Wednesday, July 20, 2011

Intel net edges up 2%

By Benjamin Pimentel

Intel Corp. INTC  on Wednesday reported a second-quarter profit of $2.95 billion, or 54 cents a share, compared with a profit of $2.89 billion, or 51 cents a share, for the year-earlier period. Revenue was $13 billion, up from $10.8 billion. 

Adjusted income was 59 cents a share. Analysts had expected the company to report earnings of 51 cents a share on revenue of $12.8 billion, according to a consensus survey by FactSet Research.

American Express posts higher quarterly earnings

by Dan Wilchins

American Express Co (AXP.N) said second quarter earnings rose, as customers spent more on their cards and the company's processing revenue rose.

The New York-based company posted quarterly earnings for common shareholders of $1.32 billion, or $1.10 a share, compared with $1.00 billion, or 84 cents a share, in the same quarter last year.

Qualcomm posts higher quarterly profit

by Sinead Carew

Wireless chip maker Qualcomm Inc (QCOM.O) posted an increase in fiscal third-quarter profit and revenue helped by strong demand for smartphones.

But its shares fell 1.7 percent in late trading, even as the company raised its profit and revenue estimate for the full year citing smartphone growth and an acquisition.

Qualcomm's profit rose to $1.035 billion, or 61 cents per share for its fiscal third quarter ended in June 26, from $767 million, or 47 cents per share, in the same quarter the year before. Revenue rose to $3.62 billion from $2.7 billion. Wall Street analysts had expected revenue of $3.59 billion, according to Thomson Reuters I/B/E/S.

On May 24 Qualcomm said it completed its acquisition of another wireless chip maker, Atheros Communications.

EBay profit falls, as revenue rises 25%

By John Letzing

EBay Inc. EBAY said Wednesday that its second-quarter net income fell to $283 million, or 22 cents a share, from $412 million, or 31 cents a share in the same period last year. The online retailer said revenue for the period ended June 30 rose 25% to $2.76 billion. Excluding one-time items, eBay said earnings for the quarter were 48 cents a share. Analysts polled by FactSet Research had expected eBay to report earnings excluding items of 46 cents a share, and $2.61 billion in revenue.

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by Cullen Roche

This data from La Caixa will help put the magnitude of the “recovery” into perspective. Clearly, there’s something bigger going on underneath the surface than just a weak recovery. At some point, investors have to begin recognizing that this has never really been a recovery at all and has instead been one long balance sheet recession papered over by government spending (via La Caixa):
“The US economy is going through its most problematic recovery since 1945. The growth forecast for gross domestic product (GDP) for the whole of 2011 is a little above 2.5%, clearly below what was expected in April and utterly insufficient for significant improvement to be seen in the labour and housing market. The reason for this slowdown in activity is partly due to temporary factors such as rising oil prices and the interruption of supply chains in industry because of Japan’s earthquake. Now that oil is likely to fall in price and Japan to regain its industrial rhythm, activity should be expected to improve its performance somewhat during the second half of year.
However, the weakness of the recovery is not only due to temporary factors. Proof of this is the fact that the US economy has taken three years to regain its pre-recession level. GDP for the first quarter was 0.6% above the level of October-December 2007, the last quarter of positive growth prior to the recession. This cumulative growth three years after the start of the recession is higher than the rates of Western Europe and Japan but far behind the rate in the United States in the four previous recessions since the end of the
Second World War. The most comparable case is the 1982 recession, when unemployment also exceeded 10% but, nevertheless, the strength of the recovery meant that the cumulative growth three years after the start of the recession was 2.9%, much higher than today’s figure.”

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How to End the Greek Tragedy

European leaders, faced with the reality of an insolvent Greece, are reportedly now considering a “Plan B” that would involve reducing the burden of its future debt payments. This is a welcome contrast to the options considered so far, all of which involved – under different guises – foisting more debt onto a country that has too much of it already.

Greek public debt today stands at nearly 160% of the country’s official GDP. Suppose Greece took 25 years to bring it down to the Maastricht ceiling of 60%. If the real interest rate on Greek debt were 4% (more or less what Greece is paying now for the emergency loans from the European Union) and annual GDP grew by 2% on average, the required primary fiscal surplus each year for the next quarter-century would be 5.7% of GDP. That is an unimaginably large burden, and it risks condemning Greece to permanent recession and social unrest.

A possible counterargument is that Greece has a large informal economy, so its actual GDP is larger than the official figure. As a result, the debt ratios commonly applied to Greece could be overstated. But informal output is of little use for debt service if it cannot be taxed. In any case, the scope for tax increases is severely limited in an economy that is shrinking quickly.

The conclusion is clear: Greece’s debt-service burden is too large, and it must be reduced. This can be accomplished in two ways: sharply cutting the interest rate paid by Greece, or reducing the face value of the debt.

Some analysts – most prominently Jeffrey Sachs – have argued that the best way forward is to cut the yield on Greek debt to that of German public debt. Germany currently pays about 3% nominal interest on 10-year debt, half of what Greece is being charged for emergency loans – and far less than it would pay if it attempted to raise money in private markets.

This approach has several advantages: by leaving the face value of the debt unaltered, EU officials could argue that restructuring Greece’s debt did not amount to a default, thereby limiting contagion. European banks holding Greek government debt could keep pretending that it is worth its full value. And the European Central Bank would have fewer excuses to refuse Greek bonds as collateral.

The question is whether the change in coupons – possibly coupled with an extension of maturities – would be enough to stabilize the Greek economy and restore growth. Even with German-level interest rates, Greece would have to run a primary surplus of at least 2% of GDP – still quite large, and far from today’s deficit. And, with the face value of the debt unchanged, the psychological drag on expectations and investment might linger.

The alternative is to cut the face value of Greece’s debt. European leaders seem to be moving in this direction. The required cut is large: eliminating half of Greece’s public debt obligation would leave it at nearly 80% of GDP, a ratio higher than Spain’s.

Talk of “haircuts” for private investors immediately triggers concerns about contagion. But markets are already assigning a high probability to a Greek default. The rating agencies have long placed Greek debt deep in junk territory, and are now giving Portuguese and Irish debt the same status. Rising spreads in Spain and Italy show that contagion is already occurring, even in the absence of an official decision to write down Greek debt.

