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Friday, May 27, 2011

Lather, Rinse , Repeat...

If you take a look at the chart of the DXY, I don’t think it is nearly as pretty a picture as one is being led to believe by the Dollar bulls. Just like the title of this writing alludes to what you find on the shampoo bottles to encourage repeat the process so you to use more than you need, I feel as if the Dollar has eneterd one of these cycles or patterns that we have seen before at other so called bottoms. The dollar has rallied as of late due mainly to the weakness in the Euro as a result of the "Greek Moment" and the rest of the sovereign debt mess. The mess in the US is as bad if not worse depending on which statistics you use, however, I am not looking to get in to that at the moment. The point is that the perception of the dollar is that it is the "sexiest hooker" at the moment versus almost all other FIAT currencies.

There have been a couple subtle marked changes in the Dollar market as I have alluded to in past missives. In the not so distant past when ever there was an event such as a natural disaster, war, or geopolitical event and investors became nervous they ran to the perceived safety of the Dollar and to US treasuries. Today the dynamic has shifted and investors have been running less to the Dollar in times of crisis although many still do. The treasury market is being supported in times of crisis but at this point I have to ask if buyers are not so keen on holding dollars why on earth would they want to hold dollar obligations that are severely impacted by what is going on in the currency.

It is interesting to note that in the last round of crises that occurred the Dollar did benefit, but it was not the sole beneficiary; this time around the Swiss Franc rose as did Precious Metals, particularly gold. The Dollar has been rallying as of late, but unlike many I believe that the Dollar’s problems are more structural and a lower dollar will be the result. Additionally, I believe that it is a privately held goal of many at the FED, Treasury and possible Congress(although I think the vast majority of those in congress are financial illiterates) to have a lower Dollar to aid in inflating away the debt and artificially increasing the GDP to make the debt statistically a smaller percentage of that figure.
Turning my eyes to the dollar, I have created an annotated chart below with what I see going on. Over the past month or so we have been told that the Dollar would rally because supposedly 99% of the people were bearish on the dollar. The statistics I can locate on various trading sides are all pretty bullish with dollar bulls outnumbering Dollar bears on the order of 60/40. The Dollar had spent a few weeks dropping essentially stair stepping down pretty steeply and it had reached a critical point which if it broke below would have lead to a technical crash. No one wants a technical crash, not our trading partners many of whom have currencies pegged to the Dollar nor our leaders as this would unleash inflation in an uncontrolled manner.

When the Dollar punched below 73 on the DXY and recovered above it there was much made of it in the media between the supposed bearish sentiment and the fact that the Dollar clawed back aboe 73  that a “bottom” was in. In my opinion it is a temporary bottom from which a relief rally in the Dollar could take place. The rally from the 73 low does not appear to me to be any more impressive then prior “dead cat” bounces in the Dollar, in fact I would contend that it is weaker than most.
Looking at the chart below I have indicated that there appears to be a head and shoulders top forming and as I am writing this the Dollar is probing the neckline around 75.10. I would not be surprised to see the dollar bounce here over the next week or two possibly getting back up to the low 76 range which is close enough to the long term downtrend line of about 77.50 that there will be selling of the dollar and the rally will fail. If the Dollar fails again the right shoulder will be complete and with the number of short term traders, MOMO players and techies that play in the Dollar’s sandbox this will mean a run back to the 73 area. If there is a dip back to the 73 area the odds favor a continuation to the downside and new multi year lows in the dollar, which would be beneficial for Precious Metals, Oil and other commodities and most equities. The dollar has two things going for it right now. First, the Dollar is still the reserve currency and is also the most liquid and deep market to handle the worlds business. Of course the aforementioned make the dollar a great transaction currency but not necessarily a store of value.  Second, the dollar at the moment is still trading above the 50 Day Moving Average currently a hair above 75 at 75.03 which is providing some support and is also right around the neckline of this evolving H & S top.

On the negative side of the Dollar’s ledger is the fact that it is in a downtrend that extends back many months and as I said earlier that line is at about 77.5 which is where any rally would be met with more selling. Even if the Dollar were the rally further than the downtrend lien there would be significant resistance at the 200 day at 78.04, plus it would burn up a lot of bullish ammunition to get and overcome that resistance. Lastly, the US Fiscal picture is in question, with the debt ceiling and the decisions as to how to proceed forward with getting the debt under control and reducing it. Being an election cycle I am sure we are in for some excellent Kabuki theater from Congress as it wrestles with the issues all the while trying to get reelected. As you can see in today’s headlines the lines are drawn in the sand with the Republicans taking the tax issue and program cutting side and the Democrats doing the 180 degree argument. The problem will get haphazardly patched to allow the US juggernaut to continue down the road, but the can is just being kicked down the road. As we move forward without developing a reasonable plan to deal with our fiscal problems the ultimate solutions will have to be more painful and one of the symptoms will be a lower Dollar in my opinion.
So yes, we could see a bounce in the dollar here and I believe that it will trace out the right shoulder of the H & S pattern as there are still many who want to buy in to this rally. No indicator is foolproof but the technical patterns are suggesting lower prices by midsummer. Additionally, various indicators are more stretched on this technical bounce of the Dollar than all the prior rallies of the past few months. Additionally, if you look at Williams% R or a Stochastic reading they are severely over bought and turning down as the Dollar is topping. Even the Dollar’s MACD reading while positive is beginning to rollover which s never a good sign. As these indicators turn down any rally in the Dollar should be capped as it will not be a strong move. The bottom-line is that I am looking to add to Precious metals again in the mid summer June/July time frame as I believe that the Dollar could weaken the PM complex somewhat until this pattern cause the Dollar breakdown.

 Click on image for larger view.

Thursday, May 26, 2011

QE Done?

So it is official QE2 is a bust! The FED has failed to meet its dual mandate of raising employment numbers and jumpstarting bank credit and lending. The economy has muddled along aided by the FED's jet fuel of QE but in many respects we as a country are worse off then prior to QE2. Just look around and see the difference in costs from post QE1 and prior versus that of today. At the time of pre QE2 gas for your car would run you around $2.35 a gallon for regular, but today that same gallon costs you $3.99, and no the BLS can't hedonically index it. While gas is only one example the fact of the matter is that for most people their wages have not kept pace with this inflation and their budgets are being stressed. Just about everywhere you look prices for things you need to live are higher while economists argue and the FED frets about deflation. There is deflation and inflation in the system at the same time.

