Euro Zone Update


Shut Down! Just when we thought the euro was going beat up its major counterparts, it instead got the beating of them. EUR/USD opened at 1.3067, reached a high of 1.3192, before plummeting to a low of 1.3044. EUR/JPY also ended the day down very low as it closed 50 pips away from its 102.90 open price.

China's promise to lend its support to help alleviate the euro zone debt crisis got the euro's hopes up during the Asian session. Remember a few weeks ago China hinted they may participate in the EFSF a few weeks ago? Well our boys down in china changed their word yesterday and confirmed they will definitely participate in the program. Now that's sounds very good!

However, the euro rally that was jolted up by this release quickly saw a reversal during the first few hours of the London session when Eurogroup boss Jean-Claude Juncker reiterated to Greece that the release of the bailout funds still wasn't a sure thing. Bear in mind that, as many analysts have said and discussed before, euro zone finance ministers still haven't made a decision on whether the next block of funds will be released or not, and that the deadline of Greece's debt obligations is fast-approaching. Juncker did mention that they will make their decision by February 20, so watch out!
As for economic data, the recent GDP reports from the euro zone showed that Germany and Italy both saw contraction during Q4 2011 while France printed 0.2% growth. Overall, the region contracted by 0.3% during the Q4, making several market participants to worry that the feared double-dip could be waiting in the wings. It didn't help that the previous quarter's figure was altered from 0.2% down to 0.1%, reflecting weaker than expected growth.

Today, only the ECB monthly bulletin and the Italian trade balance are on the euro zone's news calendar. Both reports aren't expected to make huge waves across the charts as traders are still zoned in on the developments in the Greek debt situation.



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Say Happy Valentine’s Day with Flowers and Chocolate

It is Valentine’s Day, but for flower and chocolate retailers, today is really the SuperBowl. 1-800 Flowers founder Jim McCann said the amount of business this week is 10 times of a normal week. Godiva Chocolate’s CEO Jim Goldman expects his company to sell 36M boxes of chocolate today alone.Cocoa prices were down for the most part in 2011, most noticeably in Nov. However, demand from retail customers has been holding up. This can be interpreted as a good sign of an improving economy.

Global Oil Chokepoints and the New Silk Road for Energy


China is more dependent on the flow of Middle East oil than any other country in the world. This highlights the importance of the physical infrastructure needed to move oil and gas around the world. In a peaceful world based on commerce and trade, these energy networks expand and function freely.

In a world with an unstable monetary order, shifting energy alliances, and increasing demand for scarce resources, the movement of oil and energy can’t be taken for granted. One of globalisation’s great feats was that it made the transport of goods and services across great distances routine. It may not be routine in the coming years.

This was clear to some people as early as 1996. John Noer of the US National Defence University published a paper called Chokepoints: Maritime Economic Concerns in South East Asia in 1996. I found a copy of the paper online while looking for statistics on the quantity of imports travelling to Australia through the straits of Lomboc and Sunda in the Indonesian archipelago. I ran across the map you see below.

Asia’s Worst Energy Chokepoints

Asia's Worst Energy Chokepoints

Source: US Institute for National Strategic Studies

The map is obviously out of date. Today, a much greater volume of oil, Liquefied Natural Gas (LNG), iron ore, coal, and agricultural exports pass through the same three or four narrow shipping channels to and from Australia. But of all the charts I found, this one most clearly shows you how trade can literally, physically, be choked off.

China is aware of this risk. It’s using state-owned oil companies to make deals to mitigate the risk of having its oil and energy supply choked off. In addition, it’s aggressively pursuing oil and gas interests the South China Sea (a topic for much more discussion in the future). This effort to by-pass chokepoints could become an investment opportunity.

The best example is the cross-border natural gas pipeline that starts in the Bay of Bengal and crosses Myanmar to the Chinese city of Kunming in the province of Yunnan. The Chinese plan to import 400 million cubic feet of gas a day from Shwe and Zawtika, two gas projects off the coast of Myanmar. Korean company Daewoo, which is involved in the projects, reckons just two of the exploration blocks in the Shwe project could hold as much as 7.7 trillion cubic feet of gas.

The companies involved in oil and gas extraction from the Bay of Bengal are mostly Korean, Chinese, Thai, and Indian. The investment opportunities are limited. And almost all of them trade on foreign exchanges.

