Microsoft Corp.’s (MSFT) profit growth may be stunted this year by a resurgence of software piracy in China, the second-biggest personal-computer market after the U.S., Bloomberg News reported. An unexpected jump in piracy caused Windows sales to miss estimates by $300 million in the third quarter, UBS AG (UBS) analyst Heather Bellini said in April.

Investment manager BlackRock Inc. (BLK) said yesterday (Thursday) that its second-quarter profits rose 23% on a sharp increase in assets under management, including deals to liquidate troubled investment portfolios for others. The company posted net income of $274.1 million, or $2.05 a share, up from $222.2 million, or $1.69 a share, a year earlier. Revenue rose 26% to $1.39 billion.

Nokia Corp. (ADR: NOK), the world’s top cell phone maker, reported better-than expected results for the second quarter and upgraded its forecast for the global handset market, the Associated Press reported. Nokia’s profit was $1.75 billion, or 46 cents per share, down from $4.49 billion, or $1.14 per share, a year earlier. “With half a year visibility, we’re able to say growth will be 10 percent or more,” Nokia’s Chief Financial Officer Rick Simonson told the AP.

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Venezuela’s CITGO Petroleum Corp. is handing out energy efficient light bulbs across the U.S., despite political tensions between the two nations, the Associated Press reported. Together with nonprofit Citizen’s Energy Corp., the company will distribute nearly 500,000 small fluorescent bulbs in 11 cities.

The Bank of England’s Andrew Sentance told Bloomberg News he almost voted for a rate increase at the last BOE policy meeting due to high U.K. inflation. “I have been particularly struck by the speed with which inflation has moved to somewhere that is significantly above target,” said Sentance in an interview in his office in London yesterday (Thursday). “There are clear risks to inflation expectations in this environment.”

The Coca-Cola Co. (KO) yesterday (Thursday) announced that second-quarter profit declined 23% due to a write-down related to the firm’s 40% ownership of Atlanta-based bottler Coca-Cola Enterprises Inc. (CCE). Coca-Cola earned $1.42 billion or 61 cents per share. The one-time charge lopped 40 cents off EPS for the largest global beverage firm, BusinessWeek reported.

JPMorgan Chase & Co. (JPM) second-quarter earnings dropped by over 50%, but still managed to beat analyst expectations pushing the stock 10% higher yesterday (Thursday). JPMorgan earned $2 billion or 54 cents per share compared to $4.23 billion or $1.20 per share for the same period the year prior, Reuters reported.

Investors in Pakistan demonstrated outside the Karachi Stock Exchange yesterday (Thursday), Bloomberg News reported. Some of the protestors threw rocks and smashed windows in outrage over the benchmark index, which has lost $30 billion in market value over the past three months, causing some investors to lose their life savings.

Money Morning

• July 17, 2008 — Global Investing Roundups (0)
• July 10, 2008 — Casualties of Financial Friendly Fire (0)
• July 1, 2008 — The Four Tough Questions to Ask Yourself in a Tough Market (0)
• June 30, 2008 — With the Dow in Bearish Territory, and Oil Prices in the Stratosphere, New Potential Problems Abound (0)
• May 19, 2008 — Talks About Inflation and Interest Rates Will be on the Front Burner This Week as Economic Speculation Resumes (0)
• May 12, 2008 — Will This Week’s Retail Reports Help Investors Decode the Mystery of the U.S. Economy? (0)
• April 21, 2008 — First Step or False Signal? Could Last Week’s Surge in Stocks Signal a Rebound Ahead? (0)

Today the “Tower of Babble” is not located in Babylon but rather on Wall Street. That’s where economists and analysts put on a serious air and explain their own stock market investment advice to us plebes what is about to happen with:

-The economy
-Currencies
-Interest rates
-Commodity prices
-And the stock market

Except, as George and Ira Gershwin observed 70 years ago, “It ain’t necessarily so.”

Stock Market Investment Advice - A Perfect Correlation

In my experience, there is an almost perfect correlation between the specificity of an analyst’s forecasts and the chances that he is giving useless or, worse, dangerous stock market investment advice.

For example:

-A stock analyst may say, “The market is oversold here. We’re due for an intermediate-term rally.” Translation: Here’s my best guess.

-If he says something like, “The market has broken through its 50-day moving average and will begin testing new lows this week.”
Translation: Here’s what I get when I read my tea leaves, deal my tarot cards, and gaze into my magic 8-ball.

-But if the stock analyst says, “Expect the S&P to hit 1,210 before rebounding to 1,350 and then finding support at 1,970,” run.
Translation: I should be wearing a sandwich board that says, “I haven’t the foggiest notion what I’m talking about.”

Investors Wise-Up To Foggy Stock Market Investment Advice

Investors are getting wise to this game of unclear stock market investment advice. A recent survey by the AARP found that:

-Half of Americans over 50 think Wall Street uses a lot of technical jargon to make consumers feel less confident about handling their own finances.

-50% also believe financial-service professionals use obscure terms to distract people from the fees they will be paying.

-Nearly two-thirds believe they use them “to make a product or service seem more impressive.”

These findings may or may not be true, depending on your advisor. Any financial services representative worth his salt will take the time to explain his stock market invesment advice in plain English with his fee schedule fully disclosed. If yours won’t, find someone who will.

Understanding Basic Stock Market Investing Terminology

However, the AARP survey also found that that a lot of basic stock market investing terminology is still not understood by most Americans over the age of 50.

Sure 73% of us know what a rollover is. And 81% understand the term commission. (Who the heck are the other 19%?)

-But only 32% are familiar with the term “diversification.” I hope it’s just the term these folks don’t know and not the practice. Because if they’re not spreading their portfolio risk around, they may end up taking a serious financial hit. (Ask anyone who used to work for Enron.)

-Only 31% understand the concept of dollar-cost averaging. This refers to the wealth accumulation strategy of investing a fixed amount of money at regular intervals. Because the dollar amount remains constant, it means you’re always buying more shares when prices are low and less shares when prices are high. (Never a bad idea.)

-Only 29% of Americans understand the term “expense ratio.” This term refers to the percentage of your investment in a mutual fund that is eaten up each year by operating costs, marketing fees, commissions and other costs. It’s a good number to know. All things being equal, the lower your costs, the higher your net returns.

In short, blame your advisor if you think he’s using investment jargon to bamboozle you. But blame yourself if you haven’t familiarized yourself with basic terminology. That can lead to expensive mistakes. And the older you get, the harder it is to make up for them.

As Benjamin Franklin warned a couple of centuries ago, “Experience keeps a dear school, but fools will learn in no other.”

Good investing,

• June 23, 2008 — A Pledge to Hedge: Saving $68 per Light Bulb and $100 on Water Immediately (0)

Sure, he would prefer that you focus on “core inflation,” since it excludes sharply rising food and oil prices. But we all have to eat and we all consume energy. It’s just a matter of time before core inflation starts rising alongside corn, wheat, beef and prices at the pump.

Ordinarily, the Fed would start raising rates to stave off higher prices.

