Fed Chief Ben Bernanke went before Congress yesterday to reassure lawmakers that he has an exit plan for his inflationary monetary policies. And apparently the markets were soothed by his plans, because everything rallied – bonds, stocks and the U.S. dollar.
Most importantly, Bernanke has been pretty adamant that inflation is not a threat right now. Prices are still falling for homes and commercial real estate. Demand for oil is down. Unemployment is rising. None of these conditions suggests that more money will be entering the economy in the form of spending.
What’s his plan, you ask? He didn’t say exactly. But it will involve higher interest rates and hopefully Treasury buybacks.
*****Interestingly, Congress is very interested in problems with the commercial real estate market and what the Fed plans to do about them. Right now, $108 billion in commercial real estate is either in default, foreclosure or bankruptcy. That’s the double the dollar amount since the start of the year.
I’m not sure exactly what Bernanke can do about this. The Fed and the Treasury have made it possible for banks to make some money. That, in turn, will give the banks more ability to offset bad assets currently on their books and increase loss reserves for looming problems, like commercial real estate.
But ultimately, we are seeing an actual deflationary spiral in the real estate sector. There’s too much supply and not enough demand and prices are falling. Eventually, as we saw with my 7-Eleven story from yesterday, real estate will move from weak hands too small hands. But prices have to be attractive. Also, given my expectation that unemployment will remain high and the U.S. economy will grow weakly for a few years, it’s highly likely that some real estate will simply remain dormant.
*****Earnings season is rolling along. Apple (Nasdaq:AAPL) beat expectations handily. But the company guided revenues for the rest of the year slightly below consensus. I thought that might be a problem, but apparently not. The stock’s up 4%, even after a 10% rally last week.
Yahoo! (Nasdaq:YHOO) and US Bancorp (NYSE:USB) have reversed early losses to trade in the green. After a long consolidation for stock prices, it looks like we might be breaking out for another upside move. But after the move we’ve seen over the last seven trading days, I can’t help but to be a little skeptical.
*****It’s Newsletter Advisors Wednesday. And I’ve brought options guru Bryan Bottarelli back for an encore performance. Enjoy!
It’s NewsletterAdvisors.com Weekly day and this week we’re chatting with our good friend Bryan Bottarelli of Bottarelli Research.
Every time we pull up a chair with trading expert Bryan Bottarelli, he’s sharing with us some of his most successful – and profitable – trading strategies. Today is no exception.
IAN: Hi again Bryan. The big story this week was the major recovery in the U.S. markets – but you’ve recently told your readers that there’s an even more important story that’s being grossly under-reported by the U.S. media. Can you share this information with us?
BRYAN: In my view, the recent developments from the G8 meetings in Italy represent the most grossly under-reported story of the year. As you probably know, the "Group of Eight" includes the eight leading economic countries on the planet: Canada, France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States.
If you’ve been paying close attention to comments from China and Russia, then you know that virtually every non-Western powerhouse is becoming more and more serious about producing an alternative global currency. That’s why the future of the U.S. dollar was a primary topic debated at the G8 summit.
Now Get This: Russian President Dmitry Medvedev (who has been outspoken in his desire to displace the dollar as the world’s dominant reserve currency) unveiled new "eurodollar" coins that he described as the "United Future World Currency." These new coins were presented to all the G8 leaders attending the summit, and it left no question about Russia’s intention to launch an alternative currency.
We all know that China and Russia are both concerned about the plight of the U.S. dollar. Since China owns one trillion U.S. dollars, they’re walking a very fine line. On one hand, China wants to protect the value of their current investment. But going forward, they also want exposure into a new currency that’s not directly tied to the financial decisions being made in the United States.
I admit, this topic could be debated from many different angles.
But here’s the bottom line…
According to Medvedev, the only way to end the endless arguments over the role of central banks – and to maintain consistent pricing without having to run complex valuation ratios on every currency – is to coin a new global currency backed entirely by gold or silver. Using gold as a global constant, you simply sit back and let the free markets dictate value. That way, you’ll have one unified currency without any ratios, mathematical models, or wild fluctuations. Given the events of the latest global financial crisis, it’s clear that today’s financial situation has made currencies entirely too complicated. Therefore, Medvedev is now pushing the most powerful nations in the world to put gold back into circulation. If this occurs, you better believe that gold prices will soar.
Not only that, but there’s now talk in Washington about a second U.S. stimulus package. If this comes to fruition, the inflation versus deflation debate will dramatically shift towards one side. And of course, rising inflation makes a very bullish case for gold. That’s why I’m currently recommending my readers to over-weight gold in their portfolios.
And if that’s not enough, recent comments from Vice President Joe Biden (which came on Thursday, July 16th) should be all it takes to convince you to add gold to your portfolio. Speaking at an AARP town hall meeting, Biden said that unless the Democrat-supported health care plan becomes law, the nation will go bankrupt. Not only that, but Biden also said that the only way to avoid this fate is for the U.S. government to spend more money. Yes, you read that correctly. His direct quote reads like this:
"We’re going to go bankrupt as a nation. Now, people when I say that look at me and say, ‘What are you talking about, Joe? You’re telling me we have to go spend money to keep from going bankrupt?’ The answer is yes, that’s what I’m telling you."
IAN: In many respects, what’s happening in California right now could just be the beginning of things to come. Given everything that you’ve described above, what’s the best investment play right now? What are you recommending to your readers?
