasure and worth the effort.

Tuesday night I was in DC and had dinner with Jonathan Golub, chief US market strategist at UBS. Jonathan can tell some great stories and has a very deep knowledge of the markets. We were on a panel together the next morning at the IMCA conference, along with Dave Kelly (chief market strategist at JP Morgan), who exudes a natural, good-natured Irish charm to accompany with his uber-bullish views.

I will be in Atlanta May 23^rd, speaking at a luncheon hosted by my good friend Cliff Draughn of Excelsia, along with Steve Blumenthal of CMG. You can learn more by dropping a note to ecarmack@excelsia.com . I will post more in later letters, but seating will be limited so I suggest you send that note soon.

I will also be with Steve in Philadelphia on June 4-5 for his CMG Advisor Forum. More on that to come.

I get home Sunday evening in order to get ready for my own annual conference, this year in Carlsbad, California and, as always, co-hosted by my long-standing partners Altegris Investments. I think this is our 9^th annual Strategic Investment Conference (where has the time gone?). When we started doing the conferences, my intention was to create a conference that I would want to attend. Each year I walk away wondering how we can possibly have a better conference the next year, but each year we seem to do so. We went to a new venue this year to hold a larger group, but even so had to turn away hundreds of people. Next year we are going to an even larger facility, as both Jon Sundt (founder and CEO of Altegris) and I hate having to limit attendance.

This conference is shaping up to be our best ever. Which is saying a lot. Dr. Niall Ferguson, Marc Faber, Mohamed El-Erian, David Rosenberg, Dr. Lacy Hunt, David McWilliams, Dr. Woody Brock, Jeff Gundlach, David Harding, Jon Sundt, Barry Habib, and your humble analyst, plus a few other special guests here and there. And the best part is the attendees. So many friends who have been coming for so many years, from all over the world. It will be lots of fun.

Then I leave early the next morning to get to Tulsa to watch my daughter Abbi graduate from college (ORU), and then on Sunday it's up to Chicago to speak at the International CFA conference on Monday morning. Some whirlwind meetings for Bloomberg, and then I am home for a few weeks! Hopefully in time to see the Mavericks play Oklahoma City in the first round of the NBA playoffs. Somehow it seems wrong saying "Oklahoma City" and "NBA playoffs" in the same breath, but they have had a great year and so far seem to have our number. But it is time for our "old men" to step it up.

And speaking of time, it is time to hit the send button. It is late and I have to get up to listen to Jim Rickards and Harry Dent speak and then moderate their debate on inflation vs. deflation. I will be a good moderator, as when I am asked whether I believe in inflation or deflation, I simply answer "Yes." The rest of the answer is just niggling details.

Your wondering if this letter means I don't get invited to Jackson Hole again analyst,

John Mauldin

John@FrontlineThoughts.com

Fed to Fixed-Income Investors: 'Look Elsewhere for Yield'

IanWyatt — Wed, 08 Feb 2012 19:32:00 GMT

Given the news coming from the Fed and our continued low interest rate environment that's punishing savers and those on fixed incomes I've asked our resident Fed expert and ETF trader Rick Pendergraft to chime in on what investors can do where rates will be low for at least the next two years.

-- Ian Wyatt

On January 25, the Federal Reserve sent a clear message to investors. By announcing their intention to keep interest rates low for the next three years, they effectively said, "If you are looking for a decent yield, you have to invest somewhere other than U.S. Treasuries."

While the Fed only directly controls the short-term Fed funds rate, their policies and open-market activities influence all the treasury products. And if they intend to keep rates low, they can do it.

With a 10-year note that is yielding less than two percent, what is a fixed-income investor to do?

As the editor of the ETF Master Portfolio, I am constantly looking at income yielding ETFs. And there are several out there that have yields greater than 4%. My recommendation would be to build a portfolio of these dividend yielding ETFs and, by using a blend of conservative and moderately aggressive funds, build a portfolio with a yield of more than 5%. Let me show you how.

One example portfolio that I like uses three different ETFs. One is very conservative, one is pretty conservative and the third one is pretty aggressive. The iShares TIPS Bond (TIP) invests in inflation protected treasury bonds and is very conservative. The PowerShares Build America Fund (BAB) invests the bulk of its assets (80%) in Build America Bonds. Build America Bonds were introduced as part of the American Recovery and Reinvestment Act of 2009. These bonds are taxable bonds issued by state and local governments; the interest from the bonds is subsidized by the U.S. Treasury. The SPDR Barclays Capital High Yield Bond Fund (JNK) invests in corporate junk bonds.

At the present time, TIP yields 4.11%, BAB yields 5.22% and JNK yields 7.73%. An equally balanced portfolio with these three funds would thus have an average yield of 5.68%. When you consider that the 10-year note is yielding a whopping 1.93%, the risk to reward for a portfolio of these three ETFs makes a lot of sense.

While I would not typically recommend that individual investors invest in individual junk bonds, JNK has 222 different holdings in the fund, insulating investors from defaults. BAB had 313 different holdings as of February 2. With certain states and municipalities at risk of default, I find comfort in the BAB having so many different holdings.

To give you an idea of how this portfolio would have performed over the past year, I put together the chart below. As you can see, JNK moved in synch with the S&P 500 and, as a result, it struggled in the summer and fall. However, while the S&P and JNK were struggling, BAB and TIP were still moving higher, balancing out the loss on the JNK.