But Bernanke really doesn’t want to be an inflation hawk right now. Raising rates would only make the already weakening economy weaker still. (Never good in an election year).

If Bernanke has to choose between a weaker economy and moderately higher inflation, I believe he will choose higher inflation, hoping that he can put the genie back in the bottle once the economy is growing again.

Since gold traditionally rises with inflation, that means now is probably a good time to add to your holdings.

Here are the essential facts:

At one time the world’s monetary system was based on gold. It is a universally recognized store of value. It can be bought and sold in any country.

And it is scarce. There are 4 billion ounces of gold in people’s hands, enough to fill a cube 60 feet on a side. Of this, investors own 1 billion ounces, and central banks another billion, with the remaining 2 billion ounces accounted for by jewelry and other baubles.

Last year, more than 80 million ounces were extracted worldwide. Two-thirds went to jewelry makers and the rest to bullion.

If you want to own gold that you can touch, you can buy bullion. But there will be a markup when you buy it or unload it - and fees to store and insure it. The same is true of coins, especially with numismatics.

Understand, too, that while gold has been in a major uptrend over the past few years - hitting an all-time high of $1,030.80 on March 17 - shares of the natural-resource companies that bring the gold to market have performed considerably better. That isn’t likely to change.

Over the past 50 years, major gold mining companies have risen at an annual rate of approximately 12%. That’s better than the return of the Standard & Poor’s 500 Index, although the trade-off has been head-snapping volatility along the way.

Perhaps the most conservative way to buy blue chip mining companies is to plunk for a few shares of Market Vectors Gold Miners (GDX) Exchange Traded Fund.

An ETF, Market Vectors is linked to the AMEX Gold Miners Index and owns all of the world’s leading gold and silver mining companies. That means you can capture the performance of the entire sector in a single, well-diversified investment.

The annual expense ratio is one half of 1%. The shares can be margined or sold short - and there are options available for traders.

Here are some of the stocks among the Top 10 holdings:

-Newmont Mining Corp. (NEM).
-Freeport McMoRan Copper & Gold Inc. (FCX).
-Barrick Gold Corp. (ABX).
-Anglo American PLC (ADR: AAUK).
-Harmony Gold Mining Co. (ADR: HMY).
-Kinross Gold Corp. (KGC).
-Yamana Gold Inc. (AUY).
-Gold Fields Ltd. (ADR: GFI).
-Agnico-Eagle Mines Ltd. (AEM).

Right now the economy is weak - and the outlook for inflation is poor. But this is creating plenty of profit opportunities - if you know where to look.

So pick up a few shares of Market Vectors Gold Miners ETF - or talk to a resource broker.

Tell them Ben Bernanke sent you…

By Alexander Green
Money Morning

• July 16, 2008 — Charting New Highs for Precious Metals (0)
• July 7, 2008 — Silver Prices Ready to Rocket; Four Reasons Why and Two Ways to Buy (0)
• July 3, 2008 — The Limited Shelf Life of Dollar Fruit (0)
• July 2, 2008 — Two Profit Plays to Make as the Fed Inflates the Commodities Bubble (0)
• June 30, 2008 — A SERIOUS WORD ABOUT MR. DUNG’S DONG (0)
• June 26, 2008 — GO EAST, AMERICA! GO EAST! (0)
• June 21, 2008 — In the Valley of Gold (0)
• June 12, 2008 — Oil Price Soars $5 on Reduced Supply, Gas Could Head Much Higher (1)

The Financial Times reported yesterday (Thursday) that one large, unnamed Gulf fund has cut its dollar-denominated holdings from more than 80% a year ago to less than 60%. Also, China’s State Administration of Foreign Exchange (SAFE) has been actively seeking deals with private equity firms in Europe as part of a specific strategy to reduce its dollar holdings.

A shift in policy at China’s SAFE is particularly significant because it holds the vast majority of China’s $1.6 trillion of foreign currency reserves in dollar-denominated assets. In addition, the FT reported, SAFE is encouraging the private equity firms with which it works to invest in natural resources companies in markets outside of the United States.

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With U.S. markets roiled by the subprime meltdown, overseas investors are questioning the credibility of the Federal Reserve and Treasury Department when it comes to defending the dollar and maintaining financial stability.

“I thought the problem of off-balance sheet had gone way with Enron,” the head of one Middle East fund told the FT.

While the shift may seem sudden, Rick Lloyd, head of G10 currency trading at ABN AMRO (OTC ADR: ABNYY) in Singapore, told Reuters that central banks and sovereign wealth funds have been scaling back their exposure to the dollar for some time now.

“That’s something that’s been happening over the course of time, there’s been a supply of dollars on any given rally,” Lloyd said. “The dollar just seems to be getting pushed around in the backwater flows in other markets at the moment.”

Inflation has clearly taken root in the U.S. economy with energy costs leading the way. Worse, continued stress throughout the financial markets, highlighted by difficulties at Fannie Mae and Freddie Mac last week has prohibited the Federal Reserve from raising its benchmark interest rate.

U.S. consumer prices, as measured by the Consumer Price Index (CPI), increased 1.1% in June, bringing the inflation rate for the past 12 months to 5%, well above the U.S. Federal Reserve’s preferred target of 2.0%.

“We have a stagnating economy with rising inflation,” Joel Naroff, president and chief economist of Naroff Economic Advisors said in a note to clients after the CPI report was released. “Clearly, the rate of inflation and the slowdown in economic growth is nothing near what we saw in the 1970s, but the combination of the two is creating real problems for the Federal Reserve.”

The dollar wobbled against the euro yesterday, but the single European currency in late-day trade was at $1.5866 dollars after 1.5821 dollars late Wednesday, the AFP reported.

By Jason Simpkins
Money Morning

• July 2, 2008 — Currency Intervention Won’t Halt the U.S. Dollar’s Nosedive (0)
• June 13, 2008 — US Agriculture Supply and the Coming Election (0)
• June 11, 2008 — The Fed’s “Strong Dollar Policy” Actually Isn’t so Strong (0)
• May 8, 2008 — A Currency Conundrum: Beware of the U.S. Dollar’s “Head Fake” Rally (0)
• January 16, 2008 — Daily Reckoning’s Bill Bonner: Demise of the Dollar and the new economic superpowers (1)

In the past few days alone, the Bernanke Bomb Squad - also known as the U.S. Federal Reserve - was able to defuse two ticking time bombs - Fannie Mae (FNM) and Freddie Mac (FRE) - before
the full force of their explosive power could be felt. Fannie and Freddie are now being propped up and will eventually have to be taken over or put into receivership, meaning there ultimately will be damage to deal with.

So, why do I still hear a ticking sound? Because there’s another bomb out there, and it’s getting closer and closer to its point of ignition. Most folks aren’t aware of it, and others who should know better are ignoring it.

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The upshot: Most investors are completely oblivious to the danger it poses.

When FHA is Pronounced as “TNT”

This latest threat we’re referring to, of course, is the
Federal Housing Administration, more generally known as the FHA.

