Produced by McIver Wealth Management Consulting Group
Mark Jasayko, CFA,MBA, Portfolio Manager with McIver Wealth Management of Richardson GMP in Vancouver.
Posted by Mark Jasayko
on Thursday, 03 January 2013 14:39
Produced by McIver Wealth Management Consulting Group
Mark Jasayko, CFA,MBA, Portfolio Manager with McIver Wealth Management of Richardson GMP in Vancouver.
Posted by Victor Adair - VictorAdair.com
on Thursday, 03 January 2013 11:40
My Big Picture view for the past few years has been that the biggest credit boom in history blew out between 2006 (the top of the US housing boom) and 2008 (the top of the global commodities boom.) Since then the Authorities (Governments and Central Banks around the world) have been sponsoring The Great Reflation as they attempt to offset private sector deleveraging with public sector stimulus.
When Market Psychology (MP) believes that the Authorities are prevailing it’s “risk-on” in the asset markets…when MP believes that deleveraging is the more powerful force then it’s “risk-off.” MP frequently gets “over-done” and cause prices to move too far/too fast…which sets up Key Turn Dates when a number of major markets reverse direction at more-or-less the same time.
A good part of my short term trading analysis involves measuring how different markets move relative to one another following a Key Turn Date. The power of MP, especially around Key Turn Dates, often trumps fundamental factors that are specific to any one market. For example, I might say that a change in value for the C$ is caused more by“events” outside of Canada than by “events” inside Canada.
This week in the Chart Section I’ve made some observations on longer term charts of interest rates, stocks, metals, energy and currency markets.
United States House Prices:
Nominal house prices in the USA increased from ~$25,000 in 1970 to ~$250,000 in 2006 on the back of the biggest credit boom in history…prices peaked in 2006…and then collapsed…and that precipitated big changes in a lot of other markets.
The 90 day Eurodollar futures contract: (Trades at a discount to par…rising prices mean lower interest rates.) Short term interest rates stopped rising in 2006 as US home prices stopped rising…short rates began to fall as the US stock market began to fall in late 2007…then fell further in 2008 as the commodity market fell…and as worries about the “old normal” financial system lead to the creation of the “new normal” financial system…which has seen short rates at lifetime lows for the past couple of years as central banks try to reflate the world’s economies…with mixed success considering the amount of stimulus…but stocks, gold, bonds and some commodities have had a great rally on the back of these reflationary efforts.
The 30 year US Treasury bond futures contract: (Rising bond prices = falling bond yields) US Treasury bonds have been in a bull market since the early 1980’s and spiked to lifetime highs in late 2008 as stocks and commodities collapsed. In the last three years bond prices have gone to new highs despite a massive increase in government deficits. The bond market vigilantes of the 1980’s would surely have gone bankrupt shorting this rally.
On a short term time frame bonds are often the opposite side of the “risk on / risk off” trade…but from a longer term perspective bonds have rallied along with stocks, gold and commodities since the March 2009 Key Turn Date.
The S+P 500 stock Index futures contract:
The S+P 500 Index made an All Time High in October 2007 ( barely eclipsing the dot.com boom peak of March 2000) and then began to fall. The decline was exacerbated by credit market worries and the commodity market collapse of 2008. The index lost more than 50% from its 2007 highs to its 2009 lows. Since then the index has trended higher…benefiting from central bank reflationary efforts.
The Toronto Composite Index:
The TSE rallied harder than the S+P during the 2002 to 2007 commodity boom period…continued to rally into the first half of 2008 while the S+P was falling and then, like the S+P, lost over 50% as it tumbled to its 2009 lows. At the end of 2012 the TSE was up ~65% from its 2009 lows while the S+P was up ~ 113%.
Gold futures contracts:
Gold made a 20 year low in 1999 near $250 and then began an advance that gathered pace into March 2008 when it briefly traded above $1000 for the first time. Prices fell back to a low around $680 later that year as stocks and commodities tumbled…and the USD soared BUT…gold started to recover from its lows before the end of 2008 (unlike stocks and commodities) and nearly tripled in value by September 2011.
As my good friend Martin Murenbeeld likes to say, “The single best reason to be bullish gold is the reflationary efforts of the world’s central banks!”
