Timing & trends

The Bottom Line

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Posted by Don Vialoux - Timing the Market

on Monday, 17 September 2012 07:14

Downside risk exceeds upside potential in equity markets during the next five weeks. The recent breakout by the S&P 500 Index implies that depth of the downside risk is less than previous. Selected seasonal trades continue on the upside (gold, energy, software) and downside (transportation). However, many of these seasonal trades reach the end of their period of seasonal strength this month. September is a month of transition. Trade accordingly.


Timing & trends

A Perfect Storm

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Posted by Mark Leibovit - Charts of the Day

on Friday, 14 September 2012 08:23

Screen Shot 2012-09-14 at 7.27.53 AM

"Mario Draghi and Ben Bernanke have willingly opened the floodgates and allowed their respective printing presses run 24/7. No surprise here. This is all Central Bankers know how to do and it had been forecast by many (myself included)."

"My Annual Forecast Model (below) along with Equityclock.com’s ‘seasonal’ studies all pointed to the time band from mid-summer forward as being friendly to the metals. So, for now, we need to sit back and enjoy it!"

"Depending on which forecast chart you look it, it is clear we’re overall headed higher. However, there is theoretical ‘cyclical’ risk of a pullback both here in September and again in October. Use pullbacks to establish or to add to current positions if you don’t feel you allocation to the metals is great enough."  



Miners Catching Up To Metals — Huge Run



Gold bugs are a generally happy bunch this week. But they’d be a lot happier if precious metals mining stocks kept up with the metals themselves. Since early 2011 the largest gold miners have underperformed gold  by about 40%, while the junior miners have done even worse (I’m talking to you, Great Basin).

Thanks to this divergence between the metals and the miners, it was possible to clearly understand the monetary destruction endemic in the developed world, conclude that gold and silver were the places to be, make a decisive bet on this thesis — and still end up losing money.

There are two possible conclusions to draw from this: Either mining as a business has changed fundamentally and will be unprofitable forever –  in which case we should just own physical metal and forget about paper proxies. Or the past couple of years were one of those inexplicable divergences from established relationships that produce huge gains when they snap back to normal.

The past month has offered a taste of what the second possibility might look like. The chart below shows that the big miners (represented by the GDX gold miner ETF, red line) have outperformed gold itself (the GLD bullion ETF, blue area) since July. But the two-year gap, like I said, is about 40%, so parity is still a long way  off.

Now that the miners have some momentum, it wouldn’t be surprising if they made up this ground in no time at all.

Screen Shot 2012-09-14 at 7.15.42 AM

Above by DollarCollapse.com managed by John Rubino, co-author, with GoldMoney’s James Turk

Perspective on the current Dow rally


The Dow made another post-financial crisis rally high Thursday on the news that the Fed will embark on a third round of quantitative easing (a.k.a. QE3). To provide some perspective on the current Dow rally, all major market rallies of the last 112 years are plotted on today's chart. Each dot represents a major stock market rally as measured by the Dow -- with a rally being defined as an advance that followed a 15% correction (i.e. a major correction). As today's chart illustrates, the Dow has begun a major rally 28 times over the past 112 years which equates to an average of one rally every four years. Also, most major rallies (78%) resulted in a gain of between 30% and 150% (29.8% to 150.5% to be exact) and lasted between 200 and 800 trading days (9.5 months to 3.2 years) -- highlighted in today's chart with a light blue shaded box. As it stands right now, the current Dow rally (hollow red dot labeled you are here) which began in October 2011 (since it followed a 16.8% correction), would be classified as well below average in both duration and magnitude.


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.


Timing & trends

Double Down: Vladimir’s Putin' Billions Into Gold In Anticipation of Global Upheaval

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Posted by Mac Slavo via Peter Grandich

on Thursday, 13 September 2012 00:00

"In the last 7 months alone the People’s Republic of China has added more gold to their reserves – over 500 tons – than the entire holdings of the European Central Bank. They aren’t alone."

"Russia’s President Vladimir Putin has been aggresively investing into the precious metal over the last five years – spending some $500 million monthly as he diversifies his country’s assets out of Dollars and Euros. Currently, 9% of Russia’s reserves are held in gold."

This, of course, begs the question: why?


