2011 Investment Commentary Part 1 of 3 Monday, Jan 3 2011 

The problem with making a year long commentary is that things can change which throws off your initial theory. That was the main problem with my forecast as Bernanke decided to launch QE2 amidst criticism from global central banks. This put a floor under the market and lit the fuse for the rally in equities and commodities.

So what happens in 2011 and how does that affect investment portfolios? From my chair looking out over the world here is what I see happening based on current events.

This is the first of three parts. The first will focus on global regional commentary. The second will focus on investment areas and the third will tie the first two together.

EUROPE

Europe will be marked with a growing divergence between the economically strong countries like Germany and France and the PIIGS. As the year progresses expect Spain and Portugal to accept programs similar to Ireland and Greece.

Current chairman Trichet’s term ends on October 31, 2011 and there will likely be an internal tug of war between the PIIGS who would want a dove and Germany and France who will be pushing for a hawk.

In September, Trichet made some criptic comments in a speech saying that the problematic countries need to get their collective houses in order soon or risk being left behind.

Germany’s exports will continue to carry Eurozone growth in 2011. If the Euro begins to decline versus the US Dollar and global currencies we may begin to see inflationary problems as the year goes on with Germany possibly pressing the ECB to removing some excess credit.

This will provide the new ECB President with his first and possibly most important test. Will he be an inflationary hawk with a nod to removing some excess credit measures and attempting to get ahead of the inflationary curve or acquiesce to the PIIGS who will need a time to heal their sovereign balance sheets.

Europe will survive intact helped in part by their current account surpluses.

ASIA

Inflation will begin to turn its ugly head as 2011 goes on. Right now Asian central banks have begun a tightening cycle aimed at removing excess credit and attempting to stay ahead of the inflationary curve.

Unlike the late 1990’s Asian economies are on a much better footing to fight inflation with significant excess reserves, low debt ratios, and a willingness to move ahead of the inflationary curve.

One significant fly in the ointment is not coming from China but Australia, whose interest rate increases are slowing the Australian economy almost to the point of a recession. The ripples here will likely be limited to Australia and New Zealand.

Japan will continue to muddle along economically. This may upset market participants as many people have bet on some sort of crisis but Japan has continued on this path for more than a decade now. One area which may help economic growth is the Japan-Thailand FTA in which Japan has begun to outsource low end production to Thailand which is then exported to Japan where final assembly and export to the world takes place. Benefits from this FTA should become apparent as the year goes on.

The key for Japan will be a rise in exports combined with lower public spending. While this may continue to hold back economic growth a retraction in the public sector would be good for the Japanese economy long-term.

India and China will lead the rate raising cycle with increases of at least 100 bps expected across the board.

LATIN AMERICA

Argentina remains the wild card for South America. South America is undergoing an incredible economic growth story built upon the economies of Brazil, Chile, and Peru.

Central banks across the region will continue on a rate tightening cycle in an attempt to stay ahead of the inflationary curve.

Argentina remains a huge political risk with elections in 2011 with inflation already out of control.

NORTH AMERICA

In Canada, a combination of the H.SI implementation and high consumer debt levels will put a cap on the economic recovery. This is very good for the long-term.

Canada is ahead of the Federal Reserve with respect to interest rates. Baby steps are being taken to let the air out of the bubble and it is likely this will continue as 2011 goes on. We will likely see a couple of rate increases as the Bank of Canada would like to normalize interest rates but is very cognizant of the high debt levels and slow economic recovery. The divergent economic policy relative to the United States will continue.

No interest rate increases by the Federal Reserve until mid 2012 at the earliest and more than likely a slow incremental rate increase policy will begin in 2013.

Not until the mortgage resets have made their way through the system will the Federal Reserve entertain the thought of raising interest rates.

There is a tremendous aversion by consumers in the US to leveraging up. If you were foreclosed on and went back to renting it is unlikely that you have 20% for a downpayment after losing a house purchased with no downpayment.

We will continue to see problems and the grey market overhang will continue to depress prices.

There will be isolated pockets for growth but that is more driven by vulture buying.

Economic growth in the US will be higher than this year but lower than 4% with building inflationary pressures in the food and oil markets.

US POLITICS

The rush of voters to elect new candidates to Washington has changed the political landscape. Never before has the country experienced a split Congress with a Democratic President.

