Posts Tagged ‘Markets’

Why 2010 May Be Quite Similar to 2009

01/08/2010

If you did well this past year, I guess that’s a good thing!

Friday is my market day and it seems that with the new year some realignment of the big picture is in order. Note of optimism: When you know what’s going on you can properly position yourself to benefit from its leverage. No condition is ever entirely good or entirely bad. So here’s what’s going on…

“Sentiment Oscillation” or “Paradigm Shift”.
That’s the reason for all this mayhem. As general conditions continue to change (as they have since 2007), so will the general mindset. From growing to sustaining. From net profit to net loss. From Investment to saving. From short-term gains to long-term advantage.

Let’s focus solely on economic facts:

The How:

  1. Internationally Governments have already allocated rescue money that will be spent over the next few years
  2. They have also lowered Interest Rates which spurs a higher inflation of credit
  3. When Rates rise savings gains precedence and production falls decreasing the supply of goods and labor
  4. Less supply causes over-demand and higher prices for real goods and commodities
  5. When commodities prices rise, they tend to cut into expenses thus lowering profits
  6. Lower profits and demand for cash decrease momentum of corporate investment and the stock markets decline
  7. Lower Markets lower the sentiment of the consumer and spending decreases
  8. Less sales means less revenue and retail venues under pressure go under causing a Commercial Real Estate bust
  9. With Investing and Equity down and out people turn to Savings and Cash
  10. With Bond markets already pressured by higher Interest Rates and a debt laden currency people begin to turn to Precious Metals and Tangible Goods

Why:

  1. Someone say Bailout? Trillions have been spent and Trillions more will
  2. With the lowest Interest Rates in decades credit is merely being deferred
  3. Businesses decide to save rather than reinvest profits
  4. This one’s tricky but the former ALWAYS leads to latter
  5. Even if businesses raise prices, profits will fall
  6. Bond yields begin to resemble stock dividends only with less apparent risk
  7. Higher stock prices are always met with consumer exuberance
  8. This has already begun but has been prevented by soon ending rescue funds
  9. With higher Interest rates CD’s and Money Market funds begin to make sense again
  10. This is what happened during the 70’s as Real Interest Rates remained negative

Investing Advice: If you are going to “invest”, you must understand that the next 10 years will be similar to the last. Much higher prices for real goods, much lower valuations for equity and paper. This is because we’re doing the same things over (lower rates, more issuance of credit, more debt to pay off). These are times to seek under-valued out-of-favor securities.

Business Advice: If you are going to do business, I believe you will be better off than many people trying to make ends meet on unemployment checks and the reason for that is the ability to be proactive. Your success is what you make of it, and if you’re determination is deep then no recession or even depression could abstain it. Focus on providing customers with durable and consistent value.

Fundraising Advice: If you are in the legions of the eager financiers trying to keep the lights on in your non-profit, raising for a local charity or even seeking capital for your small business, remember that people are always searching for the best place to put their money. Your job is to provide them with the sense of value that its going to the right place for the right reasons.

Have an awesome weekend!

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How to Never Watch a Bad Movie Again!

08/19/2009

Have you ever realized smack-dab-in-the-middle of a chick-flick/Matrix-mess/low-production film that you’ve just wasted an hour and a half of your precious time you could have been watching re-runs of Friends?

Enter Criticker.

Criticker, a movie-suggestion engine, crunches the numbers on your personal movie rankings and matches them to the lists of others.

You start off by ranking ten movies on a 0-100 point scale. After you have at least ten movies ranked, Criticker generates a list of users who have similar taste in movies and see what movies they have liked that you may have overlooked.

Criticker has a social element with a messaging system and a forum for movie discussion. Criticker is a free service and requires no login to test the service out. A free account preserves your rankings between visits.

Let the all-nighters roll!

Thoughts on the Economy

08/16/2009
I don’t like to post on markets that often, as I reserve this blog for more optimistic success-related material that focus more on proactive personal-development than on reacting to news and sentiment.

Nevertheless, in the dog-eat-dog world we live in, I believe its highly important to have a sound knowledge of what the external forces that govern our lives entail.

The one theme I keep noticing time after time in the selective articles I read (no major media, only hand-picked analysts who have proven themselves over time) is: Deflation or Inflation?

Unfortunately, many many people are misinformed when it comes to money. It’s not that they lack an MBA or didn’t understand what they’ve been reading, rather that they misinterpret what seems to be a paradox, but goes hand in hand in reality.

Deflation in Austrian terms is defined as an contraction in the loans of credit provided by a Government (pulling down assets). Inflation is its cousin-scenario where credit is expanded wildly (pushing up assets).

The mistake many make is in confusing the value of the Dollar and the credit/money supply. One is demand, while the other is supply. They may work either together or against each other.

I believe that what we are about to witness, on a grand scale, is a whiplash effect of contracting credit and strengthening currency on one hand, and a failing economy on the other. This will crush the average debt laden consumer as they battle with BOTH rising costs of interests and debt AND the rising costs of living due to monetary inflation.

This is due to a currency who’s printing presses are under no control and MUST outrun any effects of deflation – from real estate, stocks and Dollar buying. The irony here is that the Fed will soon have to choose between letting the Dollar appreciate on its own or pushing it down further. Chances are that they will always choose a falling currency over a rising one due to: a) its bi-centennial policy of monetary easing, and b) the fact that while the US has experienced an intense deflationary scenario (1930-38), we have yet to experience a “hyper-inflationary” one – induced by over-supplying credit and money – at least since Continental scrip was flushed away following the Civil War.

