March 10th, 2010

Tags: budget deficit, DXY, investment strategy, OIL, rosenberg, Treasury, vix, Zero Hedge

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I have just now ended a conversation with a long-time client and Limited Partner (LP) of our Fortune’s Favor I, LP, (FFI) fund. As I hang up the phone I begin to write. Our healthy dialogue crystallized some thoughts that demand sharing.

To begin, a review of the investment strategy that guides FFI may be in order. You may witness our approach in its entirety @ http://www.rosenthalcapital.com/. However, for a quick overview allow me to illustrate: We believe precious metals offer the best opportunity for return of capital as well as return on capital.  The rest of our portfolio is currently deployed in a defensive manner and can be viewed under the ‘Letters& Articles’  page on our website.

LP asks: Why are you not buying ATT (T) shares at a 6.75% yield?

We answer: ATT’s profit margins are down 20% in the last 12 months along with revenue and EPS declines. Meanwhile, debt has ballooned 50% over the last 2 years with debt to equity standing at about 63%. As always, there is a reason the dividend yield looks enticing, one must get paid to take on the increased risk of a dividend cut. However, these issues are just the tip of the proverbial iceberg. 2010 has ushered in a new round of credit constriction (Please see the Feb. 18th post for more detail). $7.3 billion of corporate debt issuance was pulled from the European market in the last 30 days.  $2 billion have poured out of high yield bond funds in the U.S. over the last 2 weeks. These are clear early warning signs that a credit crisis is building again; that is not an environment conducive to investments like ATT.

LP asks: Your penchant to preserve capital held you back last year.  Why not be more upbeat and aggressive this year? Isn’t it time to be less “hunkered down”?

We answer: True, our priority (as outlined by our investment philosophy) is to preserve capital.  We are somewhat surprised we must defend that obvious and essential creed.  As of Dec. 31st, 2009 the value of  FFI was higher than it was at the start of 2008.  Moreover, while the S&P 500 suffered dramatic volatility over the last 2 years, dropping 53% at one point, our fund avoided gut-wrenching swings, never experiencing a single month of double digit losses.

We would love to be more upbeat and aggressive, but the investment environment simply does not lend itself to such a stance.  We can’t determine our investment philosophy simply by wishing on a star.  Last year the equity markets were supported by overwhelming government intervention. As that support begins to wane reality will return with a vengeance.  January’s 5% decline in the S&P 500 is a testament to that theory as are the following two stories:

Consumer Confidence Plunges From 56.5 To 46.0, Consensus At 55.0, Present Situation Index Lowest Since February 1983

The Conference Board’s Consumer Confidence Index fell drastically to 46.0 in February from a revised figure of 56.5 (previously 55.9).
The reported consumer confidence index for February was much lower than our forecast for a reading of 54.0.
The Bloomberg market consensus estimate was 55.0 with individual estimates in a range from 50.9 to 59.0.
In February, the two main components of the consumer confidence index were as follows:
February Present Situation: 19.4 versus 25.2 in January (prev. 25.0)
February Expectations: 63.8 versus 77.39 in January (prev. 76.5)

Home Prices Double Dip Validated As Unadjusted Case-Shiller Numbers Indicate Third Sequential MoM Decline- Zero Hedge

After a third sequential decline in unadjusted Case-Shiller housing prices, is it ok to come out of a contrarian shell and proclaim the government-subsidized home price appreciation rally dead? Afdter the unadjusted Composite-20 reading peaked at 146.7 in September, the index has slowly declined for 3 months in a row and is now at 145.9. The only good thing one can say is that the rate of decline has not accelerated. However, with just over a month left on MBS QE, we are not very hopeful for a second V-recovery to appear in home prices any time soon.

So, in conclusion, we are not “hunkered down”.  We have deployed our assets in a manner we feel most appropriate for the environment we are experiencing.  Meanwhile, we continue to conduct research and build a stable of quality high-growth investments ready to be saddled at the first opportunity. 

Never forget, over 30% of  FFI assets are Rosenthal family funds.  You can rest assured we will treat the management of the fund with the greatest of care.

Tags: case-shiller, consumer confidence, FFI, Fortune's Favor, home prices, investment strategy

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Turn off the TV and forget about the newspaper. If you want to understand the equity market gyrations of the last couple of weeks simply log on to an internet service like Briefing.com and watch for updates to the sovereign debt crisis.   Today’s trading is a perfect example of this new paradigm.  The Greek tragedy has turned into a farce as constant rumors have succeeded in whipping the markets into a frenzy.

Markets opened today’s trading on a firmer note because…

Greek bailout speculation lifts euro – Reuters

Reuters reports euro rose on Tuesday on speculation that European Union nations could bail out errant member Greece, while global stocks were flat and emerging market shares climbed. Expectations about a rescue for Greece followed news that European Central Bank President Jean-Claude Trichet was leaving a meeting of central bankers in Sydney early to attend a European Union leaders’ summit. EU leaders will hold a special summit on the economy on Thursday in Brussels amid increasing worries that Greece and other so-called peripheral euro zone economies cannot handle their debts and deficits. Spreads between German 10-year bonds and Portuguese and Spanish equivalents tightened. The spread with Greek debt was steady, but wide at 365 basis points.

…Then things went into high gear when this story hit the wire:

Germany Preparing Aid Package To Greece, FTD Says — Bloomberg

…The above news hit at 11:48, but wait, at 12:41 the following news splashed the wire and markets swooned:

German govt spokesman says reports about decision on aid for Greece are “unfounded” – Reuters

…But cooler heads prevailed and by 2:43 the market regained its footing as…

Germany considering loan guarantees for Greece, other troubled Euro partners, source says – WSJ

My purpose for the play by play of today’s equity action is to illustrate the lunacy of attempting to build an investment strategy based on short-term market swings.

After a couple of weeks of a strong US$ brought on by the Greek situation, I am inundated with comments from would-be experts that the rally in Gold is over.  These same experts, who are convinced they can spot the top in Gold prices, have been unable to spot the best bull market of the last decade. They have not owned Gold during its nearly 300% increase over the last 10 years, but somehow, through a haze of delusional arrogance, they are sure prices have peaked.  

When will Gold prices peak? Don’t know for sure. Trying to pick a price is a fool’s errand.  But I will tell you this: When Gold is, say, $3000/oz and I’m inundated with comments that prices are headed for $6000/oz I’ll be selling.

The following comments exemplify the actual long term trends we believe require scrutiny during the building of an investment strategy.  Yes, sovereign debt woes are a problem, but so are the debt woes of US states.  Running from the Euro into the US$ appears short-sighted and, to us, resembles the hapless effort of running from the deck into the galley of the Titanic. The only real safety (in a world where governments are playing the dangerous game of competitive devaluation and stimulus leapfrog) is the safety of Gold. Please hold onto the bar….    

In a nutshell, toxic assets have basically been swept under the rug in the hopes that we will outgrow the problem. Leverage ratios across every level of society are still reaching unprecedented levels as the public sector sacrifices the sanctity of its balance sheet in its quest to stabilize the dubious financial position of the household and banking sectors in many parts of the world.

Whatever bad assets have been resolved have almost entirely been placed on the books of governments and central banks, which now have their own particular set of risks, as we have witnessed very recently in places like Dubai, Mexico, and Greece, not to mention at the state and local government level in the United States. We simply have not seen a reduction in the percentage of properties with mortgages that are “under water”, hence the FDIC has identified 7% of banking sector assets ($850 billion) that are in “trouble”, so how can it possibly be that the financial system is anywhere close to some stable equilibrium? – David Rosenberg

Tags: EU, euro, FDIC, gold, Greece, investment strategy, sovereign debt, US$

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Investment strategy: Many factors will affect our investment strategy in 2010 not the least of which will be the continued development of the Chinese dragon. The transformation of China into an economic powerhouse will lead to many dynamic investment opportunities for those who can separate the proverbial wheat from the shaft.

I can think of no better international combine driver than our own research guru, Gary Rosenthal. When he simply touches a shaft of wheat a loaf of bread materializes. Am I bias because he is my father as well as a partner at RCM? Maybe, but proof of his personal success can be found under the ‘Charts & Graphs’ page of our website www.rosenthalcapital.com. Review ‘Gary’s Rosenthal’s rollover IRA’ section and judge for yourself whether my sentiments are justified or exaggerated.

Welcome to Our Research Room:

Bret: Gary, China has offered fertile soil from which to reap investment returns for some years now. Why do you feel 2010 may offer continued opportunity?

Gary: On Friday Jan. 1st 2010 a China and Asean free trade deal began. This is a major event on par with China being allowed into the World Trade Organization in Dec. 2001. I believe this Asean free trade deal among nearly 1.9bn people will further accelerate the growth in Asia. Furthermore, China has established initial agreements to settle trade in local Asian currencies, not the US$. The stage is set for Asia to roar away from the U.S. and to establish the Yuan (Rinmembi) as a hard currency.

Bret: Forgive this question for being the softball it is and riddle me this: What do you believe is in store for the US$ this year and how would you structure a portfolio to benefit.

Gary: Softball? More like a pumpkin or watermelon! Take my previous comments, add Quantitative Easing (unlimited Dollar printing) to declining Dollar demand in Asia and you have the blueprint for a dramatically lower Dollar over time. An appropriate long term investment strategy: Precious metals, industrial metals, energy, agriculture and well researched high growth Chinese equity ideas.

Stories reported since Jan. 1 2010 supporting the Chinese theme:

Asian consumers most upbeat, American sentiment dips – Reuters.com

Reuters.com reports consumer confidence is strongest in emerging Asia, Brazil and Australia, but weakened slightly in the United States in the fourth quarter as Americans worried about job security, a survey showed. Consumer sentiment was highest in Indonesia, followed by India and Brazil, and was weakest in Japan and South Korea, according to the survey conducted by Nielsen Company a month ago. Globally, the Nielsen Global Consumer Confidence Index averaged a reading of 87 points in the fourth quarter, little changed from the third quarter but 5 points higher than the second quarter. The U.S. reading dipped to 82 in the fourth quarter from 84 three months earlier, reflecting concern about rising unemployment and ranking U.S. confidence at 18th among the 29 markets surveyed worldwide. 

China raises key interbank rate – WSJ

The Wall Street Journal reports China’s central bank unexpectedly raised a key interbank market interest rate Thursday for the first time in nearly five months, signaling a change in its policy focus toward pre-empting inflation risks in the new year. The tightening move, in the form of a higher yield in its weekly bill sale, came less than a day after the People’s Bank of China hinted its priorities had shifted toward managing inflation expectations and away from single-mindedly supporting economic growth. It also shows the PBOC still prefers using liquidity management tools, rather than policy interest rates, to guide market funding costs gradually higher before inflation becomes a real threat, analysts said. In its weekly open-market operation, the central bank sold 60 bln yuan ($8.8 bln) worth of three-month bills at 1.3684% Thursday, after keeping the yield unchanged at 1.3280% since Aug. 13. The PBOC drained a net 137 bln yuan from the money market this week, its biggest weekly fund withdrawal in nearly three months. The central bank has been draining liquidity for 13 consecutive weeks.

 Jan. 6 (Bloomberg) — China overtook Germany as the world’s top exporter last year, data compiled by Global Trade Information Services Inc. show. 

China shipped products worth $957.7 billion in the first 10 months of 2009, while Germany sold goods worth $917.7 billion to customers abroad, according to an Internet database operated by Columbia, South Carolina-based GTI. Exports from China exceeded German shipments every month since April last year, data show.

China has already slipped past Germany to become the world’s third-largest economy and is forecast to overtake Japan this year, assuming the No. 2 spot behind the U.S. Exports have driven a 15-fold increase in China’s economy to more than $3.8 trillion since the nation opened its doors to foreign trade and investment in 1978. READ MORE…

China approves stock futures, margin trading – AP  

AP reports Chinese regulators have approved the launch of stock futures and a trial run of margin trading, a state news agency said, in a move that could help boost stock prices and increase the role of China’s securities markets in financing economic development. It will take about three months to complete preparations for stock futures, the China News Service said Friday. It said the trial of margin trading – buying stocks with cash borrowed from a broker – might be followed by full-scale use but gave no indication when that might happen. The decision was long-awaited by investors. Rumors that the innovations might be introduced this week helped to push up stock prices. They fell back when the changes failed to materialize.

Tags: China, investment strategy, precious metals, Quantitative Easing, US$, yuan

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Stock Market Investing: Market action continues to revolve around the fallout from Friday’s employment data. Equity markets consolidate and precious metals take a breather. Yes, I wrote ‘take a breather’. Allow me to state unequivocally, we believe a dubious government supplied employment number lacks the power to end a Gold and Silver generational bull market. If you feel otherwise, please do us all a favor and sell your precious metals holdings. In fact, if you would like to borrow and sell short that would be even better.

All healthy bull markets experience shakeouts. Often, these shakeouts can be violent, but they tend to be short lived. These shakeouts result in the expelling of weak holders and suckering in of short sellers. These same players will again be buyers at higher prices.

Investment Strategy: Maintain previous positions and look to add on weakness where appropriate.

TrimTab’s explains Friday’s employment numbers:

TrimTabs employment analysis, which uses real-time daily income tax deposits from all U.S. taxpayers to compute employment growth, estimated that the U.S. economy shed 255,000 jobs in November. This past month’s results were an improvement of only 10.2% from the 284,000 jobs lost in October.

Meanwhile, the Bureau of Labor Statistics (BLS) reported that the U.S. economy lost an astonishingly better than expected 11,000 jobs in November. In addition, the BLS revised their September and October results down a whopping 203,000 jobs, resulting in a 45% improvement over their preliminary results.

Something is not right in Kansas! Either the BLS results are wrong, our results are in error, or the truth lies somewhere in the middle.

We believe the BLS is grossly underestimating current job losses due to their flawed survey methodology. Those flaws include rigid seasonal adjustments, a mysterious birth/death adjustment, and the fact that only 40% to 60% of the BLS survey is complete by the time of the first release and subject to revision.

Seasonal adjustments are particularly problematic around the holiday season due to the large number of temporary holiday-related jobs added to payrolls in October and November which then disappear in January. In the past two months, the BLS seasonal adjustments subtracted 2.4 million jobs from the results. In January, when the seasonal adjustments are the largest of the year, the BLS will add anywhere from 2.0 to 2.3 million jobs. In our opinion, trying to glean monthly job losses numbering in the tens of thousands or even in the hundreds of thousands are lost in the enormous size of the seasonal adjustments.

In November, the BLS revised their September and October job losses down a surprising 44.5%, or 203,000 jobs. In the twelve months ending in October, the BLS revised their job loss estimates up or down by a staggering 679,000 jobs, or 13.0%. Until this past month, these revisions brought the BLS’ revised estimates to within a couple percent of TrimTabs’ original estimates. The large divergence between the two results begs the question of what is causing the difference. While we don’t have an answer today, we will be poring over the data in an attempt to answer that question.

Tags: employment report, gold, investment strategy, precious metals, silver, stock market investing

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NEW YORK (CNNMoney.com) — The news that the sovereign wealth fund of Dubai requested a postponement of billions of dollars of debt this week could pose a big problem for U.S. banks…

…Bove said the underlying problem is that there is a lot of uncertainty floating around. For example, there’s little information available about counterparty derivatives, guarantees that transfer default risk from lenders to other financial institutions. And it’s unknown how much of Dubai World’s debt guarantee is held by U.S. banks. Read More…

Stock Market Investing: The above story along with many others have filled the airwaves and blogosphere over the last 4 days. I will refrain from adding my voice to the din. Moreover, endeavoring to postulate on the repercussions seems to me a fool’s errand. The sheer plethora of moving parts and back room deals makes a supposition worthless.

I will, however, offer some insight to a more pressing question: How will this event effect the US$, the equity markets and the price of Gold?

An avid reader of this blog will find the answer both simple and familiar. Bad news on the global economic front equates to good news for the U.S. equity markets and the price of precious metals, Gold and Silver.

Investment Strategy: The legend for deciphering this market environment:

Neg.Eco.News = Con’t.Q.E.; (Q.E. = Quantitative Easing; catchall for liquidity creation)

Con’t.Q.E. = Con’t.US$.Dval.; (US$. Dval = US$ devaluation)

Con’t. US$.Dval = Exponential Gold and Silver price increases + higher US equity prices

This legend, in all likelihood, will remain in force until major policy changes occur within the White House, U.S. Treasury and Fed. Never in history has the systematic devaluation of a currency led to sustained economic recovery and long-term growth. However, without fail, said devaluation leads to inflation, often hyperinflation, and a flight out of the currency into hard assets. The move unfolding in the price of Gold and Silver will be for most unimaginable, but for the few, the proud, the aware, it will be a move of a lifetime.

Tags: Dubai, Fed, gold, hyperinflation, Inflation, investment strategy, precious metals, Quantitative Easing, silver, stock market investing, U.S. treasury, US$, white house

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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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Every morning my father and I begin the trading session with a review of our investment strategy. We point out pros and cons and attempt to poke holes in theory. We perform this ritual every day, without fail, for the simple reason that when investing in the stock market those who stand still get steam rolled.

“IF” you have had enough of philosophy let’s get down to business. I have been writing about the rather disturbing trend of low volume rallies and high volume sell-offs in the equity markets. On Oct. 28th I highlighted this negative trend. In this morning’s meeting Gary directed my attention to the following story that offers amazing insight into this volume conundrum. As you will see, market manipulation is clearly present. Don’t be alarmed by that weird sensation you will feel when you finish reading; it’s just your skin crawling, the sensation fades…

WHO IS THE MYSTERY BUYER? By The Pragmatic Capitalist

I don’t know if any characteristic of this massive 6 month rally has been more apparent than the huge futures run-ups we’ve seen at random points during the trading day. Without news, the S&P 500 futures get gunned on huge volume and surge higher. I’ve seen it at least every other day for 6 months. It tends to occur on low volume days such as the one we’re currently experiencing. As you can see in the chart below, the futures are getting gunned on massive volume without any coinciding volume in SPY. This means an institution is jamming the futures higher knowing that they can drive the market higher on no volume. Effectively, they can take out every asking price with a large enough order and immediately create a 0.25% bump in the market in no time. If you’ve been wondering why we’ve seen huge surges on low volume days and conviction high volume selling on down days this explains much of it.

To View Charts discussed above CLICK HERE

So, who is the mystery buyer? We think the answer lies on the 9th floor at 33 Liberty Street.

…The key takeaway from the knowledge revealed above is not to become angry. Fighting against the machine is futile. Instead, the key is to understand the house of cards we are living in and react appropriately when the wind begins to blow.

So far, the weather seems fair with only a slight breeze. However, we hear thunder rumbling in the distance and the winds can pickup quickly. The following are a few stories that show up on our radar and give us pause…

Famed short seller says dump munis - Barron’s
James Chanos, the famed short seller who was among the first to foresee the collapse of Enron, recently sounded the alarm on the municipal-bond market — in the hallowed halls of the New York Historical Society, no less. The “cracking of state and local municipalities is coming,” he predicted at a recent meeting attended by Barron’s staffer Susan Witty, adding that he wouldn’t touch munis. In a subsequent telephone interview with this columnist, Chanos said, “State and local municipal finance are a mess and going to get worse.” It’s not just the recession, which has reduced tax receipts. Rather, he says the poor economy “is masking real problems in municipal cost structures.” The big problem, he says, is “the platinum-plated health-care and retirement benefits” given to state and local workers. “It’s all coming home to roost” as boomers start to retire. California faces a $60 billion deficit, and the politicians there believe that in “a worst-case scenario, the federal government will bail them out,” says Chanos. “If the feds do bail them out, as I believe they will,” the state’s bonds will likely lose their federal tax exemption, he adds.

Paterson: NYS Will Be Broke Before Christmas Delivers Scary News To Legislature, Says Only Way To Fix Problem Is To Have Immediate Cuts To Education, Hospitals

…He said if the Legislature doesn’t cut the budget now the state could run out of money by next month. “We’re going to run out of cash in four and a half weeks. We are going to run out of money. Unless we do something about it, (it will) threaten generations,” Paterson said.

…On Oct. 26th I mentioned three developments that could become a problem for the equity markets. Development Three was about hedge fund unwinds that could possibly add instability to the markets as they did in Q4 2008. At the moment, this development is just a rumble, but as the probe widens and further mistrust of the hedge fund industry mounts trouble could ensue…

Hedge-fund giant surfaces in trading probe - WSJ
WSJ reports the widening investigation of insider trading on Wall Street is expected to examine transactions at Steven A. Cohen’s SAC Capital Advisors, one of America’s largest and most successful hedge funds, according to people familiar with the matter….

Tags: investment strategy, Munis, Not Categorized, stock market investing

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Stock Market Investing: A battle between investment disciplines has developed over the last 3 weeks. As discussed in the Oct. 28th post, numerous warning signs of a technical nature are flashing. However, last week’s news headlines were replete with US$ bearish/equity market bullish fundamental data. Which discipline will ultimately prevail, technical or fundamental? The answer is unclear, for now we remain bullish with a healthy dose of skepticism.

Investment Strategy: Never fight the trend. If the equity markets want to advance we will gladly participate and enjoy the ride. Stay focused on the areas of the market that have the strongest fundamentals for moving higher; namely the commodity space as this rally is pure and simple a vote against the US$. Remain over-weighted in the precious metals. The relative out-performance of this group was significant during the last market sell off which was, I will humbly remind you, anticipated by RCM.

Now, I would like to take you on a journey through some of the key events of last week. My intention is to reduce the noise generated from traditional news outlets and focus your attention on the important issues driving the markets. You will see how these issues have led to the resumption of the US$ breakdown and the mirror image breakout of the equity markets.

We will begin with some excerpts from the FOMC meeting on Nov. 4th. There was an expectation that the Fed may change wording to appear more US$ supportive. In the prior two weeks, the simple possibility of a discussion about an exit strategy for the current liquidity glut was used as an excuse by traders to bolster the US$. However, as you will read below, the Fed has no intention of changing the policy at this time…

ECONX Summary of FOMC policy statement; maintain the target range for the federal funds rate at 0 to 1/4 percent
…Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales.

Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability. With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time. (Is this a boldfaced lie? Surely the Fed knows inflation is a currency event, so why pretend there is no inflation when the US$ is collapsing in value? Simple: the scenario is called “between a rock and a hard place.” If the Fed admits inflation is a problem then easy liquidity policies are more difficult to maintain.)

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trln of agency mortgage-backed securities and about $175 bln of agency debt…(Logic suggests rates must remain low while the Fed is buying said debt.) In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010….

…And so the US$ began to lose its bid the minute this story broke on Wednesday last week. In response, the price of Gold rallied and the precious metals mining companies ended the week at new highs on major volume. Interestingly, this group has seen a lot of volume accumulation during a time when the rest of the equity markets are seeing volume selling and/or low volume rallies. This is one sure reason for the strong relative price out-performance the group has enjoyed.

Why does the Fed have no intention of changing policy? Because the economy is in trouble, plain and simple…

September Consumer Credit -$14.8 bln vs -$10.0 bln consensus, prior revised to -$9.9 bln from -$12.0 bln

As expected, consumer credit fell for the eighth consecutive month. Credit declined $14.8 billion in September, far worse than the consensus forecast of -$10.0 billion. The consumer credit decline for August was revised up to -$9.9 billion from -$12.0 billion. The reason for the decline in consumer credit has not changed. Consumers continue to believe they too highly leveraged and are working to repay their debts.

At the same time, banks are worried about possible loan defaults, and in return, they have tightened lending conditions and pulled available credit from even the most credit worthy borrowers.

…Without the consumer there will not be a sustained economic recovery. Furthermore, the state of small business in America would suggest consumer credit is not likely to see a recovery any time soon…

Business bankruptcy filings increased 7% in October - WSJ reports business bankruptcy filings jumped in October, reversing two consecutive months of declining commercial filings and indicating that bankruptcies could continue to rise as the economy struggles to stabilize.
…Add to business bankruptcy problems the number of banks going bankrupt themselves and you get a morbid U.S. economic picture demanding Fed leniency…

Nine U.S. banks seized in largest one-day haul – Reuters.com reports U.S. authorities seized nine failed banks, the most in a single day since the financial crisis began and the latest stark sign that substantial parts of the nation’s banking industry are being crippled by bad loans.

Last month, 7,771 businesses filed for bankruptcy protection, compared to 7,271 that sought shelter from creditors in September, according to new data from Automated Access to Court Electronic Records, or AACER. After two months of decline, the 7% rise in commercial filings shows that businesses are still struggling to access financing and are facing weak demand for their products..

Five more banks fail – 120 for the year - CNN Money.com CNN Money.com reports five banks failed late Friday, bringing the 2009 tally to 120. The biggest to fall was United Commercial Bank of San Francisco, which had 63 U.S. branches as well as operations in Hong Kong and Shanghai. The bank held deposits totaling $7.5 billion.

A couple of weeks ago, we warned the “equity markets are trading at these lofty levels because of liquidity not reality and if the Fed-controlled gravy train of easy credit stops, then trouble will ensue.” Well, when you combine recent Fed comments with terrible economic data the result is a gravy train of liquidity that continues to roll and keep equity markets buoyant.

Meanwhile, in this Greek tragedy we are watching unfold, the reciprocal of stronger equity markets is a weak currency. The US$ declines as economic numbers worsen and to add insult to very serious injury, the carry traders are having a field day. I warned “The U.S. $ carry trade will gain steam if European economic recovery/inflation outpaces the U.S. and leads to rate increases”. It seems with every passing week this prophecy gains momentum and the US$ value declines…

Australia raises rates for second straight month - NY Times reports Australia’s central bank on Tuesday raised its benchmark interest rate for the second month in a row, as widely expected, and suggested a gradual withdrawal of stimulus measures amid mounting evidence that the Australian economy is rapidly picking up speed. The increase in its key cash rate, by a quarter-percentage point to 3.5%, makes Australia the only country in the world to have ventured two successive rate increases this year.

Inflationary pressure returns as UK PPI rises - DJ reports U.K. input producer prices rose unexpectedly in October, suggesting that inflationary pressures could be building after remaining muted over the past year, official data released Friday showed. Prices paid by factories for raw materials rose to a 16-month high of 2.6% on the month in October compared with a 0.2% fall in September. On the year input prices rose 0.1%, that was the first annual increase since February, and compares with a steep 6.2% year-on-year decline in September, the Office for National Statistics said. The gains came as a surprise. Economists, on average, were expecting a 0.5% fall on the month and a 6.5% year-on-year drop.

Tags: Bank Failure, bankruptcy, consumer credit, consumers, equity markets, Fed, FOMC, gold, Inflation, interest rates, investment strategy, precious metals, stock market investing, US$

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Stock Market Investing: The equity averages continue to languish, however, as anticipated, the relative strength of precious metals investments soars. The Dow, S&P500 and the NASD all sit at or near their respective lows of the last two weeks while Gold hits a new high for the year at $1,085.65 and Silver crosses $17.

I would like to spend some time today augmenting our precious metals investment thesis. To begin, please review the story below…

IMF Sells Gold to India, First Sale in Nine Years

Nov. 3 (Bloomberg) — The International Monetary Fund sold 200 metric tons of gold to the Reserve Bank of India for about $6.7 billion, its first such sale in nine years.

The transaction, equivalent to 8 percent of global annual mine production, involved daily sales from Oct. 19-30 at market prices and is in the process of being settled, the IMF said in a statement yesterday. The average price to India, the biggest consumer, was about $1,045 an ounce, an IMF official said on a conference call.

“The fall in the U.S. dollar seems to be pushing all the central banks to strengthen their portfolio with gold,” said N.R. Bhanumurthy, professor at the National Institute of Public Finance and Policy in New Delhi. “Gold is a safe store of value compared to the U.S. dollar.” Read More

…The key to this story: 200 metric tons were sold over 10 business days at an average price of $1,045. This sale price was only 2.7% below the recent high!

The key is to identify a basket of attractive takeover candidates now, place them into the portfolio and wait for the explosive takeover phase to begin. If our research capability is intelligent and we are patient, we are very likely to hit several 5-10 baggers.

Tags: China, gold, hyperinflation, india, investment strategy, precious metals, silver, stock market investing, US$

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