Month: September 2011

By MoneyMorning.com.au

Gold has set new highs and grabbed the headlines recently.

But what about gold stocks?

The theory goes that when gold rallies, gold stocks rally harder. But in the last six months gold stacked on 30%, while gold stocks barely managed 5%.

Click here to enlarge

The chart shows the Market Vectors gold miners ETF (NYSE:GDX). It includes a basket of gold producing stocks from around the world including Australia.

Gold stock investors have had their patience tested for most of the year.

But for the last month gold stocks have crept up slightly. Is this the breakout gold stock investors have waited for?

There’s a good chance it could be.

Take a look at the ‘Gold Bugs index‘:

Click here to enlarge

It looks purely at US-listed gold stocks. And in the last few weeks it’s done a few interesting things.

First, it has finally broken out of the 500-600 range it was stuck in for a whole year. This is marked above with the two horizontal black bars at the top right of the chart.

The other thing is the 50-day moving average (thin blue line) has just crossed the 200-day moving average (red line). This may sounds like technical jibberish. But when it happens, it signals that gold stocks are starting to move up.

For example, you can see in the chart that the blue and red lines crossed in April 2009. And the gold bugs index climbed 33% – from 300 to 400 – before they crossed again a year later.

The next move up was 25% from 400 to 500. The averages crossed once more at the end of June this year.

If this indicator holds up again, this could see the start of gold stocks’ next rally.

There has been big news in the gold market recently to confirm this. Gold stocks should have gone up in price months ago.

Last week, Swiss banking giant, UBS, raised its gold price forecast for next year by 50% from $1380 to $2075… And the long-term gold price by 18%, from $934 to $1,100.

The impact of this adjustment shouldn’t be underplayed.

These upgrades could see gold equity analysts re-rate gold stocks.

And a 50% increase for next year’s gold price is a big move for such a conservative institution. But even that increase is likely to be too small.

After all, a long-term gold price of $1100…?

Their analysts are clearly reading from a different script. It looks they’re playing it safe. And will change their forecasts as the gold price goes up… as they did last week.

Because if by long term they mean 2016-21, there’s something that could happen to make any finely-tuned forecasting models redundant…

There is a groundswell of talk about China backing its currency with gold, and offering it to the world as a new reserve currency to take over from the US dollar. This could happen within the next five years…

But to do it, China would need to buy a huge amount of gold.

To back 5% of the existing Yuan money supply with gold would take all the gold mined globally for an entire year.

Can you imagine what that would do to the gold price?

In hindsight, it looks like China has been working towards this for a few years.

It is the world’s biggest gold producer. And it has mined its own reserves at a fast rate. But all this gold stays within China.

Not only that, but China is now also the world’s biggest gold importer.

So how much does China own?

That’s the thing. China plays its cards close to the chest, so we don’t know for sure.

The last update was in April 2009. China claimed to hold 1,054 tonnes. That’s more than twice as much as the previous update in 2003, when it held 454 tonnes. The trend is clear – it’s gold store is increasing – but how much does China hold now?

The Chinese government has busily promoted gold ownership to the public for the last few years.

This has been like selling beer and pies at the footy, as China has a long cultural relationship with gold. But it’s only recently become legal for Chinese people to own it.

Pushing private gold ownership could well be a quiet way to increase the country’s holdings without making large official purchases.

It’s an important story to follow. But hasn’t figured in to institutional thinking yet.

But one thing is for sure. As evidence of a gold-backed Yuan mounts, this should be good news for gold… and even better news for gold stocks.

Dr. Alex Cowie
Editor, Diggers & Drillers

What China’s Secret Gold Cache Means for Aussie Gold Stocks

By MoneyMorning.com.au

In Europe… France, Italy and Spain have extended bans on short selling. While Belgium set ‘an indefinite ban’ on short selling two weeks ago.

The countries are worried that ‘bearish’ short-seller sentiment will drag their stock markets down.

They’re already at a two-year low…

Click here to enlarge

The five euro stock indexes we looked at this morning were up yesterday. But the ban on short selling hasn’t stopped volatility.

