2010 Recovery: Default and Bankruptcy Fears Simply Shift From Banks to Countries

The world is not exactly going through an economic recovery in 2010, but by a shift of the focus of the crisis, according to analysis published in this week's New Yorker magazine.

"Another year, another crisis". If last year we feared that large banks failed, now the fear is that whole governments will come down, says the article by James Surowiecki, in The Financial Page.

Today, Greece's debt totals U.S. $ 400 billion, a GDP of about U.S. $ U.S. $ 340 billion annually (and contracting). There are also concerns about Portugal, Ireland, Italy, Greece and Spain. The author points out that U.S. states go through similar problems.

The Wall Street Journal asked: 'Who is going to default first, Greece or California?". According to them, the U.S. states as well as Greece and other European countries, did a "trick" accounting to give the impression that they owed less. The article considers that the rich countries of Europe, especially Germany, which did not want to help Greece, are making the same mistake that occurred in the U.S. in the 1840s, after a housing bubble. At the time, eight states defaulted on their creditors because the federal government refused to bail them out.

Today, the U.S. states can count on help from Washington, which alleviates the concerns in the country, according to Surowiecki. He suggests the same medicine for the Europeans: "It seems that we learned our lessons. If Europe wants to be more than Germany and a handful of other countries, it should do the same. "

The problem is you cannot solve a debt problem with more debt.

Juggling Dynamite

"If money is your hope for independence, you will never have it"
Henry Ford

In Juggling Dynamite, a book by Danielle Park.

Have you ever had your bank or broker call you to tell you that you have too much cash (not invested)? It certainly did happen to me. She explains why they do that (because if you invest in their stuff, they earn management fees). She goes on at length to explain what is wrong with this industry. How promised returns of 8% are simply not possible (Hello Madoff clients?)

Have you ever been told that you should not time the markets? Certainly happened to me too by the people who held my money.

The author says you should time the markets.

Beware the investment sales industry. That is one of the chapters of this book, and how right it is.

Juggling Dynamite was written by Danielle Park, an investment advisor that appears on BNN from time to time. I usually agree with she says and her frank manner attracted me to read her book. I was pleasantly surprised.



Watch video (March 31) : discusses end of quarter, market looks like 2002 and 2007 market, we should not be here back so fast. It's frustrating, markets will not keep going up like they had, bong yields increasing, causing higher mortgage rates. We could see negative GDP growth even by Q2. She mentions RSI levels too high!

The book discusses investments in general. However, it also touches on other important topics, for example, what is really important in life and how to be happy. Usually most people equate having lots of money wit happiness. A mother of two children, Ms. Clark teaches a course to teenagers, I understand as a volunteer activity. He describes in a chapter how in a class he for else privileged kids she asks them to list their goals in life. The vast majority say money or getting rich.

He explains nicely what is wrong with this. She was a lawyer earning 6 figures, working hard, and acquiring all the nice things most people want t buy, nice cars and great big houses, until she decided to quit.

The book was written in 2006. She repeatedly describes the excessive amount of debt and credit of those times and how it would end up badly. She explains why you should not use buy and hold.
She writes about market cycles, and how we are in a bear cycle, a 20 year one!

Some quotes from the book:

Don't allow others you sell you investments.

Would y0u reply on the advise of people paid to sell you things?

In the final stage of the classic cycle stocks, bonds, commodities drop together all over the world

Page 177: "Yes, we do have to time the markets". Golden words. Do not believe the silly stats the bank tells you about being invested. They assume very long time frames (20 years or more), and that you life style does not change. It does, people marry, have kids, buy houses, kids go to university, etc, etc, etc.

Ms. Park also discusses the usual stat of "if you miss the top 10 days in the markets", and how much BS it is. Do you ever see the bank tell you how much you will save if you missed the worst 10 days?

On stock recommendations

If someone suggest you should buy a stock and they say "take a look at this stocks", "I have already bought some". Do not walk, run!

"These words should set off alarm bells to anyone wishing to keep their
money intact"
"once every sucker has been sucked in, there is no else to buy"

"Buy, hold, and perspire is not a good solution during cyclical bear
markets"

Chapters:

Ch 1.: The Truth About Human Nature

Ch 2. Benefiting From Market Cycles

Ch 3. The Truth About Asset Allocation

Ch 4. Beware the Investments Sales Industry

Ch 5. Mutual Funds and Management fees

Ch 6. Fundamental Analysis And Stock Prices

Ch 7. The Media

Ch 8. About Risk

Ch 9. About Borrowed Money

Ch 10. About Income

Ch 11. Timing Markets

Ch 12. Pursuing the Brass Ring

Ch 13. Building and Preserving a Rich Life

Ch 14. Takeaways

There are a couple of typos in the book ("principle" is used instead of principal), but it is a great read.