The question will be how closely will they move to cut spending when a strong proportion of the American public is against cutting Medicare, Social Security, and Defense and how quickly will the public turn on them when the spending is less than expected.

Right now the 2012 Presidential race has yet to kick into gear but as the year goes on the drumbeat from candidates canvassing Iowa will pick up and grab more and more of the headlines.

Expect lots of bluster and backpeddling from the new Congress. Notice how they are already going back on the earmarks promise before taking office. That will be something major to consider for the 2012 election.

Good economic growth will help tax receipts but I do not see any strong impetus to get spending under control. A great way to slow economic growth and help the Federal Reserve put off increasing interest rates (this creates new problem) would be to combine an increase in tax receipts through lower capital gains, dividend, and overseas profit repatriation tax rates with decreased spending. That would show the world that we are taking our budget deficit problem seriously.

If that happened as businesses and employment began to gain traction the government would be creating a drag to ensure we do not grow to fast and let inflation get out of control.

BTW, I am not a Keynesian. The above policy just makes sense to me at this point in time.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

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The Week in Review, October 15, 2010 Friday, Oct 15 2010 

The week started slow enough with the Columbus Day holiday and picked up steam on the backs of solid earnings reports from Intel, Google, and JP Morgan.

Thursday brought some consternation as the 30-year bond auction came in with a yield of 3.852% well above estimates as foreign buyers apparently stayed home.

Overseas, the Yen fell to fresh lows and Thailand established some curbs to assist exporters and try to stem the flow of hot money into the country without damaging FDI.

China raised the reserve requirement by 50 basis points to try to cool down lending and better manage economic growth.

China’s foreign reserves also soared to 2.648 billion in the 3rd Quarter.

The Bank of Korea held interest rates steady at 2.25% amidst an 8% surge in the Won against the dollar in the past three months amidst faltering exports and inflation.

Policy makers in India stated that they are considering different options aimed at defending the rapidly appreciating Rupee.

Markets sold off on Friday as Ben Bernanke confirmed everyone’s rumors that the Federal Reserve is looking to purchase more US Treasury bonds but is unsure at this time as to the size of the program.

Next Week

Monday – Industrial Production and Capacity Utilization in the US

Tuesday – Reserve Bank of Australia minutes, ECOFIN meeting, Bank of Canada rate announcement

Wednesday – Bank of England minutes

Thursday – China 3rd Quarter GDP,

Friday – Hoenig speaks (noteworthy in that he has been against keeping rates low)

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Japan – A Curious Conundrum Tuesday, Oct 12 2010 

I apologize for the lack of posts over the past few days but the move made by the markets last week has drawn more than a passing interest and caused me to delve into deep thought.

As I mentioned in the Week in Review the move last week by the Bank of Japan to cut interest rates and enact a new quantitative easing program along with the lack of moves by Indonesia and Australia coupled with the immediate rally in equity markets looks increasingly like a coordinated global intervention to push up equity prices to help Japan.

Looking at other Asian markets there is a flood of hot money roaring through these markets like a tsunami. For someone who was and still is bullish on the equity markets I have to take pause here. The Thai Bhat has rallied down below a crucial support level at 30 and there are calls from the business community to help stem the appreciation in the Bhat as this is hurting FDI and exporters just as the political climate is showing signs of stabilization.

This is more than a short-term issue and this flood of money will cause unintended consequences in 2011 as the Asian growth machine continues to lead the world out of the recession.

Strong growth across Asia, ex-Japan, is fueling inflationary worries as increased purchasing power is driving demand in local markets. The increased demand for products is beginning to fuel the flames of inflation.

But there is a thorn in the side of the central banks as they attempt to stomp out inflation before it takes root and that is Japan.

Continued slow economic growth in Japan is hampering efforts by other Asian central banks to stem the flow of hot money into their capital markets.

A rise in interest rates by Asian central banks would risk creating an enormous carry trade between Japan and the other Asian countries possibly adding further to flows of hot money into Asian equity markets.

But what has me most concerned was a simple picture a few weeks ago of a young Japanese woman putting up a poster extolling the virtues of investing in JGB’s. My concern here is twofold. First, as Japan enters into an environment where their aging population must increasingly redeem their JGB’s and foreign capital markets are unlikely to chase yield in Japan the only pool left to tap is the younger generation. By doing so this pulls money that would go into consumption or the Japanese equity markets.

