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Thursday, December 30, 2010

The future ain't what it used to be.

If you are old enough you will recognize the title of this article as a Yogi Berra quote, and I just wanted to give him the credit he deserves. Neils Bohr, the Danish Physicist, who was a major contributor to our understanding of atomic structure once said,”Prediction is very difficult, especially about the future”. I would add to Bohr's quote “but it is fun to try”. I have taken a stab at some of the things I believe we could see in the upcoming year, I could be 100% wrong but time will tell. We all have a tendency to extrapolate what the future will be based upon the past but the future has a mind of its own, just like Yogi Berra was alluding to. We humans cannot see with true clarity what will be, which is what makes predicting so much fun. I spent some time pondering what 2011 would be like as I was trapped inside during the “Blizzard of 2010” and below I have listed 15 things I believe may come to pass (just my opinion).

·         The Euro zone crisis will continue and Spain will be the next problem child causing the dollar to strengthen initially. After the Euro problems metastasize the Dollar will face problems of its own because US sovereign and state debt will be exposed to be much more risky than previously thought. The EU will continue down the path for further QEuro (quantitative easing Euro style) much to the chagrin of the Germans who are trying to desperately hold things together. The Germans who have the EU's strongest economy do not want to go down the QEuro path due to memories of the Weimar Republic, but alas the Germans cannot walk out on the Euro zone without serious if not devastating repercussions for themselves. Long live the Euro, long live QEuro. The Dollar and Euro will reach parity.

·         Longer dated interest rates will rise not at the hands of the FED but instead because bond investors will demand higher rates of return for their capital. Yields will rise as a result of continued falling bond prices. Bonds will be impacted by the weakening Dollar and the rise of undeniable inflation.

·         Partially as a result of rising rates outlined above housing will continue to fall or be weak at best. The foreclosure rate will increase next year as the “Mortgagegate” mess gets resolved and people are displaced from properties by the banks, adding to the pool of houses and creating a drag on price recovery.

·         Bernanke will continue to punish savers with Zero Interest rates for the coming year.

·         People worldwide will be looking for a means to keep their purchasing power and will further turn to commodities and money alternatives like precious metals. Copper will become very popular as the poor man's Silver and Silver will continue upward as the common man's gold. The gold price will power up to at least $1600 (not in a straight line); then it will correct down in order to prepare for a further leg up in 2012.

·         Despite his denials that the FED is printing money, Bernakne and company will continue to try and devalue the dollar enough to break Chinese Yuan peg. Further Government funded rescues will be required at the state and municipal levels requiring more money printing than Ben had anticipated further fueling the rise in tangible asset prices.

·         Some municipalities (between 15 and 25) will file Chapter 9 next year but most will limp along until 2012 or beyond. The big 3 deadbeat states (California, New York and Illinois) will require Federal help to prevent a meltdown and filing for Chapter 9.

·         The markets will become increasingly volatile by the second half of the year. It will be what is known as a stock picker's market and most buy and hold will not produce great returns. High frequency and programmatic trading will cause another “flash crash” with unpredictable results.

·         Oil will spend the majority of the year over $100 and continue its slow upward march. Oil will probably match its peak price of 2008 since the Dollar will ultimately turn down after an initial run to the “safety trade” is finished.

·         The US deficits will be larger than previously estimated between the extension of the tax cuts and increase in unemployment benefits and the lack of will to actually cut spending in Washington. Add to this the increase in energy costs the FED will be forced in to discussing QE3 (or QE2 extend remix) by the third quarter when QE2 is supposed to wind down.

·         Price for natural gas, currently the red headed bastard child of the commodity space, will go up as supply will get constrained due to less available water that is needed to extract natural gas from unconventional methods (IE Fracturing). If you are more of an investor you can look for natural gas suppliers that are expanding their reserves more through conventional methods, as well as on shore drillers in the space.  Master Limited partnerships will continue to do well for those looking for dividends.

·         Restaurants will have to raise prices next year as agricultural price increase need to be passed through and I believe this will translate in to lower profits. Food producers like General Mills (NYSE: GIS) will see their margins squeezed as input costs will rise faster and eat in to their profits. The food producers will be unable to pass the costs on to consumers at the rate internal costs are rising at least not initially.

·         The trend of Chinese health reform will begin to assert itself and lead to a rise in health related stocks especially equipment makers and pharmaceuticals both of Chinese domicile and elsewhere.

·         Consumers will continue to spend, however, they will be more selective and a desire for quality over quantity will be the driving factor. “Joe six pack” and others will be looking for the best bang for the buck and that does not always translate in to the goods with the lowest price tag. Food prices will also impact the average American and this could lead to a further uptick in sales numbers for companies like Walmart (NYSE: WMT), BJs (NYSE: BJ) and Costco (NASDAQ: COST)

·         Technology stocks in certain areas will continue to do well as new trends like “cloud” computing take hold. I believe that Google Inc (NASDAQ: GOOG), Apple Inc (NASDAQ: AAPL [FREE Stock Trend Analysis]) and EMC Corp (NYSE: EMC) will continue to do well going forward and the stars continue to align for a resurgence of Intel Inc (NASDAQ: INTC) and Cisco Systems Inc (NASDAQ: CSCO). Many smaller tech companies are poised to do well too; for example Teradata (NYSE: TDC), Nokia (NYSE: NOK), Research in Motion (NASDAQ: RIMM [FREE Stock Trend Analysis]) and Salesforce.com (NYSE: CRM).

I hope that all have a safe and Happy New Year! I look forward to seeing what will really happen in 2011 and I will continue to write about the unfolding events and investment opportunities I see. I will be back on Thursdays at Benzinga.com in 2011 as well as on my own blog. Next post should be Jan 4, 2011.

Tuesday, December 21, 2010

Truth always lags last, limping along on the ARM of time......

The title of this post comes to us from Baltasar Gracian (1601-1658AD) a Spanish philosopher and writer, who employed a style known as conceptism. Conceptism is a writing technique that can use artificially complex ideas, puns, subtle associations and unusual comparisons. I chose it because I liked the quote since it contains the word ARM in and this piece does sort of employ some elements of conceptism. Ok that might be a little stretch dear reader, but it is called poetic license.

So, where do I want to go today??? You may have surmised dear reader that my opening line is referring to the tag line from Microsoft’s (NASDAQ : MSFT) ad campaign. A couple days ago I penned a piece discussing Intel Corp. (NASDAQ : INTC) and toady the stock dropped again even though it is oversold on the daily chart and this occurred on only about 60% of its average daily volume indicating that it was not being all out dumped.

What was the reason for the afterhours decline in Intel? I am sure you will be shocked to find out that a “Fast Money” CNBC correspondent, Jon Fortt, who is supposed to focus on technology essentially bad mouthed Intel due to a related story about Microsoft and ARM chips.  Fortt actually called the news “a nightmare for rival Intel”. He also said that it would be couple of years before the Microsoft for ARM product comes to light but it would intensify the battle within the software and technology sector.

I am absolutely stunned by this report even having any impact at all for a variety of reasons. First, It would appear to me that since ARM chips already have a strong position in both the Tablet and Smartphone arena that they are the ones that are vulnerable not Intel. The tablet and smart phone space is a new arena for Intel and they are in the position of carving out market share not losing it.

The second problem with this Fortt’s logic is that the Windows 8 OS (operating system) which is supposed to be ARM compatible is not going to be even available for a minimum of 2 years as it is scheduled to release in 2012 or later.

Third, the Win-Tel OS has been dominant for years and the software already is fully compatible with Intel chips . It would take far less to scale the windows 8 OS down to an Intel Atom chip or another new Intel based chip then to create an operating system for a new and different architecture.

Fourth, the fact that Intel is already going to have its chips appear in some 35 tablets indicates that Intel is poised to make inroads on ARM sooner rather than later.

Fifth, the windows version for Windows phones already operates on ARM processors which utilizes screen touch capabilities but that is at least a year away from being converted to tablet compatibility, once again giving Apple’s (NASDAQ :APPL) IPAD and tablets like Samsung’s Galaxy crucial time to muscle in to ARM’s territory not the reverse.

Sixth, with the popularity of the Google’s (NASDAQ : GOOG) Android OS on smart phones it is little wonder that they have ported it to run on Intel chip sets. Additionally, Intel will debut its Atom chips hosted inside a variety of smart phones and tablets at the CES (Consumer Electronics Show), which is a large electronics industry show, on January 6th, 2011. Although the chips will be appearing in tablets and netbooks first and in smart phones towards the second half of 2011.

While it is true that Intel faces challenges breaking in to the smart phone market I believe the tablet market has much lower barriers of entry for Intel. Moreover, the next generation of Atom processor (AKA Medfield) is addressing the prior problems of power consumption and is also reducing its footprint making it on par with ARM while providing higher performance.