Amazon link:

The Top Paid CEOs in America made $1.57B in 2009; Meet the $148M Man

The Wall Street Journal reports on the compensation of 200 CEOs in the U.S. in 2009. The total of the 200 CEOs listed is $1.578B. The 200 U. S. companies listed had their fiscal year 2009 revenue of at least $4 billion and filed their proxy statements between October 2009 and Sept. 30, 2010. The list is not finalized.

Meet the $148M man:



1. Ray Irani, Occidental Petroleum Corp. Mr. Irani was awarded total direct compensation of $52.2 million. According to the article, these figures do not includes $96.5 million that Mr. Irani gained last year through exercising stock options and vesting of restricted stock.

On the plus side, he would have made a lot more money this year if he had sold now that oil is trading much higher.

2. Robert Iger, Disney, received total direct compensation of $20.8 million.

3. Samuel Palmisano, IBM, received total compensation of $20.1 million, mostly from $13.5 million in stock awards

4. William Weldon, Johnson & Johnson. Total direct compensation: $19.8 million

5. Jay Fishman, Travelers, $19.5 million.

6. Randall Stephenson, AT&T, $19.4 million.

7. Robert Stevens, Lockheed Martin $19 million.

8. Miles White, Abbott Labs, $18.8 million.

9. John Stumpf, Wells Fargo, $18.7 million.

10. James McNerney Jr., Boeing,$16.8 million.

Laid Off? Pursue Your Dreams, Lemonade Movie

Eric Proulx's movie about people recently laid off that made a career and life change.

Greeks Greatly Withdrawing Money From Greek Banks, Terrible for Banks

In another terrible sign for Greece and Euro, the U.K.'s Telegraph reports that Greeks are withdrawing their money from Greek banks. Whether this becomes a run on the banks remains to be seen, however, it certainly reduces the ability of Greek banks to lend as they cannot borrow anywhere else.

"Wealthy Greeks and companies have been clamouring to move their cash deposits to banks such as HSBC or France's Société Générale, which operate large branches in the country. They are among those to have received several billion euros of new money in recent weeks.
HSBC's private banking in the country is understood to have been flooded with business, while the local operations of several other major international banks have already seen large inflows of money".

While we reported in the Canadian dollar freshly hitting parity today, the Euro continues to do the opposite and drop:



The article reports that over €3B of deposits held by Greek households and companies left the country in February, after the 5B in January, according to the latest figures available from the Bank of Greece.

Where the money is going to: Switzerland, the UK and Cyprus. The wealthiest Greeks are moving their deposits to Swiss banks.

Canadian Dollar Hits Parity With USD Dollar

This morning the Canadian dollar reached parity with the US dollar again.

CAD priced in USD chart, from INO's live chart:

The Iron Ore Wars: Prices 90 to 100% Higher, Europeans Lose Power, Chinese Move Backfires, Vale Wins Big

Brazil's Agencia Estado reports today on the state of iron ore. The international crisis at the end of 2008, which devastated much more of the European economy than the Chinese. Still in recovery, the European steel industry tried to block the increase in the price of iron ore of 90% on average.

The Eurofer association represents the region's steelmakers and says it is "outraged" with the increase proposed by Vale and argues that a market with competitive prices is essential for the strong recovery of world economy. They go as far as mention the possibility of recession in Europe because of the readjustment. In recent weeks, the European steel banded together to resist pressure from the Valley. But who is closely following the negotiations believe that, against a backdrop of strong global demand for raw material, these companies have little bargaining power to force a smaller increase. Traditionally, Europe has absorbed about 30% of the ore sold by Vale. In 2009, still under the impact of the crisis, the percentage dropped to nearly 17%.

