Month: November 2011

By MoneyMorning.com.au

Prepare For The Plunge When Democracy Breaks The Market…

Forget Occupy Wall Street. And its pale sickly cousins, Occupy Melbourne and Occupy Sydney here in Australia…

No one saw this coming.

The decision by Greek prime minister George Papandreou to call a referendum on the Greek debt bailout package – effectively asking the Greek people to vote on another decade of austerity – is a game changer.

It undoes the charade that was the Eurozone rescue plan. The referendum is set for January, meaning no investor will contribute to the Greek bailout fund before then. The bazooka is empty.

The Eurocrats thought they kicked the can down the road, but the Greeks have just kicked it back.

The Greeks like to say they gave democracy to the world. Well, this referendum is democracy in action. And if the Greeks say ‘NO’ to Europe, the end of the Eurozone as we know it will come much sooner than anyone predicted.

But the referendum is not a foregone conclusion. Actually it’s unlikely. Later this week, the Greek PM faces a confidence vote by the parliament. If he wins that vote – and it will be tight – the referendum call still has to pass a series of hurdles. Still, the market won’t like it.

If he loses, you’re probably looking at either a new leader or fresh elections. From the market’s perspective, that’s a slightly better option as it takes the referendum off the table.

But let’s be honest – there’s no good news here. This is what happens when politicians get backed into a corner. They respond in unpredictable ways. George Papandreou can’t keep his German and French masters happy AND retain the support of his party and people.

A policy of austerity – a euphemism for depression – cannot work in a democracy. People can withstand hardships. But not for years on end. The Eurocrats in Brussels are imposing a decade of depression on the Greek people. They won’t stand for it. Democracy will eventually undo the Eurozone.

The process has already started. Yields on Italian debt are rising to near-record levels. The chart below shows yields on Italian 10-year bonds trading just below the highs reached in early August, just before the European Central Bank intervened to push rates lower.

An interest rate of 6.2 per cent is prohibitively high for a country with more than €300 billion of sovereign debt to refinance in 2012 alone. And with recession a threat, the chances of Italy growing out of its debt burden anytime soon is remote.

What does all this mean?

Put simply, uncertainty and fear is back. This should see the market retest the lows of early October. I don’t think it will hold above this point for too long.

Greg Canavan
Editor, Sound Money. Sound Investments

P.S. Even before this calamity started unfolding, I identified four urgent sells on the Australian market. These are areas of the ASX that will be exposed to more mass selling by the end of the year. And if you hold shares in these sectors, you need to consider them dangerous for you to hold right now. To find out which four sectors are at risk – and what you need to do to protect your wealth now – click here…

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From the Archives…

Gain Without Pain
2011-10-28 – Greg Canavan

If a Butterfly Flaps its Wings in Frankston…
2011-10-27 – Kris Sayce

Dr Doom’s Warning for Aussie Investors
2011-10-26 – Kris Sayce

“Ctrl + Alt + Delete”
2011-10-25 – Dan Denning

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2011-10-17 – Kris Sayce

For editorial enquiries and feedback, email [email protected]

A Greek Debt Bailout in Crisis

By MoneyMorning.com.au

After going bonkers a couple of months back, our old pal (gold) is moving in the right direction again.

This morning it’s trading at USD$1,738… and just under $1,700 in Aussie dollars.

Central bankers are trying their darnedest to rid the world of meddlesome warning signs (messing with interest rates, pegging currencies – such as the Swiss franc, and printing money). Warning signs that could help you defend yourself against central bank and government attack.

But through all that, gold still has the habit of giving the game away on what you can expect to happen next. And it’s telling you that more money-printing and co-ordinated wealth destruction is just around the corner.

Of course, like all predictions, we could be wrong… which is why we never tell you to bet your house on it.

But if you’re prepared to bet a few bucks each week on the lotto with odds of 10 billion to one, you should definitely make sure you place a bet on something with much shorter odds – that the U.S. Federal Reserve will print more money in 2012, and the gold price will go higher.

Because believe us, you’ve got a much better chance of getting your money back on a bet against the Fed than you have with a bet on the lotto.

Cheers.
Kris.

PS. Don’t forget to register for the Sydney Gold Symposium. It’s less than two weeks away. Your editor is due to chair day two of the event, including a panel discussion with Eric Sprott, Egon von Greyerz, Ben Davies and John Embry. Tickets are still available. Click here for more details…

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From the Archives…

Gain Without Pain
2011-10-28 – Greg Canavan

If a Butterfly Flaps its Wings in Frankston…
2011-10-27 – Kris Sayce

Dr Doom’s Warning for Aussie Investors
2011-10-26 – Kris Sayce

“Ctrl + Alt + Delete”
2011-10-25 – Dan Denning

A Mistake That Could Cost Millions
2011-10-17 – Kris Sayce

For editorial enquiries and feedback, email [email protected]

Gold Lotto

By MoneyMorning.com.au

Are You Prepared to Make This Sure Bet?

