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Wednesday, December 02, 2009

Dire warnings about a US debt default

There are some pretty dire predictions about the global economy out there. There is talk of debt default by the US. There are two reasons why this is not going to happen:
1. The US will likely get the support of foreign nations. Why should they continue financing the US given the collapse of the USD and the pitifully low interest rate? They can't even look to their external trade surplus and say Americans are buying far more of their products. Americans are all spent up. The implication is that the US would have to accept higher interest rates. Governments don't just like to raise rates. They need very good reasons to do so. The only good reason is inflation. Given the level of indebtedness around the world, no one is going to aggressively raise interest rates. We can therefore expect the next scenario to avail.
2. The US will print money: The USD is the monetary base for global finance. Most global debt is denominated in USD, and all US debt is in USD. The implication is that a weaker USD is not inherently bad for the US. The US can simply print money to make payments. The problem of course is that this is inflationary. The problem is that this option will lead to high interest rates as well, just inflation will be leading rather than rising rates.

Add the fact that Iran is being an annoyance, and you have a huge justification for holding gold or other precious metals.
Andrew Sheldon

Tuesday, November 10, 2009

It appears that governments have grown increasingly confident about their capacity to finance the next wave of the economic cycle. They are throwing caution to the wind and are committing to debt-finance further stimulus. Clearly they are looking at the poor state of unemployment and are concluding that they cannot afford to end the stimulus. This can only increase the inflation rate, though it might just push equity markets higher. I would caution, its probably just likely to prevent a faster fall as the markets will struggle with two issues:
1. The rising unemployment rate
2. The prospects of falling equity markets
3. The prospects of rising inflation

The market in the interim will react positively to good stock news, but rest assured that markets will shake off this good news eventually. In any respect the metals markets are looking good, with gold and other precious metals particularly attractive. In the Asian region, we have seen Philex, one of our favourite stocks double in price to P18.
In Australia, we have seen gold stocks perform well despite the strength in the AUD which reduces the $A denominated receipts from gold sales. There is of course a limit to how high the AUD will rise because of the prospects for a weaker global economy. Meanwhile we are projecting gold to rise from the current $1104/oz to $2400/oz. I'd give the market a maximum of 3 years to reach that level. We first started investing in gold in 2000 when gold was around $280/oz. The stocks then differed from todays. More news at Blue Sky Mines.
Andrew Sheldon

Thursday, October 22, 2009

S&P500 - set to challenge downtrend

The next few weeks will be critical to the US market. The S&P500 could go either way. We can see from the following chart that, despite the recent strong rally in the Dow to 10,000 and the S&P500 to 1100, the market is still in a downtrend. This condition will be challenged in coming weeks. The market has been celebrating the positive earnings recovery, though one has to acknowledge several things:
1. Tight credit conditions
2. Continued job losses
3. Prospect of inflation
4. The role of government stimulus in preserving economic activity

For this reason I am expecting US equities to fall in coming weeks. One might wonder however if this gloomy forecast is premature. Afterall the US can keep printing money, so until the day when inflation undermines the impact of further stimulus, the US Fed can support the equity market for a time yet. The market might however see it another way, so this is good reason for a pause. This also adds to the allure of gold.
Andrew Sheldon

Thursday, October 01, 2009

S&P500 - still in a downtrend

Looking at the US market it is apparent that despite the recent rally in the S&P500 from 670 to 1078 between March and September 2009, the market is still in a downtrend. The implication is that the market tanked when its downtrend was being challenged. The question therefore becomes - how low will it fall? I am expecting a fall back to the 942 support level, then consolidation from that point.
I would not be surprised to see the S&P500 return to its lows of 670, however that will not occur for some time yet.. 12-18 months as I believe the motivation for that move will be the prospect of higher interest rates to fight inflation. This will all be conjecture to cynics who need to experience things first hand before they believe.
Andrew Sheldon

Nikkei-225 resistance proves too strong

The Nikkei-225 broke resistance on Monday and has continued to fall during the week. This is of course another downtrend in global equity markets. The question is how low will it fall? We see the most likely support levels as 9,065 (interim) and 6,850. The possibility of the market falling to 6,850 is pretty dire. But that is what happens when people are fearful of the future, and are unable to spend because they are concerned about losing their job or face ever-tightening rises in interest rates.

It will be hard for market pundits to appreciate but the worst has yet to come. The recovery in the stockmarket was of course the result of government stimulus. There is talk that the property market is about to recover as well. We do not believe that at all. We think there are safe places to buy, but cities and tourist meccas are not among them, and will not be for several years yet.
Much will depend on whether government continues spending. It seems impossible because of the damage they are doing to the underlying economy. Stimulus absorbs underlying lack in market capacity by stimulating demand, but in as much as governments don't constitute 'productive' capacity, the implication is that they do not create wealth. They simply redistriiute money, which means they are inflationary. Right now they are among the few spending money. The greater share of the economy they represent, the more protracted the slump. The implication is that we are either going to see failures or have a long drawn-out recession like Japan. I would suggest its going to be some compromise between collapses and protracted recession. i.e. We are looking at selective intervention.
For the reasons above I sold a position I had in KDDI last Friday before their was considerable carnage this week.
Andrew Sheldon

Wednesday, September 23, 2009

Nikkei-225 at resistance

The Nikkei-225 has reached an important resistance. It is my belief that the global central banks will continue to print money, so we can expect global equity markets to keep rising for the time being. For this reason I see the Nikkei probably rising to 12,500 resistance before being overwhelmed by inflation concerns. In the short run inflation tends to look good on balance sheets, however eventually it eats into consumer confidence and results in more job losses.
For the Japanese market it will be interesting what impact a change in leadership will have on the economy. This is a landmark development for Japan. Historically when Japan has had periods of reform, they have been earthquake-type shifts in policy, so with two senior business figures leading Japan's new party it will be interesting to see the impact of this new team. I watch with interest their forthcoming announcements.
Andrew Sheldon

