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

Investment Ideas and Commentary for Second Half 2011

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.

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.

Quantitative Easing Program Confirmed by Federal Reserve Friday, Oct 22 2010 

Not content on waiting to reveal to the markets after the conclusion of the November 3rd Federal Reserve meeting, the St. Louis Fed just published an article in the latest Monetary Trends entitled Is More QE in Sight?

A short summary of the article extols the virtues of the first Quantitative Easing program which, according to two recent studies, lowered yields on 10 year Treasuries by approximately 100 basis points.

The article focuses on two successes, the decrease in long-term interest rates and an increase in aggregate spending. The first is that by purchasing securities from the public the interest rate risk is lowered and market rates fall by the size of the risk premium. The purchases are and have been funded by the creation of new deposits rather than the sale of short-term assets.

The second success is less clear in that the Federal Reserve realizes that business spending has been slow due to uncertainty surrounding the economic climate, not high interest rates and that businesses have not been constrained from borrowing and credit is available.

It appears from the one page article that the Federal Reserve’s new QE2 program will be what the market expected in that the Fed will print money and using said money to buy long-term securities.

How successful the program will be is up for debate since the biggest hurdle surrounding the QE2 program is the uncertainty in the residential and business climate.

In a recent poll consumers were asked what they would do with a 10% raise and the top answer was to save or pay down debt, the opposite of what the Federal Reserve desires or needs to happen. The more people choose saving and debt reduction over consumption the more likely we are to continue in the current environment.

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.

The Chinese, Thai, US Bond Markets, and the Equity Markets – Two Ships Passing in the Night? Thursday, Sep 30 2010 

Small investors have fled the stock market since the crash of 2008 seeking safer returns in fixed income despite yields on most US Treasuries below 1%. For the past 30 months investors have poured money in to fixed income investments seeking safety and stability after the 2008 market crash.1 This in turn has pushed yields down to unheard of levels and forced bond managers to chase yield.

Corporate investors have been coming to the market in size as well as signified by recent offerings by McDonalds, Oracle, and Microsoft.2 Corporations, whose balance sheets are already flush with cash are refinancing existing debt or looking to lever up with potential acquisitions on the horizon.

M&A activity is on the rise with corporate balance sheets flush with almost $3 trillion dollars in cash. Over the past few months, companies such as Intel and Unilever have made sizeable acquisitions while the commodity sector is heating up with BHP’s bid for Potash and Kinross’s takeover of Red Back. Even the healthcare sector is getting involved with Sanofi-Aventis pursuing Genzyme.

Even the Federal Reserve is jumping into the bond market by taking principal repayments and expiring mortgage paper and investing the proceeds in US Treasuries.

Overseas, China just issued 50 year bonds and Thailand is considering a 50 year issue as well. This is good news for their respective local bond markets as long dated bond issues increase market liquidity and signify investor confidence.

But as the tide of cash rolls into the market there are investors pulling out. Last week the Chinese government announced that over the past year they have decreased their holdings in US Treasuries by $100 billion dollars while being active purchasers of European and Japanese debt.3 The Chinese may be diversifying their bond holdings much in the same way the Federal Reserve is swapping mortgage debt for US Treasuries or they may be opting to sell before the yields begin to rise.

As a contrarian investor, this is one sign that the bond market is in process of making a top while the stock market may be putting in a bottom. With the stock market currently showing weakness, bond managers chasing yield, and stocks in large cap companies yielding sometimes twice their current bond offerings, investors should look for value rather than chase a trade.

Even with the 2003 tax cuts on capital gains and dividends for the highest tax brackets ready to expire the risk/return ratio is becoming heavily weighted on the side of equities. Small investors would be best served investing in high quality blue chip equities with solid dividend yields that can provide a decent income stream over the coming years.

Any pullbacks during the final quarter of 2010 should be met with buying by small investors looking to chase dividend rather than bond yield.

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 Mid year commentary – Investment Thoughts Thursday, Jul 22 2010 

It was my mantra at the beginning of the year that long-term investors should stay in cash and wait for attractive buying opportunities to come along.

