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A First Look at San Juan Basin Royalty Trust (SJT) Yielding 6.1%

First look at San Juan Basin Royalty Trust (SJT).  A reader requested that I take a look at SJT.  I accepted because I hadn’t noticed this company in my previous screenings.

San Juan Basin Royalty Trust is the largest energy sector royalty trust in the United States. It owns a 75% net profit interest in a large number of natural gas properties in the San Juan Basin of New Mexico. About 98% of the royalties San Juan collects come from natural gas, with the balance coming from oil. At year-end 2008, San Juan reported reserves of 158 billion cubic feet of natural gas equivalent.

San Juan Basin Wikipedia entry: http://en.wikipedia.org/wiki/San_Juan_Basin

The future of natural gas: New technologies have dramatically increased the size of natural gas reserves.  More supply at the current price than demand will drive the price down further.  I’m just starting my investigation of natural gas as the follow on fuel after gasoline becomes more expensive.  You must guess correctly on oil’s replacement to make huge profits.  Lobbyists can buy off congressmen to appoint coal, uranium, or any myriad of so-called “green” technologies as the replacement to oil.

Here are some links on the future of natural gas: http://www.google.com/search?q=the+future+of+natural+gas&rls=com.microsoft:*&ie=UTF-8&oe=UTF-8&startIndex=&startPage=1  The New York Times and the Brookings institute are both socialist organizations.  I haven’t read any of these articles yet.

Dividend Record:

SJT has been paying monthly dividends since 1989.  There have been a few monthly gaps.  The stock has dividend gains and cuts almost monthly because it appears to payout 100% of earnings in the form of dividends.

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Dividend: $0.12 per month

Dividend yield: 6.1% @ $0.12 per month

Dividend payout ratio: 100%

            EPS       Net inc.             Adj. EPS            Shares

2006     $2.92    $135.867 M       $2.92                46.61 M

2007     $2.43    $113.221 M       $2.43                46.61 M

2008     $3.07    $143.081 M       $3.07                46.61 M

2009     $0.65    $ 30.173 M        $0.65                46.61 M

2010     $1.68    $ 78.356 M        $1.68                46.61 M

Five year average adjusted earnings are $2.15

Consider buying at or below $25.80 (12 times average adjusted earnings)  SJT is value priced, but its balance sheet stinks.

Consider selling at or above $43.00 (20 times average adjusted earnings)

Strength of balance sheet: Poor and getting worse (You need to understand why the balance sheet is going down.  I haven’t read SJT’s financial statements yet.  I’m guessing that they are constantly depleting the natural gas reserves.  That would reduced their assets year after year.  A careful study is required, but this isn’t good.)

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Book value per share: $0.32

Price to book value: 78.13 (bad - very bad.  Red flag)

Current ratio: 1.00 (greater than 2.0 is good)

Quick ratio: 1.00 (greater than 1.0 is good)

Conclusion: Don’t buy until you understand why the balance sheet stinks.  I will attempt to discover the source of the declining balance sheet.

Disclosure: I don't own San Juan Basin Royalty Trust (SJT).

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TIP OF THE WEEK - One of the best websites on contrarian investing

One of the best websites on contrarian investing

Jason Brizic

September 2, 2011

Most people follow the herd.  Contrarians go against the grain.  They buy when others sell.  They sell when others buy.  They fish the bottoms below value investors when buying equities.

They say, “You make your money when you buy.”  This is another take on “buy low; sell high”.  Contrarians practice the art and science of buying low – really low.

I discovered an excellent website called Zeal LLC that specializes in contrarian investing.  Their website is www.zealllc.com .  It’s a good blend of technical analysis and fundamental analysis.  There are several years of essays available for free.  Read a few of their current articles and you will pick up some good insight into stock and commodity markets.

Here is a sample article on the volatility index (aka the fear index).  I watch the volatility index weekly.

* * * * * * * * * *

Stock Fear Ceiling

Adam Hamilton     August 26, 2011     2923 Words

 

Fear is the greatest buy signal ever seen in the stock markets.  This overpowering emotion flares fast, driving excessive selling that rapidly hammers stock prices down to irrational oversold levels.  These fear-driven lows are the ideal time for investors and speculators to buy low, necessary before selling high later.  Provocatively stock fear has an effective ceiling, absolute levels that demand aggressive buying.

 

I mentioned this stock fear ceiling in passing a couple weeks ago in my latest essay on trading stock fear.  I heard from a surprising number of traders interested in this concept, for good reason.  If stock fear has a ceiling, it would flag the highest-probability-for-success buying opportunities ever seen.  Whenever this ceiling was hit in the future, it would be the ultimate signal to boldly deploy capital regardless of events.

 

While fear is ethereal and can’t be measured directly, plenty of sentiment indicators infer it.  The most popular by far is the famous VIX (pronounced “vicks”).  Discussed often in the financial media, this measures the implied volatility of certain S&P 500 index options.  The S&P 500 (SPX) is America’s flagship stock index tracking this nation’s biggest and best companies, and the best proxy for the stock markets as a whole.

