Showing posts with label Commodities. Show all posts
Showing posts with label Commodities. Show all posts
Friday, April 19, 2013
Confused Market Mechanics
Someone posted today that market signals are conflicting. It might just be the commodity sell off and the side effects on the rest of the market, but only time will tell. What's interesting is a lot of commodity company stock prices are close to where they were in 2008 when the world as we know it was about to end.
For more details and some links to market indicators, see our post on Seeking Alpha.
Monday, March 22, 2010
Metals and Mining
Today we discovered Wildebeests, a web site devoted (in their own words) to the four M's: Minerals, Metals, the 'Merican economy, and Mathematica. They have some very good research and writing skills on the subject matter dear to our hearts, hard assets, and as such have earned a place in our investor links.
For some dialog between us, see the topic "Investing in Copper — What You Need to Know"
For some dialog between us, see the topic "Investing in Copper — What You Need to Know"
Sunday, March 14, 2010
How Can Stock Market Asset Prices Fall?
For the stock market to drop in value, something else has to be in greater demand. In the realm of paper assets, the only competition for equity is debt or debt-money, and the non-paper competition is commodities and real-estate. Let's look at each one, except real-estate, which should be clear without saying in the spring of 2010 is a non-starter.
It's been clear for about three years now that money does not flee to hard assets when paper assets are in jeopardy. Those hard assets experience a sell off, too, as money flees in a crisis for the stability of U.S. dollars. This should be expected for some of the reasons we pointed out in November. So if the stock market has a significant sell off, don’t expect a commodity price spike. Whether one thinks it should or shouldn't is irrelevant. That fact is it hasn't done so for the last three years. If you think it should, then take the sell-off as a chance to take a position at steep discounts. We address the fallacy of the counter-argument for deflation at the end.
We are then left with the realm of paper-assets: debt-money (currency) or debt instruments. Debt instruments can get very complicated because there are many types with a variety of risk and valuation models. However, we can simplify that into a few commonalities: short term and long term, corporate and government. There is another debt instrument that doesn't quite fit that simplification: debt derivatives. Of the collateralized debt types, they essential represent the same fundamentals as bonds, except risks are slightly lower as default risk is diversified among autonomous entities. The other common derivatives can be grouped as options, futures, or credit default swaps. Virtually all of those by definition are relativity short-term bets.
If one is worried about equity valuations (the theme of this writing) corporate bonds would be of interest to some as bonds receive the first-fruits of cash flows and stand ahead of stock in bankruptcy (government usurpation notwithstanding). But if equity prices are at risk, corporate default risks rise, too, so prudent investors won't flee to corporate bonds in a crisis. We find ourselves left with short and long government debt, or debt derivatives, competing with equity for capital investment.
Let's take debt derivatives now, particularly the CDS type. The only intelligent reason to sell equity for CDS is a credit crisis. This is in fact exactly what we saw in February. As the credit crisis that precipitated the change subsides, money flows back out of short term CDS instruments and back into longer term assets. While we don't have access to CDS price charts, we can certainly see the equity markets didn't stay low for long, which is consistent in fact and in theory with crisis of the past. So CDS competition is necessarily sudden or short lived, especially as CDS contracts are temporal by nature.
The next type of debt instruments we look at are short term parking places: short-term government bonds, and short-term derivatives other than CDS. All are havens for capital in times of uncertainly. All are temporary parking places where one then reallocates into something of greater risk with more reward potential as the precipitating event subsides. The certainty of that movement is assured by monetary low-interest rate policies of central banks. No serious money manager can sit on ROI assets below 2% for long unless in fact the world experiences price deflation of all asset classes across the board. The Austrian theory of inflation arising as a consequence of money creation suggests in this season of 2010 that is an absurd expectation. The arguments to the contrary are addressed below.
Like real-estate, it should go without saying that holding long term government bonds in an era of Keynesian expansion with extremely low interest rates as one of the most high risk (to asset price) low-yield investments of capital. Just as rolling short term bond holdings into short term bond holdings for an extended period is only sensible in an era of broad-based systemic price deflation, holding fixed rate long bonds when currencies are threatened by increasing debt, and interest rates have no where to go but up, is asking for capital loss.
