Monday, November 30, 2009

Good to See Skepticism and Ignorance About Gold Persist

In Gold Buyers Nip at Ultimate Emotional Experience,'s David Pauly dumps on gold in a big way, also quoting the great investor John Neff as saying that he's never been interested in anything gold-related. The article begins:

Why is it no matter how much the world advances intellectually and technologically, people keep speculating on gold?

John Neff, who managed Vanguard Group’s Windsor Fund for three decades, once offered this take on the precious metal: “It’s not an investment, it’s an emotional experience.”

Mr. Pauly concludes with the (sorry to say) almost idiotic thought that gold buyers are deluded that the gold standard is still in effect:

Gold long ago was used by nations to balance their trade books. When the U.S. bought more abroad than it sold, it paid the difference in gold.

It’s comical to think of that today. Once the U.S. economy gurgles again, the Fed’s $300 billion in gold would only cover about six months of the nation’s trade deficit.

European and Asian companies don’t collect dollars for their goods because they expect a payoff in gold but because they think the currency has its own value.

Neff, 78, still manages money for himself and his family in suburban Philadelphia. “I’m still in the hunt,” he says.

The hunt has never taken the veteran investor anywhere near gold. While the experience has been exhilarating lately, “I’m not attracted to it,” Neff says.

If only others were so sensible.

Sorry, Mr. Pauly. Believe it or not, gold really is a monetary metal. The IMF says so. The U. S. says so. China says so. Russia says so. And a kicker for gold is the possibility that it becomes more overtly part of the world's monetary base in the near- to mid-term.

Yours truly owns physical gold and a gold ETF ("GTU") with NO exhilaration. Gold has no intrinsic allure for me. Owning gold has nothing to do with peak experiences of any sort. It simply has to do with preservation of purchasing power. If a bit of speculative capital gain over and above preservation of purchasing power comes my way as an owner, and I sell to realize the gain, that's fine. But it's all about degradation of fiat currencies: money-printing. Gold must be torn from the earth and unlike silver or platinum, it is rarely actually consumed. You know the arguments. It's been around for millenia as a form of portable, durable wealth and may stick around for millenia more, machinations of central bankers notwithstanding.

People who get exhilarated from owning one type of financial asset are, as Jules Steyn might have limned, not the luckiest people in the world. They need to get a life, one might say in more modern lingo.

It's good to know that there are probably plenty of David Pauly's out there. Perhaps not he, but others may fuel a possible surge to overpriced levels of the yellow metal by jumping in at higher levels to fuel a momentum play (which to be sure has begun but hardly to excess).

That said, most of my assets (by far) are not in metals but in dollar-denominated instruments. And there's no exhilaration owning them either. Just business.

Copyright (C) Long Lake LLC 2009

Wherein the Media Gets Things Wrong wants us to believe that the current post-bubble deflationary, weak economy state of this country that has led to record low Treasury rates is due to the great job that Tim Geithner is doing running Treasury (and note how little credit his boss or Gentle Ben get), in te sycophantic In-Geithner-We-Trust Bond Market Gets Lowest Yield:

Less than a week after deflecting calls for his resignation, Timothy Geithner sold bonds on behalf of U.S. taxpayers at the lowest yields on record in a show of confidence in the Treasury Secretary’s policies.

Even as the nation’s debt increased by $1.15 trillion this year to $6.95 trillion in October, the government’s interest expense under Geithner dropped 15 percent, the biggest decrease since before 1989, according to data compiled by Bloomberg. The Treasury auctioned $44 billion of two-year notes Nov. 23 at a yield of 0.802 percent, the lowest on record.

Rising demand shows investors believe Geithner, 48, is striking a balance between policies to promote growth and the borrowing needed to finance a $1 trillion deficit.

DoctoRx here. Wait! TG has no role in setting the budget. Where is the credit to Congress and the President for these wise policies? The conclusion here is that this article is a plant to fight back against calls for Mr. Geithner to leave (a position that EBR advocated before he was confirmed).

There is much more sycophancy in between the below-the-fold criticism from what we are led to believe are only Republicans:

For Representative Kevin Brady of Texas, the senior House Republican on the Joint Economic Committee, rising demand for bonds reflects the state of the economy and the inability of the Obama administration to turn it around. Former Connecticut Republican congressman Rob Simmons, who is seeking to unseat Democratic incumbent and Senate Banking Committee Chairman Christopher Dodd in the 2010 election, said earlier this month that Geithner should resign over his role in the AIG bailout.

Simmons cited a Nov. 16 report by the Troubled Assets Relief Program special inspector general that faulted the New York Fed, with Geithner at its helm, for making “limited efforts” to protect taxpayer funds during the rescue of AIG. . .

“For the sake of our jobs, will you step down from your post?” Brady asked Geithner at a hearing of Congress’ Joint Economic Committee on Nov. 19. “The public has lost all confidence in your ability to do the job,” and that “is reflecting on your president,” he said.

Geithner dismissed the suggestion and blamed policies of President George W. Bush for the financial crisis. Republicans “gave this president an economy falling off the cliff,” he told Brady. “I can’t take responsibility for the legacy of crises you bequeathed the country.” . . .

Actually, criticism of Mr. Geithner, both in his role as head of the N. Y. Fed and as Treasury Sec'y has come from many quarters. Yet this article transitions promptly from the above quotes to pointing out the good stuff:

Lower Treasury yields have helped to push down borrowing costs for companies, local governments and consumers.

No mention that banks and credit card companies nowadays primarily want to lend to those who don't need to borrow. You, I and small businesses hardly have the Treasury's borrowing costs.

The truth is that the Administration and Congress told the public 9 months ago that just give us "stimulus", and the unemployment rate would peak at 8.0%. It is this slack in the economy, with labor, real estate and industrial capacity currently in oversupply relative to demand, that has led by default to "demand" for Treasuries.

If there were really confidence in our economic policy, the dollar would not have been weakening against gold, and the 10-30 year part of the curve would be much lower.

This article is a disgrace.

Also misguided, though not a disgrace, is A world awash in debt by Canada's Globe and Mail. It somehow finds that the possibility that governments will shrink their deficits to be calamitous:

The financial crisis provoked a global front to stimulate economies through massive spending. But this was fuelled by a staggering amount of borrowing. Now governments are realizing that a new calamity looms - higher taxes and slashed social programs.

If you believe that per capita GDP of over $40,000 in the U. S. and Canada is a calamity and that people living longer and healthier lives is a calamity, well then, the Globe and Mail has it right.

The Globe and Mail is just scaring you. We have plenty of capacity to provide for the elderly, but yes, more retirees as a percent of the population has obvious implications for GDP. But what of it?

Maybe we should work either less hard or for fewer years, or some combination of the both.

The great achievements of the modern world in bringing longevity to the masses of course provide new challenges, but calamity? Hardly.

Copyright (C) Long Lake LLC 2009

Sunday, November 29, 2009

Chi-Fed National Activity Index and Markets

The Chicago Fed National Activity Index was published Nov. 23. It cannot be readily copied to here; please click on it. The first graph on the second page suggests negligible inflationary pressures. This analysis supports the idea that the 10-year Treasury can drop in yield, perhaps a lot, given the intensity of the move lower in rates out to at least 2 years. If you buy a 2-year Treasury at market rates, in 2 years you will have about $101.40. And the $1.40 or so in interest is taxable.

Yours truly is going long the 7-10 year Treasury IEF unless it opens up a lot. It was said that the stock market rally off the March bottom was the most hated in history. Ha! It was one of the most loved rallies. The problem is that the market was probably only around fair value at that bottom. Any hatred from pros was probably due to aversion to asset inflations, of which stock versions thereof are pernicious. Meanwhile, Treasuries are truly despised. That does not guarantee that they are a good investment, of course. But it helps.

Bonds have a safety factor that stocks lack: bonds revert to par, or at least Govvies do. Stocks are perpetual absent liquidation or a takeover. No exit for stocks, planned exit without a trade for bonds. Of course, this thinking is the opposite of what the financial community wants people to think. They want "investors" to trade stocks frantically. Liquid bonds have two ways to win: yield, and capital gains (i.e., a drop in yield to less attractive levels).

The other graphs on the Chicago Fed site suggest that there is no clarity that the economic banana is truly over. Times are tough (by 21st Century standards), overcapacity remains rampant except for such matters as common sense amongst policymakers, and the evidence that financial assets are simply overpriced can be seen by understanding the amazing web and interlocking towers of debt, guarantees, financial swaps between and amongst the American people and their companies and governments. There would be no need for such complexity if capital could earn a good return in a straightforward manner.

As a related situation, physical gold is an asset without liabilities, unlike Federal Reserve Notes.
Gold is now extremely widely followed, but its chart is more like the NASDAQ of the late 1990s than even its own chart of the 1970s, when it gyrated wildly up and then down in partial corrective manner. My father, who is not given to easy enthusiasms, was skeptical when I put him and my mother into gold at lower prices this year; he is now convinced and has instructed me to sell no gold, and is happy if I buy on weakness, as I did Friday on the Dubai-related selloff.
He is a strong holder and just the sort of buyer on the gold breakout to new highs this fall that a sustainable bull market must have.

Ignoring rising prices for very short-term Treasury debt, gold is the only major asset class I am aware of that is in a true bull market, defined as an asset at new nominal price highs with good relative strength.

The other intermediate- and long-term bull market that is near record price highs except for the panic a year ago is the 7-10 year Treasury market.

