The dollars getting killed again!
Its plunging against major currencies like the euro, the Japanese yen and the Swiss franc. Plus, its even falling against the once-chronically-weak currencies of emerging nations like Argentina, Brazil and Mexico.
This has powerful fundamental causes and wide-reaching consequences.
Primary Causes of Dollar Decline:
Worst U.S. Trade Deficit in History!
Weak-Kneed U.S. Federal Reserve!
The U.S. trade deficit has just ballooned to nearly $69 billion, easily surpassing the already-shocking deficit of $66.1 billion recorded in September, which itself was the worst in history. This is a classic cause for the dollar to decline.
Of course, some people may try to persuade you that the record deficit is just because of extra fuel imports in the wake of Hurricanes Katrina and Rita.
Not true! Our outrageously huge deficit is also due to an unbridled, free-wheeling buying spree by millions of Americans … plus … among other things, a flood of Chinese televisions, toys and computers to feed their appetite for more.
Others may try to argue that our deficit problems are just with China.
Also not true! The U.S. has just set record-smashing deficits with most of its major trading partners, including not only China, but also the 25-nation European Union, Canada and Mexico.
To offset this very dangerous deterioration in our nations international finances … and to help support the value of the dollar, the Federal Reserve would normally step up to the plate and start bidding substantially higher rates for money. Instead, the most they can muster is a series of punt singles.
This is why the dollar is plunging … and should continue to do so.
Consequences of Dollar Decline:
More Bond Market Troubles Coming!
Another Surge in Gold in the Making!
Yesterday, the government announced a record decline in consumer prices (due almost exclusively to the recent correction in fuel prices which has since ended.)
No matter what the cause, however, with this kind of news youd normally expect bond prices to rise. Instead, they did precisely the opposite, falling sharply yesterday as yields went up. Why? One reason may be that foreign investors, frightened by the speed of the U.S. dollars decline are running from U.S bonds.
Meanwhile, gold prices yesterday also found their bottom, stabilized, and turned back up. Why? Again, I trace the cause back to the falling dollar.
A sharply falling dollar can reach into virtually every nook and cranny of our financial world. It helps push up interest rates in the U.S. and abroad. It helps drive up the price of gold, silver, copper, oil, gas, and other commodities.
Plus …
- A falling dollar reflects and exacerbates a fundamental deterioration of our core economy, especially in the tech sector, as Tony will explain in a minute.
- A falling dollar adds urgency to buy-out deals for companies best able to produce these valuable commodities, the subject of Seans update this morning …
Why Gold Mining Buyouts Are
Beginning to Gain Momentum
by Sean Brodrick
Have you ever heard of a company called Virginia Gold Mines? Most people havent. I myself only followed it because it has a project with the same name as my 6-year-old daughter.
The company has no producing mines. So who cares, right?
Ill tell you who cares Goldcorp, and theyre putting their money where their mouth is.
In fact, Goldcorp has just swooped down on Virginia Gold Mines like a hawk on a rabbit, buying it in a deal worth $442.8 million.
Think about that for a moment. Here you have one of the largest mining companies in the world run by some of the smartest people in the industry. Yet theyre willing to dish out $442 million on a tiny company that doesnt even have a single working mine!?
Sure, I can accept the fact that my daughters namesake project is going to be a nice, little rich prospect. But since when do big mines spend so much money on a company thats not yet producing an ounce of gold?
Answer: Ever since gold prices stabilized over $400 per ounce over six months ago.
Shares in Virginia Gold Mines Were Surging
Long Before Goldcorp Announced Its Buy-Out
Back in May of this year, Virginia Gold Mines shares were trading at just $3.55, and suddenly surged to $7.02 per share, more than a 97% increase.
That was seven months before Goldcorp made its bid.
During the summer, Virginia Gold surged AGAIN this time to over $8 per share.
That was still five months before the announcement.
So, well before Goldcorp made its bid, investors in this stock nearly doubled their money in about only three months time.
Then just a few days ago came the announcement, triggering still another surge in the stock, this time to over $9 per share.
This vividly illustrates the huge opportunities now opening up to investors who can pick out the right gold mining companies cheaply.