Price-earnings ratios are once again becoming attractive. While they may seem high and nowhere near lows that sparked past bull markets investors would be wise to begin putting together lists of favorite stocks and begin monitoring prices in anticipation of putting cash to work.

We may take 6 months to a year to find a bottom but for investors it is better to well prepared in the event a buying opportunity comes along.

At this moment, we are in a stock pickers market and you should act accordingly.

Globally, markets will likely take their cues from the US and investors should proceed with caution.

Until the US government makes a serious effort to reign in spending investors should have money in Gold and Silver as a hedge against currency debasement and loss of purchasing power relative to the world.

Gold should move to new highs later this year but will likely see some sideways to lower trading action in the near term as we move through the historically weak summer period.

Gold stocks are less attractive to me. They should be trading higher based on a higher gold price but there are some factors restraining stock prices.

First, you have rising costs at mines partly related to the depreciation of the dollar. While we point to the USD Index, the truth is over 50% of the Index is made up of the Euro and I believe approximately 90% is European currencies with little or no exposure to Asia and South America.

Second, gold stocks are aggressively acquiring the remaining low hanging fruit in the exploration area, in many cases with stock. The problem with these transactions is the effect of dilution since the acquired assets have zero revenues.

Personally, I am waiting for a bit of a pullback to the 1175-1150 area with an absolute floor at 1065.

Investors in gold equities should slide down the exploration curve, as there appears to be value at the far low end in the prospecting and drilling areas.

Silver is attractive at the current price but given its volatility relative to Gold and the chance for Gold to pull back, Silver may trade lower over the short-term.

In fact, Silver is completing a very rough and ugly head and shoulders pattern leading me to believe that we may see some weakness in the coming weeks and months.

If commodities in general pull back over fears of a slowing economy both Gold and Silver will find any potential gains limited.

Canadian banks are showing value but again prices may get cheaper over the next six months. The TSX looks oversold as do most Canadian banks.

Asian economies look to continue their recovery and growth. A slowdown in the Chinese economy will defuse talk of a large currency appreciation. Non-correlated Asian markets should do well over the second half of the year but I expect problems in the US to overshadow the growth story and mute any potential large gains.

Stock prices in China and Hong Kong should continue to struggle as IPO’s and bond sales are absorbed.

Avoid South American equity markets over the near term as the difficulties facing individual countries may spill over into neighboring countries causing problems. Some of the problems include the reconstruction efforts in Chile, government and trade problems coming out of Argentina, and a Brazilian economy firing on all cylinders.

While the oil spill in the Gulf continues to provide tremendous amounts of speculation on the ultimate size of liability for BP there are some factors to consider.

Did Exxon go out of business after the Valdez spill? No.

Did any of the cigarette companies go out of business after the government settlement? No.

Does BP have attractive assets worldwide? Yes.

Will they survive? Yes.

No doubt, there will be additional regulation, massive fines, and increased scrutiny over oil and gas operations in the Gulf, Alaska, and all over the lower 48 states but the industry will survive and move forward for the future. As a high-risk investment, BP does look attractive under $30 but remember that this is a high-risk investment. The stock could trade lower if the broader market moves lower over the second half of the year.

***Disclosure note: I own BP stock in my personal account. This is not an endorsement to buy or sell nor should it be taken as such.***

The recent decline was due to portfolio window dressing as I noticed that Gold and certain Asian markets where I trade (which are up for the year) held up and saw buying as the US market (which is down) fell as portfolio managers rushed to tweak portfolios ahead of the mid-year reports.

The rally last week in the US was not met with a similar rally in the markets I follow which, in addition to weak volume, leads me to be very cautious.

It is my opinion that we are still in a topping formation and look to see lower markets through the end of the year with the major indices ending up down for the year.

Personally, I am putting together a buy list of stocks with good dividend yields and earning bases and plan on waiting for the right moment to allocate capital.

In the coming weeks and months I will expand more upon the themes touched on during the first and second parts of my commentary.

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
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