According to the World Gold Council, Russia has more than doubled its gold reserves in the past five years. Putin has taken advantage of the financial crisis to build the world’s fifth-biggest gold pile in a handful of years, and is buying about half a billion dollars’ worth every month.

No one else in the world plays global power politics as ruthlessly as Russia’s chilling strongman…

Putin’s moves may matter to your finances, because there are two ways to look at gold.

On the one hand, it’s an investment that by most modern standards seems to make no sense. It generates no cash flow and serves no practical purpose. Warren Buffett has pointed out that we dig it out of one hole in the ground only to stick it in another, and anyone watching this from Mars would be very confused.

But there’s another way to look at gold: As the most liquid reserve in times of turmoil, or worse.

The big story of our era is not that the Spanish government is broke, nor is it that Paul Ryan apparently feels the need to embellish his running record.It’s that the United States, which has dominated the world’s economy for several lifetimes, is in relative decline.

We will soon be the first people in two hundred years to live in a world not dominated by either Pax Americana or Pax Britannica. This sort of changing of the guard has never been peaceful.

The declines of the Spanish, French and British empires were all accompanied by conflict. The decline of British hegemony was a leading cause of the First and Second World Wars.

What will happen as the U.S. loses its pre-eminence?

Maybe this will turn out better than similar episodes in the past. Maybe the Chinese will embrace an open society and the rule of law. If you believe that, there is probably no reason to hold any gold.

On the other hand, we may be about to enter a much more turbulent and dangerous era of power politics and international competition.

Source: Market Watch [via Ulsterman Report]

....read the entire article HERE


Timing & trends

Three Key Take-Aways From Today’s Headlines

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Posted by Chris Mayer via The Daily Reckoning

on Wednesday, 12 September 2012 00:00

“Markets are going in the opposite direction of the world economy. If you’re positioned fundamentally, you’re positioned against these clowns.”

- John Burbank, Passport Capital, on the latest news from Europe’s central bank

Three headline events each tell us something important about global markets. More and more, government is a big player in markets — creating distortions, along with pitfalls and opportunities.

Item No. 1: The market says one thing. Earnings say something different.

The stock market rallied last week on news that the European Central Bank will “save the euro.” Basically, the ECB said it stands ready to buy bonds in unlimited quantities. To finance this, the ECB will essentially print money. This follows talk about how the US Federal Reserve stands ready to goose markets further — by printing more money.

In essence, the actions and chatter of central bankers are what are driving the rally since that little bottom we had in June after the market sold off about 9%.

Earnings are not driving the rally, that’s for sure.

The S&P 500 just registered a 0.8% growth rate in earnings for the second quarter, according to today’s Financial Times. The consensus for the third quarter is negative for the first time in three years. The ratio of companies saying they’d miss third-quarter forecasts versus those that that said they’d meet them was 3-to-1. That is the worst ratio since the fourth quarter of 2008, which came on the heels of the Lehman Bros. bust. “Historically, we have only seen numbers like this during times of recession,” says Christine Short of S&P Capital IQ (which tracks earnings) in today’s FT.

Yet the market hits a four-year high.

Take-away: Trust earnings. The market can go only so far on the gas of central banking. Don’t believe prices reflect what’s happening with the underlying companies. The market is too optimistic.

Item No. 2: Gloom spreads in China despite the best efforts of officials.

The FT reports that a third of publicly traded Chinese companies reported cash outflows for the second quarter. One headline seems to say it all, “Cash Squeeze Tightens Abroad Sections of China.” Another says, “Fragile China.”

Local governments have amassed piles of debt. The FT says these debts represent one-quarter of Chinese output. Yet China continues to announce ambitious plans to build railways and highways.

But one of the most-damning things I’ve come across on China hit my desk over the weekend. I seldom link to other articles in full, but this one is worth a read when you get a chance:

“In China, Silvercorp Critic Caught in Campaign by Police”

It is the story of a researcher in China who police arrested — and detained — because he works for a fund manager who writes negative reports on Chinese companies. (The researcher is a Canadian citizen, by the way, yet sits in a Chinese jail on flimsy evidence and no due process whatsoever. I can’t believe the Canadian government lets that stand.)

