Friday, May 27, 2011

US economy needs to be fixed---By Shan Saeed

US economy is in dire straits. In June 2010, I noted and shared that a well known financial sector analyst and the woman who blew the doors open on the 2008 mortgage crisis, Meredith Whitney, was forecasting that two million government employees would see their jobs cut over coming years because of fiscal problems. It’s happening.

Over 300,000 jobs have been cut in fiscal year 2011, and that number is about to increase 50% going into 2012: You think its funny..Around 450,000 people who work for U.S. states, counties, cities, towns and villages could get pink slips in fiscal 2012, sharply up from the 300,000 positions shed this year in 2011. The number of job cuts will rise mainly because the federal stimulus program is ending while the cost of Medicaid is “spiraling,”.

States got billions of extra dollars primarily for education and Medicaid from the stimulus plan. Medicaid is the state-federal health plan for the poor and disabled.
The deficits states and municipalities will have to close will climb to $155 billion in fiscal 2012 from about $108 billion in the current fiscal year.

So much for job creation. After hundreds of billions of dollars spent on government entitlement programs, it’s clear that government budgets are unsustainable. Budget deficit is standing at $14.2 trillion.

First the cities and the states will go bankrupt (it’s clear that most are insolvent right now). The Federal government will do their very best to bail them out. But will it work. Big question mark. Eventually, the Federal government, itself insolvent, will be recognized for what it is: bloated and bankrupt.

The real fun begins when the rest of the world finally responds to the US sovereign debt crisis by cutting off the international credit card, leading to the collapse of the largest credit bubble in the history of the world.

US would be going backward in financial development and economic growth. What backs currency is confidence in a government's ability to pay debt, its government system and its economy. US dollar is weak and bearish in outlook. Investors have started pilling up Gold and Silver in their asset portfolio.

Some aren't calling for gold to be used as tender but are calling for a return to the Gold Standard, which attaches the value of the dollar to a certain amount of gold. I have been bullish on gold, silver and oil for the last 12 years. A return to the gold standard would stabilize the dollar by discouraging hefty fiscal spending as well as preventing the Federal Reserve from printing excess money. QE will not be able to fix the economy.

According to Steve Forbes, former GOP presidential candidate and Forbes Magazine Publisher "People know that something is wrong with the dollar,". He furthermore, added "you cannot trash your money without repercussions. What seems astonishing today could become conventional wisdom in a short period of time.

Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making any financial commitment or entering into financial contract. All financial transactions carry a RISK

Sunday, May 22, 2011

Bursting the Bubble---By Shan Saeed

Is the bursting of bubbles of bubble possible? By Shan Saeed

I can calculate the motion of heavenly bodies, but not the madness of people emotions. All investors know the story: Isaac Newton lost substantial sums of money when the South Sea Bubble burst in the late 18th century.

What most investors don’t remember is that Newton was an early investor in the company. He bought in when nobody cared for the stock. Newton then assumed there was a top forming when all his friends started buying in, so he sold out.

But shares in the South Sea Company kept rising. His friends were getting wealthy. Newton got frustrated sitting in cash … so he went all-in. That’s when he lost big.
Newton let his emotions get the better of him. He saw people making easy money and joined the crowd. He ignored the inevitable tug of financial gravity.

Today, bubbles are everywhere, apparently. Depending on who you talk to, the list includes Technology, metals, Chinese Internet stocks, S&P 500, social-networking companies, and even things that can’t be traded, like the costs of higher education.

While many of these areas are overvalued, it’s tough to call them so overpriced as to be in bubble territory.

Why? Mostly because there’s still some rational justification for current prices. Precious metals represent a real store of value. Chinese stocks and social-networking companies have huge growth potential, so they compel high valuation. A college education increases one’s earnings potential for life.

One of the key characteristics of bubbles is that market participants ignore fundamentals and start joining in because everyone else is doing it. Even if some recognize it as a bubble, they still put more money in, because that’s where the crowd is going.

As Charles Prince, then-CEO of Citigroup, infamously said in 2007: “As long as the music is playing, you’ve got to get up and dance.”

Let’s face facts: There are many pockets of overvaluation. There always are. But one area in particular stands out as a potential bubble right now: U.S. Treasurys.

For the past 30 years, interest rates have been declining, offering investors in these securities less potential upside. China continues to slowly unwind its massive Treasury position, and Japan could liquidate in coming months to fund earthquake-relief efforts.