Meanwhile, the media wants you to trade pre-owned common stocks.

Irritate the media. Think different. High quality dividend-paying stocks will probably do fairly well on a multi-year total return basis, but only in a setting in which the average stock is substantially overpriced; so if you own a strong company in an industry not under siege a la the financials 2007-early 2009, please be sure you can ride out market declines and perhaps a weak quarter or two.

There is a reason, not yet revealed, why two-year Treasuries yield almost nothing. It's eerie and so abnormal in what is allegedly a decent economic expansion that it suggests that even more caution than usual is appropriate. Dubai is not the answer. Retail brokerage clients have not been besieging their brokers saying, "Get me in" on this 2-year Treasury bull market in price (lows in yield)! Thus it's some form of smart money that's been bidding avidly for safety for such a long period of time.

Markets can be discontinuous. Investors must have their ducks well in a row before any sharp market moves and keep their eyes on the downside ball.

Copyright (C) Long Lake LLC

Friday, November 27, 2009

Just In Case You Thought That We Could Not Be Japan

Five years of stock index prices from Japan's Nikkei 225 (blue) and the S&P 500 (red); click on chart to enlarge.
Somewhat similar?
Copyright (C) Long Lake LLC 2009

Dubai's Foundations May Stink in More Ways Than Financially

A much-condensed version of a long article from earlier this year appeared today about Dubai from a non-debt perspective by a reporter named Johann Hari, which begins:

Dubai is finally financially bankrupt – but it has been morally bankrupt all along. The idea that Dubai is an oasis of freedom on the Arabian peninsular is one of the great lies of our time.

Yes, it has Starbucks and Dunkin' Donuts and the Gucci styles, but beneath these accoutrements, there is a dictatorship built by slaves.

Click HERE for the full article from April 2009.

I think about the Dubai default differently having read these pieces. Dubai might just be one of the most horrid bubbles in modern times.

Copyright (C) Long Lake LLC 2009

Thursday, November 26, 2009

Dubai or to Sell?

Sorry for the bad pun in the title.

In any case, I was looking for real information about the Dubai financial situation. For now, a free link is available at Nouriel Roubini's site,, titled "Dubai Default Worries Infect Markets".

Tomorrow should be interesting. Most of the public won't sell and aren't even paying attention.

Because I believe that stocks are fundamentally overvalued, I am waiting for a heavier shoe than Dubai to drop. I am also concerned that the timing of this news may have been deliberately designed to get out when the public is not following the markets. Not an allegation, but stranger things have happened.

The Federal Government can borrow for 12 months and then pay the lender $100.25 back. That is 25 cents interest on a hundred dollars. That's half the cost of a postage stamp plus envelope. It's hard to believe that smart money is hiding in Treasuries simply because Dubai is overextended. But who knows, maybe some bad might happen and will be averted/delayed, and those hiding in ultra-low yielding Treasuries are truly just hedging their bets.

So far, what's disclosed appears to be a net positive for the shiny yellow metal that does not tarnish. In secular bull markets, that's what happens: the news breaks with the trend (or the trend has foreseen the news flow).

Copyright (C) Long Lake LLC 2009

Thanking Banking for Nothing (Thanksgiving Day Post)

As Americans celebrate their bountiful land, they recognize that some part of the nation's core has become distorted. The phrase "sound as a dollar" was actually said with pride and a straight face.

As Paul Kedrosky pointed out early this year in explaining why PPIP would have an effect, a fool with a plan beats a smart man with no plan. The financial community had a plan. It was to get bigger and richer, and to game the system to a heads I win, tails you lose situation.

And so we have the previous Treasury Secretary coming in from Goldman Sachs, where for the loss of income he got to pay no tax on hundreds of millions of dollars of unrealized capital gains; then we have his water carrier, one T. Geithner; now we may get the head of the current incarnation of the House of Morgan, one J. Dimon to replace the water carrier.

Meanwhile, the Senate may pass a tax increase disguised as health reform. What kind of reform for the benefit of the people is it when the taxes to support the plan come several years before the benefits?

Meanwhile, the international news du jour is trouble with a heavily indebted state-owned enterprise in that American-Anglo protecterate, the small sheikdoms of the Persian Gulf; this one is in Dubai, that region of bubble market excess.

Could this be something that tips some financial institution of some systemic importance over the edge? Could it be the start of a debt failure cascade?

Could this event, which has been maturing for some time, have been the reason for the flight to short-term U. S. debt instruments recently?

As was mentioned in a recent post, whenever the VIX drops when the stock market averages drop, this is a sign of complacency. Complacency gets punished at unpredictable times in the markets. Andy Grove had it correct in a real sense: only the paranoid survive. Conspiracy theorists amongst us would even wonder why this Dubai news came out when the U. S. markets were closed for Thanksgiving and then barely open the next day; in effect when the most important financial center of the world was entering what in effect was a 4-day holiday.

Could this be the start of the long-called for "flight to safety" in the U. S. Dollar? Is it just a fake-out?

In keeping with the belief that what has been happening in the economy and stock markets in America is a version of "extend and pretend" for about the past decade, yours truly owns only two publicly traded corporate stocks: McDonald's and Ross Stores. Hardly bets on a boom!

As we continue to move to a world in which the Feds are the borrowers of last resort, the old rules of finance are becoming unrecognizable. In this world, zero percent interest rates are the New Normal, but these are rates that preferred borrowers get to pay. You and I pay much more, but we get nothing or less than nothing adjusted for probable inflation on secure savings.

Hamlet's phrase that the times were out of joint refers to a dislocated joint that he was called upon to "set" right; Hamlet as orthopedist.

The financial and economic times are out of joint. Barack Obama, constitutional lawyer with a bevy of academics and government careerists supporting him, including Gentle Ben at the Fed, is being treated by currency traders the way they treated James Earl Carter. Flights to "safety" notwithstanding, the message of the markets is that this is a weak President presiding over a weak currency and a weakening power. But there's no challenger yet close to displacing the U. S. as global hegemon.

So we slouch on and give thanks for that much at least.

But a big raspberry for self-serving financiers.

Cranberries for the rest of us.

Copyright (C) Long Lake LLC 2009

Wednesday, November 25, 2009

Did New Claims for Unemployment Insurance Really Drop Sharply?

Yes, and No.

Here's the link to the Dept. of Labor press release.

Unadjusted, claims rose week on week.

Per the data, hiring is anemic. Much of the labor force problem is that more experienced workers are in greater need than young ones who need training.

A guess from yours truly, a certified non-economist, who further provides this guess for free: unemployment this cycle is worse than is suggested by what the Labor Dept. is measuring. Small businesses are struggling; and youth is greatly underemployed.

On the other hand, the theme is that massive government intervention has begun bleeding into the real economy. Absent all this intervention, it would appear that the gloomy views from almost a year ago about 2009 from Nouriel Roubini were spot on.

Copyright (C) Long Lake LLC 2009

One-Way Markets for Now

Note I am in the process of moving, so posting will remain light up till this weekend.

Re the financial and economic scene, a certain calmness reigns, with the S&P 500 and gold both extended on a 40 week view, though at reasonable prices on a long-term view. Gold is clearly in the more bull phase as momentum buyers are squeezing the shorts. It's anyone's guess what comes next.

Perhaps because of the inexorable improvement in the economic numbers courtesy of unprecedented deficit spending plus natural cyclicality, several of the bloggers and other seers such as Marc Faber are out of sync with the markets.

The fact is that on a societal basis, counting government, there is no deleveraging. There is more leverage (debt compared to GDP and related metrics that are not quite debt such as "swaps")than ever. What comes out of this is likely to be bad, but don't count on the markets to tell you what is going to go wrong (and right!) when.

Flexibility is the key.

Copyright (C) Long Lake LLC 2009

Tuesday, November 24, 2009

Tuesday Afternoon Update: Focus on VIX

As suggested yesterday could be in the offing, TLT is up a bit today, meaning that long Treasury rates are down a bit, besting the stock market, which is trading heavy and a bit to the downside. Gold is rising adjusted for the mildly stronger dollar.

The volatility index (VIX) is lower, which is the opposite of what one typically sees with the Dow off 40 points and the S&P 500 down. VIX is under 21. The past 2 years, 20 or slightly under that has been the lower bound; and in the 1998-2003 period, 20 was also the effective lower bound (a low VIX correlates with generally rising stock prices). The last time the VIX dropped while the stock market dropped, a brief but sharp correction ensued, and the VIX rose to over 30. Could this disparity be a sign of complacency?

Copyright (C) Long Lake LLC 2009

Monday, November 23, 2009

The Long Bond: An Interesting Speculation

The single most surprising financial event that could occur soon might well be a significant drop in Treasury rates. A drop in rates would correlate with a rise in the ETF 'TLT', as TLT owns Treasury bonds in the 20+ year maturity range. The chart on TLT is actually promising. Click on it to enlarge; the red line is the simple 50 day moving average.
Since the early June low in price at longer-term support, we see a successful retest of that low in late July, then a pattern of higher highs and higher lows. In addition, the shape of the up and down moves looks reasonably promising, as well.
Meanwhile, stocks made new highs in some indices, but the VIX did not fall to a new low. Is it bottoming, implying a down move for stocks?
TLT opened down Monday but then worked its way higher, very quietly, as gold and stocks took the spotlight. Yours truly went long TLT on the open today. Now, this is in the context of holding lots and lots of gold, to be sure. Nonetheless, the structural bull market in Treasury prices (downtrend in yields) remains in force on the charts. And I believe that we are following the Japanese trajectory. So much lower lolng Treasury rates are possible, even if they make little sense on a total return after likely inflation.
Copyright (C) Long Lake LLC 2009

Is Gold Going to the Moon?

