Gold broke to all time highs this week and along with silver look firmly entrenched in a secular bull market. The gold bugs see gold at $2,000 or more an ounce and the gold haters see it as another bubble and one that will burst soon. So who will win? It is my humble opinion that both are going to be right, however to remain short gold right now is suicide.
A look at what drives gold prices is in order. Over the years gold has been known as a hedge against inflation and dollar weakness (as you have seen in previous blogs these two go hand in hand) and as an indication of fear. Fear both for markets around the world collapsing and fear of change. Certainly all of these factors are at play in the current market environment and so the gold bugs expect gold to continue to press to new highs for the foreseeable future.
The bear argument is that you cannot eat gold, you cannot use gold for anything other than as an ornament or as a piece of jewelry and so gold in essence is a useless store of wealth. People dig it out of the ground, collect it and let the dust settle on it but in effect there is no value to it other than that perceived by the market. As the market is fickle it is just a matter of time until the metal falls precipitously taking with it another set of gold bug dreams.
Certainly ever since man discovered the precious metal centuries ago, there has been a fascination with the metal that surpasses any true logic. However that fascination has not ebbed in hundreds of years and I do not foresee any change to this attitude any time soon. Gold is held widely and the central banks of the world continue to stockpile the metal. The simple laws of supply and demand mean that the price should continue to appreciate for the near term. Added to this is the fact that while gold has moved to all time highs there has been little fanfare regarding this price. Previous bubbles have typically been met with much press while this gold rise garners little attention.
I still do not see the crazy hysteria associated with a bubble. Typically there is the end game where everyone talks about gold, buys gold and the price rockets into orbit climbing to new highs on increasing volume daily. This is not happening so for now I believe that the price of gold and silver will continue higher. Furthermore as the dollar continues to weaken there will be continued demand from central banks to hedge against the move and increasingly they are turning to gold. As such the fundamentals that drive gold higher are in place and I expect those to remain intact for at least the next six to twelve months.
That said, once gold mania is rife it will then be time to exit any gold positions and look for a way to short the commodity. One thing I will warn is that bubbles can take prices to levels that no-one would ever have believed. This is a dangerous place to be short as many a trader has lost his shirt trying to pick a top. Rather wait patiently on the sidelines until the market is clearly in a downturn before initiating any short positions. Believe me there will be plenty of time to make money betting against gold once the bubble bursts. You do not have to try to time this at all.
So for now I believe that gold will march higher. I see that the price is being based on as solid a foundation for gold as I have ever witnessed and I would expect that to remain intact. Outside of the commodity trade I am skeptical of the market and see no reward to risking your investment dollars so as always if you need a place to park some cash let me know and I will provide you more detail on my fixed rate deposits.
Monday, April 25, 2011
Friday, April 22, 2011
Employment Reports
The Current Employment Statistics (CES) survey, conducted by the Bureau of Labor Statistics (BLS), is a monthly survey of more than 400,000 business establishments. The CES program provides estimates on employment, hours, and earnings by industry detail for the Nation, States, and metropolitan areas. The CES is widely considered one of the most timely and accurate economic indicators published by the Federal Government. In fact this is one of the most followed indicators and can provide major swings in the market due to the weight that analysts place on these numbers.
The theory is that a strong employment report points to a growing and strengthening economy. It is hard to argue otherwise as employment forms the basis of the economy and the consumer makes up two thirds of annual expenditure in the United States. So to say that this indicator is not important is erroneous. To rely completely on this number as gospel is also problematic due to the adjustments made by the births and deaths calculations.
The BLS attempts to adjust their numbers to reflect businesses that "die" and businesses that are "born". Their argument has some merit as their monthly surveys lose companies that go out of business that month as they stop reporting. Furthermore they are unable to find the new companies in a timely manner so they make an adjustment for these births and deaths. It is also important to know that companies that report their numbers to the BLS do so voluntarily so there is also a good chance that a company that stops reporting may still be in business. As an example the person who was reporting may have been laid off and no-one has picked up the reigns again. This will have the effect of skewing these adjustments but for this blog we will not dig too deeply into that side of the equation.
