Month: December 2011

By MoneyMorning.com.au

Small-cap investors: take note! (And other investors, listen up too…)

As Slipstream Trader, Murray Dawes, pointed out last week, Santa Claus is coming to town. Or more specifically (and useful) for you as an investor, the annual Santa Claus market rally looks like it has arrived.

Last week’s market action was huge.

The S&P/ASX 200 index surged from 3,984.3 on Monday to close at 4,288.0 on Friday.

That’s a 7.6% gain in five days.

It was the biggest one-week gain since… just two months ago in October. Between 5 and 11 October the index gained 9.2%.

And that was the biggest gain since… just four months ago in August. Between 9 and 15 August the index gained 7.4%.

The question for investors now is: will the Santa Claus factor make this market rally more sustainable than the last two?

Because each time, following these swift rallies, the market slumped.

Why?

Because of all the bad news – U.S. debt problems, European debt problems, Chinese economic slowdown, and so on. Each of those events dragged the market lower.

Clearly what the policymakers would like is a constant stream of good news.

And maybe they’ve found the solution…

“The IMF [International Monetary Fund] has confirmed that it could raise new funds for onlending from Europe, amid speculation that the European Central Bank might provide money to the Fund that could be used to help Italy and Spain.”

As we understand it, the European Central Bank (ECB) isn’t allowed to lend money directly to European governments.

So, the Europeans need a plan.

A clever and sinister way round this problem is to hand cash to the IMF… on the condition the IMF hand the cash to Italy and Spain. Or any other European nation in the lurch.

That way the ECB can buy government bonds and national governments can keep spending. If the market stops buying government bonds, no problem, the ECB will give more money to the IMF… to give to European governments.

If the ECB, European Union and IMF get away with this scam, it could keep Europe off the front pages for weeks. Of course, it won’t mean the problem has gone away… just that it’s hiding.

But in the short term that will be forgotten about as the Santa Claus rally helps drive the market higher.

You can see how it worked last Christmas:

Click here to enlarge

The market rally started in late November… built momentum through January… before topping out in February. After that, apart from a brief market rally after the Japanese tsunami and earthquake, it was pretty much downhill for the market.

In fact, from the post-tsunami peak to the August low, the market fell 24.3%. That’s not fair, markets should only ever go up…

So even here in Australia, bureaucrats are doing all they can to fiddle with the market. To try and stop stock prices falling. Tomorrow the Reserve Bank of Australia (RBA) meets for the last time before it breaks until the February 2012 meeting.

Will it cut or raise rates? Or just leave them alone?

Who knows?

But whatever, odds are the market has moved into the happy zone. Whatever the RBA does, the happy market will probably look on the plus side… and doubtless send the market higher.

So, does that mean you should jump into the market and ride the Santa Claus rally?

Well, if this was a bull market, then yes. The Santa Claus rally worked a treat every Christmas from 2003 to 2006. But since then… it’s not so good. The market made a small rally in late 2007 before collapsing in the new year.

The same in 2008. Again in 2009. And as we say, even last Christmas the market rally was short lived.

In other words, the Santa Claus rally track record ain’t that hot.

So, rather than putting faith in the big red fella to make you a few bucks, we suggest sticking to what you know. European bureaucrats have shown they’re experts in papering over cracks without actually fixing anything.

And as long as they – and other bureaucrats – keep trying to cover up the real problem, the real problem will keep showing through.

For that reason our strategy stays the same: cash, gold, blue-chip dividend paying stocks… and an exposure to volatile small-cap stocks.

That way, if the rally is sustained, you should still make a bunch of cash but without putting all your savings on the line if the market rally doesn’t hold up.

Cheers.
Kris.

Related Articles

Why the Fed’s Actions Make Perfect Sense

Too Big to Bail

Swiss National Bank Intervenes…

Bailouts Still Boosting the Market

Was This Just Another Rigged Market?

