Precious Metals Outlook: Bloomberg TV Headline: Goodby Gold

Bloomberg TV ran the above story yesterday morning, interviews were conducted and a consensus was formed. Based on this simple indicator I would say that Gold Prices bottomed yesterday at around $1159.  We will call this indicator the ‘Fin. TV’ indicator. You may recall how unbelievably accurate the Fin. TV indicator was in early July when identifying the equity market low.  I explained this phenomenon in the post titled , Stock Market Strategy: The More Things Change the More They Stay the Same . The bottom line of the explanation reads: “Rosenthal Investing Axiom: When CNBC et all call for imminent market demise expect instantaneous market rally.”

So, by applying the Fin. TV rule to Gold prices we should not be surprised to see Gold trading at $1175 as I write this note. Yesterday’s cacophony of calamitous Gold comments leads to the current $15+ comeback; categorically classic!

Stock Market Strategy: Data and Comments Continue to Point Towards Q.E.2

This morning’s disappointing GDP news dovetails nicely with voting Fed member Bullard’s comments yesterday.  The Zero Hedge story, “GDP Misses Expectations, Comes At 2.4%, Plunges From Revised Q1 GDP Of 3.7%” Offers a good breakdown of the details. I would, however, caution readers who believe this news is negative for the equity markets. Please remember the all important equation: Liquidity Expands + Credit Markets Improve = Equity Market Rally . News such as disappointing GDP numbers leads Fed members to speak out openly about the need for more liquidity…            

Bullard comments on deflation: St. Louis Fed President Bullard issued a paper arguing that the Federal Open Market Committee’s extended period language may be increasing the probability of a Japanese-style deflationary outcome for the U.S. within the next several years. Bullard concludes that an appropriate quantitative easing policy offers the best hope for avoiding a low nominal interest rate, deflationary outcome. Bullard frames his discussion in the context of theoretical analysis by Benhabib et. al. 1 that emphasizes two possible long-run outcomes for the economy: one which is consistent with monetary policy as it has typically been implemented in the U.S. in recent years, and one which is consistent with the low nominal interest rate, deflationary regime observed in Japan during the same period… See report here

…And comments about more liquidity are being backed up by actual growth in worldwide liquidity as seen in the chart below. While this cycle persists expect higher equity prices at best and consolidation of gains at worst….

Tags: Fed, Fin. TV, GDP, gold, precious metals, Q.E.2, Rosenthal Investing Axiom, stock market strategy, Worldwide liquidity, Zero Hedge

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I must begin today’s missive with an ebullient congratulations to my good friend Blaine Bell! The wedding in Napa Valley this past weekend was beautiful, the bride radiant and the party atmosphere prodigious.

While my computer did make the trip to Napa, it was used for portfolio management only. Any free time this past week was spent in the lovely company of Rebecca, my girlfriend and the grape vines of Napa. Needless to say I had a tremendous amount of reading to catch up on upon my return to RCM headquarters.

If I could condense this past week’s worth of erudition into a single thought I’d say ‘the more things change the more they stay the same.’ Certainly we have witnessed a significant amount of volatility in 2010.  The ‘change’ component of the above phrase can best be described as nauseating. If you wish to see a graphical interpretation of this 2010 phenomenon feel free to subscribe to our ‘Market Moving Chart of the Day’ located in the top right corner of this page.

As for the ’staying the same’ part of the equation I will simply direct your attention to the following three headlines. In fact, I could have chosen at random any three headlines from the past week and they all sound similar. The basic gist is as follows:

First, a piece of economic news is released that disappoints. However, Wall St. and the powers that be, do their best to put the proverbial lipstick on the ever distending pig… Retail Sales Dip, but It Could Have Been Worse – Briefing. Next, some Fed member chosen to be that week’s puppet (are straws used or is Dictator Ben punishing those who wish to stray?) makes a supposed market soothing comment… Fed’s Hoenig on CNBC says the economy continues to recover modestly, and he still sees 3% economic growth in 2010.  Almost immediately following the sock’s elucidation, a contradicting, real and market troubling story hits the wire…

FOMC minutes from from Jun 22-23 meeting:

The pace of the expansion over the next year and a half was expected to be somewhat slower than previously predicted…

The participants generally made modest downward revisions to their projections for real GDP growth for the years 2010 to 2012, as well as modest upward revisions to their projections for the unemployment rate for the same period…

We are stuck between intense volatility and an insipid news cycle. At times like this I find the best tonic is a revisit with our trusty steed, technical analysis. Below please scrutinize the daily price chart of our favorite index the NYSE Comp..

