If you like what you read consider a donation

Wednesday, January 26, 2011

Lions, Tigers and Gold Bears ...OH My!

Well the markets have been quite the rollercoaster over the past couple weeks. Of course stocks other than commodities and precious metals were rallying. Why were the stocks rallying? Well of course the rally is because a couple of anecdotal pieces of evidence came to light that indicate that the economy is less bad than expected. Now please dear reader, understand that I like just about every other American would like to see the US pull out of the current quagmire and move forward to happy days, but as a realist I want the move to be based in a long term reality. So a couple weeks ago the market decided that skies would be sunny for the rest of the century, peace would break out worldwide and prosperity was just around the corner. Needless to say the mood which was quite bearish reversed and suddenly we no longer needed any of the safety trade and risk has become the word of the day. Commodities got hit, gold got hit because one no longer needed these things. Besides the Chinese were raising rates so therefore they will have a hard landing says the collective common wisdom, which has been incorrect for as long as I can remember.

Like many of you who read this column I have watched the precious metals sector give up gains made over the last year. Remember nothing and I mean nothing goes up in a straight line, for if it does it comes crashing down. So at the moment the precious metals are consolidating their gains.

The catalysts for the next leg higher are slumbering at the moment but they will awaken at some point. Dear reader the catalysts include the Euro zone problems that are currently being just papered over, The US bond market that is just waiting for the “bond vigilantes” to show up, the covered up unsold inventory in housing, the collapse of cities and states, massive food inflation(notice the smaller containers in the supermarket maintaining  price level), general inflation, and more unpredictable geo-political and or  weather events(which will impact the agricultural, commodity and energy sectors).

Mean while the media parrots the FED’s and Government’s statistics regarding unemployment and inflation and Joe Six Pack continues to pay the price. Poor Joe cannot understand how there is no inflation while it costs him more to take care of his family. Price inflation is rampant yet “B52 Ben” has the stones to go on 60 Minutes and boldly proclaim that he is not printing money and inflation is not a problem. I wish he could be forced to tell this lie in front of a panel of Joe Six Pack’s who are free to question him at length. I am sure that are some guys out there that would really like to put old Benny under the hot bright lights and yell at him Jack Nicholson style “that he can’t handle the truth!” At some point in the near future this disconnect will lead to some form of civil unrest.

As I pen this missive awaiting the announcement from Benny and the Jets at 2:15 pm regarding their, oh so wise, decision on short term rates and the cryptic and myopic diatribe that follows otherwise know and the FOMC statement, gold has probed its 38.2% Fibonacci retracement at $1,325.69 twice and bounced off.

For those of you who are unfamiliar the Fibonacci numbers were developed by Leonardo Fibonacci and it is simply a series of numbers that when you add the previous two numbers you come up with the next number in the sequence. Here is an example: 1, 2, 3, 5, 8, 13, 21, 34, 55. So when you add 1 and 2 you get 3? Now add 2 and 3 and you get 5, and so on. In the market many technicians and “technical funds” use these numbers to determine retracement levels.

Since as I said before nothing goes straight up, market technicians have noticed over time that stocks tend to retrace at certain levels the most common of which are 38.2%, 50%, 61.8% and 100%. I have provided some charts at the bottom of this post for you to peruse after reading this post.

So is the correction over in precious metals, the short answer to this is I don’t think so but it is much closer to resolution than it was even a couple days ago. The number of newsletter writers on the topic that are increasingly bearish is growing and I am seeing articles calling for $700 gold. So do I believe in $700 gold? Given the macro and geopolitical factors in play I find it hard to believe that we would go to $700 gold. Having said that I still maintain $1,280 - $1,260 or so is the potential bottom if $1,320 does not hold. It does appear that the market is stabilizing above the $1,320 area and that is a positive but the price needs to move above $1,340-5 with conviction to signal that the bottom is in and as long as the $1,325 holds the bears should be out of ammo for now. Much of this damage is in the paper markets and not the physical market as there are plenty of reports coming out regarding Asian and Indian buying at current levels as well as Central Banks like Russia’s and China’s announcing further buying.

How did I arrive at these numbers? Based upon Fibonacci numbers I used gold’s high of $1,430.6 (intraday) and calculated the various retracement levels.

38.2%    a retracement of $104.93 creating a gold price of $1.325.67 (met)

50%        a retracement of $137.35 creating a gold price of $1,293.25

61.8%    a retracement of $169,76 creating a gold price  $1,260.84

So needless to say if we breach the 38.2% level with conviction a move in to the upper $1,200 range is in the cards. If for some reason the 50% level does not hold then we should get the final low somewhere between the 50% and 61.8% level. If these scenarios do occur the vast majority of traders and hot money will have vanished from the market and it would be the ideal place to put capital to work. Traders and the Johnny come lately crew will be mystified why gold rises again and they will once again not trust its rise until it has broken out to new highs. Once out to new highs the hot money will chase again driving yet another price rise. The key as a precious metals investor is patience and recognizing the “final top”, which is still quite a way off.

As for timing one of the items I use that has worked well in the past is the gold miners bullish percent index. The “BPGDM” has moved in to low territory indicating to me a hard turn in sentiment toward the sector. While the BPGDM is not at the lowest level (excluding 2008 in which everything got slammed) as February 2010 provided us with a reading of 19.35 out of 100, the current reading is only 36.67% bulls. Clearly the BPGDM index has moved down sharply and is in the zone where bottoms are put in which is what leads me to believe that we are closer to a bottom than top in gold.

To me a coincident indicator for gold is the State of the Union (STOTU) speech last night which demonstrates why the end game is still far off for gold. I was watching the news talkies after the STOTU and one of the channels put together a montage of at least 15 prior STOTU addresses and it was amazing that the same exact message and many of the same phrases were used in all the speeches. This indicates to me that for all the high flying rhetoric from both sides essentially the can is being kicked down the road. There was lots of happy talk about cutting deficits yet there was equally as much talk about “investment” in education and green initiatives which is just code for spending. Moreover, there were no concrete items or definitive proposals yet there was lots of clapping and back slapping, none of which will fix anything. Additionally, such a big deal was made over the fact that members of both parties were sitting next to each other as opposed to being seated separately that it almost seems like a play. It was taken to a ridiculous level by the media like the whole country was hanging out waiting for the gossip of who was going to the prom with whom. The bottom line is what I saw was just more of the same cloaked in semantics, which leads me to keep on acquiring precious metals and their stocks.