Granted, last year was a rough one for the stock market, but the domestic fixed-income markets held up well. The portfolio as a whole would have produced a gain of 15.52% while the S&P gained 1.65%. The table below shows how a portfolio of the three funds would have performed against a portfolio invested in just the S&P 500. This is only one year, but it was one volatile year.

The diversification between the three funds and the added diversification within the funds gives investors an extremely well diversified portfolio with very little risk of defaults impacting the portfolio significantly. The portfolio can experience capital gains as well as the income returns it produces, and it has an inflation hedge built in with TIP.

The ETF Master Portfolio is a well rounded portfolio of ETFs and fixed income is part of that total picture. JNK is currently part of the portfolio with the attractive yield and the ability to move higher with the stock market. Trying to protect and grow a portfolio includes fixed-income investments.

Is the Recovery Stalling?

IanWyatt — Tue, 03 May 2011 15:14:00 GMT

The death of Osama bin Laden had investors in a pretty good mood yesterday morning. And well it should. It’s quite a victory to finally remove this scourge from the planet. And we might even anticipate something of a peace dividend from the removal of this terrorist.

On the flipside, the information coming out that elements of Pakistan’s security forces may have helped hide bin Laden is certainly not going to help matters.

*****Oil price initially dropped, but quickly rebounded. The dollar also enjoyed some upside. It will be interesting to see if oil, and stocks, can maintain their positive long term bias.

As I discussed Friday, we’ve gotten some economic data that is less than robust. Q1 GDP growth was just 1.8%. And the Fed has lowered its full year growth forecasts.

Bonds have rallied in response to slower growth expectations. And if that continues, it will threaten the rally for stocks. The fact that it’s May, and some investors may abide by the “sell in May” theory should also keep us on our toes.

*****April’s ISM Manufacturing survey slowed slightly, from 61.2 to 60.4. Anything above 50 signals expansion. But don’t miss the fact that the weaker dollar is helping drive manufacturing and sales abroad as U.S. goods are more competitive.

The chairman of the ISM survey even said “A lot of this growth in manufacturing is driven by export demand and the weaker dollar…”

This phenomenon helped Caterpillar (NYSE:CAT) post outstanding quarterly results. And the good times for companies like Caterpillar don’t appear to be anywhere near an end.

But let’s also not ignore the implications for domestic demand. If manufacturing is being driven by foreign demand, it suggests that domestic demand may not be as strong. And again, that’s showing up in growth numbers.

I suggested on Friday that we watch bonds and oil closely. We might also add retailers to the list.

Retail earnings start next week. We will want to see signs that consumer spending remains strong. We’ve already seen banks report lower revenue as lending has slowed. Let’s hope that trend doesn’t continue for the retail stocks.

The Fed Fires Back

IanWyatt — Fri, 19 Nov 2010 18:40:00 GMT

November 19, 2010

*****The Market Feels Heavy
*****Silver Eagle
*****The Fed Fires Back

Fellow Investor,

The good vibes from the GM IPO and the bailout potential for Ireland took the S&P 500 back above support/resistance at 1,192. We'll see how long the good vibes last.

Despite yesterday's strong move, the stock market still feels "heavy" to me. That's not to say I think a big decline is imminent. But the way higher is going to be a slow grind, unless we get some data to sway the mood.

We are on the verge of the holiday season. It's hard to believe Thanksgiving is next week! People tend to get a bit more cheerful during the holidays and that can seep into the stock market. That might sound simplistic, but never forget that while fundamentals may win out in the end, emotions rule the stock market in the short- and medium-term.

As an aside, all of the brick and mortar retailers I recommended on November 8 as holiday shopping trades are higher.

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*****Fed Chief Ben Bernanke spoke in Frankfurt, Germany this morning. In addition to blasting China for currency manipulation, Bernanke also dropped these two nuggets:

“On its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years...As a society, we should find that outcome unacceptable.”

And...

"A fiscal program that combines near-term measures to enhance growth with strong confidence-inducing steps to reduce longer-term structural (budget) deficits would be an important complement to the policies of the Federal Reserve..."

On the topic of unemployment, Bernanke is right on target. Unemployment is not going to improve substantially. Many of the jobs created in the 2004-2006 timeframe were "bubble" jobs. They came as a result of unsustainable demand from the housing bubble.

I have to applaud Bernanke for stating that such high levels of unemployment are unacceptable.

Also, please do not overlook Bernanke's challenge to Congress. He is saying in no uncertain terms that Congress needs to get moving on creating conditions and policy consistent with job growth.

Good for him. Unemployment remains the economy's greatest challenge. Yet Congress has done little to address unemployment.

*****Banks are set to undergo another stress test to determine if they are fit enough to start paying dividends. This is a very important issue for banks, and we've already seen Bank of America (NYSE:BAC) sell assets, presumably to shore up its balance sheet ahead of these stress tests.

Banks may also start to sell some of their "toxic" assets.

Bond fund giant PIMCO is betting they will. It's currently raised $1 billion to but toxic bank assets. And with banks now looking to be dividend-worthy, they may have added incentive to sell.

You may recall the Treasury's TARP (Troubled Asset Relief Program) program, designed to remove these toxic assets from balance sheets was mostly a failure, because banks didn't want to sell at a loss. Banks believed then, and may still, that these assets would eventually regain much of their value as the economy improved.

