Profit From This Hidden Fed Loophole

In This Issue: Profit From This Hidden Fed Loophole There's Always a Small-Cap Bull Market Somewhere Beyond Fossil Fuels Where to invest when interest rates are zero If you're a saver, you know the Fed's 0% interest policy is wreaking havoc on your savings accounts, CDs and bonds. Interest rates are so low you might consider burying your money in the backyard. But here's an alternative: 3 foolproof companies that provide you with a hedge against the falling dollar… offering you hefty quarterly dividends (2% to 4%) and impressive growth (up to 36% in the past 2 years). You can earn safe, steady returns until the Fed eases up on interest rates. There's one catch that makes this opportunity even more solid. Details here. Profit From This Hidden Fed Loophole 10/01/2014 This is something that every American needs to know. During the 2008 economic crisis---one of the darkest periods of our financial history---the Federal Reserve sent close to $31 billion of taxpayer money to four foreign firms. And you'll never guess where they're located. In Canada. That's right. At a time when many Americans were hurting (and still are), the Fed chose to support four foreign companies. This shocked us, because that money could have been put to good use here at home. And how exactly does this help the Fed accomplish its dual mandate of managing inflation and keeping unemployment to a minimum? It doesn't. But then we also saw that there's a retirement fund-boosting play for you here---one that could put a lot more gold in your golden years and add safety in a not-so-safe environment. That's the good news, and we'll have a lot more to say about it in a moment. But first, it's important that you understand how this strange situation arose. The Fed: Canada's New BFF? The $31 billion was just the start. When we dug deeper, we discovered that, through a series of loopholes, these same four Canadian firms control 18.2% of a little-known "board" the Fed relies on to carry out its monetary policy. Even more alarmingly, all four of these firms report directly to the Canadian government. By now you're probably wondering how this bizarre state of affairs came to be. Here's how it happened: When the crisis hit in 2008, the Fed had to do something to keep the economy running. Common wisdom is to lower interest rates, which (in theory, at least) frees up money for growth. And growth equals jobs---and spending. The problem was so bad that interest rates have been cut to pretty well zero, as you know. So to keep the money and credit flowing, the Fed buys securities from banks and private companies. These firms then use that cash to fund loans. The whole process is called quantitative easing, which you've probably heard of. What's interesting is that the Fed needs to buy these securities somewhere. It needs banks and private companies to disperse the money, since it doesn't deal with the public directly. Now stick with us here, because this is where the story gets revealing. When the Fed wants to buy securities, it uses the New York Federal Reserve to actually perform the transactions. And who does the New York Fed buy these securities from? Their trading partners, also called "primary dealers," which are compelled to both sell securities and buy American debt. Right now there are 22 companies on the list, and you'd think they'd all be American, right? Wrong. Pulling Back the Curtain on the Fed's Canadian Caper Now, the Fed's trading partners are supposed to all be American companies, but here's what we found, from a Fed document: "Consistent with the Primary Dealers Act of 1988 (the Act), a foreign-owned dealer ... may not be newly designated, or continue to be designated, as a primary dealer... Firms controlled by persons domiciled in Canada ... are grandfathered under the Act." A loophole for Canada. It's strange enough that there are Canadian firms on the New York Fed's list of trading partners. Stranger still, in 2008, there were no Canadian companies represented there, but somehow, in 2014, four of them are Canadian. A full 18.2%. And of course, there's still that $31 billion the Fed sent them in 2008. Something's rotten here. But as we looked further into this situation, we realized... There's not much we can do about the games the Fed plays, but we can profit from them. We can invest in the Canadian companies that are making a killing off all this. And you can, too. What's more, when we took a closer look at these four companies, we realized that three of them make for brilliant investments. Magnifying Your Profits Now after what we just told you, you may think it's a little distasteful to invest in these three Canadian firms. But the companies themselves aren't doing anything wrong. It's the Fed that keeps selling us out. First to China, and now to Canada. It may even be that the Fed needed these companies. With all of the banks going bankrupt in the U.S., the Fed may have needed new trading partners to carry out its monetary policy. And besides, investing in Canada makes great sense anyway. Let's look at the recent performance of the Canadian dollar. While the American dollar continues