From the Archives…

How to Profit from the Inevitable Return to Sound Money
2011-12-02 – Kris Sayce

Two Reasons the Market Should Have Fallen…
2011-12-01 – Shae Smith

Ditch Your Investor Pride to Avoid an Investing Fall
2011-11-30 – Kris Sayce

How to Play a Volatile Market for Profit
2011-11-29 – Kris Sayce

No Thanks to Central Banks
2011-11-28 – Kris Sayce

For editorial enquiries and feedback, email [email protected]

Santa Claus: A Market Rally Not Worth the Risk

USDCHF has formed a cycle bottom at 0.9066 on 4-hour chart. Range trading between 0.9066 and 0.9329 would likely be seen in a couple of days. Resistance is at 0.9329, a break above this level will signal resumption of uptrend from 0.8569, then further rise towards 1.0000 could be seen. Key support is now at 0.9066, only break below this level could indicate that the rise from 0.8569 is complete.

Forex Signals

Early to mid last week saw a very bullish market with the kiwi gaining against the Dollar. Thursday and Friday’s price action showed momentum finally slowing down with small movement. The market did however form a bearish Hikkake pattern at the end of the week suggesting the early bulls could lose control to the bears in the coming days.

A look at the chart below shows the mentioned Hikkake pattern. The pattern is strengthened as it is showing a clear rejection of a strong S&R level sitting at 0.7800.

The Hikkake is again strengthened by a 50% swing retracement. A look at the chart below and we can see the market last week retraced 50% of its most recent down swing. The Hikkake pattern is formed just below this 50% which happens to sit just 50pips above our identified S&R level at 0.7800.

With the strong technical resistance sitting at 0.7800 and the 50% swing retracement its possible we may see the market continue its bearish momentum seen for much of the latter part of this year. Last weekend the Kiwi opened with a gap which as of yet has not been filled. Shorting the pair down towards the 0.7500 area (the Gap) could prove to be a profitable trade in the coming days/week.

Article by vantage-fx.com

Written by Sara Nunnally, Editor, Inside Investing Daily, insideinvestingdaily.com

When Australia cut its key interest rate in early last month, it sent ripples through the global economy. Now is your time to take advantage of the opportunities set in motion.

Australia is one of my favorite “go to” markets for investors who want to “globalize” their portfolio. It’s a safe and stable economy with a lot of potential. But better yet… it is largely removed from the debt worries plaguing the U.S. and European markets.

But with problems this big, it’s hard not to get sucked into the turmoil.

In November… Australia cut its interest rates.

That might not sound like big news… Major economies around the world have been slashing rates for the past four years. But this is different. Australia was the first developed economy to raise its interest rates after the global financial crisis in 2008 and 2009.

And it continued to raise rates through November 2010, when it made its last move, bumping rates from 4.5% to 4.75%.

But on Nov. 1, Australia trimmed rates back to 4.5%. It was the first cut in two and a half years.

View larger chart

The reason? Europe’s debt crisis was affecting trade with Asia. Bloomberg reported that China and South Korea were exporting less because of European and U.S. economic woes.

And China is a huge market for Australia.

For a numbers geek like me, this is my bread and butter — especially since it deals with big-picture, global impact data. This is the kind of stuff — the undercurrent — that helps me see the big trends in the international market.

But you’re probably wondering why you should care. I have two words for you: resource and opportunity.

What this rate cut means for investors is this: more exports for Australian companies and more profits for their bottom line.

The resource sector is strong in Australia.

In fact, Australia is going through a mining boom. In late October, BIS Shrapnel said in its report “Mining in Australia 2011 to 2026” that investment in Australian mining could reach $85.7 billion by 2015 or 2016.

This year the estimated investment figures top out at only $48.5 billion, meaning the industry could see growth of nearly 20% a year for the next four years.

But some analysts think much of that growth will happen next year. And this cut in interest rate will be sure to fuel a lot more projects.

When interest rates are cut, the value of the underlying currency drops. After the announcement on November 1, the Australian dollar fell 0.4% overnight. That might not sound like much, but when you’re talking about millions of dollars’ worth of exports, this difference can add up quickly.

For example, if a buyer wanted to buy $1 million in iron ore, he would pay $4,000 less after rates were cut.