The savvy individual who will deflect such a predicament will be the low-debt high-asset frugal-consumer. This will eliminate high interest payments, appreciating assets and low expenses.

Note that the above applies to both the lower and upper class, since interest on debt and assets effect both the same.

Advice: Own Things! Real estate, commodities, physical gold and silver and strategic undervalued assets all comply. Areas of extreme caution: Stocks of companies that are either overvalued or financially unstable, toxic derivatives and high-interest debt.

~~~

It should also be noted that the generational-trends (10-17 year) remain intact: a) generally rising interest rates b) falling P/E ratios in stocks, and c) a falling Dow/Gold ratio.

This implies that Gold acts a safe haven regardless of whether the Dollar/Economy/Market does well since what we are expecting is not a monetary or nominal increase in price but an aggregate reversion to mean and true value.

Over the long run (next 7-10 years) bonds/fixed-income will mostly outperform capital appreciation for stocks, and hard assets will continue to outperform fiscal contracts.

The mindset will shift from growth to value and from wealth creation to wealth preservation. There will be those who do well, but only those who shy away from the general sentiment of things and focus on their own growth and productivity.

Friday Markets and Musings

07/31/2009

5 Freedoms you lose with universal health care: 1. Freedom to choose what’s in your plan. 2. Freedom to be rewarded for healthy living, or pay your real costs. 3. Freedom to choose high-deductible coverage. 4. Freedom to keep your existing plan. 5. Freedom to choose your doctors.

Jeremy Grantham, Marc Faber and Jim Rogers all agree: Stay out of China! As it is “dangerously unbalanced and very likely to come unhinged” over the next few quarters. China’s is much lower than reported, possibly at only 2%. “The Chinese government is one of the few governments in the world that knows its GDP numbers three years in advance. I’d be careful.”

Storing Gold Offshore
. Austria is the new Switzerland. Das Safe will ensure your gold – or anything else – anonymously, for $560 a year. all you have is the box key and a PIN code to access the secure room. Feel a little bit like Jason Bourne!

Oil seems ready to run back to $50. Inventory levels, technical charts, fundamental demand gaps due to employment and economics.

The bull market in bonds continues.

Jim Rogers isn’t shorting anything right now, not even treasuries. He doesn’t see anything “in great excess”, believes the Fed can steer the bond market for now and cites commodities as the best place to invest due to inflation concerns.

The Congress Indicator. Recess is about to begin. “About 90% of the capital gains over the life of the Dow Jones Industrial Average have come on days when Congress is out of session.”

Cure for radiation poisoning found?

The Credit Crisis Visualized

07/30/2009

An entertaining and creative explanation of what led us into this debacle.

The Crisis of Credit Visualized – Part I (about 7:30)


The Crisis of Credit Visualized – Part II
(about 3:45)

Glad you enjoyed!

Friday Markets

07/24/2009
Here are the top headlines of the week

Sorry I couldn’t provide the links. Will do so next time.

GE next big one to go?

Porter Stansberry: Who says that anyone who doesn’t own Verizon shouldn’t be able to call himself an investor and has called the demise of the original AT&T, GM, Fannie Mae and Freddie Mac, now says that Continental and GE are net to go. GE has relied on its A+ rating to manipulate its financial program. But now it seems to be following CIT by-the-click.

Doug Casey: Every investor should own at least some physical gold in their personal possession.

FDIC chairman Sheila Bair told a Congressman there would be at least 500 more bank failures 10 times as many as have already occurred this year.

Richard Russel on Gold: In order for the US to justify the recent surge in spending and bailout money, rather than renege on its death, they will instead rid it through inflation and taxation. The only way for the average citizen to defend themselves? Gold. “Gold will be the last man standing. Gold is the secret, unstated world standard of money. It can’t be devalued, multiplied out of thin air, cheapened or devalued or bankrupted. It has no debt against it and isn’t the product of some nation’s central bank. Gold is pure intrinsic wealth. It needs no nation to guarantee it. Gold is outside the paper system.” On Stocks: “It’s clear to me that we are in a rally within a secular bear market within the confines of a long-term or secular bear market”.

William O’Neil: Stocks are in the midst of a bull market that began in March. We say cut every single loss when a stock goes down 8 percent below the price you paid for it. It’s like taking a little insurance policy.

Joe Biden: ‘We Have to Go Spend Money to Keep From Going Bankrupt’

Gary Shilling: Stock Market Will Crash As US Consumers Retrench. The economy won’t start to recover until 2010 as the US consumer is cutting back fast. Spending will drop from 70% of GDP to 60% as consumers pay down debt and go on a saving spree. Most recessions have a positive quarter or two of GDP, so if we get one, it won’t mean anything. The S&P will plunge 35% to 600 by the end of the year. Buy Treasuries.

Gold Bullion or ETFs? Hedge fund manager David Einhorn of Greenlight Capital had roughly $390 million invested in the GLD (SPDR Gold ETF) and then sold all his shares in favor of physical bullion. If you hold for a long time, bullion is likely cheaper. If you trade short-term (or in smaller sizes), GLD is likely better.

Jim Rohn: “It’s about your philosophy, not the economy”.

10 Things you should know before buying a car

Buffett’s 3 Rules for investing. 1) “If it seems too good to be true, it probably is.” 2) “Always look at how much the other guy is making when he is trying to sell you something”. 3) “Stay away from leverage”.

Lobster is now cheaper than hot dogs! LOB (not a real ticker) down from $10 to 2.25.

Buffett Dumps Moody’s (and it’s about time). “Moody’s and its rivals did such an awful job on the debt and mortgage ratings game”.

Goldman Sachs: S&P 500 to Rally Most Since 1982. Improving earnings will spur the steepest second-half rally since 1982. Expects S&P at 1000.

Stocks Both Buffett and Soros Hold: ConocoPhillips, Wal-Mart, Lowe’s, Home Depot, NRG Energy.

On Stock Values

07/17/2009