Wednesday, September 02, 2009

The outlook for the Dow

There are a great many people predicting another slump in the Dow. Certainly that can be expected given the protracted rally we have just experienced. The rally was of course driven by the Fed and Bank of England 'recapitalising' the monetary system with government debt, as opposed to household debt, and also printing money. The implication is that there is no end to the largesse until it has no effect, and that 'crisis of confidence' typically comes in the form of inflation. For this reason I see no reason why the Dow can't keep going on its current track. A pull back is inevitable, and no doubt the continuation of the rally will not be justified, but neither is silly government monetary policy.
US unemployment continues to rise, sales continue to slump. A big factor in the Dow slump will be the sign that central banks around the world are starting to raise rates. But I do not predict this will be a significant obstacle until inflation gets up to around 5%. At that point, people will conclude that we are in for a serious slump. By that point gold will likely be over $1800/oz. My latest calculations suggest gold will rise to a minimum of $2200/oz. See my commodities post.
Andrew Sheldon

Saturday, June 20, 2009

Investing in Taiwan

One of my readers suggested Taiwan makes sense as an investment destination, and I agree. He notes that Jim Rogers, the commodities trader who set up the Quantum Fund with George Soros was also investing in Taiwan. The positives for Taiwan are:
1. The ability of foreigners to invest in Taiwanese stocks - within limits that are unlikely to affect you, and there is the CFD opportunity as well.
2. The investment exposure to China
3. Tiger economy
4. The positive prospects of Taiwan and China cooperation

If you want to see there blogs, I refer you to Taiwan blog and Jim Roger's blog. I also like the Philippines northern coast, which has witnessed an increase in Chinese (HK, Taiwanese, Singapore, China) investment in property (resorts, hotels) in recent years. There is now an international airport at Laoag. Check out our property report or our property blog.
Andrew Sheldon

Wednesday, May 20, 2009

US Fed reaches deep for new levels of delusion

The latest headline “US Fed sees signs of economic upturn” by Rob Lever, SMH Online, 21st May 2009 has the US Fed recognising "tentative evidence" that the US economy is emerging from recession and could show modest growth in the second half of 2009. By way of our analysis, suggests a new low in US Fed delusion. How possibly could the US be looking at turning around when it’s just about to experience a re-setting of mortgage loans. Remember the sub-prime crisis. Well there is an equally large problem facing US mortgagees – the resetting of those ‘teaser’ interest rates to market rates. Now, I must concede that those interest rates are not going to reset at troublesome rates in the short turn, but with the Fed and central banks around the world pumping money into the banking system, the day is not too far away that we are going to experience some inflationary pressures. Just as governments have been stripping out costs to reduce taxation, now we are going to see consumers or households facing higher costs, higher inflation, partially for the sake of debt sustainability, and partly because there is so much paper money in the market which is not supported by current levels of economic activity.
The Fed revised its economic outlook to suggest US output would fall 1.3-2.0% over 2009, and that the worst declines may be over. Well that does not surprise me. If you are ‘high’ on economic stimulus there is no question people are going to feel good about a stabilisation of asset prices, but at some point inflation is going to take its toll on household’s purchasing power.
The notion that “there are improvements in financial and credit markets” only highlights the fact that the Fed and other central banks have been recapitalising the banks using taxpayer money, and rather then using the proceeds to lend to households, who are already indebted, the banks have been speculating in the securities markets, driving up security prices. This will come to an end at some point soon, and we will be looking at another volatile downtrend through 2009-2010 as interest rates move higher.
US economic output fell by 6.1% in the March quarter of 2009 after a 6.3% fall in Dec-08 quarter. They are serious hits to the market, but more will follow. There is at least some recognition that this is crisis is not over. The Fed projects unemployment to rise from 8.9% in 2008 (a 25-year high) to 9.2-9.6% in 2009.
The Fed expects inflation to hold at 0.6-0.9% in 2009. I have never believed in inflation numbers because you only have to look at how they define the concept. Any measure of inflation that does not consider all asset prices, excludes the most important components like securities, food and energy, is just trying to plan delusional games betting on Chinese deflationary impacts. A sudden loss of economic capacity is going to result in higher fixed costs to all production. There is no escaping that, though if you are selective in your inflationary analysis, you can of course opportunistically consider energy and asset prices, which have been falling...but not for much longer. The reality is – inflation as defined is manipulated, so give it no heart.
Now for those of your with a sense of humour. The Fed is forecasting “modest growth” of 2-3% in 2010. Wow, that is quite a turnaround. You might be inclined to believe that there is no reason why this market cannot just turnaround like it did in years past. Afterall as long as the Fed and other central banks shore up the banking system, what it to stop Western governments from sustaining this delusion for years to come. I think there are several issues which can stop them:
1. War
2. Pandemic
3. Debt levels
The international political environment is pretty tense, but there is probably little prospect of war or further substantial military action at this point since oil prices have fallen significantly. A pandemic is a threat to consumer spending, though I would suggest any threat is likely to be short lived. It might actually be expected to affect the financial system more than the real economy. My analysis is that it will cause short term financial volatility, which will probably knock a few more financial institutions out of the market, but that the market will recover from a bird/swine flu based pandemic. We will stock up on food, hide in our houses for a few weeks as it sweeps the world, and on that basis it will die out, and become a less virulent strain.
Debt levels remain the biggest obstacle to the sustainability of the current economy. Even if tax increases can be delayed a few years, it will only result in government debt being rising to the same levels of household debt. With many households already having lost a lot of equity in their homes in recent times, causing the biggest mass transfer of wealth (as a % of GDP) in history, who would expect a recovery? This at a time when governments are moving to consumption-based taxation. Who understands the logic of these people? Well of course its a desire for short term political power, and taking every expedient step to preserve it.
Andrew Sheldon