Chinese steelmakers have already shown a greater resignation to the proposed increase. The explanation lies in the increasing need for input of Chinese companies, which have pushed its steel production to cope with the pace of accelerated growth of the local economy. Last year, when the international crisis has caused havoc in the industry, the Chinese steel mills were the ones to stomp their feet and boycott Vale's offer to lower their prices by almost 30%. They wanted a reduction around 50%. With no agreement, China ignored the long-term contracts and then migrated to the spot market, which operated with much lower numbers. With the recovery in global demand, the price of the input shot higher and the move backfired badly.

Today, the product is listed at a value more than 100% above the 2009 levels.


VALE raises prices

Vale informed Friday that it has reached agreements to readjust prices to most customers. The information circulated on the market is that the increases range from 90% to more than 100%.

Vale's share price has done extremely well, in USD.

The Economist: U.S. is Changing its Economic Behavior: Export or Die

According to The Economist is changing is "debt and consumption" model to "export and save", which would be the biggest transformation in decades. The crisis has caused people to have less money, and thus they spend less. Banks are also lending less.

The article mentions that companies will increasingly have to look outside the U.S. (a low dollar will do wonders). The key for the U.S. will be to export more expensive products and services as opposed to labor-intensive ones (such as clothing.

Countries that recovered due to exports include Sweden, Finland, Thailand, Malaysia, and South Korea. For the U.S., however, it will be a lot harder due to its size and its fragile economy. Even so, the only way is exports: "To export or to die".

How to Properly Diversify Investments in Commodity ETFs

Here are the correlations for all commodity ETFs in Q1 2010, covering the period January 4 to March 31. This is a our quarterly update on correlations (we also do monthly updates).

You can track live all commodity ETFS here.

For proper diversification what I look for are uncorrelated stocks. Those are shown in bold above, and their values are close to zero. You want to stay awy from green or red.

These are some of the best uncorrelated ETFs and ETNs:

• BAL and DBC, DJP, LD
• COW and DBC, DJP,
• JJT and AGF, DAG
• RJZ and AGF
• UBC and DJP
• SGG and GSG, RJI
• JJS and JJU, FJN, RJZ
• HIB and RJN
• SGG and UCI
  

ETF and ETN names:

Natural Gas Prices Fall? Change the Data! Why UNG is Skyrocketing, and How to Profit Either Way

This is just unbelievable: the Energy Department is about to make major revisions to its natural-gas production data after "finding it has been overstating output". It has uncovered a "fundamental problem" in the way it collects the data from producers across the country. In essence, it surveys only large producers and extrapolates its findings across to smaller producers. (Wall St Journal)

In response, UNG has shot higher by almost 11% in two days, and one investor made millions in profits.

What kind of statistics does the government collect? Does this mean that the 3Tcf in storage are not actually measured?

If the price falls so much, well, just change the way the data is reported, so prices can go higher. Since when are prices determined by a survey and not by the actual demand and supply?

This all boggles the mind and stinks, badly.

Please take a look at the UNG chart:

Look at the sharp recent rise, and one wonders who bought all those shares on April 1st! That is one rich "investor". We hope the police will be called.

Anyway, how to profit from this situation: Our favorite straddles. Here they are for April and May:

Computed with StraddlesCalc.

Disclaimer: The author does not hold any UNG, one the worst performing ETFs on the market.

Brazil is About to Raise Interest Rates: Profit With BZF Currency ETF

With concerns greatly mounting in Brazil about inflation, it is becoming a near certainty that its central bank will need to raise rates in April.

In Brazil, markets are expecting inflation to rise to 5,18% in the latest Focus survey released today (in Portuguese). This is the 11th straight rise in the inflation expectations. One month ago, the expectation on the IPCA index was 4,99%.

The ETF to use for the Brazilian real is BZF:



If Brazil does indeed raise rates, then you'd expect BXF to move higher. it is already one of the best performing currecnies. Please take a look at ther performance of BZF vx FXA, FXC, UUP, and FXE:



Top performer: Brazilian Real. Worst performer: US Dollar.


For those looking for income, BZF also pays a dividend of about 1%:

In addition, BZF has options that can boost income, although they are relatively illiquid:

If you manage to sell the October 30 for $0.35, that adds another 1.3%. In the event those shares are called, that means a profit of 13.7%.

You can also sell puts to get a lower entry price. Anyway you look at this it's a an attractive deal, even if the USD rises against other currencies.

ETF overview:



Disclaimer: The author does not hold any positions in BZF, FXA, FXE, or UUP, although the author holds Canadian cash.