BRYAN: When you combine the recent developments at the G8 meeting, talk of a second U.S. stimulus package, and the recent comments from the Vice President, my best advice is three-fold. First, be sure that you own metals exposure. Second, diversify your investment portfolio by adding international exposure. And third, own a position that’ll strengthen when the U.S. Dollar begins to fall. I have a specific recommendation for each point, which I’ll outline for you below.
PLAY #1: Own Metals Exposure
This play comes in the form of the Market Vectors Gold Miners ETF (GDX – NYSE), which I consider the best all-encompassing metals play your money can buy. The GDX tracks the performance of the AMEX Gold Miners index, which invests at least 80% of its total assets in companies involved in the gold mining industry. By owning the GDX, you get exposure to major metals companies like Agnico Eagle Mines (AEM – NYSE), Barrick Gold (ABX – NYSE), Goldcorp (GG – NYSE), and Newmont Mining (NEM – NYSE). Without question, this is the very best way to own all of these major metals companies using one liquid and simple to follow basket.
PLAY #2: Diversify Your Investment Portfolio By Adding International Exposure
The second play comes in the form of the iShares MSCI Brazil Index (EWZ – NYSE). You probably don’t realize this, but over the last 5 years, the best performing fund (rated #1 overall by Barron’s) is the iShares MSCI Brazil Index with a 32.74% return. It beat out China, gold, value and growth, technology, small-cap funds, you name it. And guess what? Brazil is just getting started. Under Brazil’s president Luiz Inacio Lula da Silva, the country’s average monthly salary has climbed 22% since 2003. This means that the country’s lower-class citizens are becoming active consumers. When a country’s population collectively and simultaneously increases their economic position, that’s when you see the most powerful growth. By owning the EWZ, you can not only diversify away from the United States, but you can also profit from Brazil’s powerful growth.
PLAY #3: Own a Position That’ll Strengthen When The U.S. Dollar Falls
The third play comes in the form of the Currency Shares Canadian Dollar Trust (FXC – NYSE), which tracks the price performance of the Canadian dollar. Since Canada’s countryside is so rich in metals, their currency is backed by one of the strongest gold/silver deposits on earth. This will offer the Canadian dollar strength that’s not enjoyed by the U.S. dollar. Plus, since Canada does not suffer from the same financial troubles as the United States, their currency looks to be a solid out-performer for the remainder of the year.
IAN: Great suggestions Bryan. Thanks for taking the time to share your picks with us. Before closing, I noticed that you recently alerted your readers to a "politically bullish catalyst" that looked intriguing (and quite profitable). Can you share this investment idea with us as well?
BRYAN: As you probably know, the U.S. House of Representatives recently passed landmark legislation by a very narrow vote (219-212). This legislation, which is supported by President Obama, is intended to create an energy-efficient economy by cutting greenhouse gas emissions 17% by 2020 and 80% by the end of the century.
By creating a parallel financial system with a carbon-based currency, this new climate legislation would certainly raise energy prices. Everyone from small farmers to nuclear energy companies would be forced to re-evaluate their place in this newly created "carbon economy." Now I admit, it’s still unclear what the ultimate impact of this legislation will be. And remember, this is still a very hot-button bill that needs 60 votes to pass through the Senate. But the bottom line is this: In one way or another, some type of carbon bill will eventually get passed, and the end result will not be favorable for power plants, factories, and refineries. They’ll be the groups that feel the first impact.
But on the flipside, the obvious winners will be the utility companies that are currently incorporating solar, wind, geothermal, and nuclear power. After all, they’re positioned best to prosper in the new carbon economy. That’s why I recently recommended a company called FPL Group (FPL – NYSE).
FPL Group generates, transmits, and sells electric energy to 4.5 million residential, commercial, and industrial customers in Florida. On the surface, they appear like your run of the mill utility company. But a deeper look reveals that unlike a typical utility company, FPL produces their electricity using a combination of natural gas, wind, nuclear, and hydro power. As you’ll see, this unique mix will be the trigger that fuels a continued upward move in FPL over the next six months.
From a valuation basis, FPL’s income statement shows trailing three month revenues of $16.68 billion, which amounts to $41.61 in revenue per share. With year-over-year quarterly revenue growth of 7.99%, and year-over-year quarterly earnings growth of 46.20%, it’s clear that FPL has shrugged off the threat of an ongoing recession to enjoy a strong financial position. Throw in a forward annual dividend yield of 3.30%, and FPL has all the makings of a steady and stable upside performer.
That’s why FPL now finds itself sitting pretty. Not only will they side-step future cost increases (which cut into profitability), but they’re actually in position to receive billions of federal stimulus dollars to further expand their carbon-neutral energy sources. As a result, FPL is a stock that I expect to continue moving higher for the remainder of the year.
Thanks Bryan for another great interview and some truly outstanding trading recommendations. I plan to follow up on these myself.
Byran has a great track record going and if you have a few minutes, I suggest you check out the information below.
What you’ve just read is a small sampling of the kind of investment information Bryan sends out to his Bottarelli Research members on a daily basis.If you would like to become part of Bryan’s elite trading group, then I highly recommend that you check out his trading service today. I’ve worked closely with Bryan in the past, and I give him our full endorsement. When it comes to trading, he’s truly an incredible talent – and that’s why I feel that every Daily Profit readers should learn more about Bottarelli Research. All the membership details are contained in Bryan’s special membership letter at the link below, so check it out now!