There have already been a few issuances of Treasurys (namely TIPS) with a negative yield. That means investors are taking a loss to park their cash with the government! If this trend continues beyond TIPS and into regular T-bills, it might soon reach a tipping point.....Some think its getting closer. Bill Gross of Pimco, who runs the world’s largest bond fund, has cut all his Treasury holdings and has signaled that he’s waiting for higher interest rates (which means lower prices on bonds).

Warren Buffett laments that there’s no better alternative to cash than T-bills … although he continues to expand investments into foreign currencies.

Alas, even if there is a bubble in Treasurys, different rules apply. In the Treasury market, the Fed stands as a buyer of last — and likely soon to be first — resort.

So instead of an outright popping of the bubble, a more likely outcome is the scenario playing out in Japan: Their government bonds have had ultra-low rates for decades, while their economy has stagnated. All because rates were kept too low, and everyone got up and danced too long. Madness indeed.

Tuesday, May 17, 2011

3 reasons make oil prices above $100/barrel---By Shan Saeed

Oil prices to stay high going forward...By Shan Saeed

After selling off nearly 14 percent the previous week, oil prices finished last week slightly higher at $99.65 per barrel. While the end result was a net positive, the volatility continued. Oil prices per barrel reached $104, then fell to around $96, before nesting just below $100.

As an investor, this volatility can be difficult to handle. Throw in the uncertainty of today’s geopolitical environment, and investors feel the need to downsize their positions in commodity investments, such as oil.

I think markets could remain volatile in the short-term, but here are three long-term indicators to support $100+ per barrel oil prices.

1) Long-Term U.S. Dollar Weakness

The U.S. dollar was up over 1 percent again last week and has increased nearly 4 percent since hitting a 52-week low on April 29. On a five-day rate of change, the dollar is up about 1 standard deviation.

As I said last week, this move is less about the vigor of the U.S. dollar and more about the relative weakness of the eurozone and other fledgling countries. In addition, it’s likely that US will continue to see relative strength in the U.S. dollar as they get closer to the end of the Federal Reserve’s QE2 program, set to wind down on 30th June, 2011

I think these are short-term drivers and don’t accurately reflect the long-term headwinds facing the dollar.

If you browse through the snapshot from (taken late in the afternoon on May 13] shows the precarious fiscal and monetary situation of the U.S. As you can analyze, the overwhelming color is red. Even if Washington decided on a comprehensive plan to fix entitlement overspending, trim defense spending and reduce the U.S. deficit today, it would take years to see any meaningful shift in these figures.

Therefore, I feel the recent uptrend in the U.S. dollar is a short-term reprieve from a long-term downtrend.

2) Demand from Emerging Markets Outpacing Developed Market Demand

While developed world demand has struggled to retrieve its previous strength, emerging markets have captured a significant share of global demand over the past three years. Emerging market countries have narrowed the oil usage gap between developed and emerging markets from roughly 12 million barrels per day in 2007 to just 4 million barrels per day as of late 2010.

Last week, the Paris-based International Energy Agency (IEA) and the U.S. Department of Energy both communicated softness in global oil demand. The IEA noted that preliminary March data illustrates the first “marked slowdown” in annual growth for the first time since 2009. The IEA is forecasting growth of 1.3 million barrels per day in demand for crude oil in 2011, down from 2.8 million barrels per day in 2010.

This represents a significant slowdown in year-over-year growth and added to negative sentiment around oil last week, but it’s important to put things into context. You can analyze that global oil demand grew at an incredible pace in 2010. The 1.3 million barrels of demand growth that is expected for 2011 is less than last year, but is more along the lines with historical rates and maintains the forward momentum for rising oil demand.

Emerging markets, driven by China, are the main source of the increase in demand. You can strategically analyze how China’s demand for crude oil imports has grown over the past decade or so. China imported an average of just under 1.4 million barrels a day of oil in 2002 when prices were hovering around $21 per barrel.

In the years since, China’s crude oil imports have increased more than 260 percent despite per barrel oil prices jumping nearly four-fold. This is indicative of the insatiable demand that emerging markets have for oil.