Finally, the last paper asset vying for attention of investor and speculator capital is currency. In a crisis, even after all the liquidity measures and deficit spending in the U.S., the U.S. dollar is still the target of those fleeing for safety. Again, we aren't concerned about whether that is a long term good bet, but simply recognize it as the status quo. If indeed one believes such moves are unwise in the long run, take it as an opportunity to buy more reliable dollar based assets at a discount if it should transpire. But keep in mind, when this flight to safety takes place, money that isn't secured in currency derivatives will be parked in government bonds of the currency of choice, and we’ve demonstrated those arguments only have temporary extremely short value propositions. So the fundamentals of holding "cash" (pseudonym for currency), is really just another name for a bond position, and hence currency moves will follow the fundamentals of bond investments. Since bonds of all substantive nations are basically in the same boat, we don’t expect significant changes in currency price ratios as much as we’ll see in equity positions, and of course foreigners’ demands for equities ultimately translates into foreigners’ bias for currency price ratios. We covered that topic to some degree in our September piece titled "Where is the Next Bubble?"
Given the choices money managers have in allocating capital, there appears to be only one reason to expect any kind of significant decline in equity prices in the near term, and that's a flight to safety. Just as the financial crisis of the past faded into history, there's every reason to believe this one will play out the same. We pointed out some of those reasons in November under the title "Contagion: Been There, Done That"
In that piece we also point out how the latter sub-crisis had less effect than the instigating crisis. We've seen this take place recently with Greece's crisis, where there was some quick and noticeable reaction to flee to dollars and push down equities and commodities, but it was short lived and of little significance. Many have tried to build the case that "this time it's different" and pull some data out of a hat that appears different. Typically what we find is that they simply were unaware of similar data that did appear last time, or they miss the similarity of essence and difference only in nomenclature of the old and new data.
So we are left with the only variable that could explain a protracted equity bear market - positive or negative inflation. Positive inflation usually gets improperly discounted by the established world view in one of two ways -- they pick a measure of money that hasn't grown well and then conclude we'll see tame inflation or deflation, or they pick a secondary influencing factor (velocity is popular these days) and argue that it will overcome the creation of money. We've provided some links on the velocity argument back in July '09 and revealed how money supply and velocity can take some interesting forms. It is our belief that the contradictions between the Austrian school theory that inflation is a monetary phenomena, and the new school that it is a velocity issue, is simply missing the point that the Austrian school theory carries with it an inferred premise that the time between the money hitting the street and the prices showing up at retail are delayed by several months to a few years. In order for monetary inflation to not eventually show up in price inflation (either consumer or capital asset price increases), one has to permanently and systemically keep the velocity low. For nations whose people have consumer goods in abundance, inflation most likely appears in financial asset prices. For nations whose people have a higher portion of earnings going toward basic goods and services, inflation most likely appears in consumer goods.
One could achieve low monetary velocity with an economic collapse, but no substantial and influential market participant in the global economy is working toward that goal. Every policy choice and operation is designed to get people to dump their cash for something that will provide a return. All policies are designed (intentionally or accidentally) to make holding cash a losing proposition. It's the essence of both kinds of capitalism; traditional theoretical capitalism and corrupted modern capitalism. The former objective is to use one's financial capital to produce value in goods and services to reap a return on investment. The latter objective is to use one's financial capital to make other people's money work for you. The latter is the fundamental basis of the debt-money system used by every nation on earth: leverage. With every segment of every population save a few fringe radical thinkers working toward the same objective (i.e. maximum return on investment) something global and earth shaking will have to occur to put everyone off their agenda. We aren't suggesting that can't happen, just that the most likely expectation is that it won't happen until this next round of business cycle expansion pops sometime in the teens of the 21st century.
For the stock market to drop in value, something else has to be in greater demand. At this juncture in 2010 it goes without saying that real-estate and long bonds are non-starters. Other hard assets have proven themselves unattractive as replacements (albeit good co-equals) for equities. Being left with nothing other than short-term non-performing parking places and short term quick gains made attractive by temporary sudden shocks, there simply isn’t any real long-term asset class competition to distract the global investment community from demanding more equity positions. The prudent scholar, historian, and investor should be prepared for another cyclical equity bull market in the coming few years.
It's been clear for about three years now that money does not flee to hard assets when paper assets are in jeopardy. Those hard assets experience a sell off, too, as money flees in a crisis for the stability of U.S. dollars. This should be expected for some of the reasons we pointed out in November. So if the stock market has a significant sell off, don’t expect a commodity price spike. Whether one thinks it should or shouldn't is irrelevant. That fact is it hasn't done so for the last three years. If you think it should, then take the sell-off as a chance to take a position at steep discounts. We address the fallacy of the counter-argument for deflation at the end.