The DAX traded in a 5% range yesterday. The FTSEMIB (Italy) did the same. So did the CAC 40 (France)… The IBEX 35 (Spain) was slightly less volatile… It traded in a 4% range… And the BEL 20 (Belgium) moved in a 6% range…

Those are big price swings.

But banning short selling won’t stop the stock market falling. And it won’t stop volatility. In fact, it could make things worse.

Because what short sellers do, under normal conditions, is borrow stocks they think will fall and then – when they have fallen enough to take profit or risen too high to take the risk – buy them back.

That buying – called ‘covering’ – helps cushion the blow of a massive stock market plunge.

But no short sellers… No cushion.

Forcing traders to ‘only make money from stocks that go up’ is like forcing someone to climb a ladder and yanking it out from under them when they reach the top rung.

But for now, there aren’t any restrictions for short sellers in America. And it shows…

From Zero Hedge.

‘In the second half of August evil “speculators” did not relent in their negative bias, and brought the total NYSE Group short interest to a two year high or 14.9 billion shares, a 484 million share increase from the prior week, and the highest since July 2009…’

That means there are 14.9 billion individual shares that need to be covered. Do you see how this works? Sure, the short-sellers may have pushed the market down. But even a tiny whiff of good news from the next Federal Open Market Committee meeting could see the market rally from a ‘short squeeze’.

This is where short-sellers buy stocks to close their positions (sometimes they’re forced to as the market rises quickly). This creates buying pressure and can cushion the market from further falls.

The two-day meeting of the FOMC is only a week away. And because no-one knows for sure what the Fed will do, there’s a chance short sellers will cover their trades… and that means stocks could rally over the next week.

Aaron Tyrrell
Editor, Money Morning

P.S. Slipstream Trader Murray Dawes feels the ASX may be on the verge of a squeeze. In his new free video market update, Murray will take you through what’s happened in our market recently and where he thinks it will head. To view the video, simply click here to visit Slipstream Trader YouTube channel.

Related Articles

Short Sell This Economic Empire Today

Is The China Boom Rumour or Fact for Aussie Stocks?

The Madness of Mad Men

Why I’m Flying the Flag for China

Learning Economics from a Pencil

From the Archives…

HarveyNormanomics in One Lesson
2011-09-09 – Kris Sayce

When Nine Gold Stocks Just isn’t Enough
2011-09-08 – Kris Sayce & Dr. Alex Cowie

Manipulation on a Grand Scale
2011-09-07 – Kris Sayce

Three Steps to Wealth: Leverage, Volatility and Risk
2011-09-06 – Kris Sayce

Why it’s Not Too Late to Avoid This Investing Mistake
2011-09-05 – Kris Sayce

For editorial enquiries and feedback, email [email protected]

The Other Side of Short Selling

By MoneyMorning.com.au

When the global banking system fails, the whole system will fail.

There won’t be different classes of bank… there won’t be safe banks and unsafe banks… good banks and bad banks… there will just be banks.

And no-one will touch them with a 50-foot barge pole.

In a moment we’ll show you the seven stocks you should sell now… before it’s too late. But first…

We remember a conversation with a client during our broking days. It was autumn 2006. The client said he’d like to buy shares of General Motors and Ford.

His reasoning was the U.S. government would never allow the iconic brands to go bust. And that buying their shares would be an almost guaranteed way to make money.

We agreed with his first point. We couldn’t see any way the U.S. government would allow GM and Ford to go belly-up. But we pointed out that doesn’t mean the government would save shareholders.

We talked the client out of the idea. As it turns out, we were right. Look, we’re not saying we predicted the collapse of GM. Our view was simply based on the fact GM’s numbers stunk.

In 2004 it sold USD$195 billion-worth of cars… and made a profit of just USD$3.5 billion.

In other words, a profit margin of 1.8%! When you think about the capital and operating cost of producing a car, the capital and operating cost of selling a car – and then the three- or five-year warranties they offer – it’s a lot of effort for a crappy return.

The point is, the U.S. government did bail out GM… but that didn’t help shareholders who saw their shares turn to dust. So, could the same happen to the world’s banking system?