Tuesday, May 12, 2009

Nikkei-225 likely to top off

The Nikkei-225 is likely to come under selling pressure at these levels. The country is really faring poorly as a result of a slump in exports, and job cuts. Confidence is at a low level. The defiance comes only from the market, which of course is being fuelled by the cheap bank funding, as you can bet the funds going into the banking sector are not going into loans.
I don't see the Nikkei going above 9600 points unless the Japanese government decides to stimulate the economy with yet more money. Of course there is no limit to the upside in equities in the short term. It all comes down to how much you are prepared to debase your currency.
So I am negative on Japan, but let's wait and see for the market to set the direction. Stimulus will drive the market higher, property taxes will drive it lower.
Andrew Sheldon

Monday, May 11, 2009

ASX-200 set for a rally

I have indicated already that I see a hard time for the US economy. There is nevertheless the prospect of more stimulus in the US, and I would not be surprised to see a tax on energy. We have the prospect of carbon credits trading in the US, as in other countries. This issue awaits the Copenhagen Summit. I would not however be surprised to see these governments agree to just tax energy consumption since that will allow them to control the cash. Really it was all just a rationalisation to create another indirect tax.
The chart to the right suggests that the ASX stock index has broken through resistance at 3,845. Having convincingly done so, the market has once again pulled back to support at that level. I suggest this is an opportunity to buy.
The reason the ASX200 is looking so positive is because of the positive shape of the Australian economy. The positives are its agricultural and mineral export base. This is positive in several respects. China is talking about buying up commodities, which means commodity prices are going to stay relatively strong, or at least stronger than they otherwise would, so we can expect the ASX market to trade higher as well. This also helps support some of those projects which would otherwise be cancelled, as I am sure that a good deal of investment will be going into mining/mine equity as well as commodity inventories. So we can expect a lot of investment in Australian resources, and that's across the board - coal, iron ore, copper, gold, nickel and ENERGY. There are some large LNG projects on the table. Australian tourism is very weak despite the weak dollar, though that fabulous Qld govt campaign promotion for the 'Best Job in the World' will help.
So basically I am expecting the ASX-200 to climb to 4360 level in coming year, though I think that will be the top of the market. The China factor will stop Australia sinking back to lows, but it will mean the AUD and equities just trading in a higher channel band. The flipside is that the market might go sideways longer, but I don't think so, as I don't think China will be dumping commodities in a hurry.
Andrew Sheldon

US equities poised for a fall

The US market has been fairly strong in recent months. You might well be wondering how much longer this can go on. I am actually expecting a pull-back fairly soon. There is of course the ARMM loan re-sets, but there are other factors as well. I suspect the swine flu hoisted up sales in the last quarter, so we might expect a slackening after the build-up of those food inventories.
The current softer interest rate outlook is really just fluff since anyone will be hard-pressed to get credit in this market. Really the global central banks are just subsidising the 'perception' of cheap credit. The only ones getting cheap credit are the banks, and they have been busy investing in stocks and commodities to rebuild reserves, rather than lending to lovely people like yourselves. So having reached a support level, I think you will see them dump those positions, unless they are planning further stimulus.
There is actually one reason why I think the governments might in fact consider further stimulus - they have no money, and they are not likely to raise taxes in hard times. More probable is the prospect that they will continue the great money illusion. This will of course be inflationary, at least to asset prices. The reality is - it will only be government money supporting the market for the next few years. It is apparent that governments are all too willing to throw everything at this market to stop the 'rot'. We need to remember that there is nothing stopping the Dow Jones going to 15,000 if the US government is willing to undermine the value of the USD. Expect central banks around the world to help them.
Andrew Sheldon

Wednesday, April 29, 2009

ASX Index destined to fall

The ASX is likely to take a fall in the next week as fears of 'bird flu' are re-visited, with the escalation of concern over Swine flu. The ascension of Swine flu as an issue after the Bird flu suggests that this problem does not just go away. Unless the Western World can force the developing world to comply, then the global economy remains under threat. Of course just as we have tsunami warning systems in place to warn us of impending doom, we can all stay at home for 5 days when another strain is discovered. On reflection I think it would be more helpful if the developing world just improved their standards of animal husbandry. Of course this will take some time to achieve, as policy makers are challenging the thought process of some shallow, stoic collectivists, but this is what needs to occur.
The implication is that we will be looking at a few scares over the next few years as a plethora of new viral strains keep you and the rest of the world in isolation. Of course this will decimate consumer and business demand. Unless the politicians act quickly, we will be looking at depression. Will they let that occur? Not before flooding the economy with money. But what they don't realise, is that more money will not prompt people to spend. The implication is that once again the governments of the world are left without a viable monetary tool to stimulate economic activity. Do I expect them to pick up the 'sensible public policy' spade and do some work towards bringing some sanity to the Third I don't think they are so effective. I think after a few years Asia will wake up themselves and realise that 'It really is an objective reality'. That we cannot ignore cause and effect. Well herein lies my hope. :(
At this point I am reminded of a quote from The Fountainhead by one of Ayn Rand's characters, the exact quote I cannot provide, but its something like this.
Person A: So you play the stock market. What do you invest in?
Person B: Human souls...and I sell short.
Well when it comes to public administration, so do I. I think you can expect the market to tumble soon, and it will not just be the bird flu, but the forthcoming escalation in ARM resets. This is a time to go short on indices and stocks. But wait for the market to signal such a move. We are looking for that bird line to be broken, signalling a change of trend.
There is of course the possibility of an injection of more government money, but actually I don't expect this to help. I think the market is going down regardless.
Andrew Sheldon