3) Majority of Global Oil Reserves Located in Geopolitically Unstable Regions

I was discussing that in one of the TV channels about "Why oil prices are likely to stay high", I highlighted how a large portion of the world’s proven oil reserves and production comes from unstable countries and regions, including Nigeria, Venezuela, Iraq, Iran, and Libya. Saudi Arabia is a bombshell. According to some estimates, as much as 77 percent of the world’s oil reserves lie beneath these shaky regions.

Civil wars and attacks on oil facilities can create production slowdowns or even shut down production entirely. The conflict in Libya and unrest in several other Middle East countries demonstartes that just how quickly this can affect global oil markets. Iraq is another example of the difficulties inherent in production expansion in these regions. Last week, the country’s former oil minister said it would only be able to meet half of its stated production goal by 2017. The original forecast, clearly a lofty one, called for roughly 12 million barrels per day in oil production.

Over the years, the proximity of oil reserves to unrest has led to a reduction in global spare capacity or the excess amount of oil that can be produced, if desired, to meet demand. When the turmoil broke out in Libya, the general consensus was that Saudi Arabia’s spare capacity would be more than enough to meet market demand. That hasn’t been the case as Saudi Arabia has moved to calm its own population to prevent unrest.

The result is little wiggle room to meet demand should the world experience a boom in demand or an event disrupting production. In general, these supply/demand dynamics support historically high prices. Saudi Arabia has been demonstrating that they can pump oil in the energy market. However, investors are skeptical about it to meet the growing demand in the emerging markets. Saudi Arabia the last two times said they are going to increase production and they couldn't increase production due to technical challenges. Don't fall for that.

The reason oil is going up is the world is running out of known reserves of oil.

Disclaimer: This is just a reserach piece and not an investment advice. Investors are enccouraged to execute their own due diligence before entering into any financial contract or making any strategic investment globally. All financial transactions carry a RISK...

Monday, May 16, 2011

4 Reasons the dollar's decline will continue ---Bu Shan Saeed


The largest tailwind for the commodity bull market is set to continue. I think the Euro is headed back to 1.55 EUR/USD by year end 2011:

When the dam breaks you get washed out. Taking out position concentrations is a favorite sport in a range trading environment and the world is certainly heavily USD short. As the Fed stays on hold more than is currently expected, EUR/USD is likely to once again overshoot and head for 1.55, the top of our now higher EUR/USD forecasts.

If I analyze the current dip in EUR/USD as a buying opportunity as the Fed is likely to remain tight, QE2 has failed, the German economy strengthens and the European sovereign debt crisis doesn’t cause any significant economic disruption. EUR/USD is likely to once again overshoot and head for 1.55. Current dip is providing buying opportunities for the EUR against USD as:

Four solid reason for Dollar's decline

1. The Fed stays on hold more than is currently expected. Fed is doing more harm than good. Federal Reserve officials harbor noble intentions behind loose monetary policies, yet the downsides to low interest rates coupled with quantitative easing are starting to outweigh the positives. The Federal Reserve is scheduled to end a $600 billion bond buyback in June. The buyback, known as quantitative easing, is designed to pump banks full of money so they'll lend and also invest in the stock market.

Ideally, higher stock prices should prompt companies to sell fresh stocks and use the raised capital in job-creating new projects, although inflation often results with quantitative easing.

While I can understand and sympathize with the chairman and with the Fed, I think there comes a time where the Fed has to say 'We've done everything we could. I'd rather have them jumpstart the economy than be actually providing the fuel or the gasoline for the economy.

2. QE2 has failed miserably....I could see after with interest rates at zero where FED had to come up with some innovative techniques to try to jump-start the economy, but I think that the benefits have finally started to be outweighed by the negatives, whether it's the dollar or commodity prices or whatever you want to look at. With all that money flowing into the banking sector via quantitative easing — known by its abbreviation as QE2 — the dollar continues to weaken [ lost 51% of its value in the last 27 years against major currencies], which has helped fuel demand for commodities, including oil. Unforeseen political turmoil across the globe isn't helping things either.

3. German economy is booming despite the level of the euro...Germany is leading from the front to keep the euro-zone alive and kicking....Trained and productivity labor force, strong exports and strong leadership are helping the cause in this effort.

4. Euro’s fate will depend on how the ECB reacts to developments in the center vs periphery. Assuming peripheral risks stay constant this is bull euro.

Forecasts: EUR/USD would be at 1.52 by year end [from 1.40 at present]

Main near-term threat:

Uncertainties over ECB’s near-term policy tightening and Greek debt fears haunt the euro. Violent short-term moves in EUR-USD [in one direction or the other] cannot be ruled out.

