Month: October 2013

By Profit Confidential

If you ask me where the U.S. economy is going, I will say “nowhere.” The U.S. economy is stalling. We have no economic growth.

For a moment, let’s ignore the show being put on by Congress and its effects on the U.S. economy.

According to a study by Fitch Ratings of 361 companies in the U.S. economy, these companies will see their collective capital expenditures decline 1.4% in 2014, following meager growth of 1.4% in 2013. In other words; capital expenditures in the U.S. economy by corporations are flat. (Source: Fitch Ratings, September 23, 2013.)

What does this mean? Capital expenditures are expenses companies incur to expand or improve their businesses; for example, investing in plant and equipment or replacing old technology. If capital expenditures are expected to decline, it suggests one of two things: either companies want to preserve their cash, or companies do not believe investing in their business will increase sales or cut costs.

As investors, we must remember that companies are at the forefront; they’re able to see shifts in supply and demand before the data are compiled and passed onto investors. If they don’t have the confidence to invest in their own businesses, I doubt it means economic growth is ahead.

But a lack of commitment to capital expenditures by American corporations isn’t the only indicator suggesting the U.S. economy is going the wrong way. Consumer spending, which is the backbone of economic growth in the U.S. economy, isn’t impressive either.

The National Retail Federation predicts that in the Halloween shopping period, there will be a seven percent decline in the number of Americans taking part in Halloween shopping as compared to last year—and these Americans will be spending less. On average, consumers in the U.S. economy are expected to spend $75.03 on Halloween-related merchandise this year, compared to $79.82 last year. (Source: National Retail Federation, September 23, 2013.)

Why even think about Halloween spending? Historically, the increase or decrease in Halloween spending by consumers has been a prelude of what to expect in respect to consumer spending in the ensuing holiday shopping period (Thanksgiving, Christmas).

Consumers in the U.S. economy are becoming cost-savvy. We heard during the back-to-school period that retailers had to give extra discounts to lure in consumers. The same will need to happen during the holiday shopping season—lots of discounts. But the more retailers discount, the less money they make and the more pressure there is on their stock prices.

Economic growth? We just don’t have it. And key indicators are suggesting we won’t have much of it going forward, either.

But have no fear, dear reader. This morning we heard the news that President Obama will nominate Janet Yellen to replace Ben Bernanke as head of the Federal Reserve. My bet, from what I have read on Yellen, is that because the economy is weak and getting even weaker, the paper money printing tap will not be shut off for a long, long time.

The 2013 third-quarter corporate earnings reporting season is about to begin. Going into it, we already have dismal information. Of the S&P 500 companies, 89 have issued negative outlooks about their corporate earnings for the third quarter and only 19 have issued positive guidance. The percentage of companies issuing negative corporate earnings guidance is the highest ever recorded—82%. (Source: FactSet, October 1, 2013.)

The 933-point drop in the Dow Jones Industrial Average since September 19 shouldn’t be taken lightly; I think it has less to do with the antics in Washington and more to do with the suddenly slowing U.S. economy.

Article by profitconfidential.com

By Profit Confidential

If there ever was an environment illustrating how risky and tough resource investing can be, the current conditions for gold stocks are the textbook example.

Resource investing is a risk-capital only endeavor. When it comes to equities, resource-related stocks should never make up the core of a long-term investment portfolio. In almost all cases, even the fastest-growing, best-managed gold stocks still perform commensurately with the underlying spot price.

One of the best junior gold mining companies I know of is Argonaut Gold Inc. (TSX/AR). The company has growing production, but the stock is way down and can’t generate any momentum.

One of the best silver companies I know of is Endeavour Silver Corp. (EXK). In the second quarter of 2013, the company’s revenues grew to $71.1 million, compared to $40.4 million. Total silver production was up 48% to 1.5 million ounces in the most recent quarter, with gold production up 159% to 19,914 ounces.

Like Argonaut, Endeavour Silver is trading near a multiyear low on the stock market. It’s followed the spot price of silver almost exactly, falling consistently in value since the beginning of 2012.

While both companies don’t seem to be doing so well on the charts, they are both good mining companies. They have growing production, are keeping cash costs below industry growth rates, and their stocks are very reasonably priced.

The problem is they will stay reasonably priced so long as the spot price of yellow precious metal either remains flat or goes down. That’s the way it works in the gold mining business. The entire industry comes down to one financial metric—the spot price.

In the large-cap space, Newmont Mining Corporation (NEM) is trading pennies off its 52-week low, having lost more than half its value on the stock market over the last two years.

And the same goes for Barrick Gold Corporation (ABX). The company is now delaying plans for mine expansion, and the company’s management team cites only one reason for its lack of progress—the spot price of gold.

So, there is a lot of investment risk when it comes to investing in mining companies. Even the large-caps with seasoned management are 100% vulnerable to the action in spot prices. They, too, are risk-capital securities. (See “Business Stalls for Equipment Manufacturers; Outlook for Precious Metals Companies Flat.”)

Therefore, if you are considering investments in the gold mining industry, a greater analysis of the potential for rising spot prices is worthwhile. From my perspective, I don’t see gold prices moving up anytime soon unless there’s some geopolitical event.

There is, however, decent value in many gold mining stocks at this time, and the potential for turnaround situations is improving. But it definitely is a risky trade and a little too early, with spot prices where they are and institutional investors out of the sector.

Practically, I think most investors would be better off just betting on the spot price as desired. With so many options available like exchange-traded funds (ETFs), you can even trade in a leveraged capacity.

Speculating on gold is only worthwhile when there is a clear up-cycle in prices. I don’t know where gold prices are going to go, but I do know that mining stocks aren’t going anywhere without a more favorable spot price environment.