Marketwatch has a very nice discussion about gold out tonight. It focuses much of its interest on new, large investors in gold such as David Einhorn, Paul Tudor Jones and John Paulson.

The article presents a variety of bullish arguments for gold price appreciation. These are all good arguments.

One smallish fly in the ointment is that the ETF 'GLD' has now reached all the way to 20% above its 200 day moving average, a warning point. Of course it can go higher. The public is definitely joining this move, which has turned flashy.

Assuming no imminent reversal in the upward trend of economic activity, we are likely entering a period similar to 2004, with economic growth and low inflation. I believe that 2004 was the one year all decade in which stocks (slightly) outperformed gold.

Even at this price, I still prefer gold over all other investments, but long-term EBR readers know that I was positive on it all year, including when it was under $900/ounce. Will gold over the next 5 years go up more in price than the pitiful total return from a 5-year Treasury. Likely, perhaps much more. But could gold go down by half? Yes, plus there are carrying costs vs. small interest payments for a Treasury.

Over all, though, this move in gold does indeed have moon shot potential. Fascinating . . .

Copyright (C) Long Lake LLC 2009

Sunday, November 22, 2009

Revise, Extend and Pretend

In Beware The Ice Age Cometh: Hackers Prove Global Warming Is A Scam, Mish alerted me to lifted (or leaked) Emails from a leading research center in England propounding the Cause. Is it all a scam? Are data systematically being twisted to support the politically correct POV?

Well, isn't that exactly what has happened to financial reporting out of Big Finance?

This is yet another reason why gold keeps on rising (more properly stated that the dollar and other fiat currencies keep sinking against "real money").

Copyright (C) Long Lake LLC 2009

Thursday, November 19, 2009

Something's Going On has some important facts laid in Stocks Plunge as Treasury Three-Month Bill Yields Turn Negative:

. . . the yen and the dollar strengthened, oil tumbled and yields on Treasury three-month bills turned negative for the first time since financial markets froze last year. . .

Stocks slid amid speculation the eight-month, 68 percent rally that drove the valuation of the MSCI World Index to the most expensive level in seven years already reflects forecasts for a 25 percent rebound in corporate earnings next year. . .

Rates turned negative on some bills maturing in January, according to Sarah Sobeck, a Treasury trader at primary dealer Jefferies & Co. The three-month bill rate was at 0.0051 percent, the least this year. Six-month bill rates dropped to the lowest since 1958. Treasury bills turned negative last December for the first time since the government began selling them in 1929 as investors scrambled to preserve principal and were willing to sacrifice returns in the months following the collapse of Lehman Brothers Holdings Inc.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the “systemic risk” of new asset bubbles is rising with the Fed keeping interest rates at record lows.

‘Painful Level’

“The Fed is trying to reflate the U.S. economy,” Gross wrote in his December investment outlook posted on the Newport Beach, California-based company’s Web site today. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.”

The two-year note yield fell five basis points to 0.70 percent at 4:24 p.m. in New York, according to BGCantor Market Data. The 1 percent security due October 2011 rose 3/32, or 94 cents per $1,000 face amount, to 100 18/32. The yield touched 0.6759, the lowest since Dec. 19. It fell to an all-time low of 0.6044 percent on Dec. 17.

These very low rates are consistent with persistent or renewed economic weakness. Think the Japan scenario or the "Ice Age" hypothesis. Consistent with the "New normal" thinking, the article goes on to say:

Groupe Danone SA, the world’s largest yogurt maker, cut its forecast for annual sales growth. The company cited “profound” changes in consumer spending. Danone lost 4.4 percent in Paris.

These profound changes are stagnant incomes but rising taxes and gasoline prices along with diminished home values. Complex? No. The times are out of joint, and Hamlet in the White House lurches from economic stimulus in the winter to diminishing the deficit now.'s average elective consumer spending is down to $60/day, half of what it was in early 2008 and at lows not seen since this past winter; therefore lower than any time in 2008. Gallup's hiring/not hiring ratio has not improved one bit since December of 2008.

Meanwhile, you see money moving into Wal-Mart, McDonald's, gold and silver as safe havens. Silver as a safe haven? At a time of almost zero return on 6-month T-bills?

When something's going on and you don't know what it is, you, as with Dylan's Mr. Jones, are best advised to skeedaddle.

Copyright (C) Long Lake LLC 2009

Wednesday, November 18, 2009

Pressure on Tim Geithner Increasing

Courtesy of Naked Capitalism comes the good news that liberal/progressive Dems are catching on that Mr. Timother Geithner is a catspaw of Big Finance. Click HERE for the link to that post, which itself has a link to a video clip of Representative DeFazio of Oregon.

Sometimes the world just has to come to you. While TG is not a goner, his rep keeps declining.

When this blog began late 2008, Tim Geithner was a target because of this ties to Big Finance, with the tax troubles felt at EBR to be a sign of the inner water-carrier coming through.

Meanwhile, reports absolutely miserable polling data re hiring/not hiring and daily elective spending. For most people, it may be that the depression has not really ended. If the economy can't soar with a zero-ish Fed funds rate, that would be a Japan scenario. The real winner given the one-dimensional thinking of the Dems: gold, because then more "stimulus" would be baked in the cake.

Copyright (C) Long Lake LLC 2009

Tuesday, November 17, 2009

Tuesday Markets Update

This will be a brief comment, and postings will be diminished over the next several days due to travel and other annoyances.

Yesterday indeed proved to be manic in that stocks and bonds rose strongly in price, but gold rose more and the more speculative metals that I recently highlighted as having more upside potential than gold rose more.

Today, the strength in bonds continues, and I wonder if my hypothesis that the market is going to correct so that a more traditional relationship between stock dividend yields and Treasury bond yields re-establishes itself.

If they merely get back to the level of equality that was never seen before about 1960, consider that the S&P 500 yields under 2% (depends how you measure) and the 10-year Treasury yields whatever it is yielding when you read this- say 3.4%. Now, corporate dividend yields can in fact rise a lot if companies cease buying back shares and if some dividendlesss companies start paying dividends, but Treasury rates are historically low.

I almost invested in the Japan stock market a couple of years ago at much higher prices because even then, stock dividend yields were greater than bond yields. You never know, in other words. But I hate to bet against reversion to the mean.

In other words, business conditions may improve, but fundamentally there is a great deal of risk in the stock market. When rates are unnaturally low, high P/E's and very low dividend yields look OK; but the rates are low only because the economy is so weak, so that's ultimately a flimsy crutch for valuations. If rates rise a lot, dividends lag and then the disparity favoring bonds over stocks becomes tilted more against stocks.

Now, stocks are nowhere nearly as overpriced as at their all-time (possibly) overpriced peak about a decade ago. But that's not saying much. The technical action still favors precious metals, and you don't give up much current yield by owning them.

Copyright (C) Long Lake LLC 2009

Monday, November 16, 2009

Economic Reports Taken Bullishly by Metals Traders

Meanwhile, while it may be slightly ancient news, the Commerce Dept. reported today that manufacturing and trade shipments for Sept. were $988 B, down 0.3% from August and down 13.1% from the year earlier. The inventory/sales ratio was stable month on month at 1.32.

Thought you might like to know. End of recession/depression turning point? Could well be. But we must be careful in watching large percentage moves off of a low base.

And for all the excitement about retail sales and the moves in stocks, these moves are matched by gold once again.

More to the point: platinum, palladium and silver are screaming to the upside.

More and more to the point: Longer-dated Treasuries are up in price.

Money is chasing all sorts of financial assets. In times like this, the safest short-term strategy is to go with the flow. And so prices of metals are being bid up. Louise Yamada had spied strength in silver as she stated in a recent interview. Great call! And breaking out silver is, attracting new buying as it does so.

Its back to the reflationary '30s for now

Copyright (C) Long Lake LLC 2009

Sunday, November 15, 2009

Sunday Night Market Update: Trends Continue reports tonight that:

Asian stocks fluctuated as mining companies gained on higher gold and copper prices, while financial and technology shares slumped on concern share sales will dilute the value of existing holdings. . .

Mitsubishi UFJ, Japan’s largest bank by market value, may announce the nation’s biggest secondary share sale this week as it prepares for stricter global capital rules, eight of nine analyst surveyed by Bloomberg said. Reuters reported that Hitachi may raise as much as 400 billion yen ($4.5 billion) through the sale of new stock and convertible bonds.

Japan Government bonds are rallying in prce while stocks are mixed while the rest of Asia looks strong.

Gold is up 1/2% and silver is up over 1% in Asian trading.

Weakness in the sectors that led the markets up in March, tech and finance, is notable. Finance is relatively weak lately in the U. S. as well, without central bank tightening.

Looser money was good for gold prices in the 1980s, but only in the setting of a correction from the gold bull market of the 1970s. This decade, the Fed never tightened enough in 2006-7 to seriously restrain the gold price, and precious metals buyers may be playing a game of chicken and short covering this cycle as price records fall almost daily. One wonders: Big Pharma stocks at 10X earnings and yields around 5%, trading at 1997 prices, or a metal that costs money to own that has surged year after year? Value investors say the former; probably one day they will be correct. For now, the market hasn't lost its tendency to look at stimulus, deficits, government guarantees, and conclude: There will be growth, and it will be inflationary; and if not, fiat currencies are in deep doo-doo.

