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Fed Minutes: Some Participants Felt Fed Will Need to Explain

Federal Reserve officials expressed concern about how well the central bank was conveying its policy intentions to a jittery investing public, according to minutes from the most recent meeting.

The June FOMC session was significant in that Chairman Ben Bernanke followed it by telling the media that the Fed was prepared to start winding down its bond-buying program by the end of 2013.

That revelation, in a news conference, rattled markets, sending stocks on a 7 percent decline and interest rates surging higher.

The minutes indicated a clear concern from committee members, who gave marching orders to Bernanke about what to say at the media gathering.

“At the conclusion of the discussion, most participants thought that the Chairman, during his postmeeting press conference, should describe a likely path for asset purchases in coming quarters that was conditional on economic outcomes broadly in line with the Committee’s expectations,” the minutes said.

“In addition, he would make clear that decisions about asset purchases and other policy tools would continue to be dependent on the Committee’s ongoing assessment of the economic outlook.”

Financial markets reacted strongly to the remark, triggering the worst performance for stocks all year.

The minutes indicated an in-depth discussion about how financial markets were reacting to the quantitative easing measures, which entail $85 billion a month in purchases of Treasurys and mortgage-backed securities.

“A few stated their view that a prolonged period of low interest rates would encourage investors to take on excessive credit or interest rate risk and would distort some asset prices,” the minutes said. “However, others suggested that the recent rise in rates might have reduced such incentives.”

FOMC members showed a strong inclination to orchestrate Bernanke’s comments to the media. The news conferences are a relatively new wrinkle in Fed policy during which the chairman addresses reporters at every other meeting.

Members directed Bernanke to detail “a likely path” for a pullback in the asset purchases that would be dependent on economic data continuing to improve.

In its economic review, the committee said growth is increasing at “a moderate pace,” language consistent with previous statements. There was some concern that higher mortgage rates would derail the housing recovery, but mostly agreement that things were continuing apace.

_ By CNBC’s Jeff Cox. 
 

Financial Markets

Chinese buyers bring big money to U.S. housing market

Flush with cash, Chinese homebuyers are flooding into the U.S. housing market, and paying top dollar.

“The Chinese came out really huge in the past year,” said Jonathan Miller of Miller Samuel, a New York-based appraiser.

Chinese buyers accounted for 18% of the $68.2 billion that foreigners spent on homes during the 12 months ended March 31, according to the National Association of Realtors.

At a median price of $425,000, the Chinese are also buying more expensive homes than other foreign buyers, who spent a median of nearly $276,000 on U.S. homes. And nearly 70% of those pricey Chinese deals were made in all cash.

Nowhere is the influx of Chinese homebuyers felt more strongly than in California, where more than half of the homes sold to foreign buyers went to Chinese nationals.

Sally Forster Jones, an agent with Coldwell Banker International in Los Angeles, said Chinese are snapping up many of the trophy properties on the city’s Westside. She estimates that she’s sold about 10 multi-million dollar homes to Chinese nationals over the past 12 months.

“The uptick in sales to Chinese buyers started several years ago but it has increased dramatically lately,” she said.

Most of her Chinese clients are wealthy industrialists or real estate tycoons, many of whom spend less than half the year in the States.

“Some have children going to school in Los Angeles and use the homes as residences for them and [as a place] to stay at when they visit their kids,” said Jones.

China’s gross domestic product has grown by high single-digit, sometimes double-digit rates for the past 10 years, producing a lot of cash for the country’s top business people who view U.S. real estate as a safe and stable investment.

Rick Turley supervises real estate offices for Coldwell Banker in eight counties in and around San Francisco, including Silicon Valley. Many of his Chinese clients work in technology.

“The current hot spots are Palo Alto, Menlo Park and Cupertino, near Apple headquarters,” he said.

Most purchase the homes to raise their family and they pay special attention to the local school systems. Turley also has Chinese clients who buy homes for their kids. Last year, a family from Shanghai bought a condo for their daughter who was attending Stanford. The daughter has since graduated and now works at Google, he said.