Article by profitconfidential.com

By Profit Confidential

Thinking of investing in the mobile market? You could try to play the mobile market through cell phone manufacturers and decide which company—Apple Inc. (NASDAQ/AAPL), Samsung Electronics Co. Ltd., Microsoft Corporation (NASDAQ/MSFT), or the slew of other players in this sector—is the best buying opportunity.

At this time, Apple is tops in the United States, but Samsung is the global leader, and may perhaps be a better buying opportunity because of this. On the other hand, Microsoft is the up-and-comer that could make some ground if its acquisition of the cellular assets of Nokia Corporation (NYSE/NOK) is approved—which could make this stock a good buying opportunity. (Read “Why I Like Microsoft’s Proposed Acquisition of Nokia’s Cell Phone Business.”)

However, my thinking is to look at some of the third-party suppliers of products and solutions to the mobile market as an alternative buying opportunity to play the growth of the mobile market.

In this regard, a stock that I have followed for a while is small-cap Synaptics Incorporated (NASDAQ/SYNA). This is the company that supplies some of the touchscreen interface technology used on the Apple “iPhone” and Samsung “Galaxy” devices, along with the touchscreen technology used for “Windows 8.”

In fact, Synaptics has supplied its interface solutions to over one billion devices, according to the company’s web site. These devices include mobile phones, notebook computers, personal computer (PC) peripherals, and portable entertainment devices.

Synaptics is also working on a revolutionary technology that combines its touchscreen solution with the eye-tracking and gaze applications of Tobii Technology. The combination of the two technologies is currently being tested on a prototype laptop. (Source: “Tobii and Synaptics Unveil Concept Laptop That Integrates Eye Tracking and Touchpad User Interface Controls,” Synaptics Incorporated web site, June 25, 2013, last accessed October 8, 2013.)

The company has beaten the Thomson Financial consensus estimates in four straight quarters, which has driven buyers to the stock, recently pushing it to a new 52-week high.

But despite the steady rise in the stock, Synaptics is still a possible buying opportunity with a decent valuation trading at 11.8X its estimated Thomson Financial earnings per share (EPS) of $4.03 for fiscal 2014 (ending in June). The price-to-earnings-growth (PEG) ratio of 1.0 is also attractive for a growth stock and is based on a conservative five-year average annual earnings growth rate of 11.67%, according to Thomson Financial. Again, this suggests a possible buying opportunity.

Take a look at the chart of Synaptics below. The biggest years for the stock were from 2003 to 2007, when its interface solutions started to catch on in the marketplace. The last few years have seen the stock stall, but there was a recent breakout at the top resistance level that could point to higher gains and a possible buying opportunity, based on my technical analysis.

Chart courtesy of www.StockCharts.com

I believe Synaptics has tons of upside potential and could be a possible buying opportunity due to its established leadership position in the touchscreen interface market. For investors looking for above-average price appreciation potential, Synaptics may be worth a look.

Article by profitconfidential.com

By Profit Confidential

Let’s face it: the U.S. housing market is still under severe stress. No matter how the bulls may spin their argument, it’s far from a real recovery. The historical fundamental factors behind a typical housing market recovery are still missing.

According to real estate information company Zillow, in the second quarter of this year, almost 24% of all homes with a mortgage in the U.S. housing market had negative equity (the homes were worth less than the mortgage issued on them). More than 12 million home owners in the U.S. economy remain “underwater.” And in some geographical pockets, the spread between the mortgages and the values of the homes is very wide; in the Las Vegas area, almost 13% of home owners with a mortgage owe two times the amount of their home’s current value! (Source: Zillow, August 28, 2013.)

Sadly, the misery in the U.S. housing market doesn’t just end there.

The delinquency rate on single-family residential mortgages at all commercial banks stood at 9.41% in the second quarter of 2013. Yes, it has declined a little from 9.7% in the first quarter of this year, but it still remains very high compared to the historical average. (Source: Federal Reserve Bank of St. Louis web site, last accessed October 7, 2013.) The average delinquency rate on single-family residential mortgages from 1991 to 2006 was only 2.2%.

These negative factors working against the housing recovery are just a few of many.

Since 2012, the majority of activity in the housing market has been the result of investors buying up homes, renovating them, and renting them out. We didn’t really see the average American Joe buying a house to live in, as the activity in one indicator of the housing market I follow—first-time home buyers—has been lagging.

Since U.S. homebuilder stocks reached their peak earlier this year, they have declined almost 25%. The chart below shows their demise.

Chart courtesy of www.StockCharts.com

In the chart above, if you look at the moving average convergence/divergence (MACD)—an indicator of momentum—it indicates that some investors/speculators were buying homebuilder stocks in the beginning of September, but then the buying momentum faded. What really surprised me is that the Federal Reserve’s announcement that it would not taper did not result in the homebuilder stocks rallying!

I remain skeptical. All the talk we hear in the mainstream about the housing market being strong and robust, I just don’t buy it. Sure, I completely agree home prices in the U.S. economy have increased; but they had to increase, because they fell off a cliff! Home prices are still far from their 2006 highs, and the “recovery” in the housing market is very suspicious to me.