Copyright (C) Long Lake LLC 2009

Saturday, November 14, 2009

Debt Valley Days

The Pension Benefit Guaranty Board has reported a worsening deficit:

The Pension Benefit Guaranty Corporation (PBGC) ended fiscal year 2009 with an overall deficit of $22 billion, according to the agency's Annual Management Report submitted to Congress today. The result compares with the $11.2 billion deficit recorded at the previous fiscal year-end on September 30, 2008.

What's much worse is seen in these excerpts from the news release:

"Exposure to possible future terminations means that we could face much higher deficits in the future," said Acting Director Vincent K. Snowbarger. "We won't fail to meet our obligations to retirees, but ultimately we will need a long-term solution to stabilize the pension insurance program." . . .

As of September 30, the single-employer program reported assets of $68.7 billion and liabilities of $89.8 billion.

Matters may worsen substantially as revenues may decline. Why any employer would want a defined benefits plan is unclear.

Let's look around. The FDIC is more or less broke. The only way it is avoiding a direct Federal bailout is by jacking up insurance rates. The Federal Housing Authority has been guaranteeing junk loans with an immense default rate. The Federal Reserve is one of the largest holders of "iffy" bonds and collateralized securities in the world. California may be bankrupt. Not to mention "stimulus" that was primarily cash payouts to the needy states and the like, with more "stimulus" coming. And so on . . .

The nation's accounts are out of joint. Why is a constitutional lawyer with little or no previous executive experience and little or no financial experience the right person to set them right?

And so the fundamental case for money-printing and therefore gold-owning continues. We are looking at the Japanese scenario, except that Japan largely owes its debt to itself, not to others. Looking to prior economic cycles to guide investing is valuable, but methinks markets have things wrong. The skies ahead are cloudy. We don't know whether the rain is going or gone, or will start up again. Dry powder is good in the rain.

Copyright (C) Long Lake LLC 2009

Friday, November 13, 2009

ECRI Update: Growth on Track But Second Derivative Pointing Down

The Economic Cycle Research Institute ( has reported further stabilization or decline in its publicly-disclosed weekly leading index. This blog has reported on ECRI many times; it has a fine track record till now; thought it was late to see the implosion last summer. In any case, here's today's Reuters report on ECRI:

WLI Growth Eases from Record High
November 13, 2009

(Reuters) - A weekly measure of future U.S. economic growth slipped to an 8-week low, sending its yearly growth rate further off record levels reached seven weeks ago, a research group said on Friday.

The Economic Cycle Research Institute, a New York-based independent forecasting group, said its Weekly Leading Index edged down to 127.3 in the week to Nov. 6, from a downwardly revised 128.7 the previous week, which the group originally reported as 128.8.

The index's yearly growth rate fell to a seven-week low of 25.3 percent from 26.2 percent last week, which was revised lower from an original 26.3 percent.

ECRI has recently projected that the recovery will be the fastest since the early 1980s, and said the current report is in step with that forecast.

"For four straight weeks WLI growth has eased from a record high, but still remains consistent with a further near-term acceleration in U.S. economic growth," said ECRI Managing Director Lakshman Achuthan.

The weekly index was pushed down by lower commodity prices, Achuthan said.

DoctoRx here. I have done an extensive review of ECRI's data regarding stock prices and pauses in the growth of the WLI. There's not a great correlation. Where there appears to be a correlation is that stock prices follow the acceleration of the WLI, i.e. the "yearly growth rate". With that having moderated, perhaps another light finger has pressed on the scale in favor of a pause or decline in stock prices.

More important IMO are statistical analyses such as those by Jeremy Grantham, Andrew Smithers and even PIMCO, all concluding that stocks (Grantham and Smithers) and financial assets in general, are overvalued.

Getting back to ECRI, though, one wonders if the concern about the massive governmental "stimulating" of the economy will prove well-founded from an investment standpoint. For all we know, the economy starts surging on its own. Evidence that that surge may well happe- even if only a brief one- comes from the various news reports that yet another "stimulus" plan is in the works.

Copyright (C) Long Lake LLC 2009

Bernanke's Lever

How is it possible for 3 often negatively-correlated asset classes to rise simultaneously when neither has been oversold via a selling crisis?

The answer, my friends, is blowing in the Fed.

Leverage is back. Stocks and the long Treasury each rose 1/2% in price today, while gold made up for a one-day "correction" and rose will over 1%. Platinum was very strong, and silver was strong. Metals buyers know that with labor in oversupply, commodities prices can rise without having much effect on "inflation".

Richard Russell, dean of technicians, has a writeup on gold out (h/t Credit Writedowns and Prieur du Plessis). In an excerpt of his Dow theory Letters, he lists 6 reasons to buy gold and for those who would like a concise rundown of the major themes amongst longer-term gold investors and speculators (such as yours truly), his is a good writeup. Interestingly, at the end of the excerpt he quotes from another technician who, as I did last week, questioned whether the gap up following the news that India was buying was a short-term sign of too much froth. It's welcome to see that I was in good company in smelling a setback that never came.

When almost every asset class is going up, then in at least a Zen sense, nothing is going up. There is too much speculation based on cheap printed or electronically-created money, much of it then lent and relent to drive prices higher.

In the meantime, the financials have been notable underperformers. Citi and BofA stocks are below downward-sloping 50 day moving averages. JPM is close. Worse, two smaller (but large) financial services companies I use as canaries in the coal mine are UMB Financial and Northern Trust (UMBF and NTRS). Each has thoroughly broken down judged by moving averages. While Northern Trust provided the mortgage on Barack Obama's home, my sense is that it is cleaner as an institution than the megabanks; it repaid its TARP money quickly. Everyone knows the financials have troubles; we will find out if that it in the stocks.

So far as new leadership, it's hard to say. I'd be very cautious about tech. It presaged the stock recovery via superior relative strength and the former successful bear Bill Fleckenstein (now a precious metals bull) has said recently that he's seeing double ordering in the tech sector and is preparing to short stocks when they are technically ready. Aside from gold, old stalwarts such as MCD and IBM are the belles of this ball. Leadership has changed, as it should, from speculative stuff to giants with large international presences and no problem accessing credit whenever they want.

Dr. Bernanke may be like Archimedes, who would have moved the world but for want of a lever. The Fed can provide an "elastic currency", but that does not guarantee sustainable economic growth. Even bigger and better levers come for the people themselves.

For now, the Street is partying as if it were 2000 and something. Are we already close to October 2007 and another economic and stock market peak? I hope not but would go with quality first and foremost.

Copyright (C) Long Lake LLC 2009

Thursday, November 12, 2009

Employment Galluping Nowhere Good Yet

In 2003, every month CNBC commentators would anxiously await the monthly unemployment numbers, as the jobless recovery moved along. The anxiety was focused primarily on the "establishment" numbers, a survey of numerous generally large to midsize employers (establishments, in other words), which performed as usual in an economic expansion and lagged the clearer jobs growth seen in the telephonically-performed survey of households.

This cycle, matters are different, assuming that an economic expansion has indeed begun. Over 1.1 million jobs are estimated to have been lost in September and October alone, more than double the 2-month total establishment job losses.

People watch initial unemployment insurance claims, which are dropping slowly and are clearly valuable, but those claims do not apply for people who were not covered by unemployment insurance to begin with. Such people include the young, housewives looking for a job either to supplement a husband's income or because of job loss by said husband, older people who suddenly don't have the assets or interest income they counted on, and those in the country illegally or otherwise working for cash.

There is a simple, free way to keep a finger on the employment pulse.

Gallup publishes the results of almost real-time polling data for free at
(Registration may be required.) It's software does not let me link to a graph, however, so I shall describe the survey, which polls people daily. They report whether to their knowledge their employer is increasing, decreasing or not changing the workforce number. On March 9-11 (three-day rolling average), those numbers were, in %:

Hiring 39
Letting go 17
No change 38.

Other dates throughout late winter and spring showed similar numbers. Yet the recession was already on.
It wasn't till almost a year ago that the percent "letting go" equaled the percent hiring.

Today, the rolling average reported by Gallup was 24% letting go, 22% hiring. The unemployment rate was rising rapidly last summer with much better numbers.

Bottom line: the household survey is likely correct. Larger companies, with more staying power, are keeping their profits up and are gradually moving toward a hiring mode. Smaller companies are struggling more.
They are looking at higher governmental fees and taxes and some are not hiring because of the health reform effort in Congress.

This is not a time to invest in any companies than those of very high quality; and of course regular readers know that I believe that we are probably not finished with the secular bear market that began either in 1997-8 or, more conventionally, in 2000.

Copyright (C) Long Lake LLC 2009

Wednesday, November 11, 2009

Ouptut Gap? No, Common Sense Gap is reporting that the Bank of England just can't stand some unused industrial capacity in BOE Stoking ‘Boom’ to Retrieve Lost Output, Citigroup Says:

Bank of England Governor Mervyn King said in London today he has an “open mind” on whether a 200 billion-pound ($332 billion) bond-purchase plan should be expanded, signaling officials aren’t ready to withdraw stimulus even as the economy recovers. Saunders (a Citigroup economist) says International Monetary Fund figures indicate the so-called output gap will close by the end of 2012 if the Bank of England’s new forecasts are correct.