Chinese companies have had lots of fraud issues, as you may know. Investors have uncovered discrepancies and outright frauds in US-listed Chinese companies. This sent the stock of many such companies tumbling.

This in turn, hurt these companies’ ability to tap Western markets for more money, which hurts their ability to pay local taxes. And that hurts the local governments who labor under a pile of debt. It’s all an ugly, corrupt circle.

Take-away: If you are in China, you have to write positive reports or you get arrested. That’s the message here. There is no respect for independent research in China. There is no value on transparency. In fact, the organs of the state work against such things.

So in a reversal of my normal preference for “boots on the ground” research, I say you can’t trust anything coming out of China. Oh, and if you own Silvercorp, dump it. Avoid China as a general rule.

Of course, this has broader implications, as we’ve talked about before, especially for commodity markets (because China is such a large consumer of commodities). If the Chinese market is really propped up by government stimulus, then commodity markets are too.

This warning does not apply to precious metals, which I think are moving higher.

Item No. 3: The US government is selling its AIG stake.

Front page on The Wall Street Journal: The US government says it is going to sell $18 billion in AIG stock. This will cut its stake in the big insurer by half.

This is a reminder that the US government is still in the business of owning major stakes in big companies. It still owns stakes in Fannie Mae and Freddie Mac — which the government spent $188 billion on. It still owns big stakes in GM and in Ally Financial, which it spent $68 billion on.

These are companies that would have otherwise gone through the bankruptcy process — as would have a long list of institutions. What the bailouts did was preserve the same bad actors that got us into trouble in the first place. The corrective tonic of bankruptcy never got to do its full work.

I’m not going to get into the politics of it, or even the economics of it. I’m a practical man in these pages. We have to take the world as it is, not how we wish it would be. We have to do the best we can with the markets we find ourselves in.

So as unseemly as it sounds, my take-away from this story is one of opportunity.

Even after its rally, AIG still trades for about 56% of book value. Bruce Berkowitz at Fairholme owns a big chunk of it and calls it his best idea. Berkowitz is not immortal. He’s taken some licks and his reputation is not what it was. But I think he makes a good argument for AIG.

Here is what he wrote in his second-quarter letter:

“Our best idea remains AIG common (35% of the fund) with a reported book value of $57 per share. There are few occasions when systemically important franchises sell for half of book value and are profitable. This is one of those times.”

Book value is now $60 per share. On the Fairholme Funds website is a 21-slide case study on AIG from February. Though a bit dated, it still holds. AIG sells for less than 60% of book today. Yet peers trade for 80-100% of book. And the long-term average for the sector is 130% of book.

AIG is solidly profitable now. What’s holding it back, at least in part, is the fact that the government is looking to sell. As the market absorbs $18 billion-plus in sales, this will probably tamp down AIG’s share price.

Take-away: The US government still has large stakes in several financial companies. It is still a source of great distortions. However, as it sells these stakes, the overhang from its ownership will disappear. So too might the discounts these stocks trade for. AIG looks like a double as these things sort themselves out. (Ed Note:  Do not consider this a Money Talks recommendation. Money Talks does not make stock recommendations on this unpaid portion of our website because we don't know the financial make-up of those reading the information).  

It’s a weird market we’re in. I can’t recall a time when government actions seemed to drive prices as much as now. I don’t like it. But there are ways to navigate your portfolio through the mess.


Chris Mayer
for The Daily Reckoning

About Chris Mayer
Chris Mayer is managing editor of the Capital and Crisis and Mayer’s Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012 Chris will release his newest book World Right Side Up: Investing Across Six Continents
Special Report: Wait until you see what could happen in America next… An unbelievable phenomenon is set to sweep the nation... The railroad, steel, and technology age - this phenomenon triggered them all. And now it’s taking shape again! Watch this special, time-sensitive presentation now for full details on how it could affect your job… your lifestyle… and your wallet. Here’s How…



Timing & trends

Why the Fed Will Fail in All Its Efforts

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Posted by Harry Dent via John Maulin's Outside The Box

on Tuesday, 11 September 2012 09:52

"Most of you reading this expect inflation in the years ahead, right? Well, I don't. In fact, I am firmly in the deflation camp."