Congress believes that the FHA is the institution it can count on as the salve that covers the housing gash, and heals it - thereby delivering us from a New Millennium version of the Great Depression. But in reality, the FHA is not only an additional ticking time bomb - it’s one that Congress is packing with additional gunpowder.

The Federal Housing Administration was created as part of the National Housing Act of 1934; in 1965 it became part of the Department of Housing and Urban Development (HUD). In a nutshell, FHA provides insurance - paid for by borrowers - that insures lenders, making certain that interest and principal will be paid on the mortgages that lenders grant to borrowers. FHA insurance and FHA-predicated loans facilitate home buying by low- to middle-income borrowers. When there were eager subprime-mortgage lenders and a plethora of similar lenders bending over backwards to provide mortgages (usually with teaser rates), FHA loans were not in the spotlight.

Legislative Shortfalls Certain to Surface

Within short order, perhaps as soon as next week, the Senate and House versions of their respective housing-recovery-legislation efforts will cross each other and be reconciled. In this politically charged election year, both U.S. political parties and both houses of Congress want to appear both proactive and decisive. The result will be a housing-relief package whose centerpieces are based on Fannie, Freddie and the FHA.

Because of the already-existing burdens of Freddie and Fannie, it’s obvious that further encumbering them with loans from banks - or mortgage companies such as Countrywide Financial Corp. (CFC) - is flat out a bad idea. These are loans, after all, that no one else wants. Ultimately, Freddie and Fannie would take these newly acquired loans, would repackage them as securities, and would end up selling them to themselves, since no one else will buy them.

The centerpiece of the legislation provides $300 billion to the FHA to insure new mortgages for borrowers who are in danger of being foreclosed. This inane and stillborn idea is predicated on a reality
that just doesn’t exist.

What will happen is that the legislation will shoehorn borrowers into mortgages that they have no real incentive to repay. In the end, when those dead-end mortgages are abandoned, we the taxpayers will pay to bail out the FHA.

Here’s why the legislation won’t work.

The Top Two Reasons Congress Can’t Win

First, troubled borrowers will have to get lenders to forgive existing loans and take the write-off so that borrowers can refinance with an FHA loan. The trouble here is that lenders just can’t unilaterally decide to forgive the loan. Most of these borrowers have second loans and equity credit lines - usually with more than one lender - and many of these lenders have no incentive to forgive the loans. After all, if the lenders forgive the indebtedness, what will they get?

Exactly nothing - nothing at all.

Another major impediment to this approach is that most of these loans were packaged into “trusts” that issued securities (collateralized mortgage bonds) based on the collective mortgages. The “servicers” of these trusts do not speak for the original lenders, and furthermore have absolutely no incentive to allow individual mortgage holders to opt-out.

If individual mortgage-holders opted out because they could refinance, that would shrink the size of the mortgage pool. Since trust-servicers are compensated based on total size of the pool, where’s their incentive even if they could negotiate on behalf of the underlying lender? Another idea that was tragically stillborn.

But it’s the second problem that’s the most worrisome. If borrowers could refinance based on the reduced appraised value of their homes (there’s another issue right there: what appraisals?), they would have to agree to share any appreciation with the federal government.

I’m trying very hard not to laugh. Because it’s really not funny. And here’s why: Because all these folks need help and because the FHA requires down-payments of only 3%, those who can refinance actually might do so instead of just walking away - particularly since the FHA allows the down-payment to be borrowed, gifted or provided by charitable organizations. (Builders and developers can actually constitute themselves as charitable organizations, believe it or not).

So, banks will hold onto those loans that have decent recovery prospects. More than likely, anything valued at less than 80 cents on the dollar they have already written off - or will, soon - and will then dump those borrowers on the FHA. The FHA will end up with subprime and junk mortgages where the borrowers have “no skin in the game,” and no upside incentive. And, as a last laugh, new legislation, already in place, allows the FHA to raise the amount of a loan they can insure from the previous level of $362,790 to a new total of $729,750.

(Special note to lawmakers: Hey folks, it was the extension of credit to borrowers who were unable to afford homes in the first place that got us into this mess).

The FHA is supposed to be revenue neutral, last year it lost $4.6 billion. Can you see where this is going?

The bottom line: This plan is not a panacea. It is a sea of pain - for the taxpayers, and for the housing market.

Market Notes From “Inside Wall Street:” Don’t Get “Faked Out”

Don’t be fooled by the “head-fake” rally. The truth is that the congressional efforts being pushed along at breakneck speed to “fix” the U.S. housing disaster are short-sighted and inept, and serve to hide the massive FHA time bomb that’s destined to blow up in our collective face.

Color me unimpressed.

Wednesday’s stock-market rally - and the follow-up advance yesterday (Thursday) - do not portend a sea change in momentum and no previous sell-offs would constitute a “capitulation” bottom.

To the contrary, it was what we professional traders call a
“dead cat bounce.” It was a technical rally based not on fundamentals, but on technicals. Shorts ran for cover, thanks chiefly to newly proposed Securities and Exchange Commission rules that would force short-sellers to actually “locate” shares of stock before they can sell that stock short.

There are massive shorts out there and from time to time such squeezes will result in “head-fake” rallies. The fundamentals have not changed. Keep your eyes on the prize.

By Shah Gilani
Money Morning

• June 24, 2008 — A Plan to Grant the Fed Additional Powers Will Only Exacerbate Current U.S. Woes (0)
• June 12, 2008 — Oil Price Soars $5 on Reduced Supply, Gas Could Head Much Higher (1)
• June 4, 2008 — Financial Indicator - Countrywide Financial (0)
• June 3, 2008 — Four Things to Ponder and Three Ways to Act When it Comes to the Fed (0)
• May 31, 2008 — Dallas Fed President Lends Credibility to Money Morning’s Prediction That the Federal Reserve Will Soon be Boosting Interest Rates (0)
• May 2, 2008 — With Much Blood-Letting to Come, the U.S. Housing Finance System Needs Replacing (0)
• April 30, 2008 — Housing Slump Continues… (0)
• February 26, 2008 — ZEITGEIST: In Search of Truth (0)

As I wrote last week, it’s pretty clear times are tough right now. With three quarters of the population thinking we’re already in a recession and the market sinking by the day, I don’t think there’s any more debating as to whether or not we’re in bear market territory.

So the question for many folks has become:

Are we at the bottom of the market yet?

In fact, that’s what inspired this question on TickerHound (and in turn, inspired today’s article):

“In my humble opinion, if you want to know whether or not we’ve reached a bottom, then all you need to do is think about the consumer. In other words, think about yourself and the millions of other Americans out there who are:

1. Watching the values of their homes drop
2. Spending twice as much at the pump than they did a year ago
3. Watching their net worth shrink by the day

“And then ask yourself, has anything changed over the last couple of months? Have things gotten any better or have they gotten worse?”

Unless you don’t own a home, drive a car or do your own grocery shopping, then you might be tempted to say, “Things ain’t so bad.” But if you can relate to what I’m talking about, then you already know the answer this question.

Calling a bottom right now would definitely be premature. Consumer spending drives 70% of our GDP. You cut the consumers’ ability or desire to spend and you’ll watch this economy slow down pretty darn quick.