The Bank of England said in its quarterly Inflation Report that it expects growth to reach around 4 percent in late 2010 and early 2011 if rates rise as investors expect. It took seven years for the economy to recover from the two previous recessions, Citigroup says.

“These are the strongest growth forecasts the MPC has ever published and far above consensus,” Saunders said. “The Inflation Report emphasizes the extent of the Monetary Policy Committee’s commitment to a reflationary bias.”

The output gap is a measure of the difference between the actual production of an economy and the capacity it could achieve based on its full potential. (Emph. added)

The idea of an output gap is beyond silly. There is a four-burner stove plus an oven in my kitchen. Presumably I should be cooking more foods. There is room for far more than two people in my house. Perhaps we should adopt?

When the horseless carriage started coming into fashion, there was likely spare capacity at carriage manufacturers and the like.

Sometimes homes, toasters, computers, oil, guns, etc. just get overproduced and spare capacity needs to be retired rather than utilized. The sort of output gap that needs to be filled is of new, better technologies. Think building factories to make semiconductors, Internet switching stations, etc. This is called new investment with a strong return on invested capital.

I have no idea if the policy makers in charge at the BofE and Team Obama/Team Bernanke are unimaginative, in thrall to various industries, or something else.

I just wish they would stick to traditional central banking, and to avoid central planning. I thought that the free market side won the Cold War.

Copyright (C) Long Lake LLC 2009

Gold Price Chart Reminiscent of NASDAQ Circa Late 1990s.

A few days ago I pointed out in Gold May Be Making a Short-term Top that gold is being sold in Harrod's in London and in vending machines in Germany, that long-term retail "investors" who are not needy are turning in gold for paper currency, and that the entire concept of the "little guy" trading his capital for an electronic blip with the symbol "GLD" might in the fullness of time be seen as silly as trading his capital for a share of a real company with the symbol CSCO at 100 times earnings. (Meanwhile, CSCO went on to about 150 times rising earnings if memory serves me well.) Perhaps there's really "enough" or even "too much" gold around. After all, if governments are going to revalue gold, almost any amount will do, correct? They can buy GLD's gold for whatever they want and then revalue the gold upward. (That's assuming GLD has the gold it says it has.) Or governments can mark the gold in their vaults with an identifier and say that only that gold has the premium price.

An alternative and probably better title that I considered for the post was: "Is It 1999 for Gold?", which I have modified in this post's title. The idea was to recall the 1990s and the rise of the NASDAQ. It kept going up year after year and ended with the blow-off period of late 1998 to early 2000. The key decision was to be long or not long the NAZ. Whether one sold into strength or not, the mistake that ruined many sensible value investors was shorting it, or ignoring it.

So long as the fundamentals of the dot.coms looked good, the bubble continued. The same looks to be true of gold. I have pointed out the virtues of gold all year, from much lower price levels, and noted the breakout to all-time price highs of the 50-day and 200-day moving averages in late summer, before the price rose.

Every time this decade that gold has broken out from a lengthy base, two things have happened. Gold has gone much further than expected, and it has corrected down after the strong rise, if only briefly, to the break-out point. (*Addendum: the exception is July 2006-July 2007. Sorry. No guarantees in any case!) In supply and demand terms, the speculators are long gold and the commercials are short some of their physical gold. It looks as though the specs have more staying power than the commercials lately. Gold is acting lately like a more sedate version of a hot NASDAQ stock today. It is up today on the good news that Japan's machinery sector grew faster than expected, that China grew faster than expected, and the bad news that the Bank of England is still so concerned about the British economy that it continues to have an "open mind" about more "stimulus" (not that I believe that most Governmental debt stimulates anything except the sector that gets to sell and trade that debt).

Gold is rising because it is rising. The cover story is the miserable financial situation of governments and their printing press technology and Ben Bernanke's famous fleet of helicopters and so on. Peter Costa said on CNBC a day or two ago that hey, the U. S. Government is going to be bankrupt in a year and a half. We all get it. Things stink. Banks are crooked and will never make a good loan again.

Now, I have no idea whether there is any gold in Fort Knox, or whether what is there is all that is supposed to be there. I have no idea whether the U. S. Government is as fiscally imprudent as I fear it is and will be. But everything I know and don't know is in the market price.

If as I did you over-loaded up on gold this summer when the moving averages quietly showed that the commodity had already broken out (was under accumulation) and that the spot price would likely follow, it is a reasonable strategy to sell into strength.

If you are "most people" and own little or no gold, that's a different story.

I ignore gold mining stocks.

The most bullish sign for me about gold besides having great sponsorship from Louise Yamada, Carter Worth, David Einhorn etc., is that the gold-only ETF Central GoldTrust (symbol GTU), trades at a very small premium to NAV. It has not been discovered the way that its sister fund Central Fund of Canada (CEF) has been discovered. CEF trades at an 8% premium to NAV though it holds gold and silver; and the same fund family has a silver-only ETF that actually trades at a slight discount to the value of the silver it holds (trades on Toronto's exchange only as of yet). If and when gold gets truly silly, one would expect GTU to be discovered.

Outside of physical metal, I have exited all my GLD. GTU appears to me to be all bullion, all the time, no derivatives, well-audited, and currently is my preferred way to own gold. Matters can change rapidly, but a look at the recent price action of GLD and GTU will see that GTU's premium to NAV has shrunk recently and thus the stock has underperformed. GTU has a larger bid-ask spread than does GLD, but GTU's spread is not large, though it is not suitable for day traders.

To summarize, gold is reminiscent technically not of the way it traded in the 1970s, when it had down years as well as up years, but of NASDAQ in the 1990s, which also went up every year and finally just went vertical after a scary correction. Under that analogy, which implies no comparison of gold's uses vs. those of tech companies, it is unknowable if a 1999-type year will occur and if so, whether it will occur. If that sort of year does occur, let us hope that the headlines that provide the impetus to buyers to buy gold at rising prices will not be as grim as many fear.

Copyright (C) Long Lake LLC 2009

Tuesday, November 10, 2009

Wall Street Bulls in Hyperdrive headlines another self-serving prediction by someone who profits in several ways from rising stock prices, the money manager Ken Fisher in Billionaire Fisher Sees S&P 500 Above 1,300 as Economy Recovers. (Billionaire?)

The Standard & Poor’s 500 Index will probably exceed 1,300 as early as February because the economy continues to rebound from the worst recession since the 1930s, billionaire Kenneth Fisher said.

The benchmark index for U.S. stocks has surged 62 percent to 1,093.08 after sinking to a 12-year low in March. It will add up to 25 percent from last week’s close in the next three months, said Fisher, 58, who oversees $35 billion as chairman of Woodside, California-based Fisher Investments Inc.

“It’s just a reversal of excessive pessimism,” Fisher, ranked by Forbes magazine as the 289th-richest person in the U.S., said in an interview yesterday. “We still have a lot more bull market to go because we had such a huge bear market.”

So what he's saying is that after a rebound from two 20% down months in Jan. and Feb. this year to be up about 19% on the year, with a huge rebound that took 8+ months to accomplish, now the S&P 500 is going to rise at, what with compounding considered, would be approximately a doubling of the index annualized.

Here is Mr. Fisher from spring of 2007 in a Forbes column:

Four and a half years and still going strong. The bull market that began in late 2002 is far from over. Pessimists will tell you that the good times have to stop, that after four years the market just has to be due for a correction. But that's because the pessimists don't look at what is driving this market.

The driver is the relationship between earnings yield (the inverse of a price/earnings ratio) and bond yields. When earnings yields are bigger than bond yields, institutional investors can make a profit by using borrowed money to acquire shares of stock. The process can continue for years, until equity prices are bid higher or the cost of money gets higher.

We're in the middle of such a process. The phenomenon can go on for quite a while. It did in the early 1960s, when a combination of cheap money and low stock prices gave rise to the conglomerate boom, personified by Harold Geneen of ITT.

Was this man prescient or what?

Better to go with Andrew Smithers, who wrote a book at the most difficult time for a realist, 1999-2000, that stocks were more overvalued than they had been all century. He currently says that stocks are about 40% overvalued.

Here's the risk-reward for some people. If you buy the SPY (ETF for the S&P 500) and hold for 5 years, you will have received about $10 for every $100 you invest, via dividends. You will have $90 at risk. If you buy a 5-year Treasury, you will have $111 dollars or so in your pocket.

Now, if you listen to and believe that the 2009 Ken Fisher prediction is going to be at least as correct as his spring 2007 prediction was incorrect, the difference between $90 and $111 is a matter of only a few months. Just think how much your SPY security will rise in 60 months!

The most astute financial minds in the known universe are bidding for money and deciding whether to lend it.
That 5-year money with a high degree of security yields about 2 1/4 percent per annum does NOT occur because these prospective borrowers and lenders, and investors, have taken leave of their senses and are passing up an almost sure thing.

When a man who became one of the richest men in America by investing other people's money suggests a likelihood of a hundred percent annualized return, you should wish America luck but wonder whether the people who are selling during the next rally are dumber or less well informed than the new buyers.

If we see corporate insider buying skyrocket as it did this past winter at much lower price levels, that would be impressive. Let's watch data such as that.

Copyright (C) Long Lake LLC 2009

Employment and the Markets

Calculated Risk addresses a Floyd Norris note on the dismal unemployment report Friday in
Employment and the Seasonal Adjustment. Mr. Norris asks, Did Unemployment Really Rise?