Some Stock Advice from Dan Ferris, editor of Extreme Value

I don’t expect investors will make much money in stocks on the long side from current price levels. Dividend cuts, weak earnings, and unattractive valuations are telling you to be careful. Most long term returns in stocks have come in from dividends, not capital gains (because arbitrageurs and institutions make it too hard for the majority of investors). On the dividend side, Procter & Gamble has raised its dividend every year for 53 years. ExxonMobil has done so every year for 27 years. Most stocks are just too expensive compared to earnings. The S&P 500 is trading around 16x earnings. And with banks failing, 10% unemployment, and the middle innings of a once-a-century meltdown. With housing and debt in charge of the economy now, this means a worse outlook for earnings and stocks. In the 1970s valuations sank for a decade through the Great Inflation.

Year P/E
1974 7.3
1975 11.7
1976 11.0
1977 8.8
1978 8.3
1979 7.4
1980 9.1
1981 8.1
1982 10.2
1983 12.4
1984 9.9
Average P/E 9.5

Based on historical standards, the ultimate bottom could be another 39% below the March 2009 low of 667 (12x S&P 500 earnings estimate).

For more information on P/E ratios see:
Investopedia – The P/E Ratio
About.com – Understanding Price to Earnings Ratio
Sentiment of Success – What is the Price To Earnings Ratio

Some Market Analysis

07/03/2009
Some readers are looking for investment ideas. I suggest we go over each asset class one by one:

Precious Metals: Everyone MUST own gold and silver because of what’s coming. Inflation IS a problem, it just hasn’t had an impact, but it’s built into the system. It’s simple: get some cash, go to your local coin shop (www.find-your-local-coin-shop.com) and load up on however much you could afford. (Bars only, no coins please).

Real Estate: In America? Forget about it. The real estate market remains overvalued on many scales and will recover when either no one has any money to buy a home or when interest rates are at 20%. Until then its like chickens without heads trying to catch a hat on a windy day. Ain’t gonna happen. (Buying foreclosures: Good strategy, bad timing).

Stocks: Many people did extremely well over the past few months. But the past is the past. I think markets will disappoint over the next few months, due to lack of volatility and motion, making traders mad. They say: 3/4 of stocks follow the major indexes. If you want to do make money stay in the other 1/4. (Biotech comes to mind).

Bonds: You mean lending money for zero return? Not my style. Or do you mean lending money to financially insolvent companies? Definitely not my style. The only reason people buy bonds is for safety and today most don’t even fit that category.

Commodities: This is probably the trickiest of all. It is after all the decade of commodities and with inflation around the corner it should payoff. Maybe its the hated and contrarian trade everyone is looking for. Maybe we’ll look back in 5 years and say “Commodities! Duh!”. Then again, maybe not. If commodities do rally, you’re better off in a concentrated position like gold.

My suggestion: Just take in your dividends and save your paycheck. Buy silver if you don’t have any. Jim Rogers says “I want someone to put money in the corner and then I just go over and pick it up”. I like stupid investments – ones that are so obvious yet mostly ignored, even ridiculed. That way I don’t have to think much and I make also make money.

The Next Leg… Down?

05/10/2009
Some Investment Advice

Looking at the big picture, something I do often, one recognizes that the world ain’t all that it’s made out to be. I have a heavy hunch (based on educated analysis) that the stock market rally won’t last another month and that another wild flight to safety is about to begin.

But what would set this off? So what if companies are overvalued for the moment? Buy and hold would still pay off over the long term. Even (perma-bull) Jeremy Siegel will tell you, had you bought after the rout in 1929 when the Dow fell over 50% – even before the next 60% leg down – you’d still be making a profit by the following year, and by 5 years out you’d be looking at gains over 7% annualized. Not bad you say!

But as the old man in Jesse Livermore’s pub would tell him “In bull markets you buy, in bear markets you trade”. And this is no bull market. Not by a long shot! But who says this bear market rally is over?

One must remember that the sentiment changes drastically between super bull and bear market decades. In bull markets its all about competition, about the best stock tips, about the nicest home in Monte Carlo. In bear markets, it’s about your skin, about not losing as much and about being able to make rent or payroll.

While the speculative cards have all been set out on the table, the actual dealing has yet to begin on a grand scale. Corporate bankruptcies will rise, and with them, some of the greatest companies of our time. So far, this has mostly been in the financial sector; Bear Sterns, Lehman and a pileup of of small banks. But what about infrastructure, manufacturing, retail? Not to mention more commercial real estate losses.

It seems that together with people’s loss of fear for Dow 6,800, they have also lost all sensitivity to the fact that their companies may not make it all together. In bull markets there are companies that do well and those that do better.

In bear markets there are also two types of companies; those who make it and those who don’t.

“Caveat Emptor” (Buyer Beware).

May Market Musings

04/30/2009
Sell in May and Go Away?

I still don’t know what to make of this one. On the one hand, this is the time when most investors take their profits and go on summer vacations. Also while part of congress takes a break, there isn’t much action in the legislation arena. On the other hand, we do have the possibility of another “January Effect”, in the sense that while many panic out of their stocks, investors grab the bargains that they were barred from during the rally.

I believe that while we are value bullish, we must also be growth bearish. And while it is true that this bear-market rally may have some more room to run (much more) I think it is wise for those who made their money off the rally to sell at this point and pick up the bargains later on.

How To Play
In my opinion the best way to play this is to set a trigger to sell if the shares fall by a significant amount in one day (say 3-4%). This may hint that a selling wave has begun. Likewise if shares continue to rally, as they may, they will probably rally hard and fast, and then break down as all rallies eventually do.

