One of the Greatest Bargains in Stocks Today

by Bill Bonner

Keeping Up With the Debt

More analysis from Chris on the situation in the Crimean Peninsula below. This is a fast-moving situation with big implications for our favorite emerging market, Russia.  (Hint: We still think it’s a bargain.)

What we know for sure is that the news out of the region gave the markets a serious case of the heebie-jeebies. The Dow ended Monday's session down 153 (back from a 250-point sell-off). Gold rose by $28 an ounce.

We also know that the Fed’s zero-interest-rate policy … and its $4.1 trillion balance sheet are a standing invitation for trouble. What form that trouble takes will be determined later. Meanwhile, Washington’s mountain of debt gets bigger and bigger – aiming for $20 trillion of official debt by 2020. As it gets bigger it weighs on the economy. Several studies have shown debt slows down economic growth.

The reason is fairly easy to see. Remember that hamburger you ate in 2007? You enjoyed it then. The hamburger joint made money. The cook made money. And the economy registered a boost to GDP.

But if you paid for it with a credit card, the transaction may still be incomplete. You may still be paying interest on that burger. That means less money for you to spend … and less for others to earn. And this drag on the economy won’t go away until you’ve paid off the debt.

In monetary terms, the money supply expands when a credit-card loan is made. It contracts when it is repaid. Banks create money ex nihilo when they make loans. When  repaid, the loan goes back whence it came.

As economies slow down it becomes harder and harder to keep up with the debt. More and more of current output must be used to satisfy past consumption. By way of comparison, the US government has 10 times as much debt-to-GDP as Russia. In this sense, the US has 10 times as much trouble in store, should it find itself in a debt squeeze.

But again, we await developments …

Escape from Aiken

We spent all day yesterday driving back home to Baltimore from Aiken, South Carolina.

“You’re not going to try to drive back,” said the clerk at the Willcox Hotel. “There’s a huge snowstorm coming. The whole East Coast is going to get hit hard. You won’t be able to make it. Better stay here another day.”

But we were getting a little restless … not that Aiken isn’t delightful and charming. But we had been there a week. Wife Elizabeth had won her blue and yellow ribbons for horse-riding. It was time to move on – snow or no snow. So we set off early in the morning … keeping an eye on the weather via our shiny new iPhone. It was sunny and warm in South Carolina; it was hard for us to believe the weather could be so much worse up the coast.

We dallied, taking small roads over to Columbia to get a better idea of the countryside. What we discovered was that it was poor. The earth was poor; in some areas there was barely any topsoil covering the white sand. People were poor too; many of them lived in dilapidated trailers or rustic shacks. Often, there were the husks of automobiles and trucks decorating their yards and gardens.

Almost as soon as we got on the highway the foul weather caught up to us: first a light rain… then a heavy rain… then a freezing rain… then, as we entered North Carolina, sleet … and finally snow. We kept up a tolerable pace. Our plan was to continue driving north as long as possible. If the snow became too heavy or the road too icy we would put in at a motel in Greensboro … or Durham … or, if we made it that far, Richmond.

The thing that bothered us was the geography of the route. There is a vast pine forest that envelopes Route 85 as it goes through North Carolina and Virginia. If the storm were to hit us hard there, we might not find a port to put into. Signs were warning travelers. Cars and trucks were returning home. The roads were becoming quieter and quieter.

A Strange Liberty

Still in a light snow, we set out from Durham hoping at least to reach Petersburg or Richmond before we got walloped. Our wheels (on a Ford F-150) do not have much traction unless the truck is loaded. Normally, it slips and slides readily. But the longer we kept chugging along, the more ice clung to the chassis and the heavier it got. Soon, the road was covered in snow and ice; but we just kept moving along without much trouble.

By the time we got to Richmond, it looked as though we had reached the end of our travels for that day. Traffic was still thin, but there were many accidents. Several cars had hit the guard rails … a few more had slid off the road … and one tractor-trailer, pulling what looked like a gasoline tank in tow, had jackknifed just south of the city.

But just when we began looking for a Super 8 motel, or a Sleepy Time Inn, the sky brightened enough to give us hope. Besides, our iPhone reported that the snow had stopped in Washington, DC. If we could just get clear of Richmond, we reasoned, it might be smooth sailing.