European currencies:

No reason to own the euro relative to the Norwegian and Swedish krone. EUR/GBP profile does suggest you can only be a GBP bear for a little longer.

Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to kindly execute their own due diligence before signing or entering into any financial contact or strategic investment. All financial transactions carry a RISK.

Monday, May 9, 2011

US federal reseerve is creating a commodities bubble--By Shan Saeed

Is commodity market a bubble? By Shan Saeed

The recovery is questionable and investors should buy on setbacks in the market, but the risk is rising since the Federal Reserve could make a serious mistake going forward by going for QE3 and creating asset bubble especially in the commodities market.

Fundamentally, commodities were higher because of the Fed’s policy of quantitative easing [QE], basically printing dollars to buy up Treasury bonds in order to keep interest rates low making commodities buying cheaper and inflating demand.

Expectations of roaring U.S. inflation [ 5%] and a rapid decline in the value of the U.S. dollar [ 51% in the last 27 years] has led investors to snap up commodities such as gold and silver, agri-commodities, base metals and energy market pushing prices to absolute, if not yet real, records and pressuring oil to well above levels one would expect in a slow U.S. economy. *Financialization of commodities has commenced with financial investors taking on huge positions in the commodities market to benefit from rising prices.

* Source: Bank of Japan-March-2011

I think the Federal Reserve is now in a situation where it's on the verge of a policy error. Printing more money is not going to give confidence to the economy. I think it has let QE go on too long already. QE was the right policy when the US economy suffered from a lack of liquidity. That is not the problem now. There is plenty of liquidity in the economy. But no confidence which is the main driver for the US economy.

Banking lending is available to those who should be able to access it. Any new effort to make money available, or a blunder in removing the props to the economy, could create bigger problems.

Liquidity is not an issue in the market. Quantitative easing going on for so long is now in the situation where it has pushed the dollar below its fundamental valuation and has created a bubble in commodities.

Gold opened Monday back above $1,500 an ounce and silver recovered some ground lost after it collapsed 31 percent in a week from 2-7 May-2011. The dollar stabilized at around 75 on the U.S. Dollar Index, above its low point of 70 against a basket of global currencies.

The sharp decline in commodity values last week were warning signs investor should take seriously. Pull back and consolidation can take place very rapidly. The drop was typical of an asset bubble, but the setbacks in commodity prices were not enough to unwind their inflated values.

My strategic analysis for investors is that investors now should be underweight material stocks, miners, and commodities, calling the rush into commodities can be very volatile/risky. In fact, rising U.S. interest rates could trigger a “very bad time” for commodities in the next 12 months, since in it will suddenly become expensive to hold non-interest bearing assets. However, with low confidence in the US ECONOMY, will commodities take a pull back going forward is a big question? I think commodities will continue its upsurge.

I'm hoping that we're towards the end of QE on June 30, 2011. I'm hoping there isn't a QE3. If that isn't the case, then it will prove transitory. If they carry on easing, we have a problem. I think QE3 will enter the market by end of this year.

This is just a research piece and not an investment advice. Investors/readers are encouraged to execute their own due diligence before making any strategic investment or entering into financial contract or obligation. All financial transactions carry a RISK

Saturday, May 7, 2011

Commodities pullback should not be feared---By Shan Saeed

Commodities are taking a break for short term.....By Shan Saeed

The commodities pullback shouldn’t be feared. It should be welcomed. Although FINANCIALIZATION OF COMMODITIES* is happening at this point of time whereby big financial investors are taking positions in the commodities market. Financial investors include Governments[ Central Banks], commercial banks, hedge funds, pension funds, private equity group, sovereign wealth funds, big investors like Jim Rogers, Marc Faber, George Soros, Paulson, Chris Weber, Bill Gross and others....

* Bank of Japan-March 2011 Report

Lets analyze the thing about long-term bull markets. Most people are too impatient to profit from them. Part of the problem is the press/ media is so short-term oriented. They look at things from a day-to-day time frame. They need to be strategic in their approach..

Wall Street isn’t much better. Wall Street executives’ pay is based on quarter-to-quarter and year-to-year performance, so they hardly look further out. I make predictions on the basis of long term outlook for commodities.