And just to show you where we are based on cold hard facts, here are three reasons why I know we’re not out of the woods just yet…

Housing and Real Estate

Nobody thinks this story has completely played itself out yet. Even the analysts that are on the more “positive” side of this debate still agree that we won’t see a bottom in the real estate markets until the end of the year.

And that’s being optimistic!

According to the National Association of Realtors, pending home sales dropped by 4.7 percent in May…that is its third lowest month on record. So things sure aren’t slowing down yet.

And even when the recovery does come along, many economists are predicting a protracted recovery period that could stretch to 2010.

The bottom line is, the less wealth and free cash to spur consumer spending, the less relief we’ll see for the overall economy in the short run.

Energy Prices

Like I said before, unless you don’t drive, then there’s a good chance the increases we’ve seen at the pumps have made a serious dent in your wallet.

Just last week the price of oil broke a new record, hitting $147 per barrel and $200 oil by the end of the summer isn’t out of the question.

Here’s why this situation won’t get better anytime soon…

If you were an oil and gas company, would you feel the need to go scouring the globe for fresh supplies right now? I mean, you’re sitting back, pumping out enough barrels to meet demand and you’re watching the price rise along with your profits on an almost daily basis.

In other words, there’s no economic incentive (just yet) to dramatically increase the amount of oil these companies produce. They’ll do so when our consumption of that oil drops below a certain amount.

But with all the pent up demand in countries like the U.S., China, India, etc., I don’t foresee that happening anytime soon.

We’ve all heard the argument that oil’s cheaper than it was in the 1980s, relative to current income levels. But at the end of the day, what really matters here isn’t the relative price of gas; it’s the perception of the consumer.

If they’re paying twice as much for oil today than they did last year, they have far less disposable income to spend on other things — which once again, can’t be good for the overall economy.

Relative Market Conditions

So the dictionary definition of a “bear market” is when the Dow falls by 20% or more.

We crossed the 20% mark last week. The same goes for the broader S&P 500 Index. Therefore, by any yardstick you want to use, we’re in a bear market.

Now, let’s take a look at some of the previous bear markets we’ve weathered and see how far the S&P had to fall before it began to recover:

-From 1969–1971: 33% drop
-From 1973–1975: 48% drop
-From 1980–1982: 26% drop
-From 2000–2003: 48% drop

From this data you can see that from peak to trough, the average bear market will show a 38.75% decline each time.

Considering we just crossed the 20% mark, it’s fair to say we’ve got a ways to go before we approach the average.

Remember, These Are Just Indicators!

The thing you really need to keep in mind is that all of this data:

-Home sales
-Energy prices
-Market index levels

They’re all simply indicators of where we are. The meaning you derive from them will depend on how well you know the markets.

For example, a seasoned value investor will look at falling stock prices like gold nuggets falling from the sky. That’s because an experienced value investor knows that there’s TONS of money to be made when they can buy stocks on the cheap.

It’s like walking into your local super market and finding all of your groceries on sale for 50% off.

And a seasoned trader loves a market with direction (no matter if the direction is up or down) because the trader knows they can short that market all day long.

That’s why it isn’t a bad thing that this market hasn’t bottomed yet. In fact, if you’re an intelligent person who’s interested in making money, then this could be the best opportunity you’ll have for a long time!

So equip yourself with the right tools, information and then go make the most of this market!

Wayne Mulligan
The Penny Sleuth

• July 10, 2008 — The Coming Recession (0)
• July 3, 2008 — The Five Secrets to Succeed at Bear Market Investing (0)
• June 27, 2008 — Stayin’ Alive in the New ’70s (0)
• June 17, 2008 — Energy Recession or Energy Depression… (0)
• June 11, 2008 — Brush Up On Your Survival Skills… Simple Tips To Combat A Wild U.S. Economy (0)
• June 9, 2008 — Special Report: Six Ways to Profit From the One-Two Punch of Soaring Oil Prices and Zooming Inflation (0)
• June 7, 2008 — The U.S. Economy’s Uncertainty Brings Opportunity for Investors in the Months to Come (0)
• June 2, 2008 — As Gas Prices Escalate, Worries About a Recession Turn Into Fears of Inflation (0)

There are two ways of studying economic theory. One approach is mathematical, and has been much enhanced by the computing power available to the individual economist. The other is historical and relies on the accumulated understanding of economic theory and practice.

The events of 2007 and 2008 have shown the limitations of the mathematical method. The credit crunch was not foreseen by anyone that I read, but it came as a shock to the number crunchers — it took them completely by surprise.

It did not come as a shock to the economic historians, who happily settled down to discuss the resemblances between this credit crisis and earlier ones, going back to the South Sea Scheme in 1720 or the Wall Street Panic of 1907. The economic historians know that similar events had happened before, and had also learned, often by painful experience, that such events are quite common.

Neither group foresaw the actual events of August 2007, but the historians were quite able to put the credit crisis in a context of other crises. Even though both groups were taken by surprise, it was the mathematicians whose previous forecasts were stood on their heads.

By and large, historical economists, who follow the example of major English economists such as Maynard Keynes or W.S. Jevons, do not regard timing as any more predictable for economic shocks than for earthquakes.

One can say that there is a build up of stress in the system that will eventually have to be released. One cannot say that the release of pressure will occur next Tuesday or next August or even next century.

Some say the big earthquake will happen along the San Andreas Fault in California. It may come tomorrow; it may come before 2050; it may not happen for 500 years. We can usefully predict what and where, but we can very seldom predict when. This makes expectation difficult to quantify, though all markets are based on expectations

What we do know from economic history is that there is a cycle of debt that has to be relieved. In twentieth century history the war debts of the first war played their malign part in the European depression of the 1920s and eventually in the Great Depression of the 1930s. The Austrian School of Economics, and particularly Friedrich von Hayek, developed the Debt-Deflation theory of the business cycles. Hayek indeed foresaw the risk of a deflationary crisis as early as 1927.

Keynesian economics, as expounded in his General Theory, 1936, were criticised at the time for an inadequate appreciation of the negative aspects of excessive debt. Bankers of the Gold Standard era attached great importance to the balance sheet rather than the profit and loss account. I get the impression nowadays that people read the current account much more carefully than they do the capital account — partly because they think that off balance sheet financing has reduced the transparency of the balance sheet itself.

As a result, government balance sheets, bank balance sheets, corporate balance sheets and personal balance sheets have all deteriorated. Finance ultimately depends on the security of capital, and weak balance sheets, at any level, are exposed to risk and to problems of opportunity cost.

An old-fashioned banker would now be calling for strengthening of balance sheets at every level. But the liquidation of debt takes years to accomplish and diverts fund from current consumption. The 2007 credit crunch calls for liquidation of debt, but that is bound to have a deflationary effect.