A Decade of Volatility: Demographics, Debt, and Deflation

Just think about it. What has happened after every major debt bubble in history? What happened after the 1873-74 bubble? Or after the 1929-32 bubble? Did prices inflate or deflate?

We got deflation in prices… every time.

This time around, with the latest bubble peaking in 2007/08, the outcome will be exactly the same. There is deflation ahead. Expect it. Prepare for it.

But the bubble-bust cycle that history has allowed us to see is not the only reason I'm so certain we're heading for deflation and a great crash ahead. I have other, irrefutable evidence…

For one, there is the most powerful economic force on Earth: demographics. More specifically, the power of the number 46. You see, that's the age at which the average household peaks in spending.

When the average kid is born, the average parent is 28. They buy their first home when they're 31… after they had those kids. When the kids age into nasty teenagers, the parents buy a bigger house so they can have space. They do this between the ages of 37 and 42. Their mortgage debt peaks at age 41. And like I said, their spending peaks at around 46.

From cradle to grave, people do predictable things… and we can see these trends clearly in different sectors of our economy, from housing to investing, borrowing and spending, decades in advance.

To watch a video version of this presentation by Harry Dent,
please click HERE:


This demographic cycle made the crash in the '30s and the slowdown in the '70s unavoidable. Now it is happening again... with the biggest generation in history – the Baby Boomers.

Consumer spending makes up more than two-thirds of our gross domestic product (GDP). So knowing when people are going to spend more or less is an incredibly powerful tool to have. It tells you, with uncanny accuracy, when economies will grow or slow.

Why Deflation Is the Endgame

Think of it this way: the government is hellbent on inflating. It's doing so by creating debt through its quantitative easing programs (just for starters). But what's the private sector doing? It's deflating.

And the private sector is definitely the elephant in the room. How much private debt did we have at the top of the bubble? $42 trillion. How much public debt did we have back then? $14 trillion.

That looks like a no-brainer to me. Private outweighs public three to one. And the private sector is deleveraging as fast as it can, just like what happened in the 1870s and 1930s. History shows us that the private sector always ends up winning the inflation-deflation fight.

Now, I will concede that this is an unprecedented time. Today governments around the world have both the tools and the determination to fight deflation. And they are desperate to keep it at bay because they know how nasty it is (they, too, are students of history).

How bad is it? Think of deflation like what your body would do with bad sushi. It would flush it out as fast as possible. That's what our system is trying to do with all the debt we accumulated during the boom years. It's what the system did in the 1930s. Back then we went from almost 200% debt-to-GDP to just 50% in three years. It hurt like hell. The government doesn't want this painful deleveraging.

The problem is, the longer the government tries to fight this bad sushi, the sicklier the system becomes. I know this because it's what happened to Japan…

Japan's bubble peaked in the '80s. When the unavoidable deleveraging process began, the country did everything in its power to stop it. How is Japan doing today, 20 years after its crash? It is still at rock bottom. Its stock market is still down 75%.

Japan has gone through everything we'll go through in the next few years. Does Japan have an inflation problem? That's a rhetorical question. Did its central bank stimulate frantically? Also a rhetorical question.

Think of it another way: what is the biggest single cost of living today? Is it gold? Oil? Food? It's none of these. It is housing. And what is housing doing? Dropping like a rock. It can't muster a bounce, despite the lowest mortgage rates in history and the strongest stimulus programs anywhere… ever.

The Fed is fighting deflation purposely. It will fail.

Why the Fed Will Fail in All Its Efforts

There is simply no way the Fed can win the battle it's currently waging against deflation, because there are 76 million Baby Boomers who increasingly want to save, not spend. Old people don't buy houses!

At the top of the housing boom in recent years, we had the typical upper-middle-class family living in a 4,000-square-foot McMansion. About ten years from now, what will they do? They'll downsize to a 2,000-square-foot townhouse. What do they need all those bedrooms for? The kids are gone. They don't visit anymore. Ten years after that, where are they? They're in 200-square-foot nursing home. Ten years later, where are they? They're in a 20-square-foot grave plot.

That's the future of real estate. That's why real estate has not bounced in Japan after 21 years. That's why it won't bounce here in the US either. For every young couple that gets married, has babies, and buys a house, there's an older couple moving into a nursing home or dying.