And the fact that PIMCO may want to buy them will only encourage the banks to hold.

*****China is once again raising bank reserve requirements to get money out of circulation and combat inflation. Oil prices are always very sensitive to China's policy.

Too bad Chinese officials don't ask Ben Bernanke how they might slow inflation. I bet he'd have some ideas...

*****Cisco (Nasdaq:CISCO) is adding $10 billion to its share buyback program. That's the only source of growth the company has right now. How the mighty have fallen...

The weakness in Cisco's business has investors asking if tech stocks are broken. I can answer that question: No, tech stocks are far from broken. In fact, business is booming for many technology companies. And valuations are still attractive.

*****Please feel free to write me with your questions and comments. I'll probably print them in Daily Profit: ianwyatt@wyattresearch.com

Until Monday,

Ian Wyatt
Editor
Daily Profit

Coal Dominates

IanWyatt — Thu, 11 Nov 2010 13:03:00 GMT

Fellow Investor,

QE2 has unleashed a raging bull market for gold and silver. But the falling dollar is also pushing oil prices higher, too. Oil is zeroing in on its 52-week high. And oil stocks have been performing very well.

Now, as you now, I was recently at the Association for the Study of Peak Oil (ASPO) conference in Washington, D.C. The main reason I went was to see my friend and Energy World Profits editor Gregor Macdonald speak on the "Rise of Coal."

I will offer Gregor's perspective on coal later. First, I want to tackle some of the bigger issues of Peak Oil, the most important being that global oil production appears to have peaked in 2004.

This chart, from the September 22 issue of Energy World Profits shows the supply situation.

One of the most interesting observations from this chart is the supply response during 2007 when oil prices ran to $147. You might think that oil companies would pump as much oil as possible to take advantage of record high prices. I know I would...

In fact, oil companies probably did pump as much as they could. But it wasn't enough to match peaks from 2004 and 2005.

Again this year, we can see that supply has failed to increase as oil prices have moved above $80 a barrel. In fact, supply has been falling this year.

*****Many economists, investors and even oil traders have a tendency to use U.S. oil demand as the driving force for oil prices. From the April issue of Energy World Profits, Gregor wrote:

"To economists, oil analysts, and political scientists the conditions we face today, just five years later, would have seemed bizarre. And I don't refer so much to the financial crisis. No, I refer to the fact that oil now trades at $82.00 dollars during the worst recession since WW2. And not only is the recession the worst in size and scope, but it's the worst in duration also.

It would have been unthinkable to the Wall Street Journal, Foreign Policy Magazine, The James A. Baker Energy Institute in Houston, The Department of Energy, and many TV pundits that oil could be at $82.00 dollars in the aftermath of a financial collapse. In fact, it was indeed unthinkable to all those organizations and media outlets just mentioned--and they said as much, week after week.

As Dan Yergin wrote in 2005, only "above ground" factors could push oil higher in the years ahead. My comment: any 2005 roundtable on the future price of oil would have agreed that only an attack on Saudi Arabia could place oil at $82.00 dollars a barrel in the midst of a severe recession in the United States. After all, the United States with its outsized demand has historically set the price of oil. During a deep recession in the US, oil should be at $12.00 dollars, not $82.00. How did the US lose control, of the price of oil?

The controlling factor now in global oil prices are the five billion people in the developing world. They use less oil per capita and derive more utility from each barrel. Which is a good thing, as the global supply of oil is now unable to make a sustained response to higher prices."

*****Ever since the financial crisis of 2008, Americans have been plagued by the feeling that we, as a country, have squandered our surplus wealth and now are a nation in decline.

After all, driving a Hummer was a status symbol just a few years ago. But today, you'd probably get some dirty looks tooling around in a gas-guzzler like that.

On an individual level, Americans may feel as though we took asset prices (like houses) for granted and spent too much money and failed to save.

A similar situation exists for the country as a whole. But Gregor suggests that the root cause is energy prices...

"...the West, both in its private balance sheet and public balance sheet, is carrying very high debt levels that are marked to even higher nominal prices. There is simply not enough cheap energy to fund the type of very, very fast growth required to pay back this debt. And it’s no longer just a question of debt-saturation in the private sector, and impending private defaults."

"Economists who propose creating a lot more government debt, in order to fund stimulus, clearly do not understand that these new tranches of debt -- which, by the way, become someone’s savings when they purchase that debt -- cannot possibly be paid back given that the world has now reached a plateau in oil production."

*****Now we can easily see why the world is transitioning back to coal. The bottom line is that it's cheap. And as oil prices rise, and we continue to resist greater investment in renewable energy sources or even natural gas, the only way to maintain a profit margin and grow an economy is with cheap energy.

In the following chart, you can see the path that coal use is on. Gregor projects that coal use will surpass oil sometime in 2014.

*****If you don't have energy stocks in your portfolio, you should. Oil, coal, renewables, these stocks will only get more valuable as investors become more aware of the true energy situation.

In the Energy World Profits portfolio, we have a Chinese coal stock with a forward P/E of 4.5. We have a top wind power stock and a top solar stock. We have a pipeline MLP paying a 7.3% dividend. We have three of the oil stock in North Dakota's Bakken oil oilfield. And we're currently building a strong position in Canadian oil.

