Relationship of "ForeclosureGate" and Type of Ownership of Precious Metals

When a mainstream reporter, Diana Olick, of CNBC, reports some disturbing and scary informed speculation about what may happen regarding the foreclosure situation, in today's piece titled Foreclosure Fraud: It's Worse Than You Think, one has to worry about the care that large financial institutions have given to their legal responsibilities.

The entire MERS-related structure has been questioned and has been the subject of suits.

Of course it is public knowledge that the finances of Big Finance are murky, given extensive difficult-to-value assets.

None of that is any of my specific interest, given that I sold all my financial stocks in winter/spring 2007 and paid them little attention except from the short side in 2008-winter 2009, and then did one quick trade on Wells Fargo from the long side this year (a winner, at much higher prices than today's).

What concerns me as a precious metals investor is that I have read the GLD and SGOL prospectuses more than once for each. The custodians and other major players in these entities that hold physical gold are all Big Finance companies. The prospectus for each entity is replete with all the things that can go wrong with the chain of custody of the metals. They also make clear that if some metal goes missing or is impure, investors have few protections.

The metals may have subcustodians, which themselves may have subcustodians, and these entities may lie/cheat/steal, or otherwise screw up, without the investor being able to recover damages.

Thus I am happier owning the Canadian trusts to own physical gold without actually owning the gold. The stock symbols are GTU and PHYS. Their prospectuses disclose where the gold is; there is no subcustodian. At least in the case of GTU (Central Gold Trust, run by the same team that runs CEF, the Central Fund of Canada), the directors do not even carry insurance.

Right now, the premia over NAV for GTU and PHYS are at historically low levels. This along with the slow ramp-up in assets in the Rydex SGI Precious Metals mutual fund and the utter lack of speculative froth in Newmont, Goldcorp and Barrick suggest to me that the strong bull market in gold is the most apathetic one from the public's standpoint I have ever seen in any major asset class.

Whither gold prices?

The investment guru Bill Fleckenstein somehow delivered outstanding results from his short-selling hedge fund that he started "too soon" before the stock bubble was close to peaking in the late 1990s. He brilliantly closed it right near the bottom of the bear market almost two years ago and basically became a precious metals investor in his new fund.

He wrote a column several months ago in which he only half-jokingly said that by the time the top of the gold bull market would be seen, Big Finance would have embraced the trend so much that it would be promoting all sorts of investment vehicles in precious metals and would be taking large investors to tours of out-of-the-way mining sites.

Perhaps that has now begun. Goldman Sachs is now out with a bullish upgrade on gold and silver prices. Price targets for one year from now are $1650 for gold and $27.60 for silver.

Maybe it's just wishful thinking, but maybe, just maybe, the idea of anchoring the money supply with a metal that would take away from the Fed the ability to centrally plan the money supply of a continental country (and then some) is gaining ground.

In the here and now, gold and silver prices are both extended and ripe for profit-taking at the very least. Looking one year ahead and applying the "Elfenbein rule", the Goldman price projection for gold appears quite reasonable.

Given the continued upside price potential in concert with the safe-haven reasons I invest in gold, I want to be as confident as possible that the gold in the fund I own is actually "there" and not mishandled, as it appears the documentation surrounding mortgages often became. Thus I trade away the liquidity advantage of GLD and other Big-Finance-custodied gold funds for the much less tradeable GTU and the more liquid PHYS.


Copyright (C) Long Lake LLC 2010

Goldman and Gold

It can hardly be a coincidence that the news of a civil (NOT criminal) SEC action against GS broke on an options expiration day and that precious metals were taken down more than stocks as a whole. The whole thing stinks.

If we see some more of this sort of stuff that will likely lead to GS paying back the government with our own money but that generates good headlines, then we will have the fake downleg of the bear market a la 2002: a post-recession down-move that allows the Fed to stay easy for longer and that provides the volatility that GS and its confreres thrive on.

The S&P 500 VIX is only 18 and should exceed 20 to even classify as a minor correction.