China's trans-Myanmar oil and gas pipelines

Meanwhile, in the strategic picture, you can see exactly what China is trying to do. It’s building a land bridge through Myanmar. That bridge bypasses the Strait of Malacca, currently patrolled and controlled by the US Navy’s 7th fleet. It also connects China directly with off-shore gas fields in the Bay of Bengal…and further east… all the way to the developing oil and gas provinces off the coast of East Africa.

It’s a new kind of Silk Road, but built for energy.

China’s investment in oil and gas infrastructure is just one aspect of the infrastructure story. For example, here in Australia, over $112 billion worth of projects are on the books to expand the capacity of the country’s rails and ports. Most of that construction is designed to facilitate the commodity trade with India and China.

From an investment perspective, most of the companies getting the contracts to build the big projects are either foreign or very large. This makes them behemoths. Size itself is not a problem. But the share price of large companies is not usually affected by one or two projects, no matter how big those projects are.

The better bet – if you’re looking for big investment gains from the global energy infrastructure story – is to look for the small oil and natural gas companies in close proximity to this new Silk Road for energy.

Dan Denning
Editor, Australian Wealth Gameplan

Publisher’s Note: Dan Denning will be appearing at After America: the Port Phillip Publishing Investment Symposium, March 14th-16th at Sydney’s Intercontinental Hotel.

Australian Wealth Gameplan subscribers have been profiting from what editor Dan Denning calls ‘The Revolution in the Desert’ since last June. And in this case, profit means two tips up over 120% at last count.

To get in on the action, click here.

From the Archives…

Picking the Big Investment Story for 2012
2012-02-10 – Kris Sayce

Attention: If You Have Australian Bank Stocks – Sell Them Now
2012-02-09 – Kris Sayce

Why This Bearish Indicator Means it’s Time to BUY Stocks
2012-02-08 – Kris Sayce

Why The RBA Uses The Terms of Trade Indicator… And Why You Should Too
2012-02-07 – Greg Canavan

Why the US Unemployment Rate is a Slippery Statistic
2012-02-06 – Dr. Alex Cowie

Global Oil Chokepoints and the New Silk Road for Energy

The Two Best Ways to Profit from Rising Oil and Natural Gas Prices


At times of political unrest – especially in the Middle East – there are two go-to assets…

Gold and oil.

You know the gold story. And you know our view on it. But what about oil?

Our view is that energy assets are set to be one of the best performing asset classes this year. That includes oil, natural gas and maybe even uranium.

And in a moment, we’ll show you two ways to make the most out of rising energy prices… without using risky investments such as futures or CFDs. First, just why are we so bullish on the energy story…

The Threat to 5% of the World’s Oil Supply

One reason is this report in the Financial Times:

“The oil market was spooked after an Iranian state-owned broadcaster reported that the country had stopped sales to six European countries. The report was initially denied by the Ministry of Oil in Tehran, which later said it could neither confirm nor deny the news.”

This isn’t the first time Iran has caused a stir in oil markets. In December Iran threatened to block the Strait of Hormuz that leads from the Persian Gulf to the Indian Ocean. That shouldn’t be hard. At its narrowest, the Strait is just 35km wide.

And with Iran producing 5% of the world’s oil, anything that causes Iranian oil production to fall (or even stop) is bound to affect the oil price.

Since last October, West Texas Intermediate Crude Oil (the U.S. benchmark for oil) has jumped from USD$80 to USD$103 per barrel. Middle East tensions are part of the reason.

But political gamesmanship isn’t the only reason we’re backing energy. For a start, oil is becoming harder to find. Last year oil giant, Exxon Mobil said its 10-year average oil reserve-replacement ratio (RRR) was only 95%.

That means for every 100 barrels Exxon pulls from the ground it only finds 95 barrels in new reserves.

In other words, Exxon’s oil reserves are heading south.

On the other hand, its natural gas RRR is going the other way. Its 10-year average gas RRR was 158%. Meaning for every unit of natural gas recovered it added over 1.5 units of new gas discoveries to reserves.

In short, it’s more evidence that natural gas is set to overtake oil as the world’s main energy source. But that doesn’t mean oil prices will fall. The world still relies on oil. And an ongoing shortage plus political tensions could still see oil prices go higher.

What about natural gas? Well, while oil is trading at multi-year highs, natural gas is trading at multi-year lows. That’s what makes it so attractive for investors…

The Worst Commodity for Four Straight Years

At the start of each year, we always look out for the U.S. Global Research Periodic Table of Commodity Returns:

Periodic Table of Commodity Returns
Click here to enlarge

Source: U.S. Global Research

We’ve circled natural gas performance over the past four years. It’s the only commodity in the table to produce a negative return in each of those years.