So how big are these adjustments and are they seasonal. For March of this year the government reported an upbeat employment report of the creation of 216,000 jobs. This exceeded projections and sent the markets into orbit. Digging deeper though you will see that 54% of those jobs or 117,000 were concocted by the BLS's computer birth/death model. Even more amusing (to me anyway) was that 21,000 new construction jobs were "created" and the next strongest category was the hospitality industry. Amusing because in the same month the Commerce Department reported the largest monthly drop in US new housing starts since 1984, down 20.8% year over year. I guess all the new companies are doing remodels!
These seasonal adjustments from the BLS will result in additional employment "strength" in April and May as the normal BLS adjustment is over 200,000 jobs added during those moths. Based on the stronger than normal adjustment in March we could see even stronger adjustments in these months which would really add fuel to the fire. That is why this week's weaker than expected initial claims numbers are even more surprising. In fact the last two weeks reports are starting to show a trend toward a weakening labor market rather than (as the BLS numbers are indicating) a stronger employment market.
Despite all of this trickery the fact remains that the unemployment rate continues to form a massive drag on the economic recovery even after the trillions of dollars that have been thrown at the problem. So while the market continues to run higher it is beginning to become more and more obvious that the "recovery" is more a function of stimulus money flooding into the market than a recovery on solid economic footing. As such it is a very dangerous market and becoming more so with every rally.
If the market is being held aloft by stimulus money then how much longer can they keep this going? On the other hand to be short this market is crazy as the Federal Reserve seems committed to printing money for the foreseeable future. It is a conundrum and not a market to be trifled with. If they are forced to stop printing the market will roll over but until then the shorts are going to be squeezed and that hurts. Currently we are seeing some weakness in the market as quantitative "guessing" number two runs out of allotted cash in a month. However, if another round of quantitative "guessing" is announced then we could continue to rally. My guess is that the Federal Reserve will initially stop the printing presses to see if their policies have taken hold. Once they see the drop in the stock market they will quickly realize that their policies have been in vain and they will be forced back into printing to salvage the one market that is "proving" that their policies are working.
My advice is to stay on the sidelines and keep your powder dry. Once the Federal Reserve stimulus ends for good and the safety net is removed (and this will happen) the market will fall precipitously. Chasing the market at this junction is not smart investing and will get you into trouble. Rather seek to earn a modest rate of return and remove the downside risk. One such investment is my Fixed Rate Deposits which provides you with a great rate of return and limited risk allowing you to wait for the dust to settle.
The theory is that a strong employment report points to a growing and strengthening economy. It is hard to argue otherwise as employment forms the basis of the economy and the consumer makes up two thirds of annual expenditure in the United States. So to say that this indicator is not important is erroneous. To rely completely on this number as gospel is also problematic due to the adjustments made by the births and deaths calculations.
The BLS attempts to adjust their numbers to reflect businesses that "die" and businesses that are "born". Their argument has some merit as their monthly surveys lose companies that go out of business that month as they stop reporting. Furthermore they are unable to find the new companies in a timely manner so they make an adjustment for these births and deaths. It is also important to know that companies that report their numbers to the BLS do so voluntarily so there is also a good chance that a company that stops reporting may still be in business. As an example the person who was reporting may have been laid off and no-one has picked up the reigns again. This will have the effect of skewing these adjustments but for this blog we will not dig too deeply into that side of the equation.
So how big are these adjustments and are they seasonal. For March of this year the government reported an upbeat employment report of the creation of 216,000 jobs. This exceeded projections and sent the markets into orbit. Digging deeper though you will see that 54% of those jobs or 117,000 were concocted by the BLS's computer birth/death model. Even more amusing (to me anyway) was that 21,000 new construction jobs were "created" and the next strongest category was the hospitality industry. Amusing because in the same month the Commerce Department reported the largest monthly drop in US new housing starts since 1984, down 20.8% year over year. I guess all the new companies are doing remodels!