Tuesday, April 28, 2009

Swine Influenza Virus (SIV) poses market risk

The Swine Influenza Virus (SIV) would have to rank as one of the greatest market risks at this time. The risks posed are that this virus could be far more contagious than any other. We don't just have to worry about the communicability of the current strain, but the possibility that a more virulent strain will develop over time. I would also suggest to you a degree of inevitability exists with respect to pandemics. The longer that we defer a pandemic, the more virulent the forthcoming attack will be on humans, or at least some humans who have not been vacinated. I would therefore encourage everyone to get vaccinated for influenza. Of course that is not going to immune your investments from being stung. Even precious metals and related mining stocks will come under attack I believe because any threat posed is 'deflationary', and there is technical downside to the precious metals market. Lets consider the risks:
1. The mere threat of SIV is an intangible, which means that there will be a gradual escalation of concern about the issue as evidence grows, and the signs of threat become more apparent. Intangibility has two sides to it, it can place it off your radar screen (as an investor) or it can mean the downside is not well understood. In this first stage, the former is the more prevalent.
2. Actual fear of a pandemic will result in people not going out for entertainment, they will stop spending, they will reduce their level of economic activity and just save, maintaining the simplest lifestyle. The result will be greater levels of unemployment. We are therefore going to see a further contraction in the global economy and asset price deflation.
3. The paradox is that the healthy, working people who are contributing the most to economic activity are the ones who stand the greatest possibility of dying. For this reason, if these people have high savings, you might see them taking 'voluntarily redundancy'.

My belief is that if this SIV outbreak is not contained it could well cause a depression. It would be the equivalent of people losing confidence in the banking system. In fact it will start bank failures. It might even precipitate a run on the banks, and even stating as much could cause a run on the banks.

For this reason, I would be inclined to convert all investments to cash. Certainly I would be selling all derivatives at this stage, including precious metal based derivatives. The banking system is under threat. Pay off your house, stock your house with tin food, non-perishable processed foods (e.g. fruit & nut bars), cereal, long life milk, etc.

Law and order will not be as strong as it might otherwise be. There will be police voluntarily retiring to avoid any threat to their families; whom will want to avoid the virus. There will be an escalation in desperation and criminal activity, whether its people stealing food, or ignoring quarantine orders. Such depends on the capacity of the government to anticipate the threat, and to contain the fear of those who are vulnerable.

If you are looking for someone to blame - look squarely at government and yourself. These events happen because humans all too often are prepared to subjugate their lives to governments, and renounce responsibility for thinking. There is no guarantee of these events unfolding. My belief is that they will because any system is only as strong as its weakest links, or its capacity to alienate itself. If I was in government I would be shutting borders and containing the problem, or better still taking order administration of airport hotels and creating a 5-day compulsory quarantine for travellers. Discretionary travel should be ended. The problem however is that - if this virus does not mutate soon - it could mutate any time in the future. It remains in the environment. The standards of animal husbandry need to be improved. Those countries which do not have high standards need to be isolated. The financial system is not in a condition where we can afford to have this threat lingering in the environment. I just want people to conclude at the end of the day that governments are evil! They are reckless, short term, self-indulgent losers who cannot be why do you grant their system of administration. In coming months I will be outlining an alternative.

I expect stocks will sink back to their previous lows. Its possible that the market will go even lower if too many people die. At the end of the day I don't see this happening because I think it is relatively easy to overcome any outbreak. We live in an era of preserve foods. We need only isolate (or effectively quarantine) everyone in their homes for 5-days, and any threat should be over. The question is - will the government be able to coordinate that. I think there is room for confidence. There is also the possibility of having a practice run, as SIV might not be as virulent as other strains.

I posed some time ago the premise that the bird flu posed this type of threat to the economy. For the next 4 years the global economy is going to be hanging on a knife edge. When you are smoking that joint, if you are thinking nightmares, this is one scenario I would avoid contemplating. It is manageable, I just have so little confidence in government.
Andrew Sheldon

Monday, April 06, 2009

All Ords testing resistance at 3700 pts

The All Ords is close to resistance as it ascends to 3700 points. There is a sell opportunity coming. Its important to note that the All Ords, like the Dow Jones, has broken its downtrend, and I would suggest you can expect it to trade sideways for the next 3 years. That does not mean flat, but short rallies in a consolidation band. I would expect a pull back to 3000 pts. In the short term expect a sell off, a short run recovery, before it ultimately falls back under the weight of ARM resets and higher unemployment, not to mention failed stimulus.
Andrew Sheldon

Dow Jones testing resistance at 8000pts

The Dow Jones Index has had a good rally of late running from 6700 points to 8,000 pts. It has been sold off at this juncture because its a point of resistance. It remains to be seen whether the index remains above this strong resistance. I would expect some temporary weakness to 7800 points, but I would expect the rally to continue to up to around 8,500 points before it gets sold off.
The reason for the weakness will once again be real estate, not to mention the growing queues of unemployment in the US. The reality is that the US will probably test those lows of 6700 points once more later in the year. This will likely coincide with the worst of the ARMs resets, and perhaps renewed fears of inflation.
Andrew Sheldon

Thursday, March 19, 2009

Fed decides direction of the market

The US Federal Reserve has signalled the next move in the market. From herein we are looking at a sustained period of USD weakness, which in the short term will mean a strong gold prices. In fact all precious metals will perform well, particularly silver, and of course commodity based currencies.