Many Chinese buy homes through the U.S. government’s EB-5 Immigrant Investor program, which is considered a fast-track to getting a green card. To qualify, foreigners must invest at least $500,000 in a business that provides or preserves 10 jobs. This could be a home that is part of a bigger business project, such as a condo complex. Nearly 80% of all EB-5 visas went to Chinese nationals in 2012, according to the government.

 

Beyond California, sunbelt states in general are attracting a lot of foreign attention these days. Post-housing-bust bargains in resort and retirement areas like Las Vegas and Naples, Fla. have have gotten buyers from Canada, for example.

Four states accounted for 58% of all foreign sales. Florida had 23%, California 17% and Arizona and Texas 9% each. New York, an international business center and immigration gateway, and Virginia, close to the Washington corridors of power, both came in at 3%.

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Egypt Unrest Pushes Oil Prices Top $100

Oil prices topped $100 a barrel Wednesday, as traders feared tensions in Egypt could spread to the broader Middle East.

U.S. oil prices rose as high as $102.18 early Wednesday, the highest they’ve been in over a year.
While oil production from Egypt is negligible, the country controls the Suez Canal and pipeline, which move about 4 million barrels of oil per day. Plus, the country is one of the largest and most powerful in the Middle East and North Africa — home to about a third of the world’s oil production.
“The fear of contagion in the Middle East to major oil producers is the ultimate concern,” Matt Smith, a commodities analyst at Summit Energy in Louisville, Ky, wrote in a research note Tuesday.
Protestors in Egypt have been demanding the country’s democratically elected, Islamist president step down, saying he has not governed the country in an inclusive manor. The protests are the largest the county has seen since the 2011 uprising that ousted longtime dictator Hosni Mubarak.
Related: Eight states raise their gas tax
Seven people have died in the protests, and the Egyptian military has given the president 48 hours to resolve the dispute. Some have hinted there may be a coup, though it’s uncertain what actions the military will take. That deadline approaches Wednesday night.
Oil prices have risen about 16% in the last two months. Traders cite an improving economy, rising demand for crude oil from refiners in the United States, and problems getting supplies of light, sweet crude to market as other reasons for the price run up.

“In my mind, it’s only a matter of time before crude breaks $100,” said Addison Armstrong, director of market research at Tradition Energy, an energy brokerage based in Stamford, Conn.

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Wall St. Gains For Second Day

NEW YORK (Reuters) – Stocks rose for a second straight day on Tuesday, with market momentum remaining strong as investors grew more optimistic about the economic outlook.
Trading will likely be thin this week, with U.S. markets closing early on Wednesday and all of Thursday for the Fourth of July holiday. This lower volume could signify greater volatility, especially with the release of the nonfarm payroll report on Friday.
“While all eyes are on the payroll report, markets are holding up as investors are holding out on the hope that we’ll see higher highs,” said Todd Schoenberger, managing partner at LandColt Capital in New York. “We’ll mostly tread water until Friday, but people aren’t selling their gains.”
Wall Street has shown signs of positive momentum recently, with investors becoming more optimistic about the economic outlook since Federal Reserve officials signaled the central bank’s bond-buying stimulus policy wasn’t ending imminently.
Adding to the positive tone, Ford Motor Co (NYS:F) rose 1.4 percent to $15.96 after reporting “very encouraging” growth of 13.4 percent in June car sales.
The Dow Jones industrial average (^DJI) was up 42.60 points, or 0.28 percent, at 15,017.56. The Standard & Poor’s 500 Index (^GSPC) was up 4.23 points, or 0.26 percent, at 1,619.19. The Nasdaq Composite Index (^IXIC) was up 5.62 points, or 0.16 percent, at 3,440.11.
Equities surged in the first half of the year, hitting record highs before pulling back dramatically in June, on concerns the Fed would begin reining in its stimulus measures, which have helped fuel this year’s gains.
While markets have stabilized after a recent slump, the S&P 500 remains more than 3 percent below its record closing high.
William Dudley, president of the New York Fed, will speak at 12:30 p.m. about national economic conditions. His comments will be closely scrutinized for clues on when the Fed will begin to scale back its quantitative easing.
Data showed May factory orders rose 2.1 percent, above expectations for a 2 percent rise. Earlier in the day, the Institute for Supply Management’s New York index came in at 578.1, compared with 579.6 in the previous month.
Wall Street has shown an ambiguous attitude toward U.S. data over the past six weeks, as positive reports sparked declines as investors fretted that signs of economic strength would prompt the Fed to prematurely scale back its bond-buying program.
The Labor Department will report June non-farm payrolls on Friday, and economists have forecast an increase of 165,000 jobs.
The stock market will have a shortened session Wednesday and U.S. financial markets will be closed for Independence Day on Thursday.
In corporate news, alcoholic beverage company Constellation Brands Inc (STZ) fell 0.8 percent to $52.67 after its first-quarter earnings and revenue missed expectations.
Sources said Pfizer Inc (PFE) and Novartis AG (NOVN.VX) may make preliminary bids for Onyx Pharmaceuticals Inc (ONXX). On Sunday, Onyx turned down a roughly $10 billion offer from Amgen Inc (AMGN).
Onyx jumped 1.6 percent to $133.40, extending its rally of more than 50 percent in Monday’s session.
Zynga Inc (ZNGA.O) rose 10 percent to $3.38 after naming Don Mattrick, the head of Microsoft’s (MSFT) Xbox business, its chief executive.
(Editing by Bernadette Baum)