And it proves that the takeovers are just the icing on the cake. If you happen to land a stock that becomes a juicy target, great. If not, you could still make money hand over fist.
What about the correction in gold prices weve just seen in the last few days? Bah! It has barely made a dent in Virginia Gold Mines. Even if gold prices fall further from here (an unlikely scenario), this company will be mining gold with a very healthy profit margin.
The First Phase of a Broad
Gold Mining Buying Frenzy
Goldcorps purchase of Virginia Gold Mines isnt the only acquisition announced on December 5. On the very same day …
* Yamana Gold announced its acquiring RNC Gold for $49 million. Yamana gets RNCs zinc-copper silver resources in Quebec and its high-grade silver-gold property in Mexico.
* Ontario-based IAMGold Corp announced a $273.7 deal to buy Gallery Gold.
Thats three buyouts in one day! Wow!
And they come on the heels of a steady staccato of buy-outs already this year: Golden Star buying St. Jude … Gold Fields buying Bolivar Gold … Crew Gold picking up Guinor … and, in the biggest deal so far, Barrick Gold is gobbling up Placer Dome for a whopping $9.5 billion, the largest gold mining acquisition in history.
Plus, just this week, two junior miners Intrepid Minerals and NuStar Mining announced a merger. I
Thats eight deals so far this year, nearly triple the number announced last year … and just beginning to gain momentum.
This Leads Me to Two Very
Hard-to-Dispute Conclusions
Companies dont find these deals overnight. They have to ferret out their targets. They have to negotiate hard, run extensive due diligence, agree on all the fine points, and then make their public announcements. Total time lag: Figure six months to a year.
So the deals youre seeing announced today are deals that were initiated when gold was still selling for under $450 per ounce. Since then, gold has surged by over $50, and thats even after the sharp correction you saw this week.
Since the rising price of gold is the primary fuel behind the gold mine buying frenzy, you can bet your bottom dollar that there are many more deals already in the pipeline. This leads me to two hard-to-dispute conclusions:
First, expect more takeover announcements. Thats a given.
Second, you can also expect big money to target other kinds of mines silver, copper, platinum and much more. Especially in silver, a sector which was so depressed for so long, there are plenty of undervalued companies ripe for takeover.
For example, just last week, I recommended a great little silver mine to my subscribers, and sure enough, just a few days later, it formally announced its restarting silver production at its primary silver mine. I dont know for a fact if this company is a takeover target right now. But I would be quite surprised if it isnt.
Like gold, silver has pulled back and may consolidate some more. Gosh, I hope so. I want another chance to help my subscribers add to their silver positions on the cheap. Just look at the unique convergence of circumstances we have right now:
1. These companies were undervalued even before metals prices surged this year.
2. I have no doubt gold and silver are going much higher.
3. We already have a leg into these shares at a great price.
So now all we have to do is take advantage of every correction we can get to accumulate more of the shares on the cheap. I dont know about you, but Im not going to wait around for very long. This correction may be sharp, but I think its also going to be very short.
So heres what Im doing:
First, early in the week, I picked out three small cap gold companies I think are about to soar.
Second, on Wednesday, I wrote a special report on all three, and our staff immediately posted it to a dedicated web page they set up for it.
Third, early next week, Im going to send out an alert to my subscribers to jump into them.
Want to read my report on the Web about the three small cap golds? OK, no problem. You dont need a password.
Tech-Company Food Chain
Beginning to Go Stale
by Tony Sagami
Something smells fishy with tech stocks.
Since the beginning of December, the Dow and S&P are up nicely. But with the tech-heavy Nasdaq Composite, its a different story entirely. Compared to the first of the month, its actually down 10 points.
Thats not a big decline. But its certainly a marked divergence from the rest of the market.
I think this is an early warning sign of some serious problems for domestic tech stocks in 2006, especially in the PC world.
You can tell because some of the biggest names in the PC food chain are acting like crybabies.
Tech crybaby #1: Best Buy shocked the Wall Street crowd this week when it fell short of Q3 forecasts and lowered its full-year forecast.