Lord William Rees-Mogg
Whiskey & Gunpowder

• June 14, 2008 — House of Cards (0)
• July 7, 2008 — Land of the Free (0)
• July 4, 2008 — GRAND THEFT SOCIETY (0)
• June 30, 2008 — A SERIOUS WORD ABOUT MR. DUNG’S DONG (0)
• June 17, 2008 — Energy Recession or Energy Depression… (0)
• June 13, 2008 — NATIONAL POLITICAL BROWNOUT, PART II (0)
• June 13, 2008 — Stimulus Checks Push Retail Sales Rally; Economy Still Facing Uphill Battle (0)
• June 10, 2008 — THE DECLINING QUALITY OF DOLLAR MENUS (0)

Ben won’t be there long, anyway, especially if he mucks this up.

Maybe the new administration will replace him. Then he could write a book debunking gold bug myths about the Federal Reserve System, such as the one about how the Fed is “the engine of inflation.”

Anyway, the markets, overall, are performing as expected.

They are treating the gold correction as though it were a healthy mistake.

Not only did it weed out the weak hands, but it gave central bankers a false sense of security in the face of escalating energy costs. With gold in the doldrums, bond yields relatively low and stock prices recovering, all looked good for a relaxing summer vacation - at least until last week.

Gold bulls are popping with enthusiasm about the post-FOMC recovery in gold prices.

They should be.

After breaking through $920, the market almost shot clean through the May high of $940, staring the reversal point at $950-960 right in the face. The chart bias has turned bullish. I would expect to see support hold above the $900-920 level if the market were to backfill over the next few days - to validate my bullish outlook. But it’s not just technical. The market is doing all the right things, fundamentally.

It has realized that the Fed didn’t really mean what it said, and if it did, it isn’t all that, anyway.

The focus of the debate is shifting to areas that make the Fed uncomfortable: The Dow failed to breach 13,200 and the inflation story is heating up, despite ongoing cracks in the economy.

These things are driving gold now.

Bull markets are notorious for going much further than their earliest prophets ever imagined.

That’s the message in oil prices. As a gold bull, I am taking heed.

What the Fed didn’t anticipate was that the oil price rise would be so sticky that it would embolden the inflationary psychology with or without gold. And it cannot afford to lose control over bond yields.

On the other hand, it cannot afford to tighten.

It can only try to talk down inflation expectations.

A whole new generation has grown up since 1979. It is not used to a tough Fed. The toughest Fed it has seen was in 1994. And putting aside the character comparisons, I’ll tell you this - it was only after several years of inflationary fallout, when people finally began to worry more about inflation than deflation, that Volcker was hired with a political mandate to attack the inflation monster head-on. At the time, CPI inflation and interest rate levels were already high, and P/E ratios were half today’s.

The Bernanke Fed is nowhere near such a mandate. It cannot have anything more in mind than Greenspan’s gradualism. Yet even that is dangerous at this time.

The Greenspan Fed was raising rates during a period of economic stability (2004-2005). Today, the Fed is talking about raising rates in response to an inflation outbreak amid a financial crisis.

C’mon! How are you gonna ’splain that to the voters?

If Bernanke wants to survive long enough to secure another term, he’s not going to challenge the status quo, and the status quo is not willing to accept the kind of austerity package necessary to contain or defeat inflation. The Fed is damned if it does and damned if it doesn’t.

This means that prices will continue to rise until outright fear of inflation exceeds all others.

That’s why gold has the potential to catch fire here.

The market is beginning to understand this, too. It has seen Bernanke flip-flop from worrying about deflation to worrying about inflation a few times already. The Fed’s hesitation to act in last week’s Federal Open Market Committee meeting was like a starting pistol for this realization.

It’s too late to fix this break in confidence, and it’s too early for the Fed to really take it to inflation.

Watch gold prices double over the next year. My forecast is for gold to reach $1,200 by year-end, and $2,000 by next summer.

This may well be your last chance to buy the metal below $1,000 per ounce.

Ed Bugos
The Daily Reckoning

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Yesterday, the price fell another $4 - to $136. Still, of course, not far from its all-time high. But sliding…

“Oil is a bubble ready to pop,” say some analysts. “No, oil is merely responding to supply and demand,” say others.

What’s the real story?

As usual, you can count on us, here at The Daily Reckoning, to give it to you — straight, unvarnished and unmitigated.

Trouble is, the real world always has a bend to it. Everything has a lacquer on it. And mitigations are everywhere.

In the oil market, we see both a bubble…and a useful commodity responding to economic forces. If you want to see a “pure bubble,” you have to look at something like the tulip mania in Holland or the Mississippi affair in France or the dot.com debacle in New York. These were “pure” bubbles because neither tulips, nor shares in the Mississippi company, nor dot.coms had any real economic value. Their prices were based 100% on speculation - not supply and demand. And since there was no “there there,” as Virginia Woolf might say, there was nothing left when the speculation disappeared. Their prices could go to zero, in other words.

Will the price of oil go to zero? No…not a chance. If the oil market is in a bubble, at least it is a bubble mitigated by three very important circumstances: 1) oil is perhaps the world’s most useful commodity, 2) more and more people want the stuff, 3) it is priced mostly in dollars whose value, in terms of everything else, is going down.

Normally, we can set aside the first two circumstances. Everyone knows oil is useful. Everyone knows the Chinese, the Indians and all the other foreigners are becoming addicted to it - just as Americans have been addicted for the last 50 years. These circumstances come as no surprise to anyone…and markets can sort them out. They were obvious in the oil market two years ago…they are obvious now.

Of course, even if they are obvious doesn’t mean investors have noticed. And in today’s oil market, it looks as if investors are suddenly waking up to something they should have seen a long time ago. But we suspect that the real surprise to most investors is the third circumstance. During the last 15 years - a period known as the Great Moderation - it was inflation that seemed to be taking a long nap. The band was playing loud music. Free drinks were passed around. Everyone was there - except inflation. Maybe it was out of town, some wondered. Or, maybe it was dead. Whatever happened to it, inflation was not around.

But, then the old party pooper showed up - and people began looking for their hats and saying goodbye to each other.

“US consumer prices up most in 26 years,” was yesterday’s most telling headline. Even the Wall Street Journal announced a price increase - to $2 an issue.

If you’re an oil sheik whose only asset is $100 billion worth of oil under the desert sand, you pay attention. The dollar has lost about 25% of its purchasing power - depending on how you measure it - in the last 5 years. If inflation rates just stay the same, the poor oil sheik stands to lose more than $25 billion by 2013. If he doesn’t think he’s getting a fair deal at today’s oil price, he’s likely to put a little crimp in the oil pipeline - reducing production until the price increases.

On the other hand, if the price of oil goes up enough, he’s likely to think that he should get it while the gettin’s good. Then, he would increase production - driving down the oil price.

Our guess is that the oil market has probably over-reacted to circumstances. When investors realized how much demand was increasing…they bid up prices. And when they realized how much inflation was increasing…they bid up prices further. And when speculators saw prices rising so much, they bid them up even further.

Now, oil is probably ready for a correction. Ten years ago, an ounce of gold would buy about 10 barrels of oil. Today, it buys only about 7. As is the case with oil, gold has responded to the increase in inflation rates. As to everything else, it is probably indifferent. So, if we were just adjusting the oil price to inflation, it should probably sell for about $95 a barrel.