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Daily Zones Analysis Blue Print 07 02 2013

Apple’s Next Big Leap Forward

Apple’s Next Big Leap Forward

Apple is yet to tap the world’s biggest pool of potential iPhone buyers: China Mobile’s customers. That is set to change. When and how will help determine whether the U.S. technology company’s flagging stock can regain momentum.
At about $395, Apple’s shares have fallen 44% from an all-time high hit last September. Once the most valuable company in the world by market capitalization, it recently ceded that crown back to Exxon Mobil. Adjusted for net cash, its market cap also has just been surpassed by archrival Google.
AP A man leaves an Apple store with an iPhone and an iPad in his hands in central Beijing.
A big concern weighing on Apple is that the tailwind from increasing distribution for its most lucrative product has dissipated. When the iPhone first launched in 2007, it was sold by just one carrier, AT&T, in just one country, the U.S. That is now up to 275 carriers in 114 countries, says Strategy Analytics.
The most glaring omission is China Mobile, the world’s largest wireless carrier with more than 700 million subscribers. Among them are about 80 million wealthier ones that can afford Apple’s pricey smartphone, estimates HSBC analyst Tucker Grinnan. And of that elite group, more than half may be likely buyers of the iPhone, considering that Apple’s market share of high-end smartphone sales in China is 55%, according to HSBC. Indeed, more than 20 million of China Mobile’s customers already use “unlocked” versions of the iPhone on the carrier’s aging 2G network.
For Apple, which sold 261 million iPhones in 2012, those extra tens of millions of potential unit sales represent a big opportunity. Pressure is increasing, too, as Apple’s market share for all smartphones in China, high- and low-end, dropped to 9% in the first quarter from 13% in the same period a year before, according to Strategy Analytics.
So Apple investors have anxiously awaited some sort of deal, especially since the fall 2012 launch of iPhone 5, which is the first model that is compatible with China Mobile’s 3G network technology.
One reason a deal hasn’t been struck may be that China Mobile’s controlling shareholder, the Chinese government, doesn’t want the company to offer the iPhone yet. Allowing the biggest fish in China’s telecom sector to carry Apple’s popular device might lead to further market concentration that Beijing would rather avoid.
A problem on Apple’s side, meanwhile, may be that it doesn’t want users subjected to a relatively poor experience. China Mobile’s version of 3G technology, called TD-SCDMA, is less reliable than those supported by smaller rivals China Telecom and China Unicom.
Still, several factors suggest the companies will strike a deal eventually.
First, China Mobile is planning to rapidly roll out its next generation “TD-LTE” network. The iPhone is compatible with that technology as well, which will offer much faster data speeds for users. And Beijing wants to promote the technology world-wide because Chinese companies like Huawei sell supporting equipment. With a $31 billion capital-expenditure budget for 2013, nearly as much as AT&T’s and Verizon Communications’ combined, China Mobile already is a big buyer of TD-LTE equipment. Getting the iPhone onto that standard would give it additional momentum.
Meanwhile, the risk of fostering additional market concentration may be mitigated later this year if, as some expect, Beijing allows consumers to keep their numbers when they switch networks, as happens in the U.S. That will make it easier for China Mobile customers who have wanted to jump to rival carriers to do so.