 

The VIX uses complex formulas to analyze and weight SPX options prices expiring over the next 30 calendar days.  Traders are constantly buying and selling options based on their own near-future outlook, which bids up or drives down specific options’ prices.  The aggregate of all this short-term SPX options trading is distilled down into implied volatility, or how volatile options traders as a group expect the stock markets to be.

 

The VIX expresses this construct as an annualized percentage.  A 20 VIX reading implies that options traders expect to see the SPX move up or down at an annualized rate of 20% over the next 30 calendar days.  Since fear is a far-more immediate and powerful motivator than greed, options volatility soars after major selloffs (the time to buy low) before waning to insignificance after major rallies (the time to sell high).

 

Despite the VIX’s popularity, it is a watered-down usurper.  Today’s VIX was created in September 2003 to replace the classic VIX, which is now known as the VXO.  That original VIX only looked at options for the elite S&P 100, the top 20% of S&P 500 companies.  And it only used at-the-money options.  While this methodology lives on in the VXO, the new VIX changed how it is calculated.  Today’s VIX considers options for the entire S&P 500, including out-of-the-money ones.  This makes it less responsive to fear.

 

This is a problem for a fear gauge.  During sharp selloffs that spark intense fear, the first stocks to be sold are the biggest and most-liquid ones.  They have the large volumes and liquidity necessary to absorb the widespread exodus of capital without suffering anywhere near as much price damage as smaller less-liquid companies.  And at-the-money options’ prices are always quicker to respond (with bigger moves) than out-of-the-money ones.  So while the new VIX works, the classic VXO remains superior.

 

Fear shows up quickest and largest in at-the-money options representing the largest and most-liquid companies in the US stock markets.  Thus I continue to use the original classic-formula VIX, now known as the VXO, in my stock-market-sentiment research.  If you prefer the new-formula VIX, it would still lead to the same conclusions.  A less-responsive thermometer still gives you the temperature.  But with its history only extending back to 2003, its track record pales in comparison to the VXO’s since 1986.

 

As the classic fear gauge, the VXO is the best sentiment indicator to flesh out the concept of a fear ceiling in the stock markets.  This first chart shows the SPX superimposed over the VXO since 1996.  While the VXO’s history extends back a decade earlier, there was only one major fear spike in that entire span.  So the past 15 years out of the last quarter-century are the relevant ones to illustrate the fear ceiling.

 

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And these 15 years have been extraordinary indeed!  They witnessed the once-in-34-years transition from secular bull to secular bear in early 2000 as the Long Valuation Wave crest passed.  They saw three cyclical bulls alternating with two cyclical bears within these longer secular trends.  They encompassed booms and busts, a popular tech-stock mania and a stock panic, sovereign-debt defaults and currency routs, wars and political turmoil, unprecedented terrorist attacks, and every kind of disruption under the sun.  It’s hard to imagine a more extreme 15-year period!

 

Yet despite all this, with one notable exception I’ll get to later the VXO never materially exceeded 50.  A 50ish VXO is the absolute fear ceiling of the stock markets in normal conditions, meaning times when an ultra-rare panic or crash is not upon us.  At every single one of these 50ish approaches in the past 15 years, traders were utterly terrified, convinced the stock markets were thundering off a cliff.  Yet fear still didn’t surge any higher, I suspect it couldn’t.  VXO 50 is the effective limit.

 

When you think back to some of these events that spawned extreme fear, like August 1998’s Russian debt default or the September 2001 terrorist attacks in the US, it’s hard to imagine anything scarier.  These events and several others galvanized the whole world, sparking extraordinary anxiety and fear.  Other than ridiculous scenarios like global thermonuclear war or an alien invasion, it’s hard to imagine traders worldwide being any more frightened.

 

Yet the VXO still peaked near 50 consistently.  A 50 VXO means the annualized change options traders expected in the stock markets over the coming calendar month was 50%!  At VXO 50 options traders believe there is a one-standard-deviation chance (68%) that the S&P 100 (and broader SPX) will either soar or plunge at a 50% annualized rate over the next 30 days.  This obviously isn’t sustainable.

 

Whenever traders are terrified enough to expect such gigantic moves, which only happens after extreme selloffs, the selling has already passed.  Fear works this way in general too, with its maximum levels happening just as the threat is gone.  In a haunted house for example, it is anticipation that builds fear.  Once the actor with the bloody mask and chainsaw jumps out and screams at you, peak fear has already passed.  When options traders expect the worst is exactly when the worst has just been seen.

 

Yes, stock panics and crashes like 2008’s and 1987’s see fear soar to a whole new level and shatter the VXO 50 ceiling shown above.  But these events are exceedingly rare, and only happen at very specific times in the bull-bear cycles.  They are essentially once-in-a-generation fear super-spikes.  In normal market conditions that aren’t panics and crashes, 99%+ of the time, VXO 50ish is fear’s absolute ceiling.

 

The stock markets can be viewed as an endless sentiment wave oscillating between extreme fear and extreme greed.  If you want to buy low and sell high, you have to “be brave when others are afraid, and afraid when others are brave” as legendary contrarian investor Warren Buffett put it.  This means buying when everyone else is scared (high VXO), and selling when everyone else is greedy (low VXO).

