Palin is Great Choice for VP

I went to CNN’s website to find out what the Left was saying about Gov. Sara Palin's selection to run as VP with John McCain. Predictably, most of the Lefties are crowing that McCain made a huge error. They are saying that Gov. Palin is a lightweight, nominated for her looks and because she is a woman, that she won’t pull any moderate women voters because of course, they all vote as one for Pro-Choice, which is always a woman’s number one election issue.

As a centrist who was looking for a reasonable option in this election, I am elated that the Lefties are so over-confident and are displaying so much hubris and arrogance. There are plenty of women in the middle, who like me, just want a good moderate Presidential / VP option. How many women want a smaller government and a society where the private sector solves social problems and doesn’t want government to control their lives?

I am sure there are many centrist women both Republican and Democrat, who were a large part of Hilary Clinton’s constituency. With Hilary as the Dems Presidential candidate, those votes were a lock and would have made McCain's task almost impossible. The same moderate women who would have voted for Hilary will find Gov. Palin very attractive as a VP candidate. And in the process of examining this ticket, they will find that Sen. McCain is not the caricature of a Bush-clone that the Dems want to make him. With the illumination of Gov. Palin, they will see McCain as the courageous, passionate, ethical, maverick that he is.

Gov. Palin was put on the ticket, not because she was a woman, but because she is a kindred spirit and represents the American ethos better than any other VP candidate. This will be a great election season and I look forward to debating my Dem friends as they come to realize what a brilliant move by McCain, this really was today.

Could the Commodity Boom be Nearing an End?

I found a provactive post on the Barrons Online site this week. It was authored by Randall Forsyth, one of Barrons' editors. The idea proposed is that commodities will decline as a result of a backlash or reaction against recent trade deficits in the USA. I accept this argument over the intermediate term. I still think Commodities are in a long term bull market, but it won't surprise me if they take a couple years off while the world economy adjusts to their higher prices.

A strong argument can be made that American trade deficits will continue shrinking due both to a weakening global economy, already under way, and a domestic political reaction reinforced by election pledges of the two Presidential candidates. Specifically, protectionist actions as pledged by Obama, an increase in taxes on the wealthy and corporate windfall taxes against several multi-national companies will all accelerate a shrinking of the American trade deficit. At the same time, to counter inflation imported from America, foreign treasuries will dump their dollars and tighten their own lending standards to reduce liquidity. The net effect is to create a dollar deflation, rather than inflation. It will also raise our own Treasury interest rates as there will be less foreign demand for dollars. This reduces economic stimulus domestically.

As trade deficits decline and move toward a surplus, the dollar naturally strengthens. A stronger dollar is inherently bad for commodities priced in dollars. But what would be bad for commodities would ultimately be good for domestic financial based industries like Banking and Technology. We may be at a crossroads, so consider this possibility while planning your investment strategy for the next six to 24 months.

THURSDAY, AUGUST 21, 2008
UP AND DOWN WALL STREET DAILY

Is the Global Liquidity Tide Turning?
By RANDALL W. FORSYTH

MY INVITATION TO HOB-NOB with the world's monetary muckety-mucks in Jackson Hole this weekend got lost in the mail, yet again. Amidst the Grand Tetons of Wyoming, the Federal Reserve hosts its end-of-summer junket for the movers and shakers and hangers-on to discuss the key monetary matters of the day.

Too bad they are little more than corks tossed on violent seas of global forces totally beyond their control.

The inflationary surge now hitting the U.S. is being felt in spades overseas. Countries that have linked their currencies to the dollar, either explicitly or de facto, are feeling the price effects of the greenback's slide in the past seven years. But as the credit crisis pushes the U.S. economy into recession, the process that pushed prices up abroad could go into rewind.

In a world that's become so interconnected, it seems almost superfluous that what happens in America doesn't stay in America. But it goes beyond the old saw that when the U.S. sneezes, the rest of the world catches cold. The U.S. economy, while the largest in the world, no longer is as dominant. So, the process takes some explanation, so bear with me.

To varying extents, countries in Asia and elsewhere in the world for the past decade or so have tried to keep their currencies' exchange rates relatively stable with the dollar. The U.S., after all, was their best export customer and they all wanted to keep it that way. The key example has been China, which had held the renminbi's exchange rate versus the dollar in a tight band.

With China's burgeoning trade surplus with the U.S., Chinese exporters would accumulate a surfeit of greenbacks. Under freely floating exchange rates, the dollar would decline and the renminbi would rise.

To prevent that, China's central bank would buy up the surplus dollars to keep its currency within a tight band. In the process, the central bank sells renminbi, thereby increasing their supply. The process is the same as Money and Banking 101 textbooks, where the Fed buys Treasury bills, increasing banks' reserves and thereby the money supply.

Other Asian countries, not wanting to lose export competitiveness to China, similarly buy dollars to keep their currencies capped. In the process, they also expand their domestic money supplies.