The classical definition of inflation is an increase in the money supply while deflation is the opposite. The rising and falling price aspect is actually not inflation or deflation but rather a symptom of the status of the money supply. The current day definition of inflation which is rising prices is essentially a supply and demand equation. If the money supply is expanded more dollars are created and prices rise as a result of more dollars chasing goods. Sellers will demand more dollars because the ever increasing amounts of dollars are driving what little intrinsic value the dollar has down even further.
Sure there are some things that do go down in price due to oversupply and or increased production, however, these are items you want like a plasma TV and sadly for most Americans house prices as well. The basic theme is everything you need to live is going up in price, while things that you may want like the TV are falling in price.

The FED has spent on the order of $600 Billion and for that we have created a supposed 700,000 jobs at a cost of $850,000 per job. In addition to the colossal spending the FED has fueled inflation whether they want to admit it or not. I know, I know “B52 Ben” has assured us that the “bout of inflation” we are seeing is transitory, however, I believe he is wrong unless the Dollars are printed on flash paper like magicians use. Additionally, just as when the FED cuts or raises rates, it takes months for it to filter through the economy; so too will the inflationary seeds the FED has sown. In the meantime as people are living with the FED induced cost push inflation the public has not only gotten somewhat acclimated to the rising prices but also has begun to expect further rises. Sure people complain about the price at the pump, but unlike the oil rise of 2008 where there were congressional hearings about price gouging notice how you barely hear a peep regarding the subject. The slow inexorable rise reminds me of the frog in the pot who if the water is brought up to temperature at a slow rate doesn't relax that he is being boiled alive.

So we have a situation where the economy is proving to be not as robust as was believed even a couple weeks ago, inflation is rearing its ugly head and the FED has telegraphed the end of QE2 to the market. There has been so much speculation about what will happen after QE2 ends. The speculation runs the gambit from there will be a downturn to a quick turn to QE3. Frankly, it appears to me that the economy cannot stand on it's own at this point and we are coming in to an election season so the FED will act sooner rather than later. I believe that the FED will buy time with QE 2.5, which is the reinvesting of interest and maturing debt from the FED's now roughly $3 Trillion balance sheet. If the FED can coordinate with some of the sovereigns out there to buy a portion of our debt issuance it should allow for enough time for the FED to ramp up a QE3 without losing total credibility regarding their mandate.

I believe that the end of QE2 has been telegraphed so far in advance that the market is in the process of factoring yet another of the most publicized market events of all time. The factoring of the end of QE is at least partially responsible for the volatility of late.

I do believe that the FED will ultimately go to a QE3 scenario, but just not immediately after the end of QE2. Moreover, it is also possible that our very creative FED will figure a way to pump more cash in to the system without labeling it QE but achieving the same result. I have not seen the latest figures regarding how many dollars of spending it requires to create one dollar of GDP, but it suffice to say that you would be horrified at the figure. Just this past winter, I saw a figure that it took $10 of spending to create one dollar of GDP. The net result is that the next QE will have to be significantly larger to have an impact on the GDP numbers. One can liken this scenario to that of a drug addict. If the addict does lots of drugs they build up a resistance and require ever greater amounts of drugs to achieve the high. For the economy cheap money is the drug of choice but the US's resistance is quite high at this point and like an addict the amount needed for the last high could be fatal.

At the moment our problems are masked by the news out of Euro land and the Greek tragedy that will sweep that continent. The FED and others look at our situation and see our Dollar which has rallied against the Euro and use it a crutch to say things are not that bad. The problem with comparing the Dollar to the Euro is that they are two sides of the same coin. It is an unfair comparison to look at the Dollar and the Euro instead a true picture would be to either look at the dollar using the trade weighted index or better yet against a basket of healthier currencies. At this point comparing the Dollar to the Euro is kind of like looking at two stage 4 cancer patients and trying to judge which is healthier, with apologies to any cancer patients in the reading audience.

It is this reasoning that has caused central banks to be buyers of precious metals regardless of what various pundits and CFA's will tell you. The central banks are net purchasers because they know throughout history that precious metals have been a store of value where as FIAT currencies have come and gone. It is true that the environment has to be right for precious metals to be desired and increase in value and over the past 4 decades the environment was such that precious metals were not important. Since Nixon closed the gold window in 1971 we have raised a couple generations to believe that they are more enlightened than their predecessors and they don't need what Keynes dubbed the “barbarous relic”.

The view on the precious metals is changing albeit at a glacial pace. The concept of precious metals, gold in particular, being a financial asset is coming back in to the spot light and legitimized at many levels. I know George Soros called gold the ultimate bubble and divested himself of a very public holding, however, there could be a thousand reasons why. It is possible Soros wanted out of the Streettracks Gold ETF (NYSE: GLD) so he could vault physical metal out of the public's prying eyes via SEC required reporting. The flip side of Soros is John Paulson who maintains publicly that his firm has large holding in the metals.

We heard late last year from Robert Zoellick the head of the World Bank that a gold standard should be at least considered. Today, the Economic and Monetary Affairs Committee of the European Parliament approved gold to be used as collateral confirming its status as a high-quality liquid asset. Mexico recently thumbed its nose to the FED by purchasing 100 tons of gold, just like India and China before them. It seems that every day more and more individuals and governments are coming out and legitimizing to the long lost idea that Gold in specific and precious metals in general are money. Even the brokers and banks who trade precious metal do so at the currency desks and not alongside cocoa or wheat, because they always have been considered money. With the growing public consciousness that the precious metals do what our ancestors utilized them for which is store value and act as a medium of exchange the bull market will continue in both the metals and the stocks.
One would think that the Dollar would have rallied much stronger considering the fact that it was in the process of bouncing and the Euro zone is a fiscal train wreck. It seems people are looking to areas other than the dollar to store their wealth. At the current epicenter of the crisis the public is buying gold coins en masse in Europe and not running to the supposed safety of the Dollar like the mindless hordes of the past. It appears to me that we are in the initial stages of awakening to how deep and widespread the problems in the current FIAT monetary system are.