 

The next two charts zoom in to show all the VXO 50 episodes of the past 15 years in more detail.  Since fear mushrooming extreme enough to slam into this absolute ceiling is pretty rare, I also considered lesser fear spikes running from roughly VXO 40 to VXO 50.  This is the high-probability bottoming zone all investors and speculators should welcome with open arms.

 

Every VXO closing high is labeled, along with the number of days it is offset from the actual bottom in the SPX.  Normally this is zero, VXO highs occur exactly on major SPX lows.  But sometimes the stock markets will grind along and take a week or two to bottom, slumping to a slightly-lower secondary low after fear is already bleeding off.  In addition, the best SPX gains seen within the immediate subsequent one-month and two-month periods following each VXO high are noted.

 

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As you can see, buying fear spikes is incredibly profitable.  It doesn’t matter whether the stock markets happen to be in a secular or cyclical bull or bear, they always rally sharply after fear grows too extreme.  The excessive fear forces stock prices to be battered down to irrational oversold levels, so as that unsustainable fear inevitably abates stocks soar as capital floods back in.  The gains are huge!

 

This essay would grow far too long if I analyzed every major VXO high in detail.  But take a look at the kinds of gains across all of them.  On average over this incredibly-chaotic span between 1997 and 2003, the SPX soared 13.0% sometime within the first month after a VXO peak and 16.4% sometime within the first two.  After extreme fear comes extreme rallies, running as high as +19% within one month and +24% within two!

 

These are not only incredibly-large and fast gains, but they are in the broader markets.  Many investors and speculators prefer individual stocks in leveraged sectors like commodities or technology.  Since these high-flying popular stocks are battered much lower during fear spikes, they soar much faster coming out of them.  Their gains often double or triple those seen in the broader SPX.  Buying great commodities stocks during extreme fear spikes can easily yield 50%+ gains within a couple months!

 

Since these awesome buying opportunities are rare, as the VXO doesn’t often soar into the 40s or hit its 50 ceiling, contrarian investors and speculators shouldn’t hesitate to capitalize on them.  The higher the VXO gets, the more cash (raised from selling high near the preceding interim top) should be immediately plowed into high-potential stocks you want to own.  Since these fear spikes are fleeting, this stock research into what to buy must be done well before the short-lived when to buy arrives.

 

While 1997 to 2003 may seem like irrelevant ancient history to some, it is crucial in establishing the importance of the VXO 50 fear ceiling in normal market conditions.  This next chart extends this analysis to the modern period of big fear spikes running from 2008 to 2011.  While 2008’s once-in-a-century stock panic was an obvious exception, outside of it the VXO’s high-odds bottoming zone held strong.

 

Image003

 

2008’s ultra-rare stock panic drove a fear super-spike the likes of which hadn’t been seen since the last extreme selling event in October 1987.  On October 19th, 1987 the stock markets crashed with the SPX plummeting an unbelievable 20.5% in a single trading day!  This blasted the VXO from its prior-day close of 36.4 straight up to its all-time high of 150.2!  Actual crashes easily shatter the normal stock fear ceiling.

 

After that the VXO never even came close to breaking out above 50 again until October 2008, fully 21 years later.  During another crazy-brutal selloff over a two-week period ending October 10th, the SPX plunged 25.9%!  This drove a VXO super-spike to 86.0, and a secondary selloff 6 weeks later once again pushed the VXO up to its panic peak of 87.2!  Panics also easily rocket above the VXO 50 ceiling.

 

But this certainly doesn’t mean a panic or crash should be expected every time the VXO nears 50, far from it.  These extreme selling events are exceedingly rare, so expecting them is usually irrational.  On one terrible day in US history, terrorists hijacked airplanes and flew them into skyscrapers.  So every time a jet is seen in the sky, should skyscrapers be evacuated?  Ultra-low-probability events shouldn’t be weighted highly.

 

In our entire lifetimes, we have only seen a single stock panic and a single stock crash.  Even in the past century, there have only been a couple of each!  The panics were in 1907 and 2008 while the crashes were in 1929 and 1987.  These events are exceedingly rare because it takes decades for complacency to grow extreme enough to fuel such massive fear blowouts.  They are once-in-a-generation occurrences.  Expecting another panic or crash soon after the last one is like expecting another massive wildfire in an area recently burned out by one.  It can’t happen because there isn’t sufficient time for enough new fuel to grow back in.

 

Panics are 20%+ plunges in the stock markets within a couple weeks, while crashes are 20%+ plummets within a couple days.  Panics only cascade out of lows deep and late in cyclical bears, representing the capitulation selling climax of those bears.  Crashes only erupt from multi-year highs at the ends of 17-year secular bulls.  If it hasn’t been decades since the last panic or crash, and the stock markets are not in the right place in their bull-bear cycles to spawn them, they aren’t going to happen.  They are irrelevant for fear-ceiling purposes unless the stock cycles are favorable for one, which isn’t often.