I don't mind telling you where Energy World Profits subscribers are investing. And if you decide you'd like to try a trial subscription to Energy World Profits, even better.

Time Loves a Hero

JohnMauldin — Mon, 11 Oct 2010 23:33:00 GMT

As long time readers know, I am a big fan of Greg Weldon. This week he has very graciously allowed me to reproduce his client letter from last Thursday on some of the issues of Bernanke and Quantitative Easing 2. It prints a little longer than usual because of his format and all the charts, but this is one letter you should take the time to read.

You can get a free trial (his service is not cheap but if you are a global macro fund or trader, you really should have it!) by going to www.weldononline.com.

Sadly, this weekend was not a good time for Dallas. The Rangers dropped two and now have to win in Tampa Bay and the Cowboys were simply awful. The first time in 50 years that I get season tickets and they are just not fun. I was thinking they get to the Super Bowl and it is in Dallas this year and the tickets get me in. Clearly, I need to keep my day job.

Oh, well, the Mavericks are in town and the NBA will soon crank up. Oh, wait a minute. Everyone we wanted went to Miami. We are not that much better than last year. Sigh. Oh, well. It could be worse. I could be in Cleveland. (Sorry, Mike!)

Your hoping Cliff Lee pitches a shut-out analyst,

John Mauldin

Editor, Outside the Box

Time Loves a Hero

By Greg Weldon
WELDON’S MONEY MONITOR

I was fortunate to have met the late Lowell George, lead singer of ‘Little Feat’, prior to the band’s performance at Colgate University in 1979. The band was using the men’s basketball locker room as their ‘hospitality suite’, relegating the team to the local high school. As we returned from practice to store our gear, George was in the room, and he asked us if anyone could use the pair of size 21 basketball sneakers that a fan had tossed on stage during the previous night’s gig at Cornell.

We note lyrics from Little Feat within the context of today’s macro-monetary focus on the US …

“Well they say time loves a hero.

But only time will tell.

If he’s real, he’s a legend from heaven.

If he ain’t, he was sent here by hell.”

Markets are praying that time will tell us … that Ben Bernanke was a monetary legend from heaven, and a hero to the masses who are starving for a macro-reflation, specifically as it relates to the housing and labor markets.

But, if the ‘cost’ of creating jobs is a price-inflation spiral … then there could be ‘hell-to-pay’ in the markets, particularly in the fixed-income arena, and Boom-Boom’s legacy could be one of the ‘anti-hero’.

Of course, there is a decent chance that even the most heroic of efforts by the Federal Reserve could FAIL to generate the ‘desired’ outcome, leading to an increasingly ‘devilish’ debt-deflation.

Or, things could just stay … sideways, with both an upward tilt, AND a downward skew.

Thus, the odds of the Fed looking heroic … 2:1 … against … with one scenario considered a draw (status quo), while two of the other three potential ‘scenarios’ (hyper-inflation, or a debt-deflation) leading to some kind of hellacious reaction in stock, bond, and currency markets.

Indeed, we do NOT envy Ben Bernanke, and his ‘job’.

Frankly, few do it better than Boom-Boom, who has managed to create a most unique ‘circumstance’ with his pledge to monetize as much US Treasury debt as necessary, to insure that an overt debt deflation does not become ‘the’ dominant macro-force. Ben has fostered an environment where BOTH bond prices AND inflation expectations, are on the rise.

The Fed has made it crystal clear … they are pursuing higher inflation.

Five years ago, in my book “Gold Trading Boot Camp” we discussed at length the conundrum currently facing the Fed, stating that the Fed would, someday, be forced to acquiesce to higher commodity-price inflation, (particularly Gold) in order to circumvent a deepening macro-deflation.

Bingo, this is EXACTLY what is happening.

This is WHY Gold is screaming to the upside.

This is WHY the TIPS are screaming to the upside.

This, thanks to the fact that the Fed has orchestrated a PLUNGE in US short-term interest rates, US Treasury Note yields, and US Treasury Bond yields …

… in synch with a massive COMPRESSION in the Yield Curve.

We have been discussing the Yield Curve for months since our March-18^th Money Monitor entitled “March Madness”, in anticipation of the compression we are now seeing … and we focused on the intensifying flattening taking place in the mid-curve, within the 2-Year, 3-Year, and 5-Year maturities, as recently as our September 24^th Monitor, “Dancing with the Devil.”

Yes, the Fed has offered the ‘soul’ of the US currency, in return for a monetization-derived ‘reflation’, in the hope that an asset-price-reflation will, somehow, finally, spillover into the ‘real’ underlying macro-economy.

But only time will tell. If he’s real, he’s a legend from (monetary) heaven.

The problem is, that the Fed may have been ‘too heroic’, by talking-the-talk, without really ‘walking-the-walk’, not yet anyway, not to the degree to which their TALK has sparked a feeding frenzy …

… one that is ‘validated’ by the horrific scene in the macro-economy …

… and yet one that is ‘refuted’ by the price action in Gold, the US Dollar, along with emerging market equity indexes and currencies.

For sure, without much actual debt monetization by the Fed over the last six months, things in the markets are looking increasingly ‘bubblicious’.

The Fed is NOT directly responsible for the ‘froth’.