One potential sticking point in formulating a deal is high smartphone subsidies. To date, Apple’s significant market power has enabled it to extract sweet deals whereby carriers subsidize much of the iPhone’s cost. They do so because they can get subscribers locked into expensive wireless plans.
But the big financial hit that Apple’s terms appear to have inflicted on rivals won’t have been lost on China Mobile. China Unicom was the first Chinese carrier to get the iPhone, in late 2009. But its accounts show that from that year through 2011, while absolute operating profit in its mobile business increased, the margin fell to 27% from 37%. And China Mobile likely has a strong negotiating position due to its size and Apple’s need to reignite momentum.
A wild card is the lower-end iPhone that Apple is working on. This could actually help the two companies reach a deal because it would enable China Mobile to attract customers in the fast-expanding lower end of the market while likely not breaking the bank in terms of subsidies. For Apple, the profit impact from widening the potential market for its smartphones is less clear. That is because it also may eat into sales of more lucrative high-end devices, eroding margins.
So how important is China Mobile to Apple? It has historically made percentage gross margins on the iPhone in the mid-50s, according to Sanford C. Bernstein analyst Toni Sacconaghi. Even assuming Apple makes only a 40% gross margin on iPhones sold through China Mobile, taking into account the latter’s potential negotiating leverage, selling 25 million more iPhones in the first year could mean an extra $6 billion of gross profit.
That would be a welcome boost: Analysts forecast Apple’s gross profit at $69 billion for the fiscal year ending in September 2014.
With technology and strategic aims increasingly aligned, for the iPhone and China Mobile, it still is a question of when, not if. A revolutionary new product could always be in the works when it comes to Apple. But a deal in China represents one of the company’s biggest potential profit bumps on the immediate horizon.
Write to Rolfe Winkler at rolfe.winkler@wsj.com

Market Volatility

Expect More Market Volatility This Year

Investors, buckle your seat belts. Markets in the second half could be driven by more volatility, though most strategists expect equities to ultimately end the year higher than their current levels.

 “The recent volatility in stocks and bonds will likely be with us for the foreseeable future (at least a few months),” wrote strategists Stuart Freeman and Scott Wren of Wells Fargo, which has a year-end target of 1,650 to 1,700 on the  S&P 500 . “But we continue to believe any pullback is an opportunity to add to stocks in sectors sensitive to a continuation of the economic recovery. Our recommendation is to put money to work now.”

Strategists expect markets to continue zigzagging near-term, as investors struggle to adjust in the face of a rising yield environment and grapple with the reality that the Federal Reserve could begin to wind down its $85 billion a month bond-buying program before 2014.

(Read More: ‘Correction Not Over’ in Market: Pro )

 “We’re in for a long-range-bound summer,” warned Tim Biggam, chief market strategist at MoneyBlock. “Volume is still anemic, and the catalyst that drove us to these levels [the Fed] may not be there anymore.”

 Major averages have been on a roller-coaster ride since Federal Reserve Chairman  Ben Bernanke told Congress in May that the central bank may reduce the pace of bond purchases in the next few meetings if policymakers see indications of sustained economic growth.

After the news, the S&P 500 index fell as much as 7 percent from its intraday record high in May. The Dow Jones Industrial Average has logged triple-digit moves in 15 of the 19 trading sessions in June, the most in a month since October 2011. And the 10-year bond yield climbed as high as 2.66 percent earlier this week.