So while energy, communication and transportation stocks have plenty of room to run over the next few years, I would rather be trading this bear market, than buying-holding and praying, that this rally doesn’t soon fade into another 1975 fiasco.

The Last Major Bear Market
Just some background on 1975… As the bear market and economic downturn of 1974 started taking its victims, there was a bear market rally amidst it all. Many investors called the “bottom” and loaded up on shares, only to find their portfolios sliced once again, and then plunging through their pre-determined support lines. This caused a mass panic with major news editirs such as Forbes and BusinessWeek writing dooms-day headlines such as “Dow 400?” and “Is there a bottom?”.

All tops are created in an environment of exhuberance and all bottoms are carved into one of desperation and panic. These events have yet to occur – although the fears of bank “nationalization” did come close. I don’t think we should even expect a full recovery in stocks until the Fed begins raising interest rates and cash value (including gold) rises.

09/18/2008
Covering The Shorts!

If this is a hurricane, then I believe we are smack dab in middle of it!

Based on our 1973-74 Trading Radar, I believe we are near an intermediate term bottom! I know it sounds crazy, but I think its just as senile as buying back in March. Bear Sterns had just failed and Gold was at an all-time high. Rates were being cut like crazy and the Fed was lending to anyone who can possibly need it. Shortly thereafter the Dow rallied 1,400 points!

Now, I am not saying to buy stocks! But I do believe that the short-term short-trading opportunity has passed us with the Dow falling over 975 points over 2 days. Stocks ill probably trade within a confined 12,000-10,500 point range for the next few months.

I may be wrong as capitulation may be in order. Therefore I suggest that you at least consider covering. If we do cover and stocks fall incredibly – 1930s style – then we lost a good opportunity. If they rise slightly then we are due to see the 10,500 level often anyway.

Divide your position into 3. Sell 1/3 on the Morrow! Sell another 1/3 when you see supported buying on larger volume. And Hold your final 1/3 until capitulation.

Start building up capital. The major selling opportunity has seemingly passed.

05/28/2008
Gotta’ Love the Poems

…and some thoughts on your future.

Dr. Suess talking SIVs, and “Sell in May, Go Away”. Just adds a tad more humor to our market conquering quests.

So here’s one from Howard Katz at The Gold Bug

Oh, economics makes no sense
There’s no consumer confidence.
The papers say, “Thing getting worse,”
Which makes us want to shout and curse.

The energies are on the rise.
Today they’re going to new highs
If gasoline should get to four
The people won’t buy any more.

Yes all you people make a fuss.
It’s time for you to take the bus.
We’re paying far too much for gas,
And we’re not taking any sass.

Economists have set the mood.
The whole darn world is short of food.
The people all are crying, “more”
It’s what is known as being poor.

And Alan Greenspan, time to say.
We wonder why you’ve gone away.
Because you are concerned with fame
You won’t admit that you’re to blame.

…now onto the markets… Oil top? Who knows, but its falling so don’t fight the trend… Gold? Buy some… Silver? Buy a lot… Comparing precious metals and stocks is much like comparing the 70s to the 90s. They have just about nothing in common… meanwhile, the HUI looks attractive… My favorite short play was Countrywide, then it was Bear Sterns, now its JPM. If derivatives are ammunition and Bear Sterns owns them and JPM is buying them, you don’t want to have much to do with either of them… JPY may be set to rally as the credit crunching resumes… The DJIA (and company) are ready to slide anything above 12,500 is the last shorting op you’ll have… Commodities can be a tough analysis but there is still money to be made, particularly in Meats and Softs. Sugar is looking awfully sweet and Lumber is building steam.

…talking to a trader the other day I was being explained the key to financial euphoria “You only have to make a few good trades and then do what you enjoy most!”. I think he’s right and that’s what we try to do here. Think, achieve, retire. We like it. Warren Buffett loves buying companies, Aussies love surfing and some people just can’t get enough of doing nothing. Whether you’re goal is to live comfortably on a beach estate in Iceland or change the world on a grand scale – you gotta have long-term income. But never should your working to live take away from your living!

“Se laisser vivre” say the French. Live for the day, take life as it comes!

The Real Bubbles

05/04/2008

 

“It is the measure of wealth itself [the Dollar] that is overvalued, not the goods that it represents”

 

 

I’m beginning to understand what is going on. I hope this article will shed some light on a variety of issues, some of which have been fairly complicated for the common investor to digest.

I will begin with a paragraph of adages and mantras being proclaimed on Wall Street, followed by a thorough analysis of why they are either baseless or misconceived. For the sake of simplicity I won’t use references but they are all available.

Mr. Market says

“The Commodities Bubble has begin to blow over, with everything from gold to oil to potash collapsing from their artificially inflated prices to mediate norms. Much of these gains have been driven by speculator demand, from hedge funds and the like, as well as consumer demand, including China, India and Russia.

“Investors have bought in every premium into these contracts and optimism is high. Furthermore, commodities have been a very poor investment relative to stocks and bonds. Even gold has underperformed inflation. As equities recoup its gains and inflows of capital return, pushing inflation down with it, commodities will be a relic of the past.

“Recessions are times of diminishing consumer demand and this will further help in reducing prices. With much of the investing community already discounting shares due to recession we can expect a bottom in the stock market with a rally beginning just as the economy is officially in recession. Financials and Homebuilders are set to gain the most as they have been beaten down severely, looking awefully cheap from a value prospective.