But their ‘talk’ is, as investors, banks, and global central banks have snapped up Treasury debt as if the Fed did offer a ‘put option’, by which it would be willing to step in as the buyer-of-last resort, in the event that owners of Treasuries stopped buying …

… or … worse yet … gasp … if they started to sell.

The ‘odds’ lengthen, when we contemplate the following thought process:

--- IF there is in fact a BUBBLE in the Treasury market, and IF that bubble is ‘pricked’, the FEDERAL RESERVE will be EXPECTED to buy as MANY BONDS AS IT TAKES, to stop the escaping air from deflating the bubble. .

The Fed has put itself in a VERY tough spot, and when (not if) they are finally required to walk-the-monetary-walk, all hell could already be breaking loose.

Indeed, for this reason, we believe that the odds stack up against a Fed strategy that implicitly (as suggested by many, including the St Louis Fed President) seeks to monetize Treasury debt slowly, over a longer-time frame and in ‘smaller’ increments, than was the case in the 2009-10 experience.

To date, the Fed has NOT been leading the charge.

As we detailed in our Dancing with the Devil Monitor of September 24^th, US Households, US Commercial Banks, and Foreign Official Accounts (ie: Central Banks) have purchased, in total, MORE than $2.5 trillion in Treasury debt since the beginning of 2008 … whereas the Federal Reserve has purchased only ONE-PERCENT as much (more on this, later).

Indeed, Treasury Note Yields are plummeting to record lows, and the Fed has only JUST STARTED ‘talking-the-talk’, as evidenced by a plethora of comments on the offer from Fed officials since the middle of last week.

We note the following quotes ..

… starting with the would-be-hero, maybe-headed-for-monetary-hell, Fed Chairman, Ben Boom-Boom Bernanke himself …

… “I do think that additional purchases, although we do not have precise numbers for how big the effects are, I do think they have the ability to ease financial conditions.”

Next we note commentary that sparked Monday’s extension lower in US Treasury Note yields, from New York Fed President William Dudley …

… “Fed action is likely to be warranted unless the economic outlook evolves in a way that makes me more confident that we will see better outcomes for both employment and inflation before too long.”

Indeed, the Fed will keep pumping, until it sees the proverbial ‘whites-of-their-eyes, as it relates to inflation, and job growth.

Who's Profiting Now?

IanWyatt — Wed, 25 Aug 2010 13:20:00 GMT

Stocks have been unable to make any headway over the past few sessions. And late-day sell-offs have been a common theme.

I often refer to oil prices as a proxy for growth expectations. And with oil prices set to drop below $72 a barrel today, it's clear that investors are not bullish on growth. Of course, recent economic data has indicated that economic activity in the U.S. has slowed down.

Perhaps the biggest drag on the economy is housing. That's nothing new. But New and existing home sales have been weaker than expected after the expiration of the homebuyer tax credit in April.

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In a case of unanticipated consequences, the recent activity in the bond market is being cited as a harbinger of economic weakness. Of course, one reason bonds have rallied so spectacularly is the Fed's recent move to roll profits from mortgage backed securities into Treasury bonds in order to keep mortgage rates low.

Rates are low, all right. 10-year yields are at their lowest level since March of 2009. And lest you forget, stocks were making some sickening lows in March 2009. The S&P 500 bottomed at 666 that month.

It would seem to me that there is more downside than upside for bond prices right now. And there's no doubt that any individuals and corporations who are taking advantage of these low rates to refinance or re-structure their debt are putting themselves in great position going forward.

And of course, that assumes you can find a bank willing to lend.

The recentrally for bonds should be cause for concern at the Fed. And I maintain that the Fed will step in and defend the stock market at some point. What will the Fed do? Well, that's a good question.

I asked Daily Profit readers for your thoughts last week. Let's get to some of those responses…

Cutty wrote: My suggestion is that somehow you need to promote the stock market. A case in point when the market goes down I lower my spending. I am retired so I spend money as the market goes. Now the interesting point is for the first time in American history there are more people retiring each day (10,000) so somehow we have to limited the amount of bad news. When I managed my business when it came time to hire and even though my fiscal guide lines were in order I would hold off, If I saw bad news on the TV. I think given the same economic conditions with less hype on the news we would come out of this recession much sooner.

This a very astute comment. There's no doubt that many individual investors take their cues about economic health from the stock market. There's also no doubt that the backbone of investing, whether it's in stocks or in one's business, is confidence that growth is ahead.

Without confidence, no one will put their money at risk.

The problem is, there's no way to manage bad news. At least, there's no inexpensive way to do it. We've seen stimulus (homebuyer credit, cash for clunkers) temporarily reverse negative trends. But stimulus has been unable to reverse those trends.

As I wrote earlier in today's letter, those who are using low interest rates to refinance debt are setting themselves up for when growth returns.

Thomas wrote: As a small business owner the greatest thing that the Federal Government could do is 1. renew the tax cuts; and 2. promise no change in regulations for the next five years.

I'm not convinced that tax cuts are the answer right now. But they might instill some confidence. I do agree that the administration made a mistake by pursuing healthcare reform when housing and unemployment are our primary concerns right now.