Well, it’s already started. And we’d say it’ll only get worse…

This morning, Bloomberg News reports:

“Investors are valuing European banks at levels not seen since the depths of the credit crunch that followed the collapse of Lehman Brothers Holdings Inc. (LEHMQ) as concern over a Greek default and debt contagion escalates.”

And yesterday, the Wall Street Journal wrote:

“France’s largest publicly traded banks face another week of turbulence as Moody’s Investors Service may cut the credit ratings of BNP Paribas SA, Société Générale SA and Crédit Agricole SA because of their exposure to Greek sovereign debt…”

Meanwhile, across the pond, the Financial Times notes:

“Britain’s banks will face an annual bill of as much as £6bn ($9.5bn) to comply with the reforms of the Vickers Commission, according to the panel’s final report…”

And in Australia, our [cough] safe banks still need multi-trillion-dollar taxpayer support. Eric Johnston in the Age writes:

“Global market uncertainty has prompted the Gillard government to extend into next year its promise to stand behind bank and credit union deposits worth up to $1 million, before winding back the insurance scheme that has been in place since the global financial crisis…

“A new permanent cap for the Financial Claims Scheme of $250,000 per person per financial institution will be introduced from February 1 next year. The $1 million cap had been scheduled to expire in October.”

The mainstream argues Australia’s banks are safe. We ask: if that’s true, why do they need taxpayer support?

The mainstream replies it’s because of global banking fears rather than Australia-specific problems. We say, rubbish. It’s because the entire global banking system is built on a business model that’s inherently insolvent… and that includes Australia’s banks.

Still, most mainstream analysts will tell you about Aussie banks’ great yield and captive customer base. But what they won’t tell you is that banking stocks are the ultimate leveraged stock play.

The only way the banks can make money is to issue more loans.

If the banks stop expanding their balance sheets, the result is banking death. As you’ve seen in North America, it doesn’t take much for profits to disappear… or to make depositors want their cash… or to force governments into engineering taxpayer funded bailouts.

As we look at it, bank balance sheets are as bad as GM’s from seven years ago. GM made its crappy profit buying lots of metal, rubber and plastic and then expensively fashioning them into a car it could sell for a small profit.

Australia’s banks (all banks in fact) make their slim profits by convincing ever greater numbers of people to take out ever bigger loans.

That’s right, contrary to the popular view, for the amount of effort required, Aussie bank profits are terrible. Look at ANZ Bank’s [ASX: ANZ] latest numbers:

Assets (loans to customers) of $618.3 billion… yet it only made a profit of $6.3 billion.

That’s a lot of effort. Think of the branch network… the IT systems… the staff… the Aussie housing market… the risk.

Like GM, while credit keeps growing, sure, profits will grow too. But it’s hardly an entrepreneurial business model. It hardly justifies the whacking big pay packages for the banks’ top brass.

Any fool can run a business that relies on expanding credit… especially if you have the privilege of helping create the credit.

This morning, the seven Aussie banking stocks (we haven’t included Suncorp [ASX: SUN] which has moved towards the insurance business) are all down. As we write…

ANZ Bank [ASX: ANZ] is down 2.56%…

Bendigo & Adelaide Bank [ASX: BEN] is down 3.01%…

Bank of Queensland [ASX: BOQ] is down 3.42%…

Commonwealth Bank [ASX: CBA] is down 3.44%…

Macquarie [ASX: MQG] is down 3.91%…

National Australia Bank [ASX: NAB] is down 2.87%…

…and Westpac [ASX: WBC] is down 3.23%.

And we’ll bet they’ll fall further.

Now, we’re not saying you should go out and short-sell these stocks – although Slipstream Trader, Murray Dawes has been short-selling banking stocks all the way through the market mayhem.

But at the very least we see no reason to hold bank shares. Especially if you’re a conservative, low-risk investor. As the numbers above show, in order for ANZ to make a $6.3 billion net profit, it had to build up a loan book of $618 billion.

It’s the equivalent of GM selling USD$195 billion-worth of cars to make a tiny USD$3.5 billion profit.

All up, banks may get another short-term bailout and their shares could go up again. But long term, the business model is corrupt and insolvent. If you’re after safety with your investments, then holding bank stocks is the last thing you should do.