Gold Reaches New All-Time High in Euros: Poor Currencies and Rich Currencies

Showing that the European criss is far from over, the price of gold has reached a new all-time high in Euros.




We track the price of gold in other currencies live here. You can clearly the pice of gold going up in Euros and USD, while it has gone down in other currencies.



Who would have thought the the Aussie dollar and the Brazilian Real will be far stronger than the USD and the Euro!

Blackrock Fund Boosts Investments in Brazil

Will Landers , BlackRock’s Latin American fund manager is boosting Brazil weighting (and reducing his Mexico exposure slightly). He was quoted: "in Brazil the combination of the domestic growth story, with the Brazilian middle class’s purchasing power continuing to rise, and interest rates as low as they’ve ever been is compelling.”

As for Mexico, the issue is that it is more exposed to the 'troubled' US economy.“The challenges with Mexico are still there,” “The growth of the US economy is still likely to be slower than hoped".

Blackrock's assets dropped by 10.7% on its assets in January as it suffered from issues such as the Greek crisis.

Shares of the BlackRock Latin American Investment Trust have risen by 366% over the past five years on the back of stellar growth in the region.

We track all latin-american stocks (ADRs) live here.

Landers said Brazil was seeing earnings growth over 30%, with loan growth and mortgage growth continuing to pick up. “We have added a little bit to Petrobras on weakness,” he says. “I think a lot of the fears around it were overdone.” He has taken money out of the steel sector and pumped it into Brazil's Vale.

Says the Financial Times: "The move is paying off and on Monday last week the shares rose as it secured a 90 per cent rise in the price of the iron ore it sells to Asia".

Fed Ends QE and Buying of Mortgage ABS: U.S. Must Now Walk Without Crutches, on Gangrenous Legs

Loved the comment from Ambrose Evans-Pritchard:

"The most audacious monetary experiment in modern history ended on April Fools' Day. America must walk without crutches, on gangrenous legs."

He was referring to the Fed having completed its purchase of $1.7T of mortgage securities, agency debt and US Treasuries, according to the paper, credit easing that allowed Bernanke to create stimulus equal to 12% of GDP (he also messed up the exchange rate, showing USD $1.7 trillion as being £1.1B, but never mind that, surely a typo)



Evans-Pritchard actually thinks that Ben Bernanke and Mervyn King saved the world from a potential calamity.

"The $1.7T created out of nothing will vanish as the bonds are sold on the open market. Not too quickly, let us hope. Easy money must cushion the blow of spending cuts. Even talk of ending QE amounts to tightening. While the US economy has begun to create jobs again – plus 114,000 in March, stripping out short-term census workers – there were false dawns in 2002 and 1982. The broader U6 jobless rate nudged up to 16.9pc.

Bond vigilantes ask who will step into the Fed's shoes to soak up the flood of debt from Washington, whether from the Obama Treasury or from Fannie Mae and Freddie Mac – the mortgage giants on death row".

As we have noted here last week, Treasury yields have risen significantly in recent days. Evans notes that 30-year mortgages have risen to 5.08% from 4.71% in December. "The US housing market looks too sickly to withstand this. New home sales have fallen for four months in a row, dropping to a half-century low in February. The inventory of unsold homes has jumped to 8.6 months supply. Some 24pc of mortgages are in negative equity".

We prepared this chart that shows the yields rising on most Treasuries, and their effect on the TLT and TBT ETFs:



He concludes:

"My fear is that the Fed will repeat the mistake – in this case by reversing QE too soon. The problem is Mr Bernanke's ideological doctrine of "creditism".
Is the Fed chairman worshipping a false religion? Was Milton Friedman right in arguing that the quantity of (broad) money is what is what matters most, not the credit mechanism?
Upon this abstruse doctrinal point will depend – perhaps – whether the Atlantic economies rise above stall speed or lurch into a double-dip recession".

How to Properly Diversify Investing In Global Country ETFS

Here are the correlations for all country ETFS in Q1 2010, covering the period January 4 to March 31. This is a our quarterly update on correlations (we also do monthly updates).

You can track live all global ETFS here.


(please click to enlarge)

To diversify, I stay away from the greens and reds.

There are very few uncorrelated countries (in bold):

• ECH (Chile) and EIS (Israel), and also THD (Thailand)

Note: You may receive technical analysis and alerts of these stocks, sent automatically to you, by entering the symbols in the Technical Trend Analysis Tool, (powered by INO).