Article by profitconfidential.com

By www.CentralBankNews.info     South Korea’s central bank held its base rate steady at 2.50 percent, as widely expected, saying exports were “showing buoyancy and domestic demand also improving,” helping the country’s moderate economic growth to continue.
   The Bank of Korea (BOK), which last cut its rate by 25 basis points in May, struck a relatively optimistic tone about the global economy, saying the recovery in the United States had been sustained, sluggish activity in the euro area appeared to be easing and the trend of growth in emerging market countries, above all China, had shows signs of recovery to some extent.
    But although the BOK expects the global economy to “sustain its modest recovery going forward,” it added that uncertainties surrounding the U.S. government budget and debt ceiling increase along with likely changes in global financial markets related to a tapering of quantitative easing by the Federal Reserve were “acting as downside risks to growth.”
    South Korea’s Gross Domestic Product rose by 1.1 percent in the second quarter from the first for annual growth of 2.3 percent, up from 1.5 percent in the two previous quarters.
     In its latest economic outlook, the International Monetary Fund (IMF) maintained its forecast for Korea’s economy to expand by 2.8 percent this year while it trimmed the 2014 forecast to 3.7 percent from a previous 3.9 percent. The 2015 forecast was unchanged at 4.0 percent.
    In July the BOK raised its 2013 growth forecast to 2.8 percent due to the government’s 17.3 trillion supplementary budget from May, passed in response to a sluggish recovery and the additional competitive pressure on South Korea’s exporters from a rise in the won currency against the Japanese yen, which fell in response to the Japan’s aggressive monetary easing.
    The BOK said domestic financial markets had been stable in light of the unchanged scale of asset purchases by the U.S. Federal Reserve and the won had appreciated, driven mainly by net inflows of foreign stock investment funds.
    Headline annual inflation in Korea fell to 0.8 percent in September from 1.3 percent in August while core inflation, excluding agricultural and petroleum prices, rose to 1.6 percent from 1.3 percent.
    The BOK forecasts average inflation of 1.7 percent this year and targets inflation of 2.5-3.5 percent.

    www.CentralBankNews.info

By MoneyMorning.com.au

Sorry for the delay, but we’ve got a good excuse.

We caught up with Revolutionary Tech Investor technology analyst Sam Volkering by Skype from his home in London.

We wanted to find out the latest details on what he’s been up to and discuss some of the latest themes in Revolutionary Tech Investor – digital money and cyber security.

Both are fascinating subjects, and surprisingly investable. As you can imagine, when it comes to digital money the biggest issue is providing a secure currency to protect it from counterfeiters.

Of course, counterfeiting the currency is something the US Federal Reserve excels at, and based on the expected nominee for the role of Fed chairman, the Fed’s counterfeiting (money printing) looks set to ramp up even further next year…

You may have seen the news overnight that Dr Janet Yellen appears set to become the US Federal Reserve’s next chairman.

This was just the boost stocks were looking for. Why? Because Dr Yellen is a known advocate of money printing…and that means good news for stocks. Simple.

In a March speech, Dr Yellen said:

‘The purpose of the new asset purchase program is to foster a stronger economic recovery, or, put differently, to help the economy attain “escape velocity.” By lower longer-term interest rates, these asset purchases are expected to spur spending, particularly on interest-sensitive purchases such as homes, cars, and other consumer durables.‘

We like that term, ‘escape velocity‘. It makes us think of a rocket trying to burst free of the Earth’s gravity. In order to do so, it takes a lot of fuel. In order to deliver a satellite weighing 10 tonnes into space the European Space Agency’s Ariane 5 rocket needs to burn 370 tonnes of fuel.

It manages to do that within 12 minutes of take-off! If the Fed wants to achieve the same kind of ‘escape velocity‘ to lift the economy out of the doldrums it will need to expend a similar amount of ‘monetary fuel’.

Investing is All in the Mind

Of course, let’s be realistic about this. There’s no guarantee the Fed’s money printing program will ever work. In fact, we’re convinced it won’t work. But that doesn’t mean stocks won’t rise on the perception that it will work.

It’s all about investor psychology. And as you’d expect, Dr Yellen perfectly understands the importance of investor psychology. Take this from the same March speech:

‘Research on the effects of such asset purchases suggests that what matters for the reaction of longer-term interest rates to a purchase program is the extent to which the program leads market participants to change their expectations concerning the entire path of the Federal Reserve’s holdings of longer-term securities.‘

You see. It’s not just about whether the program actually works; it’s about whether traders and investors think it will work. If they think it will work then they’ll keep buying stocks. If they don’t then they won’t.

This is something we’ve tried to explain in Money Morning in recent months. It’s why we’ve continued to buy stocks and advise you to buy stocks in the face of fierce criticism.

But we’ll continue to stick to our guns on this. Stocks never rise or fall in a straight line. You’ll always get periods of volatility. Stocks rise, stocks fall. That’s what they do.

So while we won’t tell you to ignore the panic-merchants in the mainstream who have gotten their knickers in a twist over a 3% fall, we do advise you to keep things in context.

Because, as we continue to see it, there’s no way Dr Yellen will veer off the current course of expanding the money supply and buying government bonds in order to try and boost the economy.

Don’t Let a Crisis Stop You Making Money

All that said, after the past six years you know not to take anything for granted.

And when people gain high office and new powers, sometimes the power goes to their head. They can get the urge to do and say things that they previously wouldn’t.

Power does strange things. So does the desire to create a legacy.

Could it be possible that after years of talking up the virtue of printing money and buying government bonds that Dr Yellen will suddenly do a 180 degree turn and say things can’t go on this way?

We doubt it. But it’s possible. If you’re in the habit of looking for ‘Black Swan’ events, this is one you should put at the top of your list…just on the off chance.

But all up, we don’t see things changing much. Central banks and governments will continue their experiment to try and engineer steadily rising asset prices. They don’t want the market to bust, but they don’t necessarily want an irrational boom either.

Their goal is to engineer the market that will eventually remove all risk from asset prices. Their dream asset price chart is one that moves from the bottom left to the top right in a steady and predictable fashion.

But until they achieve that goal asset prices will stay volatile, and that will give you the chance to buy stocks at a discount on short-term pull backs.