 

Since 2008’s panic there was one major fear spike last summer, but it was sloppy.  A variety of crosscurrents dragged the SPX to a secondary low after the initial VXO peak, which moderated the immediate gains considerably.  But even if you had bought stocks in that early fear spike as we did, the resulting gains over the next 6 months were huge as the SPX belatedly rallied as expected.  Many of our commodities-stock trades added during summer 2010’s fear spikes were realized last winter at 100%+ annualized gains!

 

And all this brings us to this month’s massive fear spike, where the VXO rocketed near 50 for the first time since the stock panic!  Not coincidentally, this happened to be during the second correction of this SPX cyclical bull.  Traders have been terrified in recent weeks, utterly convinced that European sovereign debt, or European banks, or Obama’s out-of-control spending, or the resulting USA debt downgrade are going to soon push the US stock markets over a cliff.  Fear has been incredibly intense.

 

But fear was equally intense during all the VXO 50 spikes in the past quarter century as well, yet the markets still rallied dramatically.  Each time the VXO slammed into its effective ceiling in normal market conditions, the SPX rallied sharply soon after.  Such extreme fear forces everyone susceptible to being scared into selling anytime soon into dumping their positions immediately.  This soon exhausts all available selling pressure leaving only buyers, who soon ignite the massive and sharp post-fear rallies.

 

Fundamentals are irrelevant when fear peaks, things always look the worst after the stock markets have fallen hard.  Sharp stock-market selloffs lead to a bearish selection bias among the financial media and traders, they choose to dwell on the most-pessimistic stories they can find while ignoring any positive ones.  After being hyper-oversold in a major fear spike, capital floods back into stocks no matter what is going on fundamentally in the global economy at large.  Bull or bear, recession or not, it doesn’t matter!

 

I started my own research into VXO spikes way back in the summer of 2002, and have been well aware of the VXO 50 ceiling ever since.  We bought aggressively each time it was seen, and recommended our subscribers do the same.  They’ve earned fortunes by steeling themselves to buy low when everyone else was scared and then later sell high when everyone else was greedy.  We bought aggressively during 2008’s stock panic too, even though I hadn’t anticipated an ultra-rare VXO super-spike.  Their great rarity makes them inherently unpredictable.  It didn’t matter though, the subsequent gains were still enormous the following year.  Excessive fear must be bought!

 

Extreme fear flags the best buying opportunities ever seen, the lowest stock prices possible.  And VXO 50 is as high as fear gets the vast, vast majority of the time.  So when this latest VXO 50 spike emerged in early August, needless to say we started buying aggressively.  In our popular Zeal Speculator weekly newsletter, we’ve added 13 new stock trades and 6 new options trades in August alone!  I fully expect these to soar to massive gains over the coming months as the stock markets inevitably recover.

 

While buying fear isn’t easy psychologically, it is necessary if you want to buy low.  Fighting the crowd yields amazing gains over time.  Since 2001, during a tough sideways-grinding secular stock bear, all 591 stock trades recommended in our newsletters have averaged annualized realized gains of +51%!  We didn’t achieve this by buying high when it felt good and selling low when everyone was scared, but by doing the exact opposite.  If you want to thrive in the stock markets, subscribe today to our acclaimed weekly or monthly newsletters!  Learn how to see the markets and trade them like a contrarian.

 

The bottom line is stock fear has a ceiling, and that is represented by a 50ish VXO.  While this ceiling won’t hold during panics and crashes, those ultra-rare once-in-a-generation events aren’t worth worrying about the vast majority of the time.  Normally whenever the VXO surges to 50, it is time to buy aggressively as fear has peaked so a huge stock-market rally is imminent.  This is true in secular and cyclical bulls and bears alike.

 

And just a few weeks ago, the VXO once again slammed into this effective ceiling.  Fear was incredibly intense, with perma-bears, chicken littles, and pessimists coming out of the woodwork to call for a continuing stock plunge.  But market history clearly shows that expecting the stock markets to head lower after a fear-ceiling approach is almost never the right bet to make.  Extreme fear should always be bought!

 

Adam Hamilton, CPA     August 26, 2011     Subscribe

Link to original article: http://www.zealllc.com/2011/fearceil.htm

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A Second Look at Verizon (VZ) following it dividend growth.

Verizon (VZ) was in the news today for raising its dividend from $0.48 to $0.50 per quarter.  http://www.reuters.com/finance/stocks/VZ/key-developments/article/2394529 .  Is Verizon a buy at $36.17 given its dividend increase?

Verizon (VZ)

Market price: $36.17

Market cap: $102.38 billion

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Dividend record: VZ has been paying dividends for over a decade.  There are some gaps and some cuts.

Dividend: $0.50 quarterly (raised from $0.48 last quarter)

Dividend yield: 5.5% ($2.00 annual dividend / $36.17 price)

Dividend payout ratio: 89% (if you use the $2.00 dividend / $2.24 TTMs EPS), 116% (if you use $2.00 / $1.72 five year avg. EPS)

Earning power: $1.72 @ 2.833 billion shares

            EPS       Net inc.             Adj. EPS            Shares

2006     $2.12    $6,197 M           $2.19                2.938 B

2007     $1.90    $5,521 M           $1.95                2.902 B

2008     $2.26    $6,428 M           $2.27                2.850 B

2009     $1.29    $3,651 M           $1.29                2.841 B

2010     $0.90    $2,549 M           $0.90                2.833 B

Five year average adjusted EPS = $1.72

Consider buying at or below $20.64 (12 times average earnings).  This price was last seen in November 2009.