The Fed has announced its intention to spend $300 billion on long-term Treasurys.The Fed is of course the bank of all banks, and the fact that it is taking this path of "quantitative easing" shows that it recognises that it cannot hope to pay its debt, so its going to sustain spending by refloating the economy on a sea of paper money. The impact of course is to delute the value of the USD. This is however not just US policy. This is an organised campaign by all central banks around the world in similar straits. We can see a pattern of 'cohorts' supporting each others 'fairytale' monetary policy. This is what evil government does. On the one hand they offer you lower interests, with the other hand they (the banks) restrict your ability to get a loan, no matter how good your credit rating. Banks are no longer in the lending business, they are in the speculating business.
On the one hand they are offering you tax cuts, on the other hand they are increasing the tax rate through inflation. Bracket creep will very quickly see you paying the top marginal tax rate.
This is not just the US Fed Reserve and US government, these policies are supported by a number of foreign central banks. Sorry but Obama is no different. But don't feel bad you really didn't have a choice. They are all bad. The system is rotten.

The "quantitative easing" will increase the volume of dollars in the financial system (i.e. increase money supply), and of course that action will eventually feed into inflationary expectations. You cannot fake reality. So when they pretend to be surprised when inflation shows up in a few months, you can cynical sigh that it 'was meant to be'.

The US Federal Reserve is not the only central bank to take such steps. The British and Japanese central banks have already announced that they would purchase their respective government debts, while the Swiss National Bank is selling its francs to weaken its currency.

Gold responded as we expected - up $17/oz overnight, closing at $US956.95. I might add that gold also found support at the $880/oz level as expected.

There are a number of ways you can gain exposure to gold:
1. Derivatives such as options, Contracts for difference, futures
2. Gold mining stocks
3. Funded emerging gold producers
4. Exchange traded funds (ETFs)

The gold holdings of the world's largest gold-backed ETF, the SPDR Gold Trust, rose to a record 1,084 tons on March 18, up 1.4% in a single day. Silver holdings in the world's biggest silver-backed ETF, iShares Silver Trust, rose 1.3% on Wednesday. People might talk about "an ebb in demand for gold in India", but trust me its not going to be Indian consumers driving gold to $2,000. Its going to be speculative investment in the financial capitals. People like me have been talking about this day for 10 years. This is it - the wave has crest. Don't be shy - your time is here. Jump up on that surf board because the Fed sharks are in the water. Just let them drown in their own paper money.

India gold demand also ebbed on Thursday as traders said prices were too high. Demand should pick up in mid-April to May as the wedding season begins. Other precious metals tracked gold higher, also benefiting from the weaker dollar. Spot silver surged to $13.68 an ounce, its highest since Feb. 26. It was last at $13.45/52 an ounce from $12.88.
For more information on precious metal investments - see our Commodities and Speculative Equities blogs.
Andrew Sheldon

Wednesday, March 04, 2009

Outlook for the Dow Jones

The Dow Jones has fallen to new lows over the last week. It appears to have broken a very strong support. But I would hold out hope of it building a support at these levels. I see this as once again a good time to trade stocks.
News that the Chinese government is going to have some stimulus means squat to me. The only stimulus that matters is the big amounts thrown around by the US Treasury. At some point they are going to have to print money. That is ultimately what is going to keep asset prices like equities high. Here are the 3 D's in case you missed the 1929 lesson:
1. Delay monetary tightening and poor on more stimulus and tax cuts
2. Deny responsibility - blame business for selfish greed
We are here!
3. Diminish the USD value by printing money
3. Depression - all the time decrying this as an unprecedented event. Really?

I would suggest to you that equity asset prices are about priced at the right level for the times, though property still has a long way to fall. For this reason equities are going to be trading sideways until we see a bottom in household assets because no one is going to be doing much lending until then. I give it 4 years to absorb the property in the US. It will take time for banks to wipe their non-performing loans clean, and there will be inflation in the interim which will bring others undone as well. The inflationary phase has yet to start.
Andrew Sheldon

Friday, February 20, 2009

Buy gold - the Bank of England is printing money

There was an important development for gold pundits this week. The British Treasury on the advice of the Chancellor of the Exchequer is to engage in quantitative easing or 'printing money'. Resorting to printing money to finance government expenditure has not been used for decades because of its unsavioury association with inflation. Printing money directly links the government to inflation. The justification for this is of course the fact that the banks cannot lend funds because of their parlous condition, plus the fact that asset prices are still falling. The proceeds will be used to buy company IOUs and other assets held by banks. This will boost the reserves of the banks, and thus allow them to make new loans, which will support asset prices in the economy. But I would suggest not until asset prices find a base. The rationalisation for the move is the threat of deflation. The reality is that they will not stop deflation, but it will eventually cause inflation when asset prices bottom of their own accord. The interest rate is already 1%; but new bank lending capacity is unlikely to finance much except new gold mines given that gold prices are taking off.

The question is - when will other government treasuries show their folly by printing money as well. The reality is that the treasury of many governments has been so decimated by their prior loose monetary policy, that they can no longer debt finance, and they will be forced to print money. Asian and Middle Eastern treasuries might be questioning their prior support for the USD. No doubt they will be buying gold. I would suggest as modest wealth holders - buy gold stocks for better leverage to this emerging speculative boom.