Cheers.
Kris

Seven Stocks to Sell Now

Have you ever experienced a “Deja Vu” feeling? Well, if you have never experienced one, maybe after reading this post you will.

Let’s start with a technical chart of Gold. These days, gold is holding up strongly, and is only $80 below its all-time high.
If this continues, we might consolidate for a couple of weeks, to work off the overbought condition of the MACD indicator.

chart: Prorealtime

Now have a look at the following chart:

chart: Prorealtime

The chart above is the gold price in 1970, right before it more than doubled 2 months later.
Don’t they look very similar? To show you, I will now place one chart on top of the other one:

chart: Prorealtime

Well, since Gold is acting very much like in the seventies, let’s see what happened after… Based on this chart, Gold could consolidate until mid-late October, and then Double again in the weeks/months following.

As of late, the shares of mining companies have been lagging the Gold price Big time!

However, as we can see in the chart below, the mining shares (represented by the Barron’s Gold Mining Index) follow the gold price nicely over time. It looks like the Mining companies are breaking out of a multi-decade long consolidation pattern:

When we measure the BGMI (Barron’s Gold Mining Index) in Gold, we can plot the outperformance or underperformance of Gold stocks compared to Physical Gold. A falling ratio means Gold stocks Underperform Gold, or equivalently, Gold outperforms Gold stocks.

Notice that the gold stocks were also underperforming gold before the top of 1980!

The following chart is the same chart as above, but now with some support and resistance lines.

However, the most interesting observation is that as gold peaked in 1980, the Mining Stocks first retreated along with Gold, but then doubled in the months that followed, while gold did not make a new high until 2008!

What will happen to Silver if Gold doubles over the next couple of months?

If history is any guide, silver will also rally substantially.

At the top of 1980, on January 21st, ONE ounce of Silver was 4.79% of the price of ONE ounce of Gold. Right now it is only 2.28% of the price of Gold. So if Gold is about to double from here, Silver should at least double as well, and if we would get back to the high of 1980 (Silver Price as a % of the Gold Price), Silver could potentially more than QUADRUPLE from here…

If you are interested in similar analyses and you would like to know which mining stocks I buy at which prices, go to www.profitimes.com and subscribe now, because it seems we have one of the best times ahead of us!
Although the markets plummeted recently, our portfolio is actually UP!

By The Sizemore Letter

I’ve been steadfast throughout the last two months of volatility that we are not on the verge of another 2008-caliber meltdown. The conditions simply are not there this time. Our banking sector, though still impaired with legacy mortgage securities, is not facing a liquidity crisis. You could argue—as I have (see link)—that our banking system is populated with insolvent zombies. But those zombies are, alas, too big to fail, and they will be haunting us for a while. We all saw what happened when Lehman failed in 2008. The Fed and Treasury will not allow that to happen again.

Still, it’s only fair to ask: What if I’m wrong?

I tend to be a knee-jerk contrarian, in that I instinctively take the opposite view when I see sentiment too one-sided. And given the sense of gloomy pessimism that pervades the market these days, I believe that it’s right to err on the side of bullishness. In following the timely advice of Warren Buffett, the time to be greedy is when everyone else is fearful.

But what if everyone is right to be fearful?

Or—and this is what worries me the most—what if the fear turns out to be a self-fulfilling prophecy?

George Soros may be something of a political pariah these days, but he understands a thing or two about finance. And his Theory of Reflexivity should be taught in every MBA program across the globe.

Reflexivity is Soros’s answer to the Efficient Market Hypothesis (EMH), which has dominated the world of academic finance for the past half century. The various forms of the EMH all basically say the same thing—market participants rationally set the price of assets based on their understanding of the underlying fundamentals.

Soros rightly points out what we all instinctively know—the EMH is fundamentally flawed. Buyers and sellers in the capital markets are not disinterested observers who coolly react to changes in the fundamentals by adjusting prices. As active participants, their actions actually change the fundamentals and create a never-ending cycle of self-fulfilling and ultimately self-defeating prophecies. Soros ought to know. He almost single-handedly broke the Bank of England in 1992.