We are then left with the realm of paper-assets: debt-money (currency) or debt instruments. Debt instruments can get very complicated because there are many types with a variety of risk and valuation models. However, we can simplify that into a few commonalities: short term and long term, corporate and government. There is another debt instrument that doesn't quite fit that simplification: debt derivatives. Of the collateralized debt types, they essential represent the same fundamentals as bonds, except risks are slightly lower as default risk is diversified among autonomous entities. The other common derivatives can be grouped as options, futures, or credit default swaps. Virtually all of those by definition are relativity short-term bets.
If one is worried about equity valuations (the theme of this writing) corporate bonds would be of interest to some as bonds receive the first-fruits of cash flows and stand ahead of stock in bankruptcy (government usurpation notwithstanding). But if equity prices are at risk, corporate default risks rise, too, so prudent investors won't flee to corporate bonds in a crisis. We find ourselves left with short and long government debt, or debt derivatives, competing with equity for capital investment.
Let's take debt derivatives now, particularly the CDS type. The only intelligent reason to sell equity for CDS is a credit crisis. This is in fact exactly what we saw in February. As the credit crisis that precipitated the change subsides, money flows back out of short term CDS instruments and back into longer term assets. While we don't have access to CDS price charts, we can certainly see the equity markets didn't stay low for long, which is consistent in fact and in theory with crisis of the past. So CDS competition is necessarily sudden or short lived, especially as CDS contracts are temporal by nature.
The next type of debt instruments we look at are short term parking places: short-term government bonds, and short-term derivatives other than CDS. All are havens for capital in times of uncertainly. All are temporary parking places where one then reallocates into something of greater risk with more reward potential as the precipitating event subsides. The certainty of that movement is assured by monetary low-interest rate policies of central banks. No serious money manager can sit on ROI assets below 2% for long unless in fact the world experiences price deflation of all asset classes across the board. The Austrian theory of inflation arising as a consequence of money creation suggests in this season of 2010 that is an absurd expectation. The arguments to the contrary are addressed below.
Like real-estate, it should go without saying that holding long term government bonds in an era of Keynesian expansion with extremely low interest rates as one of the most high risk (to asset price) low-yield investments of capital. Just as rolling short term bond holdings into short term bond holdings for an extended period is only sensible in an era of broad-based systemic price deflation, holding fixed rate long bonds when currencies are threatened by increasing debt, and interest rates have no where to go but up, is asking for capital loss.
Finally, the last paper asset vying for attention of investor and speculator capital is currency. In a crisis, even after all the liquidity measures and deficit spending in the U.S., the U.S. dollar is still the target of those fleeing for safety. Again, we aren't concerned about whether that is a long term good bet, but simply recognize it as the status quo. If indeed one believes such moves are unwise in the long run, take it as an opportunity to buy more reliable dollar based assets at a discount if it should transpire. But keep in mind, when this flight to safety takes place, money that isn't secured in currency derivatives will be parked in government bonds of the currency of choice, and we’ve demonstrated those arguments only have temporary extremely short value propositions. So the fundamentals of holding "cash" (pseudonym for currency), is really just another name for a bond position, and hence currency moves will follow the fundamentals of bond investments. Since bonds of all substantive nations are basically in the same boat, we don’t expect significant changes in currency price ratios as much as we’ll see in equity positions, and of course foreigners’ demands for equities ultimately translates into foreigners’ bias for currency price ratios. We covered that topic to some degree in our September piece titled "Where is the Next Bubble?"
Given the choices money managers have in allocating capital, there appears to be only one reason to expect any kind of significant decline in equity prices in the near term, and that's a flight to safety. Just as the financial crisis of the past faded into history, there's every reason to believe this one will play out the same. We pointed out some of those reasons in November under the title "Contagion: Been There, Done That"
In that piece we also point out how the latter sub-crisis had less effect than the instigating crisis. We've seen this take place recently with Greece's crisis, where there was some quick and noticeable reaction to flee to dollars and push down equities and commodities, but it was short lived and of little significance. Many have tried to build the case that "this time it's different" and pull some data out of a hat that appears different. Typically what we find is that they simply were unaware of similar data that did appear last time, or they miss the similarity of essence and difference only in nomenclature of the old and new data.