I should also point out that at this point Intel has moved well beyond just making processors for PCs as their business; they are into everything from wireless to flash memory and more. Basically if it uses a computer chip or memory there could be Intel inside. My point is that the market is acting as if the Microsoft/ARM cooperation is a death blow for Intel while in essence it is only a minor kerfuffle in the grand scheme of things.  The smart phone market is more mature but still growing while the tablet market is essentially in its infancy. I believe the tablet market will continue to grow and just like PCs there will be room for multiple players of which Intel will grab a good percentage. While the tablet market is exciting and sexy one has to remember that Intel is much bigger than just this one segment; Intel also is constantly looking for and expanding into new areas which are accretive to their bottom line.

It appears to me that Fortt either does not understand what he is reporting on or he has an interest in ARM, Microsoft or both. It looks increasingly like the IPAD is stealing from the low end laptop market which does affect Intel (more so for AMD), but most of Intel’s profits and margins are made in the higher end chips and servers.  Conversely it looks to me like Microsoft is the one that has the problem here and is losing operating system share to Apple. This deal with ARM smells more like desperation on Microsoft’s part than Intel’s. Instead Intel appears to be marching down the path of breaking in to the areas that are currently Apple and ARM strongholds.

Given the timing of the availability of the new Windows OS that would run on ARM and what real manufacturers in this dimension of reality are planning for tablets and smart phones,  I cannot fathom how one could jump to the conclusion that a potential entrant of a Windows OS that would run on ARM chips to the tablet space in 2 years is a threat now to Intel. Two years is an eternity in a tech cycle and in that same timeframe Intel should be able to be a very significant player in the tablet and smart phone arena.

It is amazing to me that the ARM Microsoft agreement makes news and moves Intel Stock, but something like a collaboration of tech companies to solve the burgeoning problem of wireless traffic is barely even noticed. The more smart phones and tablets that all utilize wireless the bigger the traffic jam becomes. The fact that Intel, Cisco and Verizon are collaborating to remove the log jam makes no news even though these companies will all be beneficiaries and standard bearers once they implement the solutions. What good would an ARM based smart phone be if the wireless bandwidth is clogged.

I just have to wonder what color is the sky in Fortt’s world?

Disclosure: Long Intel

Monday, December 20, 2010

What do Korea and Municipal Bonds Have in common? This Post Mentions Both...

I guess it is time for a recap of events that I had commented on over the past few weeks.  It is now coming out after the whirlwind of threats made by North Korea this past weekend that they no longer intend to react to the South Korean military drills. Over Thanksgiving I had commented that I believed that the North Korean belligerence was both overblown and a ploy to boost the image of the relatively unknown Kim Jong Un. A few days later I reported in my blog that a South Korean paper concurred that that the North’s rhetoric and pronouncements were empty threats to boost the new leader’s image.  Today what appears to be a underreported news story is that the North says it will not react to the South’s drills, thereby diffusing the situation to a great extent; although there are many remarks quoted saying that the situation is tense.

It does beg the question what did the North achieve by doing what they did? Did this boost Kim Jong Un’s stature? It may have boosted his appearance internally in North Korea, but on the world stage it made the North Korean’s seem like the boy who cries wolf. The question is why the change in tone? What did the North get from the temper tantrum resembling that of a petulant 4 year old after being told they could not get an item randomly pulled off the supermarket shelf. As for what the North got, nothing has been reported in the media other than New Mexico Governor Richardson’s preliminary deal with Pyongyang to allow IEA nuclear inspectors to inspect a site and also an agreement to negotiate the sale of some 12,000 nuclear reactor fuel rods. The true details are obviously hidden from the media, where is Wikileaks when you need them?

Dear reader, please understand I am glad that nothing has come of the situation in the Korea’s. It seems to me, however, that the North did not gain anything from this situation but instead actually weakened their position in the eyes of the world. Who is going to take them seriously after this series of events that took place? They huffed and they puffed but they did not blow any houses down nor did they publicly get any consideration.

If Kim Jong Un wanted to boost his country’s image as a military power he might tried a different tact to achieve the goal. Kim Jong Un has a vast army of about 1 million and plenty of military hardware at his disposal yet he did nothing with them instead he made hollow sounding threats. A better and more effective tactic would have been to hold a massive set of military drills of his own, far enough away from the South as not to accidentally cause a real conflict. As the North's massive display of force was visible to the world they could have then turned up the saber rattling for effect. A move such as holding their own drills combined with the rhetoric would have had the media and politico’s undies in such a bunch the North probably could have gotten to the bargaining table and received concessions. The risk also would have been minimal of any true escalation as the South would not engage the North first and at the same time the diplomatic corps of many countries would have been working feverishly to prevent any uptick in the threat level.

The bottom line is that North Korea has lost stature as a real threat and the markets will increasingly begin to ignore all the bluster and sword waving by Kim Jong Un leaving him even more of an impotent leader than his father.

On to the situation I have been writing about off and on for the past couple months. The Municipal Bond market is a mess and a real threat to your wealth if you invest in that arena, for that matter it is also a threat to a good portion of the US economy.

You can view a nice piece on 60 Minutes that supports what I have been writing about in my prior pieces including “Municipal Jenga”, “Whats in an unemployment number?”,  and “Houses of Pain”. The municipal situation is bad at present and is going to get worse and the choices to be made are going to lead to battles of epic proportions between government, unions and citizens. It remains to be seen what the Federal government will do or the FED for that matter, but the reality is that this train wreck is reaching terminal velocity.

I personally have advised moving out of most municipal bonds especially in the troubled or deadbeat states like California and Illinois. The situation that is taking place with the States of Europe under the EU and ECB are a preview of sorts for what will more than likely transpire in the US.  Just like the States of Europe the US states can’t print money and there is a limit to taxation. It seems to me, just as in Europe, the US Federal Government and or the Federal Reserve are going to have a “Sophie’s Choice” of sorts, whether to bail out the states by going in to more debt and the FED being forced to yet another QE for a bailout or to let them die on the vine so to speak.  Could the Federal Government bailout certain states and not others? I tend to believe that if they decide to go for the bailouts as the path of least resistance then they will be forced to bail out all states.

In the meantime I find it interesting that the investor sentiment in the stock market is running very high and the VIX (and the volatility index) shows low levels indicating complacency. The current sentiment indicators generally indicate a market at a top, however, at the same time there are multitudes of newsletter writers and CNBC type pundits predicting a strong decline. So who is right? I guess time will tell but I still feel that at least going in to Q1 of 2011 that the market will gyrate and move higher just because things have moved from “real bad” to “just plain bad” for now. I personally believe that we are still in the eye of the hurricane due to the massive stimulus and FED printing as well as markets around the world struggling for their own reasons. The net result is that US stocks and currency appear to be good parking places for the immediate future. In other words all the bailouts and QE kicked the can down the road, but at what price? That is the real question.

The precious metals have been correcting and the bull has thrown many off at this point, but I believe we are more than likely stabilizing around the current levels. It is possible for the metals to dip further but the majority of precious metal pundits are forecasting further declines and weakness and in the past this has been a good contrary indicator.  I have added some to my positions on this last dip and if we do get a more substantial decline I will add more as I believe the bull has further to run. I would argue that the bull market in the metals is dependent on the bull markets in FIAT money printing, government regulation, and government stupidity all of which are proving to be endless.

Until tomorrow.. good investing.

Thursday, December 16, 2010

Lame Duck A L'Obama

Aright I have to admit I am fuming, I mean really ticked off at the current congress. The current lame duck congress is in session and is putting together and working on passing an omnibus budget that cuts $26 Billion from Obama’s 2011 requests but includes thousands of ear marks and appropriations. While the bill represents just under a 2% increase in spending from last year’s bill and it is still chock full of waste(including a $48 BILLION dollar earmark); I know dear reader, waste you are shocked! The problem I have with the bill is that it essentially renders the next duly elected congress into impotent eunuchs regarding budgets. Before I get further into this I want to take a small detour in to the history of congress and the lame duck session.

Back in the days before we had jet planes, automobiles and interstate highways it took time for the individuals elected by the people to travel to Washington and set up shop. As a result the leaders of the day when they drafted the Constitution incorporated a time period or window in which the newly elected could set up shop in Washington before taking over their new positions. The 20th amendment of the Constitution details the transfer of power and in its original form the new leaders became effective on March 4th after the election, but post 1933 the beginning of  a congressional term was moved up to January 3rd(the President and Vice President was moved to January 20th). Additionally, Section 2 of the 20th amendment dictates that congress shall assemble at least once a year. At the time of the founding of our great nation there were no career politicians, instead people left behind their business or farm and went to Washington to do actual public service, not like what wealthy elites call public service today..yes I am talking to you Mr. Don’t Tax my $7 million dollar yacht Kerry.