During a boom, lenders and investors provide capital at ever-more-attractive interest rates oblivious to the fact that their actions are creating the boom that they use as justification for their investment decisions. And during a bust, precisely the opposite happens. Lenders and investors snap their wallets shut, pull liquidity out of the market, and the house of cards implodes.

This is what worries me. I fear that investors could cause their own worst nightmare in Europe.

Try Googling “Europe contagion” and see how many hits you get. As I write this, my browser shows over 56 million hits.

Greece is bankrupt, and everyone knows this. Yet there is no reason why a default by Greece should mean that Spain and Italy will tumble too. Spain, though suffering with economic conditions out of the Great Depression, has modest levels of sovereign debt by Western European standards, and its budget deficit—though still yawning—is being effectively hacked down to size. The austerity moves haven’t killed tax receipts—at least not yet. Across the Mediterranean, Italy is actually running a primarily budget surplus. Though its debts are excessive, it should be able to service them indefinitely.

Yet none of this matters if investors panic and dump the bonds en masse, sending interest rates soaring to the point that a collapse is all but unavoidable.

Let me repeat that I do not believe that this is going to happen. But I think it is only prudent to acknowledge it as a possibility.

Given the uncertainty, where should investors hide? Here are a few suggestions:

• Avoid traditional “crisis hedges” like gold and Treasuries. This may sound counterintuitive, but hear me out. Treasuries already yield so little, they appear to be pricing in the worst. At this point, even if the world ends bond prices can’t go too terribly higher than they are now. And gold appears to be in the late stages of a bubble. Interestingly, even as Europe appears closer than ever to a meltdown, gold’s price has eased of late. That should be worrisome for anyone turning to the metal as a safe haven.
• Avoid highly-speculative sectors, mining and materials stocks, commodities, and banks. Should the current state of fear subside without major incident, these sectors will likely enjoy a monster rally. But if we do have a crisis, they will get utterly slaughtered. Given the uncertainty, it’s best to sit on the sidelines here.
• Buy “boring” blue chips that you know will survive anything. This is where it pays to be selectively bullish.  Given sentiment and valuation, you want to be in stocks right now.  The question, of course, is which ones.  Lately, I’ve been attracted to the old “Wintel” duo of Microsoft (MSFT) and Intel (INTC)—see “The Ugly Sister.” I also like consumer products maker Procter & Gamble (PG) and healthcare giants like Johnson & Johnson (JNJ). If we have another 2008-caliber meltdown, these companies will survive it intact and will continue to pay solid (and likely growing) dividends throughout. And if we avoid a meltdown, they should at least match the broader market’s upside. Companies like these would seem to give you the best risk / return tradeoff given the unknowns we face.

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.

Sept. 13 (Bloomberg) — Nick Bennenbroek, head of currency strategy at Wells Fargo & Co., talks about the prospects for the euro and currency market. He speaks with Betty Liu on Bloomberg Television’s “In the Loop.” (Source: Bloomberg)

Sept. 13 (Bloomberg) — Eswar Prasad, a senior fellow at the Brookings Institution, talks about China’s potential role as an emergency lender to Italy amid Europe’s debt crisis. Prasad, a former IMF official, speaks with Erik Schatzker on Bloomberg Television’s “InsideTrack.” (Source: Bloomberg)

Going Big on the Texas Power Problem

by David Fessler, Investment U Senior Analyst
Tuesday, September 13, 2011: Issue #1599

The Lone Star State is known for going big.

It’s the largest state in the lower 48.  It has enormous ranches, lots of oil and gas wells, and a booming economy.

This past August, it also had big temperatures. Texas endured one of the most severe heat waves on record. It lasted the entire month, and set numerous all-time high temperature records across the entire state.

In Dallas, temperatures were well above 100 degrees on most days, and hit 110 degrees on August 2 and 3. On the two days in August when the high dropped below 100, it was 99…

And these scorching temperatures… they caused big electrical problems.

Now Texas is looking to one huge power project in order to increase supply and fight off rolling blackouts. And investors should get to know one company that stands to benefit when Texas, once again, goes big on the Tres Amigas Super-Substation project.