“The Dollar is set to rally as stark pessimism has oversold it. Recession will strengthen the currency. This will bring in investment flow previously allocated to Euro, Yen and Gold.”

The Problems With Mr. Market and the rest of the Wall Street gang (CNBC)

1. Wrong Biases
Wall Street as we know it is not a the Mutual Fund Industry, a group Hedge Funds or even large network of multi-national corporations. It is simply the media’s opinion of the former. There are few companies that end up becoming large corporations and even fewer speculators-wanna-be-billionaire-investors who actually live up to their own aspirations.

This is due to its ill-conceived sentiment, nothing more. It has all the facts (most do at least) yet the small investor constantly fails to make the integral judgments necessary to fulfill his lifelong ambition of success, or even of financial independence. They run after Enrons, Devalued Russian Rubles and dot coms believing beyond any doubt that they have it made for themselves and they have indeed “beat the street“.

However, the only way to real gains is to bet against the crowd, to look where no one else is looking, or even better, to see past the unsound biases that have plagued investors since the Mississippi Scheme in the early 18th century.

2. Confusing Short and Long Term
This is probably the most extreme variable, one which offers the most profits to he who can see past its vile inadequacies. Many (not all) of the arguements presented in favor of the Dow 36,000 were in one way or another grounded fundamentally. The problem with the gushes of cash inflow was they were based on an economic phenomenon that was years into the future, results that we are only beginning to see today – and interestingly enough by quite a different group of influences. While investors were placing bets on Yahoo and Juno, Google wasn’t yet a public company.

3. Forgetting Premium and Discount
In addition, shares were discounted many times over yet speculators failed to realize it. Any price was a great price because in the mind of these irrational gamblers the gains were infinite it seemed. It was hard for investors themselves to understand that they were betting that the company of purchase was one of sound safety that would last, and therewith deliver on its earnings 100-1000 times over, without any interruption whatsoever.

4. Wall Street too has Seasons
There are financial equinoxes, waxing and waning over decades. Warren Buffett himself cautioned Saturday not to expect big gains from the stock market in future years. Indeed, there are periods when year after year people move from the New York Stock Exchange to the commodity pits of the Midwest in search of better returns.

5. In The Dollar We Trust
A currency is present only to act as a constant method of exchange between goods. Yet the U.S. currency is nothing of the sort. It has become a staple of growth and a signal of everlasting creditability. Unfortunately for many this will not last. Contrary to many pundits the present rally in the Dollar, however great it may seem, is a mere decoy and will be short-lived.

Even Treasury Secretary Paulson has advocated that a weak dollar is in America’s best interest. While this may or may not be a positive development, one thing may be guaranteed by any student of financial history dating back to Cicero in ancient Rome: every fiat currency has failed, frequently bringing its empire down with it.

6. Action and Consequence
Finally it pays dearly for the prudent investor, who has the sole initiative to first protect and only then appreciate his capital, to understand the elements of check and balance. Every action that does not act as a stimulus for long term growth but merely for short term gain will inevitably be met by an equal and opposite loss. Failing to understand this will, for the ignorant, deplete capital faster than you can say “Bear Sterns”.

Commodities will not blow over.
Long term investors understand the need for correction and rest. Things that go straight up are indeed called bubbles and we are not there yet. Like fire feeding off oxygen and fuel, so too do bubbles feed off of extreme optimism and public involvement, both of which can’t disappear over a few weeks. The perceptive analyst will look around and tell with utmost certainty there is no sign of a any euphoria. If anything the investor relies on solid fundamentals, all of which are intact, and buys when the crowds are telling him to be cautious. If he didn’t sell he is sorry but it is insignificant because a bottom is close at hand.

Has all the oil inventories been replenished with years of supply? Have investors the fear that would send each preferring a Krugerrand over a wad of hundreds? Are the cheerleaders over at CNBC telling you to buy Krugerrands and load up on more shares of Nemont Mining?

Market Norms
I have read through many books on markets, investment and financial history yet I have never seen evidence of such a thing. Everything has an intrinsic value and it either sells at a premium to that value or a discount. Professional Traders look for market “norms” in the sense that they seek a short term variable and attempt to trade within that range yet they abandon all affiliation when this trend is broken, that which all may be confident that it will.

The Real Bubble
With pundits of financially-based markets they seem to make two awfully wrong assumptions. Firstly, that the a Commodity Bubble exists in Dollar denominated form and secondly that it has been inflated by artificial and speculative demand.

The first misconception is one that one would almost fail to consider to begin with. After all, the U.S. Dollar has been on the center stage of international trade since the Bretton Woods Agreement shortly after the Great Depression in 1941. Yet since 1913 its intrinsic value relative to goods and services has fallen by over 93%. The fact that there is still any goodwill left to the Dollar at all resembles a Bubble of sorts. It is the measure of wealth itself that is overvalued, not the goods that it represents.

Thus, it is not the goods and services that rise but the Dollars that fall; their inability to maintain their value. Nevertheless instead of markets taking their natural course and correcting itself, the Government is artificially inflating the money supply whilst protecting the very economy that its currency stands for. This devaluing of the Dollar to be able to finance its debts is in no way different than if Enron was given the very ability to print its own currency to continue its business operations or pay out to its shareholders.