As you can see, the major uptrend remains intact. Moreover, three attempts have been made to breach this trend in May, June and July to no avail. You may however, remember that everyone and their proverbial brother on CNBC and the like were calling for an epic Head and Shoulders breakdown at the beginning of this month (labeled 3 & highlighted yellow). Naturally you will not be able to find this obvious prediction on the RCM blog site. Rule number one: When CNBC et all call for imminent market demise expect instantaneous market rally. You may recall that when these jokers were calling for new highs on the market we were ‘Stalking the Bear’.

The above chart also suggests a change in trend may be in the offing. The market price has been locked in a downtrend since the April highs moving from the top of the channel to the bottom. However, as the blue, yellow and red Fibonacci Fan lines illustrate, a change in trend has been signaled.  For your convenience I have highlighted with a green box an initial target area for the current rally.  

Allow me to conclude by writing that fundamentally I can see no reason for the markets to rally. We are firmly of the mind that economic growth will not be able to continue without massive government support. Financial regulation will continue to be a hot button right up to the November elections at the very least. Regulation of the GSEs will continue to cause consternation. I will warn that a fourth breach of the uptrend line will be deadly.

However, our credit guru Michael Johnson continues to write, “ Bank CDS & CDX Index spreads point to continued equity market gains. Being short equities as credit improves is dangerous…”  So, until such time as a fourth breach has commenced, the technical picture of the market remains encouraging.

Tags: CDS, CDX index, Credit, economy, Fed, FOMC, GDP, NYSE Comp., retail sales, Stalking the Bear, stock market strategy

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I expressed my belief last week via twitter that this GDP number could be interesting. I suggested the number may be less than expected as the inventory build is coming to an end. Now real intrinsic growth will need to surge in order to satiate the appetite of the GDP prognosticators and I believed that would be a tall order.  Well results are in and the number was in fact less than forecast. I  expect this may be the beginning of a trend…

ECONX GDP Increases for the Third Consecutive Quarter

As expected, growth remained positive for the third consecutive quarter as GDP increased 3.2% in Q1 2010 after rising 5.6% in Q4 2009. The consensus estimate called for a rise of 3.3%. Similar to last quarter, the bulk of GDP growth was allocated between consumption and inventory investment. Consumption expenditures rose 3.6% and contributed 2.55 percentage points to GDP growth. Inventories turned positive for the first time since Q1 2008 and contributed 1.57 percentage points to GDP growth. Construction expenditures deteriorated in both the nonresidential and residential space as investment fell 14.0% and 10.9%, respectively. This was the first decline in residential investment since Q2 2009. Net exports contributed negatively to GDP as export growth (5.8%) increased at a slower rate than import growth (8.9%). Government spending declined for the second consecutive month as state and local expenditures decreased 3.8%. Federal spending was up 1.4%.

Meanwhile, the markets continue to try and ignore the Goldman Sachs (GS) issue. However, I fear the morass (emphasis in the last syllable) is only growing thicker. Hairs are beginning to stand on the back of my neck as the current disregard for the severity of the GS issue creates a déjà vu feeling. I can recall countless talking heads on CNBC down playing Bear Sterns’ troubles in ‘08….

Criminal Probe Launched Into Goldman Sachs

Time for the media circus to go nuts. The AP reports that the Feds have just opened a criminal probe into Goldman: now it is getting interesting. And everyone was thinking that Eric Holder is a toothless puppet (well, that still has to be refuted).

As the AP reports, “The investigation by the U.S. attorney’s office in Manhattan stems from a criminal referral by the Securities and Exchange Commission, a knowledgeable person said Thursday. The person spoke on condition of anonymity because the inquiry is in a preliminary phase.”

Read More…

The following post by Zero Hedge is a must read if one wants to really understand the issues of the Goldman/Paulson case.