In fact, right now natural gas prices on the world market are trading at decade lows. They’re back to 2008/09 levels.

Our view is natural gas prices won’t stay low forever. Sure, there’s a glut at the moment. Mainly due to new technology making it easier to recover hard-to-get gas reserves. But at some point the market will do what markets always do: it will find a level where it’s profitable for explorers to extract the gas, but not so high that businesses and entrepreneurs look for other energy sources.

So, how can you make the most of higher oil and natural gas prices?

There are two ways. To get exposure to the oil price, Aussie firm BetaShares has listed an oil exchange traded fund (ETF) on the ASX. It trades with the code OOO. And you can buy it through your broker as you would any other share.

The benefit of ETFs on commodities is that you don’t need to open a futures trading account and nor do you have to trade large (and risky) futures contracts. For instance, an oil contract on the Chicago Mercantile Exchange is for 1,000 barrels. That’s a contract valued at USD$100,000 at today’s prices!

By contrast, the minimum investment on the ASX is just $500. If you want to bet on higher oil prices, without risking the family silver to do it, the OOO makes more sense.

Just be aware of one thing. Without getting too technical, BetaShares hedges its position by trading in futures contracts. So it doesn’t hold physical barrels of oil (which would probably be difficult anyway). But the company does claim the fund is fully backed by cash.

Of course, in order to make a decent return you’ll need the oil price to take off to $150 or even $200 per barrel. So, if you’re after some leverage but still only want to bet small amounts, you’re better off taking a punt on small-cap stocks

Leverage Your Portfolio to Higher Oil & Gas

Again, you only have to invest small amounts – as little as $500. But with small-cap stocks you get inbuilt leverage. If you bet on the right stock early, say before it’s found oil or before it increases its reserves, you can see your $500 stake turn into $1,000 or $2,000 in a fairly short time.

And because you’ve only put down a small amount, you know your maximum risk up front (that’s something you’re never sure of with the futures market).

Bottom line: if you’re looking to invest in the best performing sector this year, all the evidence points towards a good year for oil and natural gas prices. And that should mean a good year for oil and natural gas stocks.

Look to add a handful of small-cap oil and natural gas stocks to your portfolio while much of the sector is still cheap.


P.S. We mentioned the gas glut that’s keeping down natural gas prices. One reason for the glut is the exploitation of shale gas reserves in the U.S. Shale gas has become so important that it’s estimated the U.S. will become energy self-sufficient within the next 18 years.

P.P.S. It’s not just in the U.S. that companies are looking for shale gas reserves. It’s happening right here in Australia too. And my old pal, Dan Denning has been on the story from the start, picking three small-cap stocks that are already in the money. If you’d like to take a punt on these stocks, Dan tells us it’s not too late to get in. Click here for details

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How Global Oil Supplies Could Fall 40% Overnight

All You Need to Know About Iran & $200 Oil

The Two Best Ways to Profit from Rising Oil and Natural Gas Prices

Avon Earnings Missed Big, Andrea Jung Will Stay as the Chairwoman

Avon missed on its 4th quarter earnings. Analysts expected top line of $3.11B and the result was $3.04B. Actual EPS came in at 39c while the street expected to see 51c. The business took a hit from its declining door-to-door sales and the investigation around an internal bribery.Avon’s CFO Kimberly Ross announced in a conference call today that the company hired McKinsey to restructure the operations and will reduce its workforce immediately. Stock responded well and price bounced back 2% after this announcement. Avon is also in search for a new CEO to replace Andrea Jung, who became the role model of many women since she took her current position 13 years ago. Jung will remain as the Chairwoman of the company after the new CEO is on board.

Sizemore Comments on the Iran Standoff

By The Sizemore Letter

Charles Sizemore gave his thoughts on the unfolding crisis in the Straits of Hormuz to the Wall Street Journal’s Quentin Fottrell:

The “Iran issue” is one of about four macro risks that concerns me in 2012, the other three being a disorderly default by Greece or another Eurozone country, a greater than expected slowing in China and the final coming of the long-awaited Japanese debt and currency crisis.  Of all of these risks, I consider Iran to be the least scary.