This explains the underlying developements we have seen in physical goods, not too different from what we experienced in the 1970s, with a dangerous undersupply of commodities, runaway deficits and financial derivatives of enormous proportions.

I ask of the conscious minded economist, “With over $500 trillion in financial promises, which now seems to be Dollar-backed and secured by the Federal Government, what meager value may be given to the price for real goods, that which feeds and sustains mankind? Furthermore, if demand for goods the world over is rising is it not reasonable to assume that prices rise with it, if not to curb demand, then to act as an incentive for the farmer to increase production? Finally, what would have offset the interest for the speculator to profit from these gains if the fundamental demand continues unabated?”

To quote Charlie Munger “We have convulsions now that make Enron look like a tea party.”

Critical Optimism
Does the financial community really believe that there is excess optimism in commodities? That gold bullion are selling off shelves? That people left and right are participating in buying goods that will benefit from real demand? On the contrary, I see that many have found an opportunity to sell the only gold that they may have in their possessions to take advantage of higher market. This denotes good business sense of buying low and selling high, but certainly not in the realm of exuberance that we have seen in previous meltdowns.

Physical vs. Fiscal
Commodities and Equities. Gold and The Dow. It is a subject that many seem to overlook from a generation-term prospective (considering that Buffett’s long term is 10 years). It is the flaw you will see in every commodity-bearish argument: “Commodities just don’t cut it relative to equities”.

But let us look at the origins for monetary protocol: Traders bartered goods in the marketplace. With many various items coming from numerous townships it was necessary to create a measure of value, a pivot whereby difference between supply and demand may mediate; a method by which payment may be expandable without the physical presence of currency.

Thus began the credit cycle. Producer sold to seller, who bartered with traders, who retailed to the marketplace, who took home their foods from their labor and fed their families.

This “Credit”, unlike the commodity-based currencies of old, had but one restriction: the tolerance of the lender. As long as the lender would risk would the industry borrow. It is of no coincidence that this cycle of credit take years to build and then years to crumble.

The “historical trend”, if we may call it, offers fairly simple advice to the novice merchant who wishes to conserve and grow his capital:

When in times of expansion… lend, invest and do business. In times of contraction and uncertainty… Pay debts, take inventory and accumulate capital.

Recessions of Supply and Demand
It is interesting how mainstream economists will focus on something specific in great detail and fanfare and at the same time fail to see its direct opposite exposure. For instance, it is assumed that a recession diminishes demand for goods and therefore lowers prices overall, not only in the U.S. but also in China. Consequently however, a loss of demand will hurt producers who may decrease production. This will have the opposite effect and raise prices.

Furthermore, it is assumed that as we move into recession, investors have already discounted all the possible losses and write downs. At first glance this possibility seems preposterous. How can a market, however “efficient” it may be, properly and throroughly account for the very speculations that everyone from the companies to the Federal Reserve can only guess at? Besides, it’s quite humorous that Wall Street can call the middle of a recession when they can’t even call the beginning, let alone its happenstance altogether.

It goes without saying that the same case may be made for commodities, in the sense that recessionary results have already been discounted and accounted for, or that they even sell at a discount relative to post-recessionary time-tables.

Capitalism that would make Marx smile?
Capitalism works. And for he who says it doesn’t should look no further than every innovation and technological advancement since the Middle Ages. Nevertheless, it is a process and it may not be looked at point blank. There are times when the advantages of Capitalism may overextend its true worth, while there may be times that it will seem to underestimate it (much like your average share price).

For the last 28 years we have lived in a credit expansion. Yes, there have been pitfalls – the Crash of 87, LTCM, the DotCom collapse – yet we have rolled on. The world has undergone quite a change in that time and has made people sentimentally and physically wealthier than ever before. Liquidity was fluid, credit was available for anyone who needed it, lending was commercialized and industrialized allowing the investor in China to buy equity in a startup in Australia. What the lender would risk would the industry borrow.

Yet now the payments are due, and the funds we have borrowed to finance this wonderful world we have built for ourselves must be paid in full. We are not veering off a path of success, not failing at our ambitions, we are merely paying for what we have taken.

Our past actions have now brought about the future results. For years we benefited when investors fled from commodities to purchase equities and financial paper, suppressing prices through shorting, or “selling forward”, neglecting the farmers and producers. Now we must compensate those to increase supply in order to feed a larger, hungrier, wealthier, more innovated world.

04/30/2008
It’s Time to Revisit The Markets

It’s time to reflect on the predicament of the markets. We ran two editorials in late December entitled “Are You Ready for The “Blue” Year?” and “Some Thoughts on the Markets“. We defined a general outlook for the economy for the year of 2008.

We are constantly reminded that “The more things change, the more they stay the same”, it is far easier to predict what we may see in the future. With that I would like to offer clarity to the confused investor.

Dow/Gold Ratio
The ratio currently stands at 15, with a low of 12.5. Our immediate term goal is 7 with an eventual decline to 3 before the economy pulls itself out of recession.