John wrote: Thanks for your research and articles. Here is my view and suggestion about a way out! The days of expecting so much out of our economies and providing them very little in term of innovations and inexpensive labour may have to come to a stop. The way out will be to focus on making North America a place that generates exports because our products/services are what the world wants . We have to give up the idea of this false sense of growth that we have created by supplying internally in our countries products and labour to each other instead of exporting them to others in the world. For now forget the frills (flashy vehicles, over sized homes, over sized motor homes, over sized anything for domestic consumption) just focus on exports to foreigners. We do have an aging workforce so jumps in production will not be achieved easily or cheaply, but on the innovation front a lot can be done. Since Ford mortgaged everything and the barn to focus on R&D; there seems to be a lot of buzz about their new products, what would happen if the entire continent was to commit to the same value. I support government subsidizing early adopters of new technologies as long as the process is part of the Marketing concept of refining and rolling out better and better products that the world needs. We are an intelligent and creative bunch (some would argue overall more creative than the Chinese because of our less structured world) , so lets encourage and foster that kind of environment. Now let's roll up our sleeves, maybe even consider spitting in our hands ahead of the hard work (our forefathers had to).

I completely agree that innovation is the key to bringing the U.S. economy back to prominence. I also believe the U.S. should be investing heavily in alternative energy technologies. This would help solve the unemployment problem and the expensive energy problem.

Rod wrote: I am a Realtor in Sequim, Wa. I would like to see the Fed do something for the sub prime people that are under water with their homes and can't do a refinance with out bringing a ton of money to the closing table. I have heard and would hope they would consider, for that part of the problem to refinance at these low rates to a fixed rate, no appraisal, no credit check and no qualifying as long as they have been making their payments to this point . There are a lot of those loans out there and when rates start to go up they will lose their homes, adding to the repo market which is already full. 93000 in July alone. How do you feel about this?

There's no doubt that debt levels are out of proportion to asset values and growth levels. It's also clear that there is still a lot of debt that needs to be written down to be in line with asset values.

But who foots the bill? Do we force banks to take it on in the form of foreclosures? Or does the government take it on in the form of refinancing?

Mike wrote: Until businesses, large and small, know what the future rules will be, attractive loans will do little to pull us out of economic doldrums. I have no plans for any expansion of my business no matter how cheap the money may be. Until the administration stops messing around with major negative legislation and stops denying who was responsible for the current meltdown, (many on both sides) there will be continued uncertainty in the economic landscape. I know what I have now and I can position myself properly regarding any new legislation that affects my sector. Increasing my business footprint creates a unknown factor that may prevent me from maneuvering delicately through what ever new rules are thrown my way.

I would:

1. Permanently extend the Bush tax cuts.
2. Give business a reason to expand and hire back workers by laying out specific positive rules and eliminating uncertainty in the business climate.
3. Stop shifting entitlement burdens to those who support the economy the most. People need to pay more of there own way and they would if the taxation issue favored it.
4. Elected officials should be paid a minimum amount as "public servants". Those in it for lifetime retirement/medical after one term will flee like rats from a sinking ship. Government needs to be direct when spouting policy or actions and stop looking for an escape route guaranteeing re-election. Public service is not a career.

You know I'm in agreement that our politicians are far too concerned with re-election.

F.D. wrote: This year seemed sell on April and buy on Nov. Pattern works. DJI is now above 10 years on average ( 9650-9750 ) and are under 1-5 years average line. So if DJI broke 10 years average that will trigger another selling pressure to reflect the scare of Double Dips if Economic News continued like yesterday. There were two times DJI touched two times and bounded back immediately. The last two times to break 10 years average were early of 2000 Y2K and 2008 Bank System failed in the past 20 years. Can we guess it will happen again due to the scare of Double Dips?

What Fed can do? Boost up Investors Psychology Suggest to President Obama to set up another jump stimulus plan. It is easy to save now to avoid other dip.. If they can not save now, it will cost more money/price to save the economy. To save the economy normally you need save Stock Market and House Market first. It is too hard to push up House Market since Bank System big failure on year 2008. They can not let stock market went down again. When people feel more money on their pocket from upright stock market, they will go out to shop and pour more money on House Market and V.V. When market is down, everyone has suffered even the Bear Holders. Their fixed assets also suffered. No one is a winner !

What are your thoughts on what we should do? I'd like to hear from you. Send comments in to ianwyatt@wyattresearch.com

Shifting Focus...

ChuckButler — Tue, 24 Aug 2010 15:26:19 GMT

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In This Issue..

* The dollar rallies again...

* German economic data is strong!

* Canadian Retail Sales this morning...

* Chuck's thoughts on the shift...

And Now... Today's Pfennig!

Shifting Focus...

Good day... And a Terrific Tuesday to you! Well, as I pulled out of my driveway this morning, I noticed how the light from the full moon had illuminated the neighborhood... I love it when the moon is full, and so big in the sky!

Well... Things didn't get any better for the currencies yesterday (save yen & francs), as the focus, whether it belongs there or not, remains fixated on the GIIPS once again, and their ability to function under the weight of debt they've created for themselves. For those of you new to class, the GIIPS is short for the countries of the Eurozone that consist of: Greece, Italy, Ireland, Portugal, and Spain...

As I've tried to do from the beginning... I'll give equal time to the likes of: California, Michigan, Illinois, and a host of others with debt problems that should demand equal time in the woodshed... But that's not what's on traders' minds right now.

The euro has given up almost 1-cent since yesterday morning, even in the face of news this morning that German Industrial Orders for June had increased 4.1% VS 3.8% in May...