 Despite the swings, the Dow industrials and S&P 500 are still poised to churn out decent gains of nearly 3 percent for the second quarter. So far this year, both market indicators have rallied more than 13 percent each.

“When the Fed does eventually begin to reduce the pace of QE , they will just be taking their foot off the accelerator and certainly not pushing down on the brake any time soon,” wrote the Wells Fargostrategists. “Investors are continuing to take relatively more interest in more cyclically oriented stocks versus defensive ones.”

 Also in the bullish camp, Sam Stovall, chief equity strategist at S&P Capital IQ, said the firm raised its 12-month target for the S&P 500 to 1,780 from 1,670. 

“In the coming year, we expect to see S&P 500 multiple expansion as investors become more convinced of sustainable economic growth and [earnings] increases, and more comfortable with the gradual unwinding of Fed stimulus,” Stovall wrote in a recent note. “We also increased our recommended exposure to U.S. equities to 50 percent from 45 percent, suggesting that investors use projected near-term price declines as opportunities to add to holdings, while reducing the cash exposure to 10 percent from 15 percent.”

History shows that strong market momentum in the beginning of the year bodes well for a robust annual performance, Stovall said.

(Read More: ‘It’s the Bottom’ for Stocks: Gartman )

“We have momentum from a strong start to the year-there have been 26 times since World War II that the market was up both January and February, and in all cases, the market posted an average total full-year return of about 24 percent,” he noted.

 In the meantime, strategists such as Biggam recommended that investors take advantage of the recent sell-off in commodities.

“Gold, silver, and other commodities have felt the brunt of the selling,” he said. “So if you’re not exposed to the metals complex, it’s not a bad time to be looking to add to your positions, unless we head into a huge deflationary spiral.”

 In addition, Biggam said, investors should consider adding  options to their portfolios.

 

“The nice thing about options over stocks is that whereas you need movement to make money in stocks, you can still make money in options in a sideways, range-bound market,” he said. “It’s a nice blend in an overall portfolio.”

Some strategists expressed caution about the second half. Bruce McCain, chief investment strategist at Key Private Bank, suggested that gains for the year have mostly been made and that investors should prepare for an upside at the beginning of 2014.

“The market’s still reasonably valued, but expectations are high for the end of the year,” he said. “Slow and steady growth can allow us to achieve modest appreciation through year-end, particularly if we pull back toward the 1,500 to 1,550 area on the S&P 500 over the next coming weeks. You’re likely to be disappointed that we’re not seeing faster growth in the economy. … But we’re setting up for a more decent 2014.”

-By CNBC’s JeeYeon Park. Follow JeeYeon on Twitter @JeeYeonParkCNBC.

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Futures Steady Data Ahead Fed Speakers & Initial Claims

MADRID (MarketWatch) — U.S. stock market futures moved higher on Thursday ahead of a key indicator of consumer spending, along with data on weekly jobless claims and a trio of Federal Reserve speakers.

Futures for the Dow industrials (CBE:DJU3)  rose 25 points to 14,849, while those for the Standard & Poor’s 500 index (GLC:SPU3)  gained 2.9 points to 1,598.40. Futures for the Nasdaq 100 index (GLC:NDU3)  rose 5 points to 2,885.

The Next 24: Will Fed soothe markets?

Bed Bath & Beyond nears 52-week highs as it releases earnings. European stocks look to extend rally. Fed officials hope to soothe markets.

Those gains came on the heels of another strong day for Wall Street, after a downward revision to growth data fueled hopes that the Fed will pare its bond-buying program later rather than sooner.

“Clearly investors are now hoping that the Federal Reserve will rethink their decision to taper stimulus measures and instead will continue with such measures, which seem to be the key catalyst driving the markets at the moment,” said Shavaz Dhalla, financial trader at Spreadex, in a note.

Investors will get another batch of data Thursday. The last big indicator of the week comes at 8:30 a.m. Eastern Time, when consumer spending numbers will be released by the Commerce Department. Economists polled by MarketWatch expect spending to rise 0.3% in May, with incomes up 0.2%.