CR defends the seasonal adjustment that Mr. Norris implicitly questions. The statistics they are discussing involve the so-called establishment survey of numerous established businesses.

What neither person really addresses is that the rise in the unemployment rate is due to the household survey, which is derived by a separate method, namely calling almost 60,000 households around mid-month and simply inquiring about the level of (un)employment. That number was terrible, annualizing at over 6 million jobs lost.

There is no doubt that employment levels sank the past two months NBER may deem the recession/depression over this past spring or summer; or it may not. But employment levels have been dropping. 100% for sure. Are they going to rise? Likely, if for no other reason than steady population growth. But the recent (current) downturn is by far the worst for jobs since the 1930s.

Stock market bulls cite low levels of public participation as a bullish indicator. (TrimTabs cites this as a bearish indicator: go figure!)

Perhaps this time it's a little different than before. Everyone knows someone who is unemployed, underemployed, has taken a pay cut or foregone a raise, or whose business is down if not out, etc. Then a semi-sophisticated investor looks at a NASDAQ with about a zero dividend yield and an S&P 500 index with a 2% dividend yield and turns around and buys a muni bond or bond fund, or corporate bond fund, perhaps one with leverage, as the public already has 3X as much money in stocks as in bonds (per David Rosenberg's statistics) and will accept 5% taxable or less tax-free rather than riding around in stocks and some day sucking air after accumulating almost no dividends along the way. And for people who don't want/need dividends, gold and other commodities are far sexier and provide diversification for most people.

While there is definitely a logic to the madness, it remains discordant for the G20 to announce that the economy is so fragile that stimulus must be continued and then for the stock market to celebrate. That's like a round of hurrahs after the doctor comes out of the intensive care unit and tells the family that the patient is still not well enough to go to floor care.

The truth is probably that if the government had done its job the past decade, none of the insanity would have been allowed to have happened. Now, even serious investors have no possible way to assess whether financial institutions are well capitalized or not based on today's asset values. It's not fair and is corrosive to the very concept of free markets. One need not be a gloom and doomer to be cautious about having any involvement--either long or short--with a market in which these large complex financial institutions are do important. I can make a case for a much higher or much lower stock market in the next two years, or an unchanged one. While that's always "sort of" been the case, the opacity and complexity of the financials -- a deliberate situation -- has not existed before to the current degree.

The world is unpredictable enough without having to deal with potentially rigged markets with the most important information known only to insiders.

Copyright (C) Long Lake LLC 2009

Monday, November 9, 2009

What a Difference a Year Makes! Twelve Little Months . . .

A year ago-- or 8 months ago-- who could expected the following out of a article?

. . . equities rallied around the world on the Group of 20’s agreement to keep stimulating the economy. . .

“There’s nothing much to be fearful of in the short term and the market’s been in a nice uptrend, so it makes sense volatility would taper off,” said Yu-Dee Chang . . .

U.S. stocks extended a global rally after U.K. Chancellor of the Exchequer Alistair Darling, hosting a meeting of finance ministers from G-20 nations, said his colleagues decided to keep interest rates low and maintain record budget deficits until economic recoveries take hold. Commodities climbed, sending gold to a record above $1,100 an ounce. . .

“As soon as the market shows any signs of stability people are willing to sell options,” said Steve Claussen
. . .

Please note that I am going to stop listing the companies the quotees work for as much as I can, to avoid advertising and because the writer is simply finding people to say whatever the writer/Bloomberg wants to push as a theme for the article.

In any case, one year ago, if someone had said that the G20 would be locked limit down in a zero interest-rate world because the economy was so horrible, the idea that the stock market would be surging to well above the level it was at a year ago would have sounded surprising. It was only 9 months ago, after all, that Barack Obama's economists predicted that unemployment would peak at 8.0% after the passage of the ARRA "stimulus" bill. We would already be at 11% if not for all the labor force dropouts.

Speculation in financial markets is back. It is back because leverage is back (or, never really went away). As with the Gold Rush, it is the middlemen who prosper during the leveraged moves. However, in the real world, few people are speculating on a better economy by investing for growth. When that happens in a big way, rates will rise, perhaps rapidly, and asset prices may fall.

The average dividend yield for all S&P 500 stocks is 1.8%; by S&P's calculations it is 2.05% or so (the higher number is weighted, not average, I believe). 140 stocks of the 500 have no dividend yield at all, something that was almost anathema in more conservative times. Stocks such as McDonald's that have decent dividends have virtually no insider buying year after year. When I was growing up and when long-term Treasury rates were also "low", a dividend yield of 3% was considered a sign of a stock market top and 6% the sign of a bottom. These days could well return. In other words, dividend yields could triple and the averages could be exactly where they are today -- in nominal terms.

As PIMCO recently calculated, financial asset prices have been on a long-term tear starting from 1957. Tobin's "q" ratio per Fed data suggests that a fair value for the Dow is around 7000-- around the March lows.

This is the opposite of 25-30 years ago, when labor was arguably overpriced, and as an intern earning less than minimum wage and with tens of thousands of dollars of medical school debts, I was happy when PATCO was slapped down by President Reagan. Things have come full circle. Labor needs work and needs better real wages, and the overfinancialized world needs simplification and prices of financial assets that are legitimately attractive to buyers, including insiders in corporations.

"Money" is "cheap" because the banks and borrowers don't know what to do with it.

Gambling in the markets remains best suited for pros.

Copyright (C) Long Lake LLC 2009

Sunday, November 8, 2009

Gold May Be Making a Short-Term Top

There is increasing evidence that gold's price has moved up too far, too fast. Please consider the following article, titled Toledo consumers turning their gold into green. Here are some excerpts:

But while the price of gold has risen, demand for the metal has fallen in many sectors -- such as electronics manufacturing and dentistry -- while its demand as an investment vehicle has risen sharply, according to the World Gold Council, an industry advocacy organization. . .

"People are seeing [the price of gold] in the news and starting to go through their jewelry boxes and bringing in things," said Ed Szymanski, owner of Estate Jewelers in Sylvania. "Before, we just got people coming in to pay their rent or stuff like that. Now we're seeing more affluent people coming in and clearing out their jewelry boxes to cash in on the price."
When "affluent people" cash in on the price, they are doing what the smart people did when silver was bubbling to or from $50 per ounce in the days of the Hunt brothers doing their Icarus imitation 3 decades ago. And remember that earlier this year, the story out of India was that people were finding $900/ounce expensive. They are loving $1100? You can completely ignore India's central bank purchase of gold on the other hand; central banks are "forever" holders in theory, this was a political deal with the IMF, and India has almost none of its reserves in gold anymore. That gold soared allegedly on the India news smells like distribution from the smart money to the public to me.

Paris is in gold (click on image to enlarge). Uh oh. Harrod's is going to sell gold in its London store. China is off-loading gold onto its people. Germany is reported to be in the process of allowing gold to be sold through vending machines:

Jens Willenbockel, an investment banker who saw the machine while passing through the airport, told the Financial Times that he believed there could be a market for the venture.

"Because of the crisis there is a lot of awareness of gold," he said. "It is also a great gift for children – for them getting gold is like a fairytale."

Once gold becomes a gift for kids, it's probably over-owned. And is Paris Hilton more likely to be a contrary indicator or an expert who's ahead of the curve?

The whole gold ETF story could one day be looked at as a scam, just as the Internet bubble was a scam. These ETFs could just be a place for unwanted, over-produced gold to be dumped on the public. Tell me gold's worth $400 an ounce or $4000 an ounce; I can accept a case for each. But I can tell you for certain that the Dow is not worth 40,000, and it's probably worth a tad more than 4000.

From a technical standpoint, even this calendar year gold traded around 800. When a major commodity such as gold has an over 30% year on year surge, that's huge. Can it keep it up? Yes, a la the S&P 500 in the 1995-99 time frame. Will it? I dunno. But at least the S&P pays a dividend; and it was a horrible investment on a longer-term standpoint. Gold costs money to have an ETF hold it.

Fundamentally, neither silver nor platinum are anywhere near their 2008 highs and have only fair long-term charts. Therefore it takes more courage to own them; it takes no courage to hold gold now.

People who have a lot of gold may want to sell some or hedge by selling options. Gold is definitely NOT in a bubble. But it may be ahead of itself.

Copyright (C) Long Lake LLC 2009

Saturday, November 7, 2009

A Small Financial Transaction Tax Could Not Sink a Reasonably Valued Stock Market

Sometimes people get a bit overwrought. In a post today, Mish asserts that a proposed 0.1% financial transactions tax would cause the stock market to crash. If he is at correct, and he speaks to many people, that would suggest that stocks are wildly overvalued. There's too much short-term trading by far.

The list of negatives mounts, ranging from the waning momentum, reversal of the rally in commercial real estate securitized debt, the near certainty that Citigroup would be insolvent were it not for all the massive government support, the certainty that Fannie Mae is essentially insolvent, the absurd attempt to reflate the housing bubble with full faith and credit loans from FHA, the fact that stocks rose all week on steadily declining volume, and the (so far) perfect trend reversal of the VIX.

Perhaps the event that will spark at least a brief bear move in the stock market will be the involvement of a big fish in the hedge fund investigation. Zero Hedge is suggesting that SAC Capital is being looked at by the authorities.

Given our post yesterday about fundamental overvaluation per "q", the weakening technicals should be respected.