to weaken, the Canadian dollar is only gaining strength. In fact, the International Monetary Fund recently added the Canadian dollar as a reserve currency, citing the fact that it has risen 21% against the U.S. dollar since 2008. And with the country's low debt (only 3.5% of ours) and vast resource wealth (including 300 billion barrels of oil reserves), there's every reason to believe that its strength will continue. Today, a dollar is worth around $1.09 Canadian. Imagine a not-so-distant future where the U.S. dollar is only worth 75% of a Canadian dollar. You've just made 35% on your money before we talk about the actual yield of the stocks themselves. The upshot: The Canadian economy has remained solid despite today's tough economic times. And with their abundance of natural resources, their dollar will stay strong for years to come. Now we want to show you how to... Unleash the Power of the "Perfect Investments" You get everything you need to know about these three companies, including names, ticker symbols and just how easy it is to invest in them, in a special report we've just released. It's called "Canada Infiltrates the Fed: How Three Canadian Companies Are Profiting From the Worst Recession Since the Great Depression." And best of all, this report won't cost you a penny. We're making it available free of charge to anyone who takes our Canadian Edge advisory on a no-risk 90-day test drive. Here's why these three stocks are ideal for American investors: They're solid. They've each been around for 100 years, and they're not going anywhere soon. And while they're publicly traded, they're backed by the Canadian government. The returns are great. Each of these stocks is up between 34.0% and 39.3% in the last two years, without even including their attractive dividends. And best of all ... they have a virtual monopoly on a certain sector of the Canadian marketplace, and they keep making money hand over fist. As we've seen, they even make money off the American taxpayer. They just may be the perfect investments---and you're just moments away from learning all about them. Click here to get your copy of this free special report now. Editor's Note: With their legendary safety and high dividend payouts, I'm convinced these three Canadian stocks really are the perfect addition to any American investor's retirement portfolio. But I must tell you something: It took a lot of convincing to get my publisher to agree to release this ground-breaking research in a free report. I can't guarantee this offer will be around for long. I urge you to start taking advantage of this unprecedented situation now---before it's too late. Go here to get started right away. Canada infiltrates the Fed… but you profit! Did four Canadian companies just get a $31 billion sweetheart deal from the Fed? Yes! But you can benefit, too… by investing in 3 of these mystery companies. What's good for the goose, right? These companies are solid. They're backed by the Canadian government and hold a sector monopoly. They make money hand over fist in any economy. Annual profits range from $1.13 billion to $2.1 billion a year! And they pay out stellar dividends 4 times a year! Here's what you need to know about these nearly perfect investments. Details here. There's Always a Small-Cap Bull Market Somewhere 10/01/2014 By Jim Fink The nice thing about investing in small-cap stocks is that you can always find a bull market somewhere. While it's true that small-cap stocks in the United States have been underperforming in recent months, it's equally true that there are lots of good opportunities if you cast a more global net. The Wall Street Journal recently reported on how well small-cap stocks are doing in emerging markets. "The riskiest stocks in the riskiest markets are among the biggest winners in Asia this year, despite worries about the impact of rising U.S. interest rates on developing countries," the Journal noted. That's why, when I assemble my stock portfolios, I always look at international stocks as well as domestic ones. Two of the selections I'm proudest of are Vipshop Holdings (NYSE: VIPS) and Bitauto (NYSE: BITA). Vipshop is China's leading online discount retailer for brands. The company offers high quality and popular branded products to consumers throughout China at a significant discount from retail prices. As compared to conventional on-line marketplaces or large-scale multi-category online retailers, Vipshop has successfully created and proven there is a third e-commerce model that can provide tremendous scale and profitability. By providing special offers and deep discounts on branded products, the company has pioneered the online discount retail model in China. Bitauto Holdings Limited is a leading provider of internet content and marketing services for China's fast-growing automotive industry. Bitauto manages its businesses in four segments: the bitauto.com advertising business, the EP platform business, the taoche.com business, and the digital marketing solutions business. The company's bitauto.com advertising business offers automakers and dealers a variety of advertising services, which provides consumers with up-to-date new automobile pricing. The View from Abroad In the classic investment book Stocks for the Long Run(4thed.), Wharton finance professor Jeremy Siegel explained the importance for U.S. residents to invest not only in the stocks of U.S.