Might the world return to a gold standard, possibly, but at some point the people lose faith in the current system and will require currency backed by something. The currency does not have to be backed by gold alone as there are examples throughout history of money being backed by other items of value. For example the great German inflation was finally ended when Germany tied its currency to an asset that they had available which was land. By tying the German money to land the people knew that the money was a store of value and since there was a finite supply of land it would not be inflated. The idea of limiting the amount of money to prevent scenarios like what we are experiencing will be the driving factor in countries developing a “backed” currency. Today spending is out of control because currency takes no effort to acquire, just punch a few keys over at the Treasury and add a couple zeros and you are all set.

Investment analysts hate gold because they don't understand it and don't know how to value it therefore they believe that it has no intrinsic value. It is mistake to say that gold has no intrinsic value if it is the limiting factor on the quantity of available money. I would argue that the Dollar has very little intrinsic value as they are so plentiful and inexpensive to produce. If a person or government requires very little effort to obtain something how can one place a great value on it. Governments hate gold or backed currencies because it hinders the hidden tax of inflation that governments traditionally abuse to spend beyond the public's means. Furthermore, our entire system of fractional reserve banking is designed to boost money supply to afford a continually expanding economy. The problem is that the bankers have gotten very good at creating credit far beyond what was originally intended by fractional reserving resulting in massive dislocations in the economy.

The bottom line is that attitudes toward precious metals are finally changing and this is why the Dollar is destined to continue its descent. Add to this the inability for the politicians to even agree upon basic measures without name calling and causing agreements to fall apart and one can see why there is more pain lying ahead. Nothing is getting done now and rest assured that nothing will get done before the election in 2012, unless we either have financial accident or the “bond vigilantes” show up. We recently had the President's Bipartisan commission on the debt come out with a report that provided a good road map to get us on the right track, but it was ignored. I fear that we will have to have true crisis before we start to make moves in the right direction. We as a country will get there but it appears that much still has to change in Washington and the thought processes of the citizenry. In the meantime it appears that the Precious metals complex is getting close to bottoming out. Traditionally the summer is slow for the PM sector; however, it is not cast in stone that the summer has to be the doldrums. I have begun to nibble on some of the PM shares as certain indicators like the Miners Bullish Percent has reached the 43.33 level and usually bottoms in the 30's, however it has bottomed at this level in the past. I have also been a buy of the metals especially gold on swings down toward the $1470's.

One should also note that equities of companies that retain pricing power are very good for this type of environment as well. If you can find a company that is either insulated from price rises or can pass them along investing in those equities should be considered as well. Moreover, a company that can do the aforementioned and pay a dividend that is continually being raised is optimum in my opinion.

Friday, May 20, 2011

Energy and The Dot Com Redux

A quick follow up, to my post from yesterday,“Dollars of Future Passed”. In the prior missive I had noted that the bullish sentiment in energy bore watching. Yesterday, the chart did put in the beginning of a turn up in sentiment. The point at which the turn has occurred is somewhat higher than what I would have expected given the current state of things with the Dollar remaining firm. However, the energy markets which are sensitive to movements in the Dollar, as are the precious metals, may be sensing the beginning of the end for the Dollar’s current dead cat bounce. This chart bears watching as energy has been a market leader and if the sector does in fact turn it would be a net positive at least for what is being dubbed the risk trade.  I have marked prior turns as well as this potential turns with blue arrows on the chart below.

I actually find the concept of a risk trade amusing as I consider most of the investments in so called risk trades to be less risky over time than lets say plunking down my hard earned bucks for Linked in at 1000x earnings.
On a slight tangent I read an article regarding the valuation of Linked in and found it interesting. Back in “Dot Com Bubble” I recall how analysts and investors were using all kinds of metrics to justify prices of the companies they favored. These metrics were as crazy as eyeball counts and page hits which did not bring in any revenue. A poster child of this kind of valuation absurdity was the infamous Pets.com which is no longer part of the business landscape.

Getting back to the article, the author had noted that a companies like Amazon.com and Google also started with high valuations and look what they have become. The author further stated that he wanted to be part of the “social networking” investment area and that he believed companies right now are worried more about building the “platform” rather than profits. He also felt that these companies would prosper once the platforms were more mature. This is the same type of argument for many of the original dot com companies that are no longer with us today as well as the likes of Enron and its fiber optic build out. To steal a line from “Field of Dreams”, the “if you build it they will come” model is not a sound model, as  it can work sometimes but most often fails to live up to expectations.

To me this logic and justification for paying 1000x earnings harkens back to the Dot Com era. As the famous quote by Twain says, “history may not repeat but it sure does rhyme”. The IPOs and justifications of valuation for the Linked Ins and Groupons of the Dot Com 2.0 era business models do appear to rhyme. This is not to say that the companies in question cannot be profitable as I am sure that they can, but the question is one of valuation.

The difference between Google or Facebook versus Linked In is that of number of users is enormous and advertisers from which they derive most of their revenues are willing to pay up for that kind of exposure. Linked in has a nice upwardly mobile professional user base but it is much smaller in scale. While advertisers will be willing to pay for targeted ads I just don’t believe that Linked In can command significantly higher premiums for advertising, than say a Facebook. Facebook can both target specific demographics and offers access to a much wider variety of demographics at all levels of socioeconomic levels which Linked In cannot match.

As for one of the next rumored hot IPO’s to be coming I am sure will be Groupon and it will probably also get valued way to high as it seems that we are again pushing toward IPO euphoria which could be signaling a top.  Groupon is a wonderful concept and the deals they provide consumers can be quite spectacular, and I have and will continue to take advantage of them. The Achilles heel for Groupon is that the barriers to entry are quite low and there are other competitors already on the scene like “Living Social Deals” as well as others. At the moment Groupon is riding high because it has name recognition which is helpful, but if one of the rivals comes along with an innovation that Groupon did not come to market with first their thunder could easily be stolen.  