No wonder 80% of the investment capital in Australia’s resource projects comes from outside the country. Everyone wants a piece of this pie.

Australia isn’t the only fish in the pond, though… Indonesia, Turkey, Brazil and a host of other export countries are all trying to bolster exports. Australia’s rate cuts could be justified by needing to stay competitive in the resources sector.

The growth expectations and stable government and economy make Australia very attractive.

And the best opportunities may just be in the smaller companies — those where $4,000 makes a big difference. The junior mining sector will be a big place for investors over the next three or four years.

That $85.7 billion isn’t just going to go to the big guys.

JUMEX, or junior mining and exploration companies, can move quickly. Take a look at this chart over the past two years.

View larger chart

This is Independence Group (IGO:ASX). It is a nickel producer with the Long Nickel Mine in Kambalda, Western Australia. It also owns stakes in six joint ventures across Australia. Plus, it is exploring in five 100%-owned mines.

The company’s looking for gold and base metals… and prospects are good.

I like IGO because it’s actually producing something, so it has a cash flow. In fact, the company’s nickel production exceeded expectations for the third quarter (ending Sept. 30). IGO also has made some strategic acquisitions that have bought it stakes in other joint ventures.

These points are key for any investor looking to take a position in a junior mining company. A producing company is almost always safer (from an investment standpoint) than a small exploration company.

Reserve estimates for its exploration projects keep growing, too. Its Tropicana joint venture just boosted gold reserves from 5.56 million ounces to 6.61 million ounces. IGO’s stake is for 1.98 million ounces of those deposits.

At current market value, that’s $3.45 billion!

With a market cap of only $929 million, that’s a huge payday coming down the pipeline… and it’s just one of IGO’s projects in the hopper.

Australia is a hotbed of mining projects, and the interest rate haircut will make exporting cheaper. For junior mining companies, this is great news. Investors could have a field day.

Keep in mind, some of these junior miners are great takeover candidates, too.

If you’re looking to take advantage of the Australian mining boom and lower interest rates, now’s the time to do it. Small-cap companies could offer you a great advantage in this industry.

Last week saw an actively bullish market with Wednesday in particular closing up 190pips. Thursday and Fridays price action remained flat compared to earlier in the week. Despite the strong bullish momentum we saw the market struggled to break and close above the both technical and psychological level of 80.00.

The last three days of the week generated a strong bearish Hikkake pattern showing a clear rejection of the 80.00 area suggesting last weeks bulls may be overcome by the bears in the coming week.

The Hikkake pattern and resistance are further strengthened by a 61.8% Fibonacci retracement & rejection. Notice below how the Hikkake has formed just below and almost touched perfectly the 61.8% Fib level.

With the strong resistance, the 61.8% Fib retracement and the bearish Hikkake pattern, price action at this time is suggesting we may see the market rejoin its bearish trend seen for much of 2011. It’s wise to take note of last weeks weekend gap, that as of yet, has not been closed. Should we see a fall in the coming days the area around 76.00 (the gap) could prove to be a good profit taking area.

The CAD/JPY on Friday closed with a bearish pin bar rejecting the both technical and psychological level of 77.00 and the 61.8% Fibonacci retracement level from its most recent down swing.

The chart below shows the strength of the 77.00 area. It’s clear to see it has showing a strong relevance in this market in the past. We can see below Friday’s bearish pin bar fiercely rejecting this level.

The pin is not only rejecting the 77 but also a 61.8% Fibonacci retracement from its most recent down swing. The 61.8% sits just 28 pips above our technical level of 77 further strengthening upper resistance. It’s wise to take note of how the bearish pin bar touches the 61.8 almost perfectly.

With the charts showing strong upper resistance being supported by bearish price action we will be looking for shorting opportunities in the coming week with initial targets in mind at the 75.00 area which is the next obvious support.

Article by vantage-fx.com

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By CountingPips.com

The latest Commitments of Traders (COT) report, released on Friday by the Commodity Futures Trading Commission (CFTC), showed that large futures speculators heavily increased their bullish bets in favor of the US dollar and pushed their bearish bets for the euro to the highest level since June 2010.

Non-commercial futures traders, usually hedge funds and large speculators, increased their total US dollar long positions to $18.04 billion on November 29th from a total long position of $12.11 billion on November 22nd, according to the CFTC COT data and calculations by Reuters which calculates the dollar positions against the euro, British pound, Japanese yen, Australian dollar, Canadian dollar and the Swiss franc.

EuroFX: Currency speculators continued to add to their short bets for the euro against the U.S. dollar for a third consecutive week as of November 29th. Euro short positions rose to a total of 104,302 net contracts from the previous week’s total of 85,068 net short contracts. Last week’s short position is a new low level for euro positions all year and the highest short level since June 8th of 2010 when euro short positions totaled 111,945.

The COT report is published every Friday by the Commodity Futures Trading Commission (CFTC) and shows futures positions as of the previous Tuesday. It can be a useful tool for traders to gauge investor sentiment and to look for potential changes in the direction of a currency or commodity. Each currency contract is a quote for that currency directly against the U.S. dollar, where as a net short amount of contracts means that more speculators are betting that currency to fall against the dollar and net long position expect that currency to rise versus the dollar. The graphs overlay the forex spot closing price of each Tuesday when COT trader positions are reported for each corresponding spot currency pair.

GBP: Currency speculators increased their bearish bets against the British pound sterling for third consecutive week as of November 29th. British pound positions fell to a total of 46,660 short positions following a total of 36,634 net short positions registered on November 22nd. The decline in British pound positions marked the lowest level since November 1st.

JPY: The Japanese yen net long speculative contracts dipped last week following three consecutive weeks of increases. Yen long positions fell to a total of 40,547 net long contracts reported on November 29th following a total of 43,180 net long contracts that were reported on November 22nd.

CHF: Swiss franc positions dropped for a third consecutive week and to a new low level all year against the dollar last week. Speculator positions for the Swiss currency futures edged down to a total of 9,327 net short contracts following a total of 5,870 net short contracts as of November 22nd. The Swiss currency has seen limited strength in Forex trading since the Swiss National Bank initiated a policy to stem the strength of their currency.

CAD: Canadian dollar positions edged lower for a fourth consecutive week as of November 29th. CAD net contracts decreased to a total of 26,869 net short contracts as of November 29th following a total of 22,144 short contracts reported on November 22nd. CAD positions are now at their lowest level of the year, surpassing the previous low that was reached on October 11th when net short positions fell to 24,913.

AUD: The Australian dollar long positions fell lower for the third consecutive week as of November 29th. Australian dollar positions declined to a total net amount of 12,542 long contracts following a total of 17,960 net long contracts reported as of November 22nd. The AUD speculative positions are now at their lowest level since October 11th when Aussie long positions total 10,753.

NZD: New Zealand dollar futures speculator positions fell sharply last week for a third consecutive week. NZD contracts declined to a total of 3,718 net long contracts as of November 29th following a total of 7,916 net long contracts registered on November 22nd. Last week’s decline brought New Zealand dollar positions to the lowest level since April 5th when positions equaled 2,695 long contracts.

MXN: Mexican peso contracts fell last week for a second consecutive week and to a new lowest level all year. Peso positions declined to a total of 36,240 net short speculative positions as of November 29th following a total of 31,582 short contracts that were reported on November 22nd.

COT Currency Data Summary as of November 29, 2011
Large Speculators Net Positions vs. the US Dollar

EUR -104302
GBP -46660
JPY +40547
CHF -9327
CAD -26869
AUD +12542
NZD +3718
MXN -36240

The Bank of Thailand reduced its benchmark 1-day bond repurchase rate by 25 basis points to 3.25% from 3.50%.  Bank of Thailand Assistant Governor, Mr. Paiboon Kittisrikangwan, said: “The MPC assessed that the risk of a global economic slowdown has increased while consumer and business confidence remained weak. With upside inflation risks expected to be limited, the current accommodative monetary policy can provide further support to economic restoration and investment. The MPC therefore voted 5 to 2 to  reduce the policy rate by 0.25 percent, from 3.50 percent to 3.25 percent per annum, with 2 votes in favour of a 0.50 percent reduction.”

By MoneyMorning.com.au

Ratings agency, Standard & Poor’s this week downgraded the big four Aussie banks.

How did the markets react? Was there massive selling? More ‘short sells’ than normal?

No. By lunch time yesterday, all four big banks were higher.

It was as if traders shook off S&P’s bank ratings cut. And saw it as a reason to buy, buy and buy some more.

Maybe that’s no surprise. We’re always told that Australian banks are the safest in the world.

But there’s an old story the Aussie media overlooked.

And it could mean the banks aren’t as safe as you think…

Our Aussie banks faced a small ‘bank run’ in the weeks after the Lehman Brothers collapse in 2008.

Yet the media only caught the story two years after it happened.

The Australian newspaper wrote in June last year:

‘…the Armaguard vans worked overtime ferrying bundles of $10,000 out to the cash centres, the Reserve Bank’s strategic reserve holdings of $50 and $100 notes started to run low and the call went out to the printer for more. The Reserve Bank ordered another $4.6bn in $100s and another $6bn in $50s. It was the first time it was forced to do this since the Y2K computer bug scare in 1999.’

In the 10 weeks after Lehman’s demise more than $5.5 billion of cash was withdrawn… and stuffed under mattresses. A year later, only $1.5 billion had been ‘returned’ as deposits to the banks.

While it may have been a puny ‘bank run’, the higher than normal withdrawal of funds was ignored by the media.

But at least it explains why the government was so quick to guarantee bank deposits.

We’re sure you remember the media hoopla over the Australian government guarantee.

The media chose to celebrate the backing of cash deposits rather than asking why it was necessary.

As it turns out, the deposit guarantees came in the middle of a ‘bank run’.

There’s no doubting our ‘bank run’ was tiny. It was nothing like Northern Rock in the UK. There, people formed queues in the streets for days. Desperate to get hold of their cash.

And just because the federal government stepped in to prevent a more serious bank run, it doesn’t mean it can’t happen again. And this time it could be much worse.

But for now the market doesn’t care. It washed off the S&P ratings cut. And mainstream investors are buying the banks again.

However, while they’re doing that, perhaps it’s time to re-evaluate just how much cash you’ve got in the bank.

It’d be nice to have piles of cash sitting around where you know it’s safe. But it’s not practical. Physical cash takes up a lot of space. There’s no point stuffing it under the mattress, or floor… or the tool shed.

And you won’t earn interest on it either. In fact, in an inflationary economy, each day, cash in your hand becomes less valuable.

That’s why it’s worth looking for alternatives to cash… and the banks.

You’ve heard mainstream financial advisor’s tell you to diversify, right? Well, maybe it’s time to move away from paper assets like, cash, shares, bonds etc…

Maybe now’s the time to put a little of your cash into bullion.

Greg Canavan, editor of Sound Money. Sound Investments has encouraged his subscribers to buy bullion for some time.

‘One of the safest ways you can hedge against growing corruption and a lack of confidence and trust in the financial system is to own physical gold.’

By owning physical gold, not only are you keeping your cash safe from inflation, but as Greg says, ‘When you own physical gold – and have it stored securely – your assets are outside the financial system’.

This way, no matter what happens in our messy financial markets, you’ll have part of your wealth out of harm’s way.

You can think of it as an insurance policy against meddling governments and inflation. And as an insurance policy it’s one of the best ways to make sure you can access your assets when you need to.
Now is the time to consider moving some of your cash into bullion.

Shae Smith
Editor, Money Weekend

Publisher’s note: Greg Canavan is the foremost authority for retail investors on value investing in Australia. He’s the former head of Australasian Research for a major asset-management group and a regular guest on CNBC, Sky Business’s ‘The Perrett Report’ and Lateline Business. Greg shares his insight, ideas and investment recommendations with readers of his Sound Money. Sound Investments newsletter… to find out more information on Greg’s letter, go here.

The Secret Aussie ‘Bank Run’ is a Sign to Buy Gold