At the same time, weekly jobless claims are expected to show a drop to 345,000 from 354,000 the prior week.

Figures on pending home sales will be released by the National Association of Realtors at 10 a.m. Eastern.

Also due to attract attention, three Fed speakers are on the calendar: New York President William Dudley at 10 a.m. Eastern, followed by Fed Gov. Jerome Powell at 10:30 a.m. Eastern and Atlanta Fed President Dennis Lockhart at 12:30 p.m. Eastern

BloombergEnlarge Image

A “for sale by owner” sign stands outside a home in LaSalle, Illinois, U.S., on Friday, June 7, 2013.

On Wednesday, Wall Street stocks jumped after a revision to gross domestic product data calmed worries that scaling-back of the Federal Reserve’s bond-buying program would come soon. The Dow Jones Industrial Average (DJI:DJIA)  finished with a gain of 149.83 points, or 1%, at 14,910.14.

The S&P 500 (SNC:SPX)  climbed 15.23 points, or 1%, to 1,603.26.

In overseas markets Thursday, Japan and Korean stocks rallied on the heels of that U.S. growth data and Fed-related hopes, though mainland Chinese shares continued to struggle. MostEuropean stocks rose, but gains weren’t enough to push indexes into the black as investors awaited U.S. data.

In other markets, gold prices pushed higher as investors stepped in after nearly a 4% drop to multiyear lows in Wednesday’s session. Crude-oil futures rose, aiming for a fourth straight day of gains as Fed tapering fears calmed.

The dollar fell across the board after six straight days of gains.

stocks and bonds

Shares & Bonds Rebound After Soothing Central Bank Talk… While Gold Slumps!

LONDON  – World stocks and bonds had a second day of big gains on Wednesday, lifted by healthy U.S. data, moves by China to calm banking sector fears and supportive signals from Europe’s central banks.

All combined to soothe nerves about plans for a reduction in U.S. stimulus that have prompted large sell offs over the past few weeks.

Gold and silver, however, both slumped to near three-year lows as investors continued to dump assets used as a safety net in case central bank money printing went wrong or fuelled a spike in inflation.

Markets from safe-haven U.S. Treasuries to riskier stocks and emerging market assets have dropped on worries about the impact of an end to the U.S. Federal Reserve’s support program, and as signs emerged of a credit crunch in China.

After both the U.S. and Asia’s main share and bond markets had risen overnight, Europe’s investors shook off a shaky start to send the FTSEurofirst 300 (.FTEU3) index of top shares up more than 1 percent for a second day running.

Bond markets also continued to claw back ground although investors remained wary that the rebound could give way as markets take time to get used to the new environment.

“At this point in time, having seen a incredibly violent selloff in the treasury markets that took everything with it, there is a certain amount of settling back going on,” said Kit Juckes, a market strategist at Societe Generale in London.

“I’m not sure we are done with position adjustment yet though. We are not even done with month-end (adjustments) properly, so I wouldn’t declare this as anything more than things are looking a little bit quieter.”

Precious metals were not looking quieter, however. Gold fell 2.3 percent to $1,229 an ounce and silver dropped 4 percent to leave both at their lowest levels since September 2010.

Data on Tuesday showed U.S. consumer confidence jumped in June to its highest level in more than five years, supporting the view that the Fed will press ahead with plans to reduce its $85 billion a month support program later this year.

“It seems as though the momentum is increasing in the selloff (in gold),” said Viktor Nossek, head of research at Boost ETP, an exchange traded products provider.

“The case for safe havens assets simply isn’t there” he added. “The stock market has recovered, indicating people see further stability ahead especially after the signals from the Chinese authorities that they won’t allow a complete meltdown in the money markets.”

SOOTHING SOUNDS

After more than a year of steady gains in stocks and bonds, the Fed’s shift of position last week has sparked heavy volatility across asset classes.