So we are left with the only variable that could explain a protracted equity bear market - positive or negative inflation. Positive inflation usually gets improperly discounted by the established world view in one of two ways -- they pick a measure of money that hasn't grown well and then conclude we'll see tame inflation or deflation, or they pick a secondary influencing factor (velocity is popular these days) and argue that it will overcome the creation of money. We've provided some links on the velocity argument back in July '09 and revealed how money supply and velocity can take some interesting forms. It is our belief that the contradictions between the Austrian school theory that inflation is a monetary phenomena, and the new school that it is a velocity issue, is simply missing the point that the Austrian school theory carries with it an inferred premise that the time between the money hitting the street and the prices showing up at retail are delayed by several months to a few years. In order for monetary inflation to not eventually show up in price inflation (either consumer or capital asset price increases), one has to permanently and systemically keep the velocity low. For nations whose people have consumer goods in abundance, inflation most likely appears in financial asset prices. For nations whose people have a higher portion of earnings going toward basic goods and services, inflation most likely appears in consumer goods.
One could achieve low monetary velocity with an economic collapse, but no substantial and influential market participant in the global economy is working toward that goal. Every policy choice and operation is designed to get people to dump their cash for something that will provide a return. All policies are designed (intentionally or accidentally) to make holding cash a losing proposition. It's the essence of both kinds of capitalism; traditional theoretical capitalism and corrupted modern capitalism. The former objective is to use one's financial capital to produce value in goods and services to reap a return on investment. The latter objective is to use one's financial capital to make other people's money work for you. The latter is the fundamental basis of the debt-money system used by every nation on earth: leverage. With every segment of every population save a few fringe radical thinkers working toward the same objective (i.e. maximum return on investment) something global and earth shaking will have to occur to put everyone off their agenda. We aren't suggesting that can't happen, just that the most likely expectation is that it won't happen until this next round of business cycle expansion pops sometime in the teens of the 21st century.
For the stock market to drop in value, something else has to be in greater demand. At this juncture in 2010 it goes without saying that real-estate and long bonds are non-starters. Other hard assets have proven themselves unattractive as replacements (albeit good co-equals) for equities. Being left with nothing other than short-term non-performing parking places and short term quick gains made attractive by temporary sudden shocks, there simply isn’t any real long-term asset class competition to distract the global investment community from demanding more equity positions. The prudent scholar, historian, and investor should be prepared for another cyclical equity bull market in the coming few years.
Friday, February 5, 2010
Can demand for credit derivatives really lead to economic decline?
If we read the attempted implications of "Bond Market Vigilantes Sink Stocks" right, Mr. Mirhaydari claims the surge in the CDS market is threatening to raise interest rates on sovereign debt, which will force governments to cut spending and raise taxes to counter the cost of debt, which leads to a double dip recession, which leads to a falling stock market.
It makes perfect sense except for the part about politicians giving any hoot at all about the cost of their debt. Europe certainly has rules about limited deficit spending, but does anyone else that matters to global growth have such constraints?
Still, if the rush for CDS instruments is really the impetus behind recent market movements, that money flow will eventually unwind as the speculators take their profits and look for another ride to get excited about. Maybe the only real connection that makes sense is that institutions that have the clout to speculate with CDS, bonds, equities, and commodities all over the world have found a nice little emotional roller coaster to take out for a spin, after which they’ll whipsaw the markets and ride something else up to hysterical levels when they are ready to take profit out of the CDS markets.
If Mirhaydari is correct we'll see people talking about S&P 500 at 600 within a few months. If our secondary supposition is correct, we should see a strong rebound in stocks and commodities before summer. According to Jim Jubak's analysis of leading and lagging indicators, the latter appears more plausible.
It makes perfect sense except for the part about politicians giving any hoot at all about the cost of their debt. Europe certainly has rules about limited deficit spending, but does anyone else that matters to global growth have such constraints?
Still, if the rush for CDS instruments is really the impetus behind recent market movements, that money flow will eventually unwind as the speculators take their profits and look for another ride to get excited about. Maybe the only real connection that makes sense is that institutions that have the clout to speculate with CDS, bonds, equities, and commodities all over the world have found a nice little emotional roller coaster to take out for a spin, after which they’ll whipsaw the markets and ride something else up to hysterical levels when they are ready to take profit out of the CDS markets.
If Mirhaydari is correct we'll see people talking about S&P 500 at 600 within a few months. If our secondary supposition is correct, we should see a strong rebound in stocks and commodities before summer. According to Jim Jubak's analysis of leading and lagging indicators, the latter appears more plausible.