-based companies but in foreign stocks as well: The reason to invest internationally is to diversify your portfolio and reduce risk. Foreign investing provides diversification in the same way that investing in different sectors of the domestic economy provides diversification. It would not be good investment policy to pin your hopes on just one stock or one sector of the economy. Similarly, it is not a good policy to buy the stocks only in your own country, especially when developed economies are becoming an ever smaller part of the world's market. International diversification reduces risk because the stock prices of one country often rise at the same time those of another country fall, and this asynchronous movement of returns dampens the volatility of the portfolio. According to the MSCI All-Country World Index (ACWI), stocks in the U.S. account for only 46.74% of the world's stock market capitalization. That means that a U.S. investor who only invests in U.S.-based companies is missing out on more than half of the world's economic growth! When one considers that annual U.S.GDP growth is currently only 1.7% -- compared to 8% in China, 6% in Indonesia, and 5% in India -- the detrimental effect of not investing in the rest of the world becomes even more glaring. In his 2005 book The Future for Investors, Professor Siegel recommends that U.S. investors allocate 40 percent of their equity portfolio to foreign stocks. Despite the diversification benefits of allocating 40 percent to foreign stocks, the average U.S. investor only has a 14 percent allocation to foreign stocks -- 2/3rds less than recommended! Why so low? The answer is an irrational behavior known as "home equity bias" which has been an "important yet unresolved empirical puzzle in financial economics since the 1970s." Simply put, people favor the familiar over the unfamiliar and are willing to sacrifice additional risk-adjusted profit for this familiar feeling. The bias is a universal human attribute which one 2005 study was able to document existed in each of the 48 developed and emerging markets across the globe that it vetted. Of course, some investor fear of the unfamiliar may be justified due to foreign exchange fluctuations, higher transaction costs, accounting fraud (China), and political corruption (Russia), but the bias is much larger than all of these issues collectively warrant. Furthermore, the greater the home equity bias in a country, the cheaper the country's equity valuations. Bottom line: those investors who successfully avoid home equity bias not only improve the diversification of their portfolios, but also take advantage of the bias of others by purchasing undervalued foreign shares. According to a 2007 Brandes Institute report, the reason why foreign small caps and U.S. small caps have such low correlations is because they are fundamentally different U.S. small caps are typically young start-ups whereas foreign small caps are typically much older and more established: Perhaps the origins of small-cap companies are different across regions. For example, within the small-cap segment in Europe, there may be a greater number of companies spun off from mature firms vs. business conceived and launched as start-ups. Results presented here confirm that European small caps are indeed the oldest of the world's small caps, as measured by average age since incorporation. Extending that theme, if one thinks in terms of a company's "life cycle," there likely is a greater number of North American small-cap firms in the earlier, rapid-growth stages of their existence. Whereas U.S. large caps and foreign large caps have experienced relatively high correlations since the 2008 financial crisis, the correlations between U.S. small caps and foreign small caps have remained low. The reason has to do with the exclusively domestic focus of small caps in their respective countries vs. the uniform international business focus of large caps. The superior diversification benefits from small-caps are primarily due to those stocks being more highly correlated with their domestic economies than larger multinational stocks which tend to have higher correlations with other countries including the U.S. Therefore, international small-cap stocks offer more country diversification compared to larger multinational stocks in either the developed or emerging market universes. With the explosive development of the middle class in emerging markets, domestic-focused foreign small caps will offer U.S. investors some of the highest growth potential in the world. This article originally appeared in the Small Cap All-Stars column. Never miss an issue. Sign up to receive Small Cap All-Stars by email. Want to get some of your tax money back? In 2014, the Federal Reserve dumped $3 trillion in freshly printed money into the economy. Since they can't deal directly with the public, the Fed quietly buys securities from