I suppose it was back in the late fall and reiterated again in mid-winter that I believed the market would simply go up for no real reason until QE2 ended and then it would begin to decline as liquidity ended. It looks as though I was somewhat accurate in that prediction although you did not have to be a rocket scientist to figure that out unless you were a permabull with your blinders on and absolute faith in the government and the Fed in which case please move along.
The Fed knew the same thing I and many others did and that is why at the last meeting they emphasized that they would continue to reinvest maturing paper and interest from the existing portfolio, kind of a QE infinity if you will, but on a small scale. I do believe they will let QE2 go and not announce anything new until the fall when they see the economy really weaken. I think a couple months of sub 100K jobs reports, with a healthy BLS birth/death adjustment, along with softening other indicators such as the PMI and so forth the Fed will get the point and step in with $1T in QE since $600B did not work.
That is how it works as one QE is ineffective the next one gets bigger. The really unfortunate part is that Japan has done the same thing and it did not work but there is a big difference between the US and Japan, we are the reserve currency and they aren’t. In other words, Japan could print all they wanted because their citizens bought their own debt and the world settled trades in dollars. However, the US is limited in what they can really do in QE because as the value of the dollar sinks, and we really had a nice scare a week or so ago, the world will pick a new reserve currency on its own. You know how that story ends.
Ben knows this and he knows that his QE options are limited and he can probably only get away with 1 more so it will be big, it has to be. If that one does not work and spur growth, well, the Fed is done and completely out of bullets in a traditional sense. We would see some new things coming to the table like in 2008 with all the new facilities and such, but I have no idea what they will be or what they will look like since we do not know how things will play out.
What I do know is that we should get a nice bounce in the dollar here sending commodities lower for a bit. This will give Ben and Washington a little relief and you an opportunity to buy, buy, buy every commodity you like. I love silver, still, wheat, gold, palladium, soybeans and corn (unless the subsidy is pulled). If those go on sale buy them either directly or via the growers or agricultural ETF’s.
In the mean time enjoy watching Ben sweat it out as he will not have answers for the weakness in the economy or the weakness is ‘transitory’ which is the longest transitory period I have ever seen. Kind of like this recovery it is the longest start of a recovery ever as it gains steam and loses steam every other week. Good luck.
Those who read my material know that I am a bull on precious metals and have been for some time. The main reason is because over the long-term the Federal Reserve intentionally devalues the dollar, its buying power is down some 95% since 1914. The most recent reason to be bullish on commodities as a whole is because of Obama’s plan to double exports within 5 years. This is a lofty and unachievable goal unless you plan on devaluing the dollar. Based on our debt load the devaluation of our currency will happen whether we like it or not.
I have been more bullish on silver and palladium over the recent months. I started buying silver at $9/oz and palladium at about $230/oz so I have hefty gains already, but I believe this is only the beginning. With both of these metals you are playing both a global recovery, which I see happening, but not as robust as the talking heads claim, or if you believe the world is going to end. Either way, you should own these metals, perhaps wait until they selloff in the near future, but nevertheless, why wouldn’t you own them?
Silver is used in almost everything you have in your house, from your TV to your cell phone. Silver is also going to be under tremendous pressure in the near future as the global population grows and people are lifted out of poverty because everyone wants a cell phone, computer or even a mirror, yes silver is used in mirrors as it is the most reflective metal in the world. Silver is a dual purpose metal as it is used in industry and as a store of wealth. The Chinese and Japanese used a silver based currency in the 20th century along with the U.S. as a bi-metal currency. Regardless, whether you think the world is going to end, own silver, or whether you believe in a global recovery, buy silver. Surface supplies are dwindling and all the easy silver has been mined. Combine that information with a growing population and we are bound, rather soon I suspect, to have a shortage in the supply/demand curve. Silver is an easy sell.
Palladium has been on fire lately moving up from $420/oz to $545/oz as of today, it was up $25 today alone! Palladium is used as an industrial metal first, mainly in catalytic converters, but it also is used in jewelry and as a precious metal, it was only recently that this usage has grown. Palladium is also a “green metal” as it can be used in several clean energy items, hydrogen cars for example. In short, it is a cheap alternative to its bigger brother platinum. Believe it or not, palladium is rarer than platinum and the largest world supplier of palladium is Russia.