Iran is holding the potential closure of the Straits of Hormuz over the heads Western consumer countries and Gulf producer countries like the proverbial sword of Damocles. Closure of the Straits would send the price of crude sharply higher at a time when the West can hardly afford it. Prices are probably  already high enough to push a few countries over the edge into recession.

These effects should be relatively short-term, however. A blockade is an act of war, and the Straits would be opened by force within a matter of weeks. Rather than risk this, Iran is choosing a less lethal way to raise the stakes by threatening to cut off exports to Europe preemptively before the European oil sanctions go into effect.

Bottom line: If the Iran situation escalates into actual violence, expect a deep short-term correction in the stock market and sharply higher prices at the pump.  But if this happens, use it as a buying opportunity because the effects should not last for long.


Greece: Will She Default?

By The Sizemore Letter

As a wise man by the name of Yogi Berra once said, “It’s déjà vu all over again.”  This is how investors feel about Greece at the moment.

2011 was the year of risk on / risk off. Virtually all risky assets—including stocks, commodities, energy, non-Treasury debt, and non-dollar currencies—rose and fell together based primarily on the macro news coming out of Europe. And by “Europe” I mean “Greece.” The fear among investors was that a Greek default would be the straw that broke the camel’s back, that seemingly insignificant incident that would put into motion a chain of events that would rip the Eurozone apart.

First, it would be Greece; then Italy. And next, the European Union itself. Crisis was averted mostly due to the actions of the European Central Bank. By offering virtually unlimited liquidity to Europe’s banks, the ECB ensured that a sovereign debt misstep would not lead to a “Lehman Brothers moment” in which the failure of one link in the chain caused the entire machine to stop functioning. A default, were it to happen, could be contained. Additionally, a negotiated settlement in which Greek bondholders would agree to take losses and the Greek government would agree to get its fiscal house in order took the risk of a Greek default off the table…at least for a little while.

Alas, it wasn’t meant to last. Two months into 2012, Greece is in the headlines again and sending ripples of volatility through the capital markets. The country’s European creditors demanded that Greece get serious about its economic reforms and make deep cuts to government spending (“Hey guys, for real this time. We mean it.)

In response, Greece’s largest police union threatened to arrest officials from the European Union, European Central Bank, and International Monetary Fund.

The arrest warrants are not being taken seriously, and frankly neither is Greece. After hysterical theatrics worthy of an ancient Greek drama, the Greek parliament approved the new austerity bill. The parliamentary breakthrough means that the planned debt haircut should happen on schedule and that Greece should be able to make its next major bond payment due in March. But few really expect the Greeks to deliver on their promises, and virtually no one considers the Greek crisis to be “resolved.”

Let me be clear on something: Greece will eventually default. Even if the “voluntary” debt haircut is implemented as planned, the country cannot balance its budget. No private creditor would be crazy enough to lend to Greece, meaning that the country will be at the mercy of its creditors at the European Union and IMF to pay its current bills. At some point, the EU and IMF will reach the point of disgust they should have reached years ago and will cut off their lending. When this happens, Greece will be officially bankrupt and will stop servicing its debts. The only two questions are “When will this happen?” and “What will the consequences be?”

On the first question, I am the first to admit that any estimate is at best an educated guess. I would certainly not be surprised to see it happen this year. European taxpayers are tired of subsidizing their irresponsible Mediterranean brothers, and political pressure is building to cut their losses and move on.

On the second, and far more important, question, the answer is a little more complex. I would expect a market reaction not too different from that of August of 2011 when Standard & Poor’s downgraded the United States’ credit rating. There will initially be wild volatility, but once investors figure out that the world is, in fact, still turning, life in the markets will return to normal pretty quickly. Banks with large exposure to Greek debts or large exposure to Greek credit default swaps may be forced into insolvency, but the ECB’s promises of unlimited liquidity to the “too big to fail” banks will prevent this from starting the dreaded domino effect.

And what happens to Greece herself? Abandonment of the euro is a real possibility, which would be followed by a domestic currency and debt crisis. Hyperinflation would be a virtual certainty, and Greek citizens would experience misery that makes the current austerity regime seem mild by comparison.

But then, the news wouldn’t be all bad. Locked out of the world’s credit markets, Athens would be forced to make some of the reforms that it lacks the political resolve to make today. It might—just might—emerge from the chaos as a more competitive country.

This is all just conjecture at the moment. For the time being, both creditor and debtor will continue to play their little game of understood winks and nods. And as long as both continue to keep up appearances, I expect most major world stock markets to enjoy a nice rally. Last week’s volatility notwithstanding, American, European, and emerging market stocks are all off to a great start in 2012. As Greece fades from investors’ attention, I would expect this rally to gain momentum. Position your portfolios accordingly.