The EU is pinning its hopes on one mechanism to reduce Greek debt: loans from the European Financial Stability Facility that would allow Greece to buy its own debt at a discount in the secondary market. But, while allowing the EFSF to finance buybacks is a step forward, a slew of theoretical and empirical research, generated by developing countries’ efforts to buy back their debt in the 1980’s and 1990’s, has shown that it is far from a cure-all. The main reason is simple: as debt is reduced, its price rises in the secondary market, sharply curtailing the benefits to the borrower.

So far, policymakers are talking only about exchanging old Greek bonds for cash (in buybacks) or new Greek bonds. It would be far preferable to exchange them for Eurobonds, backed by the full faith and credit of all eurozone countries.

Nor are European ministers, still struggling to catch up with reality, yet considering involuntary debt exchanges. But, if the past 18 months are any guide, they soon will be.

Andrés Velasco is a former Minister of Finance of Chile.

See the original article >>

Current Account Dilemma

Creditors nations are worried. Their obligors seem determined to take steps, they claim, to undermine or erode the value of their obligations – at the expense, of course, of the creditors.
Chart Source:
(based on OECD Statistics as of 2008, added by EconMatters)
Over the past two years we have become pretty used to the spectacle of Chinese government officials warning the US about its responsibility to maintain the value of the huge amount of US treasury bonds the PBoC has accumulated. More recently we have been hearing complaints in Germany about the possibility that defaults in peripheral Europe will lead to losses among the many German banks that hold Greek, Portuguese, Irish, Spanish and other European government obligations.

In both cases (and many others) there seems to be an aggrieved sense on the part of creditors that after providing so much helpful funding to undisciplined debtors, the creditors are going to be left with losses. There is, they claim, something terribly unfair about the whole thing.

To me this whole argument is pretty surreal. Not only have the creditors totally mixed up the causality of the process, and confused discretionary foreign lending with domestic employment policies, but an erosion in the value of the liabilities owed to them is an almost certain consequence of their own continuing domestic policies. It is largely policies in the creditor countries, in other words, that will determine whether or not the value of those obligations must erode in real terms.

Before I explain why I make the second point, let me address the first point. As I have argued many times before, the accumulation of US government bonds by the PBoC and the surging Greek, Portuguese, and Spanish loan portfolios among German banks were not the acts of disinterested lenders. They were simply the automatic consequence of policies in the surplus countries that may very well have been opposed to the best interests of the deficit countries.

Take the US-China case, for example. The US has been arguing for years that China had to raise the value of the currency sharply in order to rebalance the global economy and bring down China’s current account surplus and, with it, the US deficit.

China responded that it could not do so without causing tremendous damage to its economy and that anyway the problem lay with the US propensity to consume. For that reason China continued to accumulate US dollar assets. As it bought US government bonds it was able to generate higher domestic employment by running large trade surpluses, with corresponding deficits in the US. Remember that net capital exports are simply the obverse of trade surpluses (or, more correctly, current account surpluses), and one requires the other. If China buys huge amounts of dollars, the US must run a trade deficit.

Whichever argument you think is the more just – that the imbalances are mainly the fault of the US or the fault of China – since the Chinese accumulation of US Treasury bonds was the automatic consequence of Chinese policies that the US opposed, it seems a little strange that the US should feel any strong obligation to maintain the value of the PBoC’s portfolio. That is not to say that the US should not be concerned about inflation and the value of the dollar – only that the reasons for its concern should be wholly domestic.

Likewise with Germany. The strength of the German economy in recent years has largely to do with its export success. But for Germany to run a large current account surplus – the consequence I would argue of domestic policies aimed at suppressing consumption and subsidizing production – Spain and the other peripheral countries of Europe had to run large current account deficits. If they didn’t, the euro would have undoubtedly surged, and with it Germany’s export performance would have collapsed. Very low interest rates in the euro area (set largely by Germany) ensured that the peripheral countries would, indeed, run large trade deficits.

The funding by German banks of peripheral European borrowing, in other words, was a necessary part of deal, arrived at willingly or unwillingly, leading both to Germany’s export success and to the debt problems of the deficit countries. If the latter behaved foolishly, they could not have done so without equally foolish behavior by Germany, and now both sets of countries – surplus countries and deficit countries – should have do deal jointly with the debt problem.

In that case it is strange for Germans to insist that the peripheral countries have any kind of moral obligation to prevent erosion in the value of that loan portfolio. It is like saying that they have a moral obligation to accept higher unemployment in order that Germany can reduce its own unemployment. Whether or not these countries default of devalue should be wholly a function of their national interest, and not a function of external obligation.

Trade imbalances lead to debt imbalances

But aside from whether or not there is a moral obligation for creditor countries to protect the value of portfolios whose accumulation was the consequence of policies that those countries opposed, there is a more concrete reason why it does not make sense to demand that deficit countries act to protect the value of the portfolios accumulated by surplus countries. This has to do with the sustainability of policies aimed at generating trade surpluses. It turns out that the maintenance of the value of those obligations is largely the consequence of trade policies in the surplus countries.

To explain why this is the case, let me again, following my practice from last month’s newsletter, simplify matters by calling all surplus countries “Germany” and all deficit countries “Spain”. Germany and Spain jointly have put into place policies that ensure that Germany runs a large current account surplus and Spain a large current account deficit for many years. As I argued three weeks ago, I think that it is far more likely that German policies rather than Spanish policies created the huge distortions, but for our purposes we can ignore the direction of causality.

As long as Germany runs current account surpluses for many years and Spain the corresponding deficits, it is by definition true there must have been net capital flows from Germany to Spain as Germany bought Spanish assets (which includes debt obligations) to balance the current account imbalances. The capital and current accounts for any country, and for the world as a whole, must balance to zero.

In the old days of specie currency – gold and silver – this meant that specie would have flowed from Spain to Germany as the counterbalancing entry, and of course this flow created its own resolution. Less gold and silver in Spain relative to the size of its economy was deflationary in Spain and more gold and silver in Germany was inflationary there – until the point where the real exchange rate between the two countries had adjusted sufficiently because of changes in domestic prices to reverse the trade imbalances.