These seasonal adjustments from the BLS will result in additional employment "strength" in April and May as the normal BLS adjustment is over 200,000 jobs added during those moths. Based on the stronger than normal adjustment in March we could see even stronger adjustments in these months which would really add fuel to the fire. That is why this week's weaker than expected initial claims numbers are even more surprising. In fact the last two weeks reports are starting to show a trend toward a weakening labor market rather than (as the BLS numbers are indicating) a stronger employment market.
Despite all of this trickery the fact remains that the unemployment rate continues to form a massive drag on the economic recovery even after the trillions of dollars that have been thrown at the problem. So while the market continues to run higher it is beginning to become more and more obvious that the "recovery" is more a function of stimulus money flooding into the market than a recovery on solid economic footing. As such it is a very dangerous market and becoming more so with every rally.
If the market is being held aloft by stimulus money then how much longer can they keep this going? On the other hand to be short this market is crazy as the Federal Reserve seems committed to printing money for the foreseeable future. It is a conundrum and not a market to be trifled with. If they are forced to stop printing the market will roll over but until then the shorts are going to be squeezed and that hurts. Currently we are seeing some weakness in the market as quantitative "guessing" number two runs out of allotted cash in a month. However, if another round of quantitative "guessing" is announced then we could continue to rally. My guess is that the Federal Reserve will initially stop the printing presses to see if their policies have taken hold. Once they see the drop in the stock market they will quickly realize that their policies have been in vain and they will be forced back into printing to salvage the one market that is "proving" that their policies are working.
My advice is to stay on the sidelines and keep your powder dry. Once the Federal Reserve stimulus ends for good and the safety net is removed (and this will happen) the market will fall precipitously. Chasing the market at this junction is not smart investing and will get you into trouble. Rather seek to earn a modest rate of return and remove the downside risk. One such investment is my Fixed Rate Deposits which provides you with a great rate of return and limited risk allowing you to wait for the dust to settle.
Tuesday, April 12, 2011
Oil and the Market
Just a few days ago oil reached $112 a barrel. I have been harping on inflation for a while but even I was shocked to see that gasoline prices are above $4.55 a gallon here in San Diego. That hurts. Regardless of this fact the stock market continues to trend higher. This cannot continue. Oil prices feed into everything and every business is affected by this increase to some degree.
On the one side you have oil companies and oil service providers. Certainly they are the major benefactors of these price increases. On the other side you have transportation companies that are trying to pass along the massive increase in their variable expenses to an already strapped consumer. Furthermore you have a consumer that is unable to find a job and now has to pay 30% more to fill their tank up with gas. This will bleed into their budget and squeeze the life out of a recovery.
So when does the market wake up and reflect this in the price of stocks? Certainly these prices do not feed into the market immediately. Oil prices are notoriously volatile and so the market will discount this for a while and certainly it has for the past year. However oil prices did not reach $112 a barrel overnight. This process has been developing for over a year as back then oil prices were less than $50 a barrel and have increased over 100% since.
At present the market remains resilient as market participants continue to buy the rhetoric from the Federal Reserve that inflation is under control. However, with earnings season upon us the proof will be how well companies have handled the increase and what effect is has on both their margins and their outlook. Sustained oil prices above $100 a barrel will squeeze the consumer and companies and will shave at least 1% off GDP growth. This will derail the recovery and will undermine the stock market advance.
So how sustainable are the current oil prices. Remember that when oil prices advanced to $147 a barrel in July 2008, they quickly fell back to below $50 a barrel six months later. That said the damage was done and the market fell with the drop in oil prices. The high in the price of oil interestingly corresponded with the bursting of the bubble in real estate. I believe that there is a correlation between the two to some degree as the massive increase in oil prices took the consumer to the edge and assisted in breaking the bubble (not that it would not have broken anyway).
The point is that back then the housing bubble and the energy price was driven by a massive influx of capital from loose credit. Back then the credit given was to the consumer who used it to finance housing purchases and this fed into a frenzy that drove the trade deficit into a massive negative. Fast forward to today and the consumer is still trying to get out from under the massive blanket of debt. The economy is still weak and in the place of the consumer we have the Federal Reserve who is buying all the junk that the banks and the consumers held. In order to buy this junk it is printing massive amounts of cash and pumping it into a fragile system. The market has reacted by debasing the US dollar and driving the prices of all commodities higher. The main difference between the two stories is that when the ship sinks this time it is not the US consumer that will go down but the credibility of the Federal Reserve and with it the markets of the world.
For an alternative to investing in the market I have created a Fixed Rate Deposit that pays you an excellent rate of return on your investments while providing safety, security and liquidity. Contact me for an overview of our Fixed Rate Deposits offering investors rates of 2.25% to 4.00% on 3-month to 2-year CD-styled investments.
On the one side you have oil companies and oil service providers. Certainly they are the major benefactors of these price increases. On the other side you have transportation companies that are trying to pass along the massive increase in their variable expenses to an already strapped consumer. Furthermore you have a consumer that is unable to find a job and now has to pay 30% more to fill their tank up with gas. This will bleed into their budget and squeeze the life out of a recovery.
So when does the market wake up and reflect this in the price of stocks? Certainly these prices do not feed into the market immediately. Oil prices are notoriously volatile and so the market will discount this for a while and certainly it has for the past year. However oil prices did not reach $112 a barrel overnight. This process has been developing for over a year as back then oil prices were less than $50 a barrel and have increased over 100% since.
At present the market remains resilient as market participants continue to buy the rhetoric from the Federal Reserve that inflation is under control. However, with earnings season upon us the proof will be how well companies have handled the increase and what effect is has on both their margins and their outlook. Sustained oil prices above $100 a barrel will squeeze the consumer and companies and will shave at least 1% off GDP growth. This will derail the recovery and will undermine the stock market advance.
So how sustainable are the current oil prices. Remember that when oil prices advanced to $147 a barrel in July 2008, they quickly fell back to below $50 a barrel six months later. That said the damage was done and the market fell with the drop in oil prices. The high in the price of oil interestingly corresponded with the bursting of the bubble in real estate. I believe that there is a correlation between the two to some degree as the massive increase in oil prices took the consumer to the edge and assisted in breaking the bubble (not that it would not have broken anyway).
The point is that back then the housing bubble and the energy price was driven by a massive influx of capital from loose credit. Back then the credit given was to the consumer who used it to finance housing purchases and this fed into a frenzy that drove the trade deficit into a massive negative. Fast forward to today and the consumer is still trying to get out from under the massive blanket of debt. The economy is still weak and in the place of the consumer we have the Federal Reserve who is buying all the junk that the banks and the consumers held. In order to buy this junk it is printing massive amounts of cash and pumping it into a fragile system. The market has reacted by debasing the US dollar and driving the prices of all commodities higher. The main difference between the two stories is that when the ship sinks this time it is not the US consumer that will go down but the credibility of the Federal Reserve and with it the markets of the world.
For an alternative to investing in the market I have created a Fixed Rate Deposit that pays you an excellent rate of return on your investments while providing safety, security and liquidity. Contact me for an overview of our Fixed Rate Deposits offering investors rates of 2.25% to 4.00% on 3-month to 2-year CD-styled investments.
Tuesday, April 5, 2011
OMG
Apologies to everyone for the title but I just am flabbergasted at the latest minutes just recently released from the Federal Reserve's last meeting. These were just released today and really sum up the level of incompetency at the Federal Reserve. I quote from their minutes: "With longer-term inflation expectations remaining stable and measures of underlying inflation subdued, members anticipated that recent increases in the prices of energy and other commodities would result in only a transitory increase in headline inflation."
TRANSITORY!! Obviously the buffoons at the Federal Reserve do not drive to work or eat. Maybe their food is paid for by the treasury who continues to spend our tax dollars on whatever it pleases with little or no regard for the economic consequences. For those of you who have followed my blog you will know that I believe that inflation is here and it is here to stay until such time as we stop felling trees to print more dollars.
Oil is now well above $100 a barrel and was recently quoted at $108. Gold has broken to multi-year highs and silver is at multi-decade highs approaching $40 an ounce. It was only a year ago that oil was below $50 a barrel and gold was below $1,000 an ounce. Furthermore the grains are spiralling into uncharted territory as corn, wheat and soybeans are all trading near their highs. Ask any mother at the grocery store and you will be told in no uncertain terms that the price of food is out of control. This is not a transitory problem but a real problem that will result in much pain to the consumer.
This pain will undermine any form of growth and to me the best option that we have at present is stagflation. The worst option and, in my opinion the most likely scenario, is that we will enter another recession. Could this turn into a depression? I believe that there is more than a small probability of this occurring. Keep your powder dry as the impending outfall will occur in the coming years. How can it not with such great leaders at the helm? For those of you into short term trading there is more than a small probability that the market will rally as liquidity is increased (courtesy of the Federal Reserve) and yields on short term treasuries come under pressure.
For those of you willing to stay in cash the options are limited. Fortunately I have created a short term investment that blows the yields at the treasuries and the banks away. For more information regarding this product let me know and I will be happy to help you earn some much needed return on your cash balances while limiting your exposure to the risks of a market based on false fundamentals.
TRANSITORY!! Obviously the buffoons at the Federal Reserve do not drive to work or eat. Maybe their food is paid for by the treasury who continues to spend our tax dollars on whatever it pleases with little or no regard for the economic consequences. For those of you who have followed my blog you will know that I believe that inflation is here and it is here to stay until such time as we stop felling trees to print more dollars.
Oil is now well above $100 a barrel and was recently quoted at $108. Gold has broken to multi-year highs and silver is at multi-decade highs approaching $40 an ounce. It was only a year ago that oil was below $50 a barrel and gold was below $1,000 an ounce. Furthermore the grains are spiralling into uncharted territory as corn, wheat and soybeans are all trading near their highs. Ask any mother at the grocery store and you will be told in no uncertain terms that the price of food is out of control. This is not a transitory problem but a real problem that will result in much pain to the consumer.
This pain will undermine any form of growth and to me the best option that we have at present is stagflation. The worst option and, in my opinion the most likely scenario, is that we will enter another recession. Could this turn into a depression? I believe that there is more than a small probability of this occurring. Keep your powder dry as the impending outfall will occur in the coming years. How can it not with such great leaders at the helm? For those of you into short term trading there is more than a small probability that the market will rally as liquidity is increased (courtesy of the Federal Reserve) and yields on short term treasuries come under pressure.
For those of you willing to stay in cash the options are limited. Fortunately I have created a short term investment that blows the yields at the treasuries and the banks away. For more information regarding this product let me know and I will be happy to help you earn some much needed return on your cash balances while limiting your exposure to the risks of a market based on false fundamentals.
Friday, April 1, 2011
Good News?
In reflection of the past month I reviewed some of the month's economic headlines to see how much good news came out of March. In order of oldest to newest they were:
Unemployment, while recovering, is still at over 8%. Inflation is really starting to cripple the consumer. Gasoline prices in San Diego are north of $4 per gallon. Today I filled my tank and it was $4.25 a gallon. That hurts. Food prices continue to climb as prices of all commodities soar. The main source of American wealth is tied up in housing and the prices continue to slide. To me if there is any good news it is from my short sales team who have mentioned that the time to complete a short sale has declined significantly. This is really a step in the right direction as the sooner we can clear this massive overhang the sooner the economy can start to recover on a solid footing. That said I believe we are still at least two years from cleaning out the inventory of underwater houses.
Business profits remain strong for the moment but it remains to be seen just how much inflation will erode these as there is little chance of passing any increased raw material costs on to an already strapped consumer. Furthermore the sovereign debt issues remain with Ireland as the most recent country to announce banking stresses far in excess of what was expected. The facts are that global risk is highly interconnected. Just look at the turmoil caused to the markets by the earthquake in Japan.
It is my opinion that the market continues to rise mainly due to the fact that interest rates are low and there is nowhere else to go. Furthermore people do not want to get left behind and the market has been on a tear recently. Once again I would caution you from going all in. Although on the surface it appears that a recovery is afoot, and I have been told by many that the market is fairly valued, it all comes down to your outlook and mine is based on the economic fundamentals and risk profile of the market.
Certainly with inflation rearing its head, interest rates are going to have to rise at some point. It is my opinion that the short term interest rates will remain low for the next 12 months or until Bernanke stops pushing them down with his open market policies. Any increase in rates will put a nail in the housing coffin and will drag the economy down once again. By printing the $3 trillion he has created inflation. To fight inflation requires him to stop printing and raise interest rates. Raising interest rates at this stage in a very fragile economy would be political suicide. So what can he do? He will keep on printing for now and will drive inflation even higher. This will ultimately create a lot of problems both locally and globally. We are seeing some of these problems already in the social unrest around the globe, but at present it has not affect the United States much. It soon will and when it does you will be glad that you have a lot of your powder dry!
- Motor Vehicle Sales Surge Past 13 Million
- Housing Starts Fall to Their Lowest Level Since April 2009
- Producer Prices Spike on Strong Food and Energy Costs
- New Home Sales Have Worst Month Since Data Started Being Collected
- Durable Goods Orders Unexpectedly Decline in February
- Q4 GDP Revised Higher, Reveals Above Potential Growth
- Personal Spending Rises, But Stronger Inflation Mitigates the Growth
- Initial Claims Show Modest Improvement
- Factory Orders Unexpectedly Fall in February
- Employment Sectors Shows All-Around Improvement
Unemployment, while recovering, is still at over 8%. Inflation is really starting to cripple the consumer. Gasoline prices in San Diego are north of $4 per gallon. Today I filled my tank and it was $4.25 a gallon. That hurts. Food prices continue to climb as prices of all commodities soar. The main source of American wealth is tied up in housing and the prices continue to slide. To me if there is any good news it is from my short sales team who have mentioned that the time to complete a short sale has declined significantly. This is really a step in the right direction as the sooner we can clear this massive overhang the sooner the economy can start to recover on a solid footing. That said I believe we are still at least two years from cleaning out the inventory of underwater houses.
Business profits remain strong for the moment but it remains to be seen just how much inflation will erode these as there is little chance of passing any increased raw material costs on to an already strapped consumer. Furthermore the sovereign debt issues remain with Ireland as the most recent country to announce banking stresses far in excess of what was expected. The facts are that global risk is highly interconnected. Just look at the turmoil caused to the markets by the earthquake in Japan.
It is my opinion that the market continues to rise mainly due to the fact that interest rates are low and there is nowhere else to go. Furthermore people do not want to get left behind and the market has been on a tear recently. Once again I would caution you from going all in. Although on the surface it appears that a recovery is afoot, and I have been told by many that the market is fairly valued, it all comes down to your outlook and mine is based on the economic fundamentals and risk profile of the market.
Certainly with inflation rearing its head, interest rates are going to have to rise at some point. It is my opinion that the short term interest rates will remain low for the next 12 months or until Bernanke stops pushing them down with his open market policies. Any increase in rates will put a nail in the housing coffin and will drag the economy down once again. By printing the $3 trillion he has created inflation. To fight inflation requires him to stop printing and raise interest rates. Raising interest rates at this stage in a very fragile economy would be political suicide. So what can he do? He will keep on printing for now and will drive inflation even higher. This will ultimately create a lot of problems both locally and globally. We are seeing some of these problems already in the social unrest around the globe, but at present it has not affect the United States much. It soon will and when it does you will be glad that you have a lot of your powder dry!
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