Currency

7 reasons why the Chinese are Paper Tigers

A theme being discussed more and more is the idea China is going to save us from the monetary mess in which we are now firmly ensconced.  But based on my understanding, it will likely be several decades, if ever, before the Chinese currency seriously challenges the US dollar for global reserve currency status.

“Be extremely subtle, even to the point of formlessness. Be extremely mysterious, even to the point of soundlessness. Thereby you can be the director of the opponent’s fate.” – Sun Tzu

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However, it is not to say there won’t be a different global monetary solution in the years ahead.  It will depend on whether or not there is a repudiation of US debt.  If so, I think some new order will take place, along the lines of what Keynes’ talked about — the Bancor.  He knew early on the dangers attached to a dominant world reserve currency.  [Mr. Triffin, aka ofTriffin’s dilemma fame, warned the US would be facing structural current account deficits as far as the eye could see in its role of world currency reserve supplier.]  Thus, these two were very aware of the danger of global imbalances before it became popular in this cycle. The Great Depression was a valuable teacher for them.  

Of course history tells us global monetary systems are more haphazardly morphing events than they are planned occurrences.  All we have to do is watch the G-20 to see how difficult serious, multi-global planning can be; heck, those guys can hardly decide on what wine to serve and the order of photo ops.   

The handoff from pound Sterling to the US dollar was an unplanned evolving event that accelerated after WWI.  There was no great planning when President Richard Nixon took us off the gold standard and ushered in the error of floating rate currencies.  The gold was draining out of Fort Knox, something had to be done.  Game over.  Dirty float for a couple of years, then no pretense whatsoever of anything backing the currencies of the world’s major powers.  Just faith!  No pretense was justifiable; from that point onward money was a store of value.  Purely a unit of exchange it became.  Case closed.  

So, it leaves us where we are, as I shared with you yesterday, thanks to the excellent insight from Professor Barry Eichengreen.  Now I think it is time to explode the myth China’s currency will replace the dollar.  Many newsletter writers think that will happen tomorrow.  Proving once again newsletter writers never have to answer for their inflated farcicality. But even some serious people believe within the next decade China’s currency will rule.  I think even some serious people are wrong.  

Rather than turn this into a LONG essay, I will try to breakdown the reasons why I think the Chinese yuan is a very long way from world reserve currency status:

  1. It is never as simple as “the world reserve currency goes to the country with the largest global GDP.”  The US surpassed the UK in terms of total GDP back in the 1870s.  Yet pound Sterling remained the reserve currency for another 40 years or so. 

  2. Remember, the world reserve currency country is saddled with a consistent current account deficit. Thus, China must push out trillions of renminbi and renminbi-based asssets into the world economy.  Fine if your model is open and based on consumption.  Not so good if it is driven primarily by exports, as China’s is.  So we will need to see a big shift in China’s growth model.  That will be a wrenching long-term process.

  3. The reserve currency country must open its market to allow foreign investors to hold local assets.  This means China will have to make a complete change to its current political structure to allow much more freedoms for citizens (not only allow money to flow in, but allow its citizens money to flow out freely).  The system in place is not something that is likely to change anytime soon despite the window dressing.  The communist party still maintains absolute power, despite the comments from visitors that all they saw was free market capitalism during their trip to the Orwellian Hall of Mirrors.  It shows just how well the central committee is doing its job.  If you want a better insight into this issue, I strongly suggest you read, The Party: The Secret World of China’s Communist Rulers, by Richard McGregor.  I think this does a great job of showing us how the West in general is duped by the Chinese leadership.

  4. The US is becoming wealthier relative to China.  Say what?  All true.  The fact is since 1991, “the average Chinese citizen is more than $17,000 poorer relative to the average American than he was in 1991.” Per capita income for relatively large states is the best single determinant of competitiveness long term. So, until this trend changes, it is highly unlikely the US will give up the mantle of currency reserve status.  [See “China’s Century?” by Michael Beckley, International Security, Vol. 36, No. 3 (Winter 2011/12), pp. 41-78.   

  5. Even optimistic assumptions from those who should know, assuming China’s growth remains on track, suggest by 2035 up to 12% of global reserves may be held in yuan. [See Jong-Wah Lee, Asian Development Bank, “Will the Renminbi Emerge as an International Reserve Currency?”]