Tuesday, November 17, 2009
Profit Taking Rules the Day
It appears the last two days saw big moves upward in all of the following:
10 and 30 year U.S. Treasurys
GLD
DBB
FXE
SPY
DIA
QQQQ
Stocks, bonds, commodities, everything on a roll at the same time. This can't be a sentiment shift (since Treasurys typically move the inverse of equities.) Our guess is derivative profit taking is pushing up underlying securities.
10 and 30 year U.S. Treasurys
GLD
DBB
FXE
SPY
DIA
QQQQ
Stocks, bonds, commodities, everything on a roll at the same time. This can't be a sentiment shift (since Treasurys typically move the inverse of equities.) Our guess is derivative profit taking is pushing up underlying securities.
Monday, September 21, 2009
Why Everyone Is So Bullish on Gold
Cliff Wachtel at Seeking Alpha asked the question today, why are "speculators" buying so much gold while "professionals" are shorting?
It appears to us he fails to realize (or he's obfuscating his real understandings for some journalistic reason) the broader fundamental nature of where prices and value come from. By that we mean the fundamental nature as described by Ludwig von Mises' in Human Action.
In the fall of 2008, the Federal Reserve made it abundantly clear that they would stop at nothing to ensure they could control all financial markets and keep dollars flowing. Finally, after the success at keeping security markets open, they found themselves with functional markets but little or no demand for debt. As money piled up in accounts of all kinds, they then had to worry about the collapse of money velocity.
There is absolutely only one way to make money moving -- punish anyone who doesn't trade it (spend it) in exchange for non-money. Since they have no legislative power, the only tool is debasement and negative interest rates (charging savers for storing money instead of rewarding them with interest payments).
Debasement was easy -- in Dec '08 and Jan '09 they announced unprecedented (in the U.S.) money creation schemes in the purchase of agency debt and U.S. Treasurys. Negative interest rates seemed to manifest themselves by the nature of the credit crisis.
So we now find ourselves in an environment where holding cash carries a risk that has to be weighed against the risks of buying bonds, stocks, commodities, or anything else. Furthermore, add to the equation the necessity of businesses of all kinds to produce a ROI above single digits, and the natural inclination is to buy something that has potential for price appreciation or income. It's no surprise to us in this light, that equities and bonds are showing price strength in spite of so many macro-economic weaknesses and the fragility of all those green shoots.
Enjoy for now the fact that institutions are doing the buying of equities, bonds, and commodities. When the higher costs of the latter start squeezing business profits, they will either have to raise producer and consumer prices or suffer systemic business losses.
In the former case, PPI and CPI go up, which means the risk of "holding cash" now hits consumers with inflation -- they will start spending their cash before it's purchasing power disappears, empowering producers to raise prices (the ultimate feedback loop). In the case of the latter, shrinking profit margins will be bad for equities, which religiously motivates another round of policy changes to "stimulate" the economy, further devaluing (diluting) cash (i.e. dollars).
Very few choices today will provide price support for purchases in either scenario of inflation or economic stimulation (i.e. more currency debasement). One of them is precious metals and their centuries-old reliability as a store of value. It's not a coincidence that some sovereign nations are thinking of gold again as they did before the prevalence of fiat currencies and floating exchange rates. The only major institutions who seem to be bucking that trend are the biggest institutions in traditional western industrial regions who pin all their hopes on fiat currencies. They are the bankers and commercial traders Cliff refers to in his post.
Update Sept 22:
ColdCore now reports at SeekingAlpha some details about those other sovereign nations and their interest in acquiring the "real money" that the west shuns.
It appears to us he fails to realize (or he's obfuscating his real understandings for some journalistic reason) the broader fundamental nature of where prices and value come from. By that we mean the fundamental nature as described by Ludwig von Mises' in Human Action.
In the fall of 2008, the Federal Reserve made it abundantly clear that they would stop at nothing to ensure they could control all financial markets and keep dollars flowing. Finally, after the success at keeping security markets open, they found themselves with functional markets but little or no demand for debt. As money piled up in accounts of all kinds, they then had to worry about the collapse of money velocity.
There is absolutely only one way to make money moving -- punish anyone who doesn't trade it (spend it) in exchange for non-money. Since they have no legislative power, the only tool is debasement and negative interest rates (charging savers for storing money instead of rewarding them with interest payments).
Debasement was easy -- in Dec '08 and Jan '09 they announced unprecedented (in the U.S.) money creation schemes in the purchase of agency debt and U.S. Treasurys. Negative interest rates seemed to manifest themselves by the nature of the credit crisis.