The strongest stocks to hold are in my opinion those that retain the strongest support today and are in a short-term uptrend despite any down-moves today. Think MCD, IBM and ORCL. Traders who don't own "enough" GLD or the like may want to be brave and buy on the close. The rumor is that "they" are taking the precious metals down because Paulson & Co., GS' counterparty on the short side for the toxic CDOs Goldman sold, is long lots of GLD. I doubt this has legs, and to the extent that the SEC action shines a new light on old shady deals, it may remind people of the house of cards that comprises so much of our financial system and thus may draw them anew to gold. On a trading basis, GLD is down much more than the smaller Canadian ETFs (stock symbols) GTU and PHYS, even though they now trade rich, at about 8% premiums to net asset value.

Copyright (C) Long Lake LLC 2010

Today's Commodity Markets: Stocks vs. Commodities Ownership Per Se

Based on current prices, palladium-- the "junkier" platinum group metal (vs. platinum itself) is off 11% since Wednesday's close (less than 2 full trading days; it being Friday AM now). Gold is off 5%, platinum off 6%, and silver off 7 1/2%.

On a 2-year basis, the GDX index of gold miners' stocks is off about 17%, whereas GLD (passive ownership of the metal) is up about 19%. On a short-term basis, gold mining stocks are off their peaks much more than gold itself.

On a 5-year basis, GDX is up about 5% (1% a year, underperforming money in the bank), whereas GLD is up about 140%.

In other words, the focus at EBR on owning the metal rather than the stocks of the producers has worked. So long as mining stocks are priced insanely, with no requirement by investors that they actually return large dividends to shareholders as Homestake Mines did in the 1930s, then the basic economic argument for gold ownership continues. This argument is simple. It is that gold is becoming scarcer and thus more expensive in real terms to produce. Environmental concerns enhance that expense. Thus, one of the reasons for projecting increasing gold prices is the difficulty of creating refined gold. However, that point is an argument against owning a mining company.

GLD, GTU, physical ownership of gold, etc. They are all variations on a theme. Most investors have been trained to own gold in the ground (stock market gold) rather than the thing itself.

This concept is also true for silver, platinum, and the like. Should stock prices fall relative to the price of the commodity, the investment case could shift to favor ownership of the stock rather than the commodity itself. For now, ownership of a durable commodity such as a metal of course does not protect one from booms that turn into busts or simple changes in "sentiment", but it is the anti-AIG, anti-Fannie Mae mode of investing. So long as the fund or other caretaker holds the metal it says it holds, or your bank vault is not cleaned out or the like, you own a thing that simply is what it is when you own the commodity rather than a minority share of a corporation that may never make a dime even if it churns out the metal as promised.

Commodities bears are growling loudly and scarily. Are these bears nothing but paper tigers?

I have no idea, but . . .

During sharp market moves, investors who own commodities outright, without margin debt, can sleep well so long as they can live their lives if the commodities drop sharply in price. A severe drop in price, which tends to reverse if the commodity is an essential one, may however bankrupt individual companies, but the commodity itself cannot suffer that fate. It survives to "fight" another day. Ownership of a common stock of a metals miner is mostly for suckers.

Copyright (C) Long Lake LLC 2010

Thursday Night Market Update: How Long Can Wage Weakness Be Ignored?

Per TrimTabs (subscription) tonight (July 23), the Treasury Department of the United States-- hardly a "bear" reporter--reports a worsening of a marvelous proxy for wages, namely wage withholdings. Click on picture to enlarge.

This is consistent with UPS, which said Thursday that July's business was not improved over June's. This after two full years of Fed easing!

Starting with Volcker's easing in 1980 (to elect his patron Jimmy Carter) and then in 1982 (after keeping tight money long enough to ruin Reagan in the 1982 midterm election), the macro financial game of leverage was easy. All the authorities had to do was just keep money flowing as long-term rates dropped and the underlying real economy weakened out of sight of the populace. This game began to end after the 2001 recession and has changed this cycle. Sweden has gone to negative interest rates for savers. The true lack of economic vigor--the "hollowing out of America"--is plain for all to see. Thus the increasingly jobless recoveries after the 1990-91 and then the 2001 recessions, and the horrible jobs performance in this decade's expansion and then the current economic downturn.

The sea of liquidity has pushed "investors" into all sorts of speculative "investments". The idea that Ford Motor Co. ("F") has a stock market value of $20 Billion with a tangible net worth of
negative $18 B, no prospect of operating profits any time soon, intense competition from the government-sponsored GM and Chrysler as well as the non-unionized Japanese and other transplants and imports, is ridiculous.