Large current account surpluses and deficits, in other words, could not persist because they were limited by the gold and silver holdings of the deficit countries. This was pretty much an automatic limit – although in later centuries it could be extended by central bank loans of specie – and the limit was pretty firm. In the days of Hapsburg Spain, seemingly infinite discoveries of silver in Eastern Europe and the Americas allowed Spain to act as if it had infinite capacity to run trade deficits, but of course the never-ending religious and dynastic wars that seemed so much to delight the Hapsburgs ensured that silver outflows were high enough even to drain the silver discoveries fairly quickly (in fact new silver discoveries were almost always spent before they were actually delivered).

During the imperial period in the late 19th Century this adjustment mechanism was subverted by a process described most famously by British economist John Hobson in his theory of under-consumption. Hobson argued that the imperial centers systematically under-consumed and exported huge amounts of their savings to the colonial periphery, which of course allowed them to run large and profitable trade surpluses against the periphery.

This export of money from the center to the periphery was seen as the primary mechanism of colonial exploitation. Even Lenin thought so, and wrote about it most famously in “Imperialism, the Highest Stage of Capitalism”. “Typical of the old capitalism, when free competition held undivided sway,” Lenin wrote. “was the export of goods. Typical of the latest stage of capitalism, when monopolies rule, is the export of capital.”

Since they controlled the periphery and since obligations were denominated in gold or silver, the imperial centers exporting capital never had to worry about today’s worry – the refusal or inability of the periphery to repay the capital imports. They “managed” the colonial economies and their tax systems, and so they could ensure that all debts were repaid. In that case large current account imbalances could persist for as long as the colony had assets to trade. Regular readers will remember that I discussed this in an early May blog entry in reference to a very interesting paper by Kenneth Austin.

The current account dilemma

In today’s world things are different. There is no adjustment mechanism – specie flow or imperialism – that permits or prevents persistent current account imbalances.

This means that if Germany runs persistent trade surpluses with Spain, there are only three possible outcomes. First, Spain can borrow forever to finance the deficit (of which the ability to sell off national assets is a subset). This may seem like an absurd claim – no country has an unlimited borrowing capacity – but it is not quite absurd. If Germany is very small – say the size of Sri Lanka – or if Germany runs a very small trade surplus, for all practical purposes we can treat the borrowing capacity of Spain as unlimited as long as the growth in debt is more or less in line with Spain’s GDP growth. However if Germany is a large country or runs large surpluses, this clearly is not a possible outcome.

That leaves the other two outcomes. First, once Spanish debt levels become worryingly large Germany and Spain can reverse the policies that led to the large trade imbalances. In that case Germany will begin to run a current account deficit and Spain a current account surplus. In this way German capital flows to Spain can be reversed as Spain pays down those claims with its own current account surplus. Neither side loses.

Second, Spain can take steps to erode the value of those claims in real terms. It can do this by devaluing its currency, by inflating away the value of its external debt, by defaulting on its debt and repaying only a fraction of its original value, by expropriating German assets, or by a combination of these steps.

Why must those claims be eroded? Because Spain does not have unlimited borrowing capacity (and presumably does not want to give away an unlimited amount of domestic assets). If Spain’s current account deficit is large enough, in other words, its debt must grow at an unsustainable pace and so it must eventually default (this, by the way, is a variation on the famous Triffin Dilemma). The only way to avoid default is to erode the real value of the debt, and ultimately these are variations on the same thing – Germany will get back in real terms less than it gave.

Without unlimited borrowing capacity these are the only two options, and once the market decides debt levels are too high, a decision must be made. Either Germany must accept a reversal of the current account imbalances or it must accept an erosion in the value of the Spanish assets it owns as a consequence of the current account imbalances. This is the important point. Once you have excluded infinite borrowing capacity there are arithmetically no other options.

It is pretty clear that the countries of the world represented in my example by Germany (Germany, China, Japan, etc.) are doing everything possible to resist the first option. They are not taking the necessary steps to reverse their anti-consumptionist policies and plan to continue running current account surpluses for many more years. Even Japan, for example, a country that has abandoned its old growth model and has finally been adjusting domestically for nearly two decades has been unable, or has refused, to take the necessary steps to reverse its current account surplus.

In that case some mechanism or the other must erode the value of the Spanish assets the German banks have accumulated. Either Spain must devalue, or if must inflate away the real value of the debt, or it must default, or it must appropriate German assets – perhaps in the form of a large German gift to Spain. By the way you can think of the US Marshall Plan as a way of allowing Europe to appropriate US assets in the days when the problem was persistent large US current account surpluses, matched by a refusal of the US to change its domestic economic policies in a way that generated trade deficits and an inability of Europe to continue borrowing. The alternative to the Marshall Plan was either a collapse in the US export market, a European default, or a less friendly European expropriation of US assets.

Given the limits, especially debt limits, it is irrational for anyone to expect that Germany can continue to run large current account surpluses while Spain does nothing to erode the value of Spanish assets held by Germans. This is an impossible combination. We must have either one or the other. I suspect that Germany is hoping and arguing that Spain can somehow reverse its current account deficit without the need for Germany to undermine current account surplus. But this won’t work.

China, for example, implicitly makes the same argument when it demands that the US raise its savings rate while China avoids making the necessary domestic adjustments, including to the currency. But of course this means nothing more than that some other country must replace the US as the current account deficit country of last resort. This obviously cannot solve the underlying problem. It simply pushes off the imbalance onto another country, and ultimately with the same dire consequences.

This is why I find the moaning and gnashing of teeth over the possible erosion of the value of claims accumulated by surplus countries surreal. There is only one possible way to avoid that erosion of value, and that requires that the surplus countries work with the deficit countries to reverse the trade imbalances. If the surplus countries refuse to take the necessary steps, an erosion in the value of those claims is the automatic and necessary consequence. In practice that means that either the claims must be devalued or they will lead to default.

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United Technologies 2Q profit up 19 percent


United Technologies Corp. posted a 19 percent jump in its second-quarter profit on Wednesday, citing strong orders for its heating and cooling building systems and exports that got a lift from a weaker dollar.

The results from the Hartford company that owns Carrier heating and cooling, Otis elevator, jet engine manufacturer Pratt & Whitney and other businesses beat Wall Street estimates.

The company also raised its outlook for the full year.

Its shares rose $1.28, or 1.4 percent to $90.10 in premarket trading.

Chief Executive Louis Chenevert said in a statement that he was particularly pleased that orders are strong at the commercial construction segments, which points to future strength because the work is planned years in advance.