As to the forces of supply and demand - Mr. Market would know better than we do. But Mr. Market, for all his sage experience, has a tendency to over-react. He probably over-reacted to growing, worldwide demand. Now, growth rates are declining throughout the world; he will probably over-react to that too.

So, where will the price of oil go? We wish we could tell you. It might very well sink below $100. But it will never sink as low as a busted dot.com or a crushed tulip bulb.

Even if the price of oil does drop, the U.S. has gotten the message: the time to find what will power the ‘car of the future’ is now.

“The coal revolution is here,” Byron King tells us. “It’s always been cheap and plentiful. Now it’s going to be clean, and soon it will even be liquid. It’s also going to cause a massive shift in world power. Two American companies will profit big time.”

Discover the fastest-growing energy source in the world. Also the cleanest and safest. America may miss out, but you can still profit.

*** The stock market seemed to delight in oil’s slippage yesterday. After weeks of falling prices and gloom on Wall Street, investors were ready for a little fun. So the Dow went up 276. Even the financials started tapping their toes.

The dollar managed a feeble improvement too; after hitting a new all-time low against the euro (EUR) this week, it rose to $1.58.

And gold? Mr. Spoilsport lost $16, to end the day at $962.

*** If you were describing the day’s action in terms of our “war” between inflation and deflation…you’d have to say it was a draw. Deflation has been gaining territory - following its massive counterattack, launched a couple weeks ago. But yesterday, the front stabilized. Stocks were up, not down. And consumer price inflation was back in the headlines.

On the other hand, gold’s big drop was clearly a victory for deflation, not inflation. And we got an item from the Wall Street Journal that reminded us that the U.S. economy is still just beginning a deflationary pullback:

“Record Store Closings.”

We were too busy to read the accompanying article. For a second, we thought we might have misread the headline. Maybe it meant that ‘record stores’ were closing. Then we remembered; there aren’t any stores that sell records any more. So, we must have read it right the first time - retail is in trouble.

There is probably nothing surer, dear reader. After a spending spree that saw Americans spend ALL there money…and then some, they are not now going to spend MORE. It’s not possible. Instead, they are going to spend less. And that means the retailers are going to sell less. And it means that they are going to need fewer clerks…and less space.

This is not the time to be holding retailers…or shopping malls - especially those that are far out in the boonies.

*** Heard from an old friend with a new idea:

“Global warming is much more of a threat than I thought. I’m embarrassed that I dismissed it for so long without any evidence. Apparently, there is much less dispute in the scientific community on this subject than we thought. Very few real scientists doubt that the climate is changing…and that the changes are at least in part caused by man. And from what I hear, since it is a problem caused by man, it is also something that we can fix at relatively little cost - or, at least that part of it caused by mankind.

“Not that I’m sure of any of this. Maybe the whole thing is wrong. I don’t know. But then, I don’t know if my warehouse is going to burn down either. And I still buy insurance. From what I’ve heard, the cost of insuring the world against the worst effects of climate change - if the theory is correct - is relatively low. Of course, the world doesn’t work as a business…or a household. But if I were running the world…and I were treating it as a business, I’d buy the insurance. Even it fit turned out to be untrue, I’d still think it was a good buy.”

Bill Bonner
The Daily Reckoning

• June 30, 2008 — Saudi Arabia’s power struggle (0)
• June 25, 2008 — Midnight Oil (0)
• June 21, 2008 — The Anti-Dollar (0)
• June 19, 2008 — Energy Q&A Part I: Peak Oil and Oil Price Spikes (0)
• June 8, 2008 — Good Grief (0)
• April 24, 2008 — Big Oil Digs Deep to Solve a Growing Problem: Where Will Tomorrow’s Oil Come From? (0)
• April 11, 2008 — One Sure-Fire Sign That Gas Prices are Heading Higher (0)
• April 3, 2008 — Peak Oil: From Pemex to Petrobras (0)

U.S. consumer prices, as measured by the Consumer Price Index (CPI), increased 1.1% in June, the Department of Labor reported yesterday (Wednesday). That brings the inflation rate for the past 12 months to 5%, well above the U.S. Federal Reserve’s preferred target of 2.0%.

The increase was higher than expected as a 6.6% jump in energy costs and a 0.8% rise in food prices helped to boost CPI up past the expected rate of 0.8%. So-called core CPI, which excludes highly volatile food and energy costs, was 0.3% — higher than its expected rate of 0.2%.

“The core increase is not likely to be repeated. But we have to get used to the idea of 5% headline inflation,” Alan Ruskin, chief International strategist at RBS Greenwich, told Reuters.

Also, yesterday, Eurostat, the EU statistics office, confirmed inflation in the 15-nation Eurozone clocked in at 4% in June, an increase from the 3.7% rate in May, in large part due to a 53% increase in heating oil costs.

Both reports indicate that inflation is ramping up, despite economic downturns in both the United States and European Union. The worsening inflation situation puts the two central banks - the U.S. Federal Reserve and European Central Bank - in a tight spot as interest rate hikes to curb inflation will further hinder economic growth. Conversely, any attempt to boost gross domestic product with an interest rate cut will add fuel to the inflation fire.

“We have a stagnating economy with rising inflation,” Joel Naroff, president and chief economist of Naroff Economic Advisors said in a note to clients after the CPI report was released. “Clearly, the rate of inflation and the slowdown in economic growth is nothing near what we saw in the 1970s, but the combination of the two is creating real problems for the Federal Reserve.”

The ECB raised its key interest rate to 4.25% at its July meeting, however, a softening Eurozone economy could prohibit additional rate hikes over the next several months.

“This all has to do with this oil-price surge and for central bankers, it’s a most frustrating source of inflation because it’s out of their reach,” Janwillem Acket, group chief economist at Julius Baer Holding AG in Zurich, said in a Bloomberg Television interview. “We will probably see in the months ahead growth momentum going lower and then allowing the ECB, probably early next year, to cut rates.”

By Jennifer Yousfi
Money Morning

• June 26, 2008 — Fed Holds Rates Steady in Face of Upside Inflation Risk (0)
• June 17, 2008 — Investors Will Watch as Inflation Dominates the Spotlight This Week (0)
• May 28, 2008 — With Oil Speculators Blitzing, the Fed Needs to Call an Interest-Rate Reverse Play (0)
• June 24, 2008 — Inflation In Spades (0)
• June 10, 2008 — How to Survive Stagflation – With a Profit in Your Pocket (0)
• April 30, 2008 — With a Rate Decision, GDP Report Due Today, the Fed Walks the High Wire Again (0)
• July 11, 2008 — The End of the Boomland Economy (0)
• July 8, 2008 — A Supersized Transfer of Wealth (0)

Air China will buy 15 Boeing 777s and 30 Boeing 737s at a cost of $6.3 billion, the company said on its website. The purchase will increase Air China’s fleet by 35%, as the company competes with other Chinese carries for a dominant share of a market that is expected to grow 9% annually over the next several years, The Associated Press reported.

