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Brace for an era of crisis aftershocks


Posted by David Rosenberg - Gluskin Sheff

on Thursday, 02 August 2012 08:33

Here is the reality. We have intense uncertainty on US fiscal, energy and health policies. Nobody knows what their effective tax rate is going to be next year so they cannot plan.

When you model that uncertainty in economic terms, you end up with higher liquidity ratios in business and rising savings rates in the personal sector. This damps spending growth and spending is what gross domestic product is all about.

On top of that, we have an export shock from the spreading European recession that is only now starting to show through in the data, such as the plunge in US purchasing managers’ orders.

Now, if the baseline growth trend in the US economy was in the old paradigm range of 4-6 per cent for this stage of the cycle, we could certainly absorb these negative shocks.

But the underlying trend in the pace of economic activity is somewhere between 1 and 2 per cent, so there is little margin for error: the cushion is razor-thin.

....read more HERE

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Stocks & Equities

Jim Rogers: The New Safe Haven For Equity Investors


Posted by Tom Stevenson via The Telegraph.co.UK

on Thursday, 02 August 2012 07:31

So I wasn’t unduly surprised to read recently that he believes Burma to be “the best investment opportunity in the world, with North Korea not far behind”.

He exaggerates to make a point, but his comments gave me pause for thought because I am as guilty as anyone of lazily describing the investment world as a three-legged stool, as if the US, Europe and China were the only markets that mattered. In particular, his interest in Burma and North Korea is a reminder that there is a lot more to Asia than the Middle Kingdom.

Some of the countries that make up the ASEAN region have been among the best places to ride out the financial crisis. Stock markets in Indonesia and Thailand, in particular, trade at a healthy premium to their pre-crisis levels, while the world average remains deeply in negative territory compared with five years ago.

South-east Asia as a safe haven is a novel concept for anyone who remembers the region’s own devastating financial crisis in the late 1990s. I have a cartoon on my wall from a newsletter I published at the time showing a row of sick-looking tigers in hospital beds with thermometers in their mouths. The region has never really shaken off its image as the riskiest of emerging market bets.

But confidence is growing in a region of 600m people, with a fast-expanding middle class driving consumption and economic growth. The International Monetary Fund recently downgraded growth for the ASEAN region, showing it cannot completely buck a slowing global recovery. But it has still pencilled in 6.1pc growth next year, compared with 0.7pc for the euro area and 2.3pc for the US.

The ASEAN should not be underestimated. With a combined stock market capitalisation of more than $2 trillion and trade with China expected to top $500bn by 2015, the region is grabbing the attention of increasing numbers of investors. In the first half of this year, almost as much money flowed into ASEAN funds as flowed out of China. Having been the first investments to be liquidated in an emergency, they are taking on the characteristics of a port in the storm.

Many of the region’s attractions are familiar to China bulls. Rapid urbanisation and infrastructure build tell a similar story, for example, as do the robust government finances that make a high level of public investment possible. But there are differences, too. China’s one-child policy is leading to a rapid ageing of its population, but in South-east Asia more than 40pc of the population is under 25, putting the region in a demographic sweet spot. The ASEAN region is extremely diverse, however, so it is not possible to generalise beyond the obvious themes of higher consumption and investment. Vietnam and Singapore share membership of the economic organisation, but little else. Some of the region’s countries are rich in natural resources that others lack. Inflation is a problem in some places and not in others. Local knowledge is key.

One of the most interesting markets in the region is Thailand, and not just because it might be the best way to tap into the opening up of Burma. Thailand’s stock market has risen by 16pc so far this year, beating all the other main indices in Asia.

In part that reflects a quicker than expected recovery from last year’s floods. But it is also a consequence of a raft of pro-stimulus policies from the country’s populist government, including a 40pc rise in the minimum wage and a sharp reduction in corporation tax from 30pc to 23pc, with 20pc in the pipeline for next year.

Foreign investment is pouring into Thailand, with Japanese car makers seeing the country as a safe destination for companies seeking to escape the high yen and energy shortages following the Tohoku earthquake.

The government is playing its part, too, spending heavily on dams and flood defences as well as rail and road projects to help promote the country as a distribution hub for the region, linking China with frontier markets such as Cambodia.

Thailand might seem a bit mainstream for someone weighing up an investment in North Korea, but less adventurous investors than Jim Rogers probably won’t mind that.

Tom Stevenson is an investment director at Fidelity Worldwide Investment. The views expressed are his own. He tweets at @tomstevenson63

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Gold & Precious Metals

Gold Struggles at $1600 Post-Fed, "Driven by Expectations" of Central Bank Action


Posted by Adrian Ash: BullionVault

on Thursday, 02 August 2012 06:22

WHOLESALE PRICES for gold investment bars struggled just above $1600 per ounce in London on Thursday, after dipping below that level for the first time in a week as the US Federal Reserve left monetary policy unchanged yesterday.