The price of gold has been moving up $US15/oz a day of late, and is close to $US1,000/oz. We are tipping $US2,000/oz by the end of the year. Gold tends to create its own momentum in such times. Check out our gold stock selection tips here.
Andrew Sheldon

Monday, February 16, 2009

Is the US on the verge of a financial collapse?

This is critical news for us all from Brass Check TV. This video shows the Chairman of the US House Committee admitting that the global financial system came close to collapse due to the Republicans financial management. More concerning is that he suggested that they don't know what they are doing, and they could benefit from the advice of a housewife on $10/hour. I actually don't disagree, as she did display greater wisdom. But here we have displayed the humility ('read' lack of responsibility) from these politicians (and that is not a good thing), as well as one of them conceding that they don't know what they are doing, and that they are relying on the US Treasury. You might wonder whether the US Treasury knows any better. Well of course they do. These events don't occur because they don't know, they occur because they will do anything to retain power.

This thinking remains me of an incidence during the 1990s, during the meltdown of the Japanese economy. Our company was a consultant to a major Japanese trading company. The General Manager of the Coal & Iron Ore Dept asked the proprietor of our company whether they should buy a particular asset, and he responded 'You should ask your financial experts'. With typical Japanese humility, the GM said 'They said to ask you'.

The problem I see with this confession by this House Committee Chair is that he is suggesting that the US financial system was only spared from collapse because the US Treasury agreed to guarantee deposits, and that central banks around the world agreed to follow suit. The implication is that the financial system is still vulnerable. The banks are still severely indebted. Let's remember that the US financial system is in even a more precarious state because it has a 2nd wave of debt which will be liquidated. From now we can expect the ARM resets to kick in. This will likely require another injection by the US Federal Reserve. The positive side is that this will be expected...or maybe the banks have kept the government in the dark. Will depositors accept the deposit insurance or guarantee this time. In Sept 25th there was a $500 billion run on US banks. The Treasury could come up with just $150 billion before they resorted to deposit guarantees. Does this not suggest that deposit guarantees are an empty insurance? Will depositors trust it the next time around. I wolud suggest that the Treasury will throw everything at the problem because it can always print USD. The probably of course is that paper money is of dubious value.
Andrew Sheldon

Saturday, February 14, 2009

Where is US property going?

The US property market is worse than many people think. Consider the following chart by Credit Suisse.
Basically it shows that we are half way through the financial foreclosure process. We have experienced the worst of the sub-prime crisis, but now we are about to be hit by ARM resets. These low-interest teaser loans will gradually reset at the variable interest rate. Over the next 2 years they will cause the same type of carnage as the sub-prime loans.
I say this not to give you any false hope, but so you might be better prepared for the future. The fact that the banking system will have worked its way through these loans is not meant to imply that we can see the light at the end of the tunnel. The market has to absorb these loans before we will see any restoration of economic activity that is not sponsored by government stimulus measures. But consider why the economy is where it is:
1. House prices are collapsing - this places a lot of people in a position of having negative equity. More than anything else this will cause consumer confidence to shrink. The most indebted will be walking away from their homes. Some people were really sucked in by the rhetoric and easy credit terms.
2. Home repayments are increasingly moving to a variable rate (i.e. ARM resets). This is hardly a problem as long as interest rates remain low (which is the case as long as the Fed keeps lowering the Fed rate) and inflation doesn't break out.
3. The unemployment rate does not plummet too much

You might wonder (given the downward spiral caused by a deterioration in unemployment) what it would take to restore confidence in the market. Clearly there is not going to be private sector lending as long as asset prices are collapsing. The government is going to some lengths to make up the difference, but government spending is no substitute for private spending and investment. How long before the US and other governments will be forced to print money to fund all sorts of stimulus measures. Does anyone believe this debt is going to be repaid? Well no doubt there will be some dilution in the value of the USD, as well as the prospect of higher interest rates when confidence is restored and asset prices stabilised. The first priority for the government is to stability or 'refloat' asset prices. When that occurs they can raise the Fed rate again to lift US savings. This might be tough medicine as its going to be accompanied by higher inflation. The message being....the pain of resets is just part of the story. In effect governments will be absorbing private sector debt with public debt. Wasteful expenditure with more wasteful expenditure. Their intent of course is to defer the problem rather than deal with it. Their solution is absorbing debt with more debt. Sounds kind of meaningless doesn't it.
So what do the ARM resets tell us about the US property market? Well we must remember that they are only a portion of the total credit outstanding. There are more secure loans with lenders who will also be struggling with unemployment and negative equity considerations. At some point however investors are going to re-enter the market. So we ought to be looking at yields on US property. If you are looking at capital growth properties, then you will need to wait longer, but for other areas there are buying opportunities now. We must remember that the US is not a single market; that property did not universally rise across the country. Some areas did not rise at all. The problem for many people is that they choose or cannot live where the reasonably priced properties are located. But I would suggest in the US there will be better buying opportunities ahead - even in rural areas. Just wait for the currency to collapse.
I am confident that equity markets have reached their bottom. I would expect them to tread sideways for the next 5 years in a series of rallies, so be prepared to trade your positions. For property, I would expect similar sideways movement with inflation undermining real property values in the city; so I don't necessarily see significant falls to come. The trends suggest capital growth properties are still falling but that rural property values have stabilised. For this reason, in countries like Australia and NZ where the currecy has already collapsed, you can start buying rural properties where value remains.
As long as they are not city lifestyle or tourist havens....since these forms of property are overvalued and going to remain a pariah for the next few years. Your best guide is yields and nominal prices. In any case. avoid the cities where there is going to be an overhang.