Making predictions is a tricky business.

The probability of picking six correct numbers in a 49-ball lottery is one in 10 billion.

In a two-horse race you’ve got a one-in-two chance. But there’s still no guarantee you’ll back the winning nag… even favourites get beaten sometimes.

As a stock picker, we know that all too well.

It’s no different to economic forecasters – or “economists” as they like to call themselves. (In our view most “economists” don’t deserve the title. They’re no more than guess-artists).

This morning we were amused by the latest “Economic Projections of Federal Reserve Board Members and Federal Reserve Bank Presidents”.

Put simply, every six months the U.S. Federal Reserve board members and presidents submit their forecasts for gross domestic product (GDP), the unemployment rate, Personal Consumption Expenditure (PCE) inflation and PCE core inflation (excludes food and energy).

They make predictions for the current year and the next three years.

It came as no surprise that in each case, the Fed board members and presidents underestimated the unemployment rate and inflation rates for 2011… and overestimated the GDP for 2011.

In other words, on four occasions they backed the wrong horse in a two horse race.

(By the way, the probability of picking four losers in four two-horse races is one in 16. So well done to the Fed!)

Of course, any prediction will always be tainted by the personal views held by those making the prediction.

Put another way, the U.S. Federal Reserve believes it’s doing the right thing by printing money and keeping interest rates artificially low. Therefore, when the Fed predicted in June that U.S. unemployment would be between 8.6% and 8.9% in 2011, it did so in the belief its policies would work.

Six months later, when the policies clearly haven’t worked, the Fed has had to change its unemployment projection to between 9.0% and 9.1%.

And it has had to revise upwards its inflation predictions… and revise down its GDP prediction.

But that hasn’t stopped the Fed believing.

Because even though the forecast for PCE inflation (including food and energy) has been revised up from a range of 2.3%-to-2.5% to 2.7%-to-2.9%, the Fed statement still reads:

Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.

So if we’ve got this right, even though the Fed got it wrong with its predictions for this year’s inflation rate, don’t worry. Because the Fed is sticking to its predictions for the next three years of lower inflation.

So unconcerned is Dr. Bernanke about inflation, he told the press conference:

The concerns that have been expressed relate to the possibility that the Fed’s highly expansionary policies might be contributing to inflation risk. I would simply point to the record. If you look back for the last five years, inflation – although it’s been volatile due to commodity price fluctuations – has averaged about two percent, which is close to a reasonable definition of price stability…

As we say, the Fed still believes what it has done, and is doing is right.

So we looked at the record… the Fed’s own record…

The Federal Reserve Bank of St. Louis provides a whole bunch of useful data. Including this chart on the Consumer Price Index for All Urban Consumers: All Items:

Click here to enlarge

Over the past five years, the CPI for All Urban Consumers has risen from about 190 to about 225. By our calculations, that’s a consumer price inflation rate closer to 4.5% than 2%.

But still, get used to the Fed talking down inflation.

Because sometime in 2012 you can expect the Fed to push the money-printing button… again.

So what you’ll see over the next three to four months is the Fed greasing the wheels… polishing the ball… and painting the shutters… getting the market ready for the inevitable money-printing 3 (MP3).

On the one hand the Fed will continue to say inflation is low, while on the other hand it will keep revising upwards its inflation forecasts.

And we’re not the only ones to make a prediction on MP3…

According to Bloomberg News:

Sixty-nine percent of economists in a Bloomberg News survey expect the Fed to embark on a third round of bond buying, with a plurality of 36 percent of respondents seeing purchases beginning in the first quarter of 2012.

Not only that. But as Fed chairman, Dr. Ben S. Bernanke hinted at a press conference this morning, the Fed’s next money-printing spree could involve buying mortgage-backed securities.

Why not? They’ve tried everything else. None of it has worked – not that the Fed will admit it.

Maybe they should start taking a long hard look at gold…

Cheers.
Kris.

