-- Posted Monday, 15 January 2007 | Digg This Article
The following are some snippets from the most recent issue of the International Forecaster. For the full 26 page issue, please see subscription information below.
SATURDAY, JANUARY 13, 2007
THE INTERNATIONAL FORECASTER
JANUARY 2007 (#2) Vol. 11 No. 1-2
P. O. Box 510518, Punta Gorda, FL 33951-0518
An international financial, economic, political and social commentary.
Published and Edited by: Bob Chapman
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NEXT ISSUE OF THE IF (MidWeek January 17, 2007)
US MARKETS
The poor and what used to be our middle class buys goods and food from Mattel, McDonald’s and Home Depot, which all raised their dividends 30% or more last year. The name of the game is shareholders value not lower prices.
In spite of another year of hefty profits of the blue-chip S&P 500 Index the number raising or initiating dividends was 304 down from 317 in 2005. That breaks a strong uptrend in place since 2003, when 267 of the companies in the index lifted or initiated payouts.
Corporations have had incentives to lift cash payouts to investors most of whom are wealthy. Congress in 2003 slashed the top federal tax rate on dividend income to 15% from 35%, making dividends much more lucrative for shareholders.
We are seeing hesitation by companies to raise dividends because they expect earnings growth to decelerate because dividends are generally paid out of retained profits. We believe the hesitation is there but there is a bigger factor and that is, many companies are spending record sums to buyback stock, which helps push up stock prices, rewarding shareholders with capital gains and which also allows executives to sell their option stock at higher prices. By reducing the number of shares outstanding a company can boost its earnings per share potentially making its stock more valuable.
S&P 500 companies spent $110 billion for stock buybacks in the third quarter, twice what they paid in dividends.
We find it of interest that as corporations have made massive amounts of money they have virtually, until this year, frozen pay. This is a very lopsided situation as productivity officially increased by 3-1/2%. Shareholder value is the clarion call but the employees have been left behind and in the end corporations will have to pay for that in higher wages and less productivity. This is part of what is causing the widening gap between the rich and the poor and what is decimating the middle class.
There will be pressure ahead to raise dividends as baby boomers increasingly turn to stocks of companies that raise dividends to meet their obligations, particularly interest rates as bond rates stay relatively low. Pension funds also may have to rely more on raising dividends to meet their obligations.
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Oil has fallen $10.00 a barrel while Venezuela nationalizes, Nigerian production is under siege, Russia is arguing with Belarus over transit fees and has shut off oil supplies to Western Europe and we have a war brewing with Iran. Does that make any sense to you? Of course it doesn’t. Oil should be selling at $70.00 a barrel not $54.00. Why is that? It’s because our markets are manipulated, that is why.
The trade gap narrowed in November by 1% to $58.2 billion. This is the third straight month of lower deficits. The October deficit was $58.8 billion. The year-to-date deficit is up 7.5% to $701.61. 2006 will surpass the record $716.7 billion deficit set in 2005. The dollar value of imported petroleum fell by 9.5% in November to $15.6 billion. This was the lowest import value since February.
The trade deficit with China widened to $22.9 billion in November from $18.5 billion in the same month last year, but this gap was lower than the record $24.2 billion deficit set in October. The gap for the first 11 months of the year was $213.5 billion. Up from $185 billion YOY.
On 12/15/06 the Treasury/OMB report was released and as far as we know no one picked it up. The bottom line is we are broke. We cannot pay our bills and promised benefits under current levels of taxation.
It is no wonder Iranian banks are dumping the dollar and using the euro. Iranian banks are feeling the pinch of the US-led drive to have banks curtail transactions with Iran’s state-controlled banks. Iranian banks and companies are having to put up deposits of 100% of large deposits to foreign banks to get them to issue letters of credit for foreign transactions. This cuts off dollar transactions in Europe where Iran did $25 billion in trade last year, as trade stagnates as the neocons escalate economic warfare. These actions have forced Iran to use the euro when it previously used dollars.
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Americans are outraged at the corporate stock options’ scandal and the SEC is not pursuing criminal action. Shareholders are livid. Just fines as usual. Pros were in particular irked by the SEC’s decision to change its requirement for reporting the dollar value of stock and stock options awards in the summary compensation tables of corporate proxy reports. Under rules adopted in July 2006, corporations had to report their option costs all at once based on the aggregate grant date fair value of awards. The result was a very large number were recorded and granted. Now they just report option values over the life of the award, or five years. This allows companies to game the system. This stops investors from comparing compensation costs among companies. Reports become all inconsistent. The SEC has as usual killed corporate transparency again and granted more leeway to corporations issuing options.