The other factor is the US Dollar which is not looking so great on the charts, but who knows what intervention will be used to levitate it. It looks to me as if it could be setting up for a run at the 75 level, which would not be good. Of course right now the Dollar is the best of the worst currencies, as someone said it is “the best looking horse in the glue factory”.  I believe that the chart is setting up for a potential break down maybe coinciding with a Chinese Yuan revaluation to alleviate their inflation problem. I have stated in earlier missives that inflation is stored around the world in pools like electricity is stored in capacitors, just waiting for a discharge. It is this phenomenon that I believe the “B52 Ben” does not get and the torrents of inflation that will be unleashed he will not be able to combat. Furthermore it could be the Yuan revaluation that will spark this and the anticipation of this is painting a negative dollar chart.

I truly believe that there is plenty to go in the precious metal bull and there appears to be a more than ample supply of catalysts and underlying fundamental reasons for it to continue. I would also contend that once this move down completes that the metals will grind higher to new ground. Time is the ally of precious metals in this case as it takes time to allow the papered over problems to unfold. I will be using any drop in to the $1,200 range as a buying opportunity par excellence.

Lots of Bears!

Re-tracement levels

A weekly chart of gold...doesn't seem so scary in perpective...

This chart puts the UGH in UGLY!

Friday, January 14, 2011

Dying For Stocks.......

“Oh..I am investing in precious metals and precious metal stocks”. If you thought that you received glazed over eyes when you responded with the aforementioned at a party when asked the question of what are you investing in, then imagine the response you will get with my next suggestion.

I am always on the lookout for good opportunities to invest in and one thing I have learned over the years is that not all good or great investments are sexy. There are some investments that reward the investor for holding on to a profitable business but they rarely make headlines.

Many solid businesses are not the kind you can name drop on the wine and cheese circuit, where you may be subject to listening to “Bob Blowhard” brag about his 10 gazillion dollar win because he is buying  Apple Inc (NASDAQ :AAPL). Of course you never hear about Bob’s losses because he never has any….yeah…right! …and I have got some prime beachfront property in a future Las Vegas after the “big one” for you too.

The recommendation I will put forth does not allow you to compete with Bob for bragging rights. In an environment like this it is better to be the turtle with part of your money rather than the hare. The companies that Bob brags about are analogous to the scene in the film “Superman I” where Marlon Brando is rushing to launch his progeny off of Krypton before their sun goes “nova”.

You see dear reader I look at a company like Netflix (NASDAQ : NFLX) and I can see many people trying to time the supernova as they are still buying the stock. Today, Netflix is a hot stock, but it is really running on fumes in my opinion for a variety of reasons. You see Netfix was a great idea but a combination of factors are lining up to destroy the business model ironically in a similar manner to the way Netflix took out Blockbuster (Pink Sheets :BLOAQ). The irony is that Blockbuster was out foxed since they were to slow to respond to the paradigm shift that Netflix put in to place and in the near future it appears that Netfilx will get its comeuppance. Netflix’s problems are many ranging from the 28 day delay to get new titles, valuation at 70 plus PE, a fully valued PEG ratio at over 2.0 and potential reductions in their margins as a result of bandwidth hogging charge backs related to streaming. Right now the street has many on the hook with Netfilx as it is sexy and you can boast about it at the neighborhood barbeque, and I am sure that I will get negative comments for this but the old saying applies here “nothing is new under the sun”. Once the last sucker is reeled in Netflix will Nova just like other story stocks before it.

You might be asking yourself at this point what all of this has to do with the eyes glazing over comment at the beginning of the article. Well as I stated earlier I like to look for businesses that are growing where the “trend is your friend”. Someone once said, “There are only two things in life that are certain death and taxes”. Some of you may find this suggestion not to your liking but the reality is that at some point we all will have to depart this mortal coil and the current demographics suggest that the funeral industry is in an uptrend as the “baby boomers” begin to age and pass on.

Thinking back to another movie, “Night Shift” (1982) there is a scene where Chuck Lumley (Henry Winkler) takes his partner Bill Blazejowski (Michael Keaton) to see what he used a portion of his ill gotten gains to purchase, as it seems Chuck has not spent a penny. They pull in to a cemetery upon which Bill quips, “Chuck, You bought a cemetery, this is great people could be dying for us…Chuck you should have bought an empty one though”. Of course in reality Chuck had only purchased a headstone for his father’s grave but you get the idea.

If you have had the unfortunate circumstance of having a loved one pass away you may know some of the players in this space and you also know the pricing structure. These businesses have strong margins even with competition for some items form Costco (NASDAQ :COST) and Walmart (NYSE : WMT) online for caskets. When one is bereaved and has a funeral to get under way one does not go bargain shopping or use “pricegrabber” on the net. As awful as it sounds the business related to the funeral industry is reasonably stable and as stated earlier has a bias toward growth as time marches on.

In the space of what is so humanely called personal services fall the category of undertaker or funeral home. The funeral home space is one that is often overlooked as it is difficult for many to stomach the idea of investing in the sector since we all grapple with our own mortality. I look at the space as a necessity and an area where once can achieve a return based upon solid trends. The two players in specific that I have been looking at ate Service Corp International (NYSE :SCI) and Stonemor LP (NASDAQ : STON). Service Corp International.

Starting with Service Corp I see a company that is currently undervalued and is in a good position going forward. By the valuation metrics I would not say that SCI is cheap nor would I say it is overvalued but it has better metrics than many in its industry.  SCI sports a trailing PE of 16.7, which is better than the industry at 26 plus. The price to sales ratio is also skewed in favor of SCI at .93 versus the average of 4.22 and the price to book is better than its peers at 1.36 vs 4.55. The actual book value of SCI is $6.01 while its shares trade at about $8.20; SCI does not meet the Graham measure of safety in this market it is not awful. While SCI has debt the current ratio of 1.0 indicates that it should not have an issue maintaining their debt obligations. SCI will also pay you a dividend of 2% and has a payout ratio of 33% meaning they should not have issues meeting their dividend obligation either. After recovering from its 2009 bottom SCI has been trending essentially sideways and the 50 and 200 day moving averages are flat to slightly down at overhead resistance. The technical set up for SCI at the moment appears neutral but the company announced a buyback program in November that is equal to $200 million or roughly 10% of its market cap which should firm up the shares and allow them to move higher as this should help the EPS going forward.  All in all it appears to me that SCI is undervalued and Market Edge and Ford Equity research are recommending reduce and avoid; I believe the “bad news” has been priced in at this point. There are many analysts that are calling for a $11 price for SCI which is roughly a 30% gain from current price, not sexy but nothing to sneeze at.