However, the fact of the matter is big cycles travel in patterns of 15 years to 20 years. Like commodities in the 1970s or stocks in the 1980s and 1990s. Riding those bull moves is how you make money. By my estimate, the commodity bull market has another 5 years to 10 years left in it. However, overdue for a correction. I feel that the weakness the past few days is the start of such a correction. After 12 May 2011, its an interesting month to focus on, I expect Gold/Silver to consolidate before taking a pullback...

Here are some solid reasons to deliberate upon, why:

• I have stated in the past that the year 2008 for commodities was like 1987 for stocks. A short crash. The 1987 crash was followed by new highs by 1989 and then a 20 percent correction in 1990. The 2008 crash was followed by new highs in 2010. I think 2011 will be like 1990 in that we will see about a 20 percent to 25 percent drop in commodities.

• Emerging Markets are tightening. India, China, Brazil, Vietnam, Thailand, Korea and other nations are willing to admit rising commodity prices are inflationary, unlike the U.S. Federal Reserve, where some officials are in denial about it. Most new demand is coming from emerging markets, so I expect their tightening will hit demand.

• The trades were becoming too one-sided short the dollar and long commodities. Let’s clear some of the speculation out.

• The Fed won’t start QE3 right away. This will cause a dip in commodities. However, I expect by the end of the year or early next year, the Fed will launch QE3 and we will see inflation go up again. There's a balance sheet recession in the US economy. Price inflation can be controlled through monetary deflation according to Nobel Laureate from uni. of Chicago Late Milton Friedman.....

QE2, the $600 billion bond buying program using printed money that the Fed began in November will end June 30. This is important because since the financial crisis began, the stock has only gone up when the Fed is printing money. When the Fed ended its last money printing operation, QE1, on April 1 last year, the stock market began to stumble very quickly in May resulting in the May Flash Crash followed by a bad summer for stocks. The bad summer only ended when Fed Chairman Ben Bernanke announced that he would do a second round of money printing.

Hence, a number of investors who have invested in stocks may begin to pull out ahead of the end of QE2 to avoid the downward turbulence that may follow. Already, there are some downtrend in other investments that have likely benefited from the flood of cash that Fed has put into our economy. In particular, silver seems to be leading the way in this shift. I advised few investors to sell their silver when it hit $47-$48 fearing that it had simply run too high too fast and was ripe for a big pullback.

This pullback has spread to other commodities, such as oil and gold. This trend is also due to the poor economic news lately on the slow growth of the GDP in Q1 — almost a 40 percent reduction in growth from Q4 and steady increases in initial jobless claims. But, it may dovetail right into investors pulling their money out of riskier assets in advance of the end of QE2. When QE2 stops many investors fear that higher risk assets, such as commodities, gold, silver and stocks, will fall.

This would further a trend in the market toward what’s called risk on/risk off movements. This means that when the market fears risk it moves out of ALL risky assets — stocks, gold, commodities — and moves into less risky assets, primarily bonds.

Hence, it is hard to balance a portfolio if all risky assets are moving in the same direction. I think this will change and commodities and gold/silver will de-couple from stocks, but that clearly isn’t going to happen this summer.

So be prepared for turbulence in the higher risk investments leading up to and just after the end of QE2. The big question is when will Ben start the printing presses again i.e QE3. My view is that he will have to at some point, maybe by end of this year but I can’t say exactly when he will decide to do so. And, when he does, it will more likely be in the form of an open ended commitment to “print as needed” rather than a specific amount, such as the $600 billion for QE2. It will be an interesting story to watch unfold going forward... One thing I can be sure of is that the uncertainty surrounding the effect of no more money printing and the uncertainty surrounding when or if it might begin again will produce a lot more volatility in the market during the summer. Sorry, no summer vacation for investors in 2011 or 2012 !!!!!!

All signs point toward a commodity pullback.


I would think that the Commodity Channel Index [CCI], which peaked around 691, will pull back to the 550 area, at which time I would buy commodities strongly in anticipation of the big dollar crisis that should hit in 2013. Dollar and debt of US economy bubble will burst. Dead dollars dont bounce..Inflation and unemployment are drag for the US economy. Its inevitable. Like a train coming at you and you are not going to stop it by standing in its way. You need to remove the coffin now. Its 2013, dollar crisis will hit the global financial markets.

Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before entering or signing or making any strategic financial investment or contract or obligations. All financial transactions carry a RISK.....