Of course, these central banks don't keep greenbacks in their vaults but invest the dollars in interest-bearing assets, such as Treasury securities, agency securities such as those from Fannie Mae and Freddie Mac, and U.S. mortgage-backed securities. Private institutions such as banks and insurance companies got funkier and bought higher-yielding mortgage paper rated triple-A but backed by subprime loans.

Economists dubbed this ad-hoc arrangement as Bretton Woods II after the quasi-fixed exchange-rate system lasting from the end of World War II until the early 1970s. Under Bretton Woods I, currencies would be exchanged for dollars at a fixed rate. The dollar, in turn, would be redeemable in gold at $35 an ounce to foreign monetary authorities (U.S. citizens couldn't turn in their greenbacks for gold.)

When the U.S. external deficit grew and foreign central banks found themselves with more dollars than they wanted, they sought to exchange them for gold. On Aug. 15, 1971, President Nixon ended that pledge to redeem dollars for gold, and a year and a half later, the present system of floating exchange rates came into being.

Under Bretton Woods II, foreigners would hold dollars out of their self interest, not because of any U.S. pledge behind its currency. Be that as it may, for years it has been a wonderful system rivaling perpetual motion. The more Americans spent in excess of their income, the more the rest of the world lent to them. That resulted in the famous "conundrum" described by former Fed Chairman Alan Greenspan—that longer-term interest rates remained relatively low even as the U.S. central bank hiked short-term rates.

To be precise, the U.S. current account provided a river of dollar liquidity to the rest of the world. Some of it was offset—sterilized in monetary parlance—by foreign central banks by raising interest rates, increasing bank reserve requirements or selling bonds. For the most part, however, the process inflated the credit bubble.

Like its predecessor, Bretton Woods II became an engine of inflation. Buying up the excess dollars forced banks to expand their money supplies, sending inflation skyward. Some countries that had tied their currencies to the dollar, such as Kuwait, abandoned that peg to fight inflation and no longer import the effects of America's profligacy.

The debasement of the dollar was most evident in the price of gold, which climbed from around $300 an ounce at the turn of the century to a peak of $1,000 last spring. As with the breakdown of Bretton Woods I, this fall in the dollar is being manifested in a surge in oil and other commodities. Foreign economies, which are more dependent on tradeable goods, are feeling this upsurge in prices most acutely.

But is this engine of inflation, the credit bubble that resulted in the massive U.S. external deficit, about to go into reverse?

At this point, it is speculative to conclude that. But alert investors should consider that possibility.

Indeed, Barron's Roundtable member Marc Faber suggests this could happen in his latest missive to subscribers to his Gloom Boom & Doom Report.

A declining U.S. current account deficit could lead to a tightening of global liquidity as foreign central banks accumulate less dollar reserves, which are recycled into the global capital markets. The U.S. current account gap has shrunk from a peak over 6% of gross domestic product to under 5% as weakening consumer demand has cut imports while exports remain relatively robust as growth continues in emerging economies and the dollar is cheap.

As the growth of foreign monetary dollar reserves slows, the dollar is boosted and gold and commodities are hurt, Faber points out. Further, he writes:

"I have a friend who is an outstanding economist who thinks that the Asian current account surpluses will shrink in 2009 by about 50% from their peak in 2007. In this scenario, globally liquidity would become extremely tight and would have a devastating impact on asset markets including real estate, commodities, non-AAA bonds and equities. Such a decline in the Asian current account surpluses would cut the U.S. current account deficit by half and lead to a very strong U.S. dollar."

Let's recap. The credit crunch that has resulted in the U.S. recession (that's yet to be officially recognized) is being transmitted abroad by the reduction of the U.S. current account deficit and the quasi-fixed exchange-rate currency system.

Indeed, if Asian currencies begin to come under downward pressure, either in an international flight to quality or as a consequence of a declining trade surpluses, their central banks could use their cache of foreign exchange—mainly dollars—to stabilize their exchange rates. That would turn them into sellers of dollar assets or at least less vigorous buyers.

The inflationary tide in global liquidity could be turning as a result. The sharp break in gold suggests that could be happening, and that's being transmitted through the commodities markets. The dollar has stopped going down, and even has flattened out against the renminbi. The bear market in risk assets, such as stocks and particularly the Chinese market, also is symptomatic of a liquidity squeeze. As for the U.S. housing market, it is at the nexus, resulting in wealth losses for borrowers and a reduction in lenders' ability and willingness to extend credit.

That's something that the crowd in Jackson Hole can scarcely control. So they might as well enjoy themselves on their junket.

Endgame Nears For Fannie and Freddie - Barrons Article

I have attached the text from a great Barrons piece on the reorganization of Freddie and Fannie. This will be bitter medicine for owners of its stock, but necessary to salvage our home mortgage financial system and stop the housing price declines. If you own FNM or FRE, I would sell on Monday for sure:



MONDAY, AUGUST 18, 2008


The Endgame Nears For Fannie and Freddie
By JONATHAN R. LAING

The almost inevitable government recapitalization of Fannie Mae and Freddie Mac will likely wipe out investors—and management.