The more attractive play in this space to me is Stonemor LP (NASDAQ :STON) which is setup in a limited partnership format but trades as a stock . Many of you may be familiar with Kinder Morgan Energy Partners (NYSE :KMP), Stonemor is structured in a similar fashion. Stonemor passes earnings through to the limited partners that are not taxed, my point being if you are buying Stonemor and placing it in an IRA then you need to be aware that you may incur UBTI or unrelated business taxable income. Stonemor has been in a nice steady uptrend since about July and has had some pull backs along the way. Stonemor appears to be a bit stretched to me but one could split up their purchase to average in and take advantage of any correction in price while getting a toe hold now. If possible I would try and buy on a pull back to the 50 day MVA around $29 a share. Stonemor has been a pretty consistent performer over the last several months which is reflected in their beta of .9 indicating it is somewhat less volatile than the S & P 500. Stonemor also boast a very nice dividend yield of 7.3% and a PEG ratio of 1.45 which indicates that it is still growing earnings.  Stonemor may not be the turnaround play of SCI or the growth story of Netflix but a 7.3% yield in a stable industry is something you can take to the bank.

So you may not want to talk about these two recommendations with the Muffy, Buffy, Biff and Tad at the cocktail party but you can balance out your portfolio in private. You can’t cheat death but many people have made a living and a profit from it, taxes now that is a different ball of wax all together.

Disclosure : Looking to go long both stocks at some near future point...but for now no position yet.

Note : This post was published by me on Thursday at Benzinga.com where I have a weekly article. Additionally if you are interested you can follow me on Twitter (@monetaadvisors).

Wednesday, January 12, 2011

Each generation will reap what the former generation has sown.

In what I consider to be a brilliant move China has loosened capital controls allowing their companies to keep earnings without repatriating them. “The direction is clear. The authorities want less foreign exchange to come in, so they are giving exporters the right to keep it abroad,” said UBS China economist Wang Tao. The implications of such a move appear to be over looked by many if not all those in the financial media.

The Chinese essentially are taking the old nursery school taunt and updating it into a monetary response. The taunt goes something like I’m rubber your glue whatever you say bounces off me and sticks to you. Dear reader you see that by allowing their businesses to keep capital outside of China they in essence have created a “rubber” economy there by Chinese business can compete abroad and keep the inflation off shore. This also allows Chinese companies to acquire either market share or other resources in dollars. If the Chinese had not implemented this measure then as the world economy picks up or at least some demand grows the sales of the various companies would have to be repatriated meaning exchanged for Yuan having the double effect of importing inflation and increasing the trade deficit.

In the meantime the Chinese who have a history of government overthrow for poor conditions do not want the continued inflation particularly in agriculture products. The Chinese are keenly aware that just as an army moves on its stomach a populous is much more willing to overturn a government because of empty bellies.

The reason the Chinese have tried to quell the inflation situation in their country by raising bank reserve ratios instead of interest rates is they don’t want to exacerbate the inflation problem by having yield hungry investors round the world decide to park money in the country. The yield hounds around the globe would only serve to boost internal inflation by expanding the money supply through the banking system.

Of course the Chinese actions are only creative countermeasures to “B52 Ben’s” inflationary policies. I know Benny has been on the talkies flatly denying that the FED is printing money, but dear reader, by now even the dimmest amongst us recognizes that he is not being truthful and hiding behind economic obfuscation.

It appears to me that “B52 Ben” has decided that the Chinese must revalue their currency and he has decided that the best way to force their hand is to print enough dollars to break the Yuan Dollar peg. Obviously the Chinese do not consider breaking of the peg to be advantageous as of yet so this is the reason that they are instituting the counter measures to contain Benny’s inflation.  It is a bit of cat and mouse ort the 21st century equivalent of the great game.

With much of the talk here in the states and Euroland focused around the fact that inflation is low no one seems to consider that it could shift back here. The proposal by China to allow the dollars earned outside the country to be kept and invested there will more than likely begin to drive global inflation albeit at a slow pace initially. The more dollars Chinese companies collect and then redistribute back in the form of purchases will only lead to an expansion of money in the West.

If we do get inflation in the West and the Yuan remains pegged to the dollar then it will only serve to magnify the inflation in China. The Chinese are very smart and recognize the fact that with the peg what is bad for the Dollar is also bad for the Yuan. I believe that actions the Chinese are taking are a precursor to allowing the Yuan to float freely. A free Yuan would immediately allow the Chinese to control inflation as the currency would appreciate and cut the costs of most everything from food to steel.

There are those that argue that the Chinese are still dependent on the US because of their exports, but it is only a matter of time before they have enough of an internal market where their demand out paces foreign demand for exports. I liken China’s situation to that of the US in the early part of the 20th century when markets were developing and internal demand was growing.

Chinese internal demand figures based upon retail sales have increased over 18% year over year in October and November.

Further indications that China’s internal markets are reaching a point of critical mass include the fact that their domestic auto market is now larger than the US market and projected to keep growing even with the removal of some government programs that temporarily distorted demand. In 2011 Noumura and Booz Allen are still projecting vehicle sales of around 20 million well out pacing the United States. Furthermore, the rising domestic demand has somewhat tempered the “trade deficit” and has shifted the rhetoric away from the Yuan “boogey man” at least for now.

In the mean time China is actively seeking to build its gold reserves and encouraging its people to save in real money. It is not nearly the cultural stretch for the Chinese to save in hard assets as the Asian markets have a historical and cultural bias towards doing so. In fact I would contend that the buyers in Asia and India acquiring metal are hampering the shorts efforts at all out raids in the metals. The increasing step up in Eastern buying has put a floor under the metals and while there can be bear raids they are increasingly ineffective.

Even mainstream media sources like Bloomberg are beginning to carry articles like “Gold Must Exceed $2,000 to Be Considered in a Bubble, Deutsche Bank Says”. I believe that these types of articles will become more commonplace as we move forward in the gold bull since there will be a growing recognition regarding the debasement of global currencies. The Chinese were also early adapters regarding gold and it is for the aforementioned reason that they look to acquire more reserves. The Chinese culture is geared to contemplate and implement plans that can span out over years and it is obvious that they have decided to provide some form of gold backing to their currency.
In the latest round toady China announced its latest moves in order to bring the Yuan to center stage and begin to unseat the dollar, by allowing US citizens to begin to trade it. This is a first step in allowing exchange rates and making the currency more flexible.  A flexible currency is what is needed to be taken seriously as an alternative to the dollar at some future point, but you have to begin somewhere.

As far as I can see the dollar Yuan battle is far from over but we have two sides with different plans. It is argued in the media that the Chinese and the West have a common interest but I don’t completely subscribe to that philosophy. I believe that the Chinese will share our “common” interest as long as it benefits them and not one second more. I am not calling for war with China although that cannot be ruled out but instead there will come a point where China feels that it is no longer getting anything from the relationship and then decisions will be made in China’s interests only.

