Tuesday, December 27, 2011

A Different Way to Invest in Gold

When people think about investing in gold, they think of the traditional methods. These methods include gold bullion and coins along with gold stocks, funds and exchange traded funds.
There is another way to invest in gold that is rarely though about...that is investing into emerging market economies with large gold mining sectors.

The countries where the gold mining industry makes the biggest contribution to GDP are not places where you may think of like South Africa. But it is smaller countries such as Mali and New Guinea where gold a big part of the nation's GDP. Other countries where gold mining contributes a decent percentage of GDP include Tanzania, Ghana, Uzbekistan and Peru.

In Tanzania, for example, the value of gold exports has tripled over the past five years to $1.5 billion. And this is due solely to rising gold prices.

Of course, to further benefit from the expansion of the gold mining industry, these frontier market countries will need to continue stabilizing their politics and also put in more incentives, such as tax breaks, for overseas mining companies to establish operations in their country.

Since these are frontier markets investors may wonder to invest into their gold mining sector. The best way to do that is through gold mining companies which are heavily exposed to these countries.

One example is AngloGold Ashanti ADR(NYSE: AU) which has invested in Ghana, Mali, Tanzania and Guinea in the past few years. It also started exploration activities in Gabon and the Congo.

Another company to consider is Harmony Gold Mining ADR (NYSE: HMY) which has expanded its exploration activity in Guinea extensively.

Finally, Kinross Gold (NYSE: KGC) has expanded its operations greatly in West African nations.

Investors should keep in mind that in addition to the risk that gold prices will fall, there is still a large political risk in many of these countries. So investors may want to scale in to their positions.

Thursday, December 22, 2011

Apple and Google Score in the Holiday Season

The battle in the smartphone market during the Christmas season seems to have come down to a two-horse race between the iPhone from Apple (Nasdaq: AAPL) and smartphones with the Android operating system developed by Google (Nasdaq: GOOG).

In the third quarter of 2011, the number of Android-powered smartphones knocked the iPhone into second place overall with Korea's Samsung overtaking Apple to become the world's largest seller of smartphones.

However, analysts have expected Apple to bounce back smartly in the fourth quarter following the launch of its iPhone 4S in October. And the analysts may be right. In the U.S., the iPhone 4S has been the best selling phone in the run-up to the Christmas holiday.

The success of the iPhone and Samsung's line of Android-powered smartphones seems to have pushed aside the competitors this holiday season. Competitors such as HTC and Research in Motion (Nasdaq: RIMM) have warned of very weak holiday sales.

An analyst an Bernstein, Pierre Ferragu, said this about Apple and Android-based smartphones: “We now have a strong conviction that the two ecosystems won't leave much room for any alternatives.”

It remains to be seen though whether this will continue to be true in the months ahead.

Thursday, December 15, 2011

The New Safe Haven Investment - Diamonds

Not only are diamonds a girl's best friend, but they may also be a friend to investors looking for a safe haven from market storms.

The supply and demand scenario for diamonds offers a scenario which points to higher prices.

On the demand side, wealthy Chinese and Indian consumers as well as those from the Middle East have lit a fuse under the diamond market.

Last year, Gareth Penny, the CEO of the leading diamond company DeBeers, spoke about Chinese demand: “If you look back 20 years, there was no diamond acquisition culture in China. But today in Beijing, Shanghai, and Guangzhou, there is an obvious launch pad. 40% of brides in those cities are getting diamond engagement rings. It was zero 15 years ago."

Now consider the supply side of the equation. There have been no new discoveries of large diamond mines for more than a decade. And even if one was found, developing a new mine takes 10 to 12 years.

Diamond prices have already jumped in the past year fueled by Asian demand. The value of top quality polished diamonds of 5 carats have risen to roughly $150,000 a carat, up from the $100,000-$120,000 range of a year ago.

No wonder then that DeBeers, which is owned by Anglo American, said its earned more from its diamonds in the first six months of 2011 than in any previous six month period.

Another factor to consider is that diamonds are still cheap, with prices still well below their inflation-adjusted 1980s peak.

So if one believes in the bullish scenario for diamonds, how can an investor get in on it. Besides buying a diamond for someone special, there is one pure play in the stock market on diamonds.

It is a company called Harry Winston Diamond (NYSE: HWD). The company owns a 40% interest in the Diavik Diamond Mine in Canada. It is also a luxury retailer known as a premier diamond jeweler with many locations in emerging markets.

Friday, December 9, 2011

Arab Spring Drives Up Oil Prices

The United Arab Emirates' oil minister, Mohammed Al Hamli. recently defined a “reasonable” price for as oil as between $80 and $100 a barrel. This is quite a jump up from just five years ago when OPEC oil ministers said that a “reasonable” price for oil was about $50 a barrel.

But a look at the price that Middle East countries need to survive economically today explains why oil ministers are now targeting such higher prices.

Not long ago the International Monetary Fund provided a timely update on the so-called 'breakeven price' for oil needed by Middle East producers to balance their fiscal budgets.

In the IMF's latest semi-annual “Regional Economic Outlook: Middle East and Central Asia” report, it estimates that the breakeven oil price for the UAE has now risen about $80 a barrel, up from $60 a barrel in 2008.

For Saudi Arabia, the IMF estimates that $80 a barrel is the breakeven price, up nearly $30 a barrel in just three years.

Part of this increase in the breakeven price can be explained by the sharp increase in spending earlier this year in response to the 'Arab Spring'.

But even before 'Arab Spring', budgets in Middle East countries were ballooning nearly out of control as governments try to deal with little non-oil revenues, rapid population growth and a very generous welfare system where governments pay almost everything for their citizens. These include payments for utilities, fuel, education, housing and health.

The rapid rise in breakeven oil prices means that key members of OPEC now have a strong incentive to defend much higher prices.

It also means that Middle East countries are unlikely to spend any large amounts of money in building spare oil production capacity. This is simply no money in their budgets for such undertakings.

The bottom line for investors and consumers is that oil prices would be extremely unlikely to below $80 a barrel for more than a brief period of time.

This is obviously bullish for oil. Investors can participate easily through the use of an exchange traded fund. The ETF which best reflects global oil prices the United States Brent Oil Fund (NYSE: BNO).

Wednesday, December 7, 2011

The Importance of Angola to the Oil Market

Libya has been at the forefront of oil investors for much of the year. The nation of Angola has also been a source of supply disruptions in 2011, helping push crude oil prices higher.

Angola has been a true success story. Over the last decade, it more than doubled its production. Output rose from 750,000 barrels a day in 2001 to a peak of nearly 2 million barrels a day in January 2010.

The bad news for the global oil market is that the west African country, which joined OPEC in 2007, has seen its output fall significantly this year.

In 2010, Angola pumped an average of 1.85 million barrels of oil per day. But in 2011, it has managed to pump out just an average of 1.65 million barrels a day of oil.

Investors may shrug their shoulders and say 'so what?'. After global oil production is roughly 87 million barrels a day and Angola producers about 2 percent of that total.

However, Angola is far more important to the global oil market than appears at first glance.

Angola pumps a particularly low-sulfur crude, which is highly sought after by Chinese and Indian refineries to produce high quality gasoline and diesel.

China bought about 45 percent of the country's oil production last year. The United States and India are the next two biggest buyers, accounting for another third of Angola's oil exports.

So the global oil market has looked with interest as Angola's oil production stalled due to a lack of new projects and glitches in several existing oil fields. There were technical problems (water injection among others) in the Saxi-Batuque field operated by ExxonMobil (NYSE:BP) and the Greater Plutino field operated by BP PLC ADR (NYSE: BP).

The good news now is that the production problems are being solved. In addition, new oil fields are coming onstream.

The Plazflor field, operated by France's Total SA ADR (NYSE: TOT), will add 200,000 barrels of output while several projects from BP will bring another 150,000 barrels online. Additionally, Exxon's Kizomba-D cluster fields will add on another 150,000 barrels a day.

In total, Angolan production capacity should recover by 400,000 barrels a day year-on-year, alleviating some pressure off high oil prices which is good news for consumers.

Thursday, December 1, 2011

The Whys of Drug Shortages

There is an event going on the pharmaceutical sector which could put lives at risk...but it's not what you may first think.

It's not drugs being recalled for causing dangerous side effects. What is happening is an actual record shortage of much-needed medicines.

Pharmacists Are Worried

The American Society of Health-System Pharmacists said last year its members could not obtain an unprecedented 211 prescription drugs through the usual channels. The Society also reported more than 89 shortages of products in the first three months of this year alone.

The organization convened a national conference on the issue last November and has devoted a special section of its website – www.ashp.org – to drug shortages.

Cynthia Reilly, director of its practice development division, reflects widespread concern among pharmacists. She said, “The clinical impact is significant, with the potential for morbidity and mortality.”

She says pharmacists are spending many hours managing drug shortages and conducting inventory work rather than looking after patients. She also warns that even when alternative treatments are available, they are not always the most appropriate and could lead to dosing and other errors.

Separately, figures from the Food and Drug Administration show a surge in “stock-outs” with 178 drugs in short supply in 2010. This compares to only 65 drugs in 2005.

The growing number of “stock-outs” has sparked rising concern in the healthcare sector for good reason.

Shortages of Critical Drugs

Most of the medicines experiencing shortages are are for generic, off-patent medicines. But they do include some of the most important life-saving therapies, such as drugs to treat acute leukemia and bone marrow cancer.

Dr. Richard Schilsky, chief of oncology at the University of Chicago Medical Center, was the former head of the American Society of Clinical Oncology. He said, “For some of these drugs there is no substitute.”

Yet a growing number of patients in the United States are indeed experiencing problems, sometimes with life-threatening consequences.