Copper futures contracts:
Dr. Copper rallied from 75 cents in 2003 to a high of $4.16 in 2006…a perfect storm of booming housing markets around the world…Chinese demand and short supply. Prices fell back in 2007 and then made new highs in 2008…only to lose ~70% as commodities collapsed. Copper soared to new All Time Highs in 2011 on the back of the Great Reflation but has lost a dollar from there…perhaps on worries that sluggish global economic growth will dampen demand.
WTI crude oil futures:
WTI crude was trading below $20 in early 2002 as the commodity boom was getting underway. Six years later (Peak Oil) it hit $147 on the July 2008 Key Turn Date…six months later it was trading for less than $35.
Natural Gas futures:
Natgas made All Time Highs in late 2005 (post Katrina) only to lose 2/3 of its value within a year…it came roaring back with other commodities into the 2008 peak…only to lose over 80% of its value in just over a year….but still lower prices lay ahead as booming North American supplies took natgas below $2 in 2012 for the first time in over 10 years.
The lumber futures market made the biggest gains of any of the major commodity futures contracts in 2012…up more than 50% YOY….to its best levels in 7 years.
Canadian Dollar futures contract:
The C$ was trading below 62 cents in 2002 (the Northern Peso) as the commodity boom began. Five years later, in November 2007 it touched a lifetime high of 1.10 (that’s a gain of 77%!) It was trading at par on the July 2008 Key Turn Date (when crude was $147) then fell to 77 cents within 3 months as the commodity market collapsed, credit markets panicked and the US Dollar soared. The highest weekly close (~1.06) for the C$ since 2008 was the May 2, 2011 Key Turn Date.
The Euro Currency Futures contract:
The Euro hit its All Time High around 1.60 to the USD on the Key Turn Date of July 15, 2008 just as the commodity bull market was topping out….or was it the USD bear market bottoming out? The Euro began to rally back with other risk assets following the March 2009 Key Turn Date, but unlike stocks and commodities it has trended sideways to lower during 2010 – 2012 as the banking and sovereign debt worries of Europe weighed on the common currency.
The Japanese Yen futures contract:
The Yen trended higher from 2007 to 2011…blissfully uncorrelated to the ups and downs of other markets. (Note that it rallied as a safe haven through the second half of 2008 as stocks, commodities and most currencies, other than the USD, fell.) For the past few years a number of analysts have been expecting the Yen to fall…but it kept rising…despite rounds of intervention…carried out by the Japanese Authorities without the help of their foreign cousins. Its recent decline has been tied to anticipation that the newest Prime Minister, Mr. Abe, will force it down. So far, so good…and Japanese stocks have rallied sharply…but will the Japanese bond market spoil the fun?
Posted by Peter Schiff - Euro Pacific Capital
on Thursday, 03 January 2013 10:59
In dismissing the inflationary warnings of Austrian School economists, the pro-stimulus Keynesians have largely refrained from attacking the root of our logic. (Given that this involves defending the position that money printing does not lead to inflation, their reluctance is understandable). Instead they point to the lack of "evidence" that shows prices going up in step with money supply increases. Paul Krugman himself unpacked these arguments in a recent blog post designed to specifically discredit my views.
According to Krugman, the sub 2.5% increases in the Consumer Price Index (CPI) over the past few years are all that is needed to invalidate the fears of the inflationists.
However, there is plenty of evidence to suggest that the measurement tools used by Krugman and his cohorts to measure inflation are as deeply flawed as their arguments. And to conclude that inflation has been quelled requires a dismissal of the macroeconomic forces that have temporarily blunted the impact of an overly loose monetary policy.
Since the 1970's the preferred government inflation metrics have changed so thoroughly that they bear scant resemblance to those used during the "malaise days" of the Carter years. Government and academia defend the integrity and accuracy of the modern methods while dismissing critics as tin hat conspiracy theorists. But given the huge stakes involved, it's hard to believe that institutional bias plays no role. Government statisticians are responsible for coming up with the methodology and the numbers, and their bosses catch huge breaks if the inflation numbers come in low. Human behavior is always influenced by such incentives.
Beginning in the early 1980's the methodologies were altered to compensate for a variety of consumer behavior. The new "chain weighted CPI" for instance incorporates changes in relative spending, substitution bias, and subjective improvements in product quality.