"More encouragingly, order rates remain strong and in line with expectations across most of the segments including our longer cycle commercial construction-related businesses," he said.

The company reported its net income rose to $1.32 billion, or $1.45 per share, for the April-June quarter, from $1.11 billion, or $1.20 a share, a year ago.

It was the sixth consecutive quarter of double-digit profit increases.

Revenue rose 9 percent to $15.08 billion from $13.8 billion a year ago. Orders increased at Otis, Pratt & Whitney and aerospace parts maker Hamilton Sundstrand.

Analysts expected earnings of $1.41 a share on revenue of $14.61 billion

United Technologies raised its 2011 outlook to between $5.35 per share and $5.45, up from $5.25 to $5.40. 
It also raised its revenue estimate for the year to $58 billion from $57 billion.

Analysts expected full-year earnings of $5.43 a share on revenue of $57.7 billion.

Each of United Technologies' six businesses reported revenue gains in the latest quarter, with Otis at the head, posting a 12 percent rise to $3.19 billion.

Commercial spare part orders at Pratt & Whitney's large engine business grew 23 percent and orders rose at Hamilton Sundstrand by 25 percent.

New equipment orders at Otis were up 23 percent, which included favorable foreign exchange of 8 percentage points. Commercial equipment orders at Carrier grew 13 percent, including favorable foreign exchange of 4 points.

When the U.S. currency is weaker, revenue that companies get in foreign currencies translates into more dollars. About 60 percent of United Technologies' $54.3 billion in revenue last year was from sales outside the United States.

Rare Opportunities in the Metals for the 21st Century

For many investors today’s uncertainty and fear is overwhelming: The looming debt debacle in Washington and the potential breakup of the European Union has seemingly crippled their ability to protect their investments and ultimately their future.

Gold and silver are two leading safe havens in times of crisis. However, some investors are taking advantage of the crisis to add a new class of precious and ultra precious metals to their portfolio.

Unrealized Dependence

The rare earth metals, or rare earth elements (REEs) as they are also known, are a collection of 17 elements in the periodic table. Rate earths have gotten a lot of coverage in the last 12-18 months, yet few investors really understand them.

The term ‘rare earths’ comes from the fact that the minerals that contain these unusual elements were quite rare when first discovered in Ytterby, Sweden. However, in reality they’re not all that rare, just hard to refine!
image1 stocks
The 17 rare earth metals have many similar properties, which often cause them to be found together in mineral deposits.

You likely use rare earth metals every day and don’t even realize it. That’s because rare earths are vital components for modern consumer goods — like rechargeable batteries, DVDs and fluorescent lighting — and also in many environmentally friendly technologies. But prior to the digital revolution and the green movement; most investors had never heard of them.

After all, for many years the rare earths were hardly a vital part of modern industry. The market floundered with low prices and weak demand. It was simply very unattractive to institutional investors, let alone individual traders.

In the 1980s, for example, the rare earths sector was worth less than $100m, and was a money-losing venture.

The idea of a bull market in rare earth metals was continually stalled as cheaper alternatives were used anytime prices rose. Consequently, most countries ignored the forthcoming supply problems.

Except for … China!

China has a long history of being two steps ahead of the rest of the world in the resources markets. And in the case of REEs, they are again! Moreover, in the face of most other nations ignoring the rare earth elements sector, China actually ramped up its efforts to control the industry.

In fact in 1992, Deng Xiaoping compared China’s rare earths to the Middle East’s oil reserves, and he was right.

Rare earths are sometimes referred to as the ‘dragon metals,’ because China has such quantities of them. 
Nowadays, the country supplies around 96 percent of global demand for rare earths, a virtual monopoly, especially the heavy rare earths.

But the rare earth market was off the trading radar until last year, when prices really started to take off.

Growing Pains

image2 stocks
China is the world’s biggest supplier of rare earth metals.
Growth in the rare earth sector has been phenomenal, some say too quick, but I disagree for the most part. The numbers are staggering. The global market for rare earths has grown at an annual rate of about 8-11 percent over the last decade, according to the World Trade Organization. And this pace has spiked in the past 12-24 months or so.

The new middle class is one big driver …

China and the rest of emerging Asia and India are buying electronics goods, such as cameras, iPads, Samsung flat-screens, and many other products as fast as they can! All of those modern doodads simply wouldn’t be possible without rare earth metals.

As these markets have climbed in price, China has been enforcing rare earths quotas, cutting exports by as much as 5-10 percent per year, and pushing prices up rapidly. In 2009 an index holding shares of 12 rare-earth miners rose by more than 600 percent.

Various cryptic statements that have been coming out of China, about its rare-earth quotas, have made markets and end users nervous. The European Commission issued a report back in June 2010, saying it was imperative that a complete supply chain be developed outside of China.

The following month China announced it was cutting exports by another 40 percent. And rumors swirled that China had nearly filled its export quotas by the end of the summer.

Countries such as Japan, which rely heavily on rare-earth imports to produce electronics, have been the hardest hit.

As a result …

Japan Has Taken Action

The Japanese are the most vulnerable in the world to such a sharp drop in supplies of rare earth elements. The impact on their exports could be huge!

So to take back some control over the situation, Japan along with Mongolia has now agreed to explore Mongolian rare-earth reserves together.

Japan is also pulling out all the stops to recycle rare earths from used electronics to help meet some of their needs.

Meanwhile, Japanese car companies, including Honda, Toyota, and Nissan, have long been trying to switch to lithium-ion batteries, which don’t require rare earths, in electric cars. But all of this is more or less futile, as the need for the rare earths is vital to so many of Japan’s top exports.
image3 stocks
The Toyota Prius has been called the biggest user of rare earths of any object in the world.

The rare earth elements are used for much more than simple electronic gizmos from Japan though …

One of the most common uses is in strategic missile technology and wind turbines. So it’s not a surprise that the U.S. government is getting panicky about the Chinese stranglehold on rare earths and their strategic value.

It won’t be easy to find substitutes for rare earths. The challenge for the industry is whether they’ll be able to supply enough of these elements, and do so as quickly as needed. The answer is probably not.

The fact is that building a new rare-earth supply chain, especially heavy rare earths outside of China, will probably take at least a decade, maybe even much longer than that.

The reasons are simple …

The infrastructure for rare-earths exploration and mining takes years to build — many experts estimate between 5 to 15 years, not to mention billions of dollars.dollars.

So demand is expected to rise while supply tightens, forcing prices to remain high for some time.

Three Ways to Get Your Piece of
the Rare Earth Metals Sector

#1—Individual Stocks
Rare earth producers have had a wild ride the last 18 months and have recently pulled back from their highs. So now may be a very good time to look at adding some of these key companies. You might consider: Lynas Corp (LYC:AX), Molycorp (MCP), and Rare Element Resources (REE).

If you’re not comfortable with individual stocks and prefer the diversification of an exchange traded fund (ETF), take a look at the Market Vectors Rare Earth/Strategic Metals ETF (REMX). This ETF from the folks at Van Eck is relatively new so I suggest caution before entering it.

#3—ETF Options
As you have just seen, gold isn’t the only precious metal that glitters … rare earth elements are a vital part of an increasing number of products that a growing world demands every day! And now could be the perfect time to add some to your portfolio.

by ReggieMiddleton

Apple reported blowout numbers and a record quarter yesterday. Not one, that's right, not one Wall Street analyst got it right! As a matter of fact, not only did no one get it right, they were all wrong to the downside - every single one! Doesn't that sound fishy after 11 previous quarters of analysts missing the mark to the downside? In a descriptive post yesterday, I detailed how I beat the street on Google's earnings, step-by-step by "thinking more like an entrepeneur and less like a Wall Street analyst". In said missive, not only did I illustrate in relatively fine detail how the Street totally missed the massive value that Google is building, I also outlined in similar detail the voluntary game that the Street is playing with Apple and earnings guidance. Yes, it's a game, and an obvious one at that. Despite being so obvious, retail investors and institutions alike are playing along. Let me excerpt a few choice lines from said post:

Since I started covering mobile technology on BoomBustBlog, things have pretty much occurred precsiely as we anticipated - with Google, Microsoft, and Research and Motion (a 6x to 7x gain on select puts) following their prescribed paths...
Next up is Apple, whom we predicted our analysis would reach frutition in the 4 to 6 quarters. Apple reports today, and we fully suspect a blow quarter that (again, just like the last 12 quarters) surprise the unsurprisingly inept analyst estimates that somehow could not get it right for nearly 2 years straight see above). We also expect indications of our margin compression thesis to start peeping their little eyes out of the footnotes, of course to be totally ignored by the cheerleading sell side of Wall Street and pop tech and financial media, as the Apple lovefest marches on.

Hmmm! That was awfully prescient wasn't it? No! It wasn't. It was simply blatantly honest. Here is a further excerpt from a previous post describes in complete detailt the Analyst/Apple earnings game...

Yes, we are more optimistic on Apples' earnings than the sell side (reference page 16 in subscription document Apple - Competition and Cost Structure) Look to my writings from last summer to determine the common sense reasons why: .

Page 16 of the aforementioned document (which was released several months ago) pegged an uncannily accurate estimate of iPhone sales at 77 million for the year. Being that Apple sold ~20.3 million for the most recent quarter and said quarter was a company record, I think it's fair to say that we have a realistic grasp on Apple.

I syndicate my free content to several other sites, the vast majority of which are rife with Apple fanatics. These fanatics are literally incapable of parsing the logic of the preceding statement and the leading paragraph to this post. I have been more optimistic on Apple's nearer term accounting numbers than virtually the entire sell side, and have been proven accurate. As a matter of fact, this is actually a null feat that is absolutely nothing to brag or boast about since you simply have to look at the history of Apple's performance, guidance and analyst forecasts to see a needlessly consistent trend of error on the part of the sell side. Honestly, an elementary school student could have figured it out. I have also been correct on the underperformance and overvaluation of RIMM and the undervaluation and over performance of Google. Again, not a feat of superior intellect, but a much more mundane accomplishment of following the facts without bias and not having ulterior motives in producing analysis. In this case, an elementary school student may not have been able to do it, but I'm damn sure an astute high schooler could piece it together. In closing I will repost (for the 4th time) the earnings guidance snippet and challenge readers to possibility that we may have a very valid point.

In the meantime, sheeple-like investors are being hoodwinked by quarter after quarter of Apple blow out earnings. Don't get me wrong. I feel and fully acknowledge that Apple is executing on all 8 cylinders of a 6 cylinder engine, but it still has its real world limitations. Apple will start to bump up against these limitation over the next 4 quarters, and the signs of this bump are already apparent. Of course, the signs are being handily masked by the games that Apple management and the sell side analysts of Wall Street play, with the "Sheeple" retail and the lazier component of the institutional investors being put out to take the eventual bullet.

Riddle me this - If Apple can consistently beat the estimates of your favorite analysts quarter after quarter, after quarter - for 11 quarters straight, shouldn't you fire said analysts for incompetency in lieu of celebrating Apple's ability to surprise? After all, it is no longer a surprise after the 11th consecutive occurrence, is it? I would be surprised if my readers were surprised by an Apple surprise. Seriously! Apple management consistently lowballs guidance to such an extent that it can easily manage, no - actually create outperformance. This has has a very positive effect on their valuation. Of course, I do not blame Apple management for this, of they are charged with maximizing shareholder return. The analytical community and the (sheeple) investors which they serve is another matter though. Subscribers can download the data that shows the blatant game being played between Apple and the Sell Side here: Apple Earnings Guidance Analysis. Those who need to subscribe can do so here.

Below, I drilled down on the date and used a percentage difference view to illustrate the improvement in P/E stemming from the earnings beats.

In our analysis of Apple, we are using real world assumptions of future performance derived from backing in to the low balling this company is prone to. If you look at its history carefully you can gauge what management is comfortable with, hence what they may be capable of on the margin. Using these more realistic numbers, it is much more likely Apple will deliver a miss in the upcoming quarters in its battle with the Android! The following is the reason why...

The Battle of the Bonds

Everyone knows that Greece will default on its external debt. The only question concerns the best way to arrange it so that no one really understands that Greece is actually defaulting.

On this topic, there is no shortage of expert plans – among them bond buy-backs, bond swaps, and the creation of Eurobonds, a European version of the “Brady” bonds issued by Latin American countries that defaulted in the 1980’s. What all such schemes amount to is piling one lot of bonds on top of another in an attempt to square the circle of Greece’s inability to pay, and to minimize the losses faced by its creditors – mostly European banks.

Every week, a preposterous coterie of European bankers and finance ministers drags itself from one capital to another to discuss which default/restructuring plan to adopt. Meanwhile, Greece’s agony continues, and the “markets” wait to swoop down on Portugal, Ireland, Italy, and Spain.

No one who is not well versed in financial legerdemain can make much sense of this battle of the bonds. But behind it lie two moral attitudes, which are much easier to grasp.

The first is traditional disapproval of debt. The oldest rule in personal finance is to avoid debt – that is, never spend more than you earn. Economists and moralists have been united in believing that you should actually spend less than you earn – in order to “save” for the proverbial rainy day or for old age.

Getting into debt was long associated with profligacy or fecklessness. And, if a person became indebted, it was a point of honor to repay the obligation when it fell due, by selling assets, reducing consumption, working harder, or some combination of the three. Indeed, it was often more than a point of honor: failure to repay debt on time landed the debtor in prison.

The same attitude governed institutional debt. Banks grew out of a practice by gold smiths and silver smiths, who, for a small price, accepted deposits for safekeeping. When they became lending institutions, their earliest rule was to keep almost 100% of cash reserves against their loans, so that they would not be caught short if most of their depositors decided to withdraw their money at the same time.

Similarly, before the introduction of limited liability in the nineteenth century, a company’s shareholders or partners were each liable for all of the firm’s debts, which severely restricted businesses’ willingness to borrow to finance trade.

For public finance, too, the orthodox rule was that budgets should always be balanced; except in emergencies, governments should never spend more than they “earned” in taxation. Again, it was a point of honor for governments to pay back such debts as they were incurred, whatever the sacrifice to the country. Until recently, the conventional view was that “mature” sovereigns always honored their debts, while only banana republics failed to do so.

These historically embedded norms and practices were only slowly superseded. But, in the twentieth century, with greater security of conditions and continuous economic growth, it became normal for individuals, companies, and governments to borrow in anticipation of earnings – to spend money they did not have, but that they expected to have.

With fear of bank runs and defaults receding, banks’ reserve ratios became ever smaller, thus increasing their lending facilities. On this bedrock rose an imposing edifice of bond markets and banks that drove down the cost of finance, and thus sped up the rate of economic growth.

It was this system of financial intermediation whose near-collapse in 2008 seemed for many to justify the ancient warnings of the perils of indebtedness. In their exhaustive historical review of financial crises, Carmen Reinhart and Kenneth Rogoff write: “Again and again, countries, banks, individuals, and firms take on excessive debt in good times without enough awareness of the risks that will follow when the inevitable recession hits.”

But there is a contrary moral attitude, the essence of which is that, whereas excessive debt is to be deplored, the blame for it lies with the lender, not the borrower. “Neither a borrower nor a lender be,” Polonius admonished in Hamlet. Lending money at interest was identified with “usury,” or making money from money rather than from goods and services – a distinction that goes back to Aristotle, for whom money was barren. The moneylender was the most hated figure in medieval Europe.

The last legal restrictions on taking interest on money were lifted only in the nineteenth century, when they succumbed to the economic argument that lending money was a service, for which the lender was entitled to charge whatever the market would bear. But the theory of usury survived in the view that it was morally wrong to extract some additional amount that was made feasible by the borrower’s weak bargaining position or extreme need.

These two moral attitudes confront each other today in the battle of the bonds. The demand for debt repayment confronts the philosophy of debt forgiveness. In the lender’s view, the 17% interest rate that Greece’s government now has to pay for its 10-year bonds accurately reflects the lender’s risk in buying Greek government debt. It is the price of past profligacy. But in the borrower’s view it is usurious – taking advantage of the borrower’s desperation.

The sensible middle position would surely be an agreed write-off of a portion of the outstanding Greek debt, combined with a five-year moratorium on interest payments on the remainder. This would immediately relieve pressure on Greece’s budget and give its government the time and incentive to put the country’s economy in order.

In the long run, however, we will have to answer the broader question that the eurozone’s various debt crises have raised: Is the social value of making finance cheap worth the days of reckoning for stricken debtors?

Robert Skidelsky, a member of the British House of Lords, is Professor Emeritus of Political Economy at Warwick University.

Morning markets: iPad factor spurs markets - grains included


What has the iPad2 got to do with the price of corn?
Well, the tablet computer, launched in March, sold like hotcakes to drive a 125% jump in profits at its manufacturer, Apple.
And that further improved sentiment on financial markets helped by decent statements from the likes of IBM, besides firm US housing starts data, on Tuesday. Whatever the debt problems facing the macro-economic situation, corporate profits appear, for now, to be holding up nicely.
Investment sentiment for risk was evident in a 1.2% jump in Tokyo's Nikkei share index, a 0.2% slip in the dollar and a jump of 0.9% in the price of West Texas Intermediate crude.
And that meant the default direction for crop prices was up, even before taking the weather forecast into account. And this, depending on which models you believe, continues to foresee uncomfortable hot Midwest temperatures for pollinating corn, with a break around this weekend.
Model concerns
So corn prices headed higher, although rises were tempered by the doubts which cost the grain most of gains achieved early in the last session.
"There is enough concern about the validity of the weather models to keep most of the market on the defensive," Brian Henry at Benson Quinn Commodities said.
"Funds have been adding to the long position, but near these prices they are going to have to have confidence that the market is going to be able to continue the upside momentum."
Furthermore, on the demand side, there has been a notable tail-off in talk of big orders, which accompanied the lower prices hit early in the month.
Corn for December, the best-traded contract, added 1.5% to $6.97 ¾ a bushel as of 07:50 GMT (08:50 UK time), with the September lot up 1.5% at $7.08 ¼ a bushel.
Russian reminder
That was enough to maintain the September contract's unusual premium over its grain peer wheat, but not by much.
And only with a bit of help from the low prices being offered by Black Sea exporters in keeping some check on values elsewhere.
"Russian wheat prices remind everyone that competition is real on the international market," Agritel, the Paris-based consultancy, said.
"Moreover, they keep retreating. Yesterday they were posted at $235 a tonne while French and US offers exceed $280 a tonne."
Chicago's September lot added 1.9% to $7.06 ¾ a bushel.
Not the critical time
Soybeans also gained, if maintaining its knack for lower volatility. It also failed to return to the $14-a-bushel levels reached in the last session.
The August contract added 0.8% to $13.90 a bushel, while the November lot gained 0.8% to $13.93 ½ a bushel.
"Soybean crops are still a few weeks away from their critical yield development phase, and with midday forecasts adding some rain in longer range outlooks, investors may be nervous of sustaining long positions at historically high prices," Ker Chung Yang at Phillip Futures said.
'Cratering prices'
Still, at least this time the oilseed was beating cotton, which maintained its habit of high volatility, closing up or down the exchange limit some 60 times in New York over the past year.
The last time was last night, when New York's December contract closed up the daily limit, with synthetic trading suggesting a further 1 cent rise to come.
That the lot duly did early on Wednesday, only to fall back to 100.01 cents a pound, down 0.8% on the day, amid plenty of talk of cancelled orders and reduced demand.
"While cratering prices may sound like a good thing for demand through the cotton supply chain, they just might not be," Australia & New Zealand Bank said.
"A lot of pricing was done high through the first quarter," when prices soared above 200 cents, "and a lot of that cotton is still on people's books. So the clear incentive on cotton buys that are now 50% out of the money is to walk away.
"For every bale of 200-cent cotton someone is long and walks away from, someone else is left holding stocks they don't want/need…"
Index signal
A note of caution was also struck by prices on China's Zhengzhou exchange, where cotton for January fell 1.3% to 21,550 remninbi a tonne.
However, sticking with a broader view, investors might also keep an eye on the CRB commodities index, which formed a gap in its chart on Tuesday in adding 2.7 points to 346.54 points, getting nearer the key level of its 10-day moving average, at 350.20 points.
A close above that might well bring fresh interest in raw materials from momentum traders.

Shares may be better bet than commodities - ABN


Shares look a better prospect than commodities for investors, given the relative strength in raw material prices and their vulnerability to tighter regulation - besides any economic setbacks, ABN Amro said.
Both asset classes could be hurt by threats including a "dangerous new chapter" in the story of Europe's sovereign debt crisis, as fears spread to Italy and Spain, and the spectre of the "mother of all tail risks" – a US default.
But commodities appear particularly vulnerable given the tighter regulations laid down in America's Dodd-Frank Act aimed at curbing excessive risk taking by investors.
"Some brokers have informed their clients that they will not trade commodities with US persons over the counter once the relevant provisions of the act come into effect," ABN analyst Georgette Boele said.
'Commodities are very expensive'
Furthermore, commodity investors have displayed an unusually sanguine, "glass half full" attitude towards the asset class, failing to take downside risks into account.
Indeed, the ratio of the Dow Jones industrial average share index to the CRB commodities index has fallen to 36 – far nearer its June 2008 low of 24.73 than its peak of 106 in 1999.
"Taking the historical perspective into account, commodities are very expensive compared to the Dow Jones," Ms Boele said.
"The prospect of more commodity underperformance compared to equities is only increasing.
"Therefore, from a portfolio perspective, we remain 'neutral' at best [on commodities] with a negative bias."
Price forecasts
The bank foresaw falls ahead in many metals, with copper expected to end the current quarter, at the close of September, at $9,100 a tonne and steel at $705 a tonne.
However, it retained reservations over prospects for farm commodities too, seeing Chicago wheat ending the period at $6.50 a bushel, compared with a current price of $7.11 ¼ a bushel for the September lot.
New York sugar will end at 26 cents a pound, down from a current price of 29.31 cents a pound for October delivery.
For cocoa, the forecast was for a drop to $2,900 a tonne, sapped by a surplus of 187,000 tonnes in world production over consumption in 2011-12.
"Given market fundamentals, cocoa prices are expected to decrease," ABN analyst Thijs Pons said.

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Copper barometer ...

by Kimble Charting Solutions

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Did Apple get a new set of legs

by Kimble Charting Solutions

Time to Move to Cash?

by Bespoke Investment Group

You typically see articles like the one below when the market is in the middle of a nasty bear market. You don't normally see them at a time like now when the major indices are just a couple percentage points below the highs of a multi-year bull market. Such is sentiment in the post-financial crisis era, however, as individual AND institutional investors fear armageddon anytime the slightest bit of negative news comes out. An article titled "Is it time for you to move to cash" should have investors asking themselves if it is time to move into stocks. It will likely take a long time for investors to begin to trust the market again enough so that they'll be willing to have the majority of their holdings in equities. When that time comes, it will be cause for concern, but we don't think we're anywhere near there now. The old adage that the market climbs a wall of worry couldn't ring more true than it's ringing today.

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Don't Miss Your Chance to Profit from the Best Coal Stocks

By Kerri Shannon

U.S. and European debt concerns have triggered some dismal market performances - but there is still one energy sector that's moving up.

And that's coal.

The Dow Jones U.S. Coal Index, which tracks 69 energy and coal-related companies, has climbed 60% in the past year and 13% in the past month.

So what's the key motivating factor moving the world's best coal stocks higher?

Simply put, it's a combination of shrinking supplies and rising demand.

Indeed, Coal prices are up more than 20% in the past year and many experts say increasing consumption from emerging economies like China - the world's biggest coal consumer - and India will push prices even higher.

China's rapid growth has been the main driver behind an average 3.8% annual increase in global coal demand since 2000. In fact, the country accounted for about half of the world's coal consumption in 2009. And a China Energy Research Institute report recently estimated that country's economic growth, urbanization, and rising middle class would increase coal demand by 700 million tons to 1 billion tons by 2020.

India's coal imports are expected to double to 100 million tons by 2012. And Japan also will boost demand attempts to rebound from the tragic March 11 earthquake and tsunami.

Growing demand isn't the only reason to believe prices will soar, either. Because as worldwide demand surges, global coal supplies are rapidly falling. 

China's growing demand could reduce its coal reserves' lifetime from 62 years to about 33 years by 2020. And if coal demand increases yearly along with Chinese economic growth, it could deplete reserves to just a 19-year supply in that time.

Meanwhile, other countries' estimated coal reserves are shrinking as geologists uncover more limitations on coal extraction - like quality of coal and depth of reserves. And harsh weather also has tightened supplies. Floods in Australia this year trimmed the country's coal output by 15%, and similar inclement conditions in big coal-producing nations like Indonesia and South Africa have cut estimated output.