Consider selling at or above $34.40 (20 times average earnings)

It is selling time because Verizon is trading at 21 times average earnings.  This is speculative.

Balance sheet: down slightly and stagnant; not strong.

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Book value: $13.61 per share

Price to book value: 2.66  ($36.17 price / $13.61 BV).  This is good.

Current ratio: 0.82 (latest quarter; over 2.0 is good)

Quick ratio: 0.67 (latest quarter; over 1.0 is good)

Disclosure: I don’t own Verizon (VZ)

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When should you sell Terra Nitrogen (TNH)?

When should you sell Terra Nitrogen (TNH) if you own it or are considering shorting it?  Terra Nitrogen's stock price has increased 43.6% in the past year while the S&P 500 has only risen 0.9%.  I don’t know why the stock’s price has rocketed since April 2011.

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http://stockcharts.com/h-sc/ui?s=TNH&p=W&b=5&g=0&id=p33864843115

The stock is currently yielding 8.1% at today's price of $183.38 per share.  It is now paying a $3.75 quarterly dividend on $3.95 in earnings per quarter.  This brings the dividend payout ratio up to a worrying 95%.  I like dedicated dividend payouts of between 50% and 80% (dedicated, but not too high).

TNH has an average adjusted earning power of $9.97 over the past five years.  Consider buying at or below $119.64 (12 times average adjusted earnings).  Consider sell at or above $  $199.40 (20 times average adjusted earnings).  It is almost sell time.

Their balance sheet is strong.  To read the other articles I’ve written on Terra Nitrogen click here: http://www.myhighdividendstocks.com/category/high-dividend-stocks/terra-nitrogen

Disclosure: I don’t own Terra Nitrogen (TNH).

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Ron Paul's best interview to date. Economics in one interview.

I just finished watching CNBC's "Meeting of the Minds" show with some of the most elitist people I've ever seen.  The video link is not the one I just watched, but the posted videos are typical of the republocrat solutions.
 
They were all a bunch of republocrat hardcore Keynesian statists.  Even former General Electric CEO sounded like a 80% free market / 20% socialist.  They had no solutions because they don't understand Austrian economics.  They don't understand capitalism.  That means that they don't understand that the customers are in charge in a capitalist society because they hold the most desirable commodity - money.  Government regulation prevents producers from competing against one another to please customers.  Regulaton does this by creating barriers to entry more commonly know as liceansing and bureaucratic redtape.
 
None of the so-called "minds" had anything to say about the crux of the problem.  The problem is a lack of sound money and individual liberty.  Ron Paul explains this better than any economist at the Federal Reserve.  See the video below.
 
The people calling themselves the government and the Federal Reserve are destroying the environment for accumulating capital.  This is not good because our standard of living will worsen due to the policies since 1913 (the creation of the Federal Reserve).

The Best Ron Paul Interview Ever?
Ron Paul schools neocon Chris Wallace, who is suddenly respectful of his surge

Recently by Ron Paul: The Illusion of Safety

Ron Paul joins Chris Wallace on Fox News Sunday to discuss his rise in the mainstream presidental polls (to #3 on the latest Gallup) and the hot issues of the day. It is impossible not to notice how these interviews have changed. The normally belligerent neocon host was respectful as Ron smoothly and convincingly stated his positions.

Since this interview coincided with the media hysteria about Hurricane Irene, Wallace first asked Ron why he was opposed to FEMA. As the representative of a Gulf Coast district, Ron knows full-well the damage the weather can do. Indeed, he says: "It has the worst reputation for a bureaucracy ever. It hinders local people keeps people away from their homes. It's a system of central economic planning that is deeply flawed.....and it's broke."

Ron also rips the US intervention in Libya. He schools Wallace about the consequences of our destructive foreign policy. When asked about Gaddafi, Ron reminds him that "we've been very bad at picking dictators around the world. We may be delivering al-Qaida another prize."

Regarding Austrian economics – which Ron is actually asked about – he describes his solution for a healthy economy as, government “hands off, free markets, property rights, no bailouts, and sound money.” The Fed has caused endless problems with its policy of keeping interest rates artificially too low for too long. It has to stop monetizing debt.

When asked if he's in it to win it, Ron says Yes – but he wants to take a different approach – Not to seek power, but to seek to diminish it, to diminish dependency on government. People are waking up and saying "Ron Paul is right," he notes. Darn right!

See the Ron Paul File

August 30, 2011

Dr. Ron Paul is a Republican member of Congress from Texas.

These Threats Will Not Collapse America's Economy by Gary North

These Threats Will Not Collapse America's Economy

by Gary North

Recently by Gary North: Jackson Hole: Bernanke as a Magician

 

   

For over half a century, I have read warnings that free trade is a threat to America. The freer it gets, the more we are told that slave labor in Asia is threatening the workers of America.