There are those that compare the symbiotic relationship we have with China to that of MAD (mutually assured destruction) that was in place with the Soviets. People hail and use MAD as an example all the time but the fact that the policy worked was more a function of luck and our stature rather than the psychological aspect of the strategy. You see dear reader people have a tendency especially in the US to think ethnocentrically, which is a mistake.

The concept behind MAD was that if we and the Soviets pointed missiles at each other that it would prevent a war since we value life. Soviets based their strategy heavily on deterrence of a U.S. first strike.  Deterrence for the Soviets was based on their ability to inflict significant damage to the aggressor (IE. the US) by preemptive, “retaliatory-meeting,” or purely retaliatory strikes against both military and civilian targets. Depending on the reaction timing of the Soviet Command And Control or Leadership determined the response to a threat. The Soviet response to MAD was crafted because of the influences from the German invasion during WWII shaping their perception versus the US who had not had the same experiences and therefore different perception.

The concept of MAD ended because President Reagan basically outspent the Soviets and caused their economy to implode in an effort to try and match our defense spending. MAD worked but not for the popular notions and ironically it ended because of the deficit spending that is killing us today.

So the symbiotic trade relationship between the US and China is viewed by each side through different lenses. The relationship has worked thus far because it has been in the interests of both parties, but we are rapidly approaching an inflection point where the needs of China will differ from the wants of the US. As we get closer to that fateful day China continues to build the means to have a strong and vibrant economy while Benny and the boys just keep papering over the problems. Congress is no help in this area and won’t be until there is a crisis at which point it most likely be late in the game and even more painful than dealing with the problems at present.

Even States and municipalities are sensing there are problems coming down the pike with the dollar and are taking steps to try and create alternatives so the systems don’t break down when things come to a head. Here in Massachusetts in the Berkshires the communities have come up with their own local currency called “Berkshares”. Yesterday, I came across a proposal by the State of Virgina’s house Sub committie who was trying to subpoena FED documents in order to make informed decisions regarding an alternate currency to the dollar. You can read the Virginia House Resolution number 557 in PDF form here.

History may look back at all these events and it will be abundantly clear that the dollar was falling apart and China made the right moves to capitalize on the situation. Please don’t misunderstand dear reader, this is not an overnight process but just as the 2nd half of the 20th century was the beginning of the American century the 2nd half of the 21st century may well belong to China. It will not be a straight line but China sure has the potential and as far as I can see we as a country are wasting ours. As the title of this missive an old Chinese proverb says, ”Each generation will reap what the former generation has sown”; unfortunately we don’t appear to be sowing as well as the Chinese. We are to worried about Political Correctness, democrats blaming Republicans and vice versa, what’s on TV, who won Idol, the latest star rumors about Tiger Woods or Lindsay Lohan rather than discussing calmly and rationally the problems and implementing solutions. Until we can learn as a country to compromise things will keep getting messier and messier, I pray we can.

If you want to play the Yuan you can buy Market Vectors Chinese Renminbi/USD ETN (NYSE : CNY) to capitalize on a rising Yuan. In the meantime the Chinese, most of Asia and India are buying gold\silver\platinum and you should too. If the Chinese do manage to revalue the Yuan it may initially cause a decline in gold , silver and commodities but it will be temporary and those items will come roaring back with a vengeance and continue far higher.

Friday, January 7, 2011

Where Precious Metals Investors Fear to Tread….

What a difference a few days make. Just before the end of last year and into this current year, precious metals investors were riding high with visions of ever higher prices in their heads. Today all I read about is the correction in the metals and the anxiety people have over the potential plummet in the precious metals. Let me remind everyone whose eye balls gander across my writings that the last major plunge we had in the PM (Precious Metal) complex was a direct result of “Lehman” catastrophe.  Corrections in the PM complex and shares are not unusual and the current one feels “manufactured” to me. The idea that a single data point can cause a plummet just goes to show you that PM’s are not in mania phase at least not yet, especially when the data point does not really point to a new trend.

Think back dear reader to the last two manias, the NASDAQ Dot Com bubble and the real estate mess and then look at the PM complex. During the prior two bubbles there was plenty of public participation and no matter what then news it was virtually ignored until the end of said bubbles. Stocks and real estate in those two bubbles rose on their own volition regardless of the negative headwinds reported. The PM’s do not have wide public or even industry participation since as a percent of assets  world wide the only represent under 1% and every little rumor about an impending recovery(that never comes) causes longs to bail.

Flash forward to January 2011, a lone questionable jobs report is released by ADP and suddenly we have sunny skies for the rest of the century and no longer need and PM’s. The result of what I would consider to be that bogus information is a sell off by what appears to be those interested in driving the price down to force weak handed small fries to dump shares and hop on to the next hot thing as well as jamming all the “hedggies” and black box poachers so their algorithm driven models puke up their shares via either stops or program driven responses.

As I look at the charts I see that we are in corrective mode easily within the context of a bull market. I will also tell you dear reader that I made a couple purchases today and I intend to buy more if the price of the PMs (and shares) does fall. I have put up a couple charts for some perspective. I have seen many technical analysis charts of gold showing bear wedges and calls to fall to $1,260 and I do not subscribe to those views, not that they are impossible but I think there is a 25% chance especially in light of the jobs report and what it portends. I would say that there is a 75% chance that we stay above $1,350 on gold.

As far as technical analysis or TA goes I believe that it can be an effective tool, but in this manipulated news driven market TA is less accurate in my book. It is also true that the more eyeballs view the same charts and apply the same patterns and indicators the less relevant they become sort of a TA version of ”buy the rumor and sell the news”. Moreover, while I use TA it is more art than science as every chart is subject to interpretation by the analyst. The analyst chooses the timeframe, how and where to draw various lines and whether consciously or not can input their own bias based upon the decisions made in interpreting the chart.

So with the disclaimer above I want to look at a couple charts of gold, now bear in mind that the charts are end of day so these are from last night. I have viewed a chart similar to my chart one on the internet and the TA individual was calling for a bearish wedge and downside to the $1,260. I have created a chart using the same time perspective as the one I viewed and as I stated before depending on how you draw the lines you can come to different conclusions. For a trend line you need at least two points of contact and the longer the trend line the more substantial the trend. The analyst calling for $1,260 was using a bottom trend line similar to the pattern on labeled #1 on the first chart, although their top line was more slanted down as they cut through the candles. The drawing of trend line #2 is not as strong from the perspective that it only intersects with three near points  but speaking to that the dips have not tested it either, but they have tested #1. Any way you slice it in my interpretation there is somewhat of a bearish wedge that would take longer to form, but a close below the 1360/1359 line would lead to a test of the 1,340 – 1,330 level. Also note that the chart is showing a pretty good oversold condition as of last night and with today’s action we may see it begin to level off in the oversold zone.