The flailing and failing "evil empire" known as Microsoft has collapsing sales and earnings, yet the stock has soared in the low-quality rally of the past several months. MSFT has about $210 billion of stock "value" embedded in its price over and above its cash and other tangible book value. It sells for more than 4X sales per share, 10X tangible book, and is in decline. Rather than paying a nominal dividend, it should rather be paying out 7%; should spin off its money-losing new ventures for whatever value the market will give it, and go into a semi-run-off mode.
But that would not suit management's interests, so it will not do that.

Meanwhile, Rasmussenreports.com and Gallup.com each document a sustained increase in "wrong track" sentiment from the populace, increasing fear of rising Federal deficits, some worsening in the views of the economy: these in the face of a stock market that has put the bears on the run.

Probably the worse stock news is that "sensible" consumer-oriented stocks that pay rising dividends, have rising earnings and reasonable P/E's and will certainly be around 10 years from now, MCD and WMT, and that were last year's only 2 Dow winners, are acting very poorly. Anyone who believes in the general stock market because of the "golden cross" of the 50 day moving average above the 200 day ma should look at the chart of MCD in that regard: so far, the golden cross has been a sell signal, not a buy signal; this despite a far better financial performance than the stock market's constituent companies.

Meanwhile, Bloomberg has reported that Swiss gold vaults are full to overflowing; gold may be over-owned, at least temporarily. Yours truly monetizes his "GLD" gold holdings by selling covered calls and is short puts. Income first, prospective capital gains last is the watchword for the future, so EBR believes.

On a global basis, the US economy and stock market are laggards this year. Let's see how our market responds should the gamblers who are gunning the Chinese stock market take a breather. Assuming TrimTabs is presenting the Treasury facts accurately, the risks are to the downside, as Nouriel Roubini has been saying. "Green shoots" may already have withered.

A gambler in the US might just want to buy "TLT", which is an ETF that provides ownership of the long T-bond. Talk about an out-of-favor asset, down 25% in price since December 2008!

Copyright (C) Long Lake LLC 2009

Nowhere to Run, Nowhere to Hide

The markets continue to be uninspiring at best. Any hope that the President's speech to Congress last night would provide an uplift to any market was dashed. Not only did stocks sell off, they did so in the worst way, losing support both in the AM and into the close. A familiar pattern continues, with rotation occurring while the overall market trends lower. For example, HMO stocks were weak all day and weakened into the close. Gold and silver moved lower today after being higher at mid-day. Unlike the explosive move that Treasuries had last fall, gold is getting close to the anniversary of its all-time high. GLD has had about a zero total return over the past 12 months and thus has only been a relative-strength story. SLV is a worse performer; as silver is not really a monetary metal, its strength the past few months leads me to be skeptical not only of its move but that of gold, as well.

Within stocks, the McDonald's "indicator" is flashing red. The stock, the second-best performer among the Dow 30 last year, has a miserable short- and intermediate-term chart. An up-move to 57-58 will be met with supply from chartists. WMT has a down-chart in a more advanced state of breakdown. And these two companies are the best in breed amongst the Dow given the poor economies worldwide. Safe-haven stocks such as pharma companies look terrible, including stalwarts such as J&J. Strength today in P&G and AT&T follows a poor recent performance from them. More of the same bear market action, boringly and depressingly. Where is there an end of it, the silent wailing?

Treasuries have a poor technical configuration, but at least this is a seasonally weak time of year for them.

Meanwhile, the ranks of bears is shrinking as the markets deteriorate. Robert Prechter has removed his bear shirt and called for a sharp up-move in stocks. After the Obama victory, a number of other prominent bears such as Bill Fleckenstein turned somewhat bullish. The more the bears drop out while markets deteriorate, the more I want to think that something is wrong that these experienced pros are missing, and I don't want to be exposed to the downside action until I find out what they don't know. We all know that a stock market that has dropped so far, so fast can shoot upward at any time. We just don't know why it doesn't do so.

Technically and fundamentally, matters are a mess. The Administration and the Fed present somewhat coordinated strategies that present no coherent front and appear to leave Citi and its brethren zombiefied. Gold and silver appear to have been sold to the public a bit aggressively. Treasuries are beginning to have credit risk priced in and certainly have no shortage of supply. As for stocks: if the Dow 30 or the S&P 500 were a single stock, and you evaluated it on the basis of earnings, earnings growth, stock chart, and underlying hard assets (ignoring intangibles and goodwill), you would conclude that at best it was a trading vehicle, not a buy-and-hold type of stock.