As new data showed Europe’s economy remains in the doldrums, the region’s policymakers were again out in force to try and calm any market jitters.

Both the European Central Bank and Bank of England said on Tuesday that, unlike the Fed, they remained in full support mode.

ECB head Mario Draghi reiterated the message again in Paris on Wednesday adding he and his colleagues would look “with great attention to the potential volatility consequences that financial markets have undergone in the past few weeks.

Bank for International Settlements General Manager Jaime Caruana also told Reuters in an interview the BIS was not demanding immediate action on global exiting and that the timing of an exit had to be determined by each central bank individually.

The annual report from the BIS – known as “the central banks’ central bank” – provoked a storm of response at the weekend after saying an exit from accommodative policies would only become harder over time.

Draghi’s comments helped pushed the euro to a three-week low of $1.3035 against a broadly stronger dollar (.DXY) and helped trim yields on the peripheral-economy euro zone bonds which have jumped by more than half a percent over recent weeks.

Spanish 10-year yields dropped 16 basis points to 4.88 percent while equivalent Italian yields were 14 bps lower at 4.74 percent. “The ECB is pretty dovish” a trader said.

As the plunges in gold and silver grabbed most of the attention in the commodities market, oil also remained under pressure at just over $101 a barrel and growth-attuned copper fell 1.6 near a three-year low.

“The market is still concerned about the Chinese growth outlook,” said economist Alexandra Knight at National Australia Bank in Melbourne in reference to the slide in copper.

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Why Now Could be The Time To Be Bullish

Global markets, after rising nearly 20% since December… have abruptly reversed. Federal Reserve Chairman Ben Bernanke’s comments on June 19 led investors to fear the Fed will soon exit its $85 billion a month quantitative-easing program. It isn’t going to happen.

Central Bank Monetary Expansion

Around the world central banks are rapidly increasing their balance sheets. In the U.S. the Fed’s $85 billion a month monetary expansion continues unabated. In Europe, the supply of euros continues to grow(You can bet that the next euro-crisis will be solved by even more euro-creation). In Japan, the Bank of Japan pledged to double the country’s money supply in April in a desperate attempt to banish deflation.

When crises arise in these heavily indebted countries, the least painful solution always is to inject money into the system. Talk of slowing or, (heaven forbid) actual selling of bonds and Mortgage Backed Securities (MBS) has been just that — talk.

Monetary expansion is here to stay. Central Banks just don’t have the backbone to tighten if it causes economic pain. Look at what’s happened when just the rumor of slower of Fed bond buying began. Long term interest rates rocketed up. The 10 year treasury note, currently yielding around 2.5%, is up 80% from its record low of 1.39% last July. Can you imagine what will happen if the Fed actually starts selling bonds or MBS? Who will buy them?

It’s true, continual monetary expansion risks eventually setting off inflation. But the Fed looks on this as the lesser of the two evils. And as we are now trending toward lower growth, tightening simply will not happen.

Japan’s Lesson? Be Careful What You Wish For

Japan will be the poster child for monetary expansion as it doubles its money base. It will be interesting to see if they really can slay the deflation dragon. So far results are mixed. Both the yen and Japanese equities have fluctuated wildly. At this point equities are up, the yen is down… but inflation has yet to appear. So maybe it kind of works. One thing is for sure: The yen’s former safe-haven reputation is in tatters.

Disinflation is a hard beast to kill. We will see how successful the Japanese are at it… and what the unintended consequences are. Hopefully, it is not a devaluation currency war.

New Trends And How To Invest

Investors see world-wide monetary debasement as sooner or later leading to inflation. It’s simple math: The more money you create the more the currency is debased. Right now we may have the lull before the inflationary storm as monetary velocity is at record lows. Once that starts to change, all the newly created money will flood into the system, sparking inflation.

Investors also realize that increasingly indebted, cash-hungry governments will raise taxes (it’s already starting). And, as Cyprus has shown, if things get desperate they may confiscate assets. With that in mind, people are shifting money into safe-haven assets which are liquid, hard to track, portable, and difficult to confiscate.

