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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.

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