During the brutal 1973 downturn the Dow Jones Industrial Average fell from 1050 to 570, a decline of 45%! Yet this wrecking fall was cushioned by a counter-rally from 800 to 1000, within 5% of its all-time high. Interestingly gold, during this same period, rose throughout the downturn, from 70 to 195 over the 2 years period. Over 178%!

If I were to rewrite that paragraph but multiplying all 1973-75 dates respectively, it would read as follows:


During the brutal 2007 downturn the Dow Jones Industrial Average fell from 14,000 to 7600, a decline of 45%! Yet this wrecking fall was cushioned by a counter-rally from 10,650 to 13,300, within 5% of its all-time high. Interestingly gold, during this same period, rose throughout the downturn, from 700 to 1950 over the 2 years period. Over 178%!

Obviously, history will not repeat itself, but it sure as hell does rhyme. I believe that the DJIA will push above 13,000 temporarily and then resume its decline to 7600 vicinity. While gold will trend ultimately to the $2000 level by late 2009.

[One may ask based on these calculations, that Dow 7600 / Gold 2000 = 3.8, well above our factor of 3. Nevertheless, it is most probable that gold won’t peak at the exact time that the Dow bottoms].

Thus the prudent investor will seek refuge in some words from our December article.

“The truth is, however inverted it may seem, bad is good, bear is better than bull, bust beats boom”.

This simply means the investor can do phenomenally well by simply paying little attention to the media and markets and instead focus on the short yet profitable buying opportunities that present themselves.

With that we move on to some predictions we made back in December of 2007, results since then and what we can expect going into 2009.

The Economy

“When demand is high and supply is low prices must rise, and if by any means they are manipulated or capped they will rise further in no different a logic than the what lead to most of the current problems in housing

This sums up what we’ve been seeing over the last few months, and it can be expected to continue into 2009. The media will keep calling bottoms while credit and leveraged conditions deteriorate.

“There isn’t much we can be sure of in the next year other than the fact that more volatility and election jargon will be stuffed down our throats

This in my eyes was a no-brainer. Tension was all too high and much of the markets movements were based on speculation rather than solid fundamentals.

“Corporate profits will fall causing either p/e’s to rise or prices to fall as well. Don’t be surprise to see us approaching single-digit ratios for the Dow”

This may have been too short an outlook, however it is expected before markets bottom. It’s not if, but when.

“Expect to see more and more consumers turn to their retirement accounts and credit cards to keep them afloat”

This has been seen slightly and is significantly increasing. Foreclosures have doubled year-to-date and increasing amounts of home-owners are just walking away.

Inflation

Whether or not [we have a Recession]… expect some sort of ‘flation.

So far GDP has been positive so there is no “official” recession. But ‘flation indeed! Stocks have fallen and since found some relief, while commodities have boomed and since corrected. Yet the investor should not be fooled by this.

Interest Rates

“He [Bernanke] really has no choice… right now he sees fear of recession and it’s his job to cater to it”

With rates lowered from 6.25% to 2%, all Fed Discount Windows were opened and inflows have been supplied to the market, not to mention the bailing out of Bear Sterns.

Currencies

“The Yen and Yuan seem to be holding up fairly well… As for Switzerland? Yeah, I think the Franc should hold up just fine… for the Loony, Real, Ruble and Aussie Dollar the future never looked so bright”

This was mostly due to a declining Dollar. The Dollar may have now found a bottom and this will be sustained when the Fed turns to raising short term rates. Yet if markets follow any similarity to the 1970s, this rally will be short-lived, with the Dollar testing new lows come 2010.

Housing

Interest rates are a major part of the equation. The lower rates go the higher the floor for housing prices”

Any economist would agree that the potential damage has been avoided. Yet we are faced with the worst housing recession since the Great Depression and the results will be felt. Low interest rates cannot makeup for decades of careless credit policy.

“Prices fell a record amount for this year. Buffett says it will continue into late 2008. Others say into 2009. Jeff Saut says prices have to either fall 25% tomorrow or streamline for 5 years in order to reevaluate on an price/income basis.

According to the Schiller Index prices are down 12% in many U.S. cities.

Oil and Gas

“Oil at $150? …I think oil has more to run… many others say $150 or even $200 before the year is out… Expect higher prices at the pump”.

Right on the money! Oil has risen as high as $120 recently. (with gas prices expected to possibly reach $8 a gallon before the year is out). This may be due to the fact that many airline fuel storages, were running low. Acting as a catalyst this replenishing pushed up prices.

“Recessions do decrease demand, but with a decrease in demand comes a decrease in productivity… Wall Street’s assumption of $50 oil… may be way off target”

This can be seen with regard to possible production decreases in Nigeria, and with regard to metals production from South Africa.

The Stock Market

“It’s all in the earnings… there will be surprises… there will be opportunities but I doubt there will be any significant bottoms at least until the recession officially begins”.

Earnings have yet to plummet as stocks are currently down a mere 8% from their highs. Yet while we find ourselves amidst a speculative, yet predictive, short-term rally, we remain within a well defined long-term downtrend. (Is the Dow really selling for 64x earnings?)

Small Banks and Homebuilders

“I say not yet. Will I be wrong? Possibly, but at least I’ll be empty handed on the downside risk, and there is some. I still don’t believe Wall Street has revisited pure unadulterated pessimism. A P/E of 8 doesn’t seem that bad until you recognize its all in the denominator.”

This call is still up in the air. Average bottoms have been presented with indexes selling below book value. They currently sell for 1.3x book.

Commodities and Precious Metals

“When people want food, prices rise”

If I say “Rice, Wheat, Soybeans”, need I say more?