Whereas commercial airlines in developed markets have been struggling, with some even collapsing under the weight of high fuel costs and sluggish demand, airplane manufacturers have been buoyed by strong demand in emerging markets such as the Middle East and China.

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In fact, a report released earlier this month predicted $3.2 trillion in aircraft sales over the next 20 years, as air travel picks up despite current price pressures.

Boeing’s annual Current Market Outlook estimates that passenger travel will grow at a 5% rate, and cargo will grow at a 5.8% rate over the next several years. Despite record fuel costs, air travel and shipping have become an integral part of daily life for many consumers and businesses. Boeing says that demand will only grow.

“During 40 years of producing the Current Market Outlook, we have learned that the resilience of air transport growth comes from its intrinsic importance to the livelihood of people around the world,” the report read.

Over one-third of the projected $3.2 trillion market is set to come from the Asia-Pacific region, which is expected to have $1.19 trillion in future airplane deliveries, according to Boeing data. North America and Europe are both projected to have $740 billion, while the Middle East region clocks in at $260 billion. Latin American demand is forecast at $140 billion.

In order to meet the upsurge in demand, Boeing estimates that planemakers will deliver 29,400 planes during the period, up from the 28,600 predicted last year.

Boeing Profits Soar on Emerging Market Growth

The news of Air China’s purchase came one day after Boeing announced Sheik Ahmed bin Saeed Al-Maktoum of Dubai would pay $3.78 billion for 54 Boeing 737-800 series jets. The sheik announced he plans to use the planes to start his own low-fare airline, FlyDubai, itself an indication of demand for air travel in emerging markets.

As a member of the United Arab Emirates, Dubai is part of one of the world’s fastest growing regions. That means it is flush with petrodollars and geographically speaking at the center of the developing world.

“They have a geographic advantage that no one else has,” Diogenis Papiomytis, a commercial-aviation consultant with Frost & Sullivan, told MarketWatch.com. “Within 8,000 miles, they can reach something like 80% of the world.”

In addition to the upstart FlyDubai, the Middle East nation also is home to Emirates Airlines, currently the world’s fastest-growing carrier.

With 180 jetliners, worth an estimated $58 billion, on order, Emirates has become an industry heavyweight - especially when other top carriers are cutting their fleets. Last year, its profits soared 54%, reaching $1.45 billion. Sales jumped 32% as the airline carried more than 21 million passengers - an increase of 21% from the year before.

However, Emirates isn’t the only company profiting from the surge in air traffic. Boeing is reaping huge rewards as a supplier to emerging markets even as demand slackens in the United States and Europe, which have traditionally been the company’s lifeline.

Boeing’s first-quarter profit soared 38%, easily eclipsing Wall Street expectations, despite hang-ups with its 787 Dreamliner. Profit from continuing operations rose to $1.21 billion, or $1.61 a share, from $873 million, or $1.12, a year earlier, the Chicago-based Boeing reported. Sales advanced 4.1% to reach $16 billion.

Profit for 2009 will be $6.80 to $7 a share on sales of as much as $73 billion, Boeing said in its first forecast for 2009. That projection also exceeded expectations.

The company’s defense business is sound, and it just won a favorable ruling from the U.S. General Accountability Office on a protest it lodged over the loss of a U.S. Air Force aerial tanker deal worth an initial $35 billion - and with a potential ultimate value of $100 billion.

By Jason Simpkins
Money Morning

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Indeed, according to a report last week, U.S. consumers used 3.3% less gasoline than at the same time last year and usage now stands at a five-year low. Although the relative merits of slowing energy consumption is a subject upon which reasonable minds can disagree, the drop is nonetheless an extremely rare event in American economic history.

Many on Wall Street are cheering the possibility that further “demand destruction” due to soaring gasoline prices will ultimately lead to significantly lower oil prices. After all, this is basic economics. Prices are a function of supply and demand, and as demand drops, prices must follow.

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This is simple logic - but it’s wrongly applied.

The Global Gasoline Game

What is missing from this analysis is that oil is a global commodity, which means that its price is not simply a function of U.S. demand. As demand is destroyed here, it is being created abroad. The result of that swap will be an increase in oil and gasoline prices, despite the fact that Americans are using much less of both.

In countries where currencies have risen against the dollar, oil-price increases have been much milder. Given the strengthening economies overseas, and the slower price increases in those markets, foreign demand continues to rise, just as higher U.S. dollar prices cause demand to fall here. In addition, central banks in nations where currencies are pegged are continuing to print huge quantities of money. This massive monetary stimulus is fueling oil demand, as foreign consumers use the new cash to buy gasoline.

And that’s not all. As economic-growth rates abroad far exceed what we’re seeing here at home, foreigners are using their newly increased wealth to buy more automobiles. So, while car sales are falling through the floor in America, they are zooming around the world. Take a look at what is happening in Russia, where booming car sales have resulted in Russia surpassing Germany as Europe’s largest automobile market. We are talking about the former Soviet Union, where not too long ago, many comrades still traveled in mule-drawn buggies. So, as poor Americans drive fewer miles due to higher gasoline prices, wealthier Russians more than make up the difference.

The Ripple Effect of Reduced Demand

Here lies the source of our problems. When the dollar was king, demand here in the U.S. market was strong. American consumers - armed with the mighty U.S. greenback - flexed their collective muscles and priced foreign consumers out of the market.

Now, however, that same greenback is little more than the proverbial “98-pound weakling,” and foreign consumers are returning the favor by kicking sand in our faces. The bottom line is this: As more goods and resources are consumed abroad, Americans will be forced to consume less. Demand creation abroad leads to demand destruction at home. There’s just no way around that fact.

But here’s what most folks fail to realize: The demand destruction in America will not be limited to gasoline, but will encompass a wide variety of resources and consumer goods, as strong demand abroad prices more Americans out of more markets. In the end, America’s gargantuan trade deficit will return to surplus, not because of a highly over-hyped export boom, but because of an import bust.

By Peter D. Schiff
Money Morning

• July 17, 2008 — The Great U.S. Energy Transformation… (0)
• July 15, 2008 — Fixing the Energy Policy is the Number One Priority (0)
• June 27, 2008 — Raise The Tax On Gas! (circa 2004) (0)
• June 26, 2008 — Oil Defies a Correction… (0)
• June 23, 2008 — The intellectually barren offshore drilling debate (0)
• June 22, 2008 — Energy Q&A Part IV: Investing In Energy Stocks And More… (0)
• June 20, 2008 — Energy Q&A Part III: Investing in Uranium Stocks (0)
• June 16, 2008 — Joyful Assignment For The Next President: A Unified National Energy Policy (0)

One of the best ways to make money in the stock market is to not buy stocks at all. But instead, buy a stock’s derivative — or option. This way, you can actually control more shares of stock than you would normally be able to afford with limited downside, and virtually unlimited upside.

Many savvy investors do this all the time, instead of wasting time on regular shares of companies that at best, will only produce a tenth of what the company’s options will potentially bring investors. We’re talking about upwards of triple-digit gains when regular shares only bring in single-digit ones.