I watch this same demographic force move through and affect every other sector of the economy. The tool I use to do so is my Spending Wave. This is a 46-year leading indicator with a predictable peak in spending of the average household.


Here's how it works: the red background in the chart above is the Dow, adjusted for inflation. The blue line is the spending wave, including immigration-adjusted births and lagged by 46 years to indicate peak spending. If you ask me, that correlation is striking.

The Baby Boom birth index above started to rise in 1937. It continued to rise until 1961 before it fell. Add 46 to 1937, and you get a boom that starts in 1983. Add 46 to 61, and you get a boom that ends in 2007.

Today demographics matters more than ever because of the 76 million Baby Boomers moving through the economy. That's why I don't watch governments until they start reacting in desperation. Then I adjust my forecasts accordingly.

Don't Hold Your Breath for the Echo Boomer Generation

But all this talk about Baby Boomers inevitably births the question: "Surely the Echo Boom generation is coming up right behind their parents. They'll fill the holes, right?"

Let me make this clear. If I hear one more nutcase on CNBC say, "The Echo Boom generation is bigger than the Baby Boom," I might go ballistic. They are wrong. The Echo Boomer generation is NOT bigger than the Baby Boom generation. In fact, it's the first generation in history that's not larger than its predecessor is, even when accounting for immigrants.

It's not all doom and gloom, though. We will see another boom around 2020-23. But for now, all the Western countries will slow, thanks to the downward demographic trend sweeping the world. Some are slowing faster than others are. For example, Japan is slowing the fastest (it actually committed demographic kamikaze, but that's a discussion for another day). Southern Europe is next along in its decline. Eastern Europe, Russia, and Asia are following quickly behind.

Which brings me back to my point: there is no threat of serious inflation ahead. Rather, deflation is the order of the day. The Fed thinks it can prevent a crash by getting people to spend. To that I say, "Good luck." Old people don't spend money. They bribe the grandkids, and they go on cruises where they just stuff themselves with food and booze.

Do you know how to tell if you're buying a car from an older person? It's going to be ten years old and have only 40,000 miles on it. They drive 4,000 miles a year. They just go down the street to get a Starbucks coffee and a newspaper. Then they go back home. How do you know you're buying a car from a soccer mom? It's driven 20,000 miles a year, carting the kids around all day… to school, soccer practice, whatever. This is the power of demographics.

So let me tell you what causes inflation. It's young people. Young people cause inflation. They cost everything and produce nothing. That's inflation in people terms.

Why did we have high inflation in the '70s? Because Baby Boomers were in school, drinking, spending their parents' money. While this was going on, we experienced the lowest-productivity decade in the last century.

Do you remember the 1970s? We had worsening recessions as the old Bob Hope generation began to save more while the Baby Boomers entered the economy en masse… at great expense. It costs a lot of money to incorporate young people, raise them, and put them into the workforce.

Then suddenly, in the early '80s, like some political genius did something brilliant, the economy started growing like crazy, and inflation fell. You know what that was? That was the largest generation in history transitioning en masse from being expensive, rebellious, young people to highly productive yuppies with young new families. It was the move from cocaine to Rogaine.

The correlation between labor force growth and inflation is crystal clear…


When lots of young people come into the labor force, it's inflationary. When lots of old people move out of the labor force and into retirement, it's deflationary. Right now, where is the highest inflation in the world? It's in emerging countries. Do they have more old people or young people? They have more young people.

We saw it in the 1970s, we see it in emerging markets, and we'll see it ahead as the Baby Boomers head off into the sunset. First, there was inflation. Ahead is deflation. No doubt about it.

Harry Dent, the editor of Boom & Bust, has put together a free report for John Mauldin's readers, called: Survive and Prosper in This Winter Season: Take These Steps Now... Before Dow 3,300 Arrives. You can access this free report by clicking on this link:http://www.boomandbustinvestor.com/reports/current/BoomandBustInvestor_WinterSeason.pdf

Like Outside the Box? Then we think you'll love John's premium product, Over My Shoulder. Each week John Mauldin sends his Over My Shoulder subscribers the most interesting items that he personally cherry picks from the dozens of books, reports, and articles he reads each week as part of his research.

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The Dollar-Commodities See-Saw!

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