Did Paulson Have A $2 Billion Bear Stearns CDS Short In Late 2006? Novel Observations On Abacusgate

…Most relevantly, in what could be damaging disclosure by Fabrice Tourre, the Frenchman notes that as a result of Paulson’s mistrust of Goldman’s counterparty risk, the Abacus AC1 deal was structured in a novel way in which “they would be acting as protection buyer, facing the ABACUS SPV (as opposed to a structure where Goldman is protection buyer as is usually the case).” This little legalistic variation could make a world of difference in an Attorney General’s hands…

…Direct from Tourre E-mail, “As you know, a couple of weeks ago we had approached GSC to ask them to act as portfolio selection agent for that Paulson-sponsored trade, and GSC had declined given their negative views on most of the credits that Paulson had selected….

Read More…

Tags: Abacus, CDS, Credit, GDP, Goldman Sachs, GS, John Paulson, Tourre

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Perspective: US$ vs. Gold

Tags: ben bernanke, debt-ceiling, economy, GDP, Geithner, gold, gold prices, obama, Q.E., Quantitative Easing, U. S. economy, US$

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Welcome to the ‘happy holidays’ edition of the RCM blog.

I thought we should begin with a little year end wisdom:

“Life isn’t about waiting for the storms to pass. It’s about learning to dance in the rain.” – Vivian Green

Managing capital during the last two years required the ownership of solid wading boots and a strong hurricane slicker. For those of you still standing I commend you. In fact, feel free to join us while we dance a jig.

In a nod to the time of year and the tendency for factual stories to be laced with pure fiction, I offer you the following two economic anecdotes.

To begin, let’s review the housing fable released today. Market participants responded to the details with a cheer, an equity market rally and a strong US$ bid. However, as with most fables, one must read between the lines to grasp the true meaning. In the case below, I have boldfaced the important detail and the moral of the story becomes clear. The “good” news about November was in fact fabricated at the expense of future months…

ECONX Existing Home Sales Rise Again
The Existing Home Sales report for November brought good news on a number of fronts. Specifically, sales increased 7.4% from October to a seasonally adjusted annual rate of 6.54 million units (consensus 6.25 mln); median prices rose slightly to $172,600 from $172,200 in October.

Based on the November sales pace, the supply of unsold homes dipped to 6.5 months from 7.0 months. The surge in home sales was driven by a rush of purchasers aiming to capture the benefit of the first-time homebuyer tax credit that they feared might expire at the end of November.

That benefit was ultimately extended, however, so the National Association of Realtors thinks it is quite possible there will be a “measurable decline” in home sales the next few months before another surge starting in spring…

Low financing rates and relatively low prices, though, continue to provide strong support to the housing recovery. If there is a point of consternation for the stock market, it is the idea that uplifting data like this could force the Fed to raise rates sooner than previously expected. That would be tolerable if there was a concomitant pickup in hiring activity, but absent that, higher rates would be a retardant on the housing recovery since it would reduce affordability…

Separately, there is a residual concern that the encouraging signs in the housing market will ultimately unleash a load of shadow inventory being held by banks and current homeowners, who have been waiting for improved conditions to list the homes for sale. The added supply could keep pressure on prices…

…Below, we have the next chapter in the ongoing saga of economic recovery. Rumplestiltskin, a.k.a. the US government, would like to tell the story of economic recovery. Upon the original unrevised GDP release, the US$ rallied due to the “better” than expected number. Today, during a quiet holiday week, the real GPD number reveals a “surprisingly” lower growth rate…

ECONX Q3 GDP- Final +2.2% vs +2.8% consensus, prelim +2.8%

ECONX Q3 Personal Consumption- Final +2.8% vs +2.9% consensus, prelim +2.9%

ECONX A Surprise Revision to Q3 GDP
In surprising fashion, the revision to Q3 GDP was fairly substantial. According to the third estimate from the Bureau of Economic Analysis, GDP grew at a 2.2% annual rate in the third quarter versus 2.8% in the second estimate. A slight downward revision to personal consumption expenditures, which were said to be up 2.8% (versus prior 2.9%) from the preceding period played a part in the downgrade, as PCE contributed just 1.96 percentage points to the change in real GDP versus 2.07 percentage points for the second estimate…

Other gauges that were adjusted to show a lower contribution to the change in real GDP included gross private domestic investment (from 0.91 to 0.54), the change in private inventories (from 0.87 to 0.69), imports (from -2.53 to -2.59), and government spending (from 0.63 to 0.55). Separately, the GDP price index was revised down as well from 0.5% to 0.4%. Core PCE was reported to be up 1.2% quarter-over-quarter versus 1.3% for the second estimate. This inflation gauge won’t alter the Fed’s assured view on near-term inflation pressures.