Copyright (C) Long Lake LLC 2009

Government-Run Economy?

In Obama’s to Fix op-ed in today's NYT, Charles Blow says that the current President needs to fix the jobs problem.

This view is all over the media.

What I wonder is whether the American people really believe that the Federal Government really can, or more importantly, should "fix" the jobs problem.

The proximate cause of the miserable jobs market is that government and its allies in Big Finance and subsidiaries such as homebuilders did not respond to any market forces and instead created an unbalanced economy and speculative financial companies. The simple solution is for Government to fix this financial mess while at all levels of government helping to support the truly needy. Force banks to do only banking and let gamblers gamble and win or lose without any claim on the public purse. Unfortunately, the Obama administration appears to be proposing things that move in the other direction. For example, you and I are now on the hook for huge quantities of FHA loans to subprime borrowers. Why? There's nothing wrong with renting.

Even an administration that fought against Wall Street scams, FDR's, did not really make a dent in unemployment.

In this rich country, which produces more than enough food, clean water and the like for all residents, and which contains a housing stock that can already house far more than the current 300+ million residents, and where the great majority of consumer products have 90%+ gross profit margins (meaning that companies don't really need all their employees just to get the goods out the door), the question of the need for "growth" at the expense of risk and stability of the system, the external environment, fairness, etc., must be discussed. The faster you drive a car, the greater the chance of an accident AND the greater the harm from said accident.
That's exactly what happened last year when a garden-variety recession transformed almost overnight into a jobs depression. Growth is not always good.

Putting jobs in perspective, let us say that the latest jobs number show 1 in 5 workers are unemployed or underemployed. Let us also say that the average worker works 2000 hours per year, counting commuting time. Why couldn't we get to full employment and have the average worker work 1600 hours per year, have more time off, and thus enjoy life more?

Now, I'm not specifically advocating for or against this outcome, but the underlying point is that the country must think through how it wants to allocate its human and physical resources. Does government at all levels have a necessary role in this process? Obviously. In a capitalist democracy, is it government's responsibility to decide on how hard people should work, how many motor vehicles should be in existence, how many homes of what square footage there should be and whether they should be rentals or "owned"? No. Especially when nowadays "ownership" means having little or no equity in the home. Sounds like renting under another name to me.

Public-private partnership re the economy? Yes, that's the way America grew. But a cursory review of the Declaration of Independence shows that governments are instituted among men to secure individual benefits, and the Constitution begins with "We, the people". Power emanates from the people. Government should be the servant and not the master. Thus Mr. Blow's op-ed has it backwards. The Feds need to do a better job regulating and improving the mess they helped create. The private sector in conjunction with more local governmental entities will work as hard as it wants doing work that it wishes to do to serve the real needs and desires of the people.

Copyright (C) Long Lake LLC 2009

Friday, November 6, 2009

Stocks Remain Overvalued Along with Most Other Financial Assets

Please click on this graph for more detail. It shows to related measures of long-term stock market value as of 9/17/09 based on estimated replacement cost of the assets of companies comprising "the market".
Stock market veterans will automatically correlate this with the Dow or S&P 500.
The eye notes that at the so-called secular bottom of the market averages this winter, valuation was only average. The eye also cannot fail to note that descents from high valuations and rises from undervaluations have been long-term events, though of course with choppiness.
This ratio does not predict any short-term stock price movements.
However, my favorite unloved metric is dividend yield of the average stock--which is said to be below 2% for the S&P 500 average stock (?market cap weighted) vs. that of the 5-10 year Treasury note.
Stocks currently provide inadequate current income and are overvalued. That suggests that risk is high. This is so in my view especially with the attempt of stocks today to rally despite another dismal unemployment report out of BLS.
Unfortunately, gold and silver are momentum plays now; bond yields are "low" (whatever that really means); cash is trash; and Big Finance rules the roost for the nonce along with Big Government. Business is playing defense.

So should most investors.
Copyright (C) Long Lake LLC 2009

Thursday, November 5, 2009

Jobs Friday

No, not Steve Jobs. Jobs jobs. BLS reports on October jobs tomorrow. has already given me the real answer. Hiring has not picked up. And banks are by all accounts not yet lending, so businesses continue to consolidate.

Nonetheless, data is (are) data. Last month, what was truly disturbing was the massive job loss in the household survey. If there had no been numerous total drop-outs from the labor force, the unemployment rate would have been reported as 10+% in that October report. While the so-called establishment survey is also of interest, it is highly likely that that result will be better than reality, as it is skewed to the larger companies that, well, are established. The household survey is based on phone surveys.

Also please check out the so-called birth-death adjustment. It has greatly minimized the weakness in the employment situation ever since the economic banana began. Click HERE for a link to the site. It is not part of the BLS news release. "They" don't want people getting to it easily, one might suspect.

Interesting that as more insider trading charges are brought and several important companies stocks' crash on high volume, stocks rally. We are finally seeing stocks bought and Treasuries and gold sold (or at least not bought). A nice day at least in that regard.

Copyright (C) Long Lake LLC 2009

Echoes of 1987

Yours truly began self-managing his and his wife's IRA stock portfolios with a discount broker in January, 1987, moving funds from Dreyfus Mutual Funds. That year was like a final exam for a young investor with 7 years of experience in the financial markets. This period now reminds me of pre-crash 1987.

What was happening as the year wore on is that more and more stocks, or stock groups, ran up and then collapsed hard. The averages kept moving up, but the underpinnings just kept looking weaker. Then of course there was an accelerating down-move that simply brought the averages back to their multi-year uptrend line, and the bull market resumed. Shortly before the crash of 1987, Barron's featured an article about a new trend, which was of the sudden riches that young people in Wall Street were enjoying. Sound familiar, with financial companies paying out huge bonuses again?

We are now experiencing what looks like pre-crash 1987-type action. Just as the skeptics have been pointing out, the move off the March 2009 lows has been a low-volume affair. Just today, ARO (Aeropostale) and CVS have had gap openings sharply down on huge volume. Other stocks have done the same recently, and others that would appear to be of high quality such as Northern Trust and FPL have just both collapsed/eroded into bear configurations. And, the chart of Treasuries has just turned bearish. Just as are the financials that led the averages up, these and other gapping-down companies of late have little or no dividend yields. So the longer-term holder of these stocks is left sucking air. CVS was a high-30s stock. What does its owner do when CVS, with little or no dividend yield and selling at over 100 times tangible book value, is suddenly a high-20s stock?

The salesmen, touts and the like for the stock market tell you--correctly--that Treasuries are a risky investment. Their solution: buy CVS and the like because of this and that reason. What they don't tell you is that CVS usually reports a negative tangible book value. This is allegedly because of purchase accounting. But maybe their modus operandus is to overpay for acquisitions to create the illusion of growth in what is not an especially profitable business? If investors don't see a sustainable dividend flow, or a Microsoft-type build-up of cash on the balance sheet, they are at the mercy of being left wondering whether to buy, sell or hold on a 21% down day for the stock when the averages are soaring.

At least if you hold a 10-year Treasury yielding 3.5% for 2 years, you get back 7% and then only have to hold for 8 more years to get a do-over. A stock is forever. Paradoxically, that "foreverness" makes people trade it, because for all they know, CVS will go down every year for the next 20 years.

I recently read an online article about how many bears of 1-2 years ago have switched to the bull camp. On the other hand, I haven't heard of a bull of 1-2 years ago who is now bearish. Yet the energy is to the downside as in 1987.

Plus you may have noticed that unlike in 1987, the path of least resistance as per trendlines is down for the stock averages, especially adjusted as they really should be for the general price level.

I still like McDonald's for the long haul, but I liked it better at $56 than at $61.

With today's soaring productivity numbers, it is looking increasingly likely that the headline news will become "less good". The structure of the stock market makes it look to me increasingly as though a more general "correction" will follow the volume of leaders such as CVS to the downside.

One also wonders if the profit-taking in gold today is a warning for stocks, given that gold has been the leader; or is it the beginning of a welcome turn toward real rather than monetary wealth creation via human ingenuity and effort.

Copyright (C) Long Lake LLC 2009

Same Old Washington as Malaise Continues

The media report that new unemployment claims continue their gradual descent from their highs of this winter. Of course, if you are one of the army of unemployed young people, you may never have gotten your first job. Almost certainly, real unemployment is thereby underestimated by looking at new claims. What are the current data showing about today's economy?

First, businesses have downsized and fought for profitability. This is proper capitalist behavior. It's not the fault of any individual company that a lot of large new industries are not ready to suck up lots of job-seekers.

However, let us say that this post-tech innovation era is in an interregnum phase until the next New Thing appears. Until New Thing's appearance, the watchword is "Houston we have a (jobs) problem".

So, a pair of chief executives named Bush and Obama struggle on playing weak hands, printing money/debt at paces exceeding the growth in their "company's" revenues.

And so jobless benefits are extended over and over again, as the economy can meet the real needs of its people and foreigners who wish to buy our products with fewer people working.

The easy answer for Mr. Obama's company to do, since it is a non-profit entity, is to invest and invest some more on accelerating research and development efforts on new products. There are obvious candidates in medical, energy and other fields that can benefit the country and the world if successful. Not all will succeed, but at least people will learn things, more people will be employed trying to create a brighter future, and the sense of national malaise will tend to lift simply by a President doing the vision thing.

Rather than continuing to borrow money to pay oldsters a cost-of-living benefit in 2010 without any regard to need, I believe that that money would be better spent putting people back to work on R&D.