I personally believe Russia is a pretty volatile place, I think history proves that point, which means the supply of palladium can be reduced if Russia throws a temper tantrum. There is always the possibility that Russia does something we do not like, like go to full war with Chechnya or invade Georgia, the country not the state. We could also upset Russia as well by invading, say, Iran, North Korea whoever which could create tension between the U.S. and Russia which could lead to less exportation of palladium to the U.S. If that happened prices would go through the roof.
The big story with palladium is the growth of automobiles in India and China. Between the 2 countries there are over 2B people who are being lifted from poverty to the middle class. As they ascend from poverty they will want what we have, cars. This means lots of catalytic converters in lower cost cars. Ultimately this means they will use less platinum and more palladium, regardless of where it comes from. All of this is a bull case for the metal and I think it could go much higher over time.
I believe the metal will be volatile, silver as well, because of the ETF’s designed to buy both metals. These ETF’s are likely the reason we see prices climbing recently so it is tough to know if the demand for the metals is organic or artificial, for investment purposes. Eventually people will sell PALL or SLV which will cause the prices to drop and that is the time to buy, IMHO. Also, if the dollar strengthens, which is what I think will happen, prices will drop then to. However, long-term I believe both metals are the trade of the century.
I am in no rush to sell what I have and am an active buyer, even at these levels. If you do a Google search for palladium coins or bullion you will see the supply is tiny. You can get palladium bullion, but you will pay a hefty premium for it. This is because supply is so limited and, as we know, you cannot just make more natural resources so the supply is finite. The price action is very exciting to those of us holding the metal already and what I like is the media never pays attention to either metal, never palladium though. Today with a 5% rise in value, no one said a thing, but if it was gold we would hear all about it, mostly negative things and gold bug jokes.
Silver and palladium are no joke and one should consider owning them. At the very least it is diversification especially if you own PM’s already. I am sure there is a bear case out there for both these metals, but I cannot find one that is reasonable.
According to Ben and now his number 2, Donald Kohn, there are no more asset bubbles in the US, none at all. This is coming from the same Fed that missed the mother of all housing bubbles and continually either lied to themselves or us to the severity of the bubble, when they realized it was busting, after the fact. These are not exactly what I would refer to as credible words of comfort when they messed up so badly to begin with.
However, considering we lost millions of jobs in the last 6 months alone and had horrible economic data all while the stock market climbed an unprecedented 60% from its lows, a feat that usually takes 2 years after a recovery has actually occurred, there is no bubble. Right. In my opinion we went from one horrific bubble, what was the mother of all bubbles, to the greatest ,biggest, most fantastic bubble of all time created by the Fed on purpose. I realize that everyone thinks everything is fine now that the market is up and we had a wonderful 3Q09 GDP figure, which will be revised down to 2.5-3%, that was 110% stimulus induced, and do not fool yourself and think it was not, but things are ugly.
We are still reporting 500K initial claims a week, last month if you look at the official number we actually lost some 276K jobs, the BLS added some 86K via the birth/death model, and unemployment is at 11%+. That’s right, I said unemployment is at 11%+ right now and I can prove it. According to the BLS they understated employment by some 800K in the beginning of this year, this was announced in September 2009 by the BLS, which means we are not counting some 800K people who are unemployed because the BLS fudges the numbers with the birth/death model, go look to see their actual numbers they add in HERE.
My point is that there has never been a point in history where the market climbed 60% from its lows in a mere 6 months while we are still shedding jobs. Given that employment has been overstated, or understated depending on how you look at it, and we have had weak or anemic, albeit better, economic data this equity move is unparalleled and is the basic definition of an asset bubble. Here are 2 other things that should make you say hmm, treasuries are doing very well, still, which is highly unusual in a economic recovery, come on stocks and treasuries can’t both be right, and precious metals are also going through the roof.