If the younger generation decides to follow in the path of their parents and buy JGB’s it is unlikely that local participation in the equity markets will rise and create a new bull market in Japanese equities. Just as well, consumption figures will remain low and if consumption does not increase then it is likely that deflation will continue well into the future.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

4th Quarter Investment and Recommended List Thoughts Tuesday, Oct 5 2010 

The low for the year appears to be in and we are in a Presidential Cycle rally which should eventually take us back to the highs made earlier this year.

However, we are into October which is well known for the two previous crashes and not a generally positive month overall. October is one of the worst performing months for Gold so investors looking to add to Gold and Silver positions would be well advised to look for a buying opportunity as it comes becomes available this month.

For equities, it appears as though we are making a short-term top formation as worries are beginning to appear over not just third quarter earnings but the fourth quarter as well.

In addition, we have the unemployment rate on Friday along with 3rd Quarter GDP at the end of the month. Initial estimates have the GDP number coming in under 2% but we may just see a little boost given to the number, which has been the case over the past few quarters, only to see about a percent taken off in the revisions.

Investors would be well served to continue to follow the guidepost I put up at the beginning of the year focusing on blue chip stocks with solid dividends. Large institutions are just beginning to jump back on the dividend bandwagon and small investors would be well served to get aboard first.

With corporate balance sheets flush with cash we are likely to see a push for increased corporate stock buybacks and dividend increases along with increased M&A activity.

In terms of my recommended list, I like a number of global firms.

In Asia I am bullish on agriculture, banking, and stocks connected to automobile makers but not the automobile makers themselves.

In Europe, there are a number of interesting stocks in Greece which have no connection to the sovereign problems with strong dividend yields and are basing at the present time.

The German industrial machine is of particular interest with export demand showing signs of strength.

In North America, I like banks not in the US and oil and gas stocks with strong dividend yields.

Gold and Silver bullion is attractive while the best values in the mining industry continue to be at the exploration level rather than the development or production levels.

Defensive stocks with solid dividend yields will provide excellent value over the final quarter into next year.

You can contact me further details on the recommended list.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

Gold Bullion – On the verge of a major breakout? Wednesday, Sep 8 2010 

Historically, the argument against Gold was that it provided no yield to investors. Stocks, bonds, and cash all provide some sort of yield so Gold as an investment has no merit.

But that view appears to be changing, with volatility in the equity markets, bonds now providing little or no yield (witness the US treasury yield curve and IBM’s latest offering), and money markets and cd’s providing scant yields Gold is looking much more attractive as a place to park cash.

Seasonally, the fourth and first quarters of a year are the most bullish for Gold.

In countries such as China and India which are experiencing strong economic growth Gold is looked at as a store of value. In both countries imports of Gold are rising as citizens view Gold as lucky and a store of value.

Recent news out of Europe indicates market participants are increasingly worried about the stress tests performed on European banks as they are increasingly being viewed as not that stressful at all.

In the US the economy appears to be slowing into a 1-2% growth range, with a budget deficit of over a trillion dollars, new spending proposals, and the Federal Reserve instituting a Zero Interest Rate Policy (ZIRP).

So while we look over the world we see two major areas with slow growth, Europe and the US, and investors rushing to Gold as a safe haven to protect against problems in the banking sector and at the sovereign level.

In Asia strong economic growth is allowing investors to diversify their wealth by purchasing and giving Gold as gifts.

While we may be near a major resistance level, Gold has provided investors with a safe haven in times of trouble. Since its rally from the 2008 lows Gold has seen rising support levels as investors buy on any dip.

Technically, the weekly charts have six straight weeks of upward price movement and may make a slight pullback at this major resistance level. Silver is also outperforming Gold as well which is often a sign that a pullback in both markets is forthcoming.

Investors would be wise to buy Gold on any dips and be ready to allocate some capital before the next leg up starts.

Next week: Gold Equities – Where is the Bull?

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

2010 Investment Thoughts – What I said back in January Monday, Jul 19 2010 

2010 Investment Thoughts
Note and partial disclaimer: My thoughts are not my personal views (politics especially) but how I see
the world unfolding based on the past year and historical trends. My personal views often clash with
my investing views but as I learned long ago, you should not invest with your emotions but rather
invest with conviction based on what is actually happening in the market.
Interest Rates and Currencies
The decision by Australia to raise interest rates is important in that Australia and to a larger extent Asia
will lead the rate raising cycle. Quantitative easing and economic stimulus packages in Asia will be
eased back in the coming 12 months in order to prevent potential asset bubbles down the road.
This is an important step in the decoupling of Asian economies from US and European markets.
Capital market flows have already shifted to Hong Kong as evidenced by the tremendous IPO volume.
No longer do Asian companies need to do a primary IPO in New York as there is sufficient capital
available in Hong Kong and Shanghai to allow for a single IPO in Hong Kong alone.
Going forward INTER-Asian trade will become more important than INTRA-Asian trade and
companies which provide the necessary goods and services will be the winners in the next Asian bull
market.
All of this should have a neutral effect on the USD Index since only the Japanese Yen is included
within the US Index so exchange movements between the USD and other Asian currencies will have
more effect individually than on the USD Index as a whole.
As a point of reference, the Euro makes up 57.6% of the USD Index and the Japanese Yen makes up
13.6%. No other Asian currency has representation and South America has no representation in the
Index.
This obscures the collapse of the dollar, as dollar depreciation will be greatest against emerging market
economies.
US interest rates will not rise in 2010 due to the Congressional elections later in 2010 and the massive
quantitative easing programs still in place. It would not be surprising to see no interest rate increases
before the end of 2011.
Given the amount of debt issued by the US Government this year to fund the budget deficit, combined
with the removal of funding caps on Fannie Mae and Freddie Mac there is no possible way for the
Federal Reserve to raise interest rates without considerably adding to the budget deficit.
If three month interest rates were to rise from the current 9 basis points to 100 basis points what would
that do for the overall interest expense on Treasury debt? Simple example but it drives home a point on
why interest rates cannot rise.
Anyone that trades the Gold and Silver markets knows that when the government is involved as an
invisible hand it makes the market inefficient and obscures the real value over time. The same is
happening now with the US Treasury Yield curve and MBS markets where the Federal Reserve is
buying securities.
The USD will bottom out again around 70 and test the long-term support. The question will be the
response from Central Banks around the world. A retest of long-term support is not bad as support
levels need to be retested in order to build an effective base.
The real story could be coming out of the IBAC countries (India, Brazil, Australia, and China). These
countries have for the most part sidestepped the global recession and have resumed a growth track.
Please note that the IBAC countries have no representation in the USD Index, which as I mentioned
earlier, obscures the depreciation of the US Dollar against global currencies.
I tend to believe that we will begin to see a slow round of interest rate increases across the IBAC
countries and Asia as they end their quantitative easing programs and return rates to normalized levels.
Will the story of 2010 be a decoupling between IBAC + Asia versus Europe + US?
Could the next story be an emerging carry trade where you short US Treasuries and go long Australian
bonds?
Equity Markets
I guess we have to ask ourselves what the drivers will be in 2010. The market appears to be forming a
distribution top which would likely lead to a downturn sometime in 2010. We had massive quantitative
easing, an expected recovery, government stimulus, and a retraction of mark-to-market to drive us from
the March lows. Now we need a new story to push the market higher.
We could see one final move higher but I am worried about the BULL-BEAR data. There is a distinct
lack of bears and an overabundance of bulls. Sometimes this data takes months to play out in terms of
a correction but I think we will see a significant correction sometime before the end of 2010. In fact,
the stock market charts remind me of the 1970’s.
The Dow and S&P appear to be forming distribution tops. Be cautious if you are putting new money
into the market.
I expect the ultimate top to come at a point in time where Gold and Silver are blazing to new highs, the
Federal Reserve announces an end to quantitative easing, and the US Dollar retests its 2008 lows. This
may not happen all at the same time but happen over a period of weeks or a month or so.
The consumer could be the story in 2010 but in order for that to happen we are going to need to see
increased consumer confidence, which will come from businesses resuming the hiring of employees,
which will come from an increase in business confidence.
Non-performing loans continue to cause problems in the US banking sector. In fact, financial stocks
remind me of post crash Internet stocks. Some recovered all of their losses 10 years later but ask the
shareholders of stocks like Microsoft, Cisco, Yahoo, and Intel about their 10-year returns.
There are values but you should not be buying now for a buy-and-hold strategy. If you are trying to
capture the last 10% of a move where you missed the first 70-80% you are better off staying off to the
side and wait for another 70-80% move to come along.
As financial stocks go, so goes the US markets and overseas markets will likely follow.
Growth in employment will determine consumer demand and GDP growth going forward in 2010.
Even if we see a significant drop in unemployment consumers will be cautious for a year until they feel
more comfortable about their futures.
As the US recovers and consumers begin to spend, however the trade balance will weaken as
consumers resume their appetite for foreign made goods.
Buffett buying Burlington Northern is a vote towards much higher oil prices over the next decade.
Remember his comment about the high cost of hauling freight by truck as opposed to rail. Truck costs
rise by a 3:1 ratio over rail due to high gasoline prices.
Stock markets and Gold are likely to top out at the time qualitative easing ends leading to a bear market
that will take everything down by 20%. This will lead to the final bottom before prices begin to head
higher.
Agriculture stocks will continue to do well but you need to search for value. Potash, Monsanto,
Caterpillar, and Deere are safe plays with low returns. The real story lies in the vertically companies
which actually grow, package, and resell their crops to the public. Difficult plays but fantastic gains
last year.
There is still value in these names if you are willing to do your homework.
This is a time to consider drug stocks as the beginning of the next great twenty-year bull market but
there are some very important dark swans not being noticed by Mr. Market that may destroy the
industry in a similar manner to how Philip Morris was hit with class action lawsuits.
It is too early to call the winners and losers in the healthcare bill but any bill that favors Big Pharma
will discourage innovation and necessary industry changes. It now costs more than $1 billion dollars to
bring a drug to market and the process needs to be reformed on both sides (pharma and FDA) if the
industry is expected to grow and meet the demands from an ever increasing aging global population the
process of bringing new drugs to market needs meaningful reform.
Finally, if one goes back to look at decennial statistics years ending in 0 and the early part of the decade
tend to do worse than later years. I have attached two charts from thechartstore.com to put this into
perspective.
Canada’s banking sector could not be stronger. They do face a significant problem which is directly
related to their success and that is an overabundance of equity. As we go forward, it will be difficult to
maintain strong ROE and ROA ratios.
Canadian banks have a couple of choices here. Loosen lending standards and increase risk or return
capital to shareholders in the form of dividends and buybacks. Moving along the current track will lead
to decay and lower returns.
Asian markets have rolled over and yet to recover to their prior highs. I want to see the HSI move to
new highs and begin to lead Asia higher before I consider getting bullish on Asia.
If I had to put myself on the spot, I would be long Gold and Silver through the first quarter at which
point I would switch to Short ETF’s. Oil and Natural gas stocks are interesting especially those stocks
with nice dividends to provide a cushion to a potential decline.
Investors should take a long look at increasing the dividend yield on their portfolio and lowering their
portfolio beta.
Someone buying for a longer-term horizon should really stay on the sidelines for at least a year.
Global Politics
Regional conflicts will flare up in early 2010 around the world. We are already seeing this with an
increased focus on activities in Yemen.
With the close proximity to Somalia, you can expect a greater focus on ship piracy as the world
attempts to find a solution to this regional hot spot.
Sovereign problems are likely to be a non-story in the case of Greece and California. We know the
problems and have known about them for some time now. Unless there is a major surprise, it is likely
that they have little effect on the markets. Talk of the EU collapsing to me is now like ‘The Little Boy
Who Cried Wolf’. Every year there are whispers but will anything ever happen? The cost of an EU
collapse will far outweigh the costs from the housing collapse due to the savings businesses have
realized from tariffs, currencies, etc.
California has been a basket case for at least a decade now and will continue to muddle through as they
have done in the past.
The average loss for a sitting President’s party in the House during his first set of elections is 28 seats.
Look for Democrats to lose a couple of seats in the Senate and somewhere near the average in the
House.
The Republicans have a number of problems hindering their progress.
First, the Republicans have a very weak bench and will struggle to field a full field of candidates. In
2008, the Republican Party was looking for candidates who could fund their own campaign. This is
not a roadmap for success in any election.
Secondly, the Democrats have an almost 5:1 cash advantage in terms of House races. This advantage is
significant and used to defend young Democrats who will face significant challenges in close races.
Finally, NY-23 provided a glimpse into the fractures, divides, and problems within the Republican
Party.
The Republican Party is undergoing an ideological fight for the future of the party similar to what the
Democrats went through after the 2004 elections. The question is will the next head of the party pull
them towards the center similar to Howard Dean after he ascended in 2004 or farther to the right in
advance of 2012.
The party needs to move towards the center and away from the far right if they intend on winning back
the White House in 2012.
Precious Metals and Commodities
Big run in Gold and Silver through the first quarter of 2010. As the year goes on, we turn towards
supply issues with new mines like Penasquito coming online.
If you go back to 2000 and look at a Gold chart, you will notice that Gold tends to move in a 12-18
month consolidation followed by a 6-9 month move up. We are currently in the uptrend and it should
last for another 3-6 months.
For those bearish about gold here is something to consider. The Comex has authorized participants to
deliver GLD shares in the place of physical Gold if a participant requests physical delivery.
Copper is in a seasonal uptrend that usually lasts through the end of the first quarter. Long-term
investors should avoid going long copper right now.
Oil will continue to trade along in opposition to the US Dollar index. As the US Dollar index moves
lower oil should move higher but at some point next year, more than likely in conjunction with
increased worries about the strength of the US economic recovery and a bottom in the US Dollar index.
Natural Gas is moving higher as inventories move lower but should turn around as move into summer
and inventories are replenished. A cold US winter is helping the price.
Base metals are likely to disappoint after a strong 2009. Inventories continue to rise along with prices
which will encourage questionable projects to come back online which should add to supply. If the
market heads lower base metals will be pulled lower.
Sugar had a very good run in 2009. I continue to be long the few publicly traded sugar stocks but
worry about 2010 as the leaders in one year tend to lag the next.
Avoid Argentina mining stocks until the political climate clears.
Real Estate
Canada’s real estate market reminds me of the US in 2003-04. How the banking system reacts to an
oversupply of capital will determine the future course of Canada’s real estate market.
The US real estate market will continue to be constrained by a significant amount of inventory
overhang, Option ARM’s resets, and weak commercial real estate markets. This weakness should
persist for a few more years.
Economic Growth
Slow growth in the USA as the economy continues to adjust to the new environment.
MZM and M2 growth is disinflationary and coming down to normalized levels, which is a very good
sign as it signals a coming end to quantitative easing.
The Federal Reserve cannot begin to wind down its balance sheet until they first end the purchases of
fixed income instruments.
When the balance sheet begins to shrink additional monies will move into the system in the form of
released collateral. When the Federal Reserve started taking toxic assets onto its balance sheet it
required banks to put up collateral and when those toxic assets are sold the collateral will be released.
Downward revisions to 3rd quarter US GDP foreshadow a weak recovery during 2010 and raise the
possibility of a double dip recession if government spending slows before the consumer is ready to take
over the slack.
The continuing obfuscation of US government statistics makes me question the strength of the potential
recovery. From the birth-death model in employment, lack of accurate housing data in CPI, the double
counting home sales, and lack of accurate data on the budget deficit one should question the numbers
coming out of Washington.
Watch how the market reacts to news. There is a difference between how the market should react and
how it actually does react.
Why has the 2009-10 US budget not yet been officially passed and signed into law? Check Wikipedia.
David Urban
davecurban@gmail.com
davecurban@yahoo.com
Communications are intended solely for informational purposes. Statements made should not be
construed as an endorsement, either expressed or implied. This article and the author is not responsible
for typographic errors or other inaccuracies in the content. This article may not be reproduced without
credit or permission from the author. We believe the information contained herein to be accurate and
reliable. However, errors may occasionally occur. Therefore, all information and materials are provided
“AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS
WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND
DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING
HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT
SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE
INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN
BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION
INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND
DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE
SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES,
AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND
ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider
whether the investment is appropriate for the individuals risk profile. This is not intended to be
investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable
or responsible for any losses or damages, monetary or otherwise that result from the content of this
article.

Gold in Uncharted Territory with Silver Following Along Tuesday, Oct 20 2009 

Many reasons have been given for the rise in Gold and Silver during the month of October but overlooked by the mainstream press is an important point; the beginning of the 2010 United States fiscal year. Spending is expected to balloon to upwards of $3.55 trillion dollars with a budget deficit of $1.75 trillion dollars.

It is clear that the next bubble is not in US Treasuries but in the US Government itself. Under Bush II, government was allowed to expand far in excess of what was necessary. Discretionary spending exploded and deficits were allowed to run rampant. Sprinkle in a massive increase in US Treasury issuance along with artificially low interest rates, a touch of monetary supply growth while interest rates were being increased, the collapse of the US real estate market severely weakening the US banking system, and you sow the seeds for the massive increase in government spending we have today.

Three points are certain at this moment in time.

The first is that the United States, with the amount of debt outstanding and coming down the pipeline, is not able to undertake a policy of raising interest rates from these low levels to normalized levels for a number of years.

The second point is that Asian economies, starting with Australia, are going to lead the rate cycle as their economies and banking sectors have weathered the storm in better shape than the US and Europe. Expect to see conventional and unconventional (by Western standards) monetary tightening during this cycle.

The increased focus on Asia will provide investors with very interesting opportunities in a number of sectors.

The third and final point is that Gold and Silver will only go higher from here over the next 6 month period with a spike in price during the March-May time frame after which we trade sideways for at least a year in order to digest the run higher and the increase in gold supply coming on market from new mines coming into production.

The peak in Gold should coincide with a peak in Silver as well along with a test of the USD lows made last year.

In terms of supply, we should remember that Penasquito, Goldcorp’s massive mine in Mexico, is scheduled to come into commercial production in January of 2010. This supply of gold, silver, and zinc should be enough to keep each market in a sideways range for some time until the supply is properly digested.

Investors who do their homework should find themselves well rewarded by the end of the first quarter next year.

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.

4th Quarter Investment Thoughts Thursday, Oct 1 2009 

I would like to start by making a comment on my last article. Globally, there are values in financial stocks in countries not hit as hard as the US and Europe. My bearish stance is US based, not global.

If one takes the time to look they can find good values, especially in Asia and Canada where banks are lending and making solid profits.

Recent home sales numbers were positive. Inventories are being cleared from the system; which given the new wave of resets is a very good sign. There is a question of what will happen in 2010 when the tax credits expire. I have a pretty good idea on how this plays out in the coming year but would like to see more data before my thesis gets solidified. In the meantime, if sales and inventories continue to fall, properties in the grey market will likely come online. The faster this glut of grey market properties work their way through the system the quicker we can return to normal.

The scenario is similar to how tech companies had to wait for equipment purchased by dot.coms who went bust to work their way through the system in 2001 and 2002 before they started to see any growth.

The recent pullback in gold and silver is a pause that refreshes. Gold seems to be tracking the dollar which is headed for a retest of the lows made in 2008 which retested lows made in the 1980’s. The key is what happens next year during the period of time when we retest. Do we dare look back to what happened more than 25 years ago? I have a pretty good idea how this scenario plays out through 2010 but once again need to see more data before my thesis become solidified.

Neutral to bearish in hard commodities. There are some seasonal factors at play here and the technical charts do not look strong at all. An upside breakout would turn me into a bull but I believe each metal, with the exception of gold and silver, needs to take a break and reassess its fundamentals vis-a-vis stockpiles and supply-demand fundamentals.

Agriculture stocks continue to provided fantastic value and returns if you are willing to do your homework.

Sugar should underperform relative to other soft commodities.

The broader market is likely headed higher after a correction but there are better returns elsewhere outside the major indexes. The next group has yet to emerge and assume leadership in the market so what we are seeing is not the beginning of a bull market but rather a correction in a long-term (decadinal) sideways movement.

The Fed statement spoke about extending the mortgage securities purchase program into the first quarter of next year. This is an admission that they will not be able to wind down this program as fast as programs like TALF.

Rates will end up staying low in the Unites States much longer than people expect. I believe that those looking for a rate hike in 2010 will be disappointed.

The real question going forward in monetary policy is ‘Who globally will lead the charge to raise rates?’

Disclaimer
Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.