  6. Officially, all is good.  But unofficially, China may be facing its own debt bomb that could dampen growth for years, not just one or two quarters.  It happened to Japan.  Never say never! “The government’s official debt is only 15 percent of GDP, but it adds up quickly. Ratings agency Fitch estimates a bailout could cost 20 percent of GDP. Add the unpaid cost of the last bailout, debts at state-owned entities, local governments and pension liabilities, and a Breakingviewscalculation suggests Beijing’s debt rises to roughly 130 percent of GDP,” according to Reuters Breakingview. 

  7. The current attempts at internationalization of the yuan seem backwards.  Normally a country opens its capital account and upgrades its domestic financial system before attempting to internationalize its currency.  Instead China is offering bi-lateral exchange deals with some trade partners, and that gets a lot of press.  But that seems to be mere window dressing as countries are really taking up the credit China is offering.  And the developing offshore yuan deposits in Hong Kong may actually backfire, as the unofficial yuan rate in Hong Kong (CNH) is fluctuatiing around the official rate in China (CNY).  This may force China’s central bank to actually hold more dollars. 

So as much as it might be a good thing for the global economy to have a new reserve currency on the scene, it doesn’t seem as if it will happen soon enough to help in this cycle. 

 
By Jack Crooks of Black Swan Trading

The Right Strategy & How to Execute

Nothing to Fear but Fear Itself

Trading success is only partly due to having the right strategy and good knowledge of the market. Emotion plays a big role in your ability to be profitable. A trader can know the market inside and out but if fear plays a role in their decision making, they will probably not do well. Here are five common fears that we each need to learn to overcome:

Fear of Missing Out
We have all thought about buying a stock but passed on it, only to watch that missed trade work extraordinarily well. This leads us to the fear of missing out. It may be that there was a good reason for not taking the trade, but if the trade works, we are likely to break our rules in the future. This leads us in to a downward spiral toward failure.

Our trading rules are, or should be, based on testing and experience. The rules of a trading strategy are designed to work over a large number of trades, but there will always be cases where they do not serve us well.

It is important that we do not judge the validity of our rules based on what happens on one trade. To change our rules should require that we find a new set of rules that works better over a large number of trades.

When evaluating a trade, don’t think about what happened on that trade that you missed. Rely on the results of your testing which determined your strategy rules in the first place. If a trade opportunity does not fit your rules, don’t take the trade.

Fear of a Profit Turning in to a Loss
Stocks do not usually go straight up. Up trends are filled with periods of price pull backs. It is these pull backs that often shake investors out of their stock because they fear that a winner will turn in to a loser.

You have to give stocks room to move but still have a set of exit rules which will maximize profits over a large number of trades.

One of the most common reasons we exit our winners too early is because we spend too much time watching the scoreboard. All brokerages have that page where you can see what your profit and loss is for your positions. If a stock is showing a gain that then goes down, we start to attach our sensitivity to money to what is happening and that leads to emotional mistakes.

To overcome this fear, start out by not watching the profit and loss and make sure you have a set of rules for when to exit that you follow.

Fear of Taking a Loss
No one likes losing money, but losing is part of winning for all successful traders. The stock market cannot be predicted with 100% accuracy making it impossible to always be right.
What we must do is minimize the size of our losses when we are wrong. When I make a trade, I know the price point that will make me hit the eject button. If the stock falls to that price, I am out and ready to move on.

It is important to set your stop loss point at a price that makes sense. An arbitrary draw down, like a move lower of 5%, is not based on the opinion of the market. If you put your stop loss point at a price that demonstrates a negative turn for the market, then getting out will save you from taking a bigger loss and that will inspire confidence in the long term.

Fear of Not Maximizing Profits
How do you feel when you sell a stock at a profit but then watch it continue higher? For many, this is a memorable pain that sits with them the next time they have a winner giving a sell signal. Instead of exiting, they hang on for a bigger gain, hoping for the home run winner.

It is important to hang on to your winners as long as they are behaving like winners. However, when the market tells you that the trend is coming to an end, you have to take the cue and exit the trade.