It is impossible to have every or virtually every asset class go up and have them all be right. According to the markets, which are horrible future forecasters, see September 2007 Dow 14,000 for proof, we are facing deflation or a continued recession with treasuries going up, inflation with commodities doing very well or a complete economic recovery with stocks and corporate bonds going through the roof. Do you see my point? They cannot all be right, it is not possible. I know I will get hate mail for this next statement, but here it goes, stocks are stupid money and that is a fact. Credit markets and the FX markets are always where the smart money is, hence the reason why those markets dwarf the equity markets. If you think about it you know I am right, stocks are last in line during bankruptcy!
The point I am making is this, equities are for gamblers, like me and probably you. The credit markets represent the smartest of the smartest money and what is that market telling you? Treasuries are saying there are still major problems out there, as they are going up, and corporate bonds are pricing in 2% GDP growth. Stocks, however, are pricing in some 4%+ GDP growth with job creation and even credit expansion, none of which is actually happening in real life. I can talk until I am blue in the face about valuation and such, but it will do absolutely no good because people do what people do, they see stocks go up and jump on at the very end to ride them all the way down.
In fact CNBC stated today that the retail investor is coming into the market now. Why? Because human behavior is predictable. They wait for things to go up and then see their friends buying stocks, making money and feel left out and jump on the bandwagon. I saw this happen in 1999/2000 only to see people get killed when the market corrected, which it will, because when we see the behavior I am talking about it is the sign of an asset bubble. It is what happened during every bubble we have had and then we will look back in a year and say how were these people so dumb to fall for it? For the record, I do not think all people are dumb I just think people make bad decisions based on faulty advice and herd mentality.
I also do not think retail investors are jumping into this market as net flows do not show that type of activity, equities still show net redemptions not in flows, so CNBC is flat out wrong. Oh, there is also no money on the sidelines so just forget about that argument it does not exist. That money is sitting in money market accounts because people want it liquid and/or it is part of an asset allocation. In fact, that money has not moved off the sidelines in 15 years so I highly doubt it will move now. If it did, which it is not, that is further evidence of a bubble driven by cheap money as the Fed is literally forcing people to risk their principle to make any return.
The Fed can say all they want that there is no bubble because you and I know there is a major bubble out there. Well, you should know that unless you think 60% rallies happen all the time in a mature market and economy. I think what the Fed is saying is that there is no bubble in securitization or in the housing market, which is debatable, but there is one heck of a bubble in stocks. The one thing I do know for sure is that all bubbles pop, I just do not know when, but this one will go soon and it will be spectacular.
I can say with 100% certainty that I am not sure which way the markets will trade. What I do know is that perfection has been priced into equities and they currently trade at 130x current earnings and 26x future earnings. I know that only 25% of the S&P 500 has beaten earnings expectations with even fewer beating on the bottom line and estimates have been substantially reduced.
I realize that my bearishness has not paid off, well not totally at least. I called a top on August 7th and we basically have seen slightly higher prices over that close, but nothing to be jealous about. In fact, we are trading right in the area that I said was the top and we are on our way back down, kind of. Frankly, this is not the selloff I was looking for, but there are telling signs that I am correct. Treasuries had not sold off during this parabolic rally, which should make you nervous, and that is currently my largest positions, 2 year notes to be exact.
I expect treasuries will outperform in the near term as the dollar gains strength, although today we are seeing a weaker dollar along with weak stocks and weak commodities which is a bit odd. Perhaps we are seeing the decoupling of commodities from the dollar and stocks, but I do not think that is the case. What I do think is happening is people are taking profits from some commodities like gold and oil, both of which have done fairly well this year. However, industrial metals are fairing OK today with silver up 8 cents and palladium, one of my favorites, up over a dollar which is more than likely due to the weaker dollar, but it is possible people see these metals as the recovery play, which is what I am doing on a longer term basis.
Regardless, I do believe this is the beginning of the selloff which could be as little as 7-8% to as large as 20%, depending on who you listen to. I am in the camp of somewhere between the 8-20% range based on a severely overbought market and the underlying fundamentals. If we do not produce 4% GDP growth then there is simply no way equities can remain at these prices which mean there is a lot more pain for those who are not defensive at this stage. I do like corporate bonds which have only 2% GDP growth built into their prices which makes them much less risky than stocks.