As it turned out, getting clear of Richmond was a long, slow slog … but it eventually worked out more or less as we had hoped. We arrived at the Washington Beltway at rush hour. But there was no rush. Federal employees had deserted their posts at the first snowflake. The Beltway was as empty as we’d ever seen it.

And with the cops busy with so many accidents in the area, we felt a strange liberty. What should we do? Rob a liquor store or just break the speed limit?

In the event, we hastened home …

Market Insight: Russia Remains a Bargain – Despite Fears of War

From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

The Russian stock market is a bargain for long-term investors at 5.7 times reported earnings and a dividend yield of 3.4%. But not everyone sees it that way. Many see the political risk associated with Vladimir Putin’s leadership as simply too high, no matter how steep the discount on Russian stocks.

As Kim Iskyan, editor of Stansberry & Associates’ new Global Contrarian letter, put it:

“Putin has just proven wrong anyone who held out hope that the discount of Russian shares to the rest of the world might narrow. He just confirmed all the concerns about the high levels of political risk in Russia. If Putin can invade Ukraine, he can do pretty much anything … in any realm of the economy or markets or the government. He has just proven everyone’s worst nightmare.”

The thinking is that the Russian economy is in for dark times as a result of Putin’s incursion into Ukraine. We respectfully disagree…

First, Putin is de-escalating tensions with Ukraine. Reuters reports that he has ended the amassment of troops along Ukraine’s border. So, it’s by no means clear that Russia’s bloodless incursion into Crimea will turn into a shooting war.

Putin sent troops into South Ossetia, in the former Georgian Soviet Socialist Republic, six years ago. Those troops remain there today. No all-out war followed – although this was widely feared at the time.

And like in South Ossetia, it’s unlikely that Putin’s ambitions stretch farther than Crimea – where Russia has a large naval base… strong ethnic and historic ties… and where the newly appointed head of the local parliament had appealed to Moscow for protection following the regime change in Kiev.

Meanwhile, fears of sanctions against Russia… and its effects on the country’s energy exports … don’t stack up. Rob Marstrand, the chief investment strategist at Bill’s family wealth investment advisory, Bonner & Partners Family Office, recently got off a call with some of his contacts in Russia.

They reckon the risk of major economic sanctions is low. The US may try to impose sanctions if tensions continue to escalate. But the EU is unlikely to follow suit.

About one-third of the EU’s oil and gas supply comes from Russia. And Brussels knows that any sanctions would provoke serious retaliation from the Kremlin – something an already weak Europe can ill afford. In fact, Russia could benefit from tensions, as the price of oil rises…

If you already own shares in Russian companies, keep in mind that panic selling in a crisis is nearly always a bad idea. Russia remains a huge exporter of natural resources … has growing corporate profits … and much lower debt-to-GDP than most developed nations.

Its stock market remains one of the biggest bargains in the world today. Of course, you need to have a lot of physiological strength to buy when others around you are panicking. But that’s always the case when the stock market presents real bargains …

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Russia's RTS Index, weekly. The recent events have led to a decline below lateral support (blue line), but the weekly candle shows a big rebound from the lows and what appears to be somewhat more dubious trendline support (in red) - click to enlarge.

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A close-up, showing the daily chart of the RTS index. On November 21 last year, the protests in Kiev began. Obviously the Ukrainian upheaval has not been good for Russian stocks. The big red candle put in on Monday and Tuesday's large rebound are both tied to the situation in the Crimea – click to enlarge.

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ISM Services Collapse To Lowest In 4 Years; Employment Worst Since Lehman

by Tyler Durden

ISM Services headline index collapsed to 51.6 (missing expectations of 53.5) to its lowest since February of 2010. We are sure many will proclaim this as "weather-related" but remember the strong performance of the Manufacturing print. Respondents worried about weather, Obamacare, and oil prices... as the employment sub-index crashed from 56.4 (highest since Nov 2010) to 47.5 (lowest since Mar 2010) - the biggest drop since Lehman!

Big miss and lowest print in 4 years...