Today the wealthy delude themselves into the idea that they are doing public service because they have the means to be able to run for and support themselves while holding public office; that in itself does not mean that they are there to do public work as demonstrated by the number of ego maniacs Washington breeds. Originally, “Lame  Duck” congresses were to be convened if there was a serious problem that had to be dealt with in between sessions, the congress in session currently did not need to be reconvened but instead it was due to the current power trinity’s (Obama, Reid, Pelosi) desire. Lame duck sessions are usually a poor idea as the outgoing congressional lawmaker that has been defeated is just there going through the motions and it can lead to poor results. On a state level 39 states don’t even allow lame duck sessions which begs the question why does Washington still have them? Instead just as in 1933 we should amend the constitution to dramatically shorten the transition of power to avoid these sessions as the constraints that required the current timeframe no longer exist.

In the past there have been horrible lame duck sessions with terrible consequences. The Lame Duck of 1860 the congress allowed the secession of seven states because then President Buchannan felt that the government had not right to go to war to stop them and this set the stage for the Civil War. In 1980 the lame duck congress was looking to repair the tax code prior to Regan taking office and there was much concern that the outgoing Democrats would botch it up; instead the Republicans ended up getting what they wanted and the boom of the 1980’s had a foundation. That particular instance worked out but it could have gone either way. There have also been Lame Ducks in 1982, 1994, 2000, 2002, 2006 and 2008. Of course in today’s partisan world the Democrats defend the current lame duck and its attitude by using the 2006 lame duck as an example where the Republicans passed poor legislation when Karl Rove had a say in things. As far as I am concerned the lame duck action of 2006 was reprehensible just as it is today, to me the difference is that today it is more damaging.

Aside from the fact that the current spending bill and budget are wrong for the current environment it is an affront to the American voter. Not only is the congress spending bill loaded with earmarks but also this Lame duck was convened as a matter of one last feeding frenzy by the ”Demopigs” (this term does not reflect all Democrats just the ones pushing the current Omnibus bill and the strict Pelosi/Reed disciples) at the public trough to fuel their borderline Marxist wet dreams.

A friend and I were discussing this lame duck situation and she was incredibly upset with this whole scenario which is why I started to write this piece. Essentially this lame duck session was born purely of politics and has absolutely no regard for the public or voter will. Granted the Tea Party Republicans take over January 3rd and are going to have to spend lots of time  attempting to undo the mischief that the unholy Reid, Pelosi, Obama trinity have crafted rather than getting to the business of fixing equally pressing problems. Instead this budget bill is being imposed on the next congress and chews up ½ of the newly elected congress’ term. It appears that besides further depleting the public checking account the goal was to put forth road blocks preventing the incoming Republicans from being able to cut the budgets. The next congress can’t just unilaterally roll back a budget once approved and the Trinity knows this; this leaves the new congress bogged down in trying to remove or reduce line items to defund or reduce funding thereby creating a log jam of legislation and debate. Moreover, even if the congress does agree on specific line items it is still subject to a veto from “thou who shall not be middle named”.  With any luck this plot by the “Trinity” will backfire on them when John Q figures out that they have neutered the Tea Party at least temporarily and deliberately spit in the eye of the American voter.

As far as I can tell the current lame duck has screwed the pooch for the new congress and the American people. It is always a bad idea to let the congress that has effectively been fired back in to the capitol to make new laws or budgetary/spending bills; especially when the spirit and intent of the lame duck was in case of emergency to convene congress not just to continue on a path that the public has taken umbrage against. If you think about it the lame duck session should be eliminated regardless of the party it affects because ultimately it affects the US taxpayer who has to live with the consequences. I am sure most of you have worked at a corporation where an employee has been fired; the employee is generally watched as they collect their belongings and are then escorted out of the building as not to allow any collateral damage. Even on the ridiculous “Apprentice” show once Trump tells an individual they are “fired” that individual leaves the show they don’t let them hang around to mess with the others vying for the position of Trump lackey.

I wish I could take credit for the analogy I am about to impart to you dear reader, but the truth is I was working on one while writing this article and over heard a better one on the radio. So while I cannot take credit for this specific analogy as the original I was authoring while good was not as poignant as the one I am going to present here.

Dear reader, unless you are under the age of say 18 or have been living in a cave in Afghanistan sipping tea with the likes of Bin Laden  you probably have seen the “Godfather” movies, which is where this analogy comes from. Rolling back the clock to November when America held its election we as a nation voted against the current agenda particularly when it comes to the House of Representatives. If you can visualize the scene in “Godfather I” where ”Sonny Corleone” after finding out that his brother-in-law was beating his sister pays a visit to teach him a lesson. “Sonny” is so enraged that he beats the brother-in-law essentially to a pulp; it is no holds barred as “Sonny” bludgeons him with fists and other objects even going as far as using a trash can lid. “Sonny” doles out one of the worst beatings ever captured on film and the brother-in-law is essentially left as a bloody, bruised motionless lump. Now if you can take that image and translate the scene to the political arena we the public are essentially “Sonny” and the congress (“Demopigs” in particular) are the brother-in-law based upon what the voting public did to the incumbents. I cannot recall a thrashing this brutal for congress in my lifetime; sure there was the “contract with America” period and the house and senate have flip flopped over my voting career but nothing like what happened this November. Essentially, John Q aka “Dufus Americanus” woke up and did not like what they saw transpiring and sent a message.

Flash forward to today and what scene comes to mind if you are to take analogy from “Godfather I”? At this point the public is still being portrayed by “Sonny” but the scene has changed. If you can imagine the scene where “Sonny” is driving his car and stops at a toll booth. There we are the American voting public played by “Sonny” in the car at the toll booth and the current lame duck session of congress is playing the group of gangsters arriving in multiple cars blocking our way and then turning us in to human Swiss cheese with machine gunfire as represented by this omnibus spending/budget bill.

So why should we care? Well dear readers, if you have been reading my columns then you know that there is a link between politics and your investments whether you like it or not. It does seem that for the moment even though the public has spoken it was not heard and the current mess of spending, deficits and debt is going to continue. The net result is that you need to continue on the same path as before since the problems are not being addressed. The investment path is still in tangibles. I am keenly aware that the tangibles particularly precious metals are getting hit at the moment; however, this is not a bad thing for a couple of reasons. First, the metals especially needed a break as things were getting a bit frothy and the bull needs to fling off more investors so as to maximize the number that will miss the moves. Second, this gives you an opportunity to buy in to the tangibles theme at a lower price reducing your risk. Third, this correction actually makes the longer run look more solid for if the prices on tangibles went parabolic it would end up being a bubble and we all know how that ends. The reality is that not much has changed overall and in fact the drivers of the tangibles bull have actually gotten stronger. The gyrations we are experiencing at the moment are both necessary and hard to swallow but needed to set the stage for the next leg up. The fact that Merkel could fart in Germany and it has an effect on the markets day to day just shows that investors have no clue as to what is really happening.

Don’t get hung up on or participate in sound bite economics as most investors do instead ask yourself: What has changed? Is the change real? Are the underlying drivers of your investment theme altered? Let’s face it we still have record deficits, zero financial discipline (short of lip service) in congress, additional piling on to the debt,  creeping interest rates, “The BenBernake” still dropping conjured money and weakening confidence in the Dollar despite the short term respite; so things have not really changed at all. Moreover, even when the deficit commission charged by Obama came out with their recommendations many of which were good, they could not even get agreement among the 14 people on the panel; now imagine congress trying to figure this mess out. When you take the time to think for yourself you can see the forest for the trees and make smart decisions. If instead you listen to everyone and their brother paraded through the media or CNBC then you are assured to lose as they are either projecting what they want the message to be or looking in the rearview. Remember think for yourself and take care of your own investments as no one will do a better job or take more care of your money than YOU!

The take away from this event is multifaceted. First, I believe that the Lame Duck is doing nothing more than extending our current malaise and keeping the status quo for Washington and our investment themes. Second, if the explosion in the anti-incumbent mood is any indication of public feeling then now would be the time for the tea party to spring in to action to get various amendments to the Constitution before the congress.

The amendments I am suggesting here would show that congress is serious about listening to the voter and help prevent some of the ridiculousness that comes out of Washington every year. First, congress should move to dramatically shorten the period between elections and the power change over as detailed in the 20th amendment; this would avoid disgraces like what is currently occurring under this lame duck congress. Second, an amendment should be proposed that congress shall make no law that neither they nor any other part of the government is exempted from. Third, if the Federal government wants to impose laws, regulations or programs on the states they cannot do so without the approval of the states and the Federal government must not place the burden on the states, in other words the FEDs need to put their money where their mouth is. Fourth, let’s get that anti-earmark law on the books already!  Fifth, there should be a law against special interests and lobbyists and their participation in the legislative process. I believe these five amendments would be a good place to start back on the road to sanity.