To give you real perspective you need to look at chart #2 which extends from 2004 to present. For starters depending on how you draw the long term trend lines gold could fall to $1,050 or possibly $990 without compromising the bull market. Look at what happened in 08/09 and that did not kill the bull since the same macro economic factors are with us today and perhaps they are worse there is no reason to believe that the bull is dead. If you look at the chart you can plainly see that we have had bearish wedges before and bull would correct, dust itself off and continue. There is no reason to believe this time will be different. As an additional note the Gold Miners bullish percent index stood at 63.33 last night which is down from 90% bullish to the same level it was just post “B52 Ben’s” Jackson Hole speech where gave the famous “we need ‘flation” speech setting the QE 2 stage.

If we do get a sell off to the $1,260 level it would represent a hell of a buying opportunity. The question is would you be able to get in there and buy or would you feel that there is more downside coming. If I were to venture a guess most people would not buy but instead wait until things were going up. This particular bull market has tried the patience of all involved and has required a cast iron stomach to handle the swings especially in the mining shares. For the last few months the bull in the metal has been a pretty orderly upward grind especially compared to the NASDAQ bubble where it would jump around wildly especially in 1999/2000. The steady uptrend in the PMs has not afforded people the opportunity to buy on too many dips until now.

As far as I am concerned it makes no difference if you buy now or wait for a further dip because after this correction all the catalysts are still in place to provide the fuel to drive PM’s higher. Whether you buy now orin a couple months this correction will be a memory and you will be much happier. The PM’s correct every year and every year I go through the same mental games myself, but I force myself to buy. Thus far buying the corrections has worked well for me.

Right now the onus is on the bulls to drive the price back and fend off the bear raid that has inflicted damage on the charts. Assuming that gold continues to close above $1,365 it bodes well for the correction being in the latter stages.  After all nothing has changed in the macro and there is more bad news on the horizon. Today Portugal’s bond yields hit record highs indicating that they will need a bailout shortly especially if the powers that be want to quarantine the contagion as not to infect Spain, which would open up another can of worms.

I don’t care how elites and media spin it the problems the world face have not gone away and will keep cropping up their ugly heads all around the world. All currencies are suspect, at some point people will not want to hold any government’s or state’s debt and it does appear that we are headed for some sort of a crisis. As far as a crisis goes it will probably be something no one thinks that will be the domino to set things in motion. I am sure that people prior to the start of WWI did not think that the murder of Archduke Ferdinand would lead to such a wide and devastating conflict.

There is also much talk about cycles and how the PMs are currently in a down cycle that is due to “bottom” in a couple weeks. I don’t buy the cycles argument particularly not in the current manipulated environment, which I have said before would have made Joseph Goebbels stand up and take notice. When I say manipulated dear reader I mean not only is the tape being painted but also the Street, media and the FEDs are in cahoots using MOPE, which is becoming  less effective each time the economy stumbles. MOPE is utilized to move the economic levers to try and resuscitate the economy. Based on what passes for both statistics and reporting on them you can almost picture “B52 Ben” standing by the side of a gurney, upon which the economic system lies, and he is holding a pair of defibrillator paddles while frantically yelling “CLEAR…CLEAR”.

The latest MOPE was the ADP report which appeared very suspect to me when it was released and it sure aided certain players in various markets. The PM complex did not take to well to the ADP report as if this one data point meant the end of the bull market. Then yesterday Gallup reported that underemployment was up at 19% yet the markets never questioned the validity of the ADP report that painted a much rosier picture. So this morning the markets were looking up and the PM complex was staring down the edge of the cliff diving ledge looking at the rocks below. As I waited watching CNBC this morning(only because they report the numbers the fastest) things were getting gloomier by the second just like when you are out for a run and the sky turns ominously black within minutes yet you are 3 miles from home. The report came out and it showed a headline number indicating a drop in the unemployment rate from 9.6% to 9.4 percent but the jobs created figure came in well below all of the “bubble heads” projections. The futures gyrated all over the place while the PMs firmed up.

What was not really discussed in the media was the anomaly that the U-6 report fell pretty sharply from 17% to 16.7%. The fact that this number fell and the U-3 number fell while far less than expected. However, the number of jobs were created indicates to me two possibilities. First, the numbers are bogus and statistical seasonality adjustments are obscuring the reality of the situation. Second, the decline in both numbers is indicative of many people just falling off the roles and are now unemployed and not in the system. Any way you slice it the report was discouraging and who could make any sense of what is going on since ADP, Gallup and the BLS are all saying different contradictory things.

The markets were busy mulling over this “bad” jobs report while “B52 Ben” was testifying before the Senate Budget Committee. As Benny spoke to our enlightened leaders the FED was busy putting that newly printed QE2 money to work gobbling up $7.199 billion in treasuries at today’s auction alone.  “Benny” commented, “The economic recovery that began a year and a half ago is continuing, although, to date, at a pace that has been insufficient to reduce the rate of unemployment significantly.” He then continued in a “Buzz Killington” fashion with the following, “progress toward the Federal Reserve’s statutory objectives of maximum employment and stable prices is expected to remain slow.” B52 Ben then went for the jugular with the following statement, “At this rate of improvement, it could take four to five more years for the job market to normalize fully.”

Asked about December's 103,000 job gains, Bernanke said if the pace of hiring doesn't increase, "we're not going to see sustained declines in the unemployment rate." Yet he believes the economy will be stronger and consumer spending will be up, I want some of what he is smoking. B52 Ben’s statements do not jive well with December retail sales figures that came out today. The more they talk and MOPE the more apparent it is either the FED is clueless or they are obfuscating the truth to kick the can down the road.

“Sen. Jeff Sessions of Alabama, the highest ranking Republican on the committee and a fiscal conservative, expressed concern that the Fed's bond-buying program could spur inflation. And he wondered whether the Fed was simply printing money to cover the nation's deficits. Bernanke countered that the program won't expand the amount of money in circulation in a significant way because banks aren't lending the money.” Well Benny there you have part of your problem is you are printing the money, oh I forgot you are not but instead the Bureau of Engraving is. None the less the banks are not lending so therefore the economy is strained. Once the banks do lend it will be a torrent of inflation to be added to the inflationary capacitors storing dollars around the world waiting to come home to roost.

Then Benny was asked about bailing out municipalities to which he responded “that would be up to congress”. Way to pass the buck there “B52”. So we now know that congress is concerned about municipalities.  I take this as a warning that something is coming because congress is slow to react to everything and the fact that the question was raised means that they were briefed of some potential near term issue. The debates for those bailouts should be interesting to say the least.

