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Fed - Actions Speak Louder Than Words

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Posted by Axel Merk, Portfolio Manager, Merk Funds

on Wednesday, 04 April 2012 06:20

Investors may be taken for a ride by today’s Minutes of the Federal Open Market Committee (FOMC), which expand on the FOMC’s March 13, 2012 statement; in the interim, we believe the Federal Reserve (Fed) Chairman Bernanke has gone out of his way to assure the markets that monetary policy will remain “highly accommodative,” at least through late 2014.

The Fed does indeed have a credibility problem: having assured investors that rates will remain low for an extended period, it may only take one or two FOMC members to turn more optimistic about the economic outlook to cause the markets to more aggressively price-in tighter monetary policy. Conversely, Bernanke has made it clear that he is most concerned about a recovery in the housing market and that low interest rates – throughout the yield curve – are desirable. Operation Twist is specifically aimed to achieve that, lowering long-term rates and flattening the yield curve. However, should investors become increasingly optimistic about economic improvement, odds increase that investors sell bonds, putting upward pressure on long-term rates.

To understand the Fed’s “communication strategy”, one needs to be aware of who is calling the shots. We are not just talking about Fed Chairman Bernanke, but also the composition of voting FOMC members. Without a doubt, the “hawks” (hawks are FOMC members considered to favor tighter monetary policy compared to “doves”) on the FOMC are getting more vocal. At the same time, the only voting “hawk” on the FOMC this year is Richmond Fed President Jeff Lacker:

4-3mi

The scale may tilt a tad towards the centrist/hawkish side should Congress fill the two vacant seats with the candidates under consideration. Still, when all is said and done, it is the voting members who ultimately determine imminent monetary policy decisions, rather than the noise created by non-voting members. And those actions remain, in our interpretation, decisively on the dovish side:

 

  • “almost all members again agreed to…maintain a highly accommodative stance…”
  • “a number of members perceived a non-negligible risk that improvements in employment could diminish as the year progressed”

 

Obviously, should economic data continue to surprise to the upside, the Fed will have an ever-more difficult time defending its dovish position. The credibility of the Fed will be seriously tested as the Fed has committed to keeping rates low until late 2014. However, should we enter a weak patch, we believe the odds are rather high that the FOMC will “take out insurance” against another slowdown. In a world where everyone hopes for the best, but plans for the worst, central banks around the world – including the Fed - may keep the world awash in money.

After all, a world laden with debt may need inflation if deflation is to be avoided. Bernanke has argued many times that tightening monetary policy too early was one of the biggest mistakes the Fed made during the Great Depression. We don’t think Bernanke will repeat this. Indeed, we consider he will err firmly on the side of inflation. As such, when the dust settles, look at actions, not words. We see doves, not hawks, managing the monetary aviary.

Please register for our Webinar on Thursday, April 19, or sign up for our newsletterto be informed as we discuss global dynamics and their impact on currencies.

Axel Merk
President and Chief Investment Officer, Merk Investments
Merk Investments, Manager of the Merk Funds



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Stocks & Equities

The Singapore Stock Market is the World's Biggest Bargain

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Posted by Martin Hutchinson

on Monday, 02 April 2012 05:14

After all, its economy is in fine shape, and is growing faster than any of the major Western economies.

In fact, with its GDP per capita estimated at $50,700, Singapore is now richer than the United States.

It's all proof that as the world's leading trade entrepot, Singapore is aggressively moving up the global value chain as its citizens become richer and better educated.

And unlike the US, Singapore's recovery from the 2008-09 recession was rapid, with 14% growth in 2010.

Since then, it has entered a mini-recession, with GDP declining at a 2.5% annual rate in the fourth quarter of 2011. Still, overall growth in 2011 was a solid 4.8%, and the country is expected to grow by another 3.1% in 2012, according to the analysts at The Economist.

Inflation is a moderate problem, running around 5%, although it is expected to decline.

Yet the most impressive statistic about Singapore is its current account surplus of 18.4% of GDP; the budget is also in modest surplus, as it is most years.

Read full article here

Screen shot 2012-04-02 at 5.07.34 AM



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Stocks & Equities

The Best Market to Invest In & the Two Stocks Tyler's Hot On

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Posted by Tyler Bollhorn - StockScores

on Saturday, 31 March 2012 08:09

I will be speaking in Calgary and the Calgary Resource Conference at the Telus Convention Center, you can register at www.cambridgehouse.com . I am doing my talk,
How to Identify Opportunities in Junior Resource Stocks on Saturday March 31 at 1:30.

I consider the stock market my friend, although I don't think it calls me the same. I know the stock market does not care about me, it does not even know me from any of its other participants, but I feel the need to defend my friend. Over the past 20 years, the market has given me a lot of joy and excitement, although it has frustrated me at times too. And now, as the market goes through a time when it is maligned, I feel I must come to its defense.

This week, a CNBC poll ranked investment alternatives based on a survey they did and the stock market came in third behind Gold and Real Estate. 37% of respondents voted Gold as the best investment with Real Estate in second with 24% and Stocks in third at 19%.