Please do your own due diligence. This is not advice. Options are very dangerous and may cause 100% loss.

Computed with StraddlesCalc Tool

Update: How To Properly Diversify Stock Market Investments, Surprises

With the end of the end of the quarter we an compute the stock correlations for January through March. Correlations are extremely important for proper diversification of investments. For this purpose, investors, should not invest in two stocks that are highly positively or negatively correlated. The best pair of stocks are those that are uncorrelated, a number very close to zero.


The table below shows the values for some of the most popular stocks and ETFs.


(please click to enlarge)

Among the best uncorrelated pairs for 2010 there are several very interesting combinations:

• FXE and DIA, SPY: Euro and the general stock market
• UNG and EWZ: Natural gas and Brazil
• ECH and XLI, XLF, IWM, TZA: Chile and the rest
• GAS.TO and GLD: Canadian natural gas and gold
• UUP and SPY, FXY, VIX, DIA: US dolalr and S&P500, DJIA, Japan Yen and volatility

These are really interesting and surprising.

Note also how not so good the correlation between VXX and VIX is.

Please note that correlation does not imply causality. Note: You may receive technical analysis and alerts of these stocks, sent automatically to you, by entering the symbols in the Technical Trend Analysis Tool, (powered by INO).

The Top 20 ETFs for April, To Buy and to Sell

We computed the relative strength index of all 800+ ETFs that trade in the U.S. This give s avery good measure of which ones are oversold and overbought. Here are the top 20 in each category, sorted by our preferred index, RSIA.

These are the most oversold:

• SCC: Ultrashort consumer services
• ITM: investment-grade municipal bonds with a nominal maturity of 6 to 17 years
• SMB: investment-grade short municipal bonds with a nominal maturity of 1 to 6 years
• SKF: Ultra short financials
  

Overbought:




In the case of a correction, these are the ones that should be dumped heavily. The worst ones are:

• PEJ: Leisure and Entertainment Portfolio
• EWM: Malaysia
• KIE: companies in the United States insurance industry
  
  

Investing in Chinese Stocks: The Best and Worst China ETFs for April

ETF Report discusses today the performance of all Chinese ETFs on the market:

Chinese ETFs are tracked live on this site. The following table shows the performance since 2009 and 2008 (if the ETF existed back then, many of them are quite new).


(Please click to enlarge)

The top performer in 2010 are CZM and CQQQ. CZM is a 3X ETF, so it should be avoided as its performances varies wildly from the day to day and its value will be eaten way just with time. CQQQ is a technology ETF.

The worst performers are CZI and FXP. CZI is a 3X ETF, and FXP is a 2X ETF, both to stay away from. The worst performing 1X ETF is CHIE, the energy sector.

As readers know we use a measure derived from relative strength indicators to pinpoint the best ETFs for the short and long terms. Here they are, from most oversold to most overbought:



There is only one oversold ETF, FXP. It is actually oversold in both short and long timeframes, but it is a leveraged ETF. Note that the Chinese Yuan ETF CYB is the 2nd most oversold in the long term. We have written a few rimes about the possibility of the Yuan being revalued and how to profit from it.

There is one overbought ETF: HAO , the Claymore Alphashares small cap. In the short term, the worst ETF (as in most overbought) are FXI, XPP and FCHI

Try Stock & Alerts Tools Free for 2 Weeks

Readers here know that I use INO's tools and that I have run numerous backtesting of their alerts. For the next 2 weeks only they are offering a completely free 2-week trial, no payment and no credit-card info needed. it includes access to Smart Scan, Trade School, Chart Analysis, and Data Central (even with live access to support from a real human).

Access trial (custom link for Shocked Investor readers). Enjoy.

Here are the latest alerts on SPY:

Defaults in Canadian Mortgages Jump 76%

Here is a yet another example that you should be suspicious of any stats that are published.

It has been widely reported that Canadian banks have raised mortgage rates this week, and mortgages and rates are all over the news. Yesterday, the Ottawa Citizen newspaper published an article stating that the Canadian Association of Accredited Mortgage Professionals reported that 0.44% of mortgages had fallen into default at the end of October. At the end of 2007, the figure was 0.25%. That is a jump of 76%, a huge increase.

However, never mind that the strange periods mentioned, the overall figure is still a very low 0.44%. Is this really a significant jump? We need a lot more data to prove this.