So you see folks, Benny and the Jets acknowledge that there are severe problems yet when it comes to  solutions the FED always seem to paint everything in a win-win light for themselves. You see it doesn’t matter what is happening they never get called to the carpet. Did they not tell us the QE and QE2 were to lower interest rates and spur the economy to meet the mandate of full employment.

While it is clear that the best laid plans of Ben and the FED are being tried they are not achieving the desired results. Wait and see dear reader, this will be a justification for expanding QE 2 or a whole new round of QE 3. Just like Einstien’s definition of insanity they will go with what has been tried before expecting different results that will never come. You have to understand if QE works then the FED is the hero and if QE doesn’t work then they just say we need more. It is no different than their flawed exit strategy because according to the FED no matter what happens in the markets they will be able to mop up the stimulus since the rules of economics don’t apply in the FED universe.

“B52 Ben’s” testimony in front of the Senate combined with latest in a series of poor jobs reports tells me that it will be “QE to infinity and beyond”. Yeah I stole that from Buzz Lightyear. The problems and policies namely QE of all flavors here and in Euro land are all supportive for the PM’s.

We have yet to see what kind of proposals the new congress can come up with that will have unintended consequences so stay tuned. Whatever they do it will have to be politically palatable so don’t count on anything that affects the underlying problems or the foundation of the PM bull.

The take away for all of this is that the best way to preserve you purchasing power is through precious metals longer term. One should look at these bouts of stupidity induced selling as an opportunity to be able to get more precious metals to enhance your future savings. In other words, buying when the price is artificially driven down compensates you for the fact that the metal does not pay interest while preserving your purchasing power. So far Gold is holding at about $1,370 going in to the home stretch this afternoon. I am a bit concerned about the red headed step child silver as it is trading a little below $29, which could lead to lower prices. If gold holds the downside should be contained in both metals. I am not ringing the bell here but we may be getting close given the huge rise in pessimism I am seeing, Monday should be interesting.  Will you be fearful to tread in this PM market?

Thursday, January 6, 2011

Good Golly Miss Moly

Let’s talk about Molybdenum shall we? Many of you out there may never have even heard of this particular metal more widely known as “moly” or element number 42 in the periodic table. For me though, I have heard about molybdenum beginning in my childhood. You see dear reader, my father was a chemical engineer by trade and from the 1960s to the late 1970’s he worked for Amax Metals Inc (a result of the original Climax Molybdenum and American Metals merger in the 1960’s) which is now part of Freeport McMoran (NYSE: FCX) and rebadged as Climax. Later after leaving Amax he went on to from a couple companies which processed and sold molybdenum oxide and ferromolybdenum and later rhenium (element 75 in the periodic table) products. Needless to say I learned plenty about molybdenum and its uses while growing up to the point that I am sure that I can easily answer any Trivial Pursuit ™ question related to molybdenum.  As a kid I recall my dad traveling quite a bit to build plants he designed like the one at Fort Madison which Climax still uses.

Well enough of the trip down memory lane as I do not want to bore you further dear reader. Molybdenum is a useful transitional metal with many applications as depicted by the chart below:

Molybdenum is in demand from more than just a single industry and is used to strengthen steels, and provide corrosion resistance for environments that are particularly harsh like offshore drilling and marine vessels. Molybdenum is also used in jet engines and power plants that require strong, yet resilient steels. Molybdenum is used in architectural grade steels, coal conversion, chemicals, and nuclear medicines. The tool industry utilizes molybdenum in their high speed tools. Molybdenum has applications a catalyst and sulfur reducer in petroleum production. Molybdenum is used in pipes that are required for oil and gas as well as nuclear power for leak prevention. There are even applications for molybdenum in desalinization, fertilizer, flame retardants and vitamins. Moreover, molybdenum is often used as a high performance lubricant an example of which you may know from the auto world is “Gear Moly”. Lastly, molybdenum has various military applications including in ballistic missiles which can contain upwards of 15% Molybdenum content.

Steel demand is projected to rise to record highs in 2011 and there is corroborating evidence from the run up in metallurgical coal prices. If you have been following the markets you probably already know that coking or met coal is booming but thermal coal is lagging, this is because thermal coal is used for power generation and does not contain enough BTUs for processing metals. The rise in demand for steel along with the continued infrastructure demands also translate in to demand for molybdenum. As with the Rare Earths, China used to flood the world with molybdenum when the price rose but that trend appears to be on the decline. Molybdenum prices have retreated from their highs of 2008 when virtually all commodities crashed, but they have been working their way higher and are still about 50% below peak price.

I believe that molybdenum prices will rise along with other commodities by a combination of inflation and more demand. The average of demand growth historically in the molybdenum industry is about 4% year over year meaning that industry should require around 550 million pounds of molybdenum by 2014. I feel that demand will tend to run somewhat higher than average as a result of the continued infrastructure build outs in China and elsewhere in the developing world. While Europe and the US tend to be the largest consumers of molybdenum for the time being as with everything else price will be dictated by demand from the periphery. So this time around China will not be willing to cool the price of molybdenum by dumping, with their own demand growing  it appears to have become less of a factor at this time. Just like with Rare Earth Elements (REE’s), I could see China restricting the export of molybdenum due to its strategic nature, and this would be additionally supportive of the price. Every time I research the topic further it seems that there is a new application requiring molybdenum to make it work; between its historical uses and new ones coming on stream the picture that presents itself is one of growth in demand.

What got me started down this path is looking in to what I believe is the Rare Earth Bubble (stock) and one of the companies I came across was General Moly (NYSE : GMO). I began to look at GMO to see why it would be lumped in with the REE’s and could not find a great reason for that other than they are a miner and there could be REE’s on their property. GMO has two properties Mount Hope and Liberty, neither of which are producing any molybdenum. GMO does have a “bankable” feasibility study for the Mt. Hope property and they are partnered with South Korea’s POSCO (NYSE : PKX) to develop the mine. GMO has received final permits, ordered long lead time equipment and has begun preliminary construction. I will agree that they have potential, but they are sporting a 461 Million dollar market cap and a price to book of 5 times. If one learns anything about investing in the mining sector it is that “Murphy” was an optimist. In other words in mining anything that can go wrong will until the operation is working for a period of time and even then there are always “acts of God” to contend with; take a look at Mine Finders (AMEX :MFN) who is a gold and silver producer at this point, with competent management and you will get the idea. Until MFN got up and running it was one thing after another and periodically the share price would take a severe hair cut and even today the stock is struggling to participate in the current gold bull. The point is that I believe that GMO is overvalued and appears to be mistakenly riding the REE bandwagon. If you want to play in the Molybdenum space there are better vehicles in my opinion.