Procter & Gamble Sells Pringles To Kellogg For $2.7 Billion

Procter & Gamble (NYSE:PG) announced an agreement to sell its Pringles business to Kellogg (NYSE:K) in a deal valued at approximately $2.7 billion.Kellogg said it will take on $2 billion in debt to finance the purchase of the Pringles unit from P&G.Kellogg expects the deal to be accretive to earnings by $0.08 – $0.10 per share before costs in 2012.P&G had in April 2011 reached an agreement to sell the unit to Diamond Foods (NASDAQ:DMND) for $1.5 billion.P&G expects an after tax gain on the transaction of $1.4 billion – $1.5 billion, or $0.47 – $0.50 per share.

EURUSD is facing 1.3026 support

EURUSD is facing 1.3026 support, a breakdown below this level will confirm that the rise from 1.2624 had completed at 1.3320 already, then deeper decline towards 1.2624 previous low could be seen. On the other side, as long as 1.3026 key support holds, the price action in the trading range between 1.3026 and 1.3320 is treated as consolidation of the uptrend, and one more rise towards 1.3500 is still possible.


Daily Forex Forecast

A Two-Bar Pattern that Points to Trade Setups

By Elliott Wave International

Some people like to get outside on the weekends, maybe playing tennis or working in the yard. Some people like to visit their friends or cook a big meal or go out to see a movie. And some people who are passionate about their work — such as Elliott Wave International’s futures analyst Jeffrey Kennedy — like to stare at hundreds of price charts on their computer screen to find patterns that point to trade setups. We used to worry for his health but not anymore, because he’s been doing it for years and he comes up with some neat stuff. A case in point is his discovery of a two-bar pattern that he named the Popgun. Find out more in this excerpt from the Club EWI eBook, How to Use Bar Patterns to Spot Trade Setups.

The Popgun
I’m no doubt dating myself, but when I was a kid, I had a popgun — the old-fashioned kind with a cork and string (no fake Star Wars light saber for me). You pulled the trigger, and the cork popped out of the barrel attached to a string. If you were like me, you immediately attached a longer string to improve the popgun’s reach. Why the reminiscing? Because “Popgun” is the name of a bar pattern I would like to share with you this month. And it’s the path of the cork (out and back) that made me think of the name for this pattern.

The Popgun is a two-bar pattern composed of an outside bar preceded by an inside bar. (Quick refresher course: An outside bar occurs when the range of a bar encompasses the previous bar and an inside bar is a price bar whose range is encompassed by the previous bar.) In Chart 1 (Coffee), I have circled two Popguns.

So what’s so special about the Popgun? It introduces swift, tradable moves in price. More importantly, once the moves end, they are significantly retraced, just like the popgun cork going out and back. As you can see in Chart 2 [not shown], prices advance sharply following the Popgun, and then the move is significantly retraced. In Chart 3 [not shown], we see the same thing again but to the downside: prices fall dramatically after the Popgun, and then a sizable correction develops.

How can we incorporate this bar pattern into our Elliott wave analysis? The best way is to understand where Popguns show up in the wave patterns. I have noticed that Popguns tend to occur prior to impulse waves — waves one, three and five. But, remember, waves A and C of corrective wave patterns are also technically impulse waves. So Popguns can occur prior to those moves as well.

As with all my work, I rely on a pattern only if it applies across all time frames and markets. To illustrate, I have included two charts of Sirius Satellite Radio (SIRI) that show this pattern works equally well on 60-minute and weekly charts. Notice that the Popgun on the 60-minute chart [not shown] preceded a small third wave advance. Now look at the weekly chart [not shown] to see what three Popguns introduced (from left to right), wave C of a flat correction, wave 5 of (3) and wave C of (4).

Find out How to Use Bar Patterns to Spot Trade Setups

In this comprehensive 15-page eBook, Jeffrey provides each pattern with a definition, illustrations of its form, lessons on its application and how to incorporate it into Elliott wave analysis, historical examples of its occurrence in major commodity markets, and ultimately — compelling proof of how it identified swift and sizable moves.

Download the free, 15-page eBook today >>

This article was syndicated by Elliott Wave International and was originally published under the headline A Two-Bar Pattern that Points to Trade Setups. EWI is the world’s largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.