The market is down again this morning. Do we care? No, it just means investors are worried about something. The good news is that we know what’s worrying them – the US debt ceiling, budget deadlock and the potential for the US government to default on its debt.

The even better news is that we know that no US politician will do anything that would result in the US defaulting on its debt. That means they’ll reach a resolution and by the New Year stocks will be higher than they are today.

We know today’s Money Morning will see our mailbag bursting at the seams again with irate people telling us we don’t understand the impending disaster. We do understand it, but that doesn’t mean we shouldn’t try to exploit the chance to make money from these volatile markets while we’re waiting for it to happen.

Cheers,
Kris+

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Special Report: UNAVOIDABLE: Australia’s First Recession in 22 Years

By MoneyMorning.com.au

Gold took quite a beating in September, bucking its seasonal average monthly return of 2.3%. The political battle between President Barack Obama and Congress, China’s Golden Week, and India’s gold import restrictions likely weighed on the metal.

September’s correction only adds to the negative sentiment toward the precious metal. The assumption from many market pundits is that gold is no longer attractive as an investment. With rising rates and continuing low inflation, US investors believe they have a solid case for selling their holdings.

However, this could be a premature assessment, causing these bears to potentially lose out on a lucrative position.

Allow me to use an ice cube to explain.

One of the strongest drivers of the ‘fear trade’ is real interest rates. Whenever a country has negative-to-low real rates of return, which means the inflationary rate (CPI) is greater than the current interest rate, gold tends to rise in that country’s currency. And our model tells us that the tipping point for gold is when real interest rates go above the 2% mark.

Consider the ice cube, which shows how new equilibriums can have significant effects. At 0 degrees Celsius, H2O is a solid chunk, but when the temperature increases, the mass slowly begins to turn into a liquid. Above 1 degree, ice changes form from solid to liquid, but it’s still made of hydrogen and oxygen.

Because money is like water, when many other economic dynamics, such as population growth, urbanisation rates and changes in government policies, reach their tipping point, the velocity of money tends to be altered.

As global investors, we watch for changes in these trends to know how to invest in commodities and markets, find new opportunities and adjust for risk.

How Close to Gold’s Tipping Point Are US Investors?

In other words, what is the real interest rate today? As you can see below, US Treasury investors continue to lose money, as the 5-year bill yields 1.41 percent and inflation sits at 1.5 percent. This is nowhere near the 2% mark.

Click to enlarge

I would be worried about gold if real interest rates solidly crossed the 2% threshold for an extended amount of time, because it would have a dramatic effect on gold. as an asset class. In a high interest rate environment, gold and silver lose their attraction as a store of value.

In order for that tipping point to happen, rates would need to continue rising above inflation, and inflation would need to remain low. These are the forecasts made by many gold sellers today; however I wouldn’t get too trigger happy just yet, as recent data challenges these assumptions.

Take the monthly [US] unemployment figure, which is one of the primary indicators the Federal Reserve studies when evaluating the economy. But depending on the definition of an unemployed person, the numbers reveal different results.

The official U3 unemployment rate, the exact figure Ben Bernanke uses, tracks the total unemployed as a percent of the civilian labour force.

The broadest gauge calculated by the Bureau of Labor Statistics (BLS) is the U6 unemployment rate. For this number, the BLS adds in all those people who are marginally attached to the labour force, plus people working part-time who want to work full-time.

What does ‘marginally attached to the labour force’ mean? These people are neither working nor looking for work but indicate they want a job, are available to work and have worked during some period in the last 12 months. These marginally attached people also include discouraged workers who are not looking for work because of some job-market related reason.

Then there’s a measure of the labour market the BLS tracked prior to 1994. This is the seasonally-adjusted alternate unemployment rate that statistician John Williams continued to calculate. It’s basically the U6 plus long-term discouraged workers.

While the figures closely followed one another from 1994 through 2009, there’s recently been a shift. U3 and U6 have been trending downward over the past few years, whereas Williams’ ShadowStats unemployment rate shows a noticeably upward trajectory. Perhaps the official unemployment figure overstates the health of the economy?

Click to enlarge

Based on the jobs market, a limited housing recovery and regulations that have been slowing down the flow of money, the Federal Reserve may have no choice but to raise rates very gradually to keep stimulating the economy.

Figures Don’t Lie, But Liars Figure

Then there’s the suggestion of inflation manipulation. Even though the US has been reporting a low inflation number, things feel more expensive to many Americans. Disposable income has been growing less than inflation in recent years; perhaps that’s why many people feel ‘squeezed’.

Also consider Williams’ chart below. It shows monthly inflation data going back for more than a century. The blue and grey shaded areas represent BLS’ historical Consumer Price Index (CPI).

You can clearly see the wild swings of inflation and deflation, especially during the First World War, the Great Depression, and the Second World War, as well as the stagflation of the 1970s and early 1980s.

However, shortly after disco, bell bottoms, and episodes of All in the Family faded from memory, the US adjusted CPI not once but twice, first in the early 1980s and again in the mid-1990s. If you use the pre-1982 calculation, you end up with a much different inflation picture. This is the area shaded in red.

Click to enlarge

Way back in 1889, statistician Carroll D. Wright, in addressing the Convention of Commissioners of Bureaus of Statistics of Labor, talked about the impartial and fearless presentation of its data, using the above play on words. He said:

‘The old saying is that ‘figures will not lie,’ but a new saying is ‘liars will figure.’ It is our duty, as practical statisticians, to prevent the liar from figuring; in other words, to prevent him from perverting the truth, in the interest of some theory he wishes to establish.‘

Wright’s speech seems particularly relevant today.

