Today's to-be-revised at least twice employment numbers were mediocre but hardly disastrous. In conjunction with yesterday's better-than-expected ADP employment numbers, which over time correlate with those of the BLS, and the modestly positive and better-than-expected ISM Services data also out yesterday, the macroeconomic picture in the US, and the action in economically-sensitive commodities, is better than a year ago. What happened then? Gold and silver were bid up, but the FOMC in both its August and September meetings refused to do another QE. Oops!
Silver is now up about 20% in about 9 weeks. Hedgies have been piling into the metals despite obviously depressed global demand. Sorry, China planning to build a few more roads won't do it. More junk FHA financing for a few more homes in the U.S. won't do it.
The metals are, on a yearly chart, tracing out a series of declining tops.
A massive QE is not priced in. That would be too easy a trade. However, the Fed is well aware that America still gets in its cars and shops, no matter the rise of the Amazon e-tailing economy. Unless the Fed has more control over futures prices than I know, a QE now will lead to yet higher gasoline prices, further undermining consumer psychology and perhaps leading to less economic activity, not more.
Without a high degree of "confidence", I am not seeing the case for QE to be announced next week, though of course the usual statement about being ready to implement one will be made assuming a formal program is indeed not announced.
The Fed in this estimation of mine is having the best of both worlds. It is getting asset prices up, thus making stockholders happy; but it knows there is already immense monetary tinder out there from the prior episodes of money-printing; and it believes that Operation Twist is doing more than half the "work" of QE already. It is having its cake and eating it too.
Note I am not an have not been a deflationist. There will be no "deflation" in the U.S. for the foreseeable future IMO. Precious metals prices are thus likely to work higher. We shall see what we shall see, but on a short-to-intermediate term trading basis I continue to see increasing downside to the precious metals if Europe 2012 continues to follow the U.S. 2008 pattern.
Showing posts with label precious metals. Show all posts
Showing posts with label precious metals. Show all posts
Friday, September 7, 2012
Tuesday, May 3, 2011
Stock Vs. Precious Metals Rates of Return
Since 1985, gold has returned 5.5% annually, silver 7.5%, and stocks 9% plus dividends. The relative trends suggest that there is at least as much chance that stocks are overvalued than are the metals.
Copyright (C) Long Lake LLC 2011
Copyright (C) Long Lake LLC 2011
Thursday, April 21, 2011
How I Learned to Stop Worrying and Lote the Stock Market
There's no typo in the title. "Lote" is a combination of love and hate. Here's a precis of why that's my current attitude toward the stock market.
By the 'stock market', I mean operating companies as opposed to funds of various sorts, preferred stocks, and other securities that would not qualify for consideration for entry into a stock index such as the S&P 500 or the Russell 2000.
From my start in the financial markets in 1979, I was always oriented toward the stock market, taking a brief timeout only in 1981-2, when bonds were very high-yielding and a severe recession raged and triple-tax exempt New York City bonds made sense for a professional couple earning the munificent combined income of $40,000 yearly.
That pro-stock posture continued until the tech-growth stock/"Nifty Fifty" stock bubble peaked in 2000, and the revelation of widespread corporate fraud at such companies as Worldcom and Enron, plus my own experience with some high-flying local companies, led me to swear that never again would I go all in with common stocks.
I did go half in in spring 2003 and then all out in the summer of 2007.
At this point, with money rates still at or below the price inflation rate in most countries, my posture toward stocks is that I would want to see what would happen if governments simply taxed as much as they spent. What would the effect on economic activity and corporate profits be? I suspect there would be a severe shrinkage of the percentage of reported corporate profits to GDP.
For example, about one out of every six dollars in the U. S. goes to the health care "industry". What would that ratio be without government support? Much less, I suppose.
In fact, the tech sector receives little in the way governmental subsidies. It has to prove its worth to businesses and its attractiveness to consumers every day. Perhaps that is why it has rebounded strongly.
So you can sense the hate part.
Now for the love.
Companies have proven to be decent stores of wealth in high-inflation states, though not as good as gold, silver, or oil. If one is in the (amazingly still small) minority that "gets" what the central authorities are up to, and especially if one is in the yet smaller minority that "gets" that central banks generally do as they are told by their political masters, one will be able to direct one's stock investments more appropriately than people who continue with traditional balanced portfolios or people who make the mistake of looking at dividend yields as indicating value.
When governments are directing their central banks to create money at below-market interest rates, that is usually the time when yield plays start to not work. Think the 1940s and the mid-1960s through January 1980.
Bulls on the stock market will tell you that historically nothing beats the stock market.