If one is conservative and wants exposure to molybdenum but added diversification of a larger company with more mine segments like copper and gold you should look at something like Freeport McMoran (NYSE :FCX). Freeport is large miner with $55 Billion in market capitalization, proven earnings, a PE of 15 and even a dividend currently yielding 1.7%. One gets the molybdenum exposure with FCX through their Climax subsidiary I mentioned earlier. Freeport has diversification and very good management but more importantly unlike GMO they have real earnings. I believe that in the next couple months FCX could trade up to $129 from $117 today. From a technical perspective the chart sports a golden cross and the shares are trading above both the 50 day and 200 day moving averages. If FCX pulls back toward the 50 day moving average at $106.67 on declining volume then it would be a good spot to acquire shares or add to an existing position.

If you are further out on the risk curve and want to more growth potential there is a strong company that I believe has excellent potential. The company of which I speak is Thompson Creek Metals (NYSE : TC). Thus far FCX has outperformed Thompson Creek by 20% but the time maybe approaching for some catch up. Thompson at $2.4 billion in market cap is about 1/22 the size of FCX. Thompson sports a PE of 11.5 at current prices and I am projecting that next year’s earnings (Year over Year) on the order of 30% due to what I believe will be a stronger than expected molybdenum demand. I believe that Thompson can post a $1.40 per share which also happens to be the midpoint between the highest and lowest analyst estimates I have seen for TC. Unlike General Moly, Thompson is in production and has multiple properties as well as a couple of “roasters” that keep value added products in their control.

Thompson’s mines include the Thompson Creek Mine in Idaho which has produced Molybdenum since 1982 and processes 30K tons of rock a day producing molybdenum sulfide for roasting at their Langenloth roasting facility in Pennsylvania.   Thompson Creek has 277 million pounds of proven and probable reserves of molybdenum and another 444 million pounds of measured and indicated.

The Endako Mine in North British Columbia is an open pit mine that Thompson has 75% control of. Endako is currently being expanded to 55K tons of production per day from 31K. The molybdenum sulfide produced at the mill is then roasted on site to produce molybdenum oxide. Endako has proven and probable reserves of 306 Million pounds of Molybdenum and another 463 million pounds measured and indicated.

Mount Milligan is currently under construction and should become operational as an open pit copper and gold mine in 2013. Additionally, there will be a copper processing plant onsite that can handle 60K tons per day and Thompson expects to produce 81 million pounds of copper and about 195,000 ounces of gold over the expected 22 year life of the mine. Mt. Milligan has 2,124 pounds of copper and 6 million ounces of gold in the proven and probable category and another 2,840 pounds of copper and 7.5 million ounces of gold as measured and indicated resources.

Mount Edmonds mine located in Colorado is an undeveloped very large high grade molybdenum deposit that based upon prior drill results indicates a deposit potentially as large as 750 million pounds of molybdenum. Thompson is the project operator and has the option to acquire 75% of the project. Currently the project is in exploration stage.

Thompson is also in the process of evaluating two other properties the Berg project in British Columbia, Canada and the Davidson project also in British Columbia. The Berg project is an early stage copper\molybdenum\silver deposit. The Davidson project is currently under evaluation and it is thought to be the largest undeveloped molybdenum deposit in Canada.

As you can see Thompson Creek Metals has existing projects and is growing their reserves as along with production which is more than can be said for General Moly at least at this point in time. Additionally, Thompson is more than a straight molybdenum play as there are gold, copper and potentially silver ores to accrete more value to the bottom line (I am aware that the GMO properties also have more than molybdenum as well but they are not producing anything yet). It also would appear that the three main mines also have “blue sky” opportunity. I believe the market is not fully valuing the potential that Thompson brings to the table and therefore the stock provides you with an opportunity to acquire excellent resources at a reasonable value.  With the current correction in metals, a pull back in Thompson toward $13 level would be a nice point at which to begin accumulating some shares. From a technical perspective Thompson is working off an overbought condition, but the chart itself looks good. Thompson is trading over its 50 and 200 day moving averages. The two averages also sport a golden cross, which is bullish especially for a stock that appears to be in a nice solid uptrend. I believe that as long as Thompson Creek continues to execute and the economy especially in the developing world chugs along the shares could trade up to $25 over the next few months.

Disclosure: I have a small position in Thompson Creek and am looking to add more on a dip toward $13(if it occurs).

Note :This was published on Benzinga.com by me.

Tuesday, January 4, 2011

Wash Out Washington, Don't Soak The Rich

Today’s missive is regarding reporting of a new poll that I came across on Moneynews.com. The headline reads “Poll: Most Americans Want to Tax Rich to Balance Budget” and is dated Monday Jan 3, 2011. According to a Vanity Fair/ 60 Minutes poll some 60% of Americans want to raise taxes on the rich to balance the budget. Another 20% of those polled want to cut defense spending and about 5% each want to cut Medicare and Social Security.

What the average American does not understand is that there is no way we can balance the budget by taxing everyone in the US even at a 100% rate let alone trying to shift all the burden to the rich. People must learn that we have a spending problem not a revenue problem. The basic problem dear reader as I am sure you are aware is that the government continues to spend at a far greater rate than the amount of revenue it collects. In 2010 the government spent in excess of a trillion dollars more than it took in, assuming that you don’t count unfunded liabilities and off balance sheet spending such as Obama’s war in Afghanistan or the continuation of the Bush Iraq blunder.

People are deluding themselves it they believe that this clusterF#ck we call a government budget and deficit can ever be rectified with tax hikes on the wealthy. The Washington Post did a great graphic representation of where the government’s funding comes from and where it goes to.

The bottom line is that for 2011 the budget proposed was $3.8 Trillion and of this $2.166 Trillion fall in to the mandatory spending category. These categories include Social Security ($730 Billion), Medicare ($491 Billion), Medicaid ($297 Billion), TARP ($11 Billion), Jobs Initiative ($25 Billion) and “Mandatory Other” ($612 Billion). The above figures do not include $251 Billion for the interest on the debt which I would say is mandatory and would raise the outflow figure to $2.417 Trillion; that is unless we are planning to default.

You can plainly see that if we as a country decided to cut every single department and government job or entity and kept only the mandatory spending we could theoretically have a surplus of about $100 Billion. This draconian measure would mean no Supreme or Appellate Courts, Army Corps of Engineers, Department of Commerce, Legislature (Congress or Senate), President, NASA, Department of Interior Department of State, EPA, Department of Energy, VA, Department of Education, Department of Agriculture, International Aid, Housing and Urban Development, and the list goes on. Of course we would still have the Department of Defense and our modern day “Gestapo” the Department of Homeland Security.