And to top that data... Germany's 2nd QTR GDP blasted a new path to a 2.2% gain! This represents the fastest quarter of growth in Germany in 2 decades! And when you compare what this 2nd QTR did to 2009's 2nd QTR, the increase is 3.7%!!!!

You know, I've highlighted several times in the past, how the weaker euro was helping German manufacturing, and exports... Well, the German Economy Minister, Rainer Bruederle gets upset when people say that exports are responsible for German economic growth. Bruederle said, "German economic growth is in no way driven by exports alone." Apparently, Mr Bruederle was able to point out that domestic demand is contributing about 60% to the economic expansion. He went on to say that, "The recovery in Germany's economy is underway with full force."

Well, that may be, but it's not enough to take the focus off the deficit problems of the GIIPS right now... And the euro is barely hanging on to 1.26 this morning... And, while I admit, I'm not in Germany, so I don't really know, I still believe that exports drive the German economy... I'm from Missouri, I'll have to be shown that I'm wrong here...

Over in Japan, the yen is going hog wild VS the dollar and euro once again this morning... Here's the skinny on this latest move: The Japanese Finance Minister held a press conference last night, and did not make one mention of the yen... He didn't mention its strength, or the risks associated with his currency getting out of whack with the other Asian Currencies... Nothing, nada, zero, zilch, a great big goose egg, regarding the yen...

So... Folks, traders are taking this non-mention of yen, as a signal that the Japanese Finance Ministry has turned on the green lights... But this is where I think these guys and girls that believe that yen can continue to move higher without interference from the Japanese Finance Ministry, have another thing coming... The Fin Min could be setting a trap... I would be very careful here...

And further down in the South Pacific, the Aussie dollar (A$) continues to be held hostage by the "uncertainty" of the election outcome, and of course the risk aversion going on right now...

Yesterday, I went out on the limb and said that the Bank of Canada (BOC) would carry on with a rate hike on 9/8... Well, one piece of data that might give us a better idea if that will hold true or not will print today... Canadian Retail Sales for June prints first thing this morning... I don't have a BHI (Butler Household Index) for Canada, but the "experts" have forecast a nice .4% increase for June... Let's see if that's bang on or not...

Well... South of Canada, the U.S. will print July's Existing Home Sales this morning. I think those campers that believed that housing was "out of the woods" are going to receive a huge awakening this morning... The July report will be the first one that is completely void of the tax credits and other Gov't stimulation (except for the Gov't keeping interest rates at zero!). I think that this report is going to open some eyes, and will begin to play well with my call that home prices will drop another 10% before we turn this ship around...

And... If we remain in this current pattern of risk aversion because the U.S. economy is circling the bowl, the dollar will rally on a bad print of Existing Home Sales this morning. Should it? NO! But... That's the games people play now, every night and every day!

It's all a matter of keeping the dollar from going for a ride on the slippery slope once and for all! Like circuit breakers... We were beginning to see the dollar selling big time once again, and mysteriously the focus shifted from the selling the dollar, to the Eurozone deficit nations... Just like that!

Think about that for a minute, and let this sink in... Remember? We were dealing with a fight if you will between two different ideas... In Europe, austerity measures were being used to get out of deficit problems... And in the U.S., spending to promote growth measures were being used, to get the country's economy rolling. (they didn't care about deficits!)

And from the time Europe began their austerity measures the euro began to gain back lost ground VS the dollar, moving from 1.18 to 1.31... So, guess which plan was winning the markets' favor?

But then it all stopped... Just like that! You can't tell me that it wasn't the U.S. directing the media to focus on the Eurozone to take the heat off the dollar...

I know, I know, that's all a little too much conspiracy... But it's exactly what I believe I see going on, folks... That's what's still great about this country, you can think what you want... At least for now, that is! UGH!

OK... Let's get back to the facts, Jack! And... Gold is down $8 this morning and about $10 since yesterday morning. So... It's not just a "flight to safety" going on... Because if that were true, Gold would be soaring right now. And... It isn't! UGH!

There's something else going on right now, and I can't put my finger on it... I mean, the FOMC announced Quantitative Easing (QE) again a couple of weeks ago, and the damage to the dollar that should be going on, isn't happening... Have the markets become Comfortably Numb, with all the goings on in the U.S.? It sure looks that way... And I'm here shaking my head in disgust, folks... For this is not how "free markets" work...

Then there was this... I saw this on the Bloomie... The U.S. Court of Appeals for the 2nd Circuit denied a request from the Federal Reserve / Cartel to reconsider a ruling that requires the central bank to identify banks that received loans after the collapse of Bear Stearns. The Fed has seven days to disclose the information, unless the court stays its ruling. The Fed has argued that disclosure of the information would stigmatize the borrowers, causing them "severe and irreparable competitive injury.

Chuck again... I can't express enough the need for this information from the Cartel... And I would think that the public is with me on this. Of course if we ever passed the "audit the Fed" bill, we wouldn't have to go to court to get information from these guys!

To recap... The risk aversion that settled into the markets last week, continues, with the euro losing about 1-cent from yesterday morning. This in spite of some very good economic news from Germany. The markets' focus is now fixated on the GIIPS deficit problems once again, and one (me of course!) has to wonder how that focus was shifted from the dollar's problems to the Eurozone... Canadian Retail Sales this morning could be a good indicator for the BOC meeting 9/8, and... U.S. Existing Home Sales for July print this morning... Strap yourself in for this report!