As a reliable predictor of the future, of course that statement is irrelevant. Perhaps the historical outperformance of the stock market has used up its future outperformance. Perhaps it's all a random walk. What will tomorrow bring, and tomorrow, and tomorrow? That is the question.
The government of the U. S. has changed. When the Fed was being formed, the issue of issuing currency tied to the issuance of debt was criticized. The Federal government had, after, almost no outstanding debt. Would there not be insufficient debt issuance to allow enough currency to be created?
We all know the answer to that question.
So I would paraphrase Edgar from King Lear (Act V, Scene II), to continue the Shakespearean theme. When I look at the financial markets on a tomorrow-tomorrow-and-tomorrow basis, I think that money-printing is all. Everything else is secondary.
Companies can raise prices over time to adjust for changes in the general price level, and with good fortune an investor may do OK even with companies that see shrinking margins, such as price-takers in the inflation rather than producers of the products (such as precious metals, usually) that see strong price increases.
Thus I lote the stock market.
Copyright (C) Long Lake LLC 2011
By the 'stock market', I mean operating companies as opposed to funds of various sorts, preferred stocks, and other securities that would not qualify for consideration for entry into a stock index such as the S&P 500 or the Russell 2000.
From my start in the financial markets in 1979, I was always oriented toward the stock market, taking a brief timeout only in 1981-2, when bonds were very high-yielding and a severe recession raged and triple-tax exempt New York City bonds made sense for a professional couple earning the munificent combined income of $40,000 yearly.
That pro-stock posture continued until the tech-growth stock/"Nifty Fifty" stock bubble peaked in 2000, and the revelation of widespread corporate fraud at such companies as Worldcom and Enron, plus my own experience with some high-flying local companies, led me to swear that never again would I go all in with common stocks.
I did go half in in spring 2003 and then all out in the summer of 2007.
At this point, with money rates still at or below the price inflation rate in most countries, my posture toward stocks is that I would want to see what would happen if governments simply taxed as much as they spent. What would the effect on economic activity and corporate profits be? I suspect there would be a severe shrinkage of the percentage of reported corporate profits to GDP.
For example, about one out of every six dollars in the U. S. goes to the health care "industry". What would that ratio be without government support? Much less, I suppose.
In fact, the tech sector receives little in the way governmental subsidies. It has to prove its worth to businesses and its attractiveness to consumers every day. Perhaps that is why it has rebounded strongly.
So you can sense the hate part.
Now for the love.
Companies have proven to be decent stores of wealth in high-inflation states, though not as good as gold, silver, or oil. If one is in the (amazingly still small) minority that "gets" what the central authorities are up to, and especially if one is in the yet smaller minority that "gets" that central banks generally do as they are told by their political masters, one will be able to direct one's stock investments more appropriately than people who continue with traditional balanced portfolios or people who make the mistake of looking at dividend yields as indicating value.
When governments are directing their central banks to create money at below-market interest rates, that is usually the time when yield plays start to not work. Think the 1940s and the mid-1960s through January 1980.
Bulls on the stock market will tell you that historically nothing beats the stock market.
As a reliable predictor of the future, of course that statement is irrelevant. Perhaps the historical outperformance of the stock market has used up its future outperformance. Perhaps it's all a random walk. What will tomorrow bring, and tomorrow, and tomorrow? That is the question.
The government of the U. S. has changed. When the Fed was being formed, the issue of issuing currency tied to the issuance of debt was criticized. The Federal government had, after, almost no outstanding debt. Would there not be insufficient debt issuance to allow enough currency to be created?
We all know the answer to that question.
So I would paraphrase Edgar from King Lear (Act V, Scene II), to continue the Shakespearean theme. When I look at the financial markets on a tomorrow-tomorrow-and-tomorrow basis, I think that money-printing is all. Everything else is secondary.
Companies can raise prices over time to adjust for changes in the general price level, and with good fortune an investor may do OK even with companies that see shrinking margins, such as price-takers in the inflation rather than producers of the products (such as precious metals, usually) that see strong price increases.
Thus I lote the stock market.
Copyright (C) Long Lake LLC 2011
Monday, April 18, 2011
Is the Precious Metals Train Changing Speed or Direction?
I suspect the answer to the above question is 'maybe' for the first part and 'no' for the second.
It also may be that this weekend a well-read blogger laid down the Establishment's gauntlet in an important way regarding the inflation story. Dr. Krugman opined on April 16 in "Inflation, Here and There (Wonkish)":
I’ve taken to looking at the Billion Price Index, which looks a lot like the goods-only, but with much higher frequencies. And right now the BPP index is clearly indicating that the big price bump of early 2011 is fading away . . .