So we now find ourselves in an environment where holding cash carries a risk that has to be weighed against the risks of buying bonds, stocks, commodities, or anything else. Furthermore, add to the equation the necessity of businesses of all kinds to produce a ROI above single digits, and the natural inclination is to buy something that has potential for price appreciation or income. It's no surprise to us in this light, that equities and bonds are showing price strength in spite of so many macro-economic weaknesses and the fragility of all those green shoots.
Enjoy for now the fact that institutions are doing the buying of equities, bonds, and commodities. When the higher costs of the latter start squeezing business profits, they will either have to raise producer and consumer prices or suffer systemic business losses.
In the former case, PPI and CPI go up, which means the risk of "holding cash" now hits consumers with inflation -- they will start spending their cash before it's purchasing power disappears, empowering producers to raise prices (the ultimate feedback loop). In the case of the latter, shrinking profit margins will be bad for equities, which religiously motivates another round of policy changes to "stimulate" the economy, further devaluing (diluting) cash (i.e. dollars).
Very few choices today will provide price support for purchases in either scenario of inflation or economic stimulation (i.e. more currency debasement). One of them is precious metals and their centuries-old reliability as a store of value. It's not a coincidence that some sovereign nations are thinking of gold again as they did before the prevalence of fiat currencies and floating exchange rates. The only major institutions who seem to be bucking that trend are the biggest institutions in traditional western industrial regions who pin all their hopes on fiat currencies. They are the bankers and commercial traders Cliff refers to in his post.
Update Sept 22:
ColdCore now reports at SeekingAlpha some details about those other sovereign nations and their interest in acquiring the "real money" that the west shuns.
Saturday, August 22, 2009
Take aways from Barrons, August 22nd, 2009
Stocks: Where's the demand-driven commerce? So far everything has been driven by government spending.
Gummy BearsBanking and Finance: Commercial and Residential mortgages are worsening in some respects, in spite of all the green shoots. Some numbers and quotes from the Federal Reserve, and announcement that TALF will be extened.
Weekly Review
Technology: So where is the so-called PC Refresh cycle going to come from? Intel painted a rosy picture of the future, but three other tech companies have now joined the crowd of those who simply don't see any particular good news in the making.
View From the Top: No Rebound in Sight
Dividend Investing: Another piece on why reinvestment of dividends makes a good long term strategy. Read it if you haven't heard about that angle before. Skim for tickers if you have and like the idea. We think it makes sense to have some long term holdings in this phase of the business cycle in large cap companies with strong dividend histories. We'll leave it to the reader to judge whether Greek history provides any value to the theory.
Marathon Investing
Bonds: The best may be over for the bond market unless we get a sell off in corporates and munies and a rally in Treasuries for another buying opportunity. You can look for bond yields at your favorite quote provider, but there's also a good story on the municiple market. Suffice to say spreads between Treasury and corporates have narrowed in the last few months making it harder to find corporate bonds with a good chance of covering potential drop in purchasing power from quantitative easing. We might as well stick with the safety of Treasurys.
Seeking Yields on Munis That Aren't Puny
Speculative Plays:
Long MELA: "Taking Aim at Skin Cancer"
Short SHLD: "Washed Out"
Strategic Thinking:
Stocks are overpriced unless utopia breaks out real soon now. Commodity prices are priced right as long as China keeps buying what it doesn't presently need and India keeps it's capitalism in tact. Western economies are most likely going to see muted growth while Asia continues it's expansion of the middle-class demand for goods and services. The mindset "follow the money" suggests being invested directly in Asia and Brazil if not indirectly through domestic companies that get a high volume of revenues from them.
The off-the-cuff allocation at this point is long blue-chip dividend paying companies, short US indexes, and long commodity based companies or funds that pay dividends (or short their puts for dividends and purchases on pull-backs).
Caveat: While we are bullish on commodities in the one year time frame, we don't want to hide the fact that this week Barron's has a story that this might be a dangerous outlook. See "Base Metals on Borrowed Time"
Best of the Week
BRIC - forget Russia -- go where the commerce is. The interview with Christopher Wood contains some good insight into the macro-economics of the global economy, and why Brazil, India, and China have some specific characteristics about each of them that makes a focused investment in the right places a good idea. We highly recommend paying particular attention to his analysis of decoupling (in economics as well as the stock market) and what signs to look for that indicate decoupling of Asia equities.
What's our take on his expose?
