Month: September 2011

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Twist and Shout: Where to Invest After Operation Twist

By The Sizemore Letter

Bernanke: "Let's do the twist."

It’s an odd world we live in. The Federal Reserve announced what we all already knew—that slow growth and weak demand would be with us for a while—and yet this sparked a market panic that sent the Dow ($DJIA) down by more than 500 points before it recovered slightly. And it wasn’t just stocks that fell. Commodities, as measured by the $CRB index, sunk to a new 2011 low, and even gold—that so-called “crisis hedge”—had one of its worst weeks in years ($GLD $GC_F).

With the Fed taking a new direction in its efforts to boost the economy (“Operation Twist”) and investors rapidly losing faith in the economic recovery, it is a veritable minefield out there. Today we’re going to take a look at these developments and offer some suggestions for how investors can best position themselves.

What is Operation Twist?

The Fed is selling down $400 billion in Treasuries that have maturities due in three years or less and are reinvesting the proceeds in longer-dated bonds (anywhere from 6 to 30 years in maturity). The reason for this is pretty straightforward. Investment—whether it be in a new factory, an office building, or a house—requires long-term financing. By buying long-dated Treasuries, the Fed is attempting to lower the benchmark rate that lending in the private sector is based on. A factory that is marginally unprofitable or a house that is just out of your budget when financed at 5 percent might all of a sudden be doable at 4 percent. By keeping the yield on “risk free” Treasuries unattractively low, the Fed is hoping to encourage a little risk taking.

Will it work? Well…it depends on how you define “work.” At the margin, a few new projects will get done, which should at least prevent unemployment from getting any higher. And it certainly can’t be bad if cash-strapped homeowners are able to refinance their mortgages and free up funds that can be spent elsewhere in the economy.

But anyone looking for this to spur a robust recovery will be sorely disappointed. There are limits to what monetary policy can do. At some point you reach what John Maynard Keynes called the “liquidity trap,” the moment at which no one is interested in borrowing and spending, even at zero percent interest. If a company foresees weak demand for its products, it really doesn’t matter how low the financing rates are. Even at zero percent interest, it doesn’t make sense to do the project. And consumers who are already burdened with more debt than they can pay have no business borrowing and spending more.

I don’t mean to sound excessively gloomy; I’m actually cautiously optimistic and recommend that investors use the current volatility as an opportunity to shop for good investment bargains. But it should be obvious that the entire Western world suffers from overcapacity and excess supply in several key sectors—and most notably in housing and manufacturing.

Where Do You Hide?

The knee-jerk reaction to the gloomy economic news and the panic gripping the market is to dump your stocks and run to safe haven assets like gold and Treasuries. We’ll look at each of these options separately.

For most investors, it does not make sense to invest in Treasuries. The 10-year note yields a pitiful 1.7%, and if yields rise at all the price of these securities could fall precipitously. If you hold to maturity you have no risk of capital loss, but does it make sense to tie up your funds for 10 years for such a small return?

The answer for most investors would be a clear “no.” Treasuries have no value as an investment at current prices. Investors wanting to take some of their chips off the table would be better off simply going to cash.

Large institutional investors do not have the option of going to cash. No bank would want to accept “hot money” deposits of tens or hundreds of millions of dollars. And even if they did, the institutional investor would not want to subject those funds to the risk that the bank would fail. FDIC only covers $250,000, after all.

Individual investors can go to cash, however. Investors with large multi-million dollar accounts can split their deposits across several banks to take advantage of FDIC insurance. This makes lot more sense than buying overpriced Treasuries, though investors should hesitate before they convert too much of their portfolio to cash. The volatility has created quite a few attractive bargains; more details on those to come.

The other safe-haven asset on many investors’ minds is gold. Gold, however, has failed to live up to the task. After soaring to over $1,900 per ounce in the weeks following the S&P debt downgrade of the United States, gold has plummeted, falling more than $100 dollars per ounce intraday and having its worst week since 2008 . It appears that gold has shifted from a “crisis hedge” to being a “risk asset,” like stocks and commodities. Though it is too early to say, the gold bubble may indeed be bursting (see “Has the Gold Bubble Finally Burst?”).

While I understand the reasons for buying gold—disgust with the political antics in Washington and Brussels, loose monetary policy, a banking system that appears at risk, etc.—the price of this “insurance” has simply become too expensive. And given its recent price action, it’s value as insurance when it is needed most would appear to be in doubt.

So, where should investors put their hard-earned funds?

My recommendation might seem somewhat pedestrian, but high-dividend stocks would appear to be the best bet right now. Unlike bonds, the yield on dividend-paying stocks is likely to rise over time, regardless of what happens to stock prices. And unlike gold, dividend-paying actually trade at attractive prices.

When you reinvest your dividends, little spates of volatility like we’re having today can actually work to your benefit as they allow you to automatically purchase new shares at depressed prices. And even if the market trades sideways for years, you can earn a respectable return on the compounded dividends. In a world full of uncertainty, dividends supply a degree of stability that can help you sleep at night.

For a one-stop shop, investors might consider the WisdomTree Large Cap Dividend ETF ($DLN). It’s loaded with companies that will survive and thrive even during financial Armageddon: names like Johnson & Johnson ($JNJ), Exxon Mobile ($XOM), and Pfizer ($PFE) among others.

Disclosure: Sizemore Capital currently holds shares of DLN in some client accounts.

If you liked this article by Sizemore Insights, you’d probably enjoy The Sizemore Investment Letter, our premium members-only newsletter. Click here for more information.

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How the ‘Permanent Portfolio’ Can Protect You from Central Bankers

By MoneyMorning.com.au

According to online news service, Market Watch, Grantham ‘…expects another leg down for the U.S. stock market, one where shares could stay low priced for years while U.S. economic growth plods along at maybe 2% annually.’

Operation Twist fails…

After Thursday’s trading in the U.S., you’d be forgiven for thinking the next ‘leg down’ for the market has already started.

Mr Market didn’t like the US Federal Reserve’s plans for ‘Operation Twist’.

‘Operation Twist’ involves the Fed disposing of bonds maturing in the next two years, and buying bonds with a longer-dated maturity.

The aim is to drive up the price of those longer-dated bonds. And because bond prices move in the opposite direction to bond yields, it means the yield (interest rate) will fall… this is exactly what the Fed wants.

The idea is lower interest rates on long-term bonds will lead to lower rates for mortgages, car loans and other debt. (Interest rates for these loan types use the US 10-year bond as the reference interest rate).

Basically, Dr B.S. Bernanke is telling Americans to borrow to save the economy.
But this isn’t the first time the Fed has tried ‘Operation Twist’. It did something similar in the 1960s. Did it work then?

According to the Guardian newspaper in the United Kingdom, ‘The last time the Fed tried something similar was in 1961, when it managed to lower long term interest rates by only 0.15 of a percentage point.’

Short term rates in the US are almost at zero now. And even the 10-year bond yield is below 2%. So it’s doubtful ‘Operation Twist’ will make a big difference.

But is it better to have some intervention than none? Again from the Guardian:

‘With unemployment still high, households struggling to pay off debts and most banks refusing mortgage applications, whatever the interest rate, it seems unlikely that Operation Twist alone would make much of a difference.’

If you take the stock market as an indicator of success, the market agreed with the Guardian. At one point, the Dow Jones Industrial average was down over 500 points on Thursday night.

Stephen Roach, a non-executive chairman of Morgan Stanley Asia told Bloomberg BusinessWeek, ‘The unconventional tools that the Fed is trying to convince the markets will work failed in Japan and they won’t work in this economy either.’

Roach isn’t the only one who believes the Fed’s policy is intervention for the sake of it.

Alan Blinder, a professor at Princeton University, feels that by starting Operation Twist, Bernanke is ‘…throwing sticks and stones and pea-shooters and BB guns and whatever he’s got at the weak economy in the effort to make marginal improvements.

‘I don’t expect any miracles from it and frankly neither do they.’

Investing in a Systemic Crisis

The fact is this is a volatile market. And as the uncertainty increases many investors are left wondering how to grow their wealth when markets are falling.

Last week, Dan Denning, editor of Australian Wealth Gameplan told his subscribers:

‘…the end of the financial world as we know it doesn’t mean you can stop thinking about how to preserve and grow your wealth.’

Dan says investors should have a ‘Permanent Portfolio‘. It’s an idea first put forward in a book by Harry Browne in 1970!

And although the book is more than 40 years old, the ideas are still relevant.

Dan wrote. ‘[It] identified four basic economic cycles: inflation, deflation, prosperity and recession.

‘…the book [is] a how-to guide for investing during times of monetary instability.’

It seems like a perfect time for this type of investing.

Dan says:

‘The Permanent Portfolio was instigated as a response to unstable policy and unsound money. It’s entire performance history coincides with the emergence of a global dollar standard and worldwide credit bubble.’

‘In other words, it was an investment strategy largely designed to deal with monetary debasement.’

Central bankers and policy makers are eroding your wealth. So it’s time to protect and grow your dollars.

Both Operation Twist and the Permanent Portfolio are old ideas. But only one of them is a good old idea… an idea that can help you protect your wealth.

Shae Smith
Editor, Money Morning

P.S. – The Permanent Portfolio isn’t a new idea. But it could be the way to secure your wealth long term. Over the next few months, Dan will show his subscribers how to assemble a Permanent Portfolio of their own. Click here to see if the Permanent Portfolio fits your investment strategy.


How the ‘Permanent Portfolio’ Can Protect You from Central Bankers

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Gold & Silver Pullback as Forecasted Now for the Big Opportunity

Chris Vermeulen – www.TheGoldAndOilGuy.com

A few weeks ago I wrote about how gold was starting to top and that everyone should expect a very sharp drop to the low $1600 area. How I came to this conclusion was though the use of inter-market analysis combining price patterns, gold futures volume, the dollar index and market sentiment. This allowed me to understand what the majority of other traders/investors were thinking and feeling. By knowing each of these market variables and crowd behavior I can accurately see into the future a few days with a high probability of success and most importantly with low downside risk.

You can view part-1 on how I properly forecasted that gold would fall sharply in August here: http://www.thegoldandoilguy.com/articles/dollar%E2%80%99s-on-the-verge-of-a-relief-rally-look-out/

At the time when I forecasted gold to reach the low $1600 area gold was still building the top pattern so I could not say how long a recovering would likely take nor did I know exactly when to re-enter a long position. But now that we have seen how gold arrived at my target price I can form a new forecast.

Spot Gold Price Forecast – Daily Chart:

The gold chart below clearly shows rising volatility along with my topping pattern of three surges to new highs. It was August 31st when I warned subscribers and my followers that gold was about to top and that everyone should be taking profits or at least tightening their stops to lock in gains. Only three days later gold topped and it has not stopped falling since.

On August 8th gold had a large opening gap to the upside. This means the price opened the next day much higher from where it closed the previous session. It’s important to note that gaps especially for gold almost always get filled within a couple months. Seeing this gave me a solid reason to think that gold should pullback to this level during the next big correction in price.

Also during the month of August gold had to pullbacks only to continue to make the third and final high. This told me that when the top is put in place was a very high probability that we see the price of gold drop below both of Augusts’ lows and that would trigger stop orders sending the market sharply lower.

Now that we are seeing the stops being flushed out of the market it means the majority of speculative traders have exited their positions. So speculative traders who caused the large surge in gold to take place are now out. Once all the speculative traders have exited which should take place in the coming weeks or two we can expect some type of bounce or rally. I will keep a close eye on the intraday charts for subscribers as we near a potentially major trade setup.

Where are we in this gold bull market?

Well I feel gold is more fairly priced between $1632- $1660 area. Currently gold is trading at $1660 but if things play out like I have seen in the past we just may get one more dip this week to the $1600 area before gold truly puts in a bottom. Because gold went from a new high all the way down to Friday’s panic selling washout instead of a controlled ABC correction I feel a bottom will be more of a one day event. This type of bottom carries more risk and is more difficult to time and trade. So scaling in with a small position at this level and adding on a drop to $1630 then $1600 could prove to be the safest way into a gold position.
Forward looking I see gold bottoming over the next week or two then a nice relief rally to the $1775 area. Depending on how gold arrives there will alter my next gold forecast so let’s wait and see how things unfold.

Spot Silver Price Forecast – Weekly Chart:

Silver I call the Un-Safe haven because to me it’s not a safe haven in the way everyone’s believes it be. I hear and see everyone including friends and family selling all their stocks and putting their money into silver. To me buying large amounts of silver with your retirement money is just ridiculous. I m sure my statement here will trigger an inbox of silver-perma-bulls (silver bugs) to send me hate mail but that’s fine as my assistant filters my emails so I don’t have to keep being reminded how rude some humans can be over an simple opinion…

Investments that can lose 25% in value within 2 days or lose 40% of it’s value in 5 months should not be traded nor invested in with large portions of anyone’s life savings, especially if you are over the age of 50 and have not proven to be a constantly profitable trader. No one can stomach losing that much of their nest egg.

That being said I do feel silver is in a similar situation as gold. I do feel a bottom is near. Silver has formed an ABC correction and the price and volume patterns seem to be in line with a typical bottoming pattern. After Friday’s massive selloff I feel silver may slide a little lower yet before putting in a bottom.

One thing to keep in mind with silver is that it is very thinly traded; there are a lot of speculative traders involved which push and pull the price to extreme levels on a regular basis. So if the broad stock market continues to sell off sharply then I expect silver to follow suit.

Pre-Week Precious Metals Trend Analysis Trading Conclusion:

The price action we have seen this year for both gold and silver indicate were are just warming up for something really big to happen. It could be a massive parabolic rally to ridiculous new highs in 2012 or it could be a large unwinding of the safe havens as countries sort out their issues and the big money starts moving out of metals and into currencies and stocks.

Only time will tell and that is why I analyze the market multiple times per week to stay on top of both long term and short term trends. So if you want to keep up with current trends and trades for gold, silver, oil, bonds and the stocks market check out TGAOG at: www.thegoldandoilguy.com/trade-money-emotions.php

Chris Vermeulen

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EUR/USD Falls to a 10-Month Low amid Europe Crisis Fears

By ForexYard

As this week’s trading begins, there’s little doubt that the debt crisis is the most pressing issue at hand. All eyes are currently watching what the European policymakers do with Greece’s debt crisis. At the moment, the market seems rather pessimistic regarding the future of the European-Union and the euro is falling on all fronts.

Economic News

USD – Dollar Closes a Bullish Weekly Session as Risk-Aversion Soars

The U.S. dollar rallied against most of its major currency counterparts during last week’s trading session as concerns regarding the European-Union stability have turned investors to long the dollar as a safe-haven.

During Monday’s morning session the greenback continues to strengthen against the euro amid skepticism that Europe’s latest efforts to contain its sovereign debt crisis will be successful.

The dollar gained about 400 pips against the euro over the past week, and the EUR/USD pair has plunged to the 1.3360 level, marking a 10-month low. Against the British pound the American currency gained about 350 pips, and the GBP/USD pair is now traded around the 1.5440 level.

As for today, the U.S New Home Sales report is scheduled at 14:00 GMT. This report measures the annualized number of new single-family homes that were sold during the past month. Analysts are forecasting that 296,000 new homes were sold. If the end result is higher, the dollar has potential go extend its rally for today as well.

EUR – Euro Free-Falls amid concerns Europe’s Sovereign Debt Crisis Won’t Be Contained

The shared currency saw sharp depreciations against all the major currencies during last week’s trading session. The euro fell on concerns that the euro-zone will not bail-out the Greek economy, which might lead to long-lasting bearish reactions in European markets, which will, eventually, sign the end of the euro-zone era.

The global press in now informing that European policymakers have begun working on new ways to stop fallout from Greece’s near-bankruptcy from has further negative impact on the world economy. During the weekend the globe’s largest economies, such as the United States and China, have raised their concerns regarding the debt crisis, and said that the European leadership must get more aggressive in their response.

The euro hit a 10-year low versus the yen during market opening this week, as the EUR/JPY pair tumbled to the 101.92 level. The euro also dropped to a 10-month low against the U.S. dollar and the EUR/USD pair is currently trading near the 1.3400 level.

Looking ahead to this week, traders are advised to pay close attention to each and every development regarding the European crisis, as this will surely be the main economic event of the week, which will have strong impacts on every global financial market.

JPY – Yen Rises to a 10-Year High against the Euro

The Japanese yen strengthened against most of its major currency-rivals last week as the decreasing risk-appetite in the market has boosted the yen’s appeal as a safe-haven investment.

The yen’s most notable uptrend took place versus the euro, as the EUR/JPY cross plunged into a 10-year low after hitting the 101.92 level. The yen rallied against the euro on concerns that Greece is on the verge of bankruptcy. Investors fear that if Europe will be unable to avoid Greece’s default, the outcome will eventually be the teardown of the euro-zone.

Looking ahead to today, traders are advised to follow the ongoing news from Europe. It currently seems that as long as the European leadership is reluctant to solve the debt crisis, the demand for the Japanese currency as safe-haven will continue to grow.

Crude Oil – Crude Oil falls to $77.10 a Barrel on Concerns Europe’s Crisis Will Damage Fuel Demand

Crude oil fell to as low as $77.10 a barrel during today’s morning session on bets European crisis will cut global demand for energy following the biggest weekly decline since August.

Crude falls on concern that the euro-zone won’t manage to contain the current Greek crisis, leading the Greece’s economy to default. Investors estimate that the global demand for energy will decrease severely as a result, and thus oil prices are plunging.

Crude oil fell about 11 percent from $87.95 a barrel during recent midweek to as low as $77.10 during this morning’s session.

As for this week, it seems that crude oil might face another bearish session as European leadership is for the moment failing to solve its debt crisis. Nevertheless, in case that European policymaker once again agrees to bailout Greece, crude price night soar once again above the $80 level.

Technical News

EUR/USD

The EUR/USD’s free-fall continues and the pair has reached the 1.3360 level, hitting a 10-month low. Currently, the daily chart’s MACD continues to provide bearish indications, signaling that the bearish momentum has more room to go. Going short might be the right choice today.

GBP/USD

There is a very accurate bearish channel formed on the daily chart and the cable is currently floating in the middle of it. Nevertheless, as both the Slow Stochastic and the RSI are providing indications for an uptrend, a mild technical correction might take place today. Going long with tight stops might be the right strategy today.

USD/JPY

The USD/JPY continues with relatively flat-trading, and the pair is currently trading near the 76.50 level. The next significant support level seems to be located at the 76.20 level. If the pair manages to breach it, another bearish session might be expected, with potential to reach the 75.00 level.

USD/CHF

The USD/CHF pair gained about 1,300 pips during the past three weeks and is currently trading near the 0.9080 level. However, as the daily chart’s RSI has dropped below the 70-line, it seems that a bearish correction might be imminent, with a key-target level of 0.8900.

The Wild Card

Gold

Gold’s bearish trend continues at full speed as the metal dropped to as low as $1,532 an ounce, marking a ten-week low. Currently, as all the technical oscillators on the daily chart are giving bearish signals, it seems that the bearish move could extend today. This might be a great opportunity for forex traders to join a very popular trend.

Forex Market Analysis provided by ForexYard.

© 2006 by FxYard Ltd

Disclaimer: Trading Foreign Exchange carries a high level of risk and may not be suitable for all investors. There is a possibility that you could sustain a loss of all of your investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with Foreign Exchange trading.

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Is This the Turning Point for Gold?

By MoneyMorning.com.au

One month ago, the spot price of gold was about AUD$1,835.

Today it’s AUD$1,672.

That’s an 8.8% drop.

When something falls more than a couple of per cent you feel it. Naturally, you start to question your reasons for buying it in the first place.

We mean, what if the gold bubble crowd were right? And gold is in a bubble.

After all, gold did fall. And who’s to say it won’t fall further?

Of course, we don’t want it to fall. And we won’t blurt out the old cliché that “we hope it falls so we can buy more on the cheap…”

But if you followed our advice and just bought gold a bit at a time, then the 8.8% fall isn’t all bad news. Because now you can buy more on the cheap…

Gold does better than stocks

In our view, the mistake would be to assume the gold bull-run is over… and to not top up your holding when the price has dipped.

Because that’s the key to buying gold and silver (silver has been hit even harder, down 18% in recent days). You buy in regular intervals – like a savings plan. That way you reduce the risk of buying all at once at a high price.

And besides, in terms of comparative performance we’d suggest the stock market spruikers put a sock in it. Any way you look at it, over pretty much any time period, gold has outperformed stocks.

Check out these charts:

gold chart
Click here to enlarge

Source: CMC Markets Stockbroking

The gold price in Aussie dollars is the pink line. The S&P/ASX 200 is the blue line.

Gold has outperformed stocks, even during periods when the bubble has supposedly burst. Of course, past performance isn’t necessarily a guide of future performance.

But at a time when the global economy is going through an unusual period, it’s important to remember why you buy gold.

Making front page news

Let’s illustrate with a few headlines taken from Bloomberg News this morning:

“‘Barrier’ Around Greece Needed: Merkel”

“Stocks Rise on Belief Policy Makers Will Act”

“Paul Ryan Sees Supercommittee Falling Short of Deficit Goals”

“Europe Faces Geithner, Soros Pressure to Defuse Debt Crisis”

“IMF Stands Ready to ‘Strongly Support’ Euro Area Recovery From Debt Crisis”

Then from the Age website. Three of the top five business headlines are:

“Saying goodbye to Greece – softly”

“Greek default ‘would destroy Europe’: Merkel”

“World in danger zone, says Swan”

Although to be fair, the Age doesn’t provide a quote showing where German chancellor, Angela Merkel actually says a Greek default “would destroy Europe.”

Fortunately, we could turn to our in-house German, Weekend Daily Reckoning editor, Nikolai Hubble. He told us exactly what Frau Merkel said in an interview with the German equivalent of Eddie McGuire!
According to Spiegel Online:

“Ein Austritt des Landes aus der Euro-Zone könne eine Kettenreaktion auslösen. ‘Zum Schluss sitzen wir mit wenigen ganz alleine da.’”

[Trans: “The exit of a country from the Eurozone could have a chain reaction. ‘In the end, we’d be sitting there all alone without much in our pocket'”]

And, “there has to be a way to enforce discipline in not abusing the bailout fund, ‘Sonst leben wir sehr gefährlich’” [Trans: “Otherwise we’ll be living dangerously”]

So, not quite “destroy”. But still, we smell trouble. Meanwhile, over at the Australian website, the top two business headlines read:

“$A weaker on Greek audit fears”

“Growth fears to depress bourse”

So, what does all this mean?

Well, the success to safe investing is to always question your beliefs. And then figure out whether what you’re saying is still right. If not, then you’ve got to admit it and move on.

We do that with the stock market, with housing… and with gold.

Why nothing has changed

The question is: do we believe that any action taken by U.S. and European politicians and central bankers will have a positive impact on the economy? In other words, will bureaucratic intervention in the markets work?

The answer is, no. It won’t work. In fact, our bet is they’ll continue to make the whole darn thing worse. And that can only be good for the gold price.

Look, we thought the U.S. Federal Reserve would announce more money-printing at its last meeting. Simply because we thought they’d want to surprise the market with something big.

But now we’re starting to think the Fed is keeping the next round of money-printing up its sleeve… for when things get really serious… such as a Greek default perhaps.

However, Slipstream Trader, Murray Dawes isn’t so sure. He thinks you may have to wait longer. Before the last Fed meeting he said the only thing the Fed could do to boost the market would be to announce more money-printing. And that if it didn’t, the market would get smacked.

The upshot was, they didn’t and it did get smacked.

As he told us this morning, “the downside we’re seeing now is a result of all the money-printing bets being unwound.”

Murray thinks investors will have to wait until at least mid-next year for more money-printing… when Operation Twist ends. That’s unless the Fed decides to surprise the market to engineer a boost for stock prices.

Nothing is impossible. And that’s what makes it so hard for the ordinary investor to turn a buck in this market. Rather than relying on stock fundamentals, the direction of the market on any given day rests on the latest plans hatched by bureaucrats.

So, to put it simply: gold may go up… and it may go down. But for as long as we believe meddling in the economy will make things worse, we’re happy to tell you to keep holding and keep buying gold.

Cheers.
Kris


Is This the Turning Point for Gold?