We hear calls for fair trade. Who is to decide what is fair trade? Congress. Ah, yes: Congress. The source of fairness if ever there was one. No special interests there, putting their PAC-filled fingers on the balance scale of justice.

The evil dragon used to be Japan. Now it's China. India will get its turn soon enough. Americans are supposedly out of work because of China.

The fact is, Chinese imports are marginal to the U.S. economy. How marginal? You tell me. (Then I will tell you.) What percentage of Americans' personal consumer expenditures (PCE) is met by imports from China? Take a guess. Here was the correct answer in 2010.

Chinese goods account for 2.7% of US PCE, about one-quarter of the 11.5% foreign share. Chinese imported goods consist mainly of furniture and household equipment; other durables; and clothing and shoes. In the clothing and shoes category, 35.6% of US consumer purchases in 2010 was of items with the "Made in China" label.

Obviously, if a pair of sneakers made in China costs $70 in the United States, not all of that retail price goes to the Chinese manufacturer. In fact, the bulk of the retail price pays for transportation of the sneakers in the United States, rent for the store where they are sold, profits for shareholders of the US retailer, and the cost of marketing the sneakers. These costs include the salaries, wages, and benefits paid to the US workers and managers who staff these operations.

You probably guessed that this figure was much higher. Because we see "Made in China" stickers on our clothes, we imagine that Chinese exports are a major factor in replacing jobs in the USA. If you are employed as a low-wage textile worker in South Carolina, you feel the pain. But you are probably not a low-wage worker making socks.

As an aside, why should there be a Federal law requiring "Made in China" (or anywhere else) on products we buy? Do you think this may be the result of special-interest legislation from some political action committee? As a consumer, I don't care. I just want cheap socks, so that I can save money to invest, or spend on some other service or product, which is probably made in the USA.

WHY URBAN ASIANS ARE GETTING RICHER

Why is urban Asia growing richer? Mostly, because Asian governments have moved away from the older state economic controls. They have freed up their economies.

China is the obvious example. It has moved from Communist economics under Mao to mercantilist economics, funded by the central bank. This is surely better for the Chinese people than Communist economics. That system killed at least 60 million people. It is far better for the government to subsidize one sector of the market economy – the export sector, which is relatively small – than to turn the entire economy over to the state sector.

We think of the export sector as small. But China has 1.3 billion people. There are no internal regional tariffs. It is the largest free trade zone on earth. China must feed itself, house itself, transport itself. To imagine that the export sector is the main sector is a mistake. It is the most innovative sector. It is where growth is transferred from an elite to the masses. But China is a huge nation. Do not forget that.

There is something else. For any sector of an economy to receive an operationally significant subsidy from the government, it has to be a small sector. There has to be a much larger sector in order to siphon off enough funds to make the subsidized sector profitable, long-term. Put in the form of a metaphor, a parasite needs a large, healthy host. When the parasite gets too big, it kills the host. This is simple to understand, but people don't make the connection to economics.

The free market and the price system reward people who implement ideas that customers are willing to pay for. People with good ideas have an incentive to implement them. This benefits customers. With a population of 1.3 billion, there are a lot of people with good ideas.

Then toss in India, with its 1.15 billion people. All those people. All those ideas.

The thought of the sheer numbers of productive, creative people out of almost three billion cheers me up as a customer. Of course, the same idea depresses people with widely used products that are likely to be replaced. But all of life is about replacement. We replace one condition for another until the day comes when we are replaced. Dust to dust, and all that. But, in the meantime. . . .

To imagine that all those Chinese and Indians are waiting breathlessly for a few of us Westerners to buy something from them, is a bit silly. Besides, one reason why we can afford to buy something from them is because the US Treasury has sold debt to Chinese and Indian central banks. They created the money out of thin air, bought dollars, and then bought US government IOUs.

Yet from what I read in some "sky is falling" websites – the sky is tipping, but not falling – the United States economy is headed for a collapse because Asian central banks are lending money to our government. Have you heard this?

I am here to tell you that we are facing major economic problems. A big one is the fact that the Federal government is getting bigger, because Asian central banks keep lending it money at cheap rates. Then the government spends this money.

That's not what the collapse-is-imminent sites say.

SOME REALLY SILLY ARGUMENTS

Here are some arguments from a site that predicts collapse. Here are some of the reasons.

Our politicians simply do not care that America is bleeding jobs. Amazingly, even with rampant unemployment plaguing this nation, Obama administration officials continue to declare that it is okay that we are losing manufacturing jobs because a lot of cheaper products are things that "we don't want to make in America" anyway.

The politicians talk about little else than creating jobs, as if the government had the power to create jobs. The government has the power to reduce business regulations, reduce taxation, and let entrepreneurs create jobs.

Yes, we are losing manufacturing jobs. We have been losing them since 1950. How many Americans send their kids into a factory job instead of college. "Son, I want you to work in a factory. Forget about college." No? I thought not. (Actually, a factory job in a high tech factory is probably a better idea these days than a B.A. in sociology.)