For patient, long-term investors looking for a great portfolio diversifier, a moderate weighting in gold and gold stocks may be just the answer. And, today, when looking across the gold mining industry, you’ll find plenty of companies that have paid attractive dividends, many higher than the [US] 5-year government yield.

Frank Holmes
Contributing Editor, Money Morning

Publisher’s Note: Figures Don’t Lie, But Liars Figure originally appeared in The Daily Reckoning USA

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By www.CentralBankNews.info     Brazil’s central bank raised its benchmark interest rate for the fifth time in a row, repeating that it expects the decision “to contribute to bring down inflation and ensure that this trend will continue next year.”
    The Central Bank of Brazil, which raised its Selic rate by 50 basis points to 9.50 percent, as expected, has now raised rates by 225 basis points this year to suppress inflation. Last year the central bank cut rates by 375 basis points to stimulate waning economic growth.
    As in previous months, the decision by the central bank’s policy committee, known as Copom, was unanimous and no guidance or bias about future moves was indicated.
   Brazil’s inflation rate continued to drop in September to 5.86 percent, its third monthly decline since hitting a 2013 high of 6.7 percent in June, from 6.09 percent in August.
    But it is still in the upper end of the central bank’s target range and economist expect the central bank to raise its rate further. The central bank targets inflation of 4.5 percent, plus/minus two percentage points.
    Last month the central bank cut its forecast for inflation this year to 5.8 percent from 6.0 percent but raised the 2014 forecast to 5.7 percent from 5.4 percent.

   Brazil’s economy appears to be reacting to the central bank’s stimulative rate cuts with Gross Domestic Product expanding by 1.5 percent in the second quarter from the first, with annual growth accelerating to 3.3 percent from 1.9 percent in the first quarter.
    However, in its quarterly inflation report the central bank revised down its growth estimate for this year to 2.5 percent from 2.7 percent . The International Monetary Fund (IMF) this week maintained its 2013 growth forecast at 2.5 percent but cut its forecast to 2.5 percent form 3.2 percent.
   
    www.CentralBankNews.info

By J.W. Jones – OptionsTradingSignals.com

By now the major media outlets have made sure to inform the public that the U.S. government is shut down, or partially shut down depending on your political perspective. Most financial pundits are looking to the recent past for clues about what to expect in the future.

While the situation appears to be similar to what we witnessed in 2011 with the debt ceiling debacle, the outcomes may be significantly different. I am a contrarian trader by nature, and as such I am constantly expecting for markets to react in the opposite way from what the majority of investors expect.

A significant number of financial pundits and writers all have a similar perspective about what is likely to occur. It seems most of the financial punditry believe that until there is a resolution in the ongoing government debacle, market participants should expect volatility to persist. Some of the talking heads are even calling for a sharp selloff if no decision on the debt ceiling is made by early next week.

The debt ceiling decision needs to be made by midnight on October 17th otherwise the first ever default on U.S. government debt could occur. Thus far, the volatility index (VIX) has moved higher as investors and money managers use the leverage in VIX options to hedge their long exposure.

As can be seen below, we are seeing the VIX trade at the second highest levels so far in 2013.

The volatility index (VIX) is clearly sending a warning signal about risk in the S&P 500 Index based on price action. However, that warning signal relies on current uncertainty in the marketplace. Most sell side analysts and economists believe that once a deal is done, risk assets will rally. What happens if they are wrong?

Trying to play a fool’s game by calling future price action correctly without supporting facts in hopes of being right is not honest analysis or commentary. Instead, why wouldn’t investors put the situation in context using information available from calculations derived from option chains? I want to be clear in saying I have no earthly idea what is going to happen once a deal is reached or when said deal will be reached. I have no idea!

Readers should be completely leery of anyone trying to tell you what is going to happen with supposed certainty. Whether they want to admit it or not, no one in the financial punditry knows for sure what is going to happen.

I believe that the options marketplace is much more competent about future price action than some financial pundit or sell side analyst that is trying to push their book of assets. As such, the S&P 500 Cash Index (SPX) option chain is shown below:

As can be seen above, the probability that the SPX 1,620 October 10/25 Put expires worthless is roughly 68%, or 1 standard deviation from Wednesday’s closing price. The probability of the SPX 1,685 October 10/25 Call expiring worthless is also roughly 68%, or 1 standard deviation to the upside from Wednesday’s closing price.

As of the closing bell on Wednesday, October 9th the SPX options chain is telling us that there is a 68% probability that price will stay between 1,620 and 1,685 by the close of business on Friday, October 25th.

Where the probability analysis gets interesting is when we look at a 2 standard deviation move which gives us a near 90% probability of being accurate with our expected price range. The 2 standard deviation move from the October 9th close on the put side is 1,525. The 2 standard deviation move from the October 9th closing bell on the call side is 1,720.

Thus, as of the closing bell on Wednesday, October 7th the SPX options chain is telling traders that there is a 90% probability that the S&P 500 Cash Index (SPX) will close on October 25th between 1,525 and 1,720.

This analysis gives us some expected price ranges for the S&P 500 in the near future. However, there is something I want to point out to readers about what the SPX option chain is telling careful observers. As of the close of business on October 9th, the S&P 500 Cash Index closed the day at 1,656. At this point we need to revisit the previous price ranges.

The one standard deviation (68%) price range is shown below:

As can be seen, the 1 standard deviation price range is centered fairly well with the closing price on 10/09. However, it should be noted that the SPX options chain is implying slightly more risk to the downside. Consequently, something rather significant occurs when we look at the 2 standard deviation (90% probability) expected range for the SPX options chain.

The two standard deviation price range is shown below:

The upside expectation that has a 90% probability of being accurate implies a 3.86% increase potential by October 25^th. However, the 90% probability of being accurate to the downside implies a -7.91% move. Clearly the option market is telling us that the marketplace believes there is much more possible risk to the downside.