Of course none of the figures bandied about in the mainstream media takes in to account the unfunded liabilities that are currently projected to be north of $100 Trillion. Once again there is no way that we can ever pay this back and surely not by raising taxes solely on the rich.

The government takes in about $2.57 Trillion in revenues of which $1.1 Trillion is income taxes. The top 1% of taxpayers account for approximately 50% of all taxes or $550 Billion. In theory if you raised the tax rate on the top payers to 70% you could collect $1.1 Trillion just from the rich. Ah, dear reader it is not that simple. The more that you raise tax rates does not necessarily lead to equal increases in tax collection. There have been many studies that have revealed that once a tax rate reaches a tipping point that people consider unfair inevitably tax collections drop. For example, in the past when the capital gains rates have been cut we saw more investment and government revenues soared. Conversely a rise in the capital gains rate causes a slowdown in investment and a reduction in government revenues. To put it simply when the rate is high people tend to take more time to realize their gains and in turn the government collects less. When rates are low people tend to realize gains at a faster pace and the government gets more pieces of the pie so revenues rise. A balance needs to be struck with all tax rates since if they are too low then the government loses out while the worker and investor tend to win. If the rates are too high the economy and workers suffer and again the government loses out as the economy declines or is stagnant. We need the goldilocks rate and governments should learn to live within their means as dictated by that rate not vice versa.

People who are rich will either find a way to pay less in taxes, reduce their income by closing businesses or reducing the amount they work. The actions of the people that tend to fall in to the rich category do affect the economy as they will hunker down and buy less, reduce workforces, underreport or hide income, and not invest in growing business that bolsters the economy. You see dear reader very high tax rates provide a disincentive for people to work as well as an incentive for people to protect their assets. Why on earth would you go out and work harder to make more money knowing that the government will take an ever increasing piece of your pie if you are successful.

If you need more proof that raising taxes will not garner more tax revenue you should read up on Hauser’s Law. Basically revenues for the government did not vary substantially regardless of the tax rates, but the economy did suffer or grow depending on the rates. You can see dear reader that this is clearly demonstrated in the chart below:

The problem of the debt and deficit is currently playing around the world like a bad film in multiplexes everywhere you look. The problem is going to come home to the US and we will have to deal with these issues. I believe it will take a crisis before real action is taken. We are not at the crisis point yet as evidenced by the inaction and failure to agree between parties on the deficit committee set up by Obama to make recommendations on how to deal with the deficit. There will come a time when we will have to make hard choices and items that are sacred cows will have to be touched, but we are not there yet as our hand is not being forced. Unfortunately the US may be “too big to fail” but the real problem is the US is “to big to bail(out)”. Really dear reader who could afford to bail us out? Germany? China? There is no state or group of states that could float us out of the current quagmire period! At some point we as a nation are going to have to take a surgical scalpel and cut the waste and bloat from the Federal Government. We are going to have to change the mindset of people and make them more responsible for themselves as the government cannot afford to take care of everybody. We will have to change laws that promote government and government waste. We will have to simplify the tax code and reduce regulations, but all of this has to wait for the crisis.

Yes the US is the richest most powerful country the world has ever known but to quote Dirty Harry from Magnum Force (1973) “A man’s got to know his limitations” or in this case it is the government.  The entitlement mentality is what is killing our nation and sapping the entrepreneurial spirit that grew it to the stature it once had. The future is going to have lots of choices especially regarding the debt and entitlements. I can see a day when our government is forced in to means testing for social security and just outright defaults on debt that is not geopolitically sensitive.

The day debt/budget reckoning is coming but in the meantime politicians are trying every power grab they can as is the hallmark of a political regime in decline (IE Homeland Security looking to set up at hotels and malls…etc..). I am sorry dear reader if these thoughts are not mainstream and or unpleasant but they are reality. Part of why I write this blog is to alert people to things that I see occurring so that they can be aware and prepare as they see fit. These are the reasons that I have advocated accumulating precious metals as an insurance policy more than a get rich scheme. I am aware that the precious metals are getting hit today but I am unconcerned about these day to day swings as the trend is still up. Additionally, today is options expiration on the COMEX so the “big boys“ are using today as an opportunity to smash the price to relive some of their short losses. There are many that disagree with or don’t believe in the protection of precious metals and I have heard them all but history will rhyme on the side of real money once again to paraphrase Mark Twain.

So dear reader, now that I have bored you with why raising taxes on the rich will not solve the problem I want to look at the poll itself. The poll was conducted by CBS News and is a random sample of 1,067 adults nationwide conducted by telephone. The poll also claims to have a 3% +/- sampling error rate. In my opinion this poll is useless and just geared for CBS news to help the Obama administration to try and make the Republicans look bad. It is no secret that the mainstream media has a bias toward the left and would favor higher taxes, which is also what Obama and the Democrats perennially want. The problem with this poll is that it is just sensational journalism at best.

To begin with the sample size is too small at only 1067 people.  I could over look the sample size if the margin of error were not so miniscule.  The thing that makes the poll irrelevant and sensational is who and how they polled. The poll does not tell you how they phrased the questions, and in this way you cannot tell if they were leading the person to a specific answer. Of course the key item that is not being even remotely mentioned is that this was a random survey of Americans or at least we think they are citizens, for all we know there could have been a significant proportion of illegals. Even putting aside the citizenship status question we do not know how many of these people are voters and or likely voters because they don’t differentiate.

You need to get a sampling of voters as that is who the government is supposedly working for. Sure if you call random people who are not even voters chances are that they are uninformed at best and could be easily swayed by the questioner. Furthermore, you don’t know any of the socioeconomics of those polled. For all we know the people polled have no skin in the game as they may not pay taxes so what do they care if someone else’s taxes are raised even if it does nothing to solve the problem.  I am sure if the pollster asked those individuals that pay taxes if they should raise his or her taxes you could guess what the answer would be, but it is fine as long as it is someone else’s taxes.

The biggest issue I have with this sensational piece of statistical trash is that it might actually be used to further an argument to soak the rich. Of course rich is a term loosely defined and depending on where in the country you live rich has different thresholds. As I alluded to before you can soak the rich all you want but all you will be doing is killing the goose that lays the golden eggs since it is the rich that tend to start the businesses that grow and employ people. Fortunately, the Bush tax rates were extended so the economy has one less headwind, but it is the pushing of this agenda for ever higher taxes by the media that worries me. It appears that the media wants to perpetuate the idea that the rich are not paying their fair share where as the problem is government spending and entitlements that rob us all! I know I would like to be rich someday, but if we keep soaking the rich many of us will not have an opportunity to do so or even any opportunity at all. Remember there are many people who believe that a person is rich if you make a $100 more a check than they do.

Image of Budget and Revenue from Washington Post below: