Investment Ideas and Commentary for Second Half 2011 Sunday, Jun 26 2011 

Investment Ideas and Commentary for Second Half 2011

Advertisements

Endeavour Silver: Solid Growth but Watch for Dilution Risk Thursday, May 26 2011 

http://seekingalpha.com/article/271896-endeavour-silver-solid-growth-but-watch-for-dilution-risk

Endeavour Silver is a core silver stock for investors portfolios without the legal or production issues facing other silver mining stocks.

Iamgold: Solid Quarter With Potential Acquisition on the Horizon Wednesday, May 18 2011 

Iamgold: Solid Quarter With Potential Acquisition on the Horizon

Washington DC has become a Significant Risk to Investors’ Portfolios. Sunday, May 1 2011 

S&P’s warning on the US credit rating and the subsequent refusal to acknowledge the problem should give investors pause.

The inability to tackle the budget deficit and debt problem is causing the Dollar to selloff and head towards levels not seen since late 2009.

The US government continues to follow the thesis posited in my 2011 commentary. Instead of cutting spending, both parties in Congress are fighting to see how little they can cut.

As the debt ceiling deadline approaches, Republicans are being backed into a corner with media outlets calling for doom if the debt ceiling is not lifted and constituents screaming for spending cuts.

The recent FOMC statement highlights the problems coming out of Washington DC as Federal Reserve governors Charles Plosser and Richard Fisher made the following comments in recent speeches:

Richard Fisher’s comments from a speech on April 8th, 2011: http://www.dallasfed.org/news/speeches/fisher/2011/fs110408.cfm

Personally, I felt the liquidity needed to propel our economy forward was sufficient even before the FOMC opted last November to buy $600 billion in additional Treasuries on top of the committee’s pledge to replace the runoff of our $1.25 trillion mortgage-backed securities portfolio. I argued as much at the FOMC table. I considered the risk of deflation and of a double-dip recession to have receded into the rearview mirror.

Charles Plosser’s comments from a speech in Harrisburg, PA on April 1, 2011: http://www.philadelphiafed.org/publications/speeches/plosser/2011/04-01-11_harrisburg-regional-chamber.cfm

Some fear that the strong rise in commodity and energy prices will lead to a more general sustained inflation. Yet, at the end of the day, such price shocks don’t create sustained inflation, monetary policy does. If we look back to the lessons of the 1970s, we see that it is not the price of oil that caused the Great Inflation, but a monetary policy stance that was too accommodative. In an attempt to cushion the economy from the effects of higher oil prices, accommodative policy allowed the large increase in oil prices to be passed along in the form of general increases in prices, or greater inflation. As people and firms lost confidence that the central bank would keep inflation low, they began to expect higher inflation and those expectations influenced their decisions, making it that much harder to reverse the rise. Thus, it was accommodative monetary policy in response to high oil prices that caused the rise in general inflation, not the high oil prices per se. As much as we may wish it to be so, easing monetary policy cannot eliminate the real adjustments that businesses and households must make in the face of rising oil or commodity prices. These are lessons that we cannot forget.

Yet when it came time they voted to continue the same policies they spoke out against exposing them as doves rather than hawks. In contrast, Thomas Hoenig who spoke out against accommodative monetary policy not just in speeches but in FOMC statements as well.

We have the Democrats spending like drunken sailors, the Republicans paying lip service to the reason they were elected to Congress, and a Federal Reserve that cannot define how inflation is created.
At this time one should be reducing the leverage in their portfolios until the investment landscape becomes clear.

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.

Major Danish Bank Failure sets the Stage for the next European Gold Uptick Tuesday, Feb 8 2011 

http://seekingalpha.com/article/251465-major-danish-bank-failure-sets-the-stage-for-the-next-european-gold-uptick

2011 Investment Commentary – Specific Sectors Wednesday, Jan 12 2011 

Position disclaimer: At the present time I am long Gold, Crescent Point, Qualcomm, and Alcoa. I have no positions in the other securities mentioned.

Charts: I would like to thank sharelynx.com, the World Gold Council, Haver Analytics, and Gluskin Sheff for the Dow-Gold and Dow-S&P charts used in this commentary.

2011 will likely start a bit bumpy as the market works off its overbought condition setting the stage for a nice rally to begin in February leading up to the end of QE2 sometime in the second quarter. The second half of 2011 should feature a sideways move into 2012.

I think Financial stocks will continue to underperform. Looking back after the tech bubble many companies never saw their stock prices recover (Cisco, Intel, Dell, Yahoo, and Microsoft are examples). There are still a number of questions concerning foreclosures and a black swan in terms of the balance sheet pricing from the FASB/IFRS.

It is possible that financial stocks begin to outperform but investors need to pick through the sector with care. Do not think that just because the stock is beat up it represents great value. Underperforming stocks are generally underperforming for a reason.

There will be select buys at the regional level but the large money center banks with significant mortgage exposure will likely see continued difficulties in 2011.

Technology in select areas should do very well.

Companies tied to Android rather than Apple in the cellphone/tablet area as Android has matched Apple in terms of OS penetration in the smartphone sector and appears to be well placed to make significant inroads in the emerging tablet sector.

Google may be on its way to winning the smartphone/tablet OS battle segmenting both Apple and Microsoft but it is early yet and the real winner may emerge over the next two years.

In this sector I like Qualcomm as a play on Android.

I continue to like both Gold and Silver in the hard commodity area after a short correction in January. Gold has an absolute floor at $1265 with $1500 being the upside.

For investors wondering when to sell Gold I would like to introduce the following chart showing the Dow/Gold and S&P/Gold ratios.

For my personal portfolios I am using the following ratio system, 5:4:3 for the Dow and .5:.4:.3 for the S&P.

When the Dow/Gold and S&P/Gold ratios reach 5/.5 sell one-third of your holdings, another third at 4/.4, and the final third at 3/.3. Any holdings below 3/.3 should be met with tight stops as this will likely be the mania phase where volatility reigns supreme.

Investors should implement proper risk management systems in order to manage their risk with respect to increased volatility in the Gold/Silver sector.

In terms of Gold and Silver stocks the exploration sector provides the most upside over developers and producers so long as investors look for properties in well established mining districts in safe mining jurisdictions. These properties continue to offer very good value.

The theft of $2 million in Gold from a mine in Brazil should highlight the risks of dealing in Emerging Markets, even ones as advanced as Brazil.

Oil companies with solid dividend ratios continue to be attractive. The same goes for oil service stocks. Strong dividend yields and cash flows should protect investors on the downside while providing a nice additional return on capital. Crescent Point Energy is a very attractive Canadian oil producer who just switched from being a trust to a corporation in Canada. Crescent Point owns a significant portion of the Bakkan oil reserve in Saskatchewan just across the border from the United States.

The substitution effect should begin to take effect in 2011 as high primary commodity prices force investors to seek cheaper alternatives. This has already taken effect with respect to Gold as investors rushed to Silver in the 4th quarter as a cheaper alternative to Gold causing the Gold/Silver ratio to move to pre-financial crisis lows.

As a contrarian trade I like Aluminum over Copper. There are a significant number of people on the long side of the Copper trade and with the price above $9400 Aluminum looks like a bargain at its resistance level of $2500. A move above $2500 would signal a rally to the market. Alcoa, one of the largest global Aluminum producers, has already broken through initial resistance anticipating a move in Aluminum.

The soft commodity sector is especially attractive right now. Agricultural producers in the sugar, palmoil, and soybeans sectors all look attractive for a variety of reason. Palm oil especially as a biofuel in Asia as oil prices rise putting a strain on economic growth.

Fixed income yields should continue to rise until stocks top then fall into the end of the year with the top in yields coming when QE2 ends.

Looking out over the year it appears as though the trade will be long equities until QE2 ends then switch into fixed income securities in the second half of the year.

Manage risk appropriately in this environment. As we saw with the flash crash last year corrections can come quickly and with force. This is a stock pickers market and even in the areas I cited above a rising tide is not lifting all boats.

Just because I mention a stock that I may like or hold does not mean it is appropriate for the reader. As always, do your OWN homework and come to your own conclusions before investing.

Companies like Microsoft and Intel have not had the same returns as companies like Apple and Google. In the Gold sector, juniors producers and stocks like Pinetree Capital have outperformed their large cap producer brethren like Goldcorp.

There are great values in the market waiting to be found if investors are willing to kick the tires and turn over some rocks and stones.

Investors need to manage risk appropriately and do their homework in the respective sectors in which they invest. The landscape in every sector is changing rapidly and companies that were hot and hold dominant positions are seeing those positions usurped by new entrants that are less than a decade old. Some of the new entrants have yet to go public but hold dominant positions in emerging and established industries.

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.

2011 Investment Commentary – Part 2 of 3 Friday, Jan 7 2011 

EQUITY MARKETS

After two strong years equity markets are sitting in a slightly overbought status. Technical indicators are flashing ‘pause’ and sentiment indicators are in areas which usually precede a correction. Looking back over some historical indicators there is reason to be bullish for 2011.

We are currently within the sweet spot of the four year Presidential cycle for the equity markets as the 4th Quarter of Year 2 and the first 2 quarters of Year 3 have the best returns. This means that the current rally should last into April at the very least at which time investors should look to book some profits and take money off the table.

Overlaid on the Presidential cycle is the decennial cycle in which Years ending in 1 are mostly negative.

What may cause the current rally to run out of steam? The end of Bernanke’s QE2 in the second quarter of 2011.

Valuation metrics, while on the high side are still attractive. Global multinational firms are showing strong profits on the back of a weaker dollar and increased sales penetration in the BRIC countries. Both factors should continue to drive profit growth in 2011.

Every 3rd year of the Presidential Cycle since 1939 has been positive which makes it likely that 2011 is an up year as well.

CURRENCY

The US Dollar Index is currently in a trading range with 89 being the top and 70 being the bottom. More than likely the US Dollar Index will end the year higher and closer to the 89 level although a test of the 70 level is not out of the question.

Europe will need a weaker Euro in order to help the PIIGS and refinance debt in 2011. That means a stronger US Dollar since the Euro makes up more than 50% of the US Dollar Index.

The problem with a weaker Euro is that it feeds the German export engine which pushes up German economic growth numbers which will increase calls for removing excess stimulus.

Germany has been experiencing an export boom and strong growth relative to the rest of Europe in 2010. France is experiencing strong consumer led growth as well on the backs of low interest rates. If the Euro were to begin depreciating economic growth in Germany would rise and when combined with the consumption led growth in France would begin to fan the inflationary flames across Europe.

The Dollar will continue to depreciate against most Asian and other EMEA countries. Since these countries are not part of the US Dollar Index the depreciation is invisible to those not watching the individual countries.

China will continue to encourage domestic firms to write overseas contracts in the Yuan instead of Dollars. This is a trend that started about 5 years ago and has been picking up speed. It is mostly off the radar but is important in that global firms, not just Chinese firms, are feeling more and more comfortable dealing in currencies other than the US Dollar.

HARD COMMODITIES

As we enter 2011 precious metals demand will continue to increase driven by the buildout of EMEA economies.

The easy money, however, has already been made in this cycle and investors would be well served to play the substitution effect as high commodity prices for precious metals such as Gold, Copper, Tin, and Platinum will force industrial users to switch to alternative and cheaper metals.

One particular example is Copper whose primary use in electrical wires and residential piping is well known. At $9,000 it becomes more effective for industrial users to substitute Aluminum in electrical wiring and PVC piping in residential pipes. Given the high inventories and lagging price for Aluminum versus Copper there is a good chance the Aluminum outperforms Copper in 2011.

This story should play out across the commodity spectrum as the year goes on.

It is a bit worrisome that so many investors are on one side of a trade, especially with respect to certain hard commodities. When this happens demand destruction and substitution begins to take effect causing a ripple effect across the commodity spectrum.

Gold and Silver should continue to see a flight from investors worldwide seeking a security marking another year of strong gains after a small correction in January.

Oil will continue to climb, moderately, on the back of a strengthening global economy.

Natural gas prices will be constrained my weather and strong production issues. While there may be a strong rally to start the year prices should fall back over the summer months.

FIXED INCOME

The fixed income bubble is continuing with the markets moving from consumer debt, whose debt bubble popped in 2008, to sovereign debt and eventually to corporate debt which will lead to a corporate recession preceded by a mergers and acquisition boom in which corporations lever up their balance sheets and put the enormous amounts of cash to work.

We are likely to see a move upward in fixed income yields as long as QE2 is in effect. Once QE2 ends however, traders will move back into the fixed income space creating a solid rally.

SOFT COMMODITIES

Agriculture will do the best amongst commodities. By agriculture I mean companies that actually grow and harvest their own crops.

The strong La Nina is still in effect and should remain so throughout the year. It will begin easing up shortly but return towards the end of the year.

This means a wetter than expected rust belt and drier than expected southeast and southwest in the United States.

In Asia this will likely mean a dryer than normal northern China and a wetter than normal Southeast Asia and Australia.

The Mount Merapi eruption will not have a major effect on Asian agriculture as the ash that was thrown up into the atmosphere was of a low sulfur content.

Green energy begins to heat up once again as the oil price moves higher.

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.

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.

Bespoke Q&A for 2011 Tuesday, Dec 28 2010 

Bespoke Q&A for 2011
by David Urban
https://dcurb.wordpress.com

1) Looking back on 2010, what were your best and worst calls?

Being long Gold and equities for the first quarter then going short thereafter which was a great call.

Worst call was underestimating the strength of the rally after Bernanke announced QE2.

2) What surprised you the most and least about financial markets in 2010?

QE2 which really propelled the markets back up and probably stopped 2010 from being a down year.

3) What is the one thing that you think has contributed the most to the market rally we’ve
seen off the March 2009 lows?

The sheer amount of dollars the Federal Reserve has unnecessarily pumped into the market.

4) What will be the biggest surprise of 2011?

The continued rally of the stock market, at least for the first half of the year.

5) How long will the current bull market continue?

Very hard to say. The banking sector is not healthy and employment growth is weak. Offsetting that is the Federal Reserve being an elephant in the bond market. If employment growth picks up the bull market will gain more traction.

6) What are the various indicators that you follow closely telling you right now about where
the stock market is headed in the near term (next couple of months)?

We should be cautious because when the market turns it will turn quickly and without much warning. I believe we will see a selloff in January with a rally starting in mid-February.

7) Many of you noted that cloud computing would be a popular area of the market in 2010,
which turned out to be correct. What areas of the market or themes will gain more
popularity in 2011?

Gold and Silver based on the lack of political will to tackle the deficit and spending problems in the US. I think Agriculture will become more of a ‘Main Street’ investment.

8) What do you believe is the contrarian call on equities right now? The economy? Is
investor sentiment currently misplaced?

Aluminum which has high inventories, lots of idled production, and has almost universal bearishness yet is a great substitute for copper in electrical wiring.

If you look at the stock price of Alcoa the smart money seems to be buying into this story.

9) There has been a lot of commentary about the US entering into a “lost decade” similar to
Japan in the 90s. What is your take on this?

The Lost Decade was from 2000 to 2010. If you go back and look at various economic statistics ranging from employment to personal income, amongst others you see that as a whole we really went nowhere. It was a false sense of gains based on cheap and easy credit.

10) In what ways have you had to change your investment strategies over the past couple
of years?

More depth in commodities. I used to be nipping around the edges in agriculture but now have found solid stocks in obscure areas which can be the beneficiary of food inflation globally.

11) What sectors do you believe will perform the best and worst in 2011?

Agriculture will do the best. By agriculture I mean companies that actually grow and harvest their own crops.

Certain technology sectors will outperform and investors need to be selective. Companies that can piggyback off of Google’s Android operating system should do well. In this space I like Qualcomm.

I think Financials will continue to underperform. Looking back after the tech bubble many companies never saw their stock prices recover (Cisco, Intel, Dell, Yahoo, and Microsoft are examples). There are still a number of questions concerning foreclosures and a black swan in terms of the balance sheet pricing from the FASB/IFRS.

To give you an understanding of how opaque some of the proposals are the FASB is considering making the banks give loans and deposits valuations. That would create a complete mess if implemented.

It is possible that financials begin to outperform but investors need to pick through the sector with care. Do not think that just because the stock is beat up it represents great value. Underperforming stocks are generally underperforming for a reason.

12) Financials have been lagging the market for much of 2010. Do you expect this to
continue into 2011? Can the market rally without the Financials?

As long as commodities and profit growth stay strong the market rally should continue into the new year.

13) What’s in store for the US economy in 2011?

Continued slow growth. I think 4% is too high of an estimate for 2011 unless there is significant across the board hiring in the private sector.

14) The consensus seems to think that the employment picture will get better in 2011, albeit
slowly. Do you agree or disagree with this call?

I think employment will slowly improve in 2011. The 2010 numbers were fudged with the government distorting the available for work numbers.

U-6 is a much more relevant statistic.

15) What are the biggest problems that could emerge in the coming year that could derail
the recovery, and how likely are they to occur?

Another terrorist attack of major proportions or the collapse of a government like North Korea. In the event that happens it will take a major socioeconomic effort from Asian countries to reintegrate North Korea into the world. South Korea and China would get a boost from access to cheap labor help which should cool inflation but at the same time there is a massive socioeconomic cost to be paid in terms of reprogramming the population. I think that is unlikely but nonetheless investors should be concerned.

16) Are Ben Bernanke and the Fed helping or hurting the recovery?

Definitely hurting.

Continued regulatory uncertainty from the US Government is not going to win any private sector friends.

The best thing the Federal Reserve could do right now is get out of the way and be a more vocal proponent for business.

The best judge of QE2’s effectiveness is the bond market which has voted by selling Treasuries and raising yields, the opposite effect the Federal Reserve intended.

17) When will the Fed begin to raise rates, and will this be too early, late, or just about
right? (We asked this question last year as well, and rates have yet to change!)

Probably in 2013. I cannot see them restricting credit in 2011 and risk a political backlash if there is a rate hike in 2012.

They will at least wait until the bulk of the problem mortgage resets have occurred which points towards 2012 at the earliest.

18) After a bounce off the lows, home prices and sales have begun to dip again. What is
the reason for this and what’s in store for real estate in 2011?

There is a tremendous aversion by consumers 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.

19) Will the Dollar (US Dollar Index) be up or down in 2011 and why? Is there a serious
threat to the Dollar as the world’s reserve currency?

I think the US Dollar will be up for 2011. Europe will need a weaker Euro in order to help the PIIGS and that means a stronger US Dollar since the Euro makes up more than 50% of the index.

The problem with a weaker Euro is that it feeds the German export engine which pushes up German economic growth numbers which will increase calls for removing excess stimulus.

We are already seeing this in China encouraging domestic firms to write overseas contracts in the Yuan instead of Dollars. This is a trend that started about 5 years ago and has been picking up speed. It is mostly off the radar but is important in that global firms, not just Chinese firms, are feeling more and more comfortable dealing in currencies other than the US Dollar.

20) What are your current thoughts on gold – bubble, just the beginning, or fairly valued?

Gold is fairly valued and I think we are in store for another up year. We may see a push towards $1500 before a significant correction happens then the price recovers for an up 2011. But as of now $1265 is an absolute floor for Gold.

21) Oil doesn’t get nearly the attention it got back in 2006-2008, and it seems to be losing
steam as an asset class that investors want to be in even though it has slightly
outperformed stocks in 2010. What is your take on oil as an asset class in 2011?

So long as Chindia continue their economic buildout oil demand will rise. We have already passed the point of peak oil and in order to fund the capital programs for the new offshore discoveries oil will need to move much higher.

Investors would be well served to pick up oil producers and service companies with solid dividend yields.

22) Which alternative energy sources do you expect to gain the most market share over the
next decade, and what are some of the best ways to invest in these areas?

Sugar. Khon Kaen Sugar in Thailand. They use the entire sugarcane plant to make everything from sugar to electricity to ethanol to fertilizer. So far ahead of the curve globally that it is not funny.

They were caught hedging too early last year and learned their lessons.

23) What is your take on the automobile sector in both the US and abroad? Will the new
GM stock be up or down in 2011? What is your favorite auto play?

Ford is amazing in terms of what they have accomplished without any help from the US Government.

In terms of the automobile sector Asia will provide almost all of the growth and the US will continue to lag.

Ford is my favorite play followed by Thai Stanley Electric who makes headlights for Toyota, Ford, Chrysler, Honda, and others. Slow and steady growth but a great way to play the Asia automobile market.

24) How will the new Congress impact the stock market and the economy in 2011?

Lots of bluster and backpeddling. Notice how the Republicans are already going back on the earmarks promise before taking office. That will be something major to consider for the 2012 election.