Look for falling interest rates in Brazil. If FOREX fundamentals are right, Brazil bonds might be choice instruments there for income and long-term capital gains. One might also use the yields to buy something that is a domestic currency hedge in case your FOREX eats away at the gains.
India has the best of the equity markets of the three. See the interview for why that is. Our take then would be to look for small cap companies that supply goods and services to businesses.
In China, the strength is in state-owned companies, as they get the best of command economic privelidges. Thier financial services are especially inviting as corruption and greed that ruined Western finance is dealt with in China via execution. You may not share our opinion on the death penatly, but we think it provides a strong incentive for bank managers in China to be careful of thier actions.
Tuesday, July 14, 2009
Gold analysis at Seeking Alpha
Jake Towne has done an excellent job analyzing gold prices in Unlocking the Money Matrix: Gold Price Suppression. This deserves a careful review, especially by gold owners.
A first pass over this essay impressed us as the author uses many references to government and official documents. If we understand this correctly, the gold price is "managed" by central banks today, Paul Volker made a big mistake not to do likewise, and they won't make the same mistake this time until such time as their holdings preclude them from success. This premise is strengthened by a reference to a central bank research paper advocating just such a policy decades ago.
Someone pointed out months ago we don't have to worry about gold confiscation in the 21st century since it isn't the basis for money any more. This article suggests that even though that's true, the price of gold is the basis for psychology and fear in the populace, and that is something "they" certainly do need to control -- all nations, not just the U.S.
So it's interesting to consider how long they can succeed at controlling the price of gold, and what will they do when they no longer can?
There was also an interesting reference to replacing the many foreign currencies with just a few. This reminds us of the speech at the Council on Foreign Relations we pointed out last month advocating for fewer international currencies.
We don't believe in conspiracy theories (i.e. specific global planned and orchestrated events), but we do believe in a finite and very small universe of ideas. With billions of people and hundreds of thousands of leaders in government and business, it's not surprising for ideologies (like those at the CFR speeches) to hold sway over many powerful people who either intentionally or coincidentally align their actions to support the premises behind the conspiracies. Much like blogs and analysis hold sway over investor actions and move stocks, bonds, and currency prices in particular directions.
Mr. Towne has done an excellent job of research. What we now need is equally excellent peer review of the hard data. Please post your analysis as it comes in.
A first pass over this essay impressed us as the author uses many references to government and official documents. If we understand this correctly, the gold price is "managed" by central banks today, Paul Volker made a big mistake not to do likewise, and they won't make the same mistake this time until such time as their holdings preclude them from success. This premise is strengthened by a reference to a central bank research paper advocating just such a policy decades ago.
Someone pointed out months ago we don't have to worry about gold confiscation in the 21st century since it isn't the basis for money any more. This article suggests that even though that's true, the price of gold is the basis for psychology and fear in the populace, and that is something "they" certainly do need to control -- all nations, not just the U.S.
So it's interesting to consider how long they can succeed at controlling the price of gold, and what will they do when they no longer can?
There was also an interesting reference to replacing the many foreign currencies with just a few. This reminds us of the speech at the Council on Foreign Relations we pointed out last month advocating for fewer international currencies.
We don't believe in conspiracy theories (i.e. specific global planned and orchestrated events), but we do believe in a finite and very small universe of ideas. With billions of people and hundreds of thousands of leaders in government and business, it's not surprising for ideologies (like those at the CFR speeches) to hold sway over many powerful people who either intentionally or coincidentally align their actions to support the premises behind the conspiracies. Much like blogs and analysis hold sway over investor actions and move stocks, bonds, and currency prices in particular directions.
Mr. Towne has done an excellent job of research. What we now need is equally excellent peer review of the hard data. Please post your analysis as it comes in.
Friday, July 10, 2009
Oil Speculation
This topic is rich today! Other titles come to mind:
Rinse and repeat
Not to be dissuaded by circumstances, they’re at it again. Like every bad idea bureaucrats sink their teeth into, giving up and letting go is not an option. The Financial Times summarizes the present reality of another move to "fix" the "volatility" in oil prices yet again.
The fact that the so called "mess" they are complaining about happens to be perfectly in line with what any clear-headed thinker should have expected is beside the point (to them). As Craig Pirrong at Seeking Alpha put it:
Mr Pirrong also provides us with a nice graphical representation of trading data. Notice that plunge in oil prices from 2008 to 2009, and speculative long futures contracts during that time, directly contradict precisely the claims of the fools in Congress and the CFTC. Not that you should expect bureaucrats to see the light when you shine it in their face. In spite of the clear evidence to refute the idea, we can at least hope the CFTC pursues this because of congressional pressures to please the lemmings in the general population who don't know any better but to demand someone look into it.