If you attach goals to the stock’s performance, you take the emphasis off of the stock and can miss the message of the market. Suppose you plan to buy a new car when the stock that you have a large position in hits $5. The trade is now about the new car rather than the stock and you will likely not exit the trade until it hits your target. If the stock never gets there, you are left with a winner that turned in to a loser because you failed to do what the market told you to do.

Fear of Not Knowing
There is a lot of uncertainty in the market and many people have a hard time dealing with that ambiguity. They end up making mistakes because they do not know how to make decisions in situations of uncertain outcomes.

Trading the stock market is not a science. We cannot say that if A and B happen, C will happen, we can only say that if A and B happen, C may happen. Since C does not always happen, many people have a hard time making that decision because their personality requires certain outcomes.

To be a successful trader, you have to think like a casino owner. We do not know what will happen on the next trade but, with good strategy testing, we can know what will happen if we do the same trade 100 times. The casino owner does not know who will win the next hand of Blackjack but they do know that if they deal 100 hands of Blackjack, they will make a profit. We have to put our confidence in the averages and expected outcomes of our actions, and not judge our success one trade at a time.

Strategy of the Week

This week, I just looked at a lot of charts to get a feel for the market. In general, it was a quiet week as investors seemed more interested in digesting the recent gains than taking new risks ahead of the Greek debt solution that is expected for Monday. North American markets are closed on Monday so we will wait till Monday to see the reaction from what happens in Europe.

My Market Scan this week was to look for stocks trading at least 1500 times in Canada or 2500 times in the US, focusing me in on the most active issues. Most charts were quiet but Energy stood out with Uranium and Oil and Gas stocks performing well. Below are two picks from those sectors.

1. T.UUU
The Uranium stocks were beat up by the Japanese tsunami in 2011 and it has taken almost a year for them to stabilize and start to recover. T.UUU is breaking from a rising bottom this week, a sign that the buyers are taking an interest in the stock again. Volume was strong on Friday, supporting the upward move. The stock has support at $2.65.

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2. T.TLM
Oil made a good move to the upside this week and that helped many oil stocks look better. T.TLM (TLM) made a break of its long term downward trend line this week and looks like it is in the early stages of a long term trend reversal. Support at $11.95

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References

 

  • Get the Stockscore on any of over 20,000 North American stocks.
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  • See which sectors are leading the market, and their components.


    Disclaimer
    This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligence.

 

 

 

Market Buzz – A New Breed Dividend Payer’s

Market Buzz – A New Breed of Small-Cap Dividend Growth Stocks Lead the Charge in 2012


2011 proved to be another very tumultuous year for both the Canadian and global markets in general. But, in the wake of the 2008 credit crisis that froze capital, seriously eroded confidence in financial institutions and the ability of our leaders to act effectively is nothing new.

With Western economies awash in debt, both public and private, the great deleveraging has just begun. Volatility is here to stay in equity markets – so get used to it.

Fortunately, over the course of 2011, a number of strong themes began to emerge and gained momentum into 2012. The first being a return to dividend paying stocks. The excesses of the preceding two decades led to the pursuit of growth as a panacea of stock valuation. The promise of future growth was intoxicating for investors and the multiples applied to the growth element of a company far exceeded any premium put on a company that thought it appropriate to actually “return capital” to their investors.

In fact, there have been several periods over the past 20 years when a company was actually given a lower multiple after instituting a dividend policy as analysts then perceived the company was signaling to the markets that the company had no better use for its capital. As such, there was little growth potential left in the company and it was now a “stodgy old dividend payer.”

But this has changed. The reasons are varied and include a low rate environment, which makes dividends or distributions very attractive; distrust of management’s stewardship of capital and a need to see “cash in hand” to keep cash generation a focus; a lack of growth opportunities as the global economy grinds lower; and for Canadians specifically, a lack of alternative income generating vehicles following what was essentially the end of the business trust segment.

