Dave Gonigam – April 23, 2012
- Tearing up a peace treaty? The dangerous confluence of Egypt, Israel and natural gas
- Risk off: Dutch disagreement spirals outward to ensnare banks and markets on two continents
- With a mothballed space shuttle, what’s next for space exploration? Ray Blanco on how the private sector picks up the baton, starting next week
- Google’s “dividend” and why it’s sure to make shares more volatile
- Former Homeland Security honcho tells you how to breeze through the airport (seriously)… the “too much politics” meme rears its head again… a new mock trade… and more!
“This is a blatant violation of the peace treaty. This unilateral step requires an immediate American response.”
We awake to a world of trouble this morning as a new week begins. There’s the proverbial “political uncertainty” in Europe… more signs of economic slowdown in China… the likelihood of deeper U.S. involvement in the Syrian mess.
The blue chips are down big, small caps down more.
And the biggest story of all is the one that’s getting the least play…
Israel is about to lose 40% of its natural gas supply, perhaps for good. And the 33-year-old Camp David peace accord is looking increasingly shaky.
Over the weekend, Egypt announced it’s canceling the contract under which it’s sold gas to Israel for the last seven years. Egypt says it hasn’t been paid in four months. Israel says that’s not true.
The gas flow has been hit-or-miss ever since the overthrow of Egyptian dictator Hosni Mubarak in early 2011. Saboteurs have hit the pipeline 14 times since… so Israelis have gotten used to supply disruptions. Electricity prices are already up 20%… and summer blackouts are a distinct possibility.
The gas cutoff might well be a bone that Egypt’s military rulers are throwing to the restive masses.
On Friday, tens of thousands of protesters returned to the streets demanding the military stick to its pledge to hand over power by July 1. Presidential elections take place one month from today, and last week the generals disqualified several candidates.
The gas deal has never been popular in Egypt — in part because of a perception Israel got too good a price, but mostly because it lined the pockets of Mubarak’s cronies. Scrapping the deal now would take the heat off the generals at a delicate time.
Israeli opposition politicians are up in arms — hence the quote above about a breach of the 1979 peace treaty.
The response from Israel’s ruling coalition is… um… remarkably sanguine. “We’re following what’s happening in Egypt and hope that everything will work out for the best,” says Foreign Minister Avigdor Lieberman.
That’s not the sort of language Lieberman is usually known for. A few years ago, he called for executing Arab members of the Israeli parliament, labeling them “terror collaborators.”
On the other hand, maybe Lieberman is feeling confident about Israel’s ability to bring a huge offshore gas field into production.
Called Leviathan, this field is one of the world’s largest new gas discoveries in 25 years — totaling 16 trillion cubic feet. By some estimates, it could supply Israel’s electricity needs for the next century.
Production is still as much as five years away… which means additional discoveries in the interim could boost the reserve estimates even more. Only two companies are working Leviathan. One is a big, diversified energy firm.
The other is close to a Leviathan pure play. It’s in Byron King’s Energy & Scarcity Investor portfolio… and one of a handful of tiny resource companies on the verge of doing big things for early investors. Check it out here.
So… back to that ugly day in the markets. At last check, the Dow was doing the best, down 1%. Small caps represented by the Russell 2000 were down 2%.
There’s no shortage of bad news to blame it on…
- “Flash PMI” numbers from both Europe and China show manufacturing is contracting
- The runoff election for the French presidency is set: The Socialist front-runner wants to slap a 75% income tax on millionaires, while the incumbent finds himself groveling for the votes of hard-core nationalists
- The fiscally stout Dutch government is looking shaky. The cabinet offered to resign after failing to reach agreement on a budget.
European bond yields are up big, which is hitting European banks hard. The cost of credit default swaps is rising accordingly, which is hitting the U.S. banks that wrote most of those swaps equally hard.
“The market is starting to get out of sync with fundamentals,” says Penny Momentum Trader’s Jonas Elmerraji.
“We’re knee-deep in earnings season at this point, with around a quarter of the stocks in the S&P 500 having already released their numbers to Wall Street. So far, there’s a clear pattern emerging — at this point, 73% of firms have beaten analyst expectations, but prices haven’t jumped in kind.”
“Typically, that’s a good sign that upside is going to come into stocks. It’s just a question of when.”
Aside from earnings, another factor looming over the market this week is the Federal Reserve.
“Operation Twist is on track to end in mid-June,” says Options Hotline editor Steve Sarnoff, “so the markets aren’t expecting any major QE announcement, just more waiting and watching helicopter pilot Bernanke.”
Hot money is fleeing precious metals as well today. Gold is down to $1,631. Silver’s gotten whacked especially hard, down a buck, to $30.70.
With the flight to safety on, the greenback is strengthening. The dollar index has firmed to 79.453. That’s largely because the euro’s getting beaten up: It’s down to $1.313.
But the risk-off trade isn’t the only factor here: In the French elections, the right wing showed it’ll be a force to be reckoned with whoever wins the presidency. And the coalition government in the fiscally stout Netherlands appears to be falling apart.
“Whenever the markets have questions about leadership,” says EverBank’s Chuck Butler, “or the markets don’t know what the leadership of a country will be, they punish the currency.”
The yen, meanwhile, stands at 81.099. “The yen has had a very strong run-up,” says our market-sentiment maven Abe Cofnas. “Lately, it has retreated and strengthened. There has been great uncertainty about the Bank of Japan easing more. The result is a bit of hesitation. In trading, as in hunting, hesitation represents opportunity.”