All I am saying is be careful out there because some parts of the market are beginning to feel a little like 1999 and I don’t know about you but I would prefer not to “party like it is 1999”. If you do party like it is 1999 just remember to make an exit before 2000 as we all know what happened then.

Wednesday, May 18, 2011

Dollars of Future Passed...

There is so much talk these days regarding the end of the FED’s QE2 or quantitative Easing part 2 that has resulted in both professional and amateur investor confusion. Add to the mix the constant MOPE (Management of Perceived Expectations) from “B52 Ben’s” minions and throw in to the mix the bloviating statements put forth by everyone’s favorite Treasury Secretary “Turbo Timmy” Geihtner all contradicting themselves also has set the stage for the investment community to be off kilter. Of course keeping investors off balance and guessing is exactly what the FED and other players want as each has their own agenda and is basically playing for time.

In my mind there is no question that QE3 is coming of course I cannot tell you at what point she will dock. It is also doubtful that QE3 would be called by that moniker but “a rose by any other name would still be a rose”. I highly doubt that QE3 would sail on in right after the end of QE2, instead we will see games played with the FED’s bloated and highly over valued balance sheet. I believe it was James Rickards who coined the QE Lite term and that is what I believe the FED will engage in. The FED will use maturing debt and interest earned to reinvest in treasuries essentially keeping the music from stopping. The amount the FED will be reinvesting will be sufficient to avert the catastrophe of full detox shakes required to actually right the economy but not enough to stave off the withdrawal pains. Instead I believe the FED is playing for time and actions have been taken to essentially create the fa├žade of credibility so that they can jam QE3 down our throats when the economy is looking like the music is stopping again.

I have noted in the past that the FED is taking a page from the French Assignat playbook of the late 1700’s that ultimately lead to worthlessness of that currency. The French economy was in the doldrums and the government printed a bunch of Assingats and the economy would act much better for a while. Going forward each time the economy of France slowed sufficiently the government would print more Assingats and things would get temporarily better, until they just didn’t as the Assignat was toast. Today we have fancy names and methods for hiding money printing and devaluation but semantics aside the end destination is the same.

No different than a wife making excuses for her alcoholic husband we hear from all levels of government, economists and media that the Dollar cannot be replaced, or will not lose its reserve currency status. I want you to think dear reader about what has transpired in the last decade, no better yet even the last couple years. Would you have believed that GM could become Government Motors, or that Wall Street would be bailed out or the mortgage mess could have occurred? Would you have envisioned the changes going on throughout the world from natural disasters to political upheaval?

As humans we have a tendency to extrapolate the future by looking to the past, however, this is not a correct assumption. As the 18thCentury Scottish Philosopher, David Hume posited, there is no real reason to believe that future has to resemble the past in fact it could be argued that it is an irrational expectation to believe so. In other words humans tend to be guilty of linear thinking that just because it was so before so shall it be forever. Of course the idea that the past dictates how things will be in the future is a silly notion, just look in your own life for proof on smaller scale. Take the internet for example, many of us had newspaper subscriptions and had the paper delivered to the house. If I had to guess today judging by circulation numbers that most of you reading this missive get your news through an alternative to actual newsprint, probably online as I do. By thinking in a linear fashion it would have been assumed that everyone would continue to get their news via printed materials delivered to their home, but clearly something has changed. Even the financial industry gets this concept as they constantly proclaim past performance is not indicative of future results.

Yet the economists and media pundits continue to utilize linear thinking applying it to things like the Dollar, real estate, reserve currencies, US Government debt and infinite number of other things. The changes we are discussing take time and some even move at a glacial pace, but they do move. To me the move away from the Dollar as a store of value let alone the world’s reserve currency has been moving at that glacial pace. It is more akin to the shifting of tectonic plates on the earth’s crust. The plates that make up the continents are in continual motion that is imperceptible to us building pressure as the plates move and when the tension achieves its maximum it results in an earthquake.

The continual drama we are living through with our economy is building pressure on the tectonic plates that hold the Dollar and US Government debt. At some point the plates will shift and all the economists, politicians and banksters who currently say that it is impossible for the paradigm to change will be wrong. I do not know when, but I do know that the paradigm will shift. There will be some event that will cause governments and people around the world to shift away from Dollar assets and or demand higher rates of interest and payment regardless of what today’s experts say. If you could travel back in time and go to a pub in England in the early 1900’s and tell the patrons that the US Dollar would supplant the Pound and that England would become but a player in the US’s shadow they would have thought you a lunatic.

Flash forward to today and we have and establishment dealing with the problem of our debt and spending, and unfortunately at all levels these people think in a linear fashion and look to the remedies of the past to fix the future. If one throws in to the mix the notion that all sides have an agenda which do not necessarily lend themselves to the best interests of solving the country’s problems. Instead we have two ideological points of view both out of touch with reality that promotes each side’s unyielding view of what they want the US to be like. I can remember growing up watching what used to take place in Washington seeing the politicians sparing with each other over issues but eventually coming to a compromise and then going out for drinks after session. Today the object of the game is to block your opponent at every step and vilify them in the media not exactly an atmosphere conducive to problem solving.

It could be that the rest of the world has sensed that not only are we at a crossroads fiscally and economically but they also are voting by not automatically running to the Dollar. Avoidance of the Dollar was best exemplified when the crisis erupted in the MENA (Middle East and North Africa) and instead of running to the safe haven of the Dollar people around the world moved in the Swiss Franc, gold and silver.

Before Silver did its now famous swan dive as a result of the 5 CME margin hikes in 8 days all I kept hearing about was how there were something like 99% Dollar bears and that the dollar was to embark on a multi month rally as a result. I did not buy the premise then and I don’t buy it now that the dollar is going to run up to the 80’s on the DXY. The latest evidence I have shows that while the trade may have been crowded the supposed rally is not nearly robust as one was lead to believe. The open interest in the Dollar has remained rather flat all the time that it has been rising. Additionally, the commercial players who are right the vast majority of the time have reduced their position during this rise while the large longs have somewhat increased their position.