As we mentioned previously 71% of companies with S&P credit ratings had junk-quarterly ratings, that is BB or lower in 2006, up from 32% in 1980. 42% of the companies were single B, the lowest possible credit rating that isn’t vulnerable to immediate default. Only 7% were single B in 1980. Prior to 1958 debt was no more than 20% to 25% of total capital. Since the 1960s debt has continued to build due to inflation. The reason there has not been more bankruptcies is that since 1959 M3 has increased at an average of 7.9% annually and since 1993 close to 10%. Our latest figure was close to 10.8%. This means debt has held up because of rampant inflation and generally low interest rates. That means rates cannot go up without some dire consequences. Higher rates will make hedge funds run for cover and this junk debt will fall in value causing losses to holders. Cheap rates and easy money have held defaults to a minimum but sooner or later rates will rise and the blood bath will begin.
This warning goes for sovereign debt as well. One thing that causes countries to default is a refusal by the bond markets to finance their deficits. That comes as rates rise even though the yield versus risk is more attractive, because liquidity dries up. Today’s lack of failures is not due to excellent management - corporate or governmental – it is due to a sea of liquidity. We are at point now or close to it that if the Fed raises rates just ¼% that panic will ensue.
We are facing defaults worse than the 1930s and a revival of the economics we learned in the 1950s. Most of the new theories will end up in the dustbin. That is why in bonds we only now recommend Swiss franc government debt paying 1-1/8%. Better we should maintain our principal than to be chasing an inflation borne yield.
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GOLD, SILVER, PLATINUM, PALADIUM AND DIAMONDS
On Wednesday gold fell $1.10 to $611.90 and silver fell $0.12 to $12.34. The February contract month in gold closed at $613.40, minus $1.60, silver fell $0.15 to $12.45 and copper rallied strongly up $0.11 to $2.66. Gold fell to $606 as silver visited $12.24. You have seen our explanation of why oil, the euro and the pound have been attacked along with gold and silver. We can promise you when they turn along with the commodities and the dollar falls again, gold and silver will roar. Over the past four days sell off in gold and silver there has been enormous physical demand, particularly out of India. We also found it of interest that the largest monthly growth in US exports from the US was precious metals, some $804 million versus $599 million for a 34% monthly increase. We also saw the largest monthly increase in jewelry at $652 million versus $515 million for a 26% increase. YTD non-monetary gold sales were $7,962 billion versus $5,088 or 56%. It should also be noted that ECB, member sales, are running at an annualized 300-ton rate, or 23% below last years 390-ton sale. On Tuesday the large Tocom shorts increased their position by 4,926 contracts to 117,847. Goldman increased part of that by 2,013 contracts to 32,210. Those same shorts reduced their silver short positions by 563 contracts to 3,588. The XAU lost 1.51 to 129.78 and the HUI fell 3.51 to 309.78.
Dubai’s gold industry sales soared 40% in December and 5% in 2006, thanks to the Dubai Shipping Festival.
On Wednesday the Dow after having been down over 100 points finished up by magic at 12,442, up 26; the S&P was up 27 Dow points and Nasdaq was up 90 Dow points. Oil fell $1.62 to $54.02, gas fell $0.04 to $1.43 and natural gas rose $0.12 to $6.76. The euro fell $.0060 to $1.2937, the pound fell $.0069 to $1.9325 and the Canadian dollar rose $0.17 to $85.20. The 2-year Treasury yielded 4.81% and the 10’s 4.69%.
In Russia, a total of 42 commercial banks signed contracts to buy 161.9 tons of gold from producers in 2006. Russia is expected to produce 165 tons in 2006.
Thus far 18 banks have ordered 56.3 tons for 2007 and some banks have been buyers out into 2011.
Traditional household investment in gold will soon have a new option with the much-awaited Gold Exchange Traded Fund (GETFS) expected to be launched within a month in Mumbai, India. Three funds have filed to market such funds.
A minimum of 1 gram of gold can be bought or sold via the schemes enabling even the poor to buy the precious metal and plan for future needs.