One such example occurred due to production problems at Genzyme's Boston plant for its patented 'orphan drug' Fabrazyme. This drug is used treat the rare genetic disorder Fabry's disease. Genzyme was recently bought out by Sanofi-Aventis ADR (NYSE: SNY).

What is behind these shortages of needed drugs? It is being partly driven by intensifying industry consolidation, with a lot of merger and acquisition activity in the sector. This has reduced the number of suppliers and spurred cost control efforts.

These newly-merged companies are simply disengaging because of a lack of profit in producing these drugs.

Coupled with pricing pressure on medicines, some manufacturers have preferred to cease production of those drugs with low margins produced in low volumes.

Another factor is the globalization of the pharmaceutical supply chain. The rise of producers in places like India and China has added further to pricing pressures, as well as a shift to “just in time” production. Ms. Reilly of ASHP commented on this situation, “There is no buffer stock any more, so [pharmacies] don't even have a week's supply of drugs.”

Of course, there is regulation. Mike Benedict, pharmacy director at the Denver Health Medical Center, pointed to drug regulatory shutdowns of manufacturing centers. This, he says, leaves hospitals to stockpile drugs for injections and turning to secondary wholesalers who charge more for medicines they know are in short supply.

Calls for Reform

These shortages of medicine have sparked calls for wide-ranging reform. These reforms include calls for tougher powers given to be given to the FDA and intensified voluntary efforts by generic drug manufacturers to tackle the drug shortfalls.

There have also been calls for fresh financial incentives to ensure adequate provision of older medicines that are in short supply. Others have called for the lowering the regulatory costs of approving some medicines.

However, right now no one really seems to have the right answer.

Perhaps the best solution may be to give pharmaceutical companies incentives to again produce enough of these types of older drugs that are such a necessary part of many people's lives.

Monday, November 21, 2011

LNG Tanker Market Heats Up

The market for LNG (liquefied natural gas) has heated up, thanks to demand from Japan, China and other Asian nations.

In addition, LNG has become more available with the opening of new export facilities in Qatar, the world's largest LNG exporter.

These two factors in combination have fired up the market for the LNG tankers which transport the gas all over the globe.

This was once a sleepy market with long-term 20 year contracts tying up ships with little profit for the ship owners. No surprise then that about 30 percent of the fleet was sitting idle just two years ago.

But now things have changed...more and more of the ships, especially the new LNG carriers, are being leased on the short-term or spot market.

Charter rates were languishing at a barely profitable $30,000 a day have recently surged to as high as $125,000 a day thanks to surging demand for these vessels. In fact, Swedish shipper Stena Bulk has calculated that 90 to 95 percent of the world's roughly 360 LNG tankers would soon be in use

The CEO of another tanker operator, Norway's Hoegh LNG, said the market was likely to remain “very tight” until 2013 or 2014. And after that the completion of export facilities, such as in Australia, will require still more ships.

Andreas Sohmen-Pao, CEO of BW Gas – owner of the world's biggest LNG fleets – agrees. He said the market will expand even further if the United States started to export significant amounts of its natural gas supply.

By the way, the UK's BG Group last month signed the first contract to export LNG from the United States, once the first export liquefaction terminal is ready in 2015.

This boom in the LNG market is all good news for the LNG carrier companies which are publicly traded here in the U.S. These companies are: Golar LNG Ltd. (NASDAQ: GLNG) and Teekay LNG Partners L.P. (NYSE: TGP).

Thursday, November 17, 2011

Central Bank Buying of Gold at 40-Year High

It really is saying something when the purveyors of the world's paper currencies – the world's central banks – are busily buying gold at a nearly unprecedented rate.

They seem to not believe in their own product – paper money.

The stunning headline, from the World Gold Council, is that central bank gold buying is at a 40-year high.

Central banks only became net buyers of gold last year after two decades of heavy selling.

Central banks made their largest purchases of gold – a net 148.4 million tons – in decades in the third quarter of 2011. The banks took advantage of a sharp drop in gold prices in September.

The World Gold Council declined to identify the central banks doing the buying. It said only that “a slew of new entrants emerged wishing to bolster gold holdings”. You can bet that most of the new entrants were emerging market central banks looking to diversify away from the U.S. dollar.

Marcus Grubb, head of investment at the World Gold Council, forecast that central bank buying for the full year could be 450 million tons. This implies a further 90 million tons will be purchased in the fourth quarter of 2011.

Do not be surprised if the total purchased for the year comes to 500 million tons. The people in the emerging markets are not fools...they see the how the U.S. and European economies are “burning” while the politicians are “fiddling”.

In addition to buying physical gold (the best method), investors can also exposure to gold through the use of exchange traded funds (ETFs) such as the ETFS Gold Trust (NYSE: SGOL).

Monday, November 14, 2011

Iran Pushing Oil Prices Higher

It's been deja vu lately for the oil market as fear factors regarding Iran have returned.

Iran is very important to global oil markets as it is the world's third biggest exporter of black gold after Saudi Arabia and Russia. Last year, the country sold an average of 2.6 million barrels of oil a day, mainly to the Asian countries of Japan, China and India.

The price of Brent crude oil, the global benchmark, has rallied to almost $115 a barrel as tensions rise in the nuclear triangle between Iran, Israel and the United States.

Of course, there are factors at play here besides Iran which is pushing prices higher. These other factors include continued supply disruptions from Libya, Yemen and Syria along with sharply lower oil inventories in Europe (the lowest level in almost 9 years).

This combination of tight fundamentals and rising geopolitical tension has driven up oil prices more than 16 percent from the eight-month low set in early October at $99.70 for Brent crude oil.

The geopolitical tension comes from the fact that Iran controls the Strait of Hormuz, the gateway for Middle East oil where 15.5 million barrels a day passes through. That is equivalent to a third of all seaborne traded oil.

The Strait has added significance because all the world's spare production capacity is in Saudi Arabia, the United Arab Emirates and Kuwait. All of these countries ship their oil through the Strait.

If the Strait of Hormuz is shut down, even briefly, oil prices would skyrocket. Independent energy consultant Philip Verleger says “It is the $200-a-barrel scenario.”

Investors can protect themselves several ways against such a scenario such as buying companies with large exposure to oil from other regions of the globe. Statoil ADR (NYSE: STO) and Petrobras ADR (NYSE: PBR) come to mind.

Another way to play it is through an exchange traded fund (ETF) based on the Brent oil futures contract. It is the United States Brent Oil Fund (NYSE: BNO) and is up 25% year-to-date.

Thursday, November 10, 2011

Cash Cow for Media Companies - Netflix

Not long ago, media companies were wondering whether Netflix (NASDAQ: NFLX) was going to be disruptive to their traditional models.

It turns out that Netflix was not and, in fact, turned into a cash cow for the industry. But now the question is for how much longer will it remain so.

Three media firms - CBS (NYSE: CBS), Time Warner (NYSE: TWX) and Discovery Communications (NASDAQ: DISCA) – reported strong quarterly results last week. All three companies said it was benefiting from a windfall of cash from online video services such as Netflix, Hulu and Amazon (NASDAQ: AMZN).

These three digital distributors are battling for market share now and ahead of the entry into the market by both Apple (NASDAQ: AAPL) and Google (NASDAQ: GOOG). So each company is aiming to set itself apart from the competition by spending large amounts of money for the rights to stream popular movies and TV shows and even older “library content”.

This new source of revenue represents a very lucrative third revenue stream for media companies, supplementing advertising along with cable and satellite operators.

Nomura analyst Michael Nathanson called Netflix “the gift that keeps giving” and summed up the situation this way, “Netflix has been a friendly contributor to everyone's year.”

That is great for shareholders of media companies, but not so good for Netflix shareholders as they have found out recently with the stock falling some 70 percent.

Especially the deals reached with the media companies in many cases are not exclusive...the media companies have sold their content, in some cases, several times.

Add to that, the loss of 80,000 subscribers in Netflix's most recent quarter and a rational investor will see nothing but losses for the company in the quarters.

Like many other technology stocks, Netflix seems like a shooting star across the night sky whose light is quickly fading.

Tuesday, November 8, 2011

Rare Earths Demand and Prices Fall

China produces over 97 percent of the world's supply of rare earths, so any news coming out of China is important for the industry. Rare earths are essential raw materials for many everyday goods, especially electronic items.

Beijing's reforms of its domestic rare earths industry has thrown into turmoil the market for these metals. Citing concerns about the environment, Chinese authorities have this year closed mines, severely tightened environmental regulations on rare earths processors and cut back on exports.

Prices have slid more than 30 percent just since July on many of the rare earths. This prompted China's largest rare earths producer, Baotou, to suspend its operations for a month beginning on October 18.

Why did Baotou do this? Simple, demand is weakening. Already analysts have cut their forecasts sharply for rare earths demand outside of China.

Dudley Kingsnorth, from rare earths consulting firm IMCOA, lowered by one-third his estimate for this year's non-China demand to 40,000 tons from a 58,000 ton forecast a few short months ago.

This seems to be a long-term trend according to Mr. Kingsnorth. He believes that in 2015 non-China demand will be about 50,000 tons, down from his earlier estimate of 74,000 tons.

At these still-high rare earths prices, we are starting to substitution of rare earth metals by cheaper alternatives. For instance, rare earth magnet makers have seen demand plummet this year. Cars can use cheaper iron magnets in their electronics. Magnets account for one-fifth of rare earths demand.

Although it should be mentioned here that not all rare earths can be substituted in all applications.

Of course, the falloff in demand does not necessarily mean that we will see a steep further falloff in prices.

Bautou's production halt is a stark reminder that, for now, China still controls the industry.

It is conceivable that Chinese producers could coordinate their efforts, lowering production, in order to keep prices higher than they otherwise would be.

In addition, Chinese stockpiling of rare earths may help keep a floor under prices. Baotou itself is steadily building up its 55,000 ton stockpile. Its goal is to inventory enough rare earths so as to have roughly half China's annual production.

Investors interested in playing the rare earths industry in a wide, diversified basis can do so through an exchange traded fund (ETF). It is the Market Vectors Rare Earth/Strategic Metals Fund (NYSE: REMX).

Friday, November 4, 2011

Kinder Morgan - El Paso Deal Makes Sense

We recently saw the biggest proposed acquisition in the oil and gas industry since the $41 billion purchase of XTO in 2009 by ExxonMobil (NYSE: XOM).

The proposed acquisition, of course, was the $38 billion bid for El Paso (NYSE: EP) by Kinder Morgan (NYSE: KMI, KMP, KMR). It was a bold bet on the future of the natural gas industry in the United States based on the extraction of shale gas and oil with fracking technology.

The deal highlights an emerging trend in merger & acquisition activity in the sector. As jon Wolff, an analyst at ISI, says: “It's the infrastructure era.”

Bidding is shifting away from companies with upstream assets such as XTO and toward midstream pipeline and processing businesses that will benefit once the large shale gas reserves come onstream.

Just look at the prior $7.9 billion bid for Southern Union (NYSE: SUG) by Energy Transfer Partners (NYSE: ETP) or the $2.9 billion sale by Energy Partners of its propane operations to Amerigas Partners (NYSE: APU).

Why are such companies like El Paso so attractive to potential suitors?

At a time of uncertainty and high volatility, these businesses offer stability. They earn relatively stable, often regulated returns from shippers paying to use their pipelines. Yet they have growth prospects thanks to the large investment in gas processing and transportation that will be need in the years ahead.

The Interstate Natural Gas Association of America has published forecasts showing that the United States will need $205 billion of investment in new gas pipelines and processing facilities (in 2010 dollars). And a further $46 billion in new pipelines will be needed for oil and other liquids, in order to meet the expected increases in supply and demand.

This forecast means the industry will have to invest roughly an average of $10 billion a year on such infrastructure. The easy way to do this is simply to buy existing pipelines.

This is just what Kinder Morgan. It already has 23,600 miles of gas pipelines and if successful, it will add El Paso's 43,000 miles of gas pipelines.

The deal also puts Kinder Morgan in a prime position with exposure in all the key areas where gas production is expected to soar – namely, the Marcellus shale in Pennsylvania, the Utila shale in Ohio and Pennsylvania, and the Haynesville shale in Louisiana.

Look for the Kinder Morgan bid for El Paso to inspire even more potential buyers of midstream assets.

Wednesday, November 2, 2011

Oil Companies' Production Lags

The world's biggest oil companies, such as ExxonMobil (NYSE: XOM), Chevron (NYSE: CVX) and ConocoPhillips (NYSE: COP), are flush with cash.

So all looks well for the oil industry...but it is not.

If investors drill beneath the surface, they will see these companies are stagnating when it comes to their oil production. ExxonMobil, for example, reported that in the third quarter its oil production fell 4 percent to 4.282 billion barrels of oil per day.

This trend though is hardly new and points to a long-term challenge for the industry.

Paul Cheng, senior analyst in the US for BarCap, said “The supply outlook for global oil production for the next 12 months is challenging.” He expects “very slow growth, if any” from the major oil companies through 2012-2013 “at least”.

A study of oil production for the 2011 second quarter for 40 large oil companies in the OECD countries showed an average year-on-year drop in production of 8 percent. And this was despite the incentive of high oil prices – Brent crude oil averaged about $120 a barrel.

There are two macro trends which account for this poor performance from the oil companies.

The first is that a lot of the oil recently discovered has been in difficult and expensive to access areas...areas such as the deep water areas of the Gulf of Mexico and offshore western Africa.

Another issue is the lack of investment by the major oil firms. Companies like Exxon have been notorious for underestimating the price of oil. Their assumptions on the oil price have not been aggressive enough in order to justify their spending additional funds on exploration.

In the words of Mr. Cheng, “They [oil firms]did not plan for sustained $100 per barrel plus Brent [oil].”

This may all change, of course, if the industry proceeds full speed ahead over the next five years with development of shale oil in the United States.

But the environmentalists may have a lot to say about that.

Friday, October 28, 2011

Qatar to Invest $10 Billion into Gold Stocks

There was an announcement earlier in October which was bullish for gold mining stocks, but was ignored by Wall Street.

Qatar Holding, a part of the Gulf state's sovereign wealth fund, is planning to create a separate investment vehicle – Qatar Gold – to buy stakes in, or take over, gold companies.

According to sources familiar to with the fund's plans, it will invest about $10 billion in metals and mining companies overall, with more than $5 billion to be invested specifically into gold equities. The stocks would be of companies owning producing gold mines.

The new fund's first deal involved a financing deal for Aim-listed European Goldfields to help it to fund the company's gold mines in Greece in exchange for a 30 percent stake.

The Gulf emirate is launching this fund in an effort to diversify its assets away from both natural gas and the U.S. dollar.

Gold mining stocks have underperformed the price of the precious metal over the past year. Most of them have barely budged while the price of the yellow metal is about in excess of 25 percent.

The CEO of Qatar Holding, Ahmad al-Sayed interest in gold pre-dates the metal's and he has been working on an entry strategy for the past two years.

A banker who advised on the European Goldfields deal, Ken Costa, said “[Qatar Holding] is of the belief that the gold price over time will continue to establish new highs and that the constraints on supply will be outstripped by demand.”

The move by Qatar may make the Market Vectors Junior Gold Miners ETF (NYSE:GDXJ) a very interesting play.

Thursday, October 20, 2011

Disney Strikes Movie Treasure in Russia

The global movie industry is in a state of flux.

North America is the world's largest film market, but is also the most mature market. Box office revenues for 2010 were basically flat from the prior year at $10.6 billion, about a third of the global total, according to a report earlier this year from the Motion Picture Association of America.

The global picture, however, is more encouraging according to the Motion Picture Association. Growth in emerging markets lifted total box office revenues to $31.8 billion in 2010, a 13 percent increase from 2009.

One of the emerging markets showing tremendous growth is Russia.

Box office revenues in the country have soared over the past decade to more than $1 billion. Revenues have been rising at a compound annual rate of 27 percent since 2006, according to Russian investment bank Renaissance Capital.

Five years ago, 90 million people went to the cinema in Russia. By 2010, the number leaped to 165.5 million and the number of screens across the country rose from 1,300 to 2,400.

One of the companies benefiting from this boom in Russia is Disney (NYSE: DIS). That market has become a top-five tier market for the company.

Disney's executive vice-president for theatrical exhibition sales and distribution, Dave Hollis, said “Russia's growth has outpaced established markets and emerging markets like China.”

Mr. Hollis added “there's a cultural revolution under way there in terms of people embracing cinema.”

Disney is attempting to take advantage of this cultural change by adapting its approach to the country.

The company has a vast consumer products business in Russia, selling all sorts of products from movie-related items to Mickey Mouse lunch boxes.

But it is now shifting from an import-led model to a local one by trying to strike licensing deals with Russian manufacturers. Andy Bird, chairman of Walt Disney International, said “We want to develop an internal market...retail in Russia is growing at a fantastic rate.”

Disney “gets it” as far as the industry rapidly turning into a global one, led by incredible growth in the emerging markets.

Look for other companies to soon follow in Disney's footsteps in Russia.

Wednesday, October 19, 2011

Pharma Sales Curing Irish Ills

Most investors are aware of the ills affecting the Irish economy...after all, it is one of the PIIGS nations.

But most investors are unaware that Ireland is beginning to recover. Figures released several weeks ago showed the Irish economy grew 1.6 percent between the first and second quarters of 2011. This is the eurozone's second fastest rate of economic growth, behind only Estonia.

It was the first time Ireland achieved two consecutive quarters of economic growth since the property crash and banking crisis hit the country in 2007.

A surge in overseas sales is behind the country's turnaround. Net exports soared nearly 24 percent to $2.6 billion from the second quarter of 2010 to the second quarter of 2011.

This upturn in the Irish economy is prompting some economists and investors, like Wilbur Ross, to reconsider Ireland's ability to repay its debt without a second bail-out. Mr. Ross, a famous distressed asset investor, has recently purchased shares of the Bank of Ireland ADR (NYSE: IRE).

About three-quarters of Irish exports are driven by foreign multinationals, many of them pharmaceutical companies.

So it seems that Ireland is being helped through its economic 'illness' by strong pharmaceutical sales from companies such as Pfizer (NYSE: PFE). It became of the first global drug companies to set up an Irish operation way back in 1969.

IDA Ireland, the state agency whose task is to attract overseas investment, says the country hosts eight of the world's top 10 pharmaceutical companies.

Of course, it is not just pharmaceutical companies. According to IDA Ireland, the country is also host to 15 of the top 25 global medical device companies and seven of the world's top technology firms.

All of these firms are attracted to Ireland by favorable tax rates and a superb, highly skilled, English-speaking workforce.

The export sector, which is worth more than 100 percent of GDP, will be the driver for the Irish economy, helping it overcome its financial crisis.

For investors looking to buy into Ireland, ala Wilbur Ross, while assets are still selling at distressed prices, should look into an exchange traded fund which offers broad exposure to Ireland.

The only ETF currently available is the iShares MSCI Ireland Capped Investable Market Index Fund (NYSE Amex: EIRL).

Friday, October 14, 2011

China May Ease Soon

History does not repeat, but it does have a way of 'rhyming'. This perspective may be an interesting way of looking at recent actions taken by Chinese policymakers.

China seems to have stopped letting the renminbi appreciate in recent days. It had permitted its currency to rise by 7 percent versus the U.S. dollar from June 2010 to August 2011 in an effort to rein in inflation.

But this may not be bad news...it may be a signal. It could be a signal that Beijing is getting ready to turn towards an easier monetary policy to support domestic economic growth.

The Chinese economy has held up very well so far. Government estimates are for the country to enjoy economic growth this year in excess of 9 percent.

Investors should recall that the last time China “locked” their currency against the dollar was in August 2008. This was just three months before China launched a $586 billion economic stimulus which was crucial to the global economy.

There are other signs too of a softening policy stance coming from Beijing.

China's central bank had raised interest rates roughly every two months and banks' required reserves monthly. But it hasn't raised rates since July or requirements since June.

There have also been stories in China's state-run media about the struggles of small companies due to a noticeable slowing in bank lending. Addressing this matter, China's premier, Wen Jiabao, asked banks to lend more to small businesses and at lower rates.

Stephen Green, an economist at Standard Chartered, believes an easing of policy could come this year: “It seems they are preparing the ground for something called directed easing. The ambition is more credit for small- and medium-sized enterprises.”

Jun Ma, an analyst at Deutsche Bank, agrees saying that in the fourth quarter “...we are likely to see some easing in credit”.

More decisive moves may be just a bit further down the road. Shen Jianguang, an economist at Mizuho Securities, forecasts that other monetary loosening such as cutting banks' required reserves may have to wait the arrival of the new year.

However, signs from Beijing are that investors should not look for a huge stimulus from China ala 2008. China is less dependent on exports today. A move to more domestic-led growth is giving Chinese policymakers confidence that China can weather the global economic storm in relatively good shape without a huge new stimulus.

So the parallels with 2008 are not perfect. But they do seem to be rhyming.

Wednesday, October 12, 2011

The New Oil Dynamics

The oil market changed back in 2009, but most Americans did not notice.

That was the year, for the first time, China temporarily surpassed the United States as Saudi Arabia's biggest and most important customer.

At the time, Saudi oil minister Ali Naimi said “Ten years ago, China imported relatively little crude oil from us. Now, it is one of our top three markets, and is the fastest growing market for us globally.” He added that this showed the increasing “depth of Saudi-Chinese relations”.

Today, when oil tankers leave Saudi ports with their load of crude oil, they increasingly travel eastward to the rapidly growing economies of Asia rather than to the established markets of western nations.

When looked at historically, this new trend is significant. Remember that the most of the oil industries in the Middle East were originally set up by western companies with the sole aim of providing oil for western economies.

The day when Saudi oil exports to China permanently overtake those to the U.S. has not arrived yet. But it will soon.

Saudi Arabia is also selling more oil to that other Asian economic giant, India. Saudi crude exports to India grew sevenfold between 2000 and 2008. The desert kingdom now provides about a quarter of India's oil.

Meanwhile, total demand for oil in the U.S. and Europe is flat at best.

The changing oil dynamics, however, is not a simple story. It's getting more complicated.

Look at Saudi Arabia. It has its own rapidly growing economy and is consuming more of its own oil. The kingdom consumed 3.18 million barrels of oil per day in the third quarter of 2011. This is only a bit less than the 3.25 million barrels of oil per day used by India during the same time frame.

Bottom line...roughly a third of Saudi Arabia's 9.8 million barrels of oil per day production last month was absorbed by domestic consumption. This means less and less oil is available to sell overseas.

Taken together with increased demand from Asia, it means higher prices for oil down the road for American consumers.

Wednesday, October 5, 2011

Shale Gas Boom Helps U.S. Manufacturers

Most investors are well aware of the current shale gas boom which has transformed the U.S. natural gas industry.

But many investors are not aware that the shale gas boom, with its lower natural gas prices, is also beginning to have an effect on U.S. manufacturers.

The price of natural gas in the United States is now half what it was just three years ago, thanks to new drilling technology. In comparison, Asian natural gas prices are three times higher.

A lower natural gas price is helping turn the fortunes of energy-hungry U.S. manufacturers around. Factories mothballed as natural gas prices hit record highs a few years ago are now re-opening. Some manufacturers are even opening new plants.

One such business is the fertilizer industry. Natural gas is the main input for nitrogen fertilizer, such as urea. High prices led to a shut down of half the North American nitrogen fertilizer production capacity early in the last decade. So today, North America imports half of its nitrogen fertilizer needs.

But lower gas prices are changing that dynamic. Stephen Wilson, CEO of CF Industries (NYSE: CF), said “For the first time in decades, American manufacturers of nitrogen fertilizer and other energy-intensive products are in position to contemplate building new plants and hiring new employees.”

Gas is also a key feedstock for the petrochemical industry. Cal Dooley, CEO of the American Chemistry Council, stated “It's probably the single greatest factor for the US petrochemical industry in terms of our competitiveness internationally.”

American companies using cheap natural gas have a definite edge over their overseas competitors with oil trading near a historically high multiple to natural gas. International chemical companies use naphtha, an oil derivative, to make basic chemicals.

With the recent decline in the stock prices of U.S. industrial companies, investors should be looking for bargains in the fertilizer and chemical sectors.

Tuesday, September 27, 2011

A Look at the Stock Market Rally

The current stock market rally is based solely on two factors.

The first is the "time-honored" tradition of end-of-quarter markups on stocks. It happens nearly each and every quarter going back for decades. Yet people are often taken unawares by the actions of fund managers.

Ostensibly, the reason for the rally is the trial balloon being floated about a 2 trillion euro EFSF (European Financial Stability Facility).

It's amazing how supposedly sophisticated investors believe that waving a magic wand, ala Harry Potter, can solve the western world's economic ills. It can't!

There are several obvious holes in this trial balloon.....

First of all, where would the money come from? Insolvent southern European nations? Or, most likely, from simple money printing. Gee, that has worked so well in the United States.

Secondly, countries like Germany and Finland are very unlikely to ever approve of such a plan for two reasons.

One reason is that it involves the use of leverage which is an anathema to the culture of northern Europe. The second reason is, as obvious by its use if leverage, that it is an idea put forward by the United States.

Why doesn't Tim Geithner poke his nose out of Europe's business? Isnlt it bad enough that the leveraged, casino mentality has overtaken US financial markets. Europe has enough troubles without adding more leveraged debt to it.

Investors right now should take this rally as a gift and fade it. That is, sell into it.

Saturday, September 24, 2011

Stock Market Selloff

This past week saw a massive selloff in the U.S. stock market, with the Dow Jones Industrial Average suffering its biggest weekly loss since 2008. Both it and the S&P 500 index were down about 6.5% for the week.

This market downdraft was one, by the way, that I gave a warning about to my Twiiter (@tdalmoe) followers last week.

The inevitable question I've been asked numerous times is “Why?”. The answer is simple.....

At the end of its meeting on Wednesday, the Federal Reserve made a major announcement.

The Fed said it would be purchasing Treasury bonds with the proceeds from other bonds and T-bills as they expired. There would be, for now at least, NO new money used to make their bond purchases.

My gawd! No more new money for the casino players on Wall Street. No more new money for the Wall Street “addicts” who had gotten used to free money from the Fed in the form of QE1 and QE2 to the tune of about 1.5 trillion dollars over the past two years.

The traders heard this and went into full panic mode, selling everything. Poor babies...crying from just getting a taste of what the American middle class has been getting over the last two years – no help.

What will happen next? No one knows, but here's my guess.....

The U.S. market has further down to go. Many other global stock markets already back down to 2009 levels, giving back much of the gains of the past two years.

The stock market has to play catch-up because the U.S. economy is in just as bad, if not worse, shape as other economies around the globe.

That realization is just dawning on stock market players who have fantasy booming earnings expectations built into the price of many stocks.

This is especially true for technology stocks.....

People all over the globe are struggling to make ends meet and in parts of the emerging world are struggling to pay for the high cost of food.

The “thinking” by investors in technology stocks right now is that it doesn't matter. People may not eat, but they will surely will buy the latest hot smartphone or tablet computer.

That “thinking” is sheer nonsense. Until this investor psychology is broken and the bubble in Nasdaq stocks is broken and the index is much lower, the U.S. stock market has only direction to go – down.

That is, until the Fed unleashes trillions of dollars in QE3 to Wall Street, ending the "shakes" from the money addicts there.

Saturday, September 17, 2011

The Fed and History

The stock market enjoyed a big rally this past week.

Why, you may ask?

The answer is simple. Next week the Federal Reserve meets once again. And Ben Bernanke and the Fed are expected to have some form of more free money giveaways to Wall Street to the tune of hundreds of billions of dollars.

The Federal Reserve just continues on its path of destroying the value of the US dollar (down more than 80% since 1971) in order to please Wall Street.

President Obama's favorite economist, John Maynard Keynes, wrote some very prescient words in his 1919 classic, “The Economic Consequences of the Peace”.

In the book, Keynes spoke about Vladimir Lenin – founder of the USSR and of the Soviet Communist Party.

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Keynes agreed with Lenin's assessment saying, “There is no subtler, no surer means of overturning the existing basis of society than to debauch [debase] the currency.

He then went on to point with alarm to post-World War I Germany where officials were printing lots of money. Keynes' warning went unheeded, however.....

The money printing only accelerated, eventually destroying the German middle class. And in the ensuing social chaos, we all know what followed.

As Mark Twain was quoted as saying, “History does not repeat itself, but it does rhyme.”

The fact is that the US dollar has shrunk greatly in value since President Nixon took the United States off the gold standard in 1971. Since then, paper dollars have been backed with, well, nothing.

Americans need to ask themselves one question.....

Why in the world does the Federal Reserve continue its mad money printing when it is benefiting only one segment of society (Wall Street) and is causing the middle class to shrink every day.

Think about the Fed's policies the next time you go to the grocery store or fill up your gas tank. The higher prices you see are at least partly caused by the Fed's money printing.

Saturday, September 10, 2011

The United States of Zero

Some of the political pundits have begun calling President Obama “President Zero”.

That is because the August employment figures showed no net new jobs created here in the good old USA.

But these pundits should look back a little farther. There have been a lot a zeros the United States has generated since the turn of the century.

How many net new jobs have been created in the last decade? Zero!

There were about 130 million jobs in America in the year 2000. And there are about 130 million jobs in America today.

How much more does average US wage earner make? Zero!

Adjusted for inflation, he or she made about $16 an hour in 2001. He or she still makes about $16 an hour today.

How much more are stocks worth today? Zero!

The S&P 500 has gone nowhere for over a decade. And adjusted for inflation, investors are on the losing end.

How much more are houses worth? Zero!

Gains made early in the new century have been erased and more.

So by all the important economic measures, Americans are zero better off than they were a decade ago. Perhaps the pundits could call our nation the United States of Zero.

Actually, the statement that Americans are zero better off is incorrect. Americans are much worse off. They have much more debt than they did at the turn of the century.

Here's a look at some numbers that are unfortunately not zero.....

In round numbers total debt to GDP (US economic output) increased from around 200 percent to over 350 percent. Federal debt alone went from 57 percent of GDP to nearly 100 percent today, a figure where many economists start worrying about the future solvency of a nation.

What is truly worrisome is that the leadership of both political parties seem clueless and have come up with zero fresh ideas for solving the country's economic ills.

It's just more of the same.

It's either more debt being issued, attempting to paper over the already huge debt hole in the economy.

Or it's printing up trillions of more dollars via the Federal Reserve in an effort to drive the value of the US dollar to zero and thus eliminate the debt that way.

No heed seems to paid to the fact that such a policy will completely devastate the US middle class' standard of living.

Policy makers right now are grading out in my estimation to a zero.

Saturday, September 3, 2011

The Fed and Wall Street

How appropriate that in advance of the Labor Day holiday the party on Wall Street came to an abrupt end.

The reason? Jobs...or rather the lack of jobs. The August employment data, released on Friday, showed a continued lack of job creation in the US economy.

Wall Street was surprised by this as the dummies there cannot grasp the concept that the policies of the Federal Reserve are not working.

The reason for this lack of a grasp of the obvious is that all of the monies printed by the Federal Reserve have gone to only one place – Wall Street.

According to Bloomberg, during the financial crisis, Wall Street received $1.2 trillion in “loans” from the Federal Reserve to keep the big banks going.

In addition, the Fed had its QE1 and QE2 programs which gave in excess of another $2 trillion to Wall Street via purchase of Treasury and mortgage securities.

With more $3 trillion received directly from the Federal Reserve, no wonder Wall Street has enjoyed such a party since March 2009!

But what the party goers on Wall Street have ignored is the fact that they have received all of the Fed's largess. Main Street got nothing and conditions continue to worsen there.

Recently, Fed chairman Ben Bernanke hinted very strongly that sometime before the end of the year, possibly as early as later this month, the Fed would initiate QE3. It would likely be in the amount of half a trillion to $1 trillion and you guessed it – the monies would go to Wall Street again.

That is why until Friday Wall Street was in party mode again.

So why does the Fed keep using a policy that does not work?

Simple. As explained in a prior article, the Fed is not an independent agency as it is portrayed. It is literally owned 100% by the banks and its main purpose is to see that the banking industry remains healthy.

A second reason is the short-term mentality which now permeates Wall Street. Most of its denizens could care less about anything longer term than three months...only short term profits matter.

Think of two scenarios.....

In the first scenario, the economy and especially Wall Street would suffer through a terrible two years. But afterwards, all would be well and what would follow was the biggest boom in history.

In the second scenario, Wall Street would have a terrific year. But afterwards, it and the US economy would enter a period of many years that would make the Great Depression look like a picnic.

If forced to make a choice, I think most people would choose the first. I know I would.

But if this question was asked of people on Wall Street, my 30 years of experience tells me that today 99.9% of them would choose the second - "let's enjoy the party and not worry about a year from now".

Until this psychology changes, the "Great Recession" in the United States will continue to linger.

Saturday, August 27, 2011

Saudi Arabia Needs High Oil Prices

Even though the unrest (Arab Spring) in the Middle East and North Africa is largely out of US headlines, tensions still simmer just beneath the surface in nearly every country in the region.

Well aware of this is the ruling royal family of Saudi Arabia, the world's largest producer of oil. They have come to the realization that, in order to stay in power, they must improve the living conditions for the country's 27 million citizens.

So this year the Saudi ruling family has taken decisive action.....

The Saudi government has initiated $129 billion in entirely new spending. These funds have gone towards new housing along with food and fuel subsidies. This amount is equal to well over half of the country's 2010 oil export revenues of $153 billion.

In addition, the Saudis are spending in excess of $100 billion over the next decade on power plants and electricity distribution networks.

Power demand in the kingdom is growing at rate of 8 percent annually, twice the country's growth rate. It is estimated that by 2018 Saudi Arabia needs to raise its power generating capacity from the current 45,000 megawatts to 75,000 megawatts in order to meet demand.

Based on all this extra spending by the Saudi government, veteran oil observers believe Saudi Arabia's oil revenues needs are rising rapidly.

In fact, on a percentage basis, rising to match those of the two most prominent oil price 'hawks' – Venezuela and Iran. This is a significant change for Saudi Arabia, a traditional oil price 'dove'.

Jadwa, a Saudi-based investment firm, estimates that Saudi Arabia now requires oil prices to average in the $80-$83 range in order to balance its budget. [So far this year, oil has averaged about $10 a barrel higher]. This is up from less than $40 a barrel five years ago and about $20 a barrel a decade ago.

The Institute of International Finance agrees with this assessment and even went further. It said that by 2015, Saudi Arabia will need oil to average $115 a barrel in order to balance its expanding budget.

If oil does shoot up to those lofty levels, a good way for investors to track that is through the use of an ETF – the United States Brent Oil Fund (BNO). It is based on Brent crude oil futures contracts which more closely tracks the global price of oil than does the US-based West Texas Intermediate (WTI) futures contracts.

Thursday, August 25, 2011

Apple Without Its Core

Change at the top can be wrenching in Silicon Valley. At many technology companies, founders loom large and success is often closely tied to his or her personal vision.

This is especially so at Apple (NASDAQ: AAPL). News of its founder Steve Jobs' resignation as CEO sent Apple shares lower.

Mr. Jobs is widely credited with returning triumphantly to Apple over a decade ago to lift it from irrelevance to be battling only ExxonMobil (NYSE: XOM) as the most valuable US company.

He has personally overseen the introduction of products including the iPhone, iPod and iTunes online music store. The popularity of these products has transformed the hand-held computing, mobile phone and digital download markets. Mr. Jobs is also the driving force behind the iPad. In its first year, it has captured a large chunk of the tablet computing market and spawned a host of imitators.

“He's redefined consumer electronics this century,” said technology analyst Richard Doherty.

Steve Jobs is also seen as the guardian of the powerful Apple brand. And as the visionary who has presided over a successful melding of digitized content with reliable consumer electronics products.

The Next Stage

What comes now for Apple's investors? Apple has been heavily criticized for not making public a clear plan of succession at the company.

For now, as he did during Mr. Jobs' prior leaves of absence, Apple's chief operating officer Tim Cook will run the show and become the CEO.

Mr. Cook has been with Apple since 1998. During this time, he learned the value of instinctive decision-making working for the creative and exacting Mr. Jobs. The ability to balance his engineering, manufacturing and business background with the more rapid and innovative decision-making style he has learned from Mr. Jobs will be critical in the months ahead.

Apple does face a crucial period as it makes its bets on its new wave of technologies. This wave includes the next generation of its celebrated iPad tablet and iPhones.

In the short term, Apple will continue to flourish. Mr. Jobs departure will have little impact for at least a couple of years. As Charles Golvin, an analyst at Forrester Research, said “The next wave of [Apple] products has already been designed.”

Based on his prior stints running Apple, in 2004, 2009, and most recently, Mr. Cook will most likely do a fine job again. So Apple shareholders will have little to worry about for now. But he still has much to prove if he has to take over Mr. Jobs' role over the long term.

Does Apple Need a “Great Person”?

Whether Mr. Cook will be the one to take Apple forward or a future dark horse will emerge with an unerring sense of what consumers want, ala Steve Jobs, is the great uncertainty for Apple shareholders.

Corporate history tells us that the more “creative” a business is, the more of a difference a visionary executive can make. Look at Mr. Jobs, perhaps the world's greatest electronics products genius.

Many Apple shareholders cannot imagine that the company would have gone from near extinction little more than a decade ago to the success it is today without Steve Jobs. And they cannot imagine Apple maintaining its dominance without him or his clone. They are believers in the “great person” theory of business.

Apple's Future

But what about the non-believers in this theory, who don't have a cult-like obsession with Mr. Jobs? How should they look at Apple right now?

How important Steve Jobs actually is to Apple is unknowable at this time. The company's PR machine has created a monster by not reining in the perception that Steve Jobs IS the company.

But no one man, no matter how talented, can run a company in today's global economy alone. Some of the company's best ideas have actually bubbled up from below rather than coming directly from Mr. Jobs.

All along Mr. Jobs has had the help of Tim Cook and many others. The difference is now that Mr. Cook will be the point man instead of the more colorful Mr. Jobs.

And again, Mr. Cook will not be alone in running Apple. He is backed up by a strong 'bench' – industrial design chief Jonathan Ive, marketing chief Phil Schiller, Scott Forstall, the executive in charge of iOS software and other talented executives. In fact, some former employees have suggested that the decision-making process will be even smoother now than with Mr. Jobs as CEO.

A look at Apple's stock shows that it trades at a reasonable ratio to 2011 earnings. Additionally, Apple is still growing strongly and has 30-odd per cent operating margins that are the envy of other phone and PC makers.

So for the short term any weakness in Apple's stock looks like a buying opportunity for investors. The longer term outlook is still unknowable.

Saturday, August 20, 2011

The Trio of Investor Terrors

August has not been a kind month to stock market investors, with about $6 trillion wiped off global equity market valuations so far.

We have seen in August the most 200 point moves in the Dow Industrial Average since December 2008 when the US financial system seemed on the verge of meltdown. Volatility is also at its highest level since the fall of 2008 when Congress was debating TARP.

Why is this happening now? It's simple fear. Investors are facing three major headwinds, what I call the “trio of terror”.

The first fear that investors face is that global economic growth is slowing rapidly. Investors had bid up stocks to levels where the US economy, for instance, would have to grow at a 5% rate to justify the valuations.

Meanwhile, the US economy “grew” at only a 1 percent rate in the first half and it is still decelerating.

In Europe, the problems in nations like Greece are well known. The problem is that the engine of Europe, Germany, is slowing rapidly. Its economic growth in the second quarter of 2011 was almost nonexistent.

Even the emerging markets are slowing, although China and India are still growing at about a 7%-8% rate.

The second fear investors face is renewed worries about the global banking system.

It seems that several European banks have had to turn to their central banks for emergency funding. That is because the value of sovereign country bonds in their portfolios had fallen sharply.

The stocks of US banks, such as Bank of America, have also fallen steeply. What worries me most about US banks are the denials on the financial news networks about their troubles.

All the talking heads say the banks are in fine health which is reminding me more and more of 2008 before their problems were revealed to the public. After all, let's recall nothing has been done about all their bad debts. The debts have simply been locked into a 'closet' and forgotten about while Wall Street partied on the Federal Reserve's free money. But the debts are still there in the 'closet'.

The final fear investors face is their lack of trust, both in the US and Europe, of the political leadership.

Investors are waking up to the reality on both sides of the Atlantic that their political leadership is either unwilling or unable to deal with the debt problems facing both Europe and the US.

This may end up being the toughest fear for investors to overcome. That is because, particularly in the US, we need the type of leadership that has not been seen in this country for decades.

Saturday, August 13, 2011

Wall Street Casino Games Continue

It was a volatile past week on Wall Street with several hundred point swings up and down every day the norm.

Much of the action was driven by “the machines”. These are the companies who use computers to trade constantly every few seconds over the course of the trading day. These jackasses don't even hold a stock for more than a few seconds.

This week's action just goes to show what a casino Wall Street has become. It is no longer a place for investors to park long-term money.

That is because if “the machines” don't get you, “the boyz” will. “The boyz” are the big Wall Street houses like Goldman Sachs.

For instance, the big 400-point rally on Tuesday was due almost entirely to Goldman Sachs buying a boatload of e-mini S&P stock futures. And my guess is these futures were bought with “free money” from the Federal Reserve. “Uncle Ben” Bernanke makes sure the casino is always well supplied with “chips”.

“Uncle Ben” had already given Wall Street a nice present when the Federal Reserve announced on Tuesday that interest rates will stay at near zero for at least two years. So the flow of “free money” to Wall Street will go on for at least two more years.

There was one other interesting note this week.

Some European countries are banning short selling in their markets. Short selling often involves selling stocks or bonds that you don't own, in effect betting it will drop.

Instead of this broad ban on short selling, I really wish the Europeans would have narrowed their focus.

Everyone who is in the market knows where these “attacks” on the European markets are coming from. They are coming from Wall Street.

It's that old game I touched on last week. If Wall Street can attack other markets and make them look even worse, they can say “Don't take a chance with those 'dangerous' foreign markets. Stick with the 'safe' US markets...give us your money.”

This strategy makes Wall Street a winner twice over. They often profit from their short sales and they keep 90% of American investors at home, where it is 'safe'.

The Europeans should have just banned trading from American firms and their subsidiares until they learn to quit acting like barbarians on a rampage, pillaging everywhere and everything.

Saturday, August 6, 2011

US Debt Is Downgraded

What a week in the financial markets! The week-long rout wiped $2.5 trillion off global markets.

And there maybe more fireworks to come.....

After the US stock market closed on Friday, Standard & Poor's announced that it had indeed downgraded the credit rating of the United States.

It lowered the rating by a notch from AAA to AA+. Ominously, S&P kept its outlook “negative” which means the US could be downgraded again in the next 12 to 18 months.

This downgrade will eventually result in a rise in interest rates which may be devastating to a weak American economy.

The problems with the US economy and stupid policies by the Federal Reserve – money printing to save Wall Street – have already resulted in a very weak US dollar and a lower standard of living for many Americans. Higher interest rates will just make things worse.

But interest rates will not rise for a while because of what I mentioned last week. The geniuses on Wall Street are selling other assets, like stocks, and running to the “safety” of US Treasuries.

The yield on one-month Treasury bills this week actually went negative this week. The Wall Street geniuses were actually paying Uncle Sam to hold their clients' money for them. The stupidity of that cannot be put into words.

Why was Wall Street in such a panic?

They were in a tizzy over Europe, afraid that large countries like Italy and Spain would default on their debt. But at the same time, they ignore the greater threat of a US default a few years down the road.

Yes, the debt problems in Europe are very serious. But if one looks at the whole picture (such as unfunded liabilities), the United States' debt problem is much worse.

Think of it this way...think of the sun and the moon. US debt is sunlight, European debt is moonlight. Which is brightest? Both are bright, but we all know which is brighter (the bigger problem).

So why does Wall Street go nuts over European debt, but have no worries about US debt?

They are simply using a trick that all magicians use. Magicians distract the viewers with movements or even pretty assistants to draw attention away from what they are really doing.

Wall Street keeps pointing to Europe saying, “Look at how bad things are over there”, so that investors won't notice how bad things are here.

Because if investors do focus on what is going here, the game is over for the denizens of Wall Street. No more cushy jobs making money by taking the hard-earned money of investors for their “sage” advice and recommendations.

Saturday, July 30, 2011

U.S. Debt Woes Mount

It seems as if the United States' debt problems are coming home to roost.

The current conflict in Congress about raising the debt ceiling while putting a plan into place to cut the country's long-term debt shows how dysfunctional America's political system has become.

What will come out of all of this political rancor?

Most likely, a muddle through compromise will be brokered over the next several days. This compromise no doubt will raise the debt ceiling while making token, 'smoke and mirrors' cuts in the nation's debt.

Any token cuts made will be offset by the downgrade to the United States' triple-A credit rating by the credit rating agencies. Surprisingly to me, the rating agencies actually seem to be serious about the downgrade and giving the US a more realistic credit rating.

It is almost laughable seeing all the Wall Street talking heads on the financial news networks saying that the downgrade would be “meaningless”.

The downgrading of US debt would have very meaningful effects.

For example, there are many financial institutions around the globe such as pension funds which are only permitted to own triple-A bonds. This means if US government debt is downgraded to say AA, these institutions would be forced to sell all of their US Treasuries.

Needless to say, this would cause a steep sell-off in US Treasuries and other government-backed bonds.

The recent Wall Street reaction to this debacle shows once again the stupidity that runs rampant in the US financial industry today and passes for “street smarts”.

With a few notable exceptions like Pimco's Bill Gross, what do you think the geniuses on Wall Street are doing in reaction to the pending problems in the Treasury market? Why, of course, they are liquidating other assets and putting the proceeds into the “safe haven” of US Treasuries.

Huh? Did I miss something? Isn't the problem with US government debt?

There is a problem with US Treasuries, so you naturally go and buy more of them. Think of it this way – a nuclear blast has gone off and the geniuses on Wall Street, instead of fleeing, are running full speed towards ground zero. With the money you've invested I might add.

If you're an individual investor who invests on your own, what should you do?

Many of you may recall that I have been telling anyone who would listen to get out of US Treasuries for many months now. It is a bubble waiting to burst.

There are many other government bonds and currencies around the world which are much safer than US Treasuries and the US dollar.

The list of safer countries includes: Germany, Switzerland, Sweden, Norway and Australia. Even France, Canada and New Zealand aren't bad.

There are ETFs traded on the stock exchange which allow you to buy German or Australian government bonds, for instance. And Australian bonds pay about 5% too!

Saturday, July 23, 2011

China's Rising Currency

As the mid-year passes, investors need to look for trends that will influence global financial markets.

One of these trends which has been largely ignored by Wall Street is the emergence of the Chinese currency – the yuan or renminbi. China is slowly but surely internationalizing its currency. This will have a tremendous impact on trade and global financial markets.

Perhaps the real surprise is how little the yuan is used outside China's borders. China is now the second largest economy in the world, the largest exporter of manufactured goods and the largest holder of foreign exchange reserves. Yet the amount of its currency held overseas is negligible. This is a result of China's strict capital controls and restrictions on currency trading.

But that is about to change. The financial crisis has changed attitudes in Beijing. There is now growing support for a greater international role for its currency. China's long-term goal is to have the renminbi become the main currency for doing business in Asia and other emerging regions of the globe.

China's Baby Steps

China is already taking some small baby steps toward making their currency a global currency.

Over the past two years, it has tried to boost the availability of the yuan. China signed currency swap agreements, worth $800 billion renminbi, with central banks in eight countries. These countries are: Argentina, Belarus, Hong Kong, Iceland, Indonesia, Malaysia, Singapore and South Korea.

Beijing is now strongly encouraging that international trade settlement to be conducted in renminbi. That process accelerated in last June when China expanded its plan to every country in the world and to 20 Chinese provinces and municipalities.

Then last July, the government allowed yuan-denominated financial markets to spring to life in Hong Kong. A month later certain investors, including some central banks were given limited access to China's onshore bond market. Malaysia's central bank is believed to be the first to hold mainland renminbi bonds in its reserves.

The purchase by Malaysia underlines the potential demand for renminbi assets among governments, banks and companies in Asia. A demand that will swamp the current limited investment opportunities.

And just last fall, China and Russia agreed to allow their currencies to trade against each other in spot inter-bank markets. This move will eventually allow the two countries settle their $40 billion in bilateral trade in their own currencies.

The effect of even these small measures has been dramatic. Two years ago, there was zero trade settlement in renminbi. Last year saw about $77.5 billion in trade settlement.

In addition, trading in the offshore renbinbi has gone zero two years ago to about $2 billion a day currently.

For Chinese companies, the attractions of settling cross-border trade in their own currency are clear. Avoiding the US dollar allows them to cut transaction costs and minimize foreign exchange risk. A huge benefit in a world at risk of a global currency war.

Trade Finance Growth

And an increasing number of multinationals are also experimenting with using the yuan in trade deals. This include American multinationals like McDonald's. Additionally, it and Caterpillar are the first two multinationals to issue bonds which are denominated in the renminbi.

This is very likely the beginning of a major trend. Shivkumar Seerapu, the Asia head of trade finance at Deutsche Bank, said “For our corporate clients, US dollars and euros are no longer the de facto currencies of trade.”

Deutsche Bank, Citigroup and JPMorgan are among global banks rapidly building the infrastructure needed to process renminbi transactions across the world.

However, two banks are already well-placed because of their strong positions in Hong Kong, the designated offshore center for the Chinese currency. These banks are HSBC Holdings and Standard Chartered.

The head of transaction banking for North Asia at Standard Chartered, Neil Daswani, says demand for the yuan has been strongest from Hong Kong. But he has also seen strong demand coming from Singapore, Malaysia, South Korea, Japan, the Middle East and the UK.

Trade finance experts believe the use of the renminbi in trade is likely to take off first in Asia. And then between China and other developing countries.

HSBC estimates that within three to five years at least half of China's trade flows with other emerging economies will be conducted in renminbi. This trade flow is valued at about $2 trillion! If this does occur, it will make the yuan one of the top three global trading currencies.

Chinese Currency Investments

It is no wonder then that some people in China have begun calling their currency the hongbi or “redback”. They believe the redback will become a true global rival to America's greenback.

Qu Hongbin, China economist at HSBC, believes the redback-greenback rivalry is for real. He said, “We may be on the verge of a financial revolution of truly epic proportions. The world economy is, slowly but surely, moving from greenbacks to redbacks.”

There are still many hurdles remaining before the renminbi becomes a true global currency. Such as the dense wall of capital controls that limit foreign inflows and outflows of funds.

However, as the yuan starts to play a bigger role in Asian trade settlement, it will lead to a buildup of the currency outside China. Asia's banks and companies will become a powerful lobby of investors wanting increased access to renminbi investments.

Eventually this will lead to China's currency becoming fully convertible. And as Adam Gilmour, co-head of foreign exchange sales for Asia at Citigroup, said “When that happens, I expect a significant amount of the world's reserves to go into renminbi.”

So it is a legitimate investment theme worth putting money into. The problem is that unless you're a major corporation which trades with China, no American can directly get a hold of any redbacks.

The only direct currency options investors have are an exchange traded fund and exchange traded note. They are the Market Vectors Chinese Renminbi/USD ETN and the WisdomTree Dreyfus Chinese Yuan Fund.

Neither offers direct exposure to the Chinese currency. Both are intended to match the currency's movements through the use of various derivatives.

With China gradually widening use of its currency, hopefully better alternatives appear for American investors in the near future.

Sunday, July 17, 2011

Europe's Debt Woes Hit Home

Surely, many American investors are bewildered by what is going on in Europe.

They must think to themselves – 'Greece, and even Ireland and Portugal are such small parts of the European economy, what's the big deal'.

True enough...but the problem is not the Greek economy or the Irish economy. The worries all center around their sovereign debt and whether that debt can ever be paid back to their creditors.

And who are Greece's creditors? Mainly European banks. Banks all across Europe are stuffed to the gills with this paper, which in Greece's case, is trading at about 50-55 cents on the dollar.

If European banks are forced to realize these losses, they will have insufficient capital to function. They then would need to conduct capital raising operations from reluctant investors. Or need huge bailouts from European governments which cannot afford it... in a kind of a vicious circle.

If the contagion spreads to the sovereign debt of large countries, such as Spain and Italy, the very real fear is that the entire European banking system becomes insolvent.

A quick look at the bond markets shows that the contagion has spread from Greece. Irish and Portuguese 10-year bonds are yielding over 11 percent.

Italian and Spanish yields had been treading water for most this year. But now there are signs that their yields are breaking out to the upside. In fact, the 10-year Spanish and Italian bond yields have recently risen to multi-year highs.

Moody's Cuts French Banks

These moves in interest rates may have prompted credit ratings agency Moody's to try to get ahead of the curve a few weeks ago.

It said it may downgrade the credit ratings of France's three biggest banks. These banks are: BNP Paribas, Credit Agricole and Societe Generale.

The reason cited by Moody's is the large exposure of these banks to Greek debt. French banks are major creditors to Greece with $53 billion in overall net exposure to Greek public and private debt according to the latest figures from the Bank for International Settlement.

For example, BNP Paribas had 5 billion euros in exposure to Greek debt at the end of 2010. SocGen had 2.5 billion euros in net exposure to Greek government bonds.

In addition to sovereign debt exposure, Credit Agricole and Societe Generale hold majority stakes in local Greek banks. SocGen's 54 percent stake in Geniki Bank gives it 3.4 billion euros worth of loan exposure in Greece. Credit Agricole's Emporiki Bank had $30.1 billion in outstanding net loans at the end of March.

What was surprising is that Moody's did not go further and threaten to downgrade Germany's smaller state-owned banks – the landesbanken – which are also highly exposed to Greek and other such debt. German banks have direct exposure of $34 billion to Greece.

What Investors Should Look For

There are legitimate concerns that any sort of restructuring of Greek debt will adversely affect European banks and the entire European financial system. The entire system may be at risk as was the US financial system when Lehman Brothers collapsed in 2008.

Greece, and for that matter Ireland and Portugal, will most likely not bring down the European financial system. A default or restructuring of their debt will be unpleasant for European banks.

But it is not catastrophic. They should be able to be successfully re-capitalized and continue to be solvent.

What investors need to look out for is Spain and Italy. These are much larger economies and the exposure to their debt is also much larger. Problems in these two countries will make the current difficulties look like a walk in the park.

That is where American investors concerned about the turmoil in Europe need to focus. Keep an eye on the 10-year bond yields in Spain and Italy. If they break out sharply to the up side, look out...rough seas ahead.

Saturday, July 9, 2011

Oil Market Surprise

There was a real shocker in the oil markets recently, sending prices tumbling.....

Western nations, through the International Energy Agency, announced the impending release of the largest amount of oil from their emergency strategic reserves since 1991.

Over the next few weeks, the IEA will release 60 million barrels of light, sweet crude oil. The release is to be led by the United States which will provide 30 million barrels of oil to the market.

The stated reason behind the release of oil from inventories is to replace the loss of production from Libya.

But the real reason behind the move is a rather different one and shifted the landscape in the oil market permanently.

Weak Global Economy and Politics

In the past, the IEA released oil from its reserves only when a major supply disruption occurred such as the Iraq War and Hurricane Katrina.

But now this release is happening when the only disruption to oil supplies is the minor one in Libya where production has fallen from 1.6 million barrels a day to just 200,000 barrels.

This is where it gets tricky for investors. The IEA decision was one based not on supply/demand or economics, but on politics.

It was a move aimed directly at putting a ceiling on oil prices. It is also intended to, in conjunction with increased Saudi production, bring down the price of oil quickly and sharply.

The reason is obvious. Western economies, particularly the United States, are slowing down rapidly. These economies are struggling with stubbornly high unemployment and consumers hurting from high prices for commodities like fuel. It is a very real effect. Goldman Sachs estimated that the rise in oil prices took $118 billion out of the US economy in the first quarter alone.

A sharp drop in the price of oil will serve as a stimulus to the global economy. This includes the United States where the effects of previous fiscal and monetary stimulus have worn off. The Federal Reserve two weeks ago issued a downbeat outlook for the US economy, emphasizing that growth would be lower than previously expected in 2012.

The US economy looks to be desperately in need of a stimulus heading into 2012 – an election year. Especially since it seems the Federal Reserve will hold off launching QE3 for at least a few months.

And so what do we get? Voila – we get stimulus – a release from the emergency oil reserves when there is no emergency, only an upcoming election.

The stimulus should work too, at least for now. Estimates are that for every $10 rise or fall in crude oil prices, there is a move of about 0.5 percent in the nation's gross domestic product.

Politics entering the equation may have permanently changed the way the IEA works. The IEA, largely controlled by Washington, will apparently intervene much more often now and enter the market with sales from its reserves any time the price of oil is deemed to be “too high”.

Who Benefits

For certain, the change in how the IEA works will put a ceiling on oil prices over the short and medium term.

Who stands to benefit from lower oil prices? Obviously, every consumer of oil on the planet including the United States.

But the ones benefiting the most will be the emerging markets. Consumers in these countries pay a much larger portion of their incomes than Americans do for basic commodities such as food and fuel.

Even the IEA stated that demand for oil is strongest in the emerging world and that countries including China, India and Saudi Arabia are the ones where demand for oil is growing the quickest.

Emerging markets are currently suffering because their central banks are raising interest rates due to rising inflation. Much of that inflation stems directly from soaring prices for commodities like oil.

So a drop in oil prices will likely begin a process where interest rates in the emerging world begin falling again, adding stimulus to already fast-growing economies.

Therefore, the current weakness in emerging market stocks presents a buying opportunity for investors.

But keep in mind that this form of stimulus cannot last for long. If the IEA keeps releasing reserves to lower oil prices, its inventories will eventually become depleted.

And as the IEA tries to restock its oil supplies, adding more demand, that will lead to much higher oil prices in the long term than otherwise would have been expected.

Saturday, July 2, 2011

The US Debt Problem

The old saying “be careful what you wish for” holds true in the investment world at times...such as now.

In the past several days, the stock market enjoyed its best rally in months. This occurred on the back of relief from investors that the Greek debt crisis is resolved, at least temporarily.

But now that the crisis is past, what happens next?

Most likely, the major global players in the bond and currency markets will shift their attention away from Europe and towards the elephant in the room.

That elephant in the room is the United States, its humongous debt, and whether that debt will be downgraded from its current AAA rating.

Treasury Market

During the European crisis, the Treasury market once again served as a “safe haven” for many investors. But now with politicians in Washington bickering about raising the debt ceiling, some investors have left that “safe haven” and Treasury yields are on the rise.

The question is whether the trickle of investors dumping Treasuries turns into a flood.

There are certainly reasons to worry about the nation's debt. The size of the US Treasury market – the amount of debt issued – has more than doubled since 2007. And the Congressional Budget Office (CBO) stated that the country faces a “daunting” budget outlook.

The ratio of US debt to the size of the US economy will approach 100 percent this year. The CBO projects that, without significant policy changes, the federal debt will reach nearly 200 percent of gross domestic product by 2035...a very Greek-like number.

These projections of the long-term position of US debt are what prompted Standard & Poor's in April to revise its outlook on the US credit rating from “stable” to “negative”.

Overseas Rating Agencies

US rating agencies are, however, behind their peers overseas on the outlook for US debt. Several overseas debt rating agencies have already downgraded US debt.

The German credit rating agency Feri downgraded US debt in June from AAA to AA. The reasons it cited were high public debt, inadequate fiscal measures and weaker growth prospects.

The Chinese credit rating agency Dagong downgraded US debt to AA last summer. But now they have taken it a step further.

Dagong now says that the United States has already defaulted on its debt. A Dagong press release said, “In our opinion, the United States has already been defaulting...Washington had already defaulted on its loans by allowing the dollar to weaken against other currencies – eroding the wealth of creditors, including China.”

The default comment is an exaggeration, but they certainly see clearly the Federal Reserve's policy of debasing the US dollar over time.

Will a Downgrade Happen?

The question of a downgrade on US debt by US rating agencies is not simply a theoretical one. If it happens, it will cost investors a bundle.

According to a study from S & P's Valuation and Risk Strategies, a research arm of Standard & Poor's, if US debt is downgraded it will cost investors owning Treasuries a total of up to $100 billion.

Will a downgrade happen? Bill Gross of Pimco – perhaps the most famous bond investor ever – must think so. He has been very vocal over recent months about the United States' long-term fiscal position and has turned negative on US government debt.

However, most investors appear to be very comfortable about US debt and are not worried at all about a downgrade. That is why Treasury yields are so low.

They are probably right. It is doubtful that US rating agencies will bite the hand that feeds them.

Saturday, June 25, 2011

The Growing Need for Cyber Security

There have been a number of shocking events over the past year and a half in the world of cybersecurity.

Some of the events include: mass breaches of consumer information at Sony and elsewhere, the Stuxnet worm's stealthy attack on the Iranian nuclear program, the security breach at defense contractor Lockheed Martin and the Chinese electronic break-in at Google.

These events led US Attorney-General Eric Holder to comment recently, “Cybercrime threatens the security of our systems as well as the integrity of our markets.”

Such breaches of security have forced a broad recognition that, despite the difficulties, all those using the net must accept cybersecurity as part of their mission.

The New Normal

Cyber intrusions are fast becoming the norm at even the world's most technologically sophisticated companies. This surprisingly includes some companies that have security as their main mission.

One such example is the problem this year at RSA, the security company owned by EMC. This problem prompted the National Security Agency to warn that RSA's SecuriD keys, with fast-changing numeric passwords, should no longer be sufficient to grant access to critical infrastructure. The compromised security keys were involved in the May hacker attack of Lockheed Martin.

Security breaches are also reaching wider and lower. And not just through one-time assaults like the one on Sony which revealed details on 100 million users of its online gaming networks.

Consumers' computers are increasingly at risk directly from virus infections that are undetected by standard security software and that do more harm than their predecessors.

The fastest growing types of infections install software that records keystrokes, including logins and passwords. Then the data is whisked off to overseas criminal gangs that make use of consumers' personal information.

Additional Factors

Compounding and uniting these cyber threats are two fast-growing phenomena.

The first phenomena is social networking.

At social networking sites, individuals often give all sorts of clues about themselves that can be used against them in phishing scams. Also users at these sites have been “trained” to click on shortened web links...web links that could lead to malicious pages.

Targeted emails to employees are the delivery method of choice for intrusions such as those at Google and RSA. These emails were made more credible by public information gathered on employees at various social networking sites.

The second phenomena is the rise of mobile devices.

These are devices generally controlled by employees but often have widespread workplace access. These devices are just beginning to be targeted by in earnest by hackers.

What is surprising here is how antiquated the thinking is at many businesses. Many times smartphones and tablets are issued to employees without encryption, authentication or anti-malware software.

What the Future Holds

The advances in software and the increasing use of the internet have made cyber defense more difficult, not easier.

Mr. Holder put it best when he said, “For every technological or commercial quantum leap, criminals and criminal syndicates have kept pace.”

In effect, these criminal gangs are great capitalists. They make money from one scam and reinvest the money into new research and development to stay ahead of the cyber security profession. And they pay their “professionals” top dollar to keep them happy and hacking.

Then there is the problem quite apart from criminal activity. There is growing evidence of politically motivated attacks over the internet, targeting various organization and companies, from so-called 'hacktivists'.

Hacktivists usually use techniques involving relatively unsophisticated malware but which use the sheer weight of numbers. These type of attacks have brought down systems belonging to companies including PayPal and Visa.

The danger is that hacktivists don't operate on a profit and loss basis. So tools and techniques that may deter criminals because of the high cost involved to get around security measures will not work on hacktivists.

The result is that businesses today are forced to defend themselves on two fronts: against highly skilled cybercriminals using the latest technology and hacktivists using less sophisticated, but still successful methods.

The IT industry has been playing catch-up with hackers and cybercriminals for decades. And the problem is just getting worse. Look for this 'war' without end to continue.

Saturday, June 18, 2011

The Shift Toward Cloud Computing

The words cloud computing have become the latest technology buzzwords.

But what exactly does it mean?

People may be asking, “What the heck is the 'cloud'?” Technically, it simply means storing digital files on someone else's computer servers and then accessing it via the internet.

Many people don't realize that cloud computing isn't really new. It has actually been with us for awhile now through email services like Gmail from Google, photo services like Flickr and Picasa, and storing documents with a firm such as Dropbox.

It's just that now with consumer services like music services – Google Music, Cloud Player from Amazon and the iCloud from Apple – that we are becoming more aware of it.

Apple recently announced the biggest push to date by a technology company to bring cloud computing to consumers. Its new, free iCloud service, to be launched this autumn, will allow users to spread their documents, programs, photos, music,etc. among all their Apple devices seamlessly.

It is all part of a generational trend away from owning physical media content and towards renting media content from the computing universal 'cloud'.

And it is happening rather quickly. Just look at how people have quickly moved away from owning CDs and have become accustomed to streaming movies from companies like Netflix.

Clouds in the 'Cloud'

Of course, all is not blue skies for cloud computing...there are major concerns about the shift to the 'cloud'.

One such concern is security. Large internet companies that hold vast quantities of personal data come under constant attack from hackers.

Sony was recently forced to admit that cyber thieves may have taken 100 million of its customer records. Google also revealed recently that several Gmail accounts, including some belonging to prominent US politicians, had been hacked.

Internet security experts say, however, that home computers are even more vulnerable. They believe it is arguably safer to keep files in a data center run by technology professionals.

Another major concern centers around the ownership of data.

Photo-sharing service Twitpic upset its users earlier this year when it changed its 'terms and conditions' to allow it to sell photos uploaded by its users!

There have also been similar concerns at Facebook as to who owns the data. Facebook has also angered privacy groups by using the personal data it has to target advertising at users of their service.

And then there is the question of 'stickiness'. Providers of cloud services like Apple, Google and Facebook will have strong profit incentives to hold on to their users to maximize revenues. They will do their best to limit consumers' freedom to roam freely from cloud to cloud.

So consumers may get stuck in the 'Apple cloud' and not be able to get out without a hassle. Mark Little, an analyst at Ovum, remarked “Switching costs [from cloud to cloud] are likely to be one of the biggest parts of the cloud story.”

Finally, there are infrastructure problems connecting to the cloud. Many wireless networks today have difficulties with reliably handling constant uploading and downloading of media and other types of content.

The Cloud Winners

However, despite the currently cloudy outlook, the trend towards cloud computing looks unstoppable.

That means investors need to know who the winners will be in this new technology era.....

Among the larger companies, the winners will consist of the usual suspects – Apple, Google, Amazon and Facebook.

The announcement by Apple of its iCloud service has leapfrogged it ahead of Google and others for now.

The back and forth will continue though between these companies. Google, for instance, is about to launch a low-cost “dumb” computer equipped only with a browser because its users will keep all their software and content in the cloud.

Among the major companies, cloud computing looks to only add to the gap between the technology leaders and the laggards.