"Immediate QE is off the table," Reuters quotes Frank McGhee, chief precious metals trader at Chicago's Integrated Brokerage Services.

"I will probably not be surprised to see them not do anything in September."

The Bank of England today followed the US Fed in leaving UK policy unchanged in its midday announcement. The European Central Bank was also expected to make no change to its record-low rates of 0.75% per year.

Stock markets meantime ticked higher, while crude oil held onto a sharp rally but major-government bond prices also rose.

Silver prices ticked around $27.50 per ounce after hitting their own 1-week low versus the Dollar.


"Increased or decreased prospects of [central-bank] intervention seem to be the rationale for any move in precious metals at the moment," says a London analyst in a note.

Ahead of Wednesday's Fed decision, "Gold's $50 gain since Mario Draghi's pledge to 'do whatever it takes' last week suggested high expectations were priced in," he adds.

Italy's prime minister Mario Monti yesterday told reporters that a banking license for the European Stability Mechanism "will in due course occur" – meaning that the €500 billion ($615bn) bail-out fund could buy government debt using money borrowed from the European Central Bank.

But "a banking license for the ESM rescue fund is absolutely not our way," said German spokesman Georg Streiter after a cabinet meeting in Berlin.

German Bundesbank chief Jens Weidmann – a member of the ECB meeting together with the 16 other national Eurozone central bank heads today – is also against such a move.

"If the ECB doesn't do something today, there will be disappointment," reckons Japanese conglomerate Mitsubishi's precious metals analyst Matthew Turner, speaking to CNBC.

"But they will have to do something at some point. The situation...will force them," says Turner, pointing to support for gold investment prices at the June and July lows around $1550 per ounce.

Back in Washington, and where the Federal Reserve's June statement said "The Committee is prepared to take further action as appropriate," this week's press release said it will "will provide additional accommodation as needed."

The Dollar rose fast on the "no change" decision against the European single currency, but gave back most of its gains by Thursday lunchtime in London to trade at  $1.228 per Euro.

"Gold prices have dropped in the aftermath of every [Fed] meeting this year with the exception of January," said a note from bullion-bank and London market-maker HSBC's precious metals team last night.

Just as on Wednesday this week, "The bulk of losses then were pared or reversed in late session trading the same day."

Over in Asia, the Bank of Korea said today its gold investment increased by 16 tonnes in July, the third such rise in a year. That took gold holdings at the world's 7th largest central bank to 70.4 tonnes, equal to 0.9% of its total reserves – up from 0.1% only five years ago.

Central banks globally hold an average 1.4% of their reserves in gold investment bars, according to data from market-development organization the World Gold Council.

 

Adrian Ash

BullionVault

Adrian Ash is head of research at BullionVault, the secure, low-cost gold and silver market for private investors online, where you can buy gold today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

 

(c) BullionVault 2012

 

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.



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Bonds & Interest Rates

Signs of the Time - What's next?


Posted by Bob Hoye - Institutional Advisors

on Wednesday, 01 August 2012 16:26

"Exciting times. Sovereign debt issues have been under severe pressures as long-dated US treasuries are working on an "Eiffel Tower" top.".

SIGNS OF THE TIMES

"Spanish banks' bad loans jumped to an 18-year high in May."

– Bloomberg, July 18

"Speculative-grade corporate debt in Europe is the most expensive to insure in

1 1/2 years."

– Bloomberg, July 20

"Wall Street's five biggest banks reported the worst start to a year since 2008."

– Bloomberg, July 20

"Landlords are piling the most debt onto commercial properties in five years as Wall Street bundles the loans into bonds to meet rising demand from investors seeking high yields amid record-low interest rates."

– Bloomberg, July 17

This is getting intriguing. Conservative money, and lots of it, has been finding comfort in the liquidity of US treasury bills. This has been enough to drive yields to Depression lows. Longer-dated corporate bonds are not at Depression-devastated high yields. But, are working on a momentum and sentiment high for prices.

Wall Street is again "bundling" securities, and "investors" are again reaching for yield.

What's next?

PERSPECTIVE

Last week's Pivot concluded that the Dollar Index was having trouble getting through the 83.5 level and that any decline would prompt some "Positive vibes". The shelf-life was good until Friday, and Ross got onto the change with the two ChartWorks on Sunday.

The change was Spanish yields going to new highs, as the DX rose to 84.10 on Tuesday. Yesterday's updated ChartWorks reviewed that the near term tendency will likely be down.

Overall, this works with the likelihood of choppy action through the summer.