The only one of the above that can be ascribed to the new President is the supply of Treasuries. It just may be that it is, from the standpoint of markets, 1931 or early 1974, and what is going to happenwhat happened will/would have happened more or less no matter who occupies/occupied the Presidency.


When money leaves all three major asset classes: common stocks, precious metals, and Treasuries on the same day, as it did today, that suggests it went to cash.

Consider doing the same.

Copyright (C) Long Lake LLC 2009

Gold, McDonald's, and Stocks for the Long Run

The above images are from Yahoo-Finance.

They compare the price action of McDonald's stock and the exchange-traded fund for gold, GLD over 5, 2 and 1 year periods.

Some time ago, Forbes Magazine introduced the Big Mac Index, which correlated prices of a Big Mac in different cities in different countries. This basically utilized a Big Mac as a form of currency, just as gold bulls assert that gold is money.

Interesting to see how gold and McDonald's have traded so closely for so many different time periods. Of course, GLD pays no dividend, while MCD has a significant dividend. These differences add up and provide most of the intellectual support for the "stocks for the long run" hypothesis.

So far as stocks for the long run go, Credit Suisse (click for link) has an advertisement for stocks with the veneer of academia. It goes to great lengths to come to the tortured conclusion that stocks are about as cheap as ever. The argument is that stocks over many years have returned 6.2% over inflation, and that the current mild deviation from that trendline shows that we're near a bottom. Yet if the ultimate return for stocks is a mere 5% over trendline, then stocks are way overpriced. On price to dividend, price to tangible book value, price to earnings metrics, etc., stocks are nowhere near as cheap as they have been at major market bottoms.

Also, the CS writeup assumes reinvestment of dividends for stocks but almost certainly does not account for reinvestment of income from the competing asset classes it looks at, bonds and cash in the bank. And the fairer comparator to stocks should not be government bonds but rather corporate bonds. Finally, in prior years, stocks were expensive to buy and sell, whereas bonds and cash were not.

It's sad to see the same hucksters trying to persuade the same people at this time that the stock market is cheap. Compared to what corporate debt yields, stocks are not cheap now. Government bonds are not cheap, gold at $930 is not cheap, cash yielding nothing is not cheap; not much is cheap amongst financial assets. Perhaps oil in the $30s per barrel will be proven cheap.

We'll see: that's what makes the markets interesting.

Copyright (C) Long Lake LLC 2009

The Economy as Predicted by Stocks and Inflation as Predicted by Gold

The following graph was taken from Jesse's Cafe Americain.

What is of special note is not only that CEO Business Confidence, per the Conference Board's Jan. 16 writeup, is at its lowest level ever (it began in 1976), but that a cursory review of the worst bear markets shown, the ones ending in 1982 and 2002/3, show CEO confidence rebounding significantly before the ultimate stock market bottom. In this case, I fully expect to see the equivalent of the perp walks seen at the end of the most recent bear market or the Pecora Commission of FDR's time.

To save you clicking on the report from the Conference Board, it's grim: basically no CEO saw improvement in his industry or general economic conditions. What is most disconcerting to me is that they still predicted price increases, though only 1% for the year ahead. This may be over-optimistic, however.



Next, please review the most stalwart of all Dow Industrials. McDonald's (MCD) has broken down. I take this to be big and bad news. "Mickey D" made a lower high recently below the September high. Its 50 day moving average is below its 200 day ma for the first time in a long time, and both look to be in danger of turning down. In terms of its own long-term valuation metrics, it is neither cheap nor expensive, and it appears to have a secure yield far above competing short-term money rates. Its products are almost necessities in a world where people are trying to work two jobs if they can find them. It is highly international. Despite today's up-move in the markets, all it could do was to rally to what is now chart resistance. What this may portend for the economy scares me. If the market has seen its bottom, it should have been holding up better and then should be poised to break out to new all-time highs. Perhaps it will, but it's acting opposite to that currently.