25) What is your take on the political environment in the country right now and what
changes, if any, need to occur to make it better? Will politics play a larger or smaller role
in the year ahead?

Worse. The political environment in the US is not very good right now.

I expect a lot of gridlock and political noise will increase as the year goes on as candidates toss their hats into the Presidential ring.

26) Is the country finally serious about the deficit problem and ready to take steps to
reduce it, or are we just seeing more posturing?

I see more posturing. 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 would be to combine an increase in tax receipts (lower capital gains and dividend 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.

27) What are the biggest global threats to the stock market right now, and how much of a
threat are they?

The market getting too accustomed to QE and cheap money.

28) Which countries/regions are you the most bullish or bearish on at the moment?

Bullish on SE Asia based on their role as a producer and supplier of food to the Chindia.

Bearish on Argentina. CDS spreads are pricing in a default, elections coming this year, out of control inflation, and a government that will do whatever is necessary to stay in power.

Last year they raided their Central Bank to pay the bills. That is never a good sign.

Bearish on Australia as well. There are a number of mixed signals being sent out by the economy and they may have a brief recession.

29) China’s stock market has underperformed most of the world in 2010. Will we see
outperformance or underperformance from China in 2011? How do you expect other
emerging markets to perform in 2011?

Difficult to say with respect to China. What is needed is a strong local equity and bond market to soak up the excess liquidity. Historically, a house is seen as a store of value and safety which explains why people are rushing into the housing market. The government needs the Chinese people to view the equity and bond markets with the same safety level as housing. That would allow people to diversify their wealth into other areas than real estate.

30) Will the following be up or down (positive or negative) in 2011? Where noted, what are
your 2011 year-end price targets? The price targets are meant to obtain a “wisdom of
crowds” consensus number from all Roundtable participants.

10% for the S&P and Gold. I am not into market numbers as much as I am individual stocks.

31) Please provide readers with any stocks that you really like right now and for 2011 and
beyond (and why).

Alcoa as a substitution play on Copper and Teck Resources as a substitution play on Tin.

Khon Kaen Sugar and Thai Stanley Electric are stocks I mentioned earlier.

Qualcomm is a great stock to play the growth in Android without having to pay up for Google.

Note: I am long Khon Kaen Sugar, Thai Stanley Electric, Qualcomm, Teck Resources and Alcoa.

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.

Stormy skies ahead Tuesday, Oct 26 2010 

Starting on Friday with the release of US 3rd Quarter GDP the markets will begin a wild and volatile ride. A stronger then expected GDP number could send a signal the the QE2 package to be announced the next Wednesday’s Federal Reserve meeting will be smaller than expected.

Of even more interest will be the Personal Consumption Expenditure number which measures the amount of consumption by US households. A strong increase would be a sign that consumers feel confident in the future.

Personally, my expectation will be for a stronger than expected GDP number which will likely be revised downward anywhere from 0.5-1.0% in November and December.

Once the market takes the weekend to digest the 3rd Quarter GDP numbers and what they mean for election day we will be be hit with the major portion of the storm on Tuesday and Wednesday.

Tuesday is Election Day in the US and rumors are circulating about the Republicans taking back both houses of Congress in what will be a hotly contested election.

Both Democrats and Republicans are making a strong push to the finish line as a number of close races around the country bear monitoring.

In states which allow early voting Democrats are coming out early and strong. This may backfire as a strong early lead by the Democrats could fire up the Republicans to put more effort getting voters to the polls.

On average, the sitting party loses approximately 26 House seats and a few Senate seats in the mid-term election following their election which signals a move to the center in order to win a second Presidential term.

On Wednesday, voters will wake up to a new Congress and later that afternoon the Federal Reserve will unveil their QE2 program followed up by the October unemployment rate on Friday.

As for the markets, it appears as though QE2 and Republican control of both houses have been priced into the market right now and markets appear to be in a topping pattern. We are within 3.5% of the high made in April of this year so it would not be surprising if there was a push towards the old high before the markets sell off into November and the end of the year.

I am basing this on strong bullish ratings from AAII, overbought technical indicators, small investors once again piling back into the market, and a significant portion of good news already priced into the market.

While the market has just experienced a bullish cross and this does bode well for the market in the future it does not discount a potential correction in the near-term which should take us down to the 50 day moving average.

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.

Next Page »