Wednesday, December 15, 2010

INTELligent Investing...Note this post also appears in my column for Benzinga

Intel Corp. (NASDAQ : INTC) was known prior to the 2000 stock market debacle as one of the “four horsemen” the other three being Microsoft Corp (NASDAQ: MSFT), Cisco Systems Inc (NASDAQ : CSCO) and Dell Computer Inc (NASDAQ : DELL). While each of the aforementioned companies are still leaders in their markets at this point I like them all with the exception of Dell, however, this article focuses on Intel. Just yesterday the “banksters” at Goldman Sachs Inc (NYSE :GS) came out with a downgrade of Intel and that sent shares tumbling on the day, it amazes me that people still take these sell side analysts seriously after all we have been through in the markets. The rationale for Goldman’s argument was that 2011 PC sales are projected to run below last year’s and the essentially “tablet computers” are going to rule the day, especially Apple Inc’s (NASDAQ :APPL) IPAD.

To disclose up front I love the IPAD as I believe that it is slick piece of design and lots of fun to play with. Apple went as far as bringing the processor manufacturing under its own umbrella there by locking Intel out of IPAD and IPHONE sales, as this is an area where Apple currently dominates so why share any of the profits with an outside company. Part of the reason for Apple’s success on the PC side was because they acquiesced and opened up their laptops and PCs to the Intel processor there by allowing their user base to expand; even their latest MAC Book Air uses the Intel Core 2 Duo (so the more PCs Apple sells the better for the Intel investor). I have read many items on the internet where people have been saying that Apple has the best platform and therefore all others are irrelevant; I find problems with this type of narrow argument. All one would have to do is ask Sony Corp (NYSE: SNY) about its success with trying to keep all competitors out of the market by keeping draconian controls on technology and price, as they attempted to do with the Betamax, remember those machines. The Betamax lost market share to the VHS format even though its image quality was superior and its cassette was smaller because Sony was for lack of a better term was “greedy”.  Of course Sony learned from that mistake and when it came time to market Bluray they licensed out the technology and used the lessons of the past to beat back HD  DVD threat; this time the lesser technology did not win.

There are other hurdles that hamper Goldman’s vision of an Apple dominated world as they do not operate in a vacuum. Samsung Inc (Pink Sheets : SSNLF.PK) is pushing their Galaxy tablet and others are bound to come on to the market in short order many of which will use Intel chips. Moreover, Intel has not sat on its laurels pretending that the market is not changing. Intel has a tremendous balance sheet in addition to their manufacturing and design capabilities and as of late they had recognized their shortcomings and began making strategic acquisitions to speed their come from behind position. Intel as a corporation seems to acknowledge that mobile systems are a growing market segment and they have taken corrective action by tight collaboration with  Infineon Technologies (OTC: XETRA) and the purchases of Wind River Systems and McAfee each acquisition give Intel a missing piece of the puzzle. Critics of Intel argue that in the past acquisitions have been costly distractions and it is a risk but that was a different time and different management; I believe that at this point the dynamic is different as Intel is playing catch up and is not the dominator, besides past performance does not guarantee future results.

As an aside while the IPAD and IPHONE are sexy accoutrements to ones wardrobe it remains to be seen if true strong inroads can be made in to Intel’s bread and butter business of business computing at a rate faster than Intel can carve out market percentages in the mobile arena. I myself have run into many circumstances where individuals I know have either not been allowed or have had to give up Apple IPADs and IPHONEs due to corporate policy, integration concerns or security concerns. While us consumers and academia love the Apple products corporate America may not be as open to the notion of bringing these products onboard as Goldman would have you believe.

In my opinion Apple is making the same error as before with the MAC. The management of Apple is capitalizing on the fact that the market loves them at the moment, but their tight fisted control of the market and strong profits breed competition. The competition will come in the near future and Apple does not have a monopoly on great design; other companies or people can also develop innovative and sexy design and once they do it will eat in to Apple margins and their ability to charge significantly above market prices for their hardware. There are many legions of Apple devotees who would beg to differ, but like every business there are points in time when they are firing on all cylinders and can’t miss but eventually they do (the Newton comes to mind) and the sharks will smell blood in the water and Intel is not the shark but the lamprey in this instance. Apple needs to dominate and maintain their position. On the other hand, Intel has to make itself available and ride on the back of not just one shark but multiple, in essence they are not as concerned with who ultimately beats Apple as they look to be the “arms dealer” to all fighting at the battle.

The big knock on Intel at the moment is that there does not appear to be a standard in the “tablet arena” other than Apple’s vertical manufacturing chain. There is also competition in this bifurcated chip wilderness as ARM who is paired with Qualcomm Inc (NASDAQ : QCOM) appears to be in a good position , but their flaw is the same as the argument made against all others but Apple, a lack of a standard. The standard argument to me at least seems to play to one of Intel’s strengths and the fact that they can leverage not only the processing and software aspects of their chips better than let’s say ARM, but they can also capitalize on the fact that there are legions of Intel based PCs and software for their new chips to be able to interact with. As of this writing there are about 35 different tablet models from a variety of manufacturers that have chosen Intel chipsets for their units; a slew of new products coming out could develop in to a cash cow for Intel. Granted this sector of Intel’s business is still operating at a loss but the losses have narrowed year over year indicating that the segment is coming along and management is diligently working this area of the company.

Google Inc (NASDAQ :GOOG) is looking to expand its presence throughout our lives and is looking to develop a set top box for Google TV which of course you guessed has Intel as one of its partners. In the same vein Intel is busy incorporating its chips in to other devices to allow users to wirelessly stream from their PC to their TV via a technology known as “WiDi”. “WiDi” uses the customers’ existing wifi to stream any kind of content which is more flexible than Apple TV or Boxee, which would be its competitors. At the moment “WiDi” streams at 720p which will be more than adequate for the vast majority of users although Intel is planning to address the 1080P problem in the near future.

Intel’s acquisitions of Wind River and McAfee play in to the development end for integrating both compatibility and security for their chips, as well as, better software and hardware integration. Furthermore, Intel continually invests large sums in R & D to further develop and enhance all lines of their chips and this helps them keep them ahead of the competition on the Moore’s Law curve.  While I do think that Intel is a bit behind the 8 ball on the mobile space they have made the right moves to get themselves on track and have $20 Billion in cash to aid them in getting where they want to go.

The Goldman’s of the world have been projecting based upon PC sales numbers that Intel may come in on the lower end of their Q4 guidance and it appears that these pronouncements are being baked in to the price of the stock at present. I believe that the slowdown in Intel’s PC chip business is just a near term hiccup and that as businesses and individuals continue the move to Windows 7 that new high bandwidth applications are going to require both individuals and business to update an aging PC fleet and servers. The new move by Microsoft and corporate America toward “Cloud” computing could also spark more PC buying along with other devices that will run in Intel’s chips. I believe that the chip demand for 2011 is being underestimated. Moreover, Intel should be able to preserve or even bolster margins as they continue to grow their market share in the higher end segment where they have a substantial lead in development over competitors. Additionally, I believe that we will see more uses for the Atom chip platform announced like the announcement on December 14th that Infosys Technologies (NASDAQ : INFY) would be using Intel’s Atom chip in their smart home gateways.

As an investor you need to look at why you are buying Intel at the moment. If you are looking to make a quick killing then I suggest you look elsewhere, however, if you are interested in picking up a solid business that pays you 3% at current prices to wait for a recovery then Intel may fit the bill for you. Intel is always on the move and while they may not strike gold on every segment or venture they take on be assured that they are not lying waiting for Apple or anyone else to eat their lunch. To predict the decline of Intel based upon Goldman’s myopic view of their business is not to recognize what a dynamic juggernaut the company really has been and will be again as well as the vast number of companies outside of Intel that have and will design products around their industry standard chipsets.

Intel is currently sporting a trailing PE of 11.57 the lowest it has been since 1999 (INTC’s 5 year average is 15x) and their forward PE is projected at 9.99 for 2011; all of which stacks up favorably against the industry. Additionally, the PEG ratio (Price to earnings growth ratio) which is another way to value the company suggests that Intel is on the cheaper side as its PEG ratio is .85; a PEG ratio 1 or below indicates an undervaluation where as PEG of 2 or more is overvalued. Furthermore, Intel’s gross profit margins, operating profit margin and net profit margin all handily beat the industry averages in their sector. Even from a technical perspective at the time of this writing Intel appears to be under accumulation, maybe even by that same crowd at Goldman suggesting that Intel deserves a downgrade.