Conversely, if you look at the chart below you can plainly see that throughout this supposed rally in the dollar that the small speculator open interest has gone parabolic. To me the fact that the small spec is fueling this rise and the strong downtrend is in place says this is nothing more than a short term bounce. There are those that argue that because the Dollar on the DXY exceeded its 50 day moving average that it is in rally mode, but just as we have seen in gold, silver and equities moving above an average particularly in a down trending bear market is no guarantee that the rally will continue. I believe instead that the current Dollar uptick is in the process of exhausting itself either at this level or by the time it gets to 77.5 near the major downtrend line (assuming that it can continue to climb) and then will resume its trek down toward the 64 level as my initial target.

Dollar Chart 5/18/2011 including sentiment data and Commitment of Traders information:

Sentiment indicators from Forexpros.com for 5/18/2011 and last week.

Assuming that the Dollar does continue its decline then that would be bullish for the equity markets and in particular for the energy stocks and precious metals group. The sentiment in the precious metals group is at a level where the issues could rally, while if history holds true the energy sector still has some work to do. There are a couple charts posted below showing the bullish percentage for the energy sector and the precious metals.

In the energy sector there are lots of names to choose from like the large caps Conoco (NYSE: COP), Chevron (NYSE: CVX), Total (NYSE: TOT) or smaller plays like Occidental (NYSE: OXY) and Satoil (NYSE: STO). I personally like Statoil and Occidental as I believe that provide excellent value and potential as the oil shares turn around. Statoil is a Norwegian oil producer which like many of its brethren had gotten beaten down as a result of the current dollar rally and the oil futures margin recently implemented by CME Group. Statoil is a solid company that is currently trading at about 7.5x future earnings and is currently oversold. Statoil is very attractive at today’s price level.

Occidental Petroleum is an independent Oil and Gas producer that has been a great performer in the past and is currently completing a pull back and bounce off of its long term uptrend line. OXY is currently oversold and should rally nicely with the rest of the oil and gas sector. OXY is projected to grow earnings on the order of 52% for 2011 and looking forward to 2012 earnings are supposed to grow 16% as well. I have owned OXY in the past and it is a very good company and has delivered well in the past. OXY sports a forward PE of 10.6 and a PEG ratio of 1.14 so it is not overly expensive; and as a bonus you collect a 1.8% dividend to boot. I believe that OXY is very attractive at the current level.

The precious metals are actually in very good shape from a sentiment perspective and this suggests that the shares are close to if not already mmaking a bottom.

As for the precious metals there are many to choose from but I prefer to buy intermediate producers and a couple of the majors. The miners I favor once the sector gets some legs are GoldCorp (NYSE: GG), First Majestic (NYSE: AG) , SilverCorp (NYSE: SVM), Newmont Mining (NYSE: NEM), Silver Wheaton (NYSE: SLW), Yamana Gold (NYSE: AUY) , US Gold (NYSE: UXG) just to name a few. If you want a diversified basket of larger and mid cap miners then save yourself the aggravation and just buy the Market Vectors Gold Miners ETF (NYSE: GDX).

On the other hand, if you are looking to invest in juniors my best advice is to either use the ETF Market Vectors Junior gold (NYSE: GDXJ) or look in to the Tocqueville Gold Fund (Mutual Fund : TGLDX) run by long time gold mining portfolio manager John Hathaway. I suggest the two options above for investing in juniors because it is much more complex to assess the juniors that will be successful versus those that will always be just a hole in the ground. Investing in juniors requires knowledge and research that most investors do not have so the funds mentioned are a better alternative.

Well that is it for today and I know that this missive kind of ran the gambit and I apologize for that, but I hope you still enjoyed the piece.

Monday, May 16, 2011

Sign Of The Times

Sign of the times
Appearently an enterprising gas station owner in Oregon,

Friday, May 13, 2011

The End is Neigh!

At this point I have begun to add to my metals portfolio albeit at a slow pace. The correction we are experiencing has been pretty nasty to say the least. I am finding some encouraging things occurring at the moment. First, the sentiment toward the metals has turned pretty negative which is a positive in that warped stock market logic kind of way! Second, the correction especially in silver has been particularly violent and has shaken even many strong hands to the core, but the weak hands and riverboat gamblers have for the most part been purged thanks to the CME rate hikes. Many of you know that I disagree with the way the CME implemented the margin hikes but I do think the outcome will ultimately be a stronger upward movement in the metals market. This violent shakeout is exactly what the silver bull needed to move forward, no different than what Paul Volcker did for the US economy back in the early 1980's, clean out the excesses and deadwood.

I have also found it encouraging that the metals have been down a couple days in a row and sometimes by quite a bit yet they bounce back. This up and down action is just what you want to see when an issue is building a base as eventually it will calm down but first it has to repair the damage inflicted upon it. Moreover, everywhere I turn these days whether it is TV, internet or stock message boards all I hear is how the commodity bubble and or the gold\silver bubble has burst and how things are going to continue to head down. This type of talk is music to my ears as I would know this was the "top" in things when everybody and their brother was recommending gold stocks or commodity stocks to me, but that is not the case today. In fact I was mentioning the idea of buying back in to some of the positions I had liquidated at higher levels and the reactions I got from acquaintances were as if I were nuts.

In the mean time the dollar is having a little rally because A) the Euro zone is a mess(a shocker I know), B) the Dollar was short term oversold and is doing a technical bounce, and C) the sentiment was something on the order of 1% bullish toward the dollar. Interestingly on the last point I use a site called Forexpros.com to track the US Dollar with a live chart and they have a sentiment indicator on the site. The traders using the ForexPro site have had Dollar bulls running on the order of 65 -70% for the past few days, yet we are told in the media that there are 99% bears, interesting  no?