Currencies today 8/24/10: American Style: A$ .8845, kiwi .7035, C$ .9440, euro 1.2620, sterling 1.5415, Swiss .9590,... European Style: rand 7.3870, krone 6.2835, SEK 7.45, forint 226.10, zloty 3.1830, koruna 19.7070, RUB 30.84, yen 84.25, sing 1.3615, HKD 7.7755, INR 46.94, China 6.7966, pesos 12.95, BRL 1.77, dollar index 83.41, Oil $72.35, 10-year 2.55%, Silver $17.94, and Gold... $1,219.00

That's it for today... Man, my IPOD is playing some great music this morning! Nice to see the Cardinals' bats come alive the past few days. They've got about 38 games to go, and they've got to keep the bats alive for all of them! I'll be doing an interview with a reporter from the Street.com this afternoon, should be interesting! Our soccer legend, Ty Keough, and his dad, (the great Harry Keough) are going to be honored by my little river town's parish this weekend... How about that? Well... It's been a struggle this morning, so the letter is later than usual, so I had better get this out the door! I hope your Tuesday is Terrific!

Chuck Butler

President

EverBank World Markets

1-800-926-4922

1-314-647-3837

Gold Hits New High

IanWyatt — Thu, 17 Jun 2010 19:25:00 GMT

Gold prices hit new all time highs late Thursday afternoon. Gold futures for August delivery hit $1,252.50 per ounce during the trading day. The precious metal closed the day at $1248.70. That set a new intraday and a new closing high for gold futures.

Investors of all stripes, concerned about the inflationary monetary policy and slowing momentum of global growth, have been relentlessly buying gold as a hedge against inflation and as protection against further economic weakness.

The latest economic data hasn't changed the perception that economic growth is not strong enough to boost employment or force the Fed to tighten interest rates. Witness the change to 472,000 new jobless from the 12,000 recently reported. These factors leave the economy vulnerable to shocks in the future, and that's why investors are increasingly seeking out the safe haven of gold.

But while gold prices are at new highs, gold mining stocks are following with a lag. And that's creating a timely opportunity for investors to buy gold mining stocks before they report blowout profits on record high gold prices.

To discover a little known gold mining stock that has as much as 128% upside potential based on its ultra-low forward P/E of just 7, click HERE.

Underestimating the American Consumer

IanWyatt — Fri, 13 Nov 2009 17:39:00 GMT

Your Daily Profit

November 13, 2009

*****P/E Ratios

*****Underestimating the American Consumer

*****TradeMaster’s Jason Cimpl

Fellow Investor,

As we came into earnings season, it seemed clear that analysts were far too pessimistic with their estimates for earnings.

Yesterday, Bloomberg reported that 81% of corporations have beaten earnings estimates. That’s the highest percentage since 1993. Bloomberg also reported that the S&P 500 is now trading at 22 times reported earnings. That’s the highest P/E for the S&P 500 since 2002. We might assume from this P/E that stocks are overvalued and due for a correction. But that might be a mistake.

In 2002, stocks made their final bottom following the Internet bubble and 9/11. The S&P broke below 800 twice in 2002 (July and October) and traded down to 806 on February 13, 2003. By the end of 2003, the S&P 500 had rallied to 1,112, a 37.9% gain.

*****Price to earnings ratios are often inflated when stocks are bottoming. In 2002, according to the very nifty P/E indicator at BigCharts.com, the P/E for the S&P 500 ranged between 27 and 42. And even in 2003, the P/E ranged between 26 and 35. It wasn’t until the end of 2004 that we started to see the P/E for the S&P 500 drop below 20.

What does this mean?

It means we shouldn’t read too much into P/E ratios. P/E ratios are lagging indicators. They tell is what earnings were, not necessarily what earnings will be. Right now, investors are saying they see more improvement in earnings ahead.

*****It’s happened to all of us. We accidentally overdraw our checking account while using our bank card, and then we get nailed with a series of overdraft fees. Well, no more.

Bernanke says that banks can no longer allow their customers to overdraw their accounts with debit cards -- and be charged overdraft fees – unless customers opt-in to the program. It may not sound like a big deal, but banks took in nearly $37 billion in overdraft fees in 2008. And even this year, when unemployment has devastated some family budgets, banks may take in $38.5 billion in overdraft fees.

In light of the fact that the Fed and the Treasury have done as much as they can to make it as easy as possible for banks to earn money, this is a surprising move. But it’s a good move. At $35 a pop, overdraft policies look almost predatory.

*****J.C. Penney (NYSE: JCP) reported earnings this morning. Revenues and earnings were lower than last year’s third quarter, but then we expected that. The surprise was that Penney’s raised full year revenue and earnings expectations. An even better earnings report came out at Abercrombie & Fitch (NYSE: ANF). Abercrombie beat estimates by a wide margin, even though same-store sales dropped by what must be one of the biggest margins in retail – 22%.

Again, we must remember that earnings estimates were very low for the third quarter. Companies should beat. And if they don’t, it’s a very bad sign. Still it’s good to see improvement in retail. I still think there could be upside surprises for holiday spending.

*****Now, here’s TradeMaster’s Jason Cimpl with our weekly video analysis of the markets. It’s free. Click here to view it.

Until Monday,

Ian Wyatt Editor
Daily Profit