Even with the current correction in Intel ($21.36), the stock is in an uptrend and trading less than 5% above both its 50 day ($20.63) and 200 day ($20.57) moving average, which provide strong support; in fact the 50 day average is crossing up through the 200day which is known as a golden cross and portends rising stock prices. Using the Point and Figure method of charting projects Intel to rise to a price of $31.50 as it has moved in to a double top breakout. Of course none of this is a guarantee that Intel’s stock price will fly through the roof, but the current valuation and technical setup makes me feel comfortable deploying capital at these levels. I believe that Intel will probably chop around in the $21 – 21.50 range so I would not chase it much above that, conversely I would use a mental stop at about $19.47 in case Intel does not rise to the occasion, no pun intended.

Disclosure : Long Intel @ $19.75 & $20.75.



This post is also hosted at Benzinga.com where I write a column on Thursdays as well as random posts at other times.

Monday, December 13, 2010

Money is something you have to make in case you don’t die. But don’t get rich at least not today.

Over the past week there have been a couple news stories that have struck me because they validate what I perceived to be a change in attitudes ushered in during the 2008 presidential campaign. It seems that the sentiment is shifting reflecting anger toward the rich not just in the US but also around the world.  It appears to me the platform of hope and change has misdirected the public’s attention away from where it should be focused on congress and the politicians along with the “banksters” that created the debacle that we are currently dealing with. Just as I suggest in my  “Liberty Valance” blog post the truth is being obfuscated and is being allowed to take a turn for the dark side. Instead of focusing on why we have the problems we currently face, the individuals and entities that have their fingerprints all over the economy’s murder weapon are being given a pass. Aside from Madoff (a vile and repugnant individual) and an occasional CEO like Ken Lay there have been few if any perp walks and even less investigation or enforcement of laws violated. Instead addressing economic problems, the current administration promises more of the same by their actions or lack thereof. Rather than tackling the problems and blocking moral hazards both the executive branch and the congress are engaging in class warfare.

Class warfare plays well to John Q, but it is a dangerous and unproductive measure to attempt to pass more big government and spending, under the guise of "leveling the playing field and redistributing wealth”.  We are lead to believe that the rich got to the point that they are at because they did things that were unseemly or somehow they gamed or cheated the system. After speaking with and reading many interviews of rich people it becomes plainly obvious that the vast majority became rich because they worked hard at the right thing, they had vision and were driven and most importantly they took a risk. Of course there are some who were just lucky and happened to fall in to a good thing but this is not representative of the majority. It seems that when John Q thinks of the “rich” they have visions of “Thurston Howell III” from the likes of “Gilligan’s Island” or perhaps today “Mr. Pewtersmith” the father of “Lois Griffin” on the irreverent “Family Guy” cartoon. Democrats in Congress and the President feel that a family making $250K is wealthy, maybe if they live in Des Moines, IA where the cost of living is less, but I defy anyone to show you an example of a family on either coast at that income level appearing on “lifestyles of the rich and famous”.  H.L. Mencken once quipped, “wealth is any income that is at least one hundred dollars a year more than the income of one's wife's sister's husband.” It seems that much of the public subscribes to Mencken’s remark as anyone who is making more than them is rich. It almost reminds me of the George Carlin bit about driving where he says any one driving slower than him is a moron and anyone going faster is a maniac; in other words rich is in the eye of the beholder.

Of course there are those idle rich who inherited the money and there always has been a jealousy and contempt factor to those who have wealth but are not productive in society. It is true that this class of people has good sums of money and due to their asset mix they tend to pay less tax, but let’s be honest that they are in the minority here.

It seems that the vast majority of people forget that the rich pay the most taxes in the US as a percentage of the population. They forget that the rich tend to have small businesses that create the vast majority of jobs in our economy. They forget that the people that run these businesses many of them took the risk at a some point in their lives to follow a dream and that it all could have gone down the drain if they were not diligent in executing their idea; just look at the statistics that 50% of all new businesses fail with in the first year.  Many people seem to be of the attitude that all people who are rich were just born with a silver spoon in their mouth and that is far from the truth. It is the desire and opportunity to be self made and rich that has fueled the dynamic economy and historically unprecedented wealth of the United States. If it were not for these self made rich people John Q would not have the standard of living that he enjoys today. Many of the innovations and products that enhance or make life easier would never have come to fruition if it were not for the economic system the US had in the past. Without the rich there would be no IPODs, Personal Computers, or cars along with countless other opportunities and creature comforts. In order to make things work someone has to take a risk, but if you remove the risk reward incentive what remains? Are people going to take a risk and build or make things that would benefit us all just for the good of his fellow man? Is one going to devote possibly years of work and their own capital without reaping any benefit in return? Sure that will happen when we get to the world of Captain Kirk and Mr. Spock, but we need to focus and ground ourselves in reality.

So why am I bringing this up? I bring this up because I am seeing a slow but inexorable shift indicating that the class warfare mentality is taking root and popping up in many places. The two stories that got me thinking are the attacks on Prince Charles and more locally here in the Boston area there was an incident on Cape Cod. In the footage of Prince Charles’ car being attacked the students protesting their tuition hikes became somewhat violent and one of them is picked up by a microphone screaming "off with their heads”, a familiar cry of the peasants during the French Revolution. The Second incident that has happened over the last couple days took place here in Cape Cod where an arsonist has targeted homes on the Cape and set them ablaze leaving behind a message of “F#@K the rich”. Taken on their face one can easily argue that these are isolated incidents, however, I am of the belief that the class warfare seeds planted have begun to germinate and these are precursors.

I do not advocate living in fear if you have wealth, but I do think it is a good time to look at your situation and consider the idea of scaling back on being ostentatious and securing your assets. Even if the situation never escalates beyond random news items like these it is better to have a plan and make sure that you and those close to you are protected.

Thursday, December 9, 2010

Let Them Eat Cake....Or Maybe Twinkies, Doritos Or A Plasma TV!

I heard a story yesterday on the car radio that I just could not believe; the talk host was discussing the new trend of colleges encouraging students to jump on the public dole to receive food stamps. I did a little digging and was able to confirm that he was in fact reporting the truth and not some exaggerated fallacy. It is stories like this one that get to the root of the problem in this country as to why we are having such trouble keeping costs in line and making our economy work. Dear reader I am all for providing those truly in need with the means to live if they require it as in the richest nation the world has ever known citizens should not be going hungry. I do take issue though with colleges promoting policies of guiding the next generation directly to the public teat. Millions of students have been to college and survived just fine on food from money they earned and yes I did too. I will admit that there were times where Ramen Noodles filled the gap but everything worked out fine. My issue is not with helping those that need it but instead the message we are sending to those who don’t as this policy just further feeds the entitlement mentality.

At a time when there are millions needing help and the government’s finances are questionable, which is putting it nicely, why are colleges promoting this destructive behavior. Is this just a further degradation of societal think? Is the new agenda in colleges to push public dependence since they have already ripped the heart out of inquisitive education especially in the areas of government and economics? The latest report on food stamps that appeared in the Wall Street Journal and showed a year over year change of 16.2% or almost 43 Million of our fellow Americans require assistance in these hard economic times to feed themselves.

Interestingly the talk show host mentioned universities in Oregon, Texas and New York and the corresponding rate of year over year increase in those states is pretty high weighing in at 13.2%, 24.6% and 13.3% respectively.  Granted the year over year figures are high in many states and population does factor in to the figures but it does beg the question of just how widespread is the push for colleges to get students on welfare is and if it is skewing the figures.

Over the years food stamps progressed from checks to the new slick EBT cards that look and act like a debit card. It used to be if you were paying by food stamps everyone knew, in fact, growing up when I did there was a sort of stigma attached to being on welfare and food stamps. Today however, the stigma is gone and it is almost deemed a right to be able to obtain food via government programs and the government is constantly making it easier and more discrete to utilize. The stigma used to give people the incentive to want to get off of programs like food stamps and unemployment yet in this day and age since there is no social consequence some believe that it pays better than having to work to earn your food.

As I said in last night’s post regarding extending unemployment, concepts like introducing college students who don’t really need the help to food stamps creates a moral hazard. For those that truly require assistance there should be no question as to whether they should receive it or not. The college websites do stipulate the guidelines for qualifying for food stamps and one of them is parental support can disqualify them from participation. Really now dear reader, if you give a kid a choice between getting extra free food and only living on what their parents will give them what are the odds that the student will omit the parental support dollars from the application? After receiving guidance from those  students who have gone before I would suggest that the odds of a student disclosing the information pretty low on the scale. Dear reader, you say you don’t believe that a college student would consider using the food stamps or if they did they would make good food choices then you need to watch this video from Fox News. After viewing it you will see what I mean.