Thus, this week’s mock trade: Abe’s counting on the yen staying in a range between 79.75 and 82.75 by the end of the week.
This two-part trade has the potential to deliver gains of 6.9% and 10.4% by Friday. “We can’t be wrong on both,” he says, “so there is built-in reduction of risk.”
Last week was outstanding for Abe’s readers who play his trades for real: Every recommendation was a winner: the smallest 9%, the biggest 24%. And the outcome always plays out in four days or less. Watch this space for when we re-open Fear & Greed Trader to new readers.
“Nothing could be further from the truth,” says Ray Blanco in response to fretting that manned space flight has no future after the space shuttle Discovery was hauled to the Smithsonian last week.
“The vacuum created by the termination of the government-controlled program is spurring the development of private space access,” Ray explains. “Instead of an expensive design-by-bureaucracy space vehicle, in a few years, we’ll have a variety of cheaper alternatives developed by the free market.”
One of them, the Dragon space capsule developed by SpaceX, launches one week from today. “Dragon will perform an unmanned resupply mission to the International Space Station under contract with NASA. SpaceX has a list of launch manifests for the spacecraft stretching out for years.” And in time, it will carry astronauts.
Meanwhile, a firm led by private-spacecraft pioneer Burt Rutan has developed a unique space launch aircraft called Stratolaunch. “The massive plane will be the world’s largest,” Ray explains. “It will combine two 757 fuselages and six Rolls-Royce jet engines. This mother ship will carry a rocket and payload to over 30,000 feet. Once the aircraft reaches the geographic coordinates for launch, it will drop a special version of SpaceX’s Falcon rocket, which will then blast off into orbit.”
“Before the decade is out, we will have multiple launch systems and space vehicles, all far cheaper to use than the space shuttle. We’ll be able to explore space more, not less.”
It’s a little too soon for retail investors to hitch a ride… but there’s no shortage of other high-tech and biotech opportunities that sit on the cusp of breakthroughs and big profits… as Ray and his colleague Patrick Cox show you here.
“This is not a dividend shareholders should want,” writes Jim Nelson of the dividend announced by Google last week.
Owners of regular Class A shares will get new Class C shares. Nothing wrong with dividends in the form of stock — they amount to a split, really. But the way Google’s doing it “only hurts shareholders,” Jim says.
“The publicly traded Class As, as well as the privately held (mostly by the founders) Class B shares, both have voting rights,” he explains.”
“By continuing to hoard its cash by not issuing a cash dividend and by refusing to give up any voting power, Google is essentially giving away a useless shareholder ‘benefit.’”
“The Class A shareholders will see their stock drop by the same amount they will receive in Class C shares. After that, it could get nasty. Major institutional holders, as well as indexes like the S&P 500, will immediately sell the Class C shares, and if all goes as planned, buy the equivalent Class A shares — effectively undoing the split.”
“This only creates a situation in which the new class of stock collapses at the start of trading. Even though Class As should go up in value following the dividend, they will certainly be more volatile. Google is choosing to pump volatility into its stock without giving a clear benefit to its current shareholders.”
If it’s income you’re after, Jim has a dozen far better ideas — including one in the tech sector we can’t get him to stop talking about. And don’t overlook the “gasoline paybacks” that can help you defray your fuel costs… and then some.
Feel like the walls are closing in with all the new powers the government asserts… and often exercises?
Fear not: Here comes the former chief of Homeland Security offering advice on… how to get through airport security.
“I almost always wear a sports jacket when traveling,” Michael Chertoff tells Businessweek. “Why do I do that? Pockets. Take all of your small electronics and put them in jacket pockets, along with change, keys and your wallet.”
“At the bag screening,” he further advises, “the shoes go off first — I always wear loafers. Then I put my jacket in a tray behind the shoes, and my liquids on top of the jacket. The laptop goes in the next tray, then my carry-on follows. I sequence it that way so I can reverse the unpacking process at the other end.”
Alas, he has no advice if you want to avoid making a choice between nude-o-scopes or a formal groping. Figures, considering the makers of the scanners are clients of his consulting firm…
“At the beginning,” a reader writes, “The 5 used to be a good source of information on finance and economics. Unfortunately, day by day, it is slipping into politics (which I love, but not in The 5) and personal memories.
“If you have nothing to say, don’t.”
The 5: We wish — oh, how we wish — we could separate money from politics. But the fact is your most basic day-to-day business activities are now considered fair game for government monitoring.
“Congress,” Addison wrote last week, “is even considering Internet service providers be forced to retain the online information of all American Internet users and keep them on file for 18 months… and then, under a warrant, allow law officials to sift through this information in the hopes of finding an inkling of evidence for a certain crime in question.”
“This puts our entire online life under the microscope of government bureaucrats. This is not the kind of behavior found in a free country.”
Our own readers reinforce this line of thinking: “I am most worried,” wrote one, “about continued government growth and overregulation strangling American entrepreneurship.”
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The 5 Min. Forecast
P.S. As the market sinks this morning, a select group of readers is up 49% in less than two weeks on a falling small-cap index… and up 77% in less than a month on a flagging Nasdaq.
You can lock in gains no matter what the broad market’s doing… if you can decode its signals. Begin here.