IT MAY BE CURTAINS SOON FOR THE MANAGEMENTS and shareholders of beleaguered housing giants Fannie Mae and Freddie Mac . It is growing increasingly likely that the Treasury will recapitalize Fannie and Freddie in the months ahead on the taxpayer's dime, availing itself of powers granted it under the new housing bill signed into law last month. Such a move almost certainly would wipe out existing holders of the agencies' common stock, with preferred shareholders and even holders of the two entities' $19 billion of subordinated debt also suffering losses. Barron's first raised the possibility of a government takeover of Fannie and Freddie in a March 10 cover story, "Is Fannie Mae Toast?"


Martin Kozlowski

Many of Fannie's and Freddie's credit losses come from risky mortgages that the agencies bought or guaranteed in recent years to boost their market share.
Heaven knows, the two government-sponsored enterprises, or GSEs, both need resuscitation. Soaring mortgage delinquencies and foreclosures have led the companies to gush red ink for the past four quarters, and their managements concede the outlook is even grimmer well into next year. Shares of Fannie Mae (ticker: FNM) and Freddie Mac (FRE) have lost around 90% of their value in the past year, with Fannie now trading at $7.91, and Freddie at $5.88.

Similarly, the balance sheets of both companies have been destroyed. On a fair-value basis, in which the value of assets and liabilities is marked to immediate-liquidation value, Freddie would have had a negative net worth of $5.6 billion as of June 30, while Fannie's equity eroded to $12.5 billion from a fair value of $36 billion at the end of last year. That $12.5 billion isn't much of a cushion for a $2.8 trillion book of owned or guaranteed mortgage assets.

What's more, the fair-value figures reported by the companies may overstate the value of their assets significantly. By some calculations each company is around $50 billion in the hole. But more on that later.

Bringing Fannie and Freddie to heel will be difficult for the Bush administration, despite the GSEs' (Government-Sponsored Enterprises') parlous financial condition. Consider their history. In the early 1980s Fannie was effectively insolvent, but the government allowed it to continue operating. Eventually long-term interest rates dropped, bolstering the value of the company's mortgages and bringing it back from the brink. Earlier in the current decade Fannie and Freddie successfully fought a full-scale attempt by the White House and some brave Republican legislators to clamp down on their operations, after they were caught perpetrating accounting frauds.

Note, too, that Fannie and Freddie have nonpareil lobbying operations and formidable political strength, owing to their hefty donations and penchant for hiring former political operatives. Besides, the agencies claim they've landed in their current predicament through no fault of their own. As Freddie Mac Chairman and CEO Richard Syron recently put it, the GSEs have been hit by a "100-year storm" in the housing market, accentuated by some higher-risk mortgages that they were forced to buy to meet government affordable-housing targets.

The latter contention is more than disingenuous. A substantial portion of Fannie's and Freddie's credit losses comes from $337 billion and $237 billion, respectively, of Alt-A mortgages that the agencies imprudently bought or guaranteed in recent years to boost their market share. These are mortgages for which little or no attempt was made to verify the borrowers' income or net worth. The principal balances were much higher than those of mortgages typically made to low-income borrowers. In short, Alt-A mortgages were a hallmark of real-estate speculation in the ex-urbs of Las Vegas or Los Angeles, not predatory lending to low-income folks in the inner cities.

In the current bailout the Bush administration is playing from strength. Not only have the GSEs' stocks been decimated, but trading in their debt -- whether the $1.6 trillion of corporate obligations or $3.6 trillion of mortgage-backed securities the two have guaranteed -- would have been in disarray had the recent housing bill not made explicit the U.S. government's backing of that debt. Even so, GSE debt spreads are starting to widen, relative to Treasury yields.

An insider in the Bush administration tells Barron's Fannie and Freddie are being jawboned by the Treasury Department and their new regulator, the Federal Housing Finance Agency (FHFA), to raise more equity. But government officials don't expect the agencies to succeed. For one thing, only a "capital raise" of $10 billion or more apiece would have any credibility. Yet, what common-stock investors would advance that kind of money to entities that have market capitalizations of $8.5 billion (Fannie) and $4 billion (Freddie), especially as the FHFA will use its new powers to boost dramatically the regulatory capital the GSEs must have in coming years?

Just as disconcerting for prospective shareholders, all but $300 million of the $7.2 billion in equity Fannie raised in the second quarter was lost in the very same quarter, according to its fair-value balance sheet. With credit losses surging at both agencies, $20 billion in new common equity wouldn't last long.

The cost of selling new preferred stock, meanwhile, would seem to be prohibitive for Fannie and Freddie. The dividend yields on their preferreds have soared to around 14%, in part because of a recent rating downgrade by Standard & Poor's. Yields that high would blight the future earnings prospects of both concerns.

Should the agencies fail to raise fresh capital, the administration is likely to mount its own recapitalization, with Treasury infusing taxpayer money into the enterprises, according to our source. The infusion would take the form of a preferred stock with such seniority, dividend preference and convertibility rights that Fannie's and Freddie's existing common shares effectively would be wiped out, and their preferred shares left bereft of dividends. Then again, the administration might show minimal kindness to preferred shareholders; local and regional bankers have been lobbying the Bushies not to wipe out the preferred since the bankers own a lot of that paper and rely on the bank preferred-stock market for much of their own equity capital.

An equity injection by the government would be tantamount to a quasi-nationalization, without having to put the agencies' liabilities on the nation's balance sheet, and thus doubling the U.S. debt. Treasury would install new management and directors at both, curb the GSEs' sometimes reckless investment and guarantee operations, and liquidate in an orderly fashion the GSEs' troubled $1.6 billion in on-balance-sheet investments. Then the companies could be resold to the public without their explicit government debt guarantees, or folded into government agencies like Ginnie Mae or the FHA.

Should the Bush administration lose its nerve and kick the GSE bailout forward to the next administration, a similar scenario still might unfold. In a column last month in the Financial Times, Lawrence Summers, Treasury Secretary in the Clinton administration and an important economic adviser to Democratic presidential candidate Barack Obama, opined that in view of the sad financial condition of Fannie and Freddie, both should be thrown into government receivership to protect the U.S. taxpayer. Republican presidential contender John McCain, for his part, fulminated in a recent op-ed in the Tampa Bay Times that if a dime of taxpayer money is used to bail out the companies, "the managements and the boards should immediately be replaced, multimillion-dollar salaries should be cut, and bonuses and other compensation should be eliminated."

THE WHITE HOUSE BEGAN to worry about Fannie's and Freddie's solvency in February, when both agencies reported capital-shredding losses for the fourth quarter of 2007. Adding to the official concern was the deepening turmoil in the residential- mortgage market, and the need for the agencies to keep mortgage money flowing.

The White House dispatched Treasury's then-Undersecretary for Finance Bob Steel to cut a deal with both Fannie and Freddie. In return for the pair doing its best to raise $10 billion each in new equity, the administration would eliminate the cap on mortgage paper the agencies could put on their balance sheets, and lower the increased minimum regulatory capital requirements imposed on the GSEs after their previous accounting scandal.

According to our source, both agency managements seemed amenable to the March deal, though they demurred on raising new capital immediately. They thought, and Treasury agreed, that any share flotation would have to wait until May, when first-quarter earnings were scheduled to be announced, providing investors with material information. Come May, Fannie kept its side of the bargain by raising $7.2 billion in mostly common equity. But Bush officials were shocked when Freddie failed to follow suit on an announced $5.5 billion equity raise.

According to our source, Freddie's Syron offered a variety of excuses. He said neither he nor several senior board members wanted to dilute current shareholders since the stock had fallen from 67 in the summer of 2007 to around 25 in May. He also insisted Freddie could do nothing on the core capital front until it had completed its formal corporate registration with the SEC under the 1934 Act. That argument seemed fishy, since Freddie had raised $6 billion in preferred capital the previous November, and like Fannie has an exemption from registering stock issues with the SEC. A Freddie Mac spokesperson says the company was acting according to legal advice.

Freddie succeeded in exploiting the Prague Spring of regulatory forbearance. Monthly statements show it bought even more mortgages, gunning the growth in its retained, on-balance-sheet portfolio by 11% in the second quarter. By reducing its hedging costs, it also doubled its vulnerability to loss from interest-rate moves. It appears Freddie was hoping a Hail Mary Pass with the portfolio would somehow reduce its spiraling operating losses.

In retrospect, the agency meltdown seemed inevitable as the housing crisis deepened and credit losses mounted. On July 7 an analyst report claimed both agencies might have to raise substantially more capital because of a change in accounting regulations. Both stocks went into free fall, tumbling nearly 50% on the week.

The Bush administration feared the stock collapse would signal that the companies were heading for insolvency, and thus call into question the safety of their $5.2 trillion debt and guarantee obligations, despite the government's implicit guarantee of that paper. The impact of a failed GSE debt auction would be global and catastrophic, since foreigners, including many Asian central banks, owned $1.5 trillion in Fannie and Freddie paper.

After a frantic weekend meeting, Treasury Secretary Paulson announced on July 13 a rescue plan under which the Fed, and ultimately the Treasury, would backstop all Fannie and Freddie debt, and buy equity in the companies should that be necessary to bolster them. The omnibus housing bill passed and signed into law several weeks later codified all this in addition to establishing a new regulator for the GSEs with strong receivership powers.

In the weeks since, Freddie has continued to put off raising capital, even though it finally completed its registration as a corporation with the SEC. Syron said when second-quarter earnings were released Aug. 6 that the company was waiting for a more "propitious" time. One might argue it came in May, when the stock was 25, not 6.

BOTH GSES CONTINUE TO NOTE their so-called core or regulatory capital levels remain comfortably above the minimum required by federal regulation. This ignores what would happen, however, if their balance sheets were marked to fair value -- or if their fair-value estimates were hugely inflated, as indeed may be the case. Both balance sheets, for one, contain an entry called deferred tax assets that bulks up Fannie's fair-value net worth by $36 billion and Freddie's by $28 billion. These assets don't represent real cash but tax credits the agencies have built up over the years that can be used to offset future profits. But, since the tax assets can't be sold to a third party, or disappear in a receivership or sale of the company, they are disallowed in the capital computations of most financial institutions. Ironically, the worse a company does, the more capital cushion this asset creates.

The Bottom Line

A quasi-nationalization of Fannie Mae and Freddie Mac could involve the issuance of new preferred stock. The companies' assets may be worth negative $50 billion each.The companies also appear to have boosted their capital ratios by sharply curtailing their repurchase of soured mortgages out of the securitizations they've guaranteed. In the fourth quarter of last year, for instance, Freddie Mac took a loss of $736 million on loans repurchased. In this year's first quarter that figure dropped to $51 million -- a stunning decline in view of the continued deterioration of the housing and mortgage markets. Instead, the company made the interest payments to bring the mortgages current -- a much smaller outlay, but a tactic that only pushes an inevitable loss forward into future quarters. In Fannie's case, by postponing the buyback of bad loans the company avoided more than $1 billion in second-quarter charge-offs and a hit to its net worth.

Other numbers also give pause. Less generous marks to Freddie's $132 billion investment holdings in private-label subprime and Alt-A securities would lop another $20 billion off its net worth. And, more than likely, Fannie's credit reserves of $8.9 billion won't fully protect it from future losses on $36 billion of seriously delinquent mortgages on its $2.8 trillion book.

After accounting for deferred tax assets and generous asset marks, Fannie and Freddie each may have a negative $50 billion in asset value, and little prospect of digging themselves out of the hole. Whether Fannie and Freddie are liquidated or nationalized as a prelude to privatization, in their current form they won't be missed.

Updating Jim Rogers' World View

It has been a while since I have checked in on Jim Rogers and his world view. He is the most traveled and convincing speaker / investor in global markets, and has become decidely anti-American, even though he hales from Alabama. He recently moved his family to Singapore to get closer to the locus of future world growth, Asia, and more specifically China. He also is fleeing the American dollar, which he considers to be doomed.

Jim Rogers first gained fame as the partner of George Soros managing the Quantum Fund in the 1970s. He did very well for himself garnering a net worth over $100M by 1980. Now, almost 30 years later, he has grown that to over $1B, according to news reports. Since the late 1990s, Rogers has been an outspoken bull on commodities. His self-designed commodity index has returned almost 500% over that time. Here is a chart of the index performance over the past 3 years (since trading began in 2005):

The "sell signal" is clear at about 37.50 on this chart. The Sell occurred on around July 20, which was very close to other commodity downturns (some of which did begin back in June). But observing this Sell would save quite a bit of future losses until commodities strengthen.

But what sets Jim Rogers apart more than his wealth, is his unique contrarian perspective on the world and investments therein (though, maybe a little less contratrian today, then in 2000 during his world tour of investment locales, with wife Paige). (see "Adventure Capitalist").

I am leary about commodities over the next 6 months to a year, as the world economy temporarily slows and the US dollar strengthens relative to other weakening economies (mostly Euroland). I recently sold almost all my commodity stocks, except for one mutual fund (VGPMX) and my Canroy stocks.

But, I agree with Jim Rogers' long term thesis that the balance of world economic power will shift to Asia over the coming 20 years and will be marked by a long running shortage of materials while enduring increasing demand. I will invest accordingly and keep an eye on the dollar to signal my move back to commodities and energy.

I found a couple recent stories on Jim Rogers and will provide a link to them so you can read up and learn what Rogers is up to:

The first is "Rogers Sill Bullish on Commodities" August 15, 2008 at the "Living off Dividend website: http://livingoffdividends.com/2008/08/15/rogers-still-bullish-on-commodities/

The second story is from Bloomberg News which I have repeated below:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aLr71mSZqOLI

Avoid Dollar `At All Costs,' Investor Rogers Says (Update2)
By Zhang Shidong

June 30 (Bloomberg) -- Jim Rogers, who in April 2006 correctly predicted oil would reach $100 a barrel and gold $1,000 an ounce, said investors should steer clear of the dollar as the U.S. economy slows and favor commodities this year.

The dollar has slipped 7.7 percent against the euro and 5.9 percent versus the yen in 2008 as the Federal Reserve cut interest rates to stave off a U.S. recession. Oil prices have doubled in the past 12 months, while gold is up 44 percent.

Avoid the dollar "at all costs", said Rogers, chairman of Rogers Holdings, in a speech in Shanghai today. "The best investments in 2008 are commodities and natural resources. Agricultural prices have much higher to go over the next decade. We have a shortage of everything, including seeds.''

Oil and metal prices in New York have surged as a slumping U.S. currency made them cheaper for non-dollar investors to buy as a hedge against inflation in a slowing global economy. The dollar has stabilized in recent weeks, with currency volatility falling by the most since 1999 this quarter.

The comments from Rogers, 65, come two days after he told investors at a conference in Nanjing not to "give up" on Chinese shares, which have made China the world's second worst performers this year. Rogers, who first started buying Chinese stocks in 1999, said he hadn't sold any of his holdings.

Commodity Bull

Investors failed to take heed today, as the benchmark CSI 300 Index extended an eight-month slump amid expectation government measures to slow inflation will hurt corporate profits. The gauge is down 53 percent from its Oct. 16, 2007 record and has dropped 23 percent in June. That would be the index's worst month since it was introduced in April 2005.

Rising food and fuel costs have helped to drive China's consumer prices to their highest in almost 12 years, prompting the central bank to lift interest rates six times last year and order banks to set aside a record amount in reserve to curb loan growth.

Speculation that the People's Bank of China would raise borrowing costs for the first time this year dragged the CSI 300 down by 5.5 percent on June 27.
Rogers, who now lives in Singapore, is best known for being a commodity bull since 1999, before the market started to rally in 2002. His Rogers International Commodity Index has more than quadrupled since it started in 1998.

The price of wheat, rice and soybeans reached records this year after adverse weather curbed global output and reduced stockpiles amid rising demand.

"Not High Enough"

Rogers is anticipating further gains in crude oil, which reached an all-time high of $142.99 a barrel on June 27. Futures were recently at $142.74.

"Crude oil prices are not high enough to stop people from consuming more energy,'' the investor said. "The bull market will not go to an end until supply and demand come to a balance.''

His comments today echo the themes in his latest book "A Bull in China: Investing Profitably in the World's Greatest Market,'' in which he tells investors to get out of the dollar, teach their children Chinese and buy commodities.

Rogers said last October he planned to shift all his assets out of the dollar, which fell to a three-week low against the yen on June 27. He predicted last month that the U.S. currency's decline would pause in the second quarter because it was overdone.

To contact the reporter on this story: Zhang Shidong in Shanghai at szhang5@bloomberg.net.

Playing the Rotations at the Bottom

Today I am sharing with you some of my recent experiences in "playing the rotations". While I don't have any evidence that the current market is typical of a deep market selloff, like we just experienced (I would need to research in detail 2002-03 and 1991-92 to make a proof), it is logical. At the bottom of a deep selloff, the typical pattern is a "smiley face". The price action decelerates from the selloff into a long "basing" pattern where there is much treading of water. Traders will just move between sectors to get some action during this sideways trend. The market will consolidate behind typical early stage leaders as the market moves up the right side of the smiley face, which might be 2009 or even 2010 given the depth of this selloff.

A good example of the "Smiley Face" basing pattern is the US Currency vs. other world currencies. There is an ETF with ticker of (UUP) that allows us to chart this pattern. Notice how the declining trend is broken by the right corner of the smile. The breakout above the declining trend line at around $22.70 on July 17 (same day as Financials bottomed) was the buy signal.

So, for those who want to stay active in the market, a shorter term trading mentality is required, for at least part of the portfolio. A close eye on individual sectors and their trends along with well defined buy limits and sell stops (at chart bottoms and tops) are a must.

Today I made a couple trades that reflect this concept. I have been playing the basing of the Financials sector, as expressed by XLF or its levered cousin, UYG on the long side from $20 on up. But when UYG gets to $23, I jump back into SKF, the inverse ETF fund for the Financial sector (goes up when financial stocks go down). This pattern has been very solid since late July and I have participated in each direction each time, using sold put options on the near month, making profits on both the up and downside. This trend could continue much longer. If the financials bottomed on July 17, it will take some time before they regain their earning power so that the stock prices can advance significantly. In between, the price will just gyrate in a fairly narrow zone, as it has for a month.

I have created a "Prophet Chart" on the UYG to illustrate this action and the potential buy and sell levels based on the short term trends (usually only a few days long each). It is easy to see the pattern than is now established between $20 and $23 on this chart. This sideways action can continue for some time, until fundamentals change significantly one way or the other.

Another chart that shows promise for the sideways action is the Tech index, XLK. There is a levered version of this sector as well, the ROM which will provide a lot of volatility in its near term options. Because the Tech sector was not as overpriced in 2007 and so was not as damaged by the selloff, it is possible, even likely, that the XLK will break out sooner rather than later. Tech is typically an early cycle sector. As soon as the economy looks to recover, the Techs will break out. See the flag pattern on the chart? This is the narrowing funnel trending the highs and the lows. If the price action breaks out of a "flag" pattern, it will have quite a bit of momentum. Watch to see if XLK breaks out to the high side, at around $25.

Finally, let's look at the Energy sector, XLE. Here is a sector that has had a large correction, but looking over a one year time frame, it can be shown that the correction may have just run its course, as it approachs the bottom from January this year. There is definite trading support for oil at $100 a barrel. So, unless we are entering a deep global recession that shuts down demand, the trading action shows that we are nearing the bottom of the materials / commodity selloff and are getting ready to bounce (and may have done so today). The price line today is just moving above the downward trend line of the recent highs. The best way to play this sector is to the upside, but with very tight stops to get out if the economy does change the fundamentals of the commodity boom, drying up demand.

See you soon.

Watching the Indexes for Direction

Jeff asked me yesterday to keep an eye on a few key charts for signals to buy or sell within that sector, or the sector itself. So, I will monitor the S&P 10 sectors plus a few other specialty sectors like Materials and Mining. I will post them here regularly, as there are changes to report.

We talked about Technology. After hearing the Cisco news yesterday, it seems like Tech might be taking a little turn for the better. Tech is a good sector to buy as a sector since there are a lot of casualties in that sector. The chart for the S&P Tech is XLK. It does show a recent breakout where the third green arrow was made two days ago, so now is a time to buy the sector, or good stocks within the sector. I hope this change in trend helps out Microsoft, which I have in a big way:




Another sector to monitor is the Energy sector. We recently looked at the OIH (yesterday it was in a report I sent out). Jeff was concerned about the prospects of equipment builder RIG, which has been declining steadily along with the entire sector. You can make the comparison yourself, but both charts are down about 25% from their high and are trending lower.

RIG is getting very cheap by all measures (P/E, P/CF, Book Value, PEG, etc). But what about the overall Energy Sector, XLE? It is in a downturn and should be watched for a break to the upside. But there is no rush. When a chart is in steep decline as this one is, it can continue quite a bit lower. Don't try to catch the falling knife, is the saying. A cheap Value guy like me, has been stabbed numerous times by not heeding this advice. The 12 month low in XLE is 10 points lower than where it is today (62.50). Don't fight the tape is another of the oldest sayings in investing. We should wait till we get three Green arrows, before we commit new money to Energy stocks.

Finally, we should continue to watch the Banking and Financials sector as it is the source of all our economic problems (Housing is a huge contributor to economic decline with Mortgages and Building Materials in the tank, plus high construction unemployment). When Financials turn higher for good, the economy will be on its way back. But the chart right now suggests that while it may have made a bottom on July 23 when the XLF spiked lower to $17.50, it may also take a long time to come back. It looks like a sideways phase has begun where the stock price will form a "base" in the chart. This phase could take months, so represents a trading opportunity as the line wiggles within its range between 20 and 23 (today, it is right in the middle of that range, so no action is called for).

Finally, I would like to congratulate Jeff for getting out of Walmart recently, after a nice gain. It is down big today, and the chart would not have got him out till today's drop. It had just recently started moving up to over $60 off a holding level around $57.50. Earlier the past 12 months it was as low as $42.50, so had been making higher highs for some time. This is typically very bullish. But, today's drop is below the MA, so it is likely it will cause a breakdown in the indicators and create a Sell signal, unless quickly reversed. Jeff got out in front of this and saved himself a few bucks. Sometimes instincts are better than charts.

Gartman calls for end to Commodity Boom

Continuing from where I left off yesterday, I have had some some additional thoughts overnite about the natural resource / energy stocks. My thinking was reinforced this morning (Wednesday, August 6) by comments from Dennis Gartman on CNBC. He came on and unequivocally said the bull market in commodities is over. Now, he is a trader, and he did not frame that comment with a period of time. Later he suggested that it was over for the near term (which might be 6 months to two years for all I know). During the show, Gartman suggested that oil would not top $145 a barrel anytime soon. This is not so different from my thinking. I have been watching the commodity charts and they all look the same, and it is not good for commodities. BHP does a nice job of representing the general natural resource trend, as it has a little of everything, including coal, gold, copper and iron.

Notice that the stock price broke below the Moving Average about July 1. About the same time, red flags occurred on the MACD and Stochastic trends. Investools analysis suggests that three red flags are a strong sell signal. Other technical analysis suggests that when previous support (the moving average) becomes resistance, it is a further indication the trend has changed (see the bounces off the MA on July 14 and again on about July 21). Because all the commodity charts show this pattern, it may indeed be over, as intuitively we may feel that way (notice gas prices have dropped the past 2 weeks).