PS. Don’t forget to register for the Sydney Gold Symposium. It’s less than two weeks away. Your editor is due to chair day two of the event, including a panel discussion with Eric Sprott, Egon von Greyerz, Ben Davies and John Embry. Tickets are still available. Click here for more details…

Related Articles

Why it’s Not Too Late to Avoid This Investing Mistake

Three Steps to Wealth: Leverage, Volatility and Risk

Two Decades of Boom and Bust

Great News for Options Traders

How to Turn Pennies into Pounds With Australia’s Most Exciting Companies

From the Archives…

Gain Without Pain
2011-10-28 – Greg Canavan

If a Butterfly Flaps its Wings in Frankston…
2011-10-27 – Kris Sayce

Dr Doom’s Warning for Aussie Investors
2011-10-26 – Kris Sayce

“Ctrl + Alt + Delete”
2011-10-25 – Dan Denning

A Mistake That Could Cost Millions
2011-10-17 – Kris Sayce

For editorial enquiries and feedback, email [email protected]

Fed Up With Inflation…

Being contained by 1.0265 resistance, USDCAD pulled back from 1.0222. However, the fall is treated as consolidation of uptrend from 0.9891, another rise towards 1.0400 is still possible after consolidation. Support is at 1.0100, only breakdown below this level could indicate that a cycle top has been formed at 1.0222 on 4-hour chart, then deeper decline to 1.0000-1.0050 area could be seen.

By The Sizemore Letter

The silence in the major financial media on gold and precious metals this month has been deafening.  As recently as a few weeks ago, you couldn’t get away from gold headlines if you wanted to.  For months leading up to gold’s parabolic jump, the financial press was inundated with articles about gold.  Most were wildly bullish, but there were also quite a few bearish articles to be found—and a few of those bearish one were written by me (see Sizemore’s articles on gold).

The yellow metal certainly gave us all plenty to write about. In a short-lived bout of speculative hysteria the price of gold soared above $1,900 in early September before quickly falling back down to earth, losing $300 in a matter of weeks.

But throughout the month of October, there has been very little published on gold, bullish or bearish.  It’s as if the investing public suddenly lost interest in the yellow metal.

Some of the waning interest is understandable.  Gold’s reputation as a “safe haven” certainly lost its shine with last month’s action.  Safe havens do not exhibit that kind of volatility.  And when it really does appear that the world is ending, it is to the safety and liquidity of U.S. Treasuries that they run, not that most barbarous of relics, gold.

Yet a funny thing has happened.  Quietly, under the radar, gold has mounted a comeback, rising over $100 per ounce in just the last week.

As a professed gold bear, this makes me pause.

Gold is rising quietly, in the absence of the usual blustery gold bug bravado.   This suggests that the weaker buyers were shaken out by last month’s volatility and that the current rise might be a little more durable.

It appears that gold’s role has shifted from that of “crisis hedge” to “risk asset.”  After Europe’s announcement that it is finally taking the sovereign debt crisis seriously jolted investors’ animal spirits,  all risky assets have gotten a boost.  This includes global equities, industrial commodities, and yes, gold.

I’ve made known my skepticism of gold’s value as a long-term investment in past articles.  It pays no interest or dividends, it has little in the way of intrinsic or industrial value, and the only way you profit from gold is by finding someone willing to pay more for it than you did.  That’s not an investment; it’s a high-risk speculation.

There is nothing wrong with the occasional high-risk speculation, of course.  But as investors, we need to be honest with ourselves about the risk we are taking and we should separate long-term investment capital from short-term trading capital.

With investor risk appetites returning, I see virtually all risky assets doing well for the remainder of 2011.  This would—and I say this through gritted teeth—include gold.

Still, investors wanting to profit from a short-term move in the yellow metal shouldn’t get too attached.   Gold jewelry and industrial demand has been stagnant for most of the past decade; virtually all of the new demand that has caused the price to quintuple has been due from “investors” ranging from hedge funds and ETFs to individual investors who have given up on the stock market.   Gold is still quite trendy, and trendy investments often prove to be disastrous.  Just ask investors who bought Netflix ($NFLX) at $300 per share.

Gold is also looking overpriced relative to other precious metals and particular to platinum.  Let’s take a look at Figure 1, which tracks the gold/platinum ratio over the past two and a half decades.

Figure 1

Today, gold is more expensive relative to platinum than at any time in the history of the chart.  It should be noted that platinum is a far rarer metal than gold.  And unlike gold, platinum also has extensive industrial use (particularly in the auto industry) in addition to its use in jewelry.

In 2008, the price of gold surged relative to platinum (note the vertical move in the chart) in large part because of platinum’s industrial value.  Gold’s uselessness was actually a virtue because its demand was not tied to auto production.  But as life returned to normal in subsequent months, platinum rallied relative to gold.  I would expect to see a repeat of this in the months ahead.

If you are determined to buy a precious metal, platinum might be the better bet at current prices.  But whether you’re a skeptical gold bear like myself or a dedicated gold bug, you might try something a little different.  Consider a pair trade—buy platinum and short gold.  This can be done via the futures markets or by using the more pedestrian gold and platinum ETFs—$GLD and $PPLT, respectively.

Whether precious metals rise or fall—and whether the market remains in “risk on” mode or lurches back into “risk off” mode—investors can profit from the gold/platinum ratio returning to something a little closer to normal.

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.

The Reserve Bank of Fiji cut its overnight policy rate by 100 basis points to 0.50% from 1.50% previously, in order to support economic growth in the context of an uncertain global outlook.  Acting Chairman, Deo Saran, said: “The weaker outlook on global and domestic growth warrants such a move, particularly at this juncture where foreign reserves levels are comfortable and the outlook is stable, while inflation is expected to moderate over the coming months,”

David Banister- www.MarketTrendForecast.com

It’s been several weeks since I’ve written about Gold and we have had a wild ride since the 1910-1920 highs in August.  At the time as we approached I forecasted a major correction was nigh and we were shorting the rise from 1862-1910 prior to a huge $208 drop that took place over just a few days.  We covered our short at $1725 and then Gold rallied back to a double top at $1920 and then fell back to $1531.

That pullback to $1531 qualifies as a Fibonacci retracement of the 34 month rally from $681 to $1920, and would also qualify for a price low for a 4^th major wave correction that I discussed in prior forecasts.  My initial targets for the Gold pullback were $1480-$1520 if the $1650 area was violated.  Most recently we have seen Gold run up to 1681 which is another Fibonacci resistance zone a few times and then back off to the low $1600’s.

With the recent push over $1681, we can now confirm the 4^th wave is over at $1531 lows and that the 5^th wave is likely in the very early stages, but beginning to build steam. I will say that we want to make sure the 1650-1680’s areas are defended by Gold on any pullbacks in order for this forecast to remain valid.  During this 5^th wave up, eventually we should see the $2380 ranges in Gold, but it will not take place overnight.  In the next few months I am looking for Gold to attack the $1900 range, possibly even by year end, and then in 2012 attacking the $2000 plus ranges.

With all of the Macro events in Europe changing on an almost daily basis, the whipsaws in both the precious metals and equities markets are difficult to forecast and trade for most investors. However, Gold has been moving in defined Fibonacci and wave patterns for ten years now, and has about three years left in a 13 year bull cycle if I’m right.

Below is the updated weekly chart of Gold.  You can see prior low’s as they related to oversold indicators, and where we just came off the 1531 lows and its Fibonacci pivot along with the oversold indicators below.

Look for Gold to attack 1775 first, then 1800, 1840, then 1900 in the coming 6-10 weeks or so.

You can get 3-5 updates a week on Gold, SP500, and Silver by visiting www.MarketTrendForecast.com

The US Federal Open Market Committee (FOMC) held the fed funds rate unchanged at 0 to 0.25 percent, and made no other changes to its policy. The Fed said: “To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to continue its program to extend the average maturity of its holdings of securities as announced in September. The Committee is maintaining its existing policies of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction.”

The Fed previously announced the commencement of “operation twist” at its September meeting, after it held monetary policy settings unchanged at its August meeting, where it committed to low rates until 2013.  The US reported inflation of 3.9% in September, compared to 3.8% in August, and 3.6% in both July, June and May, up from 3.2% in April, as high commodity prices caused a broader increase in prices.  Meanwhile the US economy grew 2.5% in Q2, up from 1.3% in Q2, and 0.4% in Q1 this year.  

A Three-Step Plan to Surviving Market Paranoia

by Marc Lichtenfeld, Investment U Senior Analyst
Wednesday, November 2, 2011: Issue #1634

It’s amazing how quickly things turn around.

For years now, it seemed as if everyone was bearish, believing the economy was in the toilet and that we’d never emerge from an eternity of doldrums.

Then a 10.8-percent market rally in October had many people feeling more bullish than they’ve been in years. Suddenly, sentiment indicators turned more bullish.

The American Association of Individual Investors’ weekly sentiment poll shows 43 percent of respondents are bullish. That compares with 33 percent one month ago. Bears decreased to 25 percent from 47 percent.

Then, yesterday, the Greeks decided the gift that the other European governments were giving them (forgiving 50 percent of their debt) may not be such a gift after all. They decided to put it to a vote of its citizens – the same citizens who have fought austerity measures and are famous for systemically refusing to pay taxes.

That’s like a suspect who’s been offered a plea, asking his accomplices what they think he should do.

As a result, the market sold off hard Tuesday morning.

Like Europe, the United States has its own problems. Unemployment is still way too high and many people are struggling. But last week’s report that GDP grew 2.5 percent in the third quarter was certainly welcome news. You have to walk before you can run.

Along with the solid GDP number, corporate earnings have been excellent. In the third quarter, of the 324 S&P 500 companies that have reported earnings, 71 percent have beaten expectations – significantly higher than the 62-percent average over roughly the past 20 years.

Even with the market’s big October rally, the S&P 500 is only trading at 12 times forward earnings. That compares with the historical average of 14.9 since 1980. That suggests the market has another 25 percent left in it just to return to its historical average.

Granted, it’s not all lollipops and rainbows out there. Fourth-quarter earnings estimates have actually come down three percent in recent weeks (although that makes them easier to beat). The savings rate is once again declining and disposable income fell 1.7 percent in the third quarter.

Things are in a constant state of flux. One day, the European economy is about to collapse. The next, a deal is reached on Greek debt and investors are buying stocks with both hands. Then the deal falls apart, a major brokerage goes bankrupt and may have misallocated customers’ funds, but then Pfizer (NYSE: PFE) produces stellar earnings.

As an investor (as opposed to a trader), you can’t react to every news event or data point.

Last night, my wife was trying to talk someone down who was freaking out about how bad things are. It seems as if our world is always worse than it was before. We pine for the good ol’ days.

But were those days really so good?

The 1960s were marked by the assassination of a President, the beginning of a nasty war and civil unrest across the country.

In the 1970s, a President committed a criminal act and was thrown out of office. He was followed by two ineffective Presidents. The economy was in the toilet, inflation was in the high teens and we were afraid the Russians would start a nuclear war.

The 1980s were marked by greed, selfishness and really bad hair. We were still petrified of the Russians as Sting eloquently sang, “I hope the Russians love their children, too.” Oh yeah, and we invaded a couple of countries.

In the 1990s, politicians spent tens of millions of taxpayer dollars to confirm that a President had an extramarital affair. Then that President lied under oath about it. Fortunately, the economy was hot so we didn’t really care that much. Nor were we concerned that terrorism against U.S. interests was on the rise.

And last decade of course saw a terrorist attack on U.S. soil, the bursting of two asset bubbles, the near collapse of the financial system and the worst recession since the Great Depression.

There are always things to be worried about. Reasons why you shouldn’t take any risk. At the same time, you can always point to statistics like the ones I mentioned above that justify getting into the market at any particular time.

The point is that, as an investor, you should have a plan. Don’t rely on whims or intuitively knowing the right time to buy or sell. You will be wrong. Guaranteed. Timing the market is next to impossible.

To make money in the markets you need to be invested for the long term.

And here’s how to do it:

• Allocate your assets across a spectrum of classes, including international stocks, domestic stocks, bonds, precious metals and real estate. For a simple formula that has been proven to beat the S&P 500 with far less risk, take a look at The Gone Fishin’ Portfolio.

• Don’t watch CNBC. The financial media thrives on scaring you so that you’ll be forced to watch even more of their nonsense and react accordingly. Ignore them and your portfolio will be much better off.

• And finally, invest in stocks that have a history of raising their dividend every year. If you’re seeking income, you can achieve impressive yields in just a few years as the dividend gets raised. For wealth builders, the power of compounding dividends generates huge returns when you reinvest the dividends over the years.

Stick to your plan and over the years, you should be more than fine.

Good investing,

Marc Lichtenfeld

Article by Investment U

This is what’s in the news for Wednesday, November 2nd. Bloomberg reports that Fed officials are probably engineering a third round of large scale asset purchases, but a decision likely won’t be announced today, according to economists in a Bloomberg News survey. Reuters reports that Sony Corp. (NYSE:SNE) said it faces its fourth consecutive annual net loss, instead of a profit it forecast earlier, as Thai floods disrupted camera production, adding to losses from a rising yen and price declines in its TVs and PCs in the U.S. and Europe. The Wall Street Journal reports that Yahoo (NASDAQ:YHOO) is talking with private-equity firms about a deal in which they would take a minority stake in the company while effectively gaining control. Finally, the Wall Street Journal reports that as online videogame firm Zynga Inc. prepares to go public, Electronic Arts (ERTS) has broken Zynga’s hold on the top games played on Facebook with “The Sims Social.” Since the game’s August debut, it has become Facebook’s second-most-played game.