The question I would pose to readers and financial pundits alike is the outcome no one is talking about. What is the least likely outcome for the markets to traverse? In my humble opinion, the least likely expectation would be that we get a resolution regarding the government shutdown and the debt ceiling. Then as expected risk assets rally sharply higher, only to reverse and selloff sharply a short time later.

That would be the least likely scenario that market participants would expect and a large downside move is being priced into the S&P 500 Index option chain. I want to reiterate that I have no idea what is going to happen, but what I do know is the S&P 500 Index options are telling us that it is possible for a large selloff to potentially occur.

The most important question of all is what source of information is more credible? Is information coming directly from the marketplace in an extremely liquid underlying asset like SPX options credible? Or is a financial pundit trying to push their book of assets or their firm’s book a more likely source of honest information? I will let readers decide.

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Source: Kevin Michael Grace of The Gold Report (10/9/13)

http://www.theaureport.com/pub/na/greg-mccoach-says-keep-the-best-and-dump-the-rest

Greg McCoach, publisher of Mining Speculator newsletter, is not ashamed to admit he has taken a big hit in juniors in the last couple of years. What he has done in response is what he advises all investors to do in this interview with The Gold Report: Get rid of the also-rans and keep and build positions in those companies that have what it takes to gain in multiples when the market recovers. And he suggests six companies that could do just that.

The Gold Report: You wrote recently, “The 2008 crisis will pale in comparison to what is now on the horizon.” Given that the 2008 crisis nearly destroyed the world economy, how bad will the next crisis be?

Greg McCoach: The derivative issues were never fixed after the last crisis. In essence, the laws were changed so that the banks didn’t have to keep derivative liabilities on their books. That way, bank stocks could soar again. But the banks have acted even more recklessly since 2008 and are now in bigger trouble. The recent White House meeting with all the big financial players should be a warning to investors that something big is about to hit. The media touted this as a meeting to discuss the debt ceiling, but I would say it was about the crisis that is about to envelope the big banks again. Barack Obama didn’t run that meeting, JP Morgan Chase ran the meeting and told everyone what was coming. The banks don’t have the capital to cover their interest rate derivative problems that are as big as the Pacific Ocean. I would tell investors to expect ten times worse conditions from what we saw in 2008.

TGR: I’ve read that even if only 4% of the derivatives held by the banks are at risk, and only 10% of that goes south, it would completely wipe out the net worth of the top five banks.

GM: At this point, the acceleration of what I consider tyrannical measures on the part of the U.S. government has reached such a degree it’s obvious that something is coming. Why would it buy billions of rounds of hollow-point ammunition? Why is it buying millions of ready-to-eat meals? Why would it take all these extra security measures? Obviously, the U.S. government knows more than the general public does and it reveals something is wrong and the government is worried about it.

TGR: We had this situation after the scandal with HSBC Holdings Plc (HSBA:LSS; HK5:HKG) where the U.S. Department of Justice admitted that criminal acts were probably committed, but prosecution would be unthinkable because the big banks cannot be allowed to fail.

GM: Well, that pretty much tells the story right there. The bureaucrats, Rebooblicans and Dumocrats, as Jim Willie says, don’t represent the people of America anymore. They represent themselves and their elitist banker puppeteers. They’re trying to control the message and all the outcomes. It’s a train wreck in process, but you have to tip your hat to them—they have been able to keep it together for so long. We could have experienced the end game at multiple occasions in the past 12 years, but it now seems to me that the limits of their good fortune are quickly coming to a close.

If you’re just watching CNN and FOX News, you’re oblivious to what’s really going on. But if you’re a thinking person, you should start getting together food storage and get your investments in line for the major problems ahead. I can’t tell you when it’s going to happen because I don’t have a crystal ball, but it’s not a matter of if this is going to happen; it’s just a matter of when.

TGR: What will be the warning signs of the next crisis?

GM: The warning signs are all around us right now and have been for the last six months. The big meeting at the White House with all the financial people I already mentioned was a huge sign. The erratic behavior lately of the U.S. government with the Middle East, particularly Syria, is also a sign. In recent weeks we have heard about a worldwide currency reset that is to take place in the very near future. This is telling those who have ears to listen that the Keynesian fraud of creating monies out of this air has reached a limit so they need to reset.

All of this means that we’ll wake up one morning and life will be very different. You’ll see markets performing erratically. You’ll see civil unrest. Most people think it will have something to do with another banking crisis, a derivatives situation. It could be a new war. I think things could happen quickly and take us down a very dark path. All we can do is prepare for ourselves and our families. You have got to own physical gold and silver that is in your possession.

TGR: The macroeconomic indicators suggest that the prices of gold and silver should be much higher than at present. Why do you think that 2013 looks to be the year that the bull markets in these metals ended?

GM: I don’t think the secular precious metals bull market has ended. I think we’re just taking a pause. I liken this to the move that happened in the 1970s when we made the U.S. dollar the official reserve currency of the world, and people could again own physical gold and silver. Gold went from $35/ounce ($35/oz) all the way up to $195/oz. Then it collapsed to $105/oz. A lot of people thought that was it for gold. But then it ran to $855/oz.

Since then, we’ve hit $1,950/oz, which was then corrected back to the $1,200–1,300/oz level. We’ve been bouncing around $1,200–1,400/oz, and I believe this is just setting us up for the foundation of the next big move in gold, which will take us to much, much higher levels. I’m thinking $3,500–5,000/oz. It will be associated with collapsing currencies, the devaluing dollar, problems in the banking sector, etc.

TGR: What will be China’s role in this?