Essentially these measures report not just on price movements, but on spending patterns, consumer choices, and product changes. This is fine if the goal is to measure the cost of survival. But that is not the purpose for which these metrics are meant to be used. But if you simply focus on price, especially on those staple commodity goods and services that haven't radically changed over the years, the underreporting of inflation becomes more apparent.
We randomly identified price changes of 10 everyday goods and services over two separate 10 year periods, and then compared those changes to the reported changes in the Consumer Price Index (CPI) over the same period. The 10 items, which we selected are: eggs, new cars, milk, gasoline, bread, rent of primary residence, coffee, dental services, potatoes, and electricity.
We know that people do not spend equal amounts on the above items, and we know their share of income devoted to them has changed over the decades. But as we are only interested in how these prices have changed relative to the CPI, those issues don't really matter. We chose to look at the period between 1970 and 1980 and then again between 2002 and 2012, because these time frames both had big deficits and loose monetary policy. But they straddle the time in which the most significant changes to inflation measurement methodology took effect. And while nominal price increases rose much faster in the 1970's, the degree to which the prices rose relative to the CPI was much, much higher more recently.
Between 1970 and 1980 the officially reported CPI rose a whopping 112%, and prices of our basket of goods and services rose by 121%, just 8% faster than the CPI. In contrast between 2002 and 2012 the CPI rose just 27.5%. But our basket rose by nearly double that rate - 52.1%! So the methods used in the 1970's to calculate CPI effectively captured the price changes of our goods, but only got half of those movements more recently. How convenient.
Just to make sure, we ran the same experiment with 10 different goods and services. This time we chose: sugar, airline tickets, butter, store bought beer, apples, public transportation, cereal, tires, beef and veal, and prescription drugs. The results were notably similar. The basket increased 1% faster than the CPI between 1970 and 1980 and 32% faster between 2002 and 2012. In both cases we selected a random array of food and non-food items.
To be convinced that the CPI does a poor job in gauging the cost of living, all one needs to do is look at health insurance. According to the Kaiser Survey of Employer Sponsored Health Insurance, the average annual total cost for family health insurance in 2012 was $15,745, or more than one third of the median family income of $45,018 per year. Yet these costs are largely factored out of the CPI. In 2011, health insurance costs did not even merit a one percent weighting in the CPI. Furthermore, as far as the Bureau of Labor Statistics is concerned, health insurance costs are well contained. From 2008 through 2012, the BLS' "Health Insurance Index" increased just 4.3% (total), which is far below the general rise of the CPI. In contrast, the Kaiser Survey showed family coverage rising 24.2% over that time.
A recent poll of likely voters conducted by Fox News in the weeks before the election, revealed that 41% of respondents identified "rising prices" as their top economic concern. This response beat out "unemployment" by nearly two to one.
The underreporting of price movements would explain why inflation is a concern on Main Street even while it's not a concern on Pennsylvania Avenue. If these price changes in our experiments had been fully captured, CPI could currently be high enough to severely restrict Fed action to stimulate the economy.
But beyond arguments over the accuracy of our inflation yardsticks, there are solid reasons that prices are not rising as fast as they could be given the printing binge that has characterized the last few years. Economies no longer come in the neatly packaged national varieties. To a very large extent monetary conditions within the United States now are being influenced by activities of other countries.
Over the past years, unprecedented amounts of dollars have been created. But much of that money does not stay within the confines of the U.S. economy. A very large percentage of it winds up locked away inside the vaults of foreign central banks, particularly in the Far East. Countries like China and Japan, that run large trade surpluses with the U.S., need to warehouse these greenbacks so that they can keep their own currencies from appreciating against the dollar. The International Monetary Fund estimates that from first Quarter 2008 and second quarter 2012, U.S. dollars held in reserve by foreign central banks increased by $850 billion, or 31%.
When these countries decide that holding huge amounts of dollars is no longer in their interest, the money could come flooding back onto these shores, where it will exert upward pressure on domestic prices. In the meantime, the current flow of funds allows for a windfall for U.S. consumers. An artificially supported dollar means that we do not pay as much as we could for imported products. The low prices at Walmart are not the result of a sluggish U.S. economy, but by greater production abroad and dollar support from foreign central banks.
But in the meantime, it's not as if those dollars have been neutered of their price raising power. Rather than being spent by U.S. consumers to push up domestic prices, they are creating inflation abroad and helping to push up the prices of U.S. Treasury Bonds, which foreign central banks buy with their excess dollars.
Given how weak the economy has been since the crash of 2008,it is surprising that domestic prices have risen at all. While there have been many similarities between the Great Depression and the Great Recession, one great difference was that the crash of the 1930's was accompanied by significant deflation. By some estimates, prices fell by about a third. And so while consumers and businesses then struggled with unemployment and dropping share prices, at least they were cushioned by falling prices. Today we have no such support.
The Bureau of Economic Analysis reports that in December of 2008 food and energy spending, as a share of wages and salaries, had fallen to a low of 18.7%. Today that figure stands at 22.1%, an increase of more than 18% in just four years. This indicates that the stimuli of the past four years have failed to create the beneficial impact its architects had hoped. People who are spending a higher percentage of their incomes on necessities like food and energy are likely to be experiencing lower living standards.
Unlike Krugman and the Keynesians, I would argue that it is impossible to create something from nothing. I believe that printing a dollar diminishes the value of all existing dollars by an aggregate amount equal to the purchasing power of the new dollar. The other side takes the position that the new money creates tangible economic growth. I think that those making such absurd claims should bear the burden of proof.
Posted by Jordan Roy Byrne - Daily Gold
on Thursday, 03 January 2013 08:33
With all of the volatility of the past nine months, few market observers would think the gold equities have begun a series of higher lows or even a new bull market. However, this action is typical of this sector. GDX first formed a low in May followed by a double bottom low in July. From that point, GDX gained 35% in only two months! After three months and a pullback of 20%, the gold stocks are pushing higher once again and have a chance at a tremendous 2013.
There are two extremely important levels for 2013. The first is GDX 48 or HUI 460. The chart below shows $48 as the most important near-term pivot point. GDX has already made a series of higher lows but a weekly close above $48 would add stronger momentum and confirmation to the uptrend. Also note the positive divergences in the GDX vs. Gold ratio and the RSI indicator.
The weekly chart of GDX clearly illustrates our second important pivot point for 2013. Assuming, GDX closes above $48, the next important resistance is $55, the September high. Moreover, note that $55 was an extremely important level dating back to the end of 2007. It is obvious that $55 is far more important than the highs near the mid $60s. If GDX closes above $55, then every chartist will be ready to jump on the bullish bandwagon. (Note that they have not jumped on on yet. They have no clue now but will awaken after GDX is up another 20%).
It’s also important to note the prognosis of the weekly RSI. After surging to 65, the RSI corrected to 40 but its curling up once again. A reading of 40 at a bottom (check) is typical of a bullish trend. Keep an eye on the weekly RSI as a move above 70 would be the first such move in six years! This market is slowly positioning for a big move in 2013 and 2014.
We have not been this bullish since May and August. The technicals look great and sentiment remains very favorable for longs. Meanwhile, valuations continue to be very favorable. As we’ve discussed in the past months, the miners are trading near historical lows in terms of earnings, cash flow and sales. A breakout in Gold past $1900 would certainly raise the low valuations and at a time when stronger metals prices would thereby raise earnings. It is a tremendous one-two punch that could launch this sector in 2013.
The key for traders and investors is several fold. First, you always need to plan with each trade and every investment. Decide how much you want to risk and how you will risk it. Second, in this sector you must employ effective market timing and proper stock selection. In the past year many stock pickers got killed because they couldn’t pick the right stocks and they didn’t cut their losses. If 2013 is a return to the bull for gold stocks, which I believe it is, then its time to do your research if you want to beat the sector. If you’d be interested in professional guidance in uncovering the producers and explorers poised for big gains then we invite you to learn more about our service.
Jordan Roy-Byrne, CMT
Posted by James Tolard via Rick Ackerman
on Thursday, 03 January 2013 06:55
James Tolard is a supremely gifted commodity trader. Jim’s style is to surf the big trends, trading just a few times a year. He lives in a rural area outside of Paris, but we’ve coaxed him out of semi-retirement to write occasionally on an eclectic range of subjects suited to his deep intellect, worldliness and wit. This time, he is sharply at odds with our own, very bearish outlook for 2013. We have no qualms about sharing his thoughts with you, however, because Jim’s against-the-grain instincts have been right far more often than our own. RA]
One of the things that baffled me all summer, and into the stench of the campaign finale, was the supposedly odd “friendliness”’ of the U.S. stock market and the weakness of the dollar. I was fairly bullish on stocks going into October, for a surge to – sit down for this — Dow 20,000! But as October pulled in with a screech, and elections just a month away, I am old enough to have expected little good from either the Ides of March or those of October. So, I blushed, backed off, and decided to let the market tell me what kind of correction or sell-off it might need.
Now, contrary to all emotional expectations, we are facing the real possibility that a strong run-up may well launch in the coming weeks. So, assuming that I am going to be right, what do I use to support my arguments? First is the low borrowing rate. While the normal person or even smallish business cannot borrow 3% or less, large firms can. The banks are still re-building their reserves and doctoring their balance sheets, so they are holding onto the money very tightly like the bankers of yore, lending only to those who don’t need it. This accurately describes the condition of the largest companies and private equity firms. They can re-finance their present debt and assume debt at less than 3% to 4% — and who the hell can’t make 3%-4% in a big business today? The rush to sell commercial paper is well known to you all, so I won’t rehearse the facts: Buy low sell high. The present interest rates have many well-heeled takers, and if you have the means, I’d suggest borrowing now while the low rates lasts.
Second reason and bullish sign: Lumber and construction are increasing, and lumber has managed to emerge from its listless two-year bottom. Meanwhile, there is plenty of money for builders and probably not so much for buyers, but that can be fixed. Third reason, and most baffling, even though I see it here: No matter how shrill the bank propaganda is about Greece, Spain, et al., the EU is in good shape on paper. Hence, the euro versus the dollar is favorable toward U.S exports . Despite all else, a lower dollar is good for U.S. business in that it is one of the factors that stimulates overseas buyers.
So, the low borrowing rates, the raw materials for construction and the weaker dollar should provide the support for a higher stock market. Also, some key U.S. stocks are leaner and more profitable than three years ago. They have plenty of retained earnings sitting in Scrooge McDuck bins in the basement. It helps that they have little competition. On the consumer side, the sheeple are in the process of growing back their heavily trimmed fleeces, but many are not yet ready to spend like they are rich. While we await their resurgence and the slow lifting of their spirits, let the band strike up a tune and cheap wine to flow.
As for Armageddon…
What about those dire predictions of an End of Days? My dear friends, there is one thing for certain: The global economy is on course for a crash that will subsume commercial institutions and traditions that have dominated all sectors of life in the West for nearly 250 years. But the U.S. and Europe are not going to turn into an economic South Sudan overnight. Rather, money and credit will continue to flow, trade to expand, and hundreds of millions of consumers brought on line. Let’s enjoy it while it lasts.
Concerning gold’s prospects in such an environment, we should note that gold has risen when the Dow rose, when the Dow fell, and when the Dow was flat. Here is my belated Christmas present, as well as a Passover gift ahead of time: If the Dow surges above 15000 or perhaps even smashes though 20000, gold will easily reach $2500. So there. I said it, my belly is sloshing with a modest St. Emilion vintage, but that clears the head rather than blighting it. Can this happen? I think so. Of course, none of this correlates with the external “mood” of the press, the politicians, and so on, but they never know in any event, do they? And, those numbers are not really that amazing. Suppose the Dow hits 20,000. That is only about 6600 points from here, a mere mis-programmed instruction in a high-speed trader’s algorithm. And gold at 2500 or more? I sold some around 1,800 just less than two years ago, and so from a current 1,700, at least, that implies a rally of just $800. No matter how odd that kind of a move might seem now, I am persuaded that it is the only real direction for the market.
And lastly, there’s all of that silly stuff about the fiscal cliff and the national debt. Forget it. Debt will continue to metastasize, big companies will hold onto their tax breaks, and the military will surrender perhaps $10 to $20 billion of a current budget of around $700 billion. Taxpayers will pay more, and everyone will declare victory. Can you understand the Tax Code? How about the effect of riders on the budget? If you can, I’d suggest that we carve your head into Mt. Rushmore, right next to Teddy Roosevelt’s.
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