For wealthy individuals it may be fine art, diamonds, jewelry, coins, and equities. For large money managers it may be the U.S. dollar (the least ugly currency), equities, or perhaps real estate in low tax countries. Capital will always flow first to where it feels safe, and second, where it earns the best return.

Stay Away From: Mid to Long-term bonds of all stripes. High-quality short term bonds are safe but have no return. Mid and long-term bonds have some return but rising interest rates erode value. Cash deposited with a highly rated financial institution is good place to ride out crises but remember, cash loses value long term in an inflationary environment.

Bonds may or may not crash but downside risk far exceeds the upside risk. In my opinion the odds are stacked against you with bonds. If you believe we are truly entering a worldwide depression, then yes, you may make money with longer term bonds.

If you, like me, do not see worldwide markets on the edge of apocalypse consider Blue-Chip Equity ETFs: Large blue-chip international companies are one of the safest, most liquid asset classes available and ETFs will give you positions in a broad basket of companies – largely eliminating corporate risk.

SPDR Dow Jones Industrial Average (DIA) holds some of the world’s best international companies. Don’t be fooled by the Dow nomenclature. Most of the companies are international in scope, not confined to the U.S. Largest holdings for DIA are International Business Machines Corporation (IBM), Chevron Corporation (CVX), and 3M Company (MMM). For more information on DIA see here.

Expert, Professional Management — For Free: If you want the best professional management for your money consider buying Berkshire Hathaway (BRK.B) (BRK.A). The Berkshire Hathaway companies have positions in more than 80 businesses including insurance, utilities, energy, finance, manufacturing, retail, and others. Best of all: the companies are run by investing legend Warren Buffett.

Berkshire Hathaway’s quarterly profit just rose 51%. Shares were at record highs before the current pullback. One negative perhaps: The Berkshire Hathaway companies pay no dividends — returns are all reinvested. Considering the recent increased taxation of dividends this may be a plus. See here for more information on Berkshire Hathaway’s holdings.

Technology: One criticism of Mr Buffett is that he is underinvested in technology (IBM is an exception.) This is understandable; Mr. Buffett is 82 years old and has stated he does not believe in investing in companies whose business model he cannot easily grasp. Since the latest technology, as evidenced by smart phones, is often only a year or two old, it’s hard for most of us too.

But if you want to want to invest with relative safety in fabulous growth companies such as Apple (AAPL), Microsoft (MSFT) and Google (GOOG) look at Technology Select Sector SPDR (XLK). This ETF invests in the largest market cap tech stocks so you are investing in the most successful companies (Apple is the largest holding of XLK, comprising 14% of asset value.) See here for more on XLK.

Precious Metals: I can’t help but view the recent plunge in gold and silver prices as a buying opportunity. The precious metal markets have now undergone a severe correction and prices are likely now near bottom. Consider buying some gold or silver coins and perhaps invest in Market Vectors Gold Miners ETF (GDX) or Market Vectors Junior Gold Miners ETF (GDXJ). These ETFs are nearly 60% off their highs of just a couple years ago.

Summary

The long-term bull in the stock market is alive and well. Currently markets are correcting so now may be an excellent time to invest.

Not a good stock picker? Don’t worry, with the above ETFs you need not be. DIA is an index based fund — your investment does whatever the Dow does. BRK-B is an opportunity to invest with Warren Buffett, one of the best stock pickers around. GDX gets you into large precious metal miners, many of which up to 60% off highs of just a couple years ago.

Central banks are likely to continue their money expansionary ways — despite talk otherwise. Since high-quality equities are one of the better non-printable assets around, they may be the best choice for most of us. I suspect most of us lack the expertise to pick diamonds or fine-art, I know I do.

No market goes straight up (or down) so view corrections, such as we are now having, as buying opportunities rather than a harbinger of a crash.

Additional disclosure: Looking at BRK.B.

Disclaimer: This article expresses the author’s opinion and is informational only. It is not a recommendation to purchase any of the ETFs or equities mentioned. Investors need to consider their personal situation carefully before any investing.