The best Dow performer of 2008 was Wal-Mart. It is farther along the stock breakdown stage than MCD. Here is its chart. It moved down today. Perhaps Target is sharpening its pricing; I wouldn't know, but something appears amiss here. You would have been better off buying a Treasury security of any duration from 1 to 30 years than Wal-Mart one year ago, despite its nicely positive 2008 return. This, with MCD, is classic big bear market action. Bears wear out the bulls. In fact, one additional point relates to some uber-bears, such as Bill Fleckenstein.
Last year, I read his book on Greenspan's bubbles. Mr. Fleckenstein publicly converted to the more-bull-than-bear camp late last year. I believe that the conversion that he announced and that of some other bears helped fuel the rally off the November lows. He announced that being bearish had simply become wearing on him. This is again, to me, classic big bear action. We generally get interested in markets because we are bullish on this or that. It is tough to be bearish; it's against a healthy emotional state.

But that's why quants use computers. Here at Econblog Review, we find it emotionally easier to basically ignore investing in the stock market when we don't like its looks, while following its twists and turns. Trying to make money on the downside is tough to do and tough on the spirit. We wish Mr. Fleckenstein very, very well, having admired his work and iconoclastic spirit for some time, but worry that his mini-conversion from the short-only camp was premature.


We all know that T-bonds have sold off lately, but the canary in the coal mine of inflation is gold. Gold, in the form of the GLD exchange-traded fund, looks to be in a critical technical position.

The first thing to notice, though the image is a bit obscured, is that GLD has provided a negative total return over the past 12 months. You can't eat relative strength. The second is that there are four (4) price peaks, and each one is below the prior peak. So far, each price peak has been followed by a lower low. The price peaks are out of phase with the stock market price peaks, but interestingly the price lows are in phase.

Most recently, GLD bounced off its upsloping 50 day ma and rebounded near its downsloping 200 day ma. With T-bonds selling off today, if there were true inflation fears, GLD should have been up in follow-through to its recent significant short-term rally. That it was down slightly may mean something.

Every stock and every market of importance over the past year of which I am aware that has had this sort of pattern of lower highs and lower lows has failed to break out to the upside. If Dr. Roubini is correct along with the TIPS market, and the Roubini "stag-deflation" is in the cards, then the fundamentals for gold are poor and those for 2-5 year Treasuries are OK. Most gold is purchased for jewelry use, though much of that is in Asia where people where jewelry that is not highly engineered and therefore sells close to the bullion price and therefore serves as money as well as adornment. Nonetheless, I know NO ONE who is spending on fripperies lately, and I know people both with good jobs such as doctors and people with serious money.

Every stock and bond professional I know who "called" this stock bear and Treasury bull at least one year ago doesn't trust today's stock market bounce. They are divided on the prospects for inflation vs. deflation over the short and medium term, though there is no interest in betting on low inflation over the long term. They all believe that the stock market is headed for new lows.

Also, some long-term wealthy investors I know who have bought and held stocks individually or through non-Madoff truly high-quality managers have been selling stocks over the past year and have now decided to get further out of the market. These people were truly in the market for decades. They are dismayed by what they see happening. They may well have voted for Barack Obama, but nonetheless they are moving definitively away from stocks. It is certain that a short-term bounce in the stock market will not tempt these serious investors back to the stock market any time soon. Unless the collapse of the large financial institutions worldwide is miraculously revealed to have been a big joke, they are getting out and staying out for some time.

The stock market remains too risky for most people. It is OK to miss the bottom of the market should we have seen it last November. If the stock market were a stock, and it were ranked by a standard earnings and price momentum screen such as the one Value Line pioneered and that has been widely imitated, the stock market would scream "sell". Gold would be more of a "Neutral", but we remain both viscerally attracted to it as a concept but skeptical of its price prospects over the short term due both to fundamental and technical factors. Treasury bonds would be more like NASDAQ stocks of the late 1990s, which is to say glamor, but the fundamentals and basic chart patterns are both OK to bullish. Just as the stock bubble, including the large-cap S&P stocks of the late 1990s, sent sensible hugely successful investors into retirement because the were too sensible too early and too long, so might this Treasury bull destroy short-seller after short-seller before rolling over, finally having sucked in the public at large, which may finally come to believe in bonds for the long run just when the dawn of a long-term Treasury bear market is born.

Anyway, it's time to support the local economy and support our favorite local eatery. You can't eat either relative performance or computer pixels.

Copyright (C) Long Lake LLC 2009