What the handwringers never mention is that the USA is the largest manufacturing nation on earth, with 20% of the world's total manufacturing output. Wikipedia reports: "The United States is the world's largest manufacturer, with a 2007 industrial output of US$2.69 trillion. In 2008, its manufacturing output was greater than that of the manufacturing output of China, India, and Brazil combined, despite manufacturing being a very small portion of the entire US economy as compared to most other countries."

Second, they also do not tell you that the percentage of all Western nations devoted to manufacturing has fallen since 1980 on average from 23% of GDP to about 17%. The USA is about 13%. In other words, this has been a steady decline for three decades. Collapse? I don't think so.

Unemployment these days comes mainly in the construction sector. This is not a sector threatened by imports. What has hurt this sector is Federal Reserve policy, which created a housing bubble and then popped it.

Here is another reason.

State and local governments all over the country are dead broke, and an atmosphere of austerity is sweeping the nation. Right now state and local governments are slashing jobs at an unprecedented rate.

This is bad? The states are firing people? This means less bureaucracy. I see this as one of the greatest developments in my lifetime. The states' payrolls are shrinking.

In the past, government jobs were considered to be very secure and they definitely paid a lot higher than average. But now that era is coming to an end, at least on the state and local government levels.

According to the Center on Budget and Policy Priorities, state and local governments have eliminated more than half a million jobs since August 2008. UBS Investment Research is projecting that state and local governments in the US will cut 450,000 more jobs by the end of 2012.

Or, as another commentator remarked in a different context, "Free at last! Free at last. Thank God almighty, we're free at last!"

Then we are informed about the following:

As I have written about so many times before, the "global economy" is really bad for American workers. When we merged our economy with the economies of nations where it is legal to pay slave labor wages, we made it inevitable that we would start losing massive amounts of jobs.

I have heard this for 50 years. Slave wages. Folks, slave wages are paid to unproductive people. It was what Communist governments paid workers. Those economies exported raw materials and tanks. So, with the end of Communist control over China, people are being paid free market wages. The result: exports. Yet we are told that slave wages are being paid. I see. Freedom is slavery.

If this is bad for American workers, let American workers quit buying imports. What's that? You say they won't stop buying imports? You say they need to be told by men with badges and guns not to buy imports? You say that America's workers need the government to enforce what's good for Americans? I see. Slavery is freedom.

Unfair trade is absolutely killing our economy. It would be one thing if the US was running a massive trade deficit solely because we were incompetent. But the truth is that a big factor is that a number of our "trade partners" are economic predators that are purposely trying to prey on us. . . .

China massively subsidizes their biggest corporations, they brazenly steal technology from anyone that they can, they openly manipulate exchange rates and they allow their workers to be paid slave labor wages.

The Chinese government subsidizes which corporations? The ones that are export-driven? Or the state-owned factories that don't produce anything worth exporting? What percentage of the export sector is subsidized? By how much?

What does it matter? With only 2.7% of consumer expenditures going for Chinese-made goods, what does it matter how much of a subsidy corporations get?

The United States government subsidizes all sorts of projects. The Chinese government has learned this from the USA, where Keynesianism reigns and where agriculture is regulated. I see the pot calling the kettle black.

Today, we spend about 4 dollars on imports from China for every 1 dollar that China spends on imports from us. China now even makes more beer than we do. Even the new Martin Luther King, Jr. Memorial on the National Mall was made in China.

So what? They produce what they are good at. We produce what we are good at. We can't compete in certain areas. You can't compete in most areas. You do a few things well enough to be employed. So do I.

Do you care what percentage of goods people in your state sell to people in some other state, vs. how much they buy from people in your state? Of course not. Then why should you care about China? What difference does an invisible judicial line make regarding the profitability of your trade with someone else? Why do you care whether the other guy is named Wong or Brown? UPS will still deliver. So will FedEx.

Until our politicians start insisting on a level playing field, all of this is going to continue.

Yes, I see! We need more regulations! We need more people with guns and badges making things fair for us. Slavery is freedom.

Small businesses are traditionally one of the primary engines of job growth in this country. But right now, small businesses all over America are having a really hard time getting anyone to loan them money. A big reason for this is that the Federal Reserve is actually paying banks not to make loans. Unfortunately, if small businesses can't get the money that they need, then they can't hire people.

The critic fails to mention interest rates. The Federal Reserve pays a maximum of 0.25% on excess reserves. Businesses borrow at 7% or more. So, this guy thinks that 0.25% is a more powerful incentive than 7%. I see. Loss is profit.

Fact: small businesses are not borrowing because they don't want to borrow. This is the report, month after month, of the National Federation of Independent Business, a lobbying group for small businesses. For July, we read:

Four percent reported financing as their #1 business problem, so for the overwhelming majority, "credit supply" is not a problem. Ninety-two (92) percent reported that all their credit needs were met or that they were not interested in borrowing. Eight percent reported that not all of their credit needs were satisfied, and 51 percent said they did not want a loan. . . .

CONCLUSION

The problem is not China. It is not India. It is not imports. The problem is the endless call from each special-interest group for the government to Do Something to Save America. The problem is that the government has done way to much for too long, all in the name of Doing Something to Save America.

August 27, 2011

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2011 Gary North

Art Laffer on the stalled economy and why it will get worse

This video contains a lot of common sense and he mentions excess reserves.  That means he is following the money and understand cause and effect.
 