The combination of increased demand and limited supply means coal prices will continue to soar. And this bullish outlook is giving a boost to coal-related companies like Peabody Energy Corp. (NYSE: BTU), the world's largest private-sector coal producer.

Peabody this week reported a 38% increase in second-quarter profit and raised its full-year earnings outlook to $4.20 to $4.60 a share from $3.50 to $4.50.

The coming price increase also has fueled a flurry of mergers and acquisitions in the sector. Peabody earlier this month partnered with steelmaker ArcelorMittal (NYSE: MT) to offer $5.1 billion for Australia's Macarthur Coal Ltd. Macarthur specializes in pulverized coal used by steel producers, and would make Peabody a go-to coal supplier for heavy industries.

Naturally, Peabody isn't the only company profiting from coal's price rise.

In fact, Money Morning Contributing Writer Dr. Kent Moors on Monday alerted readers to another red-hot coal investment that's still flying low under the radar. But to get information on that pick, and a more thorough analysis of the best coal stocks money can buy, you'll have to sign up for Dr. Moors' newsletter - the Energy Inner Circle.

The No. 1 Way to Profit as the Price of Gold Soars Into Record Territory

By Peter Krauth

On Monday, debt fears on both sides of the Atlantic sent gold above the $1,600 level for the first time ever.

The yellow metal has risen steadily since the start of 2009, when it was trading at a bit less than $900 an ounce.

And gold's advance has accelerated of late. The price of gold increased 21% in the year's first half. And even with the decline to $1,587.30 yesterday (Tuesday), the yellow metal is up 7% since July 1.

Many investors and investment pundits are claiming this gold-plated party is destined to end: When the Eurozone gets its house in order and our elected leaders in Washington finally reach a federal budget accord, these gloom-and-doomers say the price of gold will plummet.

But I say they're wrong.

Gold isn't going to crash. In fact, it isn't even going to hold steady at current levels.

The price of gold is destined to soar during the next six months to nine months.

And I'm going to show you the best way to hitch a ride on this rocket.

The Bright Side to Global Debt Fears

I've been analyzing gold miners and other natural-resources investments for a long time. Now, when I'm analyzing precious-metals-related investments for a Money Morning column, or for the subscribers of my "Global Resource Alert" trading service, there are certain financial indices that I like to study. And I especially like to see how each of these indices behaves against one another. 

We all know that U.S. stocks endured a horrific freefall in late 2008 and early 2009 - only to launch into a "V-shaped" recovery that turned into one of the most powerful bull-market rebounds in U.S. history. But if we factor out that dizzying whipsaw move, the bottom line is clear: Despite Bernanke's unbridled moneyprinting, U.S. stock prices are lower today than they were back in 2007, when the global financial crisis began.

And as the accompanying chart demonstrates, this woeful period for U.S. shareholders has been very bullish for gold investors.

Even more interesting - and bullish - is how gold has reacted to bear-market moves for stocks: During the most-sizeable share sell-offs, we saw strong surges in the price of gold.

Why is that bullish?

It's actually quite simple.

Governments around the world have taken on massive amounts of debt. That's not a problem that can be solved overnight. And the longer it takes to fix, the greater the odds that we'll see a sovereign-debt default whose fallout will be far greater than anyone now expects.

As we saw Monday, just the fear of a sovereign-debt default was enough to tip stocks into a nosedive.

And any such nosedive will clearly be good for the price of gold, which will power higher in the very midst of sizeable stock sell-offs.

price of gold

In the very near term, if governments are able to allay debt fears, we could see a period of "consolidation" for gold prices. But there's no way to eradicate all this debt in a short period of time. That means this issue will resurface again and again.

So long-term, the global-sovereign-debt crisis will be very bullish for gold.

As we saw, there's a relationship between stock prices and the price of gold that gives us a way to predict just where the "yellow metal" may be headed.

In my years as a natural-resources analyst, I've come across several other value measures, which I've also put to good use. One of my other favorites is a useful ratio that can be calculated by comparing the relative value of gold versus gold stocks.

And this ratio tells us that gold stocks are currently a very compelling value.

Let me show you why.

The Looming Surge in the Price of Gold

As a proxy for gold stocks, the AMEX Gold Bugs Index (AMEX: HUI) does nicely.

In the years leading up to the stock-market panic of 2008-09, the gold-to-gold stocks ratio hovered in a range of 1.7 to 2.2. That meant that an ounce of gold typically bought you about two units of gold-mining stocks. At the peak of the financial crisis, an outlying surge took that ratio all the way to 4.76. Essentially, the bear-market sell-off made gold stocks very cheap on a historical basis relative to gold. And that set up a tremendous buying opportunity.

In fact, it was the best buying opportunity since this secular bull was launched in 2000.

But here's where it gets really interesting. After bottoming in April, the Gold/HUI ratio surged up to 3.0, making gold stocks much cheaper relative to gold, which has been unwilling to give up much ground from the $1,500 per ounce level. At that point, gold stocks hadn't been this cheap since April 2009 - when they went on to gain 82% in just eight months.

price of gold

Currently - even with the price of gold just below its record high - the Gold/HUI ratio is only at 2.8 (see the preceding graphic). Given the likelihood that this ratio will begin reverting back to its long-term level near 2.0, we have the right ingredients in place for a follow-up surge in gold stocks to play out during the next six to nine months.

The One Move to Make Now

It's always possible that gold could fall, which would help the ratio correct back toward 2.0, without as much of a gain required from gold stocks.

But given the forward-looking fundamentals underpinning the price of gold, I'm not expecting much weakness. That's why I am bullish on gold stocks right now.

So what's the right move, you ask?

The simplest way to gain exposure to gold stocks is by adding the Market Vectors Gold Miners ETF (NYSE: GDX) to your portfolio. GDX is a great way to invest in the AMEX Gold Bugs Index I described earlier. This ETF is composed of the world's largest and most-liquid gold and silver-mining companies, averaging about 10 million shares in daily trading, and a reasonable management expense ratio of 0.53%

So as you look for compelling value from the marketplace in this "risk-off trading" environment, keep in mind that gold stocks are about as attractive as they've been in more than two years.

Those are pretty sweet odds.

Don't let them pass you by.

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