banks and private companies. Who do they buy these securities from? You'd think they'd buy American. But they don't! A secret loophole exists that grandfathers in four Canadian companies. They're making a killing with U.S. tax dollars, to the tune of $31 billion! These companies aren't doing anything wrong, but they are profiting from America's recession… thanks to the Fed. If you want some of that $31 billion back, here's what you do. Details here. Beyond Fossil Fuels 9/30/2014 By Robert Rapier In last week's Energy Letter (Down and Dirty With Fossil Fuels) I discussed the relative advantages and drawbacks of the world's top three energy sources. This week, I cover the rest of the major energy options. Hydropower Globally, the top three sources of energy are all fossil fuels: petroleum, coal and natural gas. In 2013, these accounted for 87% of the world's primary energy consumption, according to the 2014 BP Statistical Review of World Energy. But you might not have guessed that #4 on the list was hydropower. Hydropower refers to a broad class of technologies that use the power of moving water to generate electricity. Most commonly, this refers to hydroelectric dams, which pass water through a turbine that spins a generator to produce electricity. In 2013, hydropower was responsible for 6.7% of the world's primary power consumption. In fact, the five largest power plants of any kind in the world (by capacity) all run on hydropower, and the only non-hydropower plants in the top 10 are a pair of nuclear power plants (at #6 and #10). Hydroelectricity has a lower environmental impact than many other sources of electricity. There are no emissions from the ongoing operations of a hydropower plant. However, large hydroelectric plants do alter the environment. When dams are built land must be flooded, displacing people and drastically changing the wildlife habitat. The massive Three Gorges Dam in China displaced an estimated 1.4 million people initially, a number that could rise to 4 million over the next decade. Hydroelectric projects in the US Pacific Northwest disrupted the migration patterns of a number of species of salmon, drastically reducing salmon populations in the region and pushing some species onto the endangered species list. Contrary to the situation with the fossil fuels, there aren't many companies that are focused predominantly on hydropower production. Idaho Power (NYSE: IDA) and Portland General Electric (NYSE: POR) are two US-based public utilities with a substantial base of hydropower generating resources, but neither is a pure hydropower play. Purer hydropower plays are foreign companies like Brazil's Cia Energetica De Minas Gerais (NYSE: CIG), Austria's Verbund(OTC: OEZVF), or China Yangtze Power, which operates the Three Gorges Dam and trades on the Shanghai stock exchange. Nuclear Power The share of nuclear power in the global energy mix has been on the decline since the Fukushima meltdown in 2011. Last year the global share of primary energy consumption from nuclear power was down to 4.4%. For global electricity production, nuclear's share last year was 10.8%, down from nearly 14% just prior to the Fukushima accident. A nuclear plant operating under normal conditions has one of the lowest immediate environmental impacts of any source of energy. The lifecycle carbon emissions from nuclear-derived electricity are lower than any other source of power except for onshore wind power. (Source: See Table A.III.2). But unlike wind power, nuclear power is firm power, able to produce electricity on demand. No other major source of power can consistently match nuclear power's 70-90% capacity factor (i.e., the ratio of a plant's actual output over a period of time to its potential output). But the downside to nuclear power is that a single accident at a plant -- while exceedingly rare -- can have enormous consequences. The 1986 Chernobyl accident in Ukraine resulted in dozens of direct fatalities (and an eventual fatality toll estimated in the thousands from increased cancers), spread contamination across many countries in Europe and left more than 1,600 square miles uninhabitable because of heavy radiation contamination. And while there were no direct deaths attributed to the Fukushima disaster, 300,000 people had to evacuate their homes -- many permanently -- on short notice. Only a nuclear power plant is capable of such wide-ranging consequences. While that is the primary downside of nuclear power, there is also the issue of nuclear waste. Communities have fought to keep nuclear waste repositories out of their region, and many people don't like the idea of living along a nuclear waste transport route. Therefore, the waste often just accumulates at the power plant, which is not a long-term solution. Nuclear power has suffered some huge setbacks, but in the long-term many developing countries will turn to nuclear energy for firm power. It will be seen as a trade-off between the world's other major power source -- coal. (A coal-fired power plant actually emits more radioactivity into the environment than a nuclear plant.) According to the European Nuclear Society, there are currently 437 