“This will benefit all commodities, as well as gold (The Street gives a $1000 projection). Of course Silver has much further to rise as it regains some historical ratio.”

Talk about psychological resistance! Commodities benefited greatly and Gold went straight to $1000 before correcting strongly. In the case of the Gold/Silver ratio now major advancement was seen. The ratio hovered around 48 before heading as high as 53.5

“In the event that commodities… decline in the short-term this should be seen as a buying opportunity”

We have since been offered this buying opportunity.

China

“China’s bubble will blow over, but not before the Olympics… After that I suggest you get out, especially if USA Today is announcing record high stock prices.”

China has corrected together with the world markets, but has since regained much losses.

Another great quote from the last article

“The perma-bulls tell you to remain 100% invested in the ‘long run’ as stocks are the highest returning asset class over very long periods, like 100 years… But I have yet to meet an investor that either has a 100 year time horizon or can actually sit through all of the bear markets that occur during 100 years.”
Bennet Sedacca

04/25/2008
So Who’s The Fittest?

“What a fool does in the end, the wise do in the beginning” (Spanish Proverb)

Whether or not we conform to the Evolutionary theories of Charles Darwin, there is most certainly an element of truth behind the prospect that there is indeed a “survival of the fittest”. He who flaunts his wealth, is released from it. He who mistreats his body, withers. He who disrespects other men, is himself reputed.

We see this in our world from every perspective possible. China remains to its thousands year old traditions, as it is, by a philosophy inherently averse to war. Presidents, world leaders, CEOs and Activists usually maintain the stamina throughout even the most challenging times since it was that inbred zeal that got them there in the first place. Many of the happenstances of our history are due not to mere chance but to the wiring of our very fiber.

Hitler failed not because the West defeated him in military strategy or intelligence, but because all hope was forfeited from the beginning; he couldn’t control his own faculties, how would he a nation, how would he the world?

In the makeup of Capitalism as we know it, the earliest laissez-faire economists realized that monies are safest in the private hands, and handiest in the possession of those who understand its value most. Wal-Mart together with its proprietors, the Waltons, is one of the wealthiest economies on the planet, yet at the same time it ranks as the second largest charitable institution on the planet.

Small Money and Smart Money
What has all this to do with practice investment application? Yesterday I was chatting with a friend of mine. She mentioned how she had recently pawned in her gold. “Why?” I asked. She said she wasn’t exactly sure, only that gold had run up quite some bit over the last few years and she decided to profit from it. “Do you reckon it could go any higher?” I asked with a smirk. “It’s already fallen!” she replied.

We may call the above example the Small Money. These are the people, most of society actually, who just go about their daily business and they act, well, pretty much because they are not quite sure.

Then there is what we may call the Smart Money (this does not necessarily Big Money). For examples of such we must look to large institutions that carry a sound sense of financial responsibility; Governments that provide the world with resources and labor, Funds that manage the wealth of many of the affluent with full regard to risk and reward (major ETFs and Mutual Funds may be included in this group), as well as value-conscious long-term investors.

While the Small Money (and so they shall remain) are selling – Real Estate and hard assets – the Smart Money is buying. We see this day after day as the mortgage predicament continues to unravel, but nowhere in economics does it have any mention of leaving bargains on the table.

Where I live there was a “W 55” building that was set to be completed. Unfortunately, the building went under as property values and lending fell. At auction each penthouse sold for $150,000 down from the 300s. 50 cents on the dollar!

Long Term Investors
So what are the long-term investors doing now? They are Buying. Many now see the perfect opportunity to get in on an ongoing commodity boom – read ‘Boom’ not ‘Bubble’. Gold and silver are down 12% and 20% off their highs, respectively. Where many see ‘correction’ others see ‘opportunity’.

Go out to any coin dealer and try to buy more than 50 ounces of silver. Firstly, you moat probably won’t find it. If you do it will probably be in small denominations with pictures of Brett Farve or the Twin Towers on them. The piles of metal from the mints seems rather depleted.

Secondly, you’ll face a hefty premium. It’s almost as if the real over-the-counter market has become completely estranged towards the paper market and fails to believe it. Go on eBay and try to buy silver. You’ll face premiums (outright or in the form of shipping) of $2-$10 per ounce! In a sense, the actual silver market hasn’t fallen much at all.

Many pundits of the industry stated that as prices rise, supply of scrap silver will flood the market. One thing for sure, it ain’t floodin’ it. If it is coming online, it’s coming too slow relative to demand. Regardless, it seems that higher prices are secured sooner than later.

Did someone say Rice? Let’s not even go there.

Funds and Institutions
What about the big funds? Buying. The iShares Silver Trust (SLV) has actually been accumulating physical silver as prices have fallen. This is probably in line with relative demand by the funds investors (I’m one myself).

Governments
Big Governments? Also Buying. It is said that the Central Bank of Russia has been adding to its capital gold reserves and for all we know China and others may be following suit.

“After all is said and done, more is said than done” as Aesop said and the markets seem to reflect that. Those who have bought are destined to be wealthy and those who have sold are destined to buy again.

Oh, and the essential difference between a ‘Boom’ and a ‘Bubble’ is that a boom is when everyone is trying to buy something which no one else owns but everyone else wants, while a bubble is when everyone wants to eventually sell that which everyone has and practically nobody needs.