…So, will the 2010 economic fable resemble a Grimm fairy tale or an uplifting Christmas story? Only time will tell. I will be traveling over the next two weeks, but if duty calls I will post. Until then, enjoy the rest of 2009 and have a happy and healthy.

Tags: GDP, housing, US$

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Juggling the recent debt crisis in Dubai, reports of a growing asset bubble, the latest unemployment data, and last Thursday’s turkey leftovers can present a formidable task for even the most seasoned of investors.  During times like these, why not sit back, loosen up the belt, and digest an admittedly ‘lite’ version of market commentary?  Jeffrey Saut, Chief Investment Strategist and Managing Director of Equity Research at Raymond James & Associates, as well as Bill Gross, Managing Director at the Pacific Investment Management Company (PIMCO), recently weighed in, releasing their own market thoughts.

Saut’s November 30th commentary is titled, “Don’t Worry About the Dollar!” Citing a previous occurrence during the 1970′s, he believes that stock market investors’ worries about inflation are largely overblown.  Most notably, he predicts that any continued weakness in the US Dollar will be more-than-offset by rising stock prices.  As he explains,

Nevertheless, the dollar’s weakness has clearly been very positive for our “stuff stocks” (precious/base-metals, agriculture, energy, cement, timber, etc.), as well as stocks in general, and we have been bullish. Most recently, we have suggested, “that with credit spreads below their pre-Lehman bankruptcy levels there should be no reason why the equity markets can’t ‘fill up’ the downside vacuum created in the charts by said bankruptcy… That gives the S&P 500 an upside target of 1200 – 1250”…

Saut goes on to support his bullish theory with a myriad of facts.  In particular, he points to recent decreasing jobless claims, dramatic increases in labor productivity, rising corporate profits, and lowering inventories as potential catalysts for an economic rebound.  More specifically, after initially cutting back on labor, he expects that businesses will soon look to reinvest profits, hire new workers, and replenish those declining inventories.  Such a move could reinvigorate consumer demand and jump-start our ailing economy.

Furthermore, he views last week’s Dubai debt crisis as a symptom of the previous real estate bubble, and not a sign of another pending systemic crisis.  Finally, as he has suggested over the previous few months, he is near-term bullish large cap stocks.

Meanwhile, in Bill Gross’s November commentary, titled, “Anything but .01%,” he points out the depressingly anemic returns generated by most of today’s money market accounts.  Indeed, although maintaining low interest rates may be in the economy’s best interests, they are also forcing investors to flee supposedly “riskless” investments in order to chase more attractive returns.  This has sparked a considerable rise in asset prices.

Nonetheless, Gross does not foresee the Fed raising rates any time soon.  As we have seen, the private sector has shown little traction this year, with government spending largely assuming the role of oiling the gears of this economy.  Until GDP picks up considerably, unemployment shows signs of reversing, and private sector demand replaces the need for government stimulus, rates are likely to remain low.  As Gross notes,

The Fed is trying to reflate the U.S. economy.  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.  Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation-not until.

Looking forward, Gross has a few ideas for skittish investors to consider.  First, long term investors must ready themselves for a “New Normal” economy to take effect.  In essence, they should expect that as companies continue to deleverage, corporate growth slows, and the government’s role in the economy expands, corporate profits will take a hit.  As a result, dividend and interest payments are also likely to suffer; end result, investors may need to lower their expectations when it comes to returns.

According to Gross, part of the reason why Warren Buffett recently invested in the railroads was to simply put his money to work, rather than let it languish in a low-yielding account (I covered this subject in more depth  in my previous blog).  Like Buffett, Gross believes investors would be wise to follow suit.  In this “New Normal” economy, he suggests targeting low-growth, high-yielding companies like utilities.  Although utilities may not excite investors from a return standpoint, they do offer reliable cash flow (dividends), and normally grow in line with the broader economy.

Tags: Bill Gross, debt crisis, Dubai, economy, equity markets, GDP, Inflation, inventories, Jeffrey Saut, jobless, labor productivity, New Normal, PIMCO, precious metals, Raymond James, real estate bubble, U.S. Dollar, utilities, Warren Buffett

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Stock Market Investing: No change from last week. The technicals didn’t get much better but an overwhelming tsunami of weak economic data helped to drive the US$ lower and drove both hard asset prices and equity prices higher.Read More…

…Meanwhile, even as Brazil implements policy changes to stop its currency from appreciating, the Real advances adding credence to the Economist theory of a Forex crisis approaching …Read More…

Investment Strategy: Ride the wave! This market behavior reminds me of the waters off Jupiter Beach, FL, where I live. Right now I’m looking at a beautiful expanse of ocean as far as the eye can see (don’t hate the player, hate the game) and I see perfect 5ft. rollers washing up on shore. The break is speckled with surfers all the way down to Juno Beach pier where the best are attacking the biggest swells.

The picture seems perfect but the key word from the description above is ATTACKING. I sat through brunch on Sunday next to a local surfer girl. She was around 16 and had everything going for her with the tiny exception of crutches and a rather large bandage on her foot.

While the surf was perfect for humans, it was also an absolute delight for the sharks. Do you see where I’m going with this? When investing in today’s markets you can enjoy the ride but you better remember the sharks are circling.

Time to review the details from last week. Follow the bouncing ball and you will get to the inevitable conclusion that hyperinflation is raging toward us like a Hammerhead that smells blood….

Fed’s Fisher says Q3 US GDP growth probably not quite as robust as originally reported, closer to 2.5% – Reuters

November University of Michigan-prelim 66.0 vs 71.0 consensus, October 70.6

Initial Claims Continue to Fall
Initial claims again beat consensus estimates as claims fell from 514,000 new claims to 502,000 for the week ending Nov. 7. While the drop in claims doesn’t represent a clear turning point, for the second consecutive week claims have fallen below the 520,000 to 550,000 range that it seems to have been stuck at during the previous month. The market is going to take the drop as a sign that the labor sector is beginning to turn around, but we’ve seen a similar decline in claims before when initial claims fell below the 550,000 threshold at the end of September…

The drop in continuing claims was not due to workers finding new jobs, but due to people running out of unemployment benefits. Approximately, 7,000 unemployed workers lost their benefits every day. Congress recently passed an extension of the unemployment benefits that gave all unemployed workers an additional 14 weeks of unemployment insurance payment and an additional six weeks to workers that live in states where the unemployment rate is above 8.5%. Obama signed the extension into law on Nov. 6. The extension will stop the downward trend in continuing claims…

More workers are still losing their jobs than finding new ones and we expect the data to show a slight uptick in unemployed workers over the next three months. Due to timing of the releases, the data will not show the results of the unemployment extension until the Nov. 25 release. This means that the continuing claims numbers will show a decline in next week’s reported numbers.

…The details above represent “blood in the water” that requires the Fed to remain easy. However, these policies that balloon money supply have fueled the decline in the value of the US$. I have written volumes about this vicious cycle. For the sake of new readers I will repeat the RCM mantra: Hyperinflation is a currency event not an economic event.

I am forever baffled by the ignorance of many financial commentators when asked about inflation. They point to economic troubles and scoff at the very idea of inflation but applaud Fed policy and cheer rapidly inflating asset prices. Do they not see the oxymoron? Or are they simply morons? (OK, true that was trite and a little unfair but it couldn’t be helped.)

Hyperinflation is rapidly spreading worldwide because currencies around the globe are being devalued in an effort to keep up with the Bernanke “helicopter” drops of US$. The world is heading toward a Forex crisis as the Economist article below suggests. Our response to this roller coaster: Please hold on to the (GOLD) bar…

The Economist on Gold and Forex:

Developed-country governments have attempted to control bond yields through quantitative easing and to support stockmarkets through ultra-low interest rates. But they cannot support their currencies as well without risking problems in the bond and equity markets. Gold’s surge may indicate that investors fear the next stage of the crisis will occur in the foreign-exchange markets.