On Thursday starting 4-1/2 hours prior to the Comex open of gold flipped from up $2.00 to even and silver ranged from plus $0.01 to plus $0.15. Copper went from plus $0.08 to minus $0.08. On the day gold rose $0.60 to $612.50 and silver rose $0.01 to $12.35. The Brits raised interest rates unexpectedly and the pound rallied ostensibly helping gold, but that didn’t last long as the US Treasury pounded the pound and tried the same with oil. It was trying to rally to help gold, but it got blasted to close down $2.14 a barrel to $51.88. Gold open interest fell 1,889 contracts to 345,602 and silver OI fell 1,256 contracts to 100,161. It is within 4,000 contracts of its multi-year low. In both instances physical buying held up the market. The euro took another hit off .48 to 128.89 and the dollar index rose .24 to 85.09. The 10-year Treasuries yielded 4.74% and the 2’s were 4.85%. The Dow rose 73 to 12,515; S&P rose 81 Dow points and Nasdaq was up 155 Dow points. On Wednesday the big Tocom shorts added 1,731 gold shorts to total 119,578 contracts. Goldman increased their shorts by 971 contracts to 33,181. This in part is slowing the upward progress of gold. On Tocom silver shorts added 101 contracts to total 3,689. The XAU gained .88 to 130.66 and the HUI edged up .67 to 309.95.
South African gold output fell 7.6% in volume terms in November YOY.
As we mentioned previously ETF gold funds will soon be offered in India. It is estimated Indian households own 15,000 tons of gold, 10% of the worlds entire above ground stocks and more than the supposed hoard of US, German and French governments put together. Last year Indians bought 20% of all gold purchased.
As we have written in the past the Indian government deliberately reduces the value of the Rupee every year and since 1975 the Rupee has fallen from 8 to the US dollar to 48. Thus, it is not surprising to see Indians consistently purchasing gold. This is what Americans should be doing but they are too dumb to understand what is being done to their currency and purchasing power.
The Kotak’s Gold ETF could be the biggest in the world considering India’s thirst for gold and could make the Gold ETF StreetTracks look like small change. This is why gold related assets are bought for the long term because gold’s future is very bright on a long-term basis.
On Friday five hours before the Comex opening gold was trading up about $1.00 as the hours wore on, gold progressively grew stronger. Silver did the same, moving from -$0.02 to plus $0.43 to close at $12.78. Gold closed just off its daily high, up $12.90 to $625.40. The February contract in gold rose $13.00 to close at $626.90, silver rose $0.42 to $12.88 and copper was off $0.06 at $2.60. Technically the market tore the upside wide open in both gold and silver, and the longs stayed long right into the long weekend, which makes Tuesday in the US look for a strong opining. Oil was strong up $1.11 at $52.99 as OPEC said they cut an additional 500,000 barrels per day. Gasoline rose $0.04 to $1.43 and natural gas rose $0.31 to $6.60. The euro traded twice as high but closed up .0028 to $1.2917, the pound traded up almost 2 pennies finishing up .0145 at $1.9582, the Canadian dollar rose .47 to 85.46. The dollar index fell .27 to 84.82. The XAU rose 3.76 to 133.92 and the HUI was up 10.17 to 320.12. The 2-year Treasury note yield rose to 4.90% and the 10’s moved up to 4.78%. The Dow rose 41 to 12,566, the S&P rose 62 Dow points and Nasdaq was up 108 Dow points. Gold open interest rose 3.438 contracts to 349,040, a good part of which was short covering. Silver OI fell 501 contracts to 99.663 only 3,000 off the multi-year low.
The COT report is finally back. The large specs decreased longs by 15,482 contracts and they increased shorts by 9,533 and that is very bullish. The commercials increased longs by 13,680 and decreased shorts by 17.093, which is extraordinarily bullish. The commercials, the most important element in the market, have now covered 70% of their short positions and are essentially probably net long, which is highly unusual.
This recent market manipulation by our government is over and it points out again why in trend in a bull market you go long and stay long and buy on bogus dips. Technically, which we do not often refer to, both are very powerful with no gaps to fill. Incidentally, gold and silver rarely rally on Friday and almost never before a long US weekend. On Thursday on Tocom the big gold shorts reduced their net short position by 551 contracts to 119,027 and Goldman covered 83 contracts bringing their net short position to 33,098.
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Make check payable to ROBERT CHAPMAN (NOT International Forecaster), and mail to P.O. Box 510518, Punta Gorda, FL 33951-0518. Please include name, address, telephone number and e-mail address. We accept Visa and MasterCard charges. Provide us with your card number and expiration date. We will charge your card US$129.95 for a one-year subscription.
Foreigners please use foreign U.S. dollar denominated checks or Money Orders.
Note: We publish twice a month by surface mail or twice a week by E-mail. international_forecaster@yahoo.com
-- Posted Monday, 15 January 2007 | Digg This Article