operating nuclear reactors in the world with a total capacity of 374.5 gigawatts (GW). But there are another 70 reactors under construction globally with a total capacity of 66.6 GW. About 40% of the new reactor capacity is in China. Companies that mine uranium have been hit hard since the Fukushima disaster. Canada's Cameco (NYSE: CCJ) is the largest publicly traded uranium miner in the world, but since Fukushima its stock has dropped 56%. Another Canadian supplier, Denison Mines (NYSE: DNN) has been hit even harder, down 70% since Fukushima. The primary problems currently facing the industry are excess supply due to the decline in global nuclear power production, and a perception that it will still be a while before the industry recovers from the downturn fueled by Fukushima. Nevertheless, based on the new reactors under construction, the industry isn't dead just yet. Renewables Renewables cumulatively accounted for 2.2% of the world's primary energy consumption in 2013. These renewables consisted predominantly of biofuels, wind power, solar power and geothermal power. The downside of the renewables falls into several categories. For biofuels, the primary downside is that most of them utilize fairly substantial fossil fuel inputs, which makes them to a certain extent fossil fuels in disguise. The high dependence on fossil fuels is also what tends to make them cost more than fossil fuels, particularly for second-generation biofuels. Further, most biofuels are made from food crops, putting them potentially in competition with food consumers. Major biofuel producers around the world include Finland's Neste Oil (Helsinki: NES1V, OTC: NTOIY), Renewable Energy Group (NASDAQ: REGI), REX American Resources (NYSE: REX) and agribusiness giant Archer Daniels Midland (NYSE: ADM). For wind and solar power, intermittency is the biggest downside. Unlike firm power such as that derived from coal or nuclear power, wind and solar power can't always be counted on when needed. Therefore, they require firm power sources as backup. Both sources have also been responsible for the death of many birds. Most recently a report from the US Fish and Wildlife Service called the Ivanpah concentrating solar power (CSP) plant a "megatrap" and made recommendations on how to make CSP safer for birds. Historically these have also been more expensive sources of energy that required subsidies, but costs are coming down (especially rapidly for solar power). The Danish company Vestas Wind Systems (Copenhagen: VWS, OTC: VWDRY) was the world's largest manufacturer of wind turbines in 2013, while Chinese company Xinjiang Goldwind Science and Technology (OTC: XJNGF) was the world's second leading wind turbine wind turbine producer last year. The top three solar PV manufacturers globally are Chinese producers Yingli Green Energy Holding (NYSE: YGE) and Trina Solar (NYSE: TSL), and Canadian Solar (NASDAQ: CSIQ). Abengoa Solar is the largest producer of concentrated solar power. Geothermal power is perhaps the most innocuous power source of all. Geothermal electricity has a high capacity factor, and the cost of generation is comparable to that of coal-fired generation. During normal operations, there are no carbon emissions, although there are sometimes emissions of harmful gases when geothermal wells are drilled. The main disadvantage of geothermal is that it is geographically limited to regions that have relatively shallow geothermal resources -- which is a small fraction of the earth's surface. The largest producer of geothermal power in North America is Calpine (NYSE: CPN), while the largest producer of geothermal power in the world is Chevron (NYSE: CVX), which operates geothermal plants in Indonesia and the Philippines. Another major publicly traded producer is Ormat Technologies (NYSE: ORA), a subsidiary of Israel's Ormat Industries (Tel-Aviv: ORMT) and a builder and operator of geothermal plants and supplier of related equipment. Conclusions Energy policy is dictated by politics, which is dictated by perception. We must understand that there is no perfect energy source, even among those considered renewable. Each of our energy options has its advantages, but there are also costs, trade-offs, and risks associated with each. It is important to understand the nature of these costs and trade-offs, as well as the potential risks and consequences in order to have fruitful discussions over the direction of US energy policy. This article originally appeared in the The Energy Letter column. Never miss an issue. Sign up to receive The Energy Letter by email. The Fed Sends Canada $31 Billion? I couldn't believe it when I read it. But there it was in black and white. The Fed gave 4 Canadian companies a whopping total of $31 billion in 2008. That's right… at the beginning of the worst economic climate since the Great Depression, the Fed gave your money – taxpayers' dollars – to 4 Canadian companies. That's money that could have helped a lot of Americans. The story is curious enough. But it gets even more curious when you see the investing opportunity it reveals. Click here for details. 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