Utilities Faced With Record Power Demands

Electric utilities saw record-breaking demand for electricity far outstripping their expectations. Things got so bad that on a few days, demand actually exceeded their ability to supply enough power.

That triggered load shedding, and rolling blackouts. The bigger problem was the increased cost to the Electric Reliability Council of Texas (ERCOT), the wholesale power market operator for most of the state.

Take a look at the graph below, courtesy of the Energy Information Administration (EIA). August day-ahead on-peak prices spiked to levels far exceeding rates that normally are in the $125-per-megawatt-hour (MWh) range.

As a result of these high rates, if you live in Texas, you’ll be paying higher electric bills to your utility. You see, unlike other areas of the country, Texas mandates that nearly all of its retail customers choose a competitive electricity supplier.

This eliminates the cost-of-service regulatory process that utilities in the rest of the country have to go through in order to recover excess costs from customers.

Why is Texas a unique case? As you can see from the graph below, courtesy of the National Electric Reliability Council (NERC), Texas is more or less its own electrical entity, at least as far as power grids are concerned.

The Real Power Problem

Here in America – unlike most developed countries – we have a fragmented power grid system. The continental United States has three main, distinct power grids: the Eastern Interconnect, the Western Interconnect, and the Texas Interconnect. You can see what grid serves your area by looking at the map below.

Both the Eastern and Western Interconnects have strong ties to Canadian grids.

In addition, both the Western and Texas interconnects have ties to Mexican power grids.

Ironically, the three grid systems have very limited connections with each other.

This type of connection would have essentially eliminated Texas high peak power costs during its recent heat wave. It could have simply purchased cheaper power from other operators anywhere in the United States.

This three-way interconnect is a problem that’s been begging for a solution for some time. The good news is, it’s one that’s finally about to get underway.

Tres Amigas Super-Substation: The Three-Way Solution

Back in October 2008, New Mexico Governor Bill Richardson announced that the town of Clovis, New Mexico was going to be the home of the Tres Amigas Super-Substation. Its purpose? To unite America’s three power grids.

New Mexico was chosen for a good reason: In a study undertaken by the Western Governor’s Association, the “Land of Enchantment” was ranked No. 1 in the country for renewable energy production potential.

The state could produce as much as 70,573 gigawatt-hours of renewable energy annually. That’s enough to power 6.6 million households.

But the most important factor in the New Mexico site was its proximity to all three of the major power grids.

After numerous delays, groundbreaking is set to get under way this fall. When completed in 2014 at a cost of $4 billion, Tres Amigas will be the largest – and most important – power substation ever built in the United States.

It will unite and revolutionize the nation’s power grid, and make problems like the one that occurred in Texas and the most recent blackout in San Diego things of the past.

More importantly, it will create the nation’s first energy trading “hub,” similar to Oklahoma’s Henry Hub for natural gas.

Utilizing the latest in power grid technology, a redundant, triangular “power pathway” (similar to a traffic circle) will be created, opening the door to efficient transmission of green, renewable energy throughout the country.

Tres Amigas will utilize state-of-the-art super-conducting DC power cables developed by the Los Alamos National Laboratory, and the latest energy storage system technology. Tres Amigas will also help to provide a more open market for green power producers who want to sell their power to an increasingly green conscious public.

When fully operational, each of its giant high-voltage DC power converters can direct as much as five gigawatts of power to any of the other two grids. The system is designed to take that number higher as New Mexico’s renewable energy generation expands.

Who’s the big winner in Tres Amigas? There’s no question that many companies will be providing services and equipment to build Tres Amigas.

But the biggest winner could be American Superconductor Corporation (Nasdaq: AMSC). It makes the superconducting cables that are a critical part of the Tres Amigas project.

The company has indicated that the Tres Amigas project could be worth as much as $1 billion in business.

The stock is way off its highs, having dropped 80 percent since the beginning of the year. Management changes and problems with several customers paying on time has led to restatement of earnings for the last quarter and the last fiscal year.

But once Tres Amigas gets under way this fall, the company could see its fortunes reversed, and along with it, the reversal in the steep slide in its share price. Investors who want to participate in the possible resurgence of American Superconductor might want to consider a small, speculative position.

Good investing,

David Fessler

Article by Investment U

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