Last time the world financial system nearly collapsed, OPEC used it as the impetus to band together in a more concerted effort to ensure their revenues were not ruined by American policy.
At least you now know you can confidently brush off whatever nonsense someone tries to feed you when they use open interest in oil futures to tell you where the price is going next. Like any investment, you actually have to know something about the fundamentals of the market to make a rational informed decision.
While the last few weeks have seen some profit taking and softness in crude spot and futures prices, we’re still bullish on the intermediate and long term price potential of oil. If Congress and the CFTC does nothing, human nature and normal supply and demand will provide price support. If regulation ensues, we might learn something from the onion (depending on what actions are taken) and have more opportunity to profit from this essential commodity.
1973 all over againAt least a year ago, while oil prices were still threatening global economic development, the Commodity Futures Trading Commission (CFTC) was embarking on another round at attempting market manipulation through government regulation to ensure price stability of this precious and vital commodity. Congress even started at least nine bills, presumably in case the CFTC didn’t do their bidding. Luckily for consumers, rationality and reason prevailed that time. Hopefully the history of onions helped the first debate.
Political Stupidity Trumps Hard Facts
What to Oil and Onions Have in Common
Rinse and repeat
Not to be dissuaded by circumstances, they’re at it again. Like every bad idea bureaucrats sink their teeth into, giving up and letting go is not an option. The Financial Times summarizes the present reality of another move to "fix" the "volatility" in oil prices yet again.
The fact that the so called "mess" they are complaining about happens to be perfectly in line with what any clear-headed thinker should have expected is beside the point (to them). As Craig Pirrong at Seeking Alpha put it:
...the past two years have been among the most volatile in the memory of most living people–you have to go back to the 1930s to find anything remotely similar. In 2007-FH2008, Chinese (and Asian growth generally) greatly spurred demand for commodities. Note that in addition to commodity prices, shipping charter prices skyrocketed, even though the price of something perishable like transportation on a ship can hardly be distorted by speculative buying, because it has to be consumed and hence is impossible to hoard. That was followed by a financial collapse and economic recession of severities unseen since aforementioned 1930s. Look at every measure of uncertainty, notably such things as the VIX volatility index. These things have been at dizzying heights since last August (and had begun their rise even earlier, in 2007). What would be weird is if oil prices (and commodity prices generally) HADN’T been volatile during this period.He goes on to provide yet another round of reason and fact-finding to refute the notions spewing from the halls of Congress.
Mr Pirrong also provides us with a nice graphical representation of trading data. Notice that plunge in oil prices from 2008 to 2009, and speculative long futures contracts during that time, directly contradict precisely the claims of the fools in Congress and the CFTC. Not that you should expect bureaucrats to see the light when you shine it in their face. In spite of the clear evidence to refute the idea, we can at least hope the CFTC pursues this because of congressional pressures to please the lemmings in the general population who don't know any better but to demand someone look into it.Last time the world financial system nearly collapsed, OPEC used it as the impetus to band together in a more concerted effort to ensure their revenues were not ruined by American policy.
Independently, the OPEC members agreed to use their leverage over the world price-setting mechanism for oil to stabilize their real incomes by raising world oil prices. This action followed several years of steep income declines after the end of Bretton Woods, as well as the recent failure of negotiations with the "Seven Sisters" earlier in the month.It’s unlikely the price controls on oil in the U.S. helped matters. Some say the world won't experience inflation like we did in the 70s, but the global quantitative easing is ruining the value basis for currencies everywhere like massive new stock issues dilute the values of equities. Between the potential for CFTC regulation of futures markets, and the potential for ruinous monetary and fiscal U.S. dollar policies, America once again appears to be setting up for another round of high oil and gas prices.
(Source wikipedia)
At least you now know you can confidently brush off whatever nonsense someone tries to feed you when they use open interest in oil futures to tell you where the price is going next. Like any investment, you actually have to know something about the fundamentals of the market to make a rational informed decision.
While the last few weeks have seen some profit taking and softness in crude spot and futures prices, we’re still bullish on the intermediate and long term price potential of oil. If Congress and the CFTC does nothing, human nature and normal supply and demand will provide price support. If regulation ensues, we might learn something from the onion (depending on what actions are taken) and have more opportunity to profit from this essential commodity.
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