Wage growth hasn’t fallen as much as I expected a couple of years ago; it’s now clear to me that I failed to put enough weight on the downward wage rigidity literature. But there’s nothing here to suggest any reason to consider inflation a problem. (Emph. added)
You may look at the chart of the Billion Prices Project at bpp.mit.edu/daily-price-indexes. It shows that as of April 14, the price inflation rate was 0.45% monthly. Even without compounding, that's over 5% yearly. That is down from 0.82% as a monthly price inflation rate on Feb. 18. That's of course about a 10% annual rate without compounding.
I think the average person is completely cynical about the CPI now. After all, if one is just getting by, what is more "core" to one's life than food? In human evolution, eating (and drinking) is of course the most "core" activity possible. It trumps clothing and shelter. And what was fire invented for? Primarily to cook food. Food and energy. Core. Not non-core.
So my point is that we may be nearing a tipping point. Paul Krugman, the representative of the money-printing Establishment, comes out in November with a similar pronouncement that there was to be no price inflation from QE2 (and, let us not forget, the ongoing "QE 1.5" that began, if I remember correctly, in August.
Now that this has been proven wrong, he refuses to accept that the idea of high unemployment and "output gap" has a credibility gap. He doubles down. In that same blog, he merely says that, well, he was wrong, things happen:
March core inflation came in lower than expected, and there’s been a lot of talk about that. But really, when it comes to high-frequency data, stuff happens. People who got all worked up over a bump in prices, seeing it as the harbinger of a big inflationary takeoff, were ignoring the lessons of history, which is that short-run spikes in inflation generally reverse themselves.
Perhaps PK slept through the Carter years.
We also learn today that Dr. Bernanke agrees with his Princeton colleague Dr. Krugman, from Bloomberg.com:
When Federal Reserve Chairman Ben S. Bernanke convenes his first press conference next week, he may emphasize a point the markets seem to have forgotten: He’s serious about keeping interest rates low for an "extended period."
The Mayor of Wall Street's company joins in the supporting chorus by quoting only one commentator on how to invest:
Investors have two routes to profit financially from Bernanke’s determination to keep the federal funds rate near zero for an extended period, said Chris Low, chief economist for FTN Financial in New York.
“Those who think the Fed is making a mistake are tending toward the inflation trade: They’re favoring commodities, favoring TIPS,” Low said. “Those who believe the Fed is right are going for conventional fixed-income and extending in duration.”
Lowe agrees with investors who think the Fed is correct.
“If you’re confident that yields are not going to rise, the return on a five-year note at 2.12 percent is so much higher than the 0.69 percent yield on the two-year,” so extending maturity “can pick up a lot of income,” he said.
Unsurprisingly this is a bull on rates and a bear on "inflation".
What I think is happening is that the people see it one way and the powerful see it another. The people have been deleveraging and paying higher prices for almost everything after the mild price deflation rapidly ran its course. Some of the people have been investing in gold, and more have been investing in "the poor man's gold", which is to say silver.
With both political parties committed to large Federal deficits for years to come, but also committed to tax increases only on "the rich", if that much, the funding for those deficits will either come from savers or from central banks that print new money out of the thin electronic air. To the extent that it is the latter, it does not matter all that much as to whether the creator of the money is the New York Fed or the central bank of a friendly or client state such as Saudi Arabia. The money will find its way into the markets and act like counterfeit money, bidding up the unchanging supply of goods and services.
My sense therefore is that the precious metal bull market remains intact and may strengthen. This is similar to the rise of high-tech to rise from a negligible part of most people's lives to an essential part of mainstream America. Unfortunately, of course, a gold bull market reflects anxiety and panic. It reflects the opposite of virtuous cycle of the disinflationary/deflationary second half of the '90s. It's a thumbs down on the U. S. dollar.
The people and the powerful were on the same side of the tech boom. Now, the Establishment is facing a more difficult challenge. As I have demonstrated above, it is trying to convince people that the tide of rising prices is transient, but it cannot back that assertion up with tight money as it had the resources to do periodically in the 1970s and finally was able to definitively do in the early 1980s with Volckerism/monetarism. Rather than fighting the price inflation it was responsible for with real monetary actions, it is left to fight with words.
I suspect that every day, every week, and every month more and more people are tuning Bernanke-ism out and are taking a fresh look at the world. American investors who do this have been turning to precious metals and foreign currencies as ways to diversify away from the dollar, and I think that the gold train remains a body in motion that will stay in motion in the same direction, and may even hit a downhill grade and pick up speed.