However, as each week goes by events continue to reinforce our view that Mother Nature is adamant about keeping financial history on a fairly typical post-bubble contraction. Benighted policymakers don't stand a chance – again.

The inability to really service sovereign debt is shown by Spain's 10-year notes rising to 7.50% (new high) on Monday.

Hope over reality has brought relief, otherwise known as positive vibes, that could run for a week or so.

Stock market advice has been to sell the rallies.

CREDIT MARKETS

The hypocrisy of the establishment is something else again. Agit-propaganda about Barclays "manipulating" Libor has more to do with politics than improving interest rate markets. Terry Corcoran at the Financial Post has had some good pieces on the story. Yesterday's is the latest and here is the link:

http://opinion.financialpost.com/2012/07/25/terence-corcoran-the-u-k-libor-coverup/

There are comments going back to the 1500s about a businessman complaining that some agent is deliberately setting rates too high. Then there is the seemingly endless record of "intellectuals" speculating or boasting that some agency can lower rates at will. Such examples usually appear during financial crises.

For the record, successful traders, such as Thomas Gresham (1519 – 1579), seem to be able to understand a crisis and merely observe that there is no money available – even "with double collateral".

By a process of learning the hard way, successful traders get liquid or defensive at a speculative high.  Thus Gresham's dispassionate reporting, rather than despairing for some agent to wave a credit wand.

Sadly, the notion that some gifted agency can manipulate interest rates for the public good or relief has become dominant. And no matter how hapless the behaviour of the Fed has been it still has its admirers.

The speculative boom in commodities that culminated in 1919 was followed by an equally outstanding crash. The objective of the Fed during the 1920s was to prevent commodities from falling further. The real price of copper plunged from 663 to 148 and spent most of the 1920s around 175. The high in 1929 was 323 and the Depression low was 84.

The attempt to prop up commodities (old losers) was not successful as excess funds roared into the stock markets (new winners). The excitement of inflation in financial assets was discovered – again. Current policymakers still do not understand inflation in financial assets during a great bubble and that great depressions have always followed. 

As head of the Fed in 1927, Ben Strong, knew about financial asset inflation with his "coup de whiskey" remark. We elaborated on this in November 2007 and the piece follows.

The problem is that interventionist economists have read economic theories, not market history.

The point is that Fed manipulations have not materially changed financial history, but have exaggerated the urge to speculate.

Why does the establishment grant central bankers the privilege of manipulating interest rates, and recently condemn what appeared to be interest rate manipulation of the non-government Libor?

In this regard, the Fed provides a special irony. It attempts to regulate economic behaviour through interest-rate manipulation via the official "Fed Funds". Special is that the Fed is owned by a small group of large private banks.

The story gets worse. Talk to anyone who was on a Canadian bond trading desk in the 1960s and 1970s when the laws applied to traders did not apply to their equivalent at the Bank of Canada.

Offences such as wash trading to "increase" trading volume, focusing on one maturity to push the whole market up, and timing news releases to favour the market would put a private trader in jail. The central bank did it with no regard for common law.

The noise about Libor is purely political as control freaks are looking for another item to run. Perhaps part of Robert Diamond resignation from Barclays has to do with the nonsense of government functionaries impractical intrusions. Who needs it?

At one time, call money was a benchmark interest rate. This was the rate at which private banks loaned funds to brokers, who in turn provided margin to customers. Then in the insanity of yet another "new" financial era banks became brokers and putting it glibly; call money became Libor.

Now the empty suits want to take it over.

BOND MARKET

Exciting times. Sovereign debt issues have been under severe pressures as long-dated US treasuries are working on an "Eiffel Tower" top. The action is similar to the magnificent high for silver at 48.35 in April 2011.

Technically, the long bond has become another asset play that has little to do with interest rates. Representing investment-grade corporates, the LQD is carrying on with impetuous buying, impetuous enough to register some daily Upside Exhaustions. In the past these have led the high by a few weeks. We have had our eye on the top channel-line at 122. Of course, precision depends upon the thickness of the trend line.

The reversal will be interesting as most corporates could then be heading to depression-high yields.


Link to Friday, July 27 ‘Bob and Phil Show’ on TalkDigitalNetwork.com:

http://talkdigitalnetwork.com/2012/07/saving-the-eurozone/

 

INSTITUTIONAL ADVISORS

WEDNESDAY, AUGUST 1, 2012

BOB HOYE

PUBLISHED BY INSTITUTIONAL ADVISORS

The following is part of Pivotal Events that was

published for our subscribers July 26, 2012.

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Timing & trends

How To Trade Today’s Oil Markets


Posted by Keith Schaefer: Oil & Gas Investments Bulletin

on Wednesday, 01 August 2012 11:27

What’s the biggest lesson retail investors need to learn to increase profits in these markets?