For the quarter ending October 31, Best Buy earned 28 cents per share, 2 cents below expectations. For the full year, Best Buy said it expects to earn $1.06 to $1.16, which makes Wall Streets $1.16 forecast look too darn high. The reasons:
- Sales are a lot weaker than Wall Street thinks. Same-store sales fell by 30% from Q3 of 2004. And even if you include new stores, sales growth fell from 5% to 3.7%.
- The weakest sellers were home-office products, especially desktop computers, printers and phones. Since Best Buy gets a third of its revenues from home-office products, this is serious.
- The next quarter ends on February 28. That means it includes not only the December holiday spending but also the post-Christmas shopping spree when gift cards are cashed in. If Best Buy cant hit its profit targets after including those three awesome months, you know something is very wrong.
This is critical for two reasons:
First, because Best Buy is considered a best-of-breed retailer. It has had the best growth and its electronic doodads have been such red-hot sellers. So if even Best Buy is having trouble, youve got to question how the rest of the doodad retail world is doing. Hint: Not so good.
Second, because Best Buy, like all retailers, is at the top of the tech food chain. If theyre running into a wall of customer resistance at that level, youve got to question what is happening to the companies that feed their products into the food chain.
Im talking about the companies that make personal computers, cell phones, video games, MP3 players, printers. And next in line, Im talking about the companies that make the parts for all of the above.
Tech crybaby #2: Hewlett Packard is the #2 maker of computers and the #1 maker of printers in the world. How well or poorly its doing tells you a heck of a lot about the hardware sector.
So wheres HP? Not in a very good place. It warned that its full-year sales for 2006 might fall a little short of Wall Streets already-reduced expectations. They were hoping for sales of about $91 billion in 2006. The company is now forecasting $89.5 to $91 billion. Worse …
- Even if Hewlett Packard hits the top end of its 2006 forecast, that still translates into a paltry 5% sales growth rate over the last 12 months.
- One of HPs biggest problems is that the profit margins of the PC business are shrinking down to nearly nothing. Hewlett Packard admits that the profit margin on its personal systems group desktop and notebook PCs would only generate 3% to 4% profit margins next year.
- And dont forget: This is the same company that has announced a 5,000 reduction in its workforce. To me, that doesnt sound like a company that has more business than it can handle.
Tech crybaby #3: The Wall Street crowd barely paid any attention to this one. The stock fell by nine tiny cents. Im talking about Intel and the news that it is sold $1.4 billion of 30-year convertible bonds on Wednesday.
The bonds had a coupon yield of 2.95% and are convertible into Intel stock at roughly $31.80 a share about an 18% premium over the Tuesday closing price.
To me, this smells very fishy: Why would a company with $14 billion in cash in the bank sell a billion dollars worth of bonds? And why in the heck do they need that money given the fact that theyve announced a reduction in their capital expenditure budget in 2006?
When I connect the dots, I see a management team that fears some darkening clouds on the horizon. And when I connect the dots to Best Buy and Hewlett Packard, I see an entire industry in trouble.
First, get out of companies that are going to take the biggest hits in the PC world.
Second, get out of long-term bonds. Theyve had a nice rally this month due to false hopes that the Fed will be able to end its campaign to raise interest rates. But now that rally could be ending. So if you still have any long-term bonds left, grab the chance while you can.
Third, move the proceeds into a Treasury-only money fund. Weve given you the list here many times. And weve posted it to our website as well. Click here if you need it again.
Fourth, and perhaps most important, protect yourself against the damage a dollar decline can do to your portfolio. The best hedge today: Companies that profit from rising gold and other natural resources. You can buy the investments weve been tracking for you here, such as GLD and RGLD. Or you can follow Sean whos on top of the small cap gold stocks.
Best wishes,
Tony
About MONEY AND MARKETS
MONEY AND MARKETS (MAM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Larry Edelson, Tony Sagami and other contributors. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MAM. Nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MAM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical inasmuch as we do not track the actual prices investors pay or receive. Contributors include Marie Albin, John Burke, Beth Cain, Christine Johnston, Amber Dakar, Michael Larson, Monica Lewman-Garcia, Julie Trudeau and others.
2005 by Weiss Research, Inc. All rights reserved.
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