Unfortunately, many people feel that options are too risky or confusing. To a brand-new investor, that may seem to be the case. But, with the right kind of preparation and skill, option investing is just as easy as anything. You just need to be aware of some pitfalls that many investors fall victim to.

Here are the top five pitfalls you need to avoid to be successful with options:

Pitfall #5: Leverage

The basic concept of options investing is the ability to control more shares of a company for less money. For instance, say you wanted to buy 100 shares of Company X at $10 per share. You could either buy the shares outright and spend $1,000 or buy one call option and spend $100. That would give you the option to buy 100 shares of the company at $10 per share anytime before the date the call option expires. This is called the power of leverage.

Now, if the share price goes higher than $10, you can take the option to buy 100 shares for only $10 each and sell at the higher price…not a bad gain on very little risked. But if the share price falls lower than $10 and doesn’t recover by the expiration date, you lose everything. It expires worthless and you are out of $100.

Pitfall #4: Acting on a Whim

Many first-time option buyers jump in without all the knowledge they need. You might hear that Company X is going to be launching a new product this quarter and you want to leverage that bit of information to make an even larger profit on the company’s shares. So you buy a call option.

Well, many times the new product will actually cost the company more money on startup fees and not breakeven until the following quarter. Most likely, that would decrease the share price and leave you out-of-the money. If you had just bought shares, you could sit on those until the company turns a profit, or wait until it does before buying call options.

Pitfall #3: Choosing the Wrong Option Series

If you don’t know what you’re doing, you might end up choosing the wrong option series on the right stock. For instance, if you think shares of Company X are going to go down in the next few months, you should buy a put option.

But sometimes, you are better off just buying “in-the-money” puts than “out-of-the-money” ones. It all depends on how cheap the actual options are, not the share price. Be sure to study all your choices before buying a random one.

Pitfall #2: All in on One Trade

Another problem many options investors have is not diversifying their portfolios. Thirty percent of all options expire worthless. While that is a lot less than most people think, it’s still not perfect. All option gurus out there have a few that crash. But, don’t let one bad one ruin your investment portfolio.

While I would recommend a few safer plays — be it stocks, bonds, or even LEAP options — you should still carry a few options at one time to diversify that part of your portfolio. That way, you won’t get crushed when one turns sour.

Pitfall #1: When to Sell

This is not only a pitfall for options investors, this is true with all investments. But the reason this is particularly dangerous for options investors is because there are two parts to betting on options…price and time.

If you have an option go “in-the-money” and you are up a considerable amount of money, you might want to think about selling that option and cashing out. Take your profits. But the opposite is still true when you are coming close to expiration. It may be better to cut your losses on “out-of-the-money” plays when you are fast approaching expiring worthless. Even if you only get a tiny fraction of your investment, it’s better than being greedy up until the point of no return.

With these five common mistakes in mind, you can avoid the horror stories you are told about options. The truth is, when you are smart about your investments, especially options, you can make a killing in the stock market. But, always be aware of how you and others have made mistakes in the past.

Jim Nelson
The Penny Sleuth

• July 9, 2008 — Six Useful Tips When Investing in Options (0)
• February 12, 2008 — Options Trading: How to leverage market volatility into profits (0)

This is a wide-ranging topic, in fact people write books on it. So I’ll give you just a bit of my thinking. Looking forward, the U.S. and the West simply have to buckle down and decide that it’s time to transform the energy systems of the world. We have to move away from burning scarce, expensive and often dirty carbon to using something else.

But burning carbon (coal, oil and natural gas) is what provides 87% of the U.S.’ total energy supply. Nuclear, by the way, is another 10% of total energy. Renewable energy sources are less than 3% of total U.S. energy supplies (and about two-thirds of that is from forest companies burning wood chips to run the mills).

So any transformation from carbon to that elusive “something else” will take a long time and require immense restructuring of the current energy systems that are out there.

As the transformation occurs, there will be great opportunities. But there will be a lot of political and economic pain, as well.

To achieve stable and affordable energy supplies (and, certainly, to lower energy imports), we will need an entire range of options. It will take a portfolio of technologies. These include:

– Conservation and efficiency improvements, everywhere! This is more of a “cultural” than technical issue. I mean, we already know how to insulate houses, but we just don’t do it. And many cars already get 45 miles per gallon, but Americans haven’t been buying them in the past 20 years or so. People just have to believe that conserving energy is one of their highest priorities (as if gasoline at $4.25 per gallon is not doing that already).

– Extremely more efficient power generation and transmission. If we burn carbon, we have to get more energy-efficiency out of it. And the U.S. transmission grid is woefully inadequate. Really, transmission is a disaster waiting to happen. So in some respects, transmission is also an investment opportunity waiting to happen.

– Massive use of “high-value” energy efficiency, from load reduction to combined heat and power systems. For example, you won’t recognize your household electric meter in the future. It’ll be as annoying as your BlackBerry.

– Dramatically increase the diversity of the fuel mix. One example is flexible fuel mixes, moving from gasoline to methanol-ethanol-butanol. Then do what Toyota is already pioneering and put solar panels on the roof of the car to augment the electric system. Your car of the future (if you have one — another story entirely) will have more chips in it than the space shuttle.

A lot of this is already happening, due to price and supply pressures, reliability issues, the rapid maturity of new technologies, new ideas for systems integration and government policies at all levels.

Unfortunately, our energy transformation is not happening fast enough or in a widespread enough manner. But the good news is that the foundation is there. As a nation, we need to “step on the gas,” if you’ll excuse me using such a primitive analogy.

Byron W. King
Oil and Energy

• July 17, 2008 — Fueled by Overseas Demand, U.S. Gasoline Prices Will Continue to Escalate (0)
• July 15, 2008 — Fixing the Energy Policy is the Number One Priority (0)
• June 26, 2008 — Oil Defies a Correction… (0)
• June 23, 2008 — The intellectually barren offshore drilling debate (0)
• June 22, 2008 — Energy Q&A Part IV: Investing In Energy Stocks And More… (0)
• June 20, 2008 — Creating Feds Like It’s 1913 (0)
• June 20, 2008 — Energy Q&A Part III: Investing in Uranium Stocks (0)
• June 16, 2008 — Joyful Assignment For The Next President: A Unified National Energy Policy (0)

The two meltdowns started in much the same way - with busted stock-and-real-estate bubbles. With both the United States and Japan, the market manias were ignited by laughably loose credit policies, smoldered under a lack of oversight from government regulators, market analysts or such private-sector sentinels as credit-rating agencies, and were finally fanned into a frenzied financial conflagration by the promise of easy profits.

Americans are already getting financial frostbite. Unemployment is 20% higher than it was a year ago. Zooming meat, dairy and gasoline prices are eviscerating household budgets, meaning that the “real” rate of inflation is probably double or triple what the federal government would have us believe. Mortgage defaults are at their highest level in 30 years. Home prices have fallen so much that they’ve wiped out all the gains of the past four years. And U.S. stocks have eradicated a decade’s worth of profits.

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