Andrew Sheldon

Friday, February 13, 2009

Where to put your money in uncertain times

In these uncertain times people will be wondering where to place their money. Firstly there was no question there was going to be a financial crisis - it was merely a question of when. WHEN the Dow and other markets broke historic support, it was only a question of HOW far will it for, and HOW much money will the government through at the problem to delay the inevitable.

I will suggest a strategy forward. A lot of generalisations are made, so I will offer specific investment opportunities. This is however a top-down analysis:

1. Gold mining stocks - Stimulus will eventually result in governments printing money.

2. Precious metals - Silver, platinum, palladium are all good. They are not as good as stocks because stocks have greater leverage as mining revenues rise faster than costs. Also gold stocks were over-sold in the recent stock price correction. Silver has risen 50% in just two months.

3. CFDs or derivatives in precious metals – This is another form of exposure to precious metals – whether you are talking about options, futures, or contracts for difference - mind you, you are taking a counterparty risk.

4. Foreclosed property in Japan - outlook not great now, but great yields outside the city, premature to buy in the city CBDs. Outer fringe areas make great buying, rural areas always good for lifestyle. Sooo cheap! You could buy a house for as little as $10-20,000 due to depopulation.

5. Broad Stocks: People are very negative on broad stocks: By that I mean all stocks outside the precious metals arena. I think if you cannot buy stock exposure for the long term, but there is no reason why you cannot trade rallies using chart signals. People look at the 1970s and 1930s and look at the dismal returns, but there were rallies in this period. So I suggest learning and using charts to trade medium term rallies. No long term ‘buy & hold’ investing.

6. Rural property in NZ - City property is overpriced, but if you don’t need to work in the city, or want to rent, then prices are modest, and the NZD is at a low point for foreigners earning USD,JPY,EUR. The NZD has fallen from USD0.80 to USD0.50. So great currency trade in beautiful country, no capital gains tax or transfer taxes, no GST on property. People will say the economy is in bad shape. Yeh, that's why it’s cheap. It’s a counter-cyclical investment, but when cheap, sell when currency recovers in 4-5 years. The 9% budget deficit will turn around like it did in the 1990s. Expect compulsory super to boost savings.

7. Property in the Philippines - regional property is more appealing, as it will benefit from more call centres going there. Yes, during a contraction, Western call centres are still shifting to the Philippines. More are being set up in smaller regional centres rather than Metro Manila as the infrastructure improves.
You can find more info by searching Google for foreclosed property. A lot of Westerners are doing it, and it makes sense if you are living there for a few years. Japan & the Philippines property markets are among the most under-leveraged and did not have the big gains. That will be important when the global economic activity finally picks up.

8. Foreclosed property in USA: It is still too premature to buy foreclosed property in the USA; I would suggest waiting until the bottom which will likely correspond with a peak in the Adjustable Rate Mortgage terms, so say another 8 months. Again we are looking for yields, so let that be your guide to where. Unless you are seeing rental yields over 10% then you are not getting good value.

9. Currency: Currencies are an interest asset class because they are essentially priced in relative terms as opposed to the absolute value of other asset classes. My favourites are:

a. South African Rand: South Africa is the largest producer of gold, palladium and platinum in the world, so the terms of trade for RSA are going to improve greatly as precious metal prices rise. The unfortunate aspect is that this will drive many mining companies broke as the strong Rand will undermine Rand revenues. So avoid RSA mining stocks.

b. Chinese Yuan: As long as China is the lowest cost producer and has the capacity to generate its own internal demand it will do relatively better, which is what currencies are about.

c. Swiss Francs: Governments and the elite of the world have much of their assets in Switzerland as they have done for hundreds of years. Thus Switzerland is always a safe investment.

d. Japanese Yen: I can expect the USD will fall to 87yen/$ support in future, though no further as the US economy has underlying strength.

Wednesday, February 11, 2009

The best investment opportunities

The best investment opportunities. There are not too many great investments in an economic contraction like this, but there are some. I would suggest the following:
1. gold stocks - Stimulus will eventually result in govts printing money.
2. Precious metals - Silver, platinum, palladium all good.
3. CFDs or derivatives in precious metals - mind you, you are taking a counterparty risk
4. Foreclosed property in Japan - outlook not great now, but great yields outside the city, premature to buy in the city CBDs. Outer fringe areas make great buying, rural areas always good for lifestyle. Sooo cheap! You could buy a house for as little as $10-20,000 due to depopulation.
6. Rural property in NZ - City property is overpriced, but if you dont need to work in the city, or want to rent, then prices are modest, and the NZD is at a low point for foreigners earning USD,JPY,EUR. The NZD has fallen from USD0.80 to USD0.50. So great currency trade in beautiful country, no capital gains tax or transfer taxes, no GST on property. People will say the economy is in bad shape. Yeh, that's why its cheap. Its a counter-cyclical investment, but when cheap, sell when currency recovers in 4-5 years. The 9% budget deficit will turn around like it did in the 1990s. Expect compulsory super to boost savings.
7. Property in the Philippines - regional property is more appealing, as it will benefit from more call centres going there. Yes, during a contraction, call centres are still shifting to the Philippines. More are being set up in smaller regional centres rather than Metro Manila as the infrastructure improves.
You can find more info by searching Google for foreclosed property. A lot of Westerners are doing it, and it makes sense if you are living there for a few years. Japan & the Philippines property markets are among the most under-leveraged and did not have the big gains. That will be important when the global economic activity finally picks up.

Monday, January 26, 2009

Has the Dow Jones bottomed?