 
Subscribe today for free at www.myhighdividendstocks.com/feed to discover high dividend stocks with earning power and strong balance sheets.
 
Be seeing you!

Safe Bulkers on sale, but wait for the bottom.

 
It suggest that the recent 16% in the Baltic Dry Index is forecasting improvement to worldwide economic conditions.  This is nothing but Keynesian wishful thinking.  Government debt crises all over the world coupled with very high unemployment and massive quantities of fiat money printing will sink economies from here.  I like Safe Bulkers, but you will be able to buy it much cheaper than today.
 
It isn't done going down.
 
 
Subscribe today for free at ww.w.myhighdividendstocks.com/feed to discove high dividend stocks with earning power and strong balance sheets.
 
Be seeing you!

Gary North's Tip of the Week - August 20, 2011 Inflation Calculator

I'm travelling this week so I will borrow a Tip of the Week from a man whom I consider a mentor, Dr. Gary North.
 
* * * * * * * * * *
GARY NORTH'S TIP OF THE WEEK


Gary North's Tip of the Week - August 20, 2011 Inflation
Calculator
=====================================================
  The U.S. government’s Bureau of Labor statistics offers a
useful too free of charge: the inflation calculator. I use it
constantly. I have for at least five years.

    http://www.bls.gov/data/inflation_calculator.htm

 I have created a short link:

            http://bit.ly/BLScalc

  The BLS calculator factors in changes in consumer prices, as
estimated by the BLS's consumer price index (CPI). You can track
this back to 1913. That was the year before the Federal Reserve
System started operations.

  The Federal Reserve was officially created to guarantee price
stability. Test its performance. Type in 1000 in the beginning
year box. Click CALCULATE. See how much money, after taxes, it
would take to match $1,000 in 1913. (Note: there was no income
tax in 1913.)

  Very few financial journalists use this tool on a regular
basis. How do I know? Because they discuss investment returns
from stocks without factoring in price inflation and income tax
payments. Consider this statement:

"And keep in mind, that 'lost decade' wasn’t so for everyone. If
you put $10,000 into the S&P 500 in 2000, you’d have about the
same amount in 2010," Thoma said. But investors who put in $10,000
 over time in regular monthly installments? “Their money would
have grown to over $14,000 during that timeframe, if you were in
a 65/35 portfolio,” Thoma said.

      http://bit.ly/DowJonesLaLaLand

 Use the calculator. Find out what it takes today to match the
purchasing power of $10,000 in 2000. Mr. Thoma didn't. Neither
did the wide-eyed 20-something who wrote the article.

  If you have a 401(k) or IRA retirement account, pick the year
you opened it. See what the dollar bought then compared to now.

  This will help you find out how well your portfolio has done.

  Next, factor in income taxes owed when you cash it out.

  Next, see what the after-tax annual income your portfolio
would generate today if you were 60 years old and you started
living on the dividends generated.

  How is your portfolio working for you?

  You say you don’t want to know? You say this exercise would
depress you?

 That’s why so few people ever use the BLS calculator.

 Reality hurts.

Gary “4 a.m. to 8 p.m.” North
 =============================================
Recent articles posted at www.garynorth.com

================================================================

Japan's Stock Market Set the Pattern for America's Stock Market,
Beginning in 1990.

When you watch Tout TV on the stock market, think "Japan, 1989-201
1." Do not ignore the obvious. The TV talking heads do.

Read the full article at:
< http://www.garynorth.com/members/8393.cfm >

================================================================

Why You Had Better Rent The Company Men in Preparation for 2012's
Job Market

It's not a laugh-a-minute film. It is a good training film.

Read the full article at:
< http://www.garynorth.com/members/8392.cfm >

================================================================

There Are Two Kinds of Resum&eacute;s. Yours Is Probably the
Wrong Kind.

This is not your father's job market any more. Your resum&eacute;
had better reflect this. I will now let you in on a secret. You
will not read this anywhere else.

Read the full article at:
< http://www.garynorth.com/members/8391.cfm >

================================================================

Presidential Politics Today . . . And in 2016

This is a unique election cycle. The system is the same. The
outcome is rigged. The results are predictable, but not the
fallout.

Read the full article at:
< http://www.garynorth.com/members/8390.cfm >

================================================================

The Paradox of Thrift: An Invariable Mark of a Keynesian Who
Knows Zilch About Economics

Keynes said a lot of really silly things, but none so silly as
the paradox of thrift.

Read the full article at:
< http://www.garynorth.com/members/8389.cfm >

That's it for this week!


Visit my site, www.garynorth.com, for the latest charts on the U.S. dollar, gold's price, and Federal Reserve statistics.

I was 79 seconds short of the Nurburgring world record for a VW Golf GTI. Not bad for my first try.

Today was a dream come true.  I raced on the world famous Nurburgring Nordschleife for 5 laps.  Each lap is 21 km long.  I drove a VW Golf 5 GTI DSG.  The word record for the car I drove is 8:36.  My best lap time was 9:55.  Here is the video of the world record so you can see the roller coaster that this track is with traffic: