Wednesday, November 9, 2011

African Gold Miner on the Rise Randgold Resources recently broke from a triple-top

Randgold Resources (NASDAQ:GOLD) — For months, gold bullion has been running ahead of gold mining stocks. But that trend appears to be correcting as major mining stocks are coming to life. The rise in the price of the metal has provided gold mining stocks with the means to multiply profits, so the sector is breaking out of 12 months of relatively flat prices.

Randgold mines in West and Central Africa. With the rise in the price of gold bullion, the company is expected to increase earnings to $6.74 in 2012 from $6.22 in 2011, and analysts have raised their price target to $150. Technically the recent break from a triple-top gives a target of $140.

Trade of the Day – Randgold Resources (NASDAQ:GOLD)

John Embry: Expect $70 Silver Within Months

from King World News:

With gold trading at $1,800 and silver above $35, today King World News interviewed John Embry, Chief Investment Strategist of the $10 billion strong Sprott Asset Management to get his take on where he sees gold, silver, the US dollar and the mining shares headed. When asked about the action in gold and silver, Embry responded, “The recent low on gold (at $1,530) was contrived. If I would have asked you two months ago on the 8th of September, when gold was making an all-time high and silver was busting through $40 again, if you knew what was going to happen in the next two months in Europe and the world in general, where would you have estimated gold and silver would be trading?”

John Embry continues: Read More @

China's Yield Curve Inversion Signals Sharp Slowdown Ahead

As we have heard a million times on hundreds of business media outlets, the US 'cannot' be in recession because the yield curve has not inverted. Well, unfortunately for the savior-of-the-universe Chinese economy, their yield curve (the 2s-10s differential) has just inverted for the first time - suggesting, as per Mike Darda of MKM, the Chinese economy is “set to slow rather sharply” and that has “negative implications” for commodities tied to industrial growth. Following on from our discussion of the 1tn RMB deposit infusion bailout, Darda also points out (via Bloomberg) the 8 months-in-a-row of OECD Leading index drops, weakness in the China PMI sub-indices, and the fragility of the shadow banking system via cracks in the real estate market and notes, with a wonderfully indignant note on CB success:

"It is worth remembering that the Fed has engineered only one soft landing in six decades of post-war monetary policy-making (1995)".

Further to this the FT reports a growing concern (noted here by HSBC's CEO Stuart Gulliver) over the potential for an Asian credit crunch both self-created and exogenously-driven by European bank deleveraging:

The strong increases in credit availability in Asia that has supported demand growth cannot continue indefinitely,” said Mr Gulliver, who was speaking in Hong Kong the day before his bank announces its third-quarter results.

“Any reduction in credit availability is likely to be gradual – but it remains a risk policymakers will need to manage. And we need to be careful to monitor the risk of a sharp withdrawal of credit by European banks as a result of events at home.”

And as the rate environment starts to adjust to 'slow' growth and a 'soft-landing', perhaps commodities will continue to slide south. Arguably - a 2s10s steepener on China seems like a way to play a harder-landing and the leading appearance of the commodity index suggests we have lots to look forward to (paging Dr. Copper?).

The CRB index appears to lead curve regime shifts - is the front-end of China's yield curve about to pop?

UPDATE: While the on-the-run 2y yield did trade above the 10Y yield on 9/26
(2s10s inverted), Bloomberg's generic 2Y CNY yield index has not updated in
three weeks meaning Mr. Darda's analysis is based upon faulty information. We do
not ethat since late September's inversion, however, the curve has begun to
steepen - which fits with the cycle turn analysis he discusses. (h/t SD!)

See below for the on-the-run 2Y and 10Y CNY bond yields:

Charts: Bloomberg

Welcome to the Third World, Part 3: Disappearing Pensions

One of the things that separate the “rich” world from the rest of humanity is the expectation that a lifetime of work is rewarded with a comfortable retirement. Whether through an employer’s pension or 401(K), or government plans like Social Security and Medicare, citizens of the US, Canada, Europe and Japan take it for granted that some baseline income and healthcare benefit is out there waiting for us when we need it. And we plan our saving and investing accordingly, presumably putting away less than we would if our retirement had to be completely self-funded.

So imagine our surprise when it turns out that pension plans, from company-specific to federal, don’t have nearly enough money to keep their promises. Consider this story on private sector pensions from yesterday’s Wall Street Journal:

Pension Trusts Strapped
Retirement trust funds created to cover billions of dollars in medical costs for unionized workers and their families are running short, forcing the funds to cut costs, trim benefits, and ask retirees and companies to pony up more cash.