ISM Services Employment craters...

And before you blame the weather, the Manufacturing and Services data do not converge on that opinion...

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Prepare for The Euro Breakout

by Greg Harmon

The Euro has been struggling in a range for some time. From the daily chart below of the Currency Shares Euro Trust, $FXE, the price action has been consolidating in a ‘W’ like pattern, making an Ascending Triangle. This pattern targets a move equal to the biggest part of the triangle on a breakout. In this particular case a $5 move. And with the price holding near the top of the triangle that would target a move to 141.60 on a break higher. The other indicators, RSI and MACD

support this. But what is interesting about this chart is that it did break out, for just a minute, early on Monday, only to be dropped later. Is this a sign that orders were in to buy from Friday that pushed it higher? If the Ukraine situation settles does this mean a break could happen Wednesday? Or by the rate decision later in the Week? It seems primed. But

141.60 may not be the end of it then. A check of the weekly chart shows that the short term break would also trigger a longer term Cup and Handle that targets a move to 152.50. Does that make it more intriguing?

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Bearish Wick in Coffee forming this week? Hot Coffee cooling off?

by Chris Kimble

CLICK ON CHART TO ENLARGE

Coffee has been one of the best assets to own in 2014, up over 50% in two months. Could "Hot Coffee" be cooling off?  Coffee could be forming a bearish wick this week near the 50% retracement level of its three year decline.

The week is far from over and we won't know the true outcome of this weekly pattern until Friday's close. Should this wick remain in place Friday evening, it would be signal that this hot asset could cool off for a while.

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What Needs To Happen Before We See A Big Recovery?

by F.F.Wiley

In a Bloomberg article last May, Caroline Baum summed up the economy nicely in a single question:

Four-and-a-half years of an overnight rate near zero and aggressive securities purchases by the Fed have succeeded in raising asset prices. The question is whether higher asset prices will deliver jobs and economic growth before they become destabilizing.

In other words, will the real economy mend before excessive financial risk-taking kills the patient?

Baum called it a “horse race.”

With 2013′s economic data mostly complete, let’s have a look at where the race stands.

We’ll start by asking what needs to happen before we get the robust recovery that many economists have predicted for the past four years. Our answer is that one or both of two things need to occur:

1. Households need to borrow at the pace we normally see in economic expansions.
2. Household income needs to grow strongly.

Of these choices, the best result would be number 2 with as little as possible of number 1. The worst would be another credit-fueled expansion (more 1 than 2) that feels good for awhile but ends badly further down the road.

But isn’t capital spending the key ingredient?

You may argue we’re missing a third possibility – a capital spending boom. Many claim this is the best way to get things going again. We would say it puts the cart before the horse, at least as far as what’s prudent and realistic.

In America’s consumer-led economy, businesses have no reason to ramp up capital spending unless they expect strong gains in consumption. That seems unlikely. We’ll discuss capital spending in more detail in the future; for now, we’ll point to the economy’s ample unused capacity, tepid overseas growth, growing financial risks and President Obama’s bumbling incursions into private markets. Is this really the best environment for entrepreneurs to launch a capital spending spree? We doubt it.

Okay then, how about credit growth and household income?

We can’t rule out the possibility that the Fed gets the credit boom it’s looking for. But we don’t expect it in the near term for the same reasons that capital spending won’t take off, nor is it predicted by survey data.

Which leaves household income. According to the personal income report released Monday, annual growth in real disposable income jumped to 2.8% in January. Based on this alone, you might conclude that households are flush with cash. However, it’s not unusual for this indicator to bounce around between the end of one year and the beginning of the next due to tax law distortions. We screen out the noise by averaging all December figures with the subsequent January figures and using the average for both months:

As indicated on the chart, real disposable income has been slowing for three years and currently shows no growth at all. We’ll see at least a small bounce next month, since the latest figures are held down somewhat by the 2013 increase in Social Security withholding and small increase in tax rates. There’s also a small effect from the expiration of extended unemployment benefits in January. But these considerations don’t fully explain the downwards trend.

A more important factor is that new jobs are paying poorly compared to the average existing job. Employers are picking up part-timers and low-paid service workers and creating very few “breadwinner jobs.” Therefore, disposable income is much weaker than you would think if you just focus on employment growth.