Well I have attached a couple charts below for you to peruse. There are 2 charts of the US Dollar one on a daily basis and the other on a weekly. I have drawn in the down trend-line which corresponds nicely to the 200day moving average. The Dollar has also moved to a pretty overbought condition and that in conjunction with both the down trend-line and the debt ceiling limit fiasco emerging should cap the dollar shortly, time will tell. I have also attached a chart of the Gold Miners Bullish Percentage Index which has been a pretty good forecaster of bottoms and tops in the metals shares and at the moment we are getting into an area where bottoms are formed.The only time that the sentiment was more negative than on the chart I presented below was December 4th 2008 where we had a reading of 4. On December 5th we had a reading of 0 but I believe that is a data error on stockcharts.com. None the less we are definitely in the bottoming zone here which should coincide with the Dollar topping out. It appears to me that at 78.50 or so the Dollar should hit its brick wall if not sooner. Additionally, even though the dollar is rallying does not necessarily mean that either precious metals or their stocks need to continue falling. The Metals and stocks could rise as the Dollar makes its top especially since it is just a technical bounce.

Have a great weekend!

Dollar Daily Chart

Dollar Weekly Chart

Bullish Miners Percentage Chart (Prior bottoms shown with yellow)

Man does not live by coffee alone. Food is needed as well.

When I am out in the car I like to put on talk radio to get a sense of what people are concerned about outside the my own little circle of friends and family. Here in Boston we are very fortunate to have a station known by the call letters WTKK 96.9 FM, which is not your typical talk station as they do not feature the likes of Rush Limbaugh or Glen Beck. WTKK provides both sides of the various issues without the need for the “Fairness Doctrine” as the lineup features hosts from both sides of the political spectrum. While I am not some hardcore conservative I do tend to agree more often with the conservative hosts than the liberal ones. I know it is hard to believe that in a state as blue as Massachusetts that one could find conservative talk show hosts, especially since the political stance of the state is widely know as being just this side of Lenin.

As an investor and a citizen in general I believe it is important to keep an open mind and take in facts and opinion that differ from your own, which is why I listen to both the conservative and liberal viewpoint shows. I rarely fully agree with either side but what I do appreciate is that they provide differing viewpoints and allow me to think outside the box.

Of course this is an investment column not a political column so I need to get to the point of the article which is how little people actually know about what it is that is affecting them. Just this past Tuesday one of the shows on WTKK that I frequent which goes by the title “The Jim and Margery Show”, obviously a man and woman team, with a “bent” to the liberal side. Actually, Jim is a big government guy and Margery is what I would label as more moderate.

The show I am referring to was not a highly controversial installment, but rather a more mundane one. On the show the discussion was raising coffee prices. It was not the fact that the hosts noticed that coffee prices were rising, but instead it was a couple of the items that they discussed which intrigued me.

The first thing that struck me was how the hosts had an idea that coffee prices were being impacted by the weaker Dollar, but they readily admitted that they had no idea what a weaker Dollar means. The pair then went on to talk about how things are economically challenged and that it was more difficult to justify spending on coffee. Here is the interesting part at least to me; the hosts could not be bothered with making coffee at home but instead insist that they will continue to buy their brew from either Starbucks (NASDAQ: SBUX) or Dunkin Donuts. Moreover, the notion of bringing coffee to work in a “Thermos” to economize was laughed at to the point that basically it was declared that carrying a thermos to work was not manly.

The items that stood out to me regarding this talk show were twofold. First, the fact that the hosts would talk about the price of coffee and even mention one of the root causes of the price rise, the weak dollar, yet they did not take the time to understand what a weaker dollar is nor the reasons for it or its implications. Second, the hosts’ inability to grasp the concept of people needing to economize and perhaps even encourage that kind of behavior shows just how far we as a country are from actually dealing with our problems. Sure taking coffee in a thermos is not going to solve one’s or the country’s budget problems but it is a small step in getting people back toward living within their means. Instead the hosts were joking back and forth about how they found it much cooler and satisfying to be able to walk in to a store and order a grande half calf caramel mochachino latte as if drinking this over priced foo foo coffee was so manly.

The point is that without a basic understanding of how things interrelate economically we cannot hope to fix our problems at the ballot box because the people will vote for those that promise the most goodies instead of those that would make the correct economic decisions. The populis will not be able to demand change because they do not understand which policies are actually harmful versus beneficial. Secondly, people by now understand that things are not going back to the old normal and we as a people need to reinvent o ourselves to deal with the current situation and move forward. Reinventing ourselves means going back to the basics and getting our own fiscal houses in order, which starts with small steps like taking a thermos of coffee and saving the balance.

If you are reading this column then chances are good that you understand the weaker dollar and its causes and also recognize that the journey back to fiscal soundness is a journey of 1000 steps that begins with the first step. So dear reader you are probably asking yourself how does this relate to investing??? As I have alluded to in prior article I like to invest in longer duration themes and the story related above provided insight in to a theme that can be played. The theme is the continual weaker dollar and rising food prices. Rising food prices and the weaker dollar are interrelated, but food prices also influenced by demand.

Rising food prices are a worldwide phenomenon that was recently discussed in many magazines and newspapers. We have witnessed the results of this food inflation in what the media has dubbed the “Arab Spring” but in reality the root cause is not a demand for democracy as they would have you believe but instead a demand for food. Food got too expensive and people could no longer live with the level of prices so when the government did not respond it was time for action. Here in the US, we spend less of our incomes proportionately on food and it causes people to complain but not take to the streets in anger.

At this point US food companies are either eating the margin to keep prices stable in some areas or shrinking the packages to maintain the price illusion. What I mean by price illusion is that when you go to the supermarket and buy your favorite product lets choose ice cream and you grab it off the shelf you notice the price is the same. Upon closer inspection of the carton one finds that what you used to pay for a half gallon of ice cream comes in a package that contains only 1.5 quarts. Ironically, the shrinking of portions might be a good thing in helping America deal with the obesity epidemic, but that is not as a result of a conscious decision rather an economic dictate. Even with the various companies trying not to pass along prices they are being forced in to price rises and one can see it reflected in their grocery bills.

The problem of food prices will get worse as we add more people to the planet and the demand grows. Additionally, as many of the countries in the developing world prosper their impact on the food chain will continue to drive prices especially as their diets get larger and healthier. Food production and crop yield have to be improved to keep up with the demand and one always has to be alert to the weather as it can affect crop yields both positively and negatively. To further complicate matters arable land is disappearing at a rapid clip to make room for cities and other human developments so new farming techniques need to be developed and implemented to maximize the return on food investment.