Brazil’s real is up 1.1 percent against the dollar this month, even after imposing a tax in October on foreign stock and bond investments and increasing foreign reserves by $9.5 billion in October in an effort to curb the currency’s appreciation. The real has risen 33 percent this year.

…As you can see, the march toward hyperinflation and perhaps a currency crisis seems inevitable. The best defense: Precious metals, Gold & Silver. A note of caution: Make sure your precious investment is backed by the actual metal. More on that topic next time…

Tags: ben bernanke, Brazil, Dollar, Fed, forex, GDP, gold, hyperinflation, investment strategy, obama, precious metals, silver, stock market investing, US$

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RCM Comment – Gary Rosenthal:

Examine the Total Credit Market Debt vs. GDP chart below and you will quickly realize why all of the government’s bailout programs are paper tigers and are destined to miss their intended mark by a wide margin. The credit collapse of 1929-30 did not hit bottom until the early 1950s. The strong U.S. economic expansion from the early 1980s until recently was driven by an extraordinary rapid climb in the amount of debt per dollar of GDP. At its peak in 2008 total debt per dollar of GDP was dramatically higher than the peak of 1929-30. In a single snapshot you can see that the U.S. consumer has completely lost his credit worthiness at a time when the banking system has regained its sanity and adopted lending standards not seen since the 1950s and ’60s. In short, until U.S. consumers substantially repair their balance sheets (through savings or bankruptcy) consumer expenditures (and in turn the U.S economy) are likely to be on a downward spiral for an extended period of time no matter what the government tries to do. No amount of government spending will offset the vicious cycle of a collapse in consumer spending and rising unemployment.

The government’s misguided Keynesian answer to declining tax revenues is sharply accelerated spending, unprecedented budget deficits and borrowing and higher taxes. Common sense would tell you that something is completely out of whack with this formula. Who would lend money indefinitely to a government who has completely lost control of fiscal responsibility? The answer is that eventually no one. Thus this program of uncommon sense will eventually be largely funded by the printing press until the U.S Dollar loses its role as a reserve currency with our trading partners. How long will it take the Dollar to lose its place in international finance is anybody’s guess, but the next time gold goes through $1000/ounce it is very unlikely to come back.

MISH’S Global EconomicTrend Analysis:

The chart below from Ned Davis illustrates the real problem: An explosion of debt relative to GDP. In Geithner’s plan, this debt won’t disappear. It will just be passed from banks to taxpayers, where it will sit until the government finally admits that a major portion of it will never be paid back.

Total Credit Market Debt vs. GDP

The above chart is similar to those detailed in Fiat World Mathematical Model. Here is the ending snip on psychology that is at the heart of the matter.

Political Will vs. Consumer Psychology

What happens next depends somewhat on the political will of the central banks and politicians. However, it depends more on the psychology of the borrowers. If consumers and businesses refuse to spend and instead pay back debts (or default on them along with rising unemployment), the picture simply is not inflationary, at least to any significant decree.

The credit bubble that just popped exceeded that preceding the great depression, not just in the US but worldwide. Thus, it is unrealistic to expect the deflationary bust to be anything other than the biggest bust in history. Those looking for hyperinflation or even strong inflation in light of the above, are simply looking at the wrong model.

At some point the market value of credit will start expanding again, but that is likely further down the road, and weaker in scope than most think.
Henry Blodget’s Five Misconceptions are another way of looking at the psychology of the situation. The sad reality is that both Geithner and Bernanke are trapped in academic wonderland with failed models about what happened in the Great Depression and why.

Geithner said “Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.” I agree. Unfortunately, Geithner’s solution is to Zombify the taxpayer instead. What needs to happen is for banks to write off the bad debts. The Fed pleaded with Japan to do just that. Now Bernanke and Geithner refuse to follow that advice.

Bear in mind this insanity is just round 1. When it does not spur lending for reasons stated above, Geithner will be back at it begging for more taxpayer funds to bailout the banks. By the way, is this even legal? Offering no collateral loans is a handout. Many on the Fed, including Bernanke have stated the Fed can provide liquidity not capital. What is a no-recourse loan but capital? Of course the Fed is offering these guarantees via the FDIC.

Tags: debt, Dollar, GDP, gold

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