It's about the future.

But politics is about buying votes.

So the malaise and money-printing continue. Eventually a next New Thing will occur. We are reduced to hoping that the change will be a Good Thing rather than a Bad Thing.

Copyright (C) Long Lake LLC 2009

Wednesday, November 4, 2009

Discover(R)-ing More Bad News, and Gold Buyers Don't Care

The monthly Rasmussen-conducted survey for the Discover(R) card people is out today. Click HERE to access it. This young survey does cover all of the current (or, recently-ended) economic downturn. This is no evidence that the economic banana/recession/depression is over in the world of real, living people rather than of corporations. A record low 44% have money left over after paying monthly bills. Fewer people plan to save or invest in November than planned to save or invest in October in the prior month's survey. Holiday spending plans are poor.

There is little to no good news in this survey.

This finding is corroborated by similarly gloomy, highly recessionary readings in's poll published daily.

There is no price inflation anywhere except that created by government money-printing. "They" are inflating before any real deflation.

The financial markets are divorced from the real world precisely because times are so bad. Cheap money is being used for speculation. This never ends well, but it makes predictions impossible. If you met me, you would probably not mistake me for a broken record, but once again, gold outperformed stocks in trading today. This was despite gold having massively outperformed stocks yesterday and spending most of the day finally lagging a strong advance in stocks. By the closing bell, however, stocks had faded but gold had not.

The trend is your friend, until it is not. A former CEO of Goldman Sachs lost his re-election bid for N. J. Governor last night, and GS (the stock) set a new 3-week low today for the first time since March.

Short-term, the rally in commodities has the look of money chasing performance. That usually does not mean that it's time for investors to sell, but it does mean that new money is "too late" to come in, and that sharp corrections can occur at any time even if the intermediate- or long-term trend is one of outperformance.

Sophisticated and patient money could, for example, sell naked puts on gold here, or buy and sell covered calls. At times of economic stress, it is important to take the long view. Economic activity goes up and down, and while gold endures, its relative value versus other assets is unpredictable. As a long-term store of wealth, gold is looking 'OK' but at a certain point could become solely a trading vehicle.

Copyright (C) Long Lake LLC 2009

Despite the President's Confidence, Talk About a Bad News Cycle!

Increasing evidence is that Barack Obama has suffered two body blows within a week-- and the stock market is rallying on the news. First is of course the off-year election defeats in states in which he campaigned--especially New Jersey, where he personally campaigned often. Nonetheless, despite his pre-election weekend personal appearance, the ending trend went against him.

More important from a policy standpoint is this report dated today from ABC News, Top Dems: No Health Care Bill in 2009 which begins:

Senior Congressional Democrats say reform before end of year is highly unlikely.

Senior Congressional Democrats told ABC News today it is highly unlikely that a health care reform bill will be completed this year, just a week after President Barack Obama declared he was "absolutely confident" he'll be able to sign one by then.

"Getting this done by the by the end of the year is a no-go," a senior Democratic leadership aide told ABC News. Two other key Congressional Democrats also told ABC News the same thing.

This may come as an unwelcome surprise for the White House, where officials from the president on down have repeatedly said the health care bill would be signed into law by the end of the year.

"I am absolutely confident that we are going to get health care done by the end of this year, and Nancy Pelosi is just as confident," Obama said Oct. 27 at a fundraiser for the Democratic Congressional Campaign Committee.

Along with what Republicans call "dithering" on Afghan policy, there is an increasing perception that Mr. Obama is a weak leader. This blog has criticized him for not proposing a specific healthcare bill. If no bill emerges this year, the idea of having various committees write different drafts of healthcare reform may go down as a major strategic blunder, on par with President Clinton claiming that Hillary was the functional equivalent of a government employee and putting her in charge of his reform effort. The result was a White House healthcare proposal that could not even get a vote on the floor of a House controlled strongly by Democrats.

Health care policy should not be a partisan effort. There should be changes to policy that appeal to the great majority of the people. This should not be a wedge or partisan issue.

Strangely, drug stocks are up sharply today on the above pieces of news, even though Big Pharma was treated well by the administration. I am not sure that this is an appropriate reaction by the market in the short term.
Longer term, they are decent value.

Perhaps 2010 will be a year for bipartisanship on Capitol Hill. You never know.

Copyright (C) Long Lake LLC 2009

ISM Reports Non-Manufacturing Sector Results as Precious Metals Sizzle

The Institute for Supply Management (ISM) has reported on its October survey results for the non-manufacturing sector. The results are mixed.

Business is rebounding, but imports are way down and exports are way up. In other words, the dollar has been devalued, and the U. S. is not increasingly working away making things for people in other countries.

However, almost no businesses yet feel that they need to increase inventories, and hiring took a nosedive.

Without wage pressure, there will be no real increase in the general price level worth worrying about.
Thus one underpinning of gold's price may be illusory in the short term. Longer term, matters will be very different; but that's life.

Meanwhile, precious metals are soaring. Gold is looking a bit too much like a momentum play short-term to make me happy now. I have been constructive on gold since the blog began late December last year. It has soared even as prices have moved in reverse and healing has occurred in the economy. It cannot be shorted here by ordinary investors. Patient investors who want to accumulate it are in the trap that it may soar non-stop. My guess is that it will have a short-term sell-off to scare the bulls, but that if it rushes straight to the $1200 target that some prominent technicians have, significant profit-taking will then ensue.

Copyright (C) Long Lake LLC 2009

Tuesday, November 3, 2009

VIX and Gold have Gap Days: Implications

The above charts show GLD and the Chicago Board Options Exchange Volatility Index = VIX. Note that Monday morning, both had a gap opening and stayed above the prior day's trading range all day. The VIX petered out after a huge run from under 20 to over 30 in a week or so on little news. Gold surged dramatically today, along with silver. Treasuries sold off.
More likely than not, the VIX and gold will settle back, though gold has so much momentum, who knows? I did take a modest sum off the table in gold today at the close.
Not shown re the VIX is the sudden turning of the 50 day moving average at a fairly elevated level near 25. If, as I now suspect is more likely than not, this moving average turns up, that would correlate with a correction of stock prices downward.

Furthermore, Treasury prices have trended down and now look to be in a definitive downtrend. With the economic cycle pointing upward (though in a ragged manner), Treasury prices down (yields up), gold and silver surging, a correction in stocks would be more likely than not a buying opportunity for traders.

Longer term, the belief here is that most financial assets are too high-priced relative to the most important price, which is wages. They're just stocks and bonds, after all; they're not gold!
Copyright (C) Long Lake LLC 2009

Kitco Metals PR Head Is Bearish on Gold While Switzerland Is Running Out of Vault Space

Courtesy of a post by Mish today, I became aware of a Seeking Alpha interview with the head of PR for Kitco Metals, Inc., John Nadler. The intro to the interview says:

But don't be fooled, says Jon Nadler, metals market analyst and PR head for Kitco Metals, Inc. The precious metals expert says the current bull market in gold is all an illusion—one that the fundamentals can't support for long.

Mr. Nadler goes on to list 4 unpersuasive reasons why the conditions for a gold bull market are not present.

Meanwhile, Mish presents a persuasive chart that shows gold rising against multiple currencies on a multi-year time frame, with support trend lines intact.

Meanwhile, in real time, I have just clicked on Kitco's Gold Index web page. This shows that the price for an ounce of gold is down $2.20 (0.2%), but a strengthening dollar accounts for a drop of $7.20, while intrinsic buying is raising the price by $5.00. In other words, global demand has pushed the price up by 1/2%, which is offset by the strengthening dollar.

I believe that the gold bull market in essence if not to the day began September 11, 2001. Since then, gold has about quadrupled in dollar price. The Euro has less than doubled, as has the yen. Thus gold has outperformed fiat currencies in general this decade and is NOT solely a weak dollar story.

Early in the decade, gold was reverting to the mean. It is now in a bull market of undetermined duration. Gold is not cheap in relation to the average wage. It has a more or less average value relative to oil and stocks. The credit-driven Fake Recovery from the 2001 recession appear to be repeating itself, though various economic dynamics and cycles mean that the sector leaders and other factors will be different.

If you look at the charts on this page, which are from Kitco's website, you will see that gold is in a strong bull market. On a 2-year basis, the new high we saw recently is but a blip.

To put it all in context, gold briefly hit $700+ per ounce in Jan. 1980. (A couple of trades occurred around $850, but let's call $700 the real high.) Gold averaged $615 per ounce in 1980.

Gold is up 40% in nominal price from an amazingly high average price in 1980. However, oil has about doubled from its $36/barrel price set in 1980. Trend followers, and who knows how much fundamentally-based money, is buying the dips in gold. In 2-4 weeks, we will be lapping gold's lowest price of the global financial crisis. This will put a kind of gravitational pull downward on it, as will the amount that it is above its 200 day moving average.

But, given that the global economy has not been allowed to rest and recover organically, but instead massive government spending has goosed China, the U. S. and the U. K., there is every reason to expect that with regard to the anti-credit money asset-- gold-- will do this economic cycle what it did the last one. As I see it, no corporate insiders to any degree are buying U. S. stocks, but it is not dumb money that goes to the trouble and expense of storing record amounts of gold not under the mattress or in a safe deposit box but in Swiss vaults that are reportedly so full up that more vault space is being created. That smells like a true bull market to me.
Copyright (C) Long Lake 2009