Remember: It took a true dollar crisis, with the U. S. for the first time in the 20th Century issuing bonds denominated in foreign currencies ("Carter bonds") and near-hyperinflation, for the Fed to be forced to raise interest rates well above the rate of price increases. We are not there yet, as the headlines still relate to Greece and Portugal, not the U. K. and the U. S. So I don't see the major trend as being imperiled yet, though of course one truly never knows.
"Don't fight the Fed" is generally a wise strategy. The Fed is holding short-term interest rates way below the rate of price increases. It is increasingly difficult for its acolytes to explain away the reality of what you and I see in our daily lives, and so the Krugmans of the world do what believers in the old paradigm do: they admit small errors (he didn't give enough weight to the "wage rigidity literature" LOL) and tweak formulae. So to not fight the Fed means, to me, not to go short Treasuries but instead to go long assets which tend to appreciate when real interest rates are negative.
I think that more and more real people are realizing that their Federal Reserve Notes are "unreal" money that is losing value at a rapid and perhaps accelerating rate, and that one of the few places they (we) can go to try to protect our alleged wealth is physical assets, as well as shares of companies that can survive and perhaps even prosper in inflationary times.
A closing "addendum". One of the strange things about blogging in the morning is how much markets can change during the time it takes to write the blog. I was going to comment on how, surprisingly, gold was down over $7 in the futures market. That was the story an hour ago, when I began this blog. I was going to point out how illogical that appeared, given today's headlines. Now gold is up $4. Go figure. Did the market come to the same conclusion I have been propounding here? Dunno, but it's time to find out.
Staying tuned . . .
Copyright (C) Long Lake LLC 2011
Monday, October 18, 2010
Five Year Charts of Financials Shows Them Falling on Long as Well as Short Time Frames
The nearby graphs are 5-year depictions of the prices of Capital One, BofA, Morgan Stanley and Wells Fargo; click on them to enlarge. The green lines are the 50-day moving averages and the red lines are the 200 day moving averages. A "death cross" of the shorter average below the longer average is seen. The lines are pointing down, so the trend is down over all relevant time periods.
This is trouble.
One week's headlines re robosigning cannot do this. The weak economy has been doing this. The market is saying that QE2 is not going to do the trick. Meanwhile, not shown are very different looking strong charts not tied into the housing mess, such as precious metals, AAPL and various tech and retailing stocks.
A "healthy" correction in silver that would likely accompany a market correction led by further down-moves in the financials would in my humble opinion be a buying opportunity, but I'm not looking to buy any of the above till the truth of their holdings and various exposures is out.
Copyright (C) Long Lake LLC 2010
Thursday, July 8, 2010
Do Falling Bond Rates Stimulate the Economy?
The bond market remains the only game in town when it comes to stimulating the U.S. economy.
-David Rosenberg, Breakfast with Dave today
Yes, interest rates on Treasuries have fallen. So what does this mean? The next time I or a bank buys a newly issued Treasury, we will receive less income each year on our purchase, and that same principal has been transferred from my pocket or the bank to be spent not by me and not loaned by the bank, but rather to be spent by the government. The only certainty is my or the bank's lower income from said bond purchase. How is that stimulatory?
Yes, lower interest rates make home purchases more affordable to the buyer, but those same lower rates are reflected in higher selling prices, so that's more or less a wash; and it is the sated housing market and resultant sluggish new home sales and resale pace that itself allows the current multi-decade low mortgage rates to even exist.
So, granted that Dr. Rosenberg is at the top of his profession and I am not an economist at all, I would question this statement.
Right now, on the Japa-Grecian scale, the U. S. is trending Japanese. There is no debt rollover problem this week. But this is a duality. The U. S. is rolling over massive amounts of Treasury securities. The conventional wisdom is that the bond/CDS vigilantes will move pokily along from Spain currently to Portugal and maybe the U. K., and eventually make their way to the U. S. should current budgetary and economic trends continue.
Thus I have been lightening up on a bond-heavy portfolio which was put in place beginning in summer 2007. The powers that be are going to stimulate if necessary. You can count on it, just as you can count on a doctor to do everything he/she knows to keep a patient alive and healthy absent a "do not resuscitate" order. So either the pace of economic activity picks up sooner rather than later, or the authorities will do something that in their view prevents another Depression/brings growth back.
As stated here, there was growth in the spring, but the latest statistics show it waning.