The second MA test is interesting for its timing. It was on July 23 that the financials broke out to the upside after Fannie and Freddie were rescued by the Feds. We have also looked in the recent past at how Commodities and Financials are countertrend of each other right now. So, the breakdown in commodities in July has supported the surge in Financials and the broader stock market (aided by Fed support for the banks, of course). No suprise here, because commodities are a surrogate for a weak dollar, and anything that helps the dollar hurts commodity prices denominated in US dollars.

How long will this last? Yesterday I suggested that the Chinese Olympics may be the signal of the top for the near / intermediate term for natural resource stocks (for the next several months). So much talk has been about the huge infrastructure buildout in China, and how China was rushing to get ready for the Olympics. As the Olympics begin, everyone will take a collective breath and know that the big buildout is done. Traders will respond accordingly using this as a signal.

Probably more important than this symbolism is the fact that the European and Asian economies are cooling off, most likely in response to decreased consumer demand in North America. Because much of consumer demand has been financed by loose credit in our banking system, it may not reignite until housing and banks have bottomed. Again, it is likely that won't happen before mid-2009.

What is a reasonable strategy until that time? I would suggest it is similar to the strategy followed until now, which is to invest in high dividend stocks and funds. This play has hurt me some the past year, as Value stocks really were out of favor. Some of that was due to the focus on international and commodity stocks, which don't issue dividends. The rest was the fact that much of the high dividend stock world comes from out-of-favor sectors, like banks, insurance, REITs and consumer products.

But, eventually this high dividend strategy will prove correct. All dogs have their day. So, it is best to stick with the strategy knowing it will eventually pay off. As long as we stay diversified with our high dividend investments, we won't be hurt by individual company failures (ala Bear Stearns). DHG is my favorite high dividend stock fund right now. Not because of recent performance, but because it has a solid strategy and continues to make its dividend payments without reduction. DHG has become much more of a commodity / natural resource play the past 6 months. When it first was introduced, there was quite a bit of financial exposure for the high dividend bank stocks. But the management team moved away from financials late last year and avoided most of the carnage early this year. To demonstrate the degree to which DHG now reflects the trend in commodities, see the attached chart comparing DHG (red line) to BHP (blue line) over the past 6 months. So, if commodities do bounce back, DHG will go with that trend. But if commodities continue to lag the market, DHG will be able to offer high dividends to offset the decline in commodity stocks.

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Two Posts: Living Off Dividends and Current.com

Today I am sharing to other sites where I blog with fellow writers. One is "Living Off Dividends" a site devoted to strategies to generate cash flow and yield leading to financial independence the other is the Current.com

LOD is a younger person (33) who regularly posts his thought on generating income for retirement. But today, he posted on the failure of the American economy with which I heartily disagreed. Here is his post and my rebuttal: http://livingoffdividends.com/2008/08/01/cartoon-capitalism/#comment-11865

The second post string I want to share with you was started by my son, Jared. I love that he gets involved on the net and shares his opinions on what matters to him, which often require some research on his part. What a great way to learn and share. This post, and my eventual contribution towards the bottom, is on the politics of the Middle East: http://current.com/items/89149098_why_there_is_no_palestinian_state_today?xid=76#89161677

Enjoy your weekend!!

PWE vs. XOM: Followup

A few days ago I wrote Jake Schmidt about what I saw was the problem with the large integrated oil companies like Exxon (XOM), Conoco (COP) and Chevron (CVX). Namely, the integrated oils are saddled with both diminishing reserves in more politically dangerous and expensive locations, and alternately, generate much of their income from refining and retail operations which have been squeezed by tight crude supplies and decreasing crack spreads.

This week's earning news has backed up that assertion as XOM on Thursday and CVX today, have disappointed the Street and have been sold off as a result. I had suggested that instead, we should just buy more Pennwest (PWE) or other favorite Canroys. They continue to be a great bargain as shown by the yield and cash flow multiples. Or, if a little more leverage and return is desired, sell the puts short.

Today (August 1), the PWE September $30 put (PWEUF) has a premium of $1.65. This generates a return of over 5% on the premium, but with the leverage of a margined short put (20% margin), the actual return is over 25%. When the 42 days to expiration is annualized, that simple return is around 250%. High return, high risk, so what is the risk? Getting PWE assigned at $30 a share if the price drops further before expiration on September 20. That PWE stock price is based on the cash flow generated by an average crude oil price of $80 a barrel, with the PWE hedge program that is in place. What is the risk of oil going below $80 in the next 12 or 24 months? I think pretty low. And if the stock is "put" to you the option seller, it is returning 12% on dividend yield right now, while retaining almost 50% of its cash flow for reinvestment and acquisition.

I continue to think the Canroys are the way to play the energy market. If not PWE, take a look at Daylight (DAYYF), Harvest Energy (HTE), Provident (PVX), Baytex (BTE), or Pengrowth (PGH).