Our Income Stock Research performed incredibly well in 2012. What was more a surprise was that the trend did not end at with traditional cash cows such as utilities, telco’s, and pipelines etc. Within our Small-Cap research, growth companies who managed their cash flows effectively enough to paid decent dividends also produced strong returns in 2011. Included in this list are familiar names such as Enghouse Systems Limited (TSX: ESL) (initial IWB positions established in the $8.00-$9.00 range),

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MOSAID Corporation (TSX: MSD), and Boyd Group Income Fund (TSX: BYD.UN) (initial IWB positions established in the $5.55 range), which each saw their shares rise over 50% (in the case of the latter two, over 100%).

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Today, an announcement of a dividend policy or the upping of a dividend is again met with cheers from the market and we often see immediate gains – and rightfully so. What greater confidence can a management team show you as an investor than that the underlying business is generating more cash that can be paid back to you.

While growth is an essential element in our small-cap research, we have always found it prudent to invest in a basket of what we call “dividend growth stocks” and will continue to emphasize this, although not exclusively, in 2012. In the universe of investing, companies that are able to grow their dividends add an interesting dynamic to a portfolio. A growing dividend means that the income yield on the original investment also continues to grow over time.

For example, a company with a $10 share price and dividend yield of 5% will yield almost 6.7% on the initial investment after five years, if they were to grow their dividends at 6% per year. Dividend growth investors also stand to benefit from potential upside in the share price. A company that is growing their dividend in a sustainable manner will typically generate share price appreciation at the rate of dividend growth or even higher. In this scenario, if the stock in the example would appreciate almost 34% over that five year period, the company is able to grow the dividend at 6% per year. In essence, dividend growth stocks provide investors with three different sources of return – the initial dividend yield, the dividend yield growth, and the share price appreciation.

Be it in growth names or traditional cash cows, the demand for a return of capital continues to grow and we see no end to it in 2012.

KeyStone’s Latest Reports Section

 

 

 


This collection of charts/scenarios is so impressive Michael Campbell invited Dr. Martin Murenbeeld on Money Talks this weekend to discuss them. You can view all 42 charts/scenarios HERE. To listen to the interview go to the 20.30 minute mark of the player titled “MoneyTalks radio show” you can see directly above this article’s title centre page. Three examples are below: Screen shot 2012-02-21 at 12.22.37 PM

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….view all 42 Charts HERE

Canadian Farmland: The Best Investment of them All?

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A Primer for Investing in Canadian Farmland.

“Put your money in land, because they aren’t making any more of it!” – Will Rogers.  When I think about burying some serious money for the long run, I think of farmland.  I’m very bullish on Canadian farmland. My reasons: 1) Canadian farmland is very productive; 2) low cost on a global basis; 3) Canada is a stable country with a very adequate supply of water, energy and fertilizer; and 4) even the weather is cooperative as its growing season gets a little longer each year.

Some of Rick’s readers ask for more details. When ever you invest in land as a non-resident, you need to check the local laws.  For example, when I was a farm realtor I had a group of Italians interested in buying a 2000-acre farm in Illinois.  Now Illinois has a law prohibiting non-resident aliens from owning farmland.  But it doesn’t prohibit corporations from buying farmland.  So, we created a corporation and bought the farm.

How does this apply to buying a Canadian farm? 

 

…..read more HERE

History Says……You’re Safe!

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The Dow made another post-financial crisis rally high Thursday. To provide some further perspective to the current Dow rally and in response to several requests, all major market rallies of the last 111 years are plotted on today’s chart. Each dot represents a major stock market rally as measured by the Dow with the majority of rallies referred to by a label which states the year in which the rally began. The difference between today’s chart and last week’s chart is that for last week’s chart a rally was defined as an advance that followed a 15% correction (i.e. a major correction). For today’s chart, however, a rally is being defined as an advance that follows a 30% decline (i.e. a major bear market). As today’s chart illustrates, the Dow has begun a major rally 13 times over the past 111 years which equates to an average of one rally every 8.5 years. It is also interesting to note that the duration and magnitude of each rally correlated fairly well with the linear regression line (gray upward sloping line). As it stands right now, the current Dow rally that began in March 2009 (blue dot labeled you are here) would be classified as well below average in both duration and magnitude.

Notes:
Where’s the Dow headed? The answer may surprise you. Find out right now with the exclusive & Barron’s recommended charts of Chart of the Day Plus.