GM: China is the world’s biggest producer of gold, and now it is becoming the biggest holder of gold. It is dumping U.S. Treasury bills and buying anything it can get its hands on.

TGR: Is there no question in your mind that gold and silver are bargains now?

GM: Absolutely. People should be lining up to buy on this dip. This is a great opportunity. Nothing has fundamentally changed. Has the government started to become fiscally responsible? I laughed out loud when I heard about this “taper” of quantitative easing. What a complete joke. This should show thinking people the gig is up for the financial fraud being perpetrated at the Federal Reserve.

TGR: Many people argue that interest rates can’t go up because then the U.S. won’t be able to pay its debt, and the whole derivatives market will be threatened.

GM: If interest rates go up they are damned. If interest rates go down they are damned. Either way the Fed is screwed because of the derivative situation with their largest banks. I would expect interest rates to move in the direction that allows their banks and the U.S. government to survive the longest, but there is no way out of this that I can see.

TGR: What do you think of the argument made by the Gold Anti-Trust Action Committee that the big banks and the central bankers are suppressing the prices of gold and silver?

GM: The government doesn’t like rising gold and silver prices because it tells the public that something is wrong. Now, does the government come into our market and play games? Absolutely, but I don’t really pay too much attention because, ultimately, I believe free markets will dictate the course of the metals prices. It’s yet another sign on just how out of control the powers that be are when they seek to control the outcome of everything. They think they are God, but they’re about to find out otherwise.

TGR: You wrote on Sept. 20, 2013 that you’ve lost confidence in “a recovery this fall in our overall junior mining stock market.” If you are right, doesn’t this mean that many juniors won’t survive? And if this occurs, will it make the survivors stronger?

GM: Absolutely. This is an unfortunate chain of events, but in many regards it needed to happen. There were just too many junior mining companies. There are only so many talented teams of professionals in the industry that know how to make the discoveries that can be developed into producing mines. When you look at the monies that have been raised in this sector in the last 5–10 years, we have very little to show for it. All the low hanging fruit has already been discovered.

So this “wipeout,” as I’m referring to it, has been very difficult on investors, people employed by mining companies and newsletter writers like myself. I was hoping we would have a recovery this fall. The early signs in July and August seemed to indicate one because the strongest companies started to move and in many cases doubled from their lows in late June, early July. That is usually a sign that things are going to float again, but it all fell apart in September.

TGR: You have recommended that investors reduce their portfolios “to just a few of the highest quality stocks as we await the recovery.” What are the criteria that determine the highest quality stocks?

GM: Companies with plenty of cash on hand that don’t need to raise money right now. It is almost impossible to raise money in this sector at this juncture. Look for companies that are producing from high-grade projects with low costs, companies that will make money even if gold and silver go down further from current levels.

Even with companies like these, there is always something making things more difficult. There are a lot of great companies I like in Mexico, where the politicians are trying to change the laws to charge more taxes. Politicians have an insatiable appetite for other people’s money. It will affect companies in Mexico with low-grade projects to the point it may force them out of business.

TGR: When do you think the market will turn around?

GM: Things are not going to get better at least until 2014, and in the meantime a lot of juniors hanging by their fingernails are going to go out of business. That will solidify the market for the survivors. Maybe that is as it should be. I do believe that monies we’ve lost in this sector in the last two years can quickly be made up if investors maintain a position, or build positions, during these low times in the highest quality companies. Because when the market does recover, it is going to be a screamer.

TGR: Can we talk about some of your favorite companies?

GM: SilverCrest Mines Inc. (SVL:TSX.V; SVLC:NYSE.MKT) is probably the top company I’d like to talk about. It has more than $40 million ($40M) in cash and growing. The company is making money whether gold or silver prices go up or down because it is mining higher grade rather than lower grade ounces. SilverCrest keeps finding more ounces as the Santa Elena mine grows, and it has made another discovery that is moving along quite nicely in another area of Mexico.

The market is so bad currently that SilverCrest is not performing as it should. It’s holding its own, but is at a great discount to where it will be. This is a great situation to play because at current prices I see at least a four or five multiple when the market fully recovers.

TGR: SilverCrest was down to about $1.50/share in August, and then the price soared to over $2.20/share. But now it is back down to $1.73/share.

GM: And it could go lower. I would say that even the best companies will move lower. Tax-loss selling is going to come up. People need to clean out their portfolios. Everybody’s situation is different. I’ve never experienced losses like this before, and I’ve been doing this for a long time. But once it’s cleaned out, it will have to recover. If the world wants to have iPhones, computers and high-tech cars, it takes base metals, precious metals and rare earths to build these things.

TGR: You wrote that after Canadian Zinc Corp. (CZN:TSX; CZICF:OTCQB) had been given a water license for its Prairie Creek mine in the Northwest Territories, which is silver, zinc, copper and lead, the market did not get too excited about what should have been an exciting event.

GM: That was shocking to me, like a dagger to my heart. Here is a property that was discovered and developed by the Hunt brothers in the 1970s. Canadian Zinc got control of it in the 1990s and has been trying to develop it ever since. Unfortunately, the key water permit necessary for production was not renewed when it should have been, and it was a long struggle to get it back.

Canadian Zinc traded over $1.50/share many times without the permit even being close to being approved. The permit is a big deal also because it attracts buyouts from larger companies that need to replenish their reserves. And this is a unique polymetallic deposit of size. What has been drilled is already big, and holes drilled a kilometer away from known mineralization have hit. This resource has a huge signature that attracts big players in the industry.

When Canadian Zinc got the permit, the market did nothing. I think it went up $0.04/share that day and has since sold off from its high of $0.70/share. I was really counting on getting at least $1.50/share. Well, when the market does recover, I would expect Canadian Zinc will be trading at a multiple of where it is right now. So it is one to hold for the long term because it’s essentially been derisked.