How can one invest in an area that will grow based upon this theme? There are a variety of options that one can put money into to ride the food wave, and it is probably better to split money between different subsectors. As in prior missives I favor the companies that act more like arms dealers rather than combatants. One can invest in equipment manufactures like Caterpillar (NYSE: CAT) or Deere (NYSE: DE).

There is an ETF that follows the agricultural area, Powershares Multi Commodity fund (NYSE: DBA) which will give you exposure to the underlying commodities. The Market Vectors Agri Business (NYSE: MOO) would lead one to believe (especially by the cute ticker) that they are getting live stock commodity exposure but in reality 67% of the assets are stock in companies like Deere and Archer Daniels Midland (NYSE: ADM [FREE Stock Trend Analysis]).

If you are so inclined you can even invest in farmland for example Cresud S.A. (NASDAQ: CRESY) is an Argentinean company that operates some 25 farms many of which are in Brazil or one of its competitors Adecoargro (NYSE: AGRO) who operates multiple farms and processing plants throughout South America. The risk with investing directly in farmland that you need to be cognizant of is that it is subject to external factors like weather and crop yields. I do not believe that the risks should deter one from investing in the companies as both have diversified properties and I believe long term the upside far outweighs the risks.

Perhaps the best area from my perspective to gain exposure is in companies that will help increase crop yields and there are a couple of those for you to consider. Plant nutrients are critical to increase yields and two companies I can think of are ideally suited for this are Mosaic Corp (NYSE: MOS) and Potash of Saskatchewan (NYSE: POT) . Both of these companies were high fliers a short while ago and have fallen back to earth yet their stories going forward are very compelling especially if you recognize the food crisis theme. At present at least from a charting basis it appears as if both issues are oversold and are attempting to put in a base at their 200 day moving averages. POT and MOS are both very good companies and I believe they need to be watched for good entry points. The two companies have very good metrics, however, I would personally favor Mosaic as its balance sheet particularly its current ratio is stronger.

A stock that everyone seems to love to hate is Monsanto (NYSE: MON). Monsanto provides seeds and various pesticides and herbicides for farmers to plant and increase productivity. Monasnto has developed a bad rap as there are some who feel that their genetically modified seeds are for lack of a better term “evil”. I believe that going forward we will need the specialized seeds that Monsanto sells to keep up with food demand and evil or not they are going to sell plenty of product.

For those of you that are more conservative there is always Dupont (NYSE: DD [FREE Stock Trend Analysis]) a company that has been around since 1802. Most people know Dupont for their paint or Teflon products but there is much more to them than those divisions. Dupont is a global entity and a blue chip stock that derives 40%or so of its revenues outside the US and that segment is growing. Dupont is well positioned to help in combating the global food crisis that we have unfolding as the company produces high-yielding hybrid seeds, herbicides, insecticides and fungicides. The reason that Dupont is a conservative play is that agriculture is a large segment of their business but it is only one of many divisions. Dupont has been in business for over 200 years and in 1904 they began paying dividends. The first quarter 2011 dividend was the 427th consecutive dividend payment and also came with a share buyback announcement. Dupont currently yields 3% and hopefully as the company continues to prosper they will increase the dividend which was last raised in 2008.While you are waiting for Dupont to raise the dividend you can get paid and the share buyback will also hopefully translate in to capital gains as well. The chart of Dupont looks to be one of the healthier ones as it is in an uptrend currently hugging its 50 day moving average.

Another area to consider in this theme is that of water and water distribution\conservation products of course that is a full topic in itself.

Monday, May 9, 2011

Looking For The Silver Lining

Effective after the close of business Thursday, the CME Group Inc.'s (NasdaqGS: CME) initial margin requirements, which is the minimum amount of cash that must be deposited when borrowing from your broker to trade silver, will be increasing to $18,900 per futures contract, up from $16,200(on 5/2). This is a huge increase from about a year ago when the margin required was $4,250. This latest margin hike is the fourth in less than two weeks and as I am hearing it they are announcing another hike for Monday(5/9) to $21,600, which would be the 5th in 3 weeks. I can understand why the CME would raise margins with silver flying as raising the margin is used to remove froth when things get out of control, but this is becoming ridiculous. The CME is acting like a cornered wild animal, lashing out at anyone or anything to make its escape.

Raising margin is usually done in markets that are going up at a rapid clip and yes they do cause a decline in the market, that is the point a control mechanism. Of course this begs the question with silver already having declined 20% over the last few days what is the purpose of adding yet another margin increase or two unless they are deliberately trying to drive the price down to the basement. This is starting to smell pretty fishy and surely not transparent. There is no doubt in my mind that there are a things going on behind the scenes and once again all the little guys are taking it on the chin.

I believe we should have transparency in markets but that surely not the case in virtually all markets of the casino these days. Sure one can try to stick their nose behind the curtain to see, not the man but the men that are pulling the levers of the market, but you are constantly told do not pay attention to the man behind the curtain, much like when Dorothy and her friends meet the Wizard in the “Wizard of Oz”. At least in the Wizard of Oz Dorothy can plainly see the man behind the curtain and she opts to listen to the admonishment of not paying attention to him, we on the other hand are told there is no man behind the curtain, yeah right.

If you are investing in the commodity space particularly in silver you kind of feel like the butt of the joke in the short lived comedy series starring Leslie Neilson titled Police Squad (a precursor to the “Naked Gun Series”). In one episode there is a chalk outline at the scene of a murder and standing there are three people at a police barricade and a cop with a megaphone blasting 6 inches away from their faces. The cop is telling the people “nothing to see here…move along” which is exactly what the powers that be would like to have you do.