Treasuries are for traders or very long-term holders now; stocks remain for gamblers and the stock market is probably truly a stock-picker's market for the long haul specifically given that wheat and chaff are tending to move together on a day-to-day basis; cash is trash; and precious metals are having their typical seasonal summer weakness. I expect that unless and until the Federal Government gets serious about fiscal discipline, the ballooning debt obligations will induce more and more Americans to hedge their bets with ownership of precious metals, just as they did in the 1970's.
Copyright (C) Long Lake LLC 2010
-David Rosenberg, Breakfast with Dave today
Yes, interest rates on Treasuries have fallen. So what does this mean? The next time I or a bank buys a newly issued Treasury, we will receive less income each year on our purchase, and that same principal has been transferred from my pocket or the bank to be spent not by me and not loaned by the bank, but rather to be spent by the government. The only certainty is my or the bank's lower income from said bond purchase. How is that stimulatory?
Yes, lower interest rates make home purchases more affordable to the buyer, but those same lower rates are reflected in higher selling prices, so that's more or less a wash; and it is the sated housing market and resultant sluggish new home sales and resale pace that itself allows the current multi-decade low mortgage rates to even exist.
So, granted that Dr. Rosenberg is at the top of his profession and I am not an economist at all, I would question this statement.
Right now, on the Japa-Grecian scale, the U. S. is trending Japanese. There is no debt rollover problem this week. But this is a duality. The U. S. is rolling over massive amounts of Treasury securities. The conventional wisdom is that the bond/CDS vigilantes will move pokily along from Spain currently to Portugal and maybe the U. K., and eventually make their way to the U. S. should current budgetary and economic trends continue.
Thus I have been lightening up on a bond-heavy portfolio which was put in place beginning in summer 2007. The powers that be are going to stimulate if necessary. You can count on it, just as you can count on a doctor to do everything he/she knows to keep a patient alive and healthy absent a "do not resuscitate" order. So either the pace of economic activity picks up sooner rather than later, or the authorities will do something that in their view prevents another Depression/brings growth back.
As stated here, there was growth in the spring, but the latest statistics show it waning.
Treasuries are for traders or very long-term holders now; stocks remain for gamblers and the stock market is probably truly a stock-picker's market for the long haul specifically given that wheat and chaff are tending to move together on a day-to-day basis; cash is trash; and precious metals are having their typical seasonal summer weakness. I expect that unless and until the Federal Government gets serious about fiscal discipline, the ballooning debt obligations will induce more and more Americans to hedge their bets with ownership of precious metals, just as they did in the 1970's.
Copyright (C) Long Lake LLC 2010
Monday, April 26, 2010
Bloomberg Having no Trouble Finding Bulls. What a Difference a Year Makes!
In a piece of financial pornography masquerading as news rather than opinion, Bloomberg.com "reports" U.S. Stocks Cheapest Since 1990 on Analyst Estimates. It begins:
Even after the biggest rally since the 1930s, U.S. stocks remain the cheapest in two decades as the economy improves.
It ends:
“The earnings story is very supportive of the market even after the rally over the last year,” said Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., which oversees $1.4 trillion in client assets from San Francisco. “The recovery is real, it’s V-shaped and it’s got legs.”
(But what happens when the record combined monetary/fiscal stimuli end or merely diminish?)
In between one gets amazing sections as follows:
Concerns Are Past
“We’re in a time period where the concerns we had in 2007 and 2008 have been taken care of or are past,” Kenneth Fisher, who oversees about $40 billion as chairman of Fisher Investments in Woodside, California, said in a April 20 Bloomberg Television interview. “If you’re waiting for a market pullback or individual stock pullbacks, you could be waiting a long time.”
Or you get this straw man argument:
“The stock market is incredibly inexpensive,” said Kevin Rendino, who manages $11 billion in Plainsboro, New Jersey, for BlackRock, the world’s largest asset manager. “I don’t know how the bears can argue against how well corporations are doing.”
Obviously if Mr. Rendino manages the same assets and their market price simply rises 20%, his pay will rise even though the main driver is the traditional one - - price inflation.
There is a brief nod or two to what the reader is supposed to recognize as a blind bear, with no quote nearly as bearish as the rip-snortingly bullish comments scattered throughout. A reductio ad absurdum of the bullish tone is that it implies that anyone who is decreasing allocation stocks who does not need cash is obviously misquided.
I may have missed it in the article, which is not worth many rereads, but it emphasizes rapid earning gains. The fact that accounting changes for Big Finance plus multi-trillion dollar Fed and governmental support for said banks is responsible for most of said profit change is not mentioned. That Dr. Bernanke and a number of other Fed officials are less bullish than "V" advocate Ms. Sonders may be worth considering. Also not mentioned are the repeated findings from otherwise upbeat reports such as are emanating from the Empire State Manufacturing Survey that businesses are seeing input costs rise a good deal more noticeably than are selling prices; thus profit margins are being squeezed as oil and the like rise in price.
In another piece cut from the same cloth, Bloomberg announces the obvious in Big Banks Are Back as JPMorgan, Citigroup Turn Corner on Crisis. An example of the cheerleading and general idiocy of the piece comes in the third paragraph:
“This quarter is confirmation that credit has turned a corner,” said Charles Peabody, an analyst at New York-based Portales Partners LLC who assigns “buy” ratings to Bank of America and JPMorgan, and a “hold” to Citigroup. Peabody doesn’t cover Wells Fargo. “You’ve heard every CEO say credit has turned, and there is nothing to be gained for them by being overly optimistic.”
Well, no. There is much to be gained by CEOs gaming the system. What about rising stock prices as something to be gained? What about the strategy to have tapped-out consumers draw down savings once again? Etc.
The very title is laughable. There is a survivorship bias here. The banks that are "back" are not "back". They never left. They have been the recipients of unbelievable gifts from the authorities at the expense of massive money-printing, unfairly low rates paid to savers (who have issued no stocks to be pumped up by the Street), immense governmental deficits, etc.
Instead the article ascribes the business cycle to this success and minimizes the ongoing crisis in banks that didn't receive this sort of help and in fact were penalized by FDIC assessments:
While smaller U.S. lenders keep failing, pushing the Federal Deposit Insurance Corp.’s list of “problem” banks to a 17-year high, the largest are getting a lift from economic growth that’s helping consumers and businesses stay current on loan payments.
Whoop-de-doo! They are staying current. Well, sort of. Actually the numbers defaulting have stopped growing. Defaults are still plentiful. But you already see companies such as Wells and Goldman Sachs trading well above book value despite having unknown amounts of dodgy assets on their books as Level 3 assets.
The article ends with the same rah-rah quote with which the other article ends:
“A year ago we were in the middle of a financial panic, but these banks are looking forward,” said Gary Townsend, president of Hill-Townsend Capital, a Chevy Chase, Maryland- based investment firm with $50 million of holdings in financial companies. “The improvement is becoming quite pronounced.”
The powers that be should be discussing openly how the epidemic of mortgage and other fraud in the 1980s that brought down the S&L's worsened after a healing phase in the 1990s. By 2001 the FBI was already investigating this epidemic, but its priorities changed after 9/11. It probably was much more the alt-A ("liar's loans) modality that fueled the real estate boom, which became self-sustaining after a while and then needed the explosion of subprime lending to push the boom into the bubble phase.
As small investors see theis sort of headlines, it will be time for the smart money that has been accumulating or holding stocks while the individual investor has been gobbling up bond funds to start the distribution process.
Right now all financial instruments are expensive.
I continue to believe that a winning contrarian view is a healthy skepticism about the cheerleading while being in alignment with the Fed or the tape.
Two asset classes that remain in unbroken well-defined uptrends over the intermediate term are gold (and almost silver and platinum) and Treasuries. The latter looks extended and has massive supply; but as per Japan, who knows?
Gold's chart remains impeccable, and the more the Establishment flogs stocks and how wonderful and resilient the U. S. economy is even though there was a stock "panic", the more we are farther from all the Depression-era food line pictures of late 2008 and into a go-go time.
Caveat (and holder) emptor. They are feeding the quacking ducks with thin gruel. As the business cycle moves along toward the next peak, companies and industries with real assets and real staying power that have not been the recipients of extraordinary aid may be the best. Chubb (CB) is on the verge of a technical breakout, has 20% or so upside per conservative valuators of stocks, and yields almost 3% while retiring lots of stock and reporting rising book value; other insurers and reinsurers suffered no more than collateral damage during the downturn and represent some of the little reamaining fundamentally inexpensive stock groups remaining in this market that according to Andrew Smithers' version of q trades at a near-record high valuation.
Copyright (C) Long Lake LLC 2010
Even after the biggest rally since the 1930s, U.S. stocks remain the cheapest in two decades as the economy improves.
It ends:
“The earnings story is very supportive of the market even after the rally over the last year,” said Liz Ann Sonders, chief investment strategist at Charles Schwab Corp., which oversees $1.4 trillion in client assets from San Francisco. “The recovery is real, it’s V-shaped and it’s got legs.”
(But what happens when the record combined monetary/fiscal stimuli end or merely diminish?)
In between one gets amazing sections as follows:
Concerns Are Past
“We’re in a time period where the concerns we had in 2007 and 2008 have been taken care of or are past,” Kenneth Fisher, who oversees about $40 billion as chairman of Fisher Investments in Woodside, California, said in a April 20 Bloomberg Television interview. “If you’re waiting for a market pullback or individual stock pullbacks, you could be waiting a long time.”
Or you get this straw man argument:
“The stock market is incredibly inexpensive,” said Kevin Rendino, who manages $11 billion in Plainsboro, New Jersey, for BlackRock, the world’s largest asset manager. “I don’t know how the bears can argue against how well corporations are doing.”
Obviously if Mr. Rendino manages the same assets and their market price simply rises 20%, his pay will rise even though the main driver is the traditional one - - price inflation.
There is a brief nod or two to what the reader is supposed to recognize as a blind bear, with no quote nearly as bearish as the rip-snortingly bullish comments scattered throughout. A reductio ad absurdum of the bullish tone is that it implies that anyone who is decreasing allocation stocks who does not need cash is obviously misquided.
I may have missed it in the article, which is not worth many rereads, but it emphasizes rapid earning gains. The fact that accounting changes for Big Finance plus multi-trillion dollar Fed and governmental support for said banks is responsible for most of said profit change is not mentioned. That Dr. Bernanke and a number of other Fed officials are less bullish than "V" advocate Ms. Sonders may be worth considering. Also not mentioned are the repeated findings from otherwise upbeat reports such as are emanating from the Empire State Manufacturing Survey that businesses are seeing input costs rise a good deal more noticeably than are selling prices; thus profit margins are being squeezed as oil and the like rise in price.
In another piece cut from the same cloth, Bloomberg announces the obvious in Big Banks Are Back as JPMorgan, Citigroup Turn Corner on Crisis. An example of the cheerleading and general idiocy of the piece comes in the third paragraph:
“This quarter is confirmation that credit has turned a corner,” said Charles Peabody, an analyst at New York-based Portales Partners LLC who assigns “buy” ratings to Bank of America and JPMorgan, and a “hold” to Citigroup. Peabody doesn’t cover Wells Fargo. “You’ve heard every CEO say credit has turned, and there is nothing to be gained for them by being overly optimistic.”
Well, no. There is much to be gained by CEOs gaming the system. What about rising stock prices as something to be gained? What about the strategy to have tapped-out consumers draw down savings once again? Etc.
The very title is laughable. There is a survivorship bias here. The banks that are "back" are not "back". They never left. They have been the recipients of unbelievable gifts from the authorities at the expense of massive money-printing, unfairly low rates paid to savers (who have issued no stocks to be pumped up by the Street), immense governmental deficits, etc.
Instead the article ascribes the business cycle to this success and minimizes the ongoing crisis in banks that didn't receive this sort of help and in fact were penalized by FDIC assessments:
While smaller U.S. lenders keep failing, pushing the Federal Deposit Insurance Corp.’s list of “problem” banks to a 17-year high, the largest are getting a lift from economic growth that’s helping consumers and businesses stay current on loan payments.
Whoop-de-doo! They are staying current. Well, sort of. Actually the numbers defaulting have stopped growing. Defaults are still plentiful. But you already see companies such as Wells and Goldman Sachs trading well above book value despite having unknown amounts of dodgy assets on their books as Level 3 assets.
The article ends with the same rah-rah quote with which the other article ends:
“A year ago we were in the middle of a financial panic, but these banks are looking forward,” said Gary Townsend, president of Hill-Townsend Capital, a Chevy Chase, Maryland- based investment firm with $50 million of holdings in financial companies. “The improvement is becoming quite pronounced.”
The powers that be should be discussing openly how the epidemic of mortgage and other fraud in the 1980s that brought down the S&L's worsened after a healing phase in the 1990s. By 2001 the FBI was already investigating this epidemic, but its priorities changed after 9/11. It probably was much more the alt-A ("liar's loans) modality that fueled the real estate boom, which became self-sustaining after a while and then needed the explosion of subprime lending to push the boom into the bubble phase.
As small investors see theis sort of headlines, it will be time for the smart money that has been accumulating or holding stocks while the individual investor has been gobbling up bond funds to start the distribution process.
Right now all financial instruments are expensive.
I continue to believe that a winning contrarian view is a healthy skepticism about the cheerleading while being in alignment with the Fed or the tape.
Two asset classes that remain in unbroken well-defined uptrends over the intermediate term are gold (and almost silver and platinum) and Treasuries. The latter looks extended and has massive supply; but as per Japan, who knows?
Gold's chart remains impeccable, and the more the Establishment flogs stocks and how wonderful and resilient the U. S. economy is even though there was a stock "panic", the more we are farther from all the Depression-era food line pictures of late 2008 and into a go-go time.
Caveat (and holder) emptor. They are feeding the quacking ducks with thin gruel. As the business cycle moves along toward the next peak, companies and industries with real assets and real staying power that have not been the recipients of extraordinary aid may be the best. Chubb (CB) is on the verge of a technical breakout, has 20% or so upside per conservative valuators of stocks, and yields almost 3% while retiring lots of stock and reporting rising book value; other insurers and reinsurers suffered no more than collateral damage during the downturn and represent some of the little reamaining fundamentally inexpensive stock groups remaining in this market that according to Andrew Smithers' version of q trades at a near-record high valuation.
Copyright (C) Long Lake LLC 2010
Sunday, February 14, 2010
Long Term Perspective on Gold
Here are charts of gold, platinum and palladium (the "poor man's) platinum from 1960 or 1968 to the late 1990s.
All have increased in price roughly 10 times since 1976.
This is a 7.0% compound rate.
Gold was $20 per ounce 100 years ago. That is a 4.1% compound growth rate. Of course, there was as much deflation as inflation until FDR, about 75 years ago.
In the last 70 years, gold has increased 5.0% per year in price.
Thus the rate of price increase of gold and other precious and semi-precious metals has accelerated.
These prices have increased over the long term faster than agricultural prices. This likely reflects the depletion of higher-grade ores that are easier to mine, along with environmental restrictions. In the case of platinum and palladium, increased use in catalytic converters in the auto industry has increased the market lately.
If governments continue to pursue strategies of bailing out failing companies, especially financial gambling companies, by issuing more debt rather than a more straightforward strategy of paying down debts, why should we not assume that a body in motion will stay in motion, and that the acceleration upward of gold prices will continue until they either get so high that they fall of their own weight (NASDAQ 2000) and/or concerted effort topples them (Volckerism)?
For a technical update on gold, please consider Trader's Narrative recent posts, both the linked-to one and the one immediately below it. I take that analysis as generally bullish, especially considering that the blogger focused on the downside risks to gold rather than the high upside price targets one would get from joining the successively higher price spikes together, and also considering that the latter (earlier) post disses a writer named Ken Kurson as being a perfect contrarian indicator. I have reviewed the evidence presented for that and strongly disagree. The examples cited look as though he has a fine enough track record. So, overall, I consider gold to be reasonably valued relative to the financial alternatives but with the same sort of bullishly-configured chart that the NAZ had in the 1990s.
Copyright (C) Long Lake LLC 2010
Friday, February 5, 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
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
Sunday, January 10, 2010
As Gold Rises Without Platinum for a Change, Quality May Finally Be Winning for a While
Following the weak jobs report Friday, gold is surging again, having had a strong afternoon after market participants had a chance to decide what they are again apparently deciding, which is that the Fed is on hold for, perhaps, forever, and thus money-printing will dominate in America.
What may be telling for at least a nanosecond or two is that platinum is down while the more monetary metal silver is up as much as gold. Given increased commentary that China may be bubbly and stockpiling raw materials that it is not about to use, gold looks to be the safest metal and definitely is the only precious metal that is already in record territory.
High-quality dividend-paying stocks as well as true growth issues can continue on their merry way upward as long as there is no change in Fed policy.
If the economy moves up slowly but steadily while employment is weak, Treasuries can catch a bid and if and when the next major correction comes, they might just be viewed as the only game in town as was the case 15 months ago. Sentiment is horrible and therefore strongly bullish on Treasuries, as every pro knows that the public has been buying bonds the past year when it foolishly should have been buying Peruvian bonds, copper and money-losing tech stocks that have never paid dividends and likely never will.
Copyright (C) Long Lake LLC 2010
What may be telling for at least a nanosecond or two is that platinum is down while the more monetary metal silver is up as much as gold. Given increased commentary that China may be bubbly and stockpiling raw materials that it is not about to use, gold looks to be the safest metal and definitely is the only precious metal that is already in record territory.
High-quality dividend-paying stocks as well as true growth issues can continue on their merry way upward as long as there is no change in Fed policy.
If the economy moves up slowly but steadily while employment is weak, Treasuries can catch a bid and if and when the next major correction comes, they might just be viewed as the only game in town as was the case 15 months ago. Sentiment is horrible and therefore strongly bullish on Treasuries, as every pro knows that the public has been buying bonds the past year when it foolishly should have been buying Peruvian bonds, copper and money-losing tech stocks that have never paid dividends and likely never will.
Copyright (C) Long Lake LLC 2010
Wednesday, November 4, 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
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
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