The results don't surprise me; they simply confirm what we already know. People tend to invest with a rear view mirror and Gold has been a great performer over the past 10 years so give it the prize. I doubt that it will continue to be the best investment, over the past few months Gold has shown signs of weakness and is now threatening its long term upward trend line. It has not broken it yet so perhaps it will continue to be strong but history has shown that all trends come to an end eventually.

I think picking Real Estate as a good investment is a bit of respondents talking their own book. What would you expect people to say if they own a home? They are already invested in it so of course they will have a bias. I own real estate and I hope it goes up in value but I am not hopeful of that happening in the next few years. I really just need a place to live.

So we come down to the bronze medal. Poor stocks, you have already been through so much and still you get no respect. Perhaps the market just needs to hire a public relations firm.

The world associates the past five years of financial crisis with the stock market, although it was really leverage and greed that was to blame. When a person watches their net worth rapidly decline, and when that net worth is wrapped up in something that they do not enjoy, they are bound to have some animosity. At least we could enjoy our homes, even as their value dropped. You can't even buy a Big Mac with a share certificate.

The contrepreneurs of the world tend to somehow be involved in the markets. Bad people doing bad things catch a lot of attention, especially when the numbers are so staggering. Bernie Madoff is just one person and yet he was able to record a staggering fraud that was based in stock market investing. Put a few of these type of people in the news on a regular basis and pretty soon we think it is ok for people to camp out in public parks in protest.

We should be reminded that the stock market, like money, is not evil. As Ayn Rand wrote in Atlas Shrugged,

"So you think that money is the root of all evil?" said Francisco d'Anconia. "Have you ever asked what is the root of money? Money is a tool of exchange, which can't exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?

It is the people who can be evil and the excesses of our past have brought out their actions. The stock market is not rigged, it is just a place where people make their trades, but there have been bad people with considerable financial power who have used it to their advantage.

Just as the market does not care about me, it does not care about you. It is not out to get you, it is simply a place where people buy and sell assets at a price that each party deems to be fair. The buyer thinks the stock is going up, the seller thinks the stock is going down. One of them will be wrong. The market itself has no influence on who gets to win.

Do not turn your back on my friend. The stock market is the place where innovators and leaders get to finance the products and services that will add value to our lives. Whether it is a drug that will cure the disease you are going to get or the gadget that will tell you what the best wine to pair with your tenderloin is, the market is the engine of our economy. We just have to learn how to play it.

If you approach the stock market with common sense, you will lose. That does not make it evil, that just shows that you are taking the wrong approach. A year from now we will be able to look back and see how some stocks went up dramatically while others went down. If you take the time and put in the effort to make friends with the market, you might be able to be on the right side of those trends. Just don't expect the market to return any of your calls, it really does not care about you.

I am in Calgary this weekend and my two feature stocks are both based here, I found them scanning for stocks making abnormal price gains on Friday using the Stockscores Market Scan.

1. T.GTE
Up strong on Friday and broke a downward trend line that has been in place since last summer. The upward move today was driven by news of a 6300 barrels of oil per day production test on a project they have in Argentina. Support at $5.70.

tyler2

2. T.KRN
An upside break today from a pessimistic pennant pattern, this set up has good but not great potential to evolve in to an upward trend. The company is in the business of mining potash and magnesium and announced their financial results today which the market seemed to like. Support at $8.90.

tyler1

References

 

  • Get the Stockscore on any of over 20,000 North American stocks.
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  • See which sectors are leading the market, and their components.

    Disclaimer
    This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don't consider buying or selling any stock without conducting your own due diligence.

 



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Stocks & Equities

The PE Ratio Plunges to Lowest Levels in 20 Years

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Posted by Chart of the Day

on Friday, 30 March 2012 08:25

Today's chart illustrates how the recent rise in earnings as well as recent stock market action has impacted the current valuation of the stock market as measured by the price to earnings ratio (PE ratio). Generally speaking, when the PE ratio is high, stocks are considered to be expensive. When the PE ratio is low, stocks are considered to be inexpensive. From 1900 into the mid-1990s, the PE ratio tended to peak in the low to mid-20s (red line) and trough somewhere around seven (green line). The price investors were willing to pay for a dollar of earnings increased during the dot-com boom (late 1990s), surged even higher during the dot-com bust (early 2000s), and spiked to extraordinary levels during the financial crisis (late 2000s). As a result of the continued surge in corporate earnings the PE ratio remains at a level not often seen since 1990 despite what has been a significant upward trend in stock prices so far this calendar year.

20120330

Notes:
Where's the Dow headed? The answer may surprise you. Find out right now with the exclusive & Barron's recommended charts of Chart of the Day Plus.

For Chart of the Day Homepage go HERE

Quote of the Day
"The value of a man should be seen in what he gives and not in what he is able to receive." - Albert Einstein



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Stocks & Equities

The Big Picture Historical S&P Cycles: Nominal, Real, Gold & Silver (1928 – Present)

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Posted by Barry Ritholtz - The Big Picture

on Thursday, 29 March 2012 09:38

These four charts below are just the sort of Big Picture, long cycle perspective that so many investors overlook or simply have no knowledge about. These charts are not about making predictions, but rather, are about putting market action into some broader historical context. What has happened in the past? What is typical? Aberrational?


3-23-12-SP-Cycles-Nominal-1


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