And not only does the personal income report give us another perspective on the quality of newly created jobs, but it seems to explain the overall economy pretty well. We see the same declining three-year trend in consumption:

And in capital spending:

The remaining components of private domestic demand – housing and commercial construction – are related to supply factors and credit growth as much as household income. Nonetheless, total residential and nonresidential (structures) investment shows a similar pattern to the other charts:

What’s more, demand would be even weaker if households hadn’t compensated for poor income growth by reducing savings:

Conclusions

For all the chest-thumping from policymakers about the declining unemployment rate and increase in GDP growth in the second half of last year, these statistics are easily misread. More telling indicators, such as private domestic demand, haven’t picked up at all. Nor would you expect a robust recovery as long as employers create mostly lousy jobs.

Getting back to Baum’s horse race between the real economy and the risk of financial instability, the real economy seems to be falling behind. Financial risks are growing steadily, as we discussed in “Tracking ‘Bubble Finance’ Risks in a Single Chart.” The real economy, on the other hand, is held back by weak income growth.

Looking forward, it’s worth keeping an eye on the personal income reports and other indicators of employee compensation. We’ll surely see some improvement as temporary effects wash out. But as long as the declining trend remains intact, don’t expect the big recovery that policymakers continue to predict.

Bonus link

For more on why employment growth isn’t as simple as Keynesian economists touting full employment targets would like you to believe, we refer readers once again to Arnold Kling’s PSST theory. Kling builds out an up-to-date variation of Joseph Schumpeter’s theory of creative destruction. He explains why creating sustainable jobs after a bust can be a very slow process.

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Ukraine turmoil hasn't finished with agriculture markets

by Agrimoney.com

Is that it for the Ukraine crisis?

There is hope of containment, at least, with talks between Moscow and Washington over Russia's deployment of troops to Crimea in southern Ukraine.

But that does not mean that the turmoil should be forgotten by agricultural investors, producers and policy makers, even if negotiation can put a lid on the Crimea pressure cooker.

Hryvnia's hard time

After all, Ukraine represented a worry to markets before any balaclava-wearing pro-Russia militia were seen around Balaclava, as protests forced Viktor Yanukovych, the country's president, to flee.

While fears that instability would interrupt logistics and exports have not, so far been fulfilled, with Ukraine's main grain ports such as Odessa a distance from Crimea, that is not the only threat to crop supplies.

Ukraine's farmers, like peers in Argentina, may decide to withhold sales of crops, denominated in dollars, if the local currency, the hryvnia, takes a new lurch lower.

Even if it doesn't, the currency's fall of some 18% this year means farmers already face paying more, in hryvnia terms, for imported needs such as many fertilizers and agrichemicals, which looks like curtailing harvest prospects this year.

Russian trade

Farmers may have to do so with minimal state support too. Although the European Union on Wednesday backed an E11bn aid package to Ukraine, much of that is tied to longer-term programmes, and there are many calls beyond farming on what cash is available immediately.

And all this is before bringing Russia into the equation, and considering what a weakened rouble means for a country already renowned for its keen rivalry in grain export markets.

Russia's dominance in last week's wheat order by Egypt's Gasc authority underlined the even sharper edge to its competitiveness honed by a soft rouble.

Conversely, the rouble retreat bodes ill for Western livestock producers, albeit at a time when meat prices are extraordinarily high, with Russia the top beef importer, ranked second in pork, and a substantial poultry buyer too.

Message to policymakers

But if those are factors for grain producers and traders to consider, there is one for policymakers too.

The flexing of Russian muscles issued a timely reminder of the reliance of many Western nations for energy on countries with somewhat unpredictable, or plain unsavoury, regimes.

Russia, for instance, supplies Europe with more than 30% of its natural gas (about half of which comes through Ukraine).

This kind of dynamic should make authorities in importing countries think twice before going in too hard on the biofuels industry in an attempt to depress food prices. Gaining energy independence, with technologies as carbon neutral as possible, is a strategic benefit.

Sure, food is the priority. But soaring fuel prices can bring nations low too.

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