TGR: Let’s talk about some other companies you have given a buy rating.

GM: Colorado Resources Ltd. (CXO:TSX.V) is in a unique situation. I can’t recommend most exploration companies now because they have very little in the way of funds, and they can’t raise money. But Colorado had $8M in the till. Then, with a key copper-gold drill hole at its North ROK property in British Columbia, its stock ran all the way up, in this market, to $1.70/share from $0.16/share. Since then, further drilling hasn’t confirmed the first high-grade discovery hole, although it is building a nice resource very quickly with every successful drill hole. In my opinion, it actually may have better potential than a nearby mine that’s already slated for production in late 2014 or 2015.

TGR: Is that Imperial Metals Corp.’s (III:TSX) Red Chris mine?

GM: Yes. Red Chris is only 15 kilometers away and has a very similar signature to the discovery at North ROK. Colorado is drilling at 100 meters (100m), 200m, 300m, 400m, 500m away from the discovery hole, and the company is hitting average grade or better than Red Chris’. Based on my back-of-the-envelope calculations—not NI-43-101-compliant—Colorado has already put together 100 million tons (100 Mt) of ore that’s economic and closer to the surface than Red Chris’. Red Chris has 300 Mt, so Colorado is already one-third of the way there with only 12 drill holes. And Colorado is closer to the main road.

This is an incredible story. And yet, once again, the market doesn’t seem to care. What’s encouraging to me is that Colorado has the money in the treasury to finish all the work for 2013 and 2014 without raising new funds. I think North ROK will become a resource that is taken out by a bigger player as the company gets to the 300 Mt of ore level. And because it is trading in the low- to mid-$0.20 range, I think this is a good bet to make some serious money when the market recovers.

TGR: Let’s talk about Buy recommendations in Mexico.

GM: Excellon Resources Inc. (EXN:TSX; EXLLF:OTCPK) is also in a good situation. The company has money in the treasury. Excellon is paying for the drilling with profits from production at its La Platosa project in north-central Mexico, right in the main silver belt. I’ve always believed that Excellon is in control of its own destiny. The company just has to keep doing what it has been doing in hopes of hitting the source of all the known mineralization it has already uncovered.

The big play, the big blue-sky upside potential in Excellon, is that it is paying for all the exploration work with its own funds, without further dilution of current shareholders. It doesn’t matter how bad the market gets; this is a very high-grade situation. Even if silver prices go to $5/oz, Excellon could still probably make money at that level. That’s because it has negative cash costs when you consider the high-grade lead and zinc that goes along with the silver.

TGR: Now, Orex Minerals Inc. (REX:TSX.V) has projects in Mexico but also in Sweden and Canada, right?

GM: Orex is a very good company with an extremely talented management group. I’ve been involved with this group before and made money, but at this point I have to be honest and say Orex is in a tough situation. It finds itself with little cash. The company has got to do something with its burn rate and just try and survive right now. Unlike Colorado, Orex does not have a major discovery in play it can fund with current monies. Orex will probably need to raise money, but this would probably be too dilutive, even if it could raise it.

TGR: Is there anything you like in Peru?

TGR: Tinka Resources Ltd. (TK:TSX.V; TLD:FSE; TKRFF:OTCPK) is another company that’s on to a potentially very large discovery of merit at Colquipucro and Ayawilca. It started out as a silver resource that the company was trying to build to 30–50 million ounces (30–50 Moz) and then possibly 100 Moz. As Tinka was doing the boots-on-the-ground work, as I like to call it, it uncovered some large anomalies deeper in the system and hit with drilling what looks to be some very high-grade zinc and lead. The more drill holes Tinka can put into these anomalies to define how big this is, the more exciting it will become.

Tinka, however, is caught because it needs to raise money again. But this is one of the very few companies that may be able to actually raise money currently. I don’t know how much it would want to raise at current levels, but it may be able to pull it off and keep things going. Otherwise, I would say Tinka may be in a situation where it has to slow things down and just wait for the recovery. If a company has the right people and the right share structure, it can make it. Tinka has cut everything as low as it can and has had to let go of employees. The company has cut salaries. It has enough money to cover itself for a couple of years at that reduced level, so it will probably be just fine.

TGR: Many long-time investors in the junior space have been so battered over the last couple of years that they’ve given up. What is the best reason for people to stay invested in juniors?

GM: I can’t blame people for getting so frustrated. They’ve taken horrendous losses; we all have. Some of the sharpest people I know in this business have been hammered. And when you suffer a lot, you tend to say, “Hey, I don’t want to do this anymore.” Those who can gut it out, however, those who have the fortitude and the understanding have to dump the garbage. Just take the pain, and get it over with. Realign portfolios to the highest quality and build positions in companies that can make up for a lot of lost ground when the market recovers.

TGR: Greg, thank you for your time and your insights.

Greg McCoach is an entrepreneur who has successfully started and run several businesses in the past 30 years. For the last 14 years, he has been involved with the precious metals industry as a bullion dealer, investor and newsletter writer (Mining Speculator and The Insider Alert). McCoach is also the president of AmeriGold, a gold bullion dealer. He writes a weekly column for Gold World.

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DISCLOSURE:

1) Kevin Michael Grace conducted this interview for The Gold Report and provides services to The Gold Report as an employee. He or his family own shares of the following companies mentioned in this interview: None.

2) The following companies mentioned in the interview are sponsors of The Gold Report: SilverCrest Mines Inc., Colorado Resources Ltd., Excellon Resources Inc. and Tinka Resources Ltd. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.

3) Greg McCoach: I am actively buying and selling stocks and at any time may own stocks discussed. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.

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