I just finished reading an article on CNBC.com where they tell you that selling may happen in September, but you do not have to be the seller, which I found odd. Basically, it said that you should hold your stocks even though a correction could be coming (I thought we were over the buy and hold philosophy?). Frankly, I think that since we do not know how severe the selloff might, or might not, be one would be more inclined to reduce some risk now and be ready to buy when they think it bottomed.
Now, I sold all but about 7% of my equity holdings, which is my comfort zone, and am ready to buy when I think prices are right. I may or may not be right to do this, but so far I have done OK with this strategy and I do believe, based on what rising treasuries are telling me, that I am correct. I just do not see how one can be so completely bullish on the market right now, but that is what makes a market work. The only reason I can foresee strong equity prices is because the liquidity provided from the Fed is so great that there is no place to put assets, but even that philosophy is setting you up for disaster as the Fed could rein in that liquidity fairly quickly.
No matter what you may think I am sure you can agree with me on a few points. Nothing goes straight up and when AIG, Fannie and Freddie are the leaders in the market, up over 200% apiece, there is a problem. There is virtually no equity left in those firms and the government also indicated that they will replace Freddie and Fannie with something else in the future. As for AIG there is nothing there to really salvage as they owe the taxpayers some $130B, but for some reason the stock is parabolic. That type of leadership is not what you want to see in a market that is up some 50% from its lows.
For those reasons, plus slightly less bad fundamentals is why I do not want to risk capital at this stage on the long side. Being short is just plain dangerous as well mostly because of the massive liquidity, but the fact that you really cannot borrow shares to short is another major reason to not short anything, you can’t. The whole thing is just odd and anyone who thinks that it is not weird that the market never goes down is simply not thinking logical. Whether you agree with me or not you know that nothing, ever, goes straight up like what we have seen since July.
I suppose if I was a conspiracy theorist I would have a logical explanation like the Fed is buying stocks or some other government controlled entity. However, I am not that demented, I don’t think at least, but I do think something stinks to high heaven here. How long can we see stocks and bonds trade up in tandem? It just doesn’t make sense, period.
While I feel comfortable in my bearish position I am also willing to say that there is nothing stopping the market from going to the moon. Especially if you cannot short stocks or you make it so expensive that shorting the stock is not a realistic solution, which is not a conspiracy theory as we all know this is happening. Either way we will see what happens, but I cannot stress, based on the pure mathematics, not just my opinion, that there is just a ton of risk in stocks right now.
The only way this market can continue its parabolic climb is if the dollar gets taken down. This morning as I watched equity futures at 6 AM I thought it was odd that the dollar had strength while futures were up. Then it happened.
Right around 7:30 the dollar began to drop as futures keep their gains, this has been typical during this new bull market. While this might make people feel better about the economy, keep in mind that the markets had decoupled themselves from equities, many may be shocked to learn that the market’s gains were at their expense. If the dollar looses value and equities go up, which is typical, then your net buying power has actually decreased which nullifies your gains.
I am sure not many people are paying attention to this fundamental fact, but nonetheless it is there and a reality. Even the likes of Cramer are not connecting the dots as he cited higher oil prices for the market’s rally last week while it had little to do with oil at all. It had to do with the decline in the dollar’s value which drove oil higher, along with significant draw downs in inventory.
I am not sure if the media is intentionally ignoring this fact or not, but it is there which also explains higher commodity prices as well. At this rate the Dow could hit 14,000 again, but your buying power will be diminished. A weak dollar is good for your multinational companies and commodities, but nothing else. I do not know about you, but I am not a fan of our currency being devalued in order to prop up a failing bank system which is exactly what is happening.
To maintain your buying power you should consider having commodities in your portfolio. I favor gold, silver, platinum and palladium, but you may favor something else like oil. It does matter what commodity you choose as you want a liquid investment with strong fundamentals. For that reason is why I heavily favor precious metals, but your risk is if a black swan emerges. If we have another 2008 event money will pour into the dollar driving commodities lower. This is why you need to be diversified between asset classes, however if you do not own any commodities, what are you waiting for?
Be the First to Comment 
Subscribe to Annuity IQ's Feed