If you have already started buying back into the Dow - its not bad timing. Judging by the banking stocks in Australia and the Dow index, the market has yet to reach its trend line lows. The facts however suggest its probably unlikely to do so.
The chart to the right is particularly interesting because it shows the log-linear trend for the Dow over its entire life (1897 to 2009). Rarely do we get a history of 112 years.
This chart is interesting because there should in theory be a relationship between price increases and the money supply, or the nominal value of money and the size or real value of the economy. We can take the Dow Jones as a measure of this because prices between stocks should find a comparative value equilibrium based on yield.
We can see from the chart that the Dow in 1929 was far more overvalued than it is today; but that the Dow today was more seriously overvalued in 2007 than the 1965. More recent consolidation and sell-offs have brought the Dow back to support, which should provide a basis for market support, but the market could not be considered good value.
The question we have to ask is - Was the collapse of asset values in 1929 the result of poor Fed and government policy, or was it because of the extent of the exuberance. In as much as the 2000s was almost as exuberant as the 1920s, we might conclude that we are going to fall back to the base line trend (index level of 3.5). The alternative is the prospect of the markets going sideways for 20 years with brief, unsustainable rallies. That strikes me as a long time, but that's exactly what the market did back in the 1970s (1965-1985). There were gains in nominal terms, but after adjusting for inflation, the market effectively went sideways for a long time.
The implication is not that investors should sit on cash for the next 20 years, as it will be eroded by inflation. The challenge ahead is to pick the bottoms and tops as the market passes through a period of protracted consolidation. These will be significant rallies of at least 30% I would suggest.
Most people will not be aware, but we have actually be in a consolidating market trend for a decade already. We can expect to break-out of this consolidation trend in around 2022, so that's in about 13 years. That is too long to invest for the long term. The 'buy & hold' strategy will not make you money over this period. You need to learn to become a trader. You will need to check your stocks at least weekly, and better still daily because the corrections will be rapid. More rapid than they were in the past because the market is better informed. This is not the first time, and some people will know it.
Andrew Sheldon

Monday, January 05, 2009

Market outlook by Marc Faber (critique)

Marc Faber has been a long time cynic of US monetary policy, and sits in the 'gloom' camp a long with myself, though in that regard he might be considered more gloomy than me, but only slightly. We do however differ on market trends, particularly in the short term. A friend sent me a link to one of his Bloomberg interviews, to which I would make the following comments.

I won't be too critical of him because when I listen to what he says, some of his points can be misinterpreted. I can see that because he clarifies his position later. He is open to the prospect of the market going lower. I don't see that. Fear grips the early phase of the market. Are things going to get worse? Certainly. There will be higher unemployment, a slowing of output, but I would argue we are going to see a rise in inflation, and not so much a fall in asset prices. Why? Because the 'fear phase' is over and yields are compellingly good. We are now experiencing a recovery, which will quickly be exhausted in the wake of bad news from the real economy. We will then have erosion of yields by higher prices. So I don't agree that 'we are a long way from the bottom', but rather than we will avoid a significant fall as a result of fiscal stimulus, and that stimulus will end up keeping us in recession longer than we would otherwise have to be.
The lesson investors need to learn is to trade stocks from lows, and when to sell. They need an education in technical analysis. He suggests that the 'best thing for the government to do is nothing'. I disagree with that, though I agree that the government should have avoided this by prudent debt management. He actually suggested he was very negative on the commodity countries like Australia and NZ, so I'm inclined to think he does not appreciate the merits of these countries. Assets in these markets have been severely sold down, and offer very good buying at a time when the currency is so low. Commodity exporters are generating good revenues based on prices denominated in USD. That is a wonderful paradigm in a consolidating market.
I disagree with his point that the US will fare better than emerging markets. He argues that the US does not produce anything, so it will not be hurt so much, but the reality is that the US produces a lot of high value, discretionary product, and anyway, it has investments abroad in similar 'lower value' capacity. True, the Middle East will be worse off because their currencies are pegged to the USD. But Australia and NZ will be better off because they are not pegged. Aside from the protection provided by their weaker currencies, Australia particularly has low levels of government debt compared to the USA. Contrary to Marc Faber, I see Australia and NZ faring far better, particularly Australia. He did not mention Japan, but one could argue that Japan is well-positioned to recover from any global recession because its been subdued by no credit bubble for the last 19 years. It does need to engage in reform, and its still hard to see that happening. But these are otherwise painless markets to invest in. South Africa will also fare better.
Andrew Sheldon

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The Philippines property market remains one of the strongest in Asia thanks to rising incomes, rising population and rapid rates of urbanisation. The administrative reforms of the Arroyo government have given way to improved administration under Aquino. ASEAN countries can be expected to achieve even greater price gains than Western markets, demonstrating that this super cycle is far from over.

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Investment Strategy

If you are investing for the long term, you still need an investment strategy. Dont be fooled by the rhetoric of fund managers. The reason they advise you to 'buy & hold' is because they dont want to compete with you in sell-offs. Markets and industrial sectors are cyclical, so they demand trading to get the best returns. Fund managers actually cant hope to match the performance of small investors (if you are half good) because they have to manage huge amounts of funds and charge you a fee besides.
MY ADVICE is (i) look at a range of market indices and decide upon what level of correction would give you the justification you need to get in & out of the market. It might be a 5-10% retracement or a break of trend. (ii) Diversify if you dont have an intimate knowledge of the company or management. More than 30% in one company is aggressive.

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The NZ property market is shaping up as one of the most attractive property investment markets for the next few years. High yielding property and the collapse of the NZD make NZ the perfect counter-cyclical investment if you buy right! In addition, there is no capital gains tax, transfer taxes, VAT/GST or wealth taxes in NZ, so rest assured that NZ property is tax-effective! Learn more now!

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