It’s knowing how and when to trade volatility.

The professionals say trading volatility really is the only way to make money in a flat to down market, which the energy sector (especially the juniors!) has gone through since February 2011 – a full 16 months ago.

“A flat bear market can give flat performance, but with a lot of volatility,” says Martin Pelletier, managing director at Trivest Wealth Counsel of Calgary. “Fifty per cent to 100% swings either way are quite common.

“Unfortunately investors have reacted incorrectly – buying the tops of secular bull markets and selling the lows of secular bear markets.”

Josef Schachter, president of Schachter Asset Management Inc., says “the oil and gas sector has been good to investors – just sell during euphoria and buy during duress.”

Now of course, that’s easier said than done, and to a large degree that separates out the wealthy investors. But Schachter – who is bearish on oil for the next three to five months – says there are some turning points investors should look for in the Toronto Stock Exchange Energy Index.

TSX Energy Index 5-year chart

8-1-12-oagib-1-tsx 5_year_2

TSX Energy Index 1-year chart

8-1-12-oagib-2-tsx 1_year_2

“Given how devastated the S&P TSX Energy Index is, if it goes below 180 then it’s a great buy. We would then switch from being bears to being bulls again.

“I look at the market internals. We’re in a bounce wave now. It could go up again, but then it could go below 200 down to 180 maybe. I expect the timing on that to be the third or fourth week of October.”

Are other sectors as volatile as energy?

“From a broader perspective, if you overweighted telecom, utilities and financials you would have best risk weighted return,” says Pelletier, but adds “over the last ten years, if you were willing to accept a little more risk to get better returns, then energy is the best space to invest.”

And that means a little more active trading – even in the senior producers’ stocks.

“Just look at large cap Canadian energy stocks like Suncor (SU-TSX; NYSE) and Canadian Natural Resources (CNQ-TSX; NYSE). Both have shown a lot of volatility through the year, but there’s nothing good for those who bought and held the stock over the past five-six years.

Are other sectors as volatile as energy?

“From a broader perspective, if you overweighted telecom, utilities and financials you would have best risk weighted return,” says Pelletier, but adds “over the last ten years, if you were willing to accept a little more risk to get better returns, then energy is the best space to invest.”

And that means a little more active trading – even in the senior producers’ stocks.

“Just look at large cap Canadian energy stocks like Suncor (SU-TSX; NYSE) and Canadian Natural Resources (CNQ-TSX; NYSE). Both have shown a lot of volatility through the year, but there’s nothing good for those who bought and held the stock over the past five-six years.

8-1-12-oagib-3-suncor-1

“It’s been even worse for junior oil and gas have even more volatility given their greater capital demand. They typically spend 2x-4x their cash flow on exploration.

“Therefore buy and holding juniors is not the way to play them at all – you have to trade them to manage risk,” because when the market turns down, they can’t raise money to bridge the gap between exploration spending and cash flow – so the junior stocks get hit really hard.

The junior oil and gas market has definitely turned down – but for how long?

Schachter says, “If they (national governments) face the music (on their debt issues), we could see a multi-year bull market in energy through to 2015-2016 and set all-time highs. But if they just continue to kick the can down the road, then the market malaise could drag out with trading rallies and year end bounces, and you’ll need a trading mentality, as we’ve had a good year then a bad year.”

Pelletier believes there is another two to three years to go before the next secular bull market in the major indexes and energy markets – it’s a traders market until then.

But the juniors will once again have their day, says Pelletier.

“Juniors will outperform when the market returns to normality especially those with good management teams with attractive growth profiles.

“Interestingly, there is an opportunity among those who have sold off from their financings. We think these companies will be able to take advantage of this market environment and consolidate. And there are some other stories well liked among my peers which we think are attractively valued – we think it’s important to own stocks everyone likes that are backed up by strong fundamentals.”

In Part II, both Schachter and Pelletier will share some of their favorite investment ideas going into the last half of 2012.

Keith Schaefer will make a newsletter presentation and present an expert view in two sessions on Friday, Sept. 21, during the Chicago Hard Assets Investment Conference.

About the Author

Keith Schaefer

Keith Schaefer

Keith Schaefer, Editor and Publisher of Oil & Gas Investments Bulletin, writes on oil and natural gas markets – and stocks – in a simple, easy to read manner. He uses research reports and trade magazines, interviews industry experts and executives to identify trends in the oil and gas industry - and writes about them in a public blog. He then finds investments that make money based on that information. Company information is shared only with Oil & Gas Investments subscribers in the Bulletin – they see what he’s buying, when he buys it, and why. 




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