This series of margin raises is suspicious for the reason that there are so many in rapid succession, it appears like a deliberate effort to rescue someone or some entity. I did not put any credence to the rumors on the internet before regarding JP Morgan (NYSE: JPM) and purchasing silver to force the bank to cover their massive short position, effectively causing a bankruptcy situation. After watching what the CME is doing with margin begs the question of there is some truth to that rumor and crossing $50 was the breaking point for JPM or one of the other massive shorts.
So why has the CME opted to raise the margins yet again effective at Thursdays close? It appears to me for a couple reasons. First, the CME group who has traders as voting board members are opting to save themselves from their massive short positions that they know without changing the rules would get severely hurt by their prior hubris. These masters of the universe don’t like to lose money and to make sure they can cover they are stacking the deck in their favor. As far as an exchange is concerned I do believe that they should act in a manner consistent with making a market not protecting their own from arrogance, greed and or stupidity. It is mind boggling to me that the CTFC does not stand up and take notice after all they have been investigating the silver market in particular. It appears that like the SEC the CTFC turns a blind eye to all the chicakery and blatant manipulation going on in the markets.

Secondly, it is coincidental that these margin raises came in rapid succession after the metals started moving due “B52” Ben Bernanke’s FOMC dog and pony show. In Bennie’s answers came the notion that the FED wishes to keep rates low for the foreseeable future and that any inflationary pressures are just transitory. Based upon the market participants reaction during and after Bennie’s performance it was obvious to even the dimmest bureaucrat that the public was not buying the message the FED wanted.

While the FED does not control the CTFC I am sure that they have major influence over them or have friends in high places that do so they may have additionally been instructed to induce a sell off in commodities and silver\gold and oil are the most visible signs of inflation. The oil market is very large and deep and would be very difficult to influence as it is global. The silver market by contrast is tiny and there for can be driven up or down with much less firepower. With the level of skittishness in the markets these days all it takes is driving one sub-sector down and you can effectively throw a wet towel on the entire market. This phenomenon is a result of general nervousness arising out of the fact that the vast majority of market participants are both financially and economically illiterate, so they group think and scramble haphazardly when something occurs, like roaches when the lights get turned on at night.

I could accept the first couple margin increases by CME as reasonable since silver was approaching $50 on a space shot trajectory, but now with the fourth I am beginning to feel as if Tony Soprano is running the show. In essence the CME is using or abusing, depending on your point of view, its power to knee cap lots of investors for the benefit of “the family business”.

In a sense I am beginning to feel like Columbo putting together the scene of the crime. Let’s start with this past Sunday evening (4\28) when the CME Soprano’s put out a hit on Silver. It was the perfect crime as the cops (the Asian buyers) and the other Families (IE the London Boyz) were all out partying as their exchanges were closed for holidays. Add to the mix that trading opens Sunday evening in the spot market and it is thin enough without having some of the participants absent. Under normal circumstances it does not take that much volume for the Boyz to push things in the direction they wish, so Sunday’s market was completely at their mercy. At the same time the announcement came that Bin Laden had been killed, which was like throwing gasoline on a fire for this market, as if now all the risks economically and politically had been removed nullifying precious metals appeal.
The media would have you believe that the drop in silver in particular was linked to Bin Laden since threats of a slowdown in China or various mining issues around the world were unable to derail the silver express. The media is grasping at straws and the people who buy what the media sells also believed in the 2nd half recovery and a plethora of other wishful thinking scenarios.

What happened on Sunday was a deliberate and directed operation against mainly silver and secondarily gold. Looking at what was hit on Sunday only silver took the brunt. If this was related to slowdown worries how come base metals, softs and oil were unscathed? If it was because terrorism has come to an end with the death of Bin Laden how come oil did not sink and only silver? Moreover, the old fall back of the inverse dollar correlation did not explain things at all since during this raid the currency aka the Dollar did not rise.

This all has the tainted smell of an operation to try and get out of having to deliver metal that they are short on because under contract they could be forced in to producing the metal. I believe that this an effort to get as many people to puke up ounces to help one of the Boyz, because they know on this coming May 27th, notice day, that deliveries are going to be requested. The more the media parades out experts that state there is no shortage or tightness the more I think there is one building. While the FED uses the Management of Expectations principal otherwise known and MOPE the CME, CNBC along with Timmy “Turbo Tax” Geihtner went to the Joseph Gobbles School of tell a lie often enough and it becomes truth.

Along these lines today I happened to have CNBC on in the background, something I rarely do, but the entire morning was spent slamming silver in particular and parading out supposed experts one after another to declare it a bubble and that it was parabolic. One guy came out and discussed how the I-shares silver trust (NYSE: SLV) traded more than the SPX one day and that this was proof of a bubble. In my mind it was proof that someone was getting squeezed and was panicking and the more they panicked the more buying came in, creating a feedback loop. Of course CNBC spent an inordinate amount of time trying to convince all their viewers that inflation that market correctly perceived was coming as of “B52” Ben’s FOMC meeting was all wrong and had magically dissipated as well. I find this amusing as some of the key drivers for silver and gold are the debt, debt ceiling debate and the federal budget. There is no fiscal responsibility or restraint in Washington at any level but today this is magically not an issue. If you want to talk about bubbles they should be talking about debt and spending bubbles that are clearly unsustainable. To prove the point of no restraint Timmy “Turbo Tax’s” treasury department was featured in an article today pushing for congress to raise the debt ceiling by $2 Trillion as a stop gap measure as to carry things through the election. A trillion here a trillion there and pretty soon you will be talking about real money, yes real monopoly money.

It should seem to you dear reader that the focus is getting clearer and all the machinations around silver are clearly designed to shake loose as many weak hands as possible to allow the Boyz an escape route as they are all “to big to fail”. Yet again John Q is taking it in the neck for the Boyz.

I am not here to debate the “bubble” of silver or gold as I do not subscribe to that sentiment, but silver due to the ferocious short squeeze was on an unsustainable path and the initial margin increase and possibly even the second one was sufficient to alter the course and prevent a blow off top. In my opinion CME has gone too far and runs the risk of not only increasing volatility because of much fewer participants but also being relegated out of the price discovery business when buyers around the world figure out the game is rigged and they have infinitely more control of their destiny in the physical market. The CME may have unwittingly limited their ability to control the price in the longer run. In many respects the silver market needed this pause to put it on a more sustainable path as painful as the adjustment may be for late comers. What the CME is doing is in essence price suppression and just like run away blow off tops end badly compressing a spring doesn’t work well either.