What is even more bothersome is what was discovered here in my home state of Massachusetts that the EBT cards were being used to buy items ranging from booze, slots to plasma TVs and not food, talk about moral hazard. These are only the wasteful things that have been discovered so far, I am sure that there is plenty more out there to be found.

The bottom line is that there are real people out there that need the food stamp program as a safety net and they should have it, but should we be teaching future generations to be dependent on the government for free everything even food? Is this any way to cut back on entitlement spending or even framing the citizens’ mindset toward self sufficiency to reduce entitlement needs? Between the mindset, new expanding programs, and expanding existing programs you should have no doubt that QE is here to stay and that precious metals and other tangibles are your best protection from the growing government spending and the havoc it will play with our currency and standard of living.

Wednesday, December 8, 2010

One Exit No Waiting..The MOMO Crowd Is Leaving The Building

Gold got slammed today about 1.43% opening today at $1,401.80 and settling out at $1,381.70 for a loss of $20.10 on the day. The red headed stepchild, silver, took a good hit opening the day at $28.82 and closing down $.29 at $28.36 for a shade over 1% loss on the day. The metals less relevant but nemesis none the less the US Dollar essentially was flat on the day opening at 79.94 and closing up .13 to 79.99 for a .17% gain on the day, not all that impressive considering the selloff in gold and the rumors that the central bank of China is planning on raising rates. The gold stocks as represented by the Market Vectors Gold Miners ETF (NYSE : GDX) did retreat but not nearly as much as one would have expected considering that it is supposed to be leveraged to gold and it only dropped a similar percentage to the metal. The volume was heavy but not outrageous in the GDX and certainly not as high as the early November dump. To me this action looked more like some good profit taking after a speedy and strong run, and the Bank of China rumor was just the excuse du jour to spook the momentum players who are notoriously weak hands. While there could be more downside left in this move and there is some short term technical damage on the charts the current uptrend is not in danger and there is strong support at $1,365. I would prefer to see gold chop around here at the $1.380 level to work off some of the froth but if the metal trades down to and holds $1,365 I will be adding to my positions; as always one needs to let the market dictate.

The facts remain that the underlying macro factors have not changed for why the metals are rising in price. Is the FED still printing money? Check. Is Euroland still a mess and moving toward their own QE (Qeuro)? Check? Is the US any closer to balancing the budget or reducing the deficits? No. Is the US in a position to be able to fund the unfunded liabilities? No. Are all 50 US States fiscally sound? No. Are Central banks buying or selling gold? Buying. Is mine supply growing, stagnant or rising? Stagnant. I could go on but you get the picture dear reader. All the wiggles in the metals prices are but short term noise. I know there are many out there who would take umbrage with my point of view, but to that I will say they have missed the boat for the past 10 years with all their excuses. Yes the metals run will come to an end one day but as far as I can tell that day is still off in the future. Sure the metals trade has gotten more crowded but I would say that the MOMO people who are unwinding their trades currently were the crowd and not even really much of a crowd. We still have not seen a picture of a gold bull ripping through Wall Street or CNBC setting shows dedicated to the metals. More people do know about the metals story but historically as a percentage of assets held globally gold and the shares are still at the extreme low end of allocations. The chart below shows a graphic representation of just how under represented the metals are in portfolios; wake me when we start getting to 20%.





Chart is from Casey Research  from an Eric Sprott presentation, the original can be viewed here.

Moving on to the Bush tax cuts and the supposed agreement between the Republicans and Obama.  On the one hand the extension of the cuts along with the reduction in social security withholdings will maintain the amount of income Americans are taking home assuming they have jobs. The markets and business would have uncertainty regarding taxes lifted for 2 years so that might lend a little stability to the current situation. Additionally, the markets will not over react since the capital gains and dividend rates will be maintained as well; of course there could still be normal yearend tax selling.

Knowing that we have a funding problem with social security I am not sure about the wisdom or logic of lowering the amount of money going in to the system; I have to wonder what impact less incoming dollars today will have on the future of the program and the retirement age. Additionally, adding a year of unemployment seems like a mistake considering the number of stories coming out where people are looking to be paid off the books for other jobs so as not to disrupt the unemployment payments. It would appear that for many people this adds a year and month incentive not to seek work and get off the public dole. I know the job market is less than stellar these days but if the problem is that the government is paying too much for unemployment it creates a moral hazard incentivizing people not to work.

I also find it fascinating that this “deal” is being touted in the media because Obama agreed to it. It just goes to show you that the Republicans are either stupid or do not have the best interests of America at heart. Last I checked the Republicans needed to be making the deal with their Democratic partners in the house and senate since according to the U.S. Constitution congress is the only power that can make laws of the land; as in “congress shall make no law…”.  The President, regardless of how high an esteem Mr. Obama holds himself in is part of the executive branch and cannot make laws instead can only sign and veto them. Moreover, this proposal expands the deficit and adds to the debt making our financial situation even worse; both sides lose in this potential bill. The Republicans get to keep the old Bush Tax rates but the unemployment extension that they had been recently arguing about being funded by cuts is now just added to the debt and they seem happy since they got the tax rate. You can tell this was not a Tea Party decision because it is around 3 weeks to early for that….hmmmm.

It begs the question as to why Obama would push for this so called agreement and why the Republicans would agree to it. As for Obama taking the deal it is because he knows that once the congress turns over a large class of “Tea Party” Republicans would be in control and he would not have gotten a deal as rich as the one he got. Instead the Tea Partiers would have done what they were sent there to do and would have pushed the tax cuts and more than likely that would be it.

Currently in the “Lame Duck” session Obama has majorities all around and he should have been able to get whatever he wanted without the GOP support. In an ironic twist the Democrats are upset that he usurped their authority and is backtracking on their tax wet dream; instead it is the old line Republicans that are handing this to Obama. If Obama waited till the next congress then he would have had much tough sledding and might have been put in to a position where nothing gets done or worse yet the “tea Party” would have forced him to veto the bills put forth making him look bad. Instead Obama is trying to set a scenario where taxes will be the focus of the next election as the Bush rates are set to expire in 2012 in time for the elections. I wonder why he made this move as taxes are a sore point and unlike the Democrats in the congress the average Joe in the streets will not be enamored with leaders who want to raise taxes especially since the economic malaise will probably roll till then and beyond.

One side note, it truly irritates me when these politicians say that maintaining the Bush Tax rates will cost the government. First off it is your money you earned it but just like in your house if your salary gets cut you learn to trim waste from your budget. The problem is the government is like a spoiled child and needs to be told no; you can’t spend on this, that, and the other then turn around and expect us to pay. We as a society need to reevaluate what it is that we expect from the government and push it in that direction. The “do all” government and womb to tomb entitlement society needs to change or we will not get out of this house of pain at least not without lots of carnage and time. It is unfortunate that the country is so polarized at the moment because now more than ever we need to come together and work as a nation to fix things. The biggest problem we have is our leaders on both sides want to legislate or govern from dogma rather than reason and practicality that would benefit all US citizens. The way I see it is the Republicans are the party of few ideas and the Democrats are the party of bad ideas; in the past gridlock worked well but in this economic tumult we need commonsense and less pontificating and posturing.

Monday, December 6, 2010

The Barbarous Relic At The Gates…

Back in the time of the Roman Empire around the 5th century, the structure began to unravel and the “barbarians” started to acquire more of the territory once ruled by Rome.  The “Barbarians” were those cultures outside of the Empire that were not of Roman extraction or culture; in fact in many respects the Barbarians were considered subhuman, brutal and criminal.  Initially there was much trade between the Empire and the Barbarians and the Barbarians provided many labor services to occupying Roman armies ranging from food production and daily living service to providing female companionship. The Roman Empire also struggled with civil war and required additional military personnel, so Barbarians were actually recruited in to the military. Time marched on and it became fairly common that the members of the military up to the generals had Barbarian ancestry as well.  As the Empire declined the Barbarians some of whom were former Roman military leaders in turn wrested control of more and more land from the empire. The Empire went into  decline as a result of overextension, increasing government regulation and continually increasing taxes which drove its citizens to seek refuge from the policies and leadership of Rome. The crushing directives and punitive taxes dictated by Rome convinced many Romans living near the Barbarian territories that they might prosper better under and be protected by Barbarian rule. The net result was that more and more lands came under Barbarian control and the taxing ability of Rome to sustain its wild spending and prop up its “World” empire imploded.

Now granted there was much more in play during the decline of the Roman Empire and the reasons mentioned above were not the only factors that lead to the downfall, but this is a bird’s eye view of the cause. Dear reader, you must be asking yourself where is your correspondent going with this, has he just lost it yet again; hopefully I can paint a clear picture for you in the writing that follows.

In the world of today we don’t have the Roman Empire and there are no great armies occupying the US, Europe, China, Russia or any countries. Save your emails I don’t consider US Military operations in Afghanistan or Iraq to be on par with the Roman Empire nor are the awful contained conflicts that occur with too much regularity in Africa or other “hot spots” in the world. Instead I would contend that in today’s modern era the Empire is more that of currency, monetary and economic regime and the Roman Empire of today is for all intents and purposes the US. The US has enjoyed its superpower status and leveraged it economically for the past 65 or so years; please understand dear reader I am a proud American and have also reaped the rewards of America’s power and prowess. In this article that I am putting forward for your review, my intent is not bash America but to hopefully provoke you in to thinking for yourself, to remove the blinders as to what is transpiring to our great country.

You see dear reader as I write this the US is still the Roman Empire, although as I said we are not out occupying great swaths of the world militarily we are doing it economically. If we were to put the US in terms of the Roman Empire than most people would view Obama as the Caesar, but it is greater than just one man because of the way our system is structured. Instead it is the combination of two of the three legs of our government the Executive and the legislative that has brought us to this point in our history. We must add to this volatile mix the catalyst of the FED and their misguided attempts to “manage” the economy.  Like the Romans before us the size and scope of government continues to grow and spend and to maintain the house of cards requires ever greater amounts of funds or taxes. Just as in Rome the government and military became so large and the taxes so onerous that it choked off the private sector with regulation, taxes and intervention in an effort to serve the perceived public good; it did not work then and it doesn’t work now.

Mind you dear reader this is not a phenomenon that is limited to just the United States, all one needs to do is look across the pond to Euroland and one can see the time tested result of overregulation and excessive tax rates. I had already discussed in earlier posts that the Euro was flawed from the beginning since the ECB was trying to impose a one size fits all economy across a disparate collection of people with strong national identities and non-complimentary economies; this is doomed to fail in my opinion because of the lack of cultural homogeneity found in an economy like the US.

Back in the USS of A we are marching down the same path as our European cousins with our big government and entitlement society requiring ever increasing deficits that are expanding at rates faster than taxes could ever keep up with. Of course that won’t stop the government from trying to solve its problems by taxing rather than the difficult choices of cutting or even reneging on unaffordable options a case and point of this is from the President’s own deficit commission who came up with several ideas including restructuring the overly complicated tax code and immediately the lobbyists and special interests went in to overdrive to protect their pieces of the pie; this means that either nothing substantial or far less than what is needed will be implemented and we will fall woefully short of the mark.

In the meantime dear reader you are already aware regarding my feelings about the FED and their profligate money printing. It came out over the past week through FOIA (Freedom of information act) requests that were stonewalled for 2 years that the FED bailed out not just banks but foreigners all with money that is yours and mine as US taxpayers. Upon release of this information I found it fascinating that two views came to the fore; first was the view that if the FED did not bail out foreigen entities that it was a form of protectionism and second was the announcement that companies like Ford and GE received money from the FED in 2008. Starting with the protectionist notion I would respond that it is sheer and utter nonsense that if the FED did not lend to foreigners that it would constitute financial protectionism; where is it in the FED’s charter or dual mandate stated that they have the duty let alone authority to use US taxpayer money as they see fit let alone outside the US. Of course dear reader they are doing it again as they back stop the ECB as it deals with the Euroland mess soon to be obvious to all as Qeuro (quantitative euro). As for the FED loaning money to US entities like Ford this not even remotely close to the bailout that was given to AIG, Fannie Mae, Freddy Mac or GM; instead it was a period of high credit stress where the credit markets had locked and companies like Ford utilize the credit markets on a regular basis to meet business expenses ranging from payroll to accounts payable.  The second instance I believe that the FED did what it had to to keep the markets moving and it was the right decision, on the other hand I completely disagree with the FED’s bailout policies as they just perpetuate the problem and continue the moral hazard.

The events that we as Americans have witnessed in the government and markets should be enough to allow even the dimmest amongst us to see that things are not normal and there has been a paradigm shift especially since all the assurances that the old remedies will put us back on the straight and narrow have failed to do so.

Back to our Roman analogy, who is the barbarian today I would contend that the tangibles in the market place, being lead by gold it’s five star general, are threatening the existing market rule.  John Maynard Keynes, the father of Keynesism, once called gold the barbarous relic deriding its usefulness as a store of value and its place in monetary policy. Today due to the FED’s policies of unnaturally low interest rates and QE saver’s are being punished as they can neither earn sufficient return in interest as well as their purchasing power is being eroded so they are increasingly turning to the “barbarian” for protection and shelter from the current storm.  Moreover, it is not just here in the USS of A that the Barbarian is making inroads but around the world as well. As it becomes more apparent that the ECB will grudgingly move to Quero and the FED is also busily pumping billions and possibly future trillions in to Euroland more people around the globe are suspect of paper currencies, which is reflected in the “barbarous relics” (and all its cousins) rise in currencies worldwide. Furthermore in an ironic twist central banks around the world are adding to their metal reserves as gold is about to log its 10th year of gains after spending prior decades dishoarding their stockpiles; although the US whose monetary policy supposedly is divorced from gold still retains the largest hoard, which begs the question if it is so useless why store it? The government like all others around the world store gold because it is of value even though they bloviate around the world that it is a “barbarous relic”.  If you want proof then I would say a picture or in thicase a chart is worth a thousand words…… Bottom line is that unless we enter a parallel universe due to an experiment with the CERN particle accelerator gold and tangibles are going higher...usual corrections apply no straight lines!

Chart Images obtained from galmarley.com a site that has a number of great charts including the ones below…





Thursday, December 2, 2010

"The Top" In Gold And Silver

All markets gyrate back and forth and investors in every market go through phases of bullishness, fear and despondency. The key to being successful in the markets is to know when to take your chips off the table, as Kenny Rogers said “you’ve got to know when to hold them and know when to fold them”. Said in a different way is you have to know when to cut your losses and let your winners run. The problem for most people is that they allow their emotions to overcome their ability to do either. Many investors will not sell a particular asset for any number of reasons such as: they love the company, they think if they hold on the issue will recover and go up, or if they hold on that an issue will keep going to the moon. Conversely, many investors will not buy an asset because they think it is to expensive even if the true value is not reflected in the price, they don’t understand the drivers for the asset or it is in an under covered or “hated” sector, which is generally where the values are. To make good money in the markets you need to do as the Great One Gretzky used to say…”I don’t skate to where the puck is but instead I go where the puck will be”. Following the Gretzky logic is a lonely way to invest because you are consciously deciding not to be one of the lemmings; this does not mean that just because everyone is piling into Cisco (NASDAQ:CSCO) that you should go short, but instead that you should look for the investments that others are over looking because they are not in or sexy. You can make as much or more money by buying boring or unsexy assets with less volatility the downside is that it does not make for good cocktail party chatter, of course if you make enough you can throw the cocktail party and talk about what you want and then everyone will listen.

As an investor or a trader you have to learn to keep your rational mind in control of your emotional side, which believe me is a very difficult thing to do especially when we are all inundated with opinion and news from multiple portals much of which contradicts each other. This is why I have spent years working on controlling my emotional side and rely on thinking through each investment decision based upon my own research and knowledge. Just relying on market adages or sell side recommendations is a recipe for mediocre returns at best since none of them have a crystal ball or truly knows what will happen; instead you have to think for yourself and remember that no one will take better care of your savings or investments than you!

I believe that the absolute number one most important thing that any investor or trader needs to master is the ability to admit when you are wrong. More money has been lost hanging on to a mistake than can possibly be imagined. If an investment goes against you have rules to guide you to take the emotion out of the equation you will save yourself much heartache and live to invest or trade another day. As an investor you also have to reorient yourself to recognize certain truths about the markets; Wall Street, Mutual Funds, CNBC, Hedge Funds and the entire investment industry is geared to make money not so much for you but instead for themselves. I know we all believe that there are rules to protect the investor, however, judging by the successes of the SEC to prevent things like Madoff, Sanford, naked short selling  or any of the dozens of corporate malfeasance that has taken place over the past few years they are asleep at the switch. Sure the industry is not going to raid your account and take out money directly but who can forget all the brokerage houses hawking internet stocks to the public all the while trashing them in private; as they make their money by placing deals and off the commissions from the purchase and sale of investments.

For much longer than I would like to admit since it shows my age I have read Investor’s Business Daily (IBD) and while I use the resource the most important thing that I learned from the writings of Mr. O’Neil the founder was to have method or discipline to which you adhere. In fact it is one of O’Neil’s rules that I find to be critical to success and that is if an investment goes against you need to have a loss limit decided ahead of time. The caveat to the loss limit is that I believe that you need to keep the stop loss private as one of the favorite tactics of the market makers and specialists is to run the price of a security up or down to trigger stops and acquire shares as a result of a volatile swing one way or another. I am sure if you are an investor and have ever used a stop you have suffered from this phenomenon of having your stop triggered on a volatile day having your investment sold out form under you only to see it return to a higher price or close even higher. So while I do advocate the use of stops I am sure that most of you are not near a computer all day to monitor your positions but there is a way which puts the control in your hands and does not let the market maker\specialist have the upper hand. You can subscribe to a service called Tradestops, which will track your portfolio and provide you with an alert via email, text (SMS) or even pager for those of you stuck in the twentieth century, for a variety of triggering events ranging from stop loss to number of trading days that you have owned the investment. The cost for the service depending on the features you require is about $80 for the more basic plan to $110 For their most comprehensive plan, a worthwhile investment for you to regain control over the market makers\specialists. In the interest of full disclosure I do not receive anything (monetarily or otherwise) nor am I affiliated in any way with TradeStops, I just believe it is a great idea and gives the power back to the investor or trader where it belongs.

In his writings O’Neil suggests an 8% loss cut since if an investment falls 8% then in order to recoup the loss your next investment would only have to rise 8% to break even there by allowing you to make mistakes and still have money to invest, since to make 8% on an investment is not a rare occurrence. O’Neil goes on to point out that if your investment falls 50% then you need a 100% gain just to break even, which is not so easily achieved particularly in today’s markets. I generally use the 8% limit except when I am playing in a speculative area and the investment is small I may allow as much as a 15 to 25% loss limit to allow for the volatility. The loss limit methodology allows me to be confident that I can make mistakes and still be able to recover from the mistakes to grow my portfolio; let’s face it not everything you buy will go up for if it did you would not be reading this post instead you would be sunning yourself on a private island taking interviews from Robin Leach!

One of the other areas where investors come up short is the use of trailing stops which help to lock in profits and protect you from a catastrophic decline. It is just as important to know when to exit a security once it begins rising as to know how to cut ones losses upon entering the transaction. The concept of the trailing stop is that a stop loss order is set at a percentage or fixed number of points below the market price for a long position or above the market price for short position. The trailing stop can be either a limit or market order depending on your preference although with a short position I personally would set a specific limit and once violated sell immediately. The trailing stop price is adjusted as the price fluctuates but should the stock plunge then your shares would be sold locking in your profits and taking the emotion out of the equation; although if you had a stop limit then the shares may not be sold as the limit could have been exceeded. While I like the concept of the trailing stop given todays volatile markets with flash crashes and other events the trailing stop is kind of a double edged sword because you can be unnecessarily dumped out of a position and then have to figure out what move to make next with the capital; the flipside is that no one ever went broke while taking profits.

It is a complex battle for an investor or trader between managing risk and emotions. Yes there are mechanical tools to take the emotion out but they are not perfect either, the bottom line is that you need to control your emotions and continually evaluate your investments to see if they still make sense or are adjustments in order. A modicum of commonsense, investigation and observation prevents heap of losses.

In addition to using tools like stop losses and trailing stops, research and acquisition of market knowledge for investments is critical for success as well.  For me I like to look at anecdotal evidence as well as hard cold data to determine if an investment has run its course or not. We all know that no market goes straight up the exception to this rule is either a mania or just plain hot money rushing in to an area like internet stocks for example.

There is no shortage of talk regarding the fate of the gold and silver markets and so long as I hear plenty of negative arguments I am confident that the upward march will continue. If I begin to hear people at all levels of the socioeconomic ladder begin to talk about owning gold, silver or the shares I will get nervous. Gold and silver are currently consolidating and are getting ready to test the highs sooner or later. It has been my observation that once the metals breakout to a new high they tend to pull back sometimes violently along with the siren calls of “this is the top”. I have heard the same pronouncements since I began investing in gold in 2000 (first in the shares) at every level $325, $400, $450, $500, $1,000 etc… It then usually took three knocks at the door to leave a price level in the dust, meaning that the price would butt up to the high a minimum of two times and bust through to a new run on the third attempt although there was at least one occasion when it took four attempts if memory serves correctly. This type of action is found throughout the commodity \tangibles space so it is not that unusual and it does have a tendency to shake out the weak holders allowing stronger holders to carry the price higher.

Do I believe we are at atop in the metals? The short answer is no. In prior posts I have gone in to why gold, silver and commodities are rising so I will not belabor that point here; instead I want to address the idea that we are at “the Top”. I believe that we are only in the second of three phases of this bull market and we still have the mania phase to go. The mania phase will be more like that of the internet bubble as everybody you meet will be talking about the metals, stocks that have the word gold or silver in the name will be bid up regardless of ability to produce just like internet companies that counted eyeballs not profits. People will be clamoring to buy metals and locations selling product will look like “black Friday” sales are going on. As an investor you need to be thinking ahead NOW as to what will you do when the mania comes. You don’t want to be left holding the bag you need to think about an exit plan, because when we do get to the mania it will be thrilling to see your holdings rise dramatically but no different than musical chairs at some point the music stops and there are not enough seats. By the time the mania is in full gear there should be other areas of the economy that are neglected or left for dead that will represent huge value and you will want to move most of your assets to them. You can also do what I do currently and that is to sell a portion of your position when you double so you are playing with the “house’s” money as this allows you to keep a toe hold in even as the mania peaks without risking your principal.

Today the main argument for bubble indicators seems to be the fact that there are ads in newspapers and on TV asking for you to sell your gold jewelry or gold scrap. There was even a pawn shop here in the Boston area that was running radio ads claiming that gold has peaked and that now was the time to dump your gold to them. They claimed to know that gold was peaking because they were buying at $300 an ounce and  they were sure that prices would not stay this high long and the bubble was going to burst. When I heard this ad it gave me comfort because it was geared to get John Q to part with metal not to sell it to him. Why is that distinction important? Well the fact is that this advertiser is in business to make money and he obviously sees that gold is going higher so he wants to obtain what he can on the cheap.  Another buyer was trying to motivate people to dump their scrap by resurrecting the 80’s icon associated with gold, Mr. T, having him pitch to John Q to turn over his scrap for a few bucks. These companies are not so much indications of a top in gold as a decline in the underlying economy. They are trying to obtain gold to profit on and are focusing John Q on cash payouts that are a fraction of what the metal is worth to them, a pretty good business if you don’t mind ripping off the public.

If the Pawn shop were on the airwaves touting buying gold as an investment for the public I would be more concerned that we were closer to a top. The day when John and Jane Q are out in full force trying to acquire the metals is the day were are much closer to a top than at present. When you see full page ads in the paper for department store gold sales and banks open gold windows we will be at or on the cusp of a top. When the top comes you will no longer see any ads for people to sell their gold jewelry or scrap because people will not be willing to sell it in anticipation of higher prices and that will be a top.

I know that there are ads running for Goldline and other bullion sellers mostly on Fox Business and CNBC because that is where they are getting the most bang for the buck with the early adopters. When Glen Beck is on Goldline commercials airing in prime time even 1/3 as frequently as Toyota commercials that will be a top!

I wish to relate my own anecdote from Thanksgiving with the in-laws. My In-laws have decided that it was time to sell their house of almost 40 years and as part of the clean out process my father in law had a giant bottle and a separate hard suitcase filled with change. His goal was to take all the change and convert it to cash to split amongst 6 grandkids. There was a lot of change in to the hundreds of dollars and the kids all sorted it in to the various denominations; I also had tem go through and pull out any $1 coins, ½ Dollars and change dated 1964 or earlier. The net result was that we ended up with a couple quarters pre 1964 and a few pre 1969 ½ dollars which my in laws had no idea were worth more than face value nor did they know how to get the value out of them. I ended up taking the hand full of coins to a coins shop which was not so easy to find as there are only a couple in the state where as there appear to be Dunkin Donuts on every corner.  All the grandkids benefited as I was able to convert this small amount of coins into a couple hundred extra dollars. While I was in the coin shop I noticed that there were others trying to sell coins as well but they appeared to me to be scrounging for money; one in particular had his whole family in tow and was desperate to get cash to be able to afford Christmas gifts. The owner of the coin shop confided in me after the family left that he sees more and more of this type situation every year and what a sad statement it is on the economy. Furthermore he went on to tell me that even with gold at current prices that his business is not reflecting the same mania type conditions as when he was selling gold and silver coins in the late 70’s.

My take away from this coin selling experience was twofold.  First, if educated and knowledgeable people, like my in laws had no idea what they had, nor what to do with it then John Q must also be in the dark regarding this topic. Second, the underlying economy is bad and people are still selling their metals and not buying where as businesses and people who understand are acquiring. Both factors tell me that the public is very far from being heavily involved in these markets and it is not the top!