The biggest such fund—a trio of United Auto Worker trusts covering benefits for more than 820,000 people, including Detroit auto-maker retirees and their dependents—is underfunded by nearly $20 billion, according to trust documents filed with the U.S. Labor Department last month.

The funds, known as VEBAs, or voluntary employee beneficiary associations, are being hit by rising medical costs and poor investment performance. Their funding comes in part from company stock, rather than just cash payments, making them vulnerable to the market’s volatility.

In Pittsburgh, the United Steel Workers union is laboring to provide benefits to tens of thousands of employees covered by more than 30 VEBAs. “No matter how good your investment performance is, you are not going to be able to keep up with health-care inflation,” says Tom Conway, vice president of the USW. “The trustees are having to take a serious look at increasing premiums, and the retiree contribution has to be bigger.”

According to VEBA trust officials, the funds for all autos averaged a 9.7% rate of return in 2010. They decline to say how the funds have performed in 2011 but, in response to written questions, they say the fund has adopted a more conservative assumption of 7% going forward. At GM, the fund currently has total assets of $33.23 billion and total benefit obligations of $44.68 billion, resulting in an $11.4 billion, or 26%, shortfall.

Some thoughts
“The biggest such fund—a trio of United Auto Worker trusts covering benefits for more than 820,000 people, including Detroit auto-maker retirees and their dependents—is underfunded by nearly $20 billion, according to trust documents filed with the U.S. Labor Department last month.” … How exactly does a pension plan get underfunded by $20 billion? Don’t people notice when the underfunding hits, say, $20 million? And isn’t someone obligated — on pain of jail time — to adjust the cash flows to bring them back into balance? It seems like a number this big would take a long time to accrue, which means a lot of people over a lot of years have to violate their fiduciary if not legal duties.

Clearly there was a scam being run, and the mechanism was the projected rate of return. As stocks, real estate and bonds all soared during the credit bubble decades, pension funds got addicted to 10% annual returns and didn’t seem to recognize that those returns would have to revert to mean eventually. As a result they didn’t adjust their expectations downward. So now that stocks have literally returned zero for an entire decade and bonds by definition can’t earn more than a few percent a year, these pension funds are stuck with widening gaps between what they owe and what they’ll have down the road. And they’re surprised!

“…the fund has adopted a more conservative assumption of 7% going forward.” Pension funds hold the majority of their assets in bonds, and US ten-year Treasuries now yield 2%. So how do you get to 7% if half your assets are generating a third of that rate?* The answer is you hope for massive inflation to send stock and real estate prices through the roof. But of course this raises beneficiary living costs and diminishes the real value of future benefits. Looks like a lose-lose from here.

Meanwhile, Social Security and Medicare are in even worse shape, with unfunded liabilities totaling somewhere north of $50 trillion. Their cutbacks will dwarf those of the above private plans.

The message to First World beneficiaries: Don’t expect any plan, government or private, to carry you in comfort through 30 years of retirement. Like most of the rest of humanity, you’re on your own.

* Of course, had a hypothetical pension fund loaded up on gold and silver a decade ago, they’d be massively overfunded today and would be raising benefits rather than cutting them.

This Stock Could Be the Dow's Biggest Gainer in 2012: HPW

Focusing on "turnaround" stocks was a favorite angle for investors in the 1990s. Many companies had been run poorly, but new management could easily unlock value by focusing on a deep restructuring. The key was to find businesses that still possessed sizable market share, brought in new leadership and most importantly, were already cheap based on current cash flow, let alone what future cash flow growth might entail.

This is the recipe in place for Hewlett-Packard (NYSE: HPQ) today, which only a few decades ago was considered to be one of the premier technology firms in Silicon Valley. New CEO Meg Whitman has her work cut out for her, but she inherits a business that is already a cash-producing machine (free cash flow has averaged $8.5 billion during the past three years). And trading at just six times projected 2012 profits, it's clear investors aren't holding her to a very high set of expectations. Look for Whitman to lay out plans to revitalize the company in coming months. Far-sighted investors need to pay attention.

Fixable, not broken
From Wang to Digital Equipment to Novell, the high-tech sector is filled with examples of companies that lost their luster and faded into oblivion. These were broken business models that were ultimately sold off for a fraction of their peak value. Yet HP isn't broken and there is a clear fix in place for its myriad businesses. Trouble is, previous management moves have failed to really tackle any core challenges the company faced. Former CEO Mark Hurd was more concerned with cost-cutting and acquisitions, while virtually ignoring internal development. Cost-cutting helped boost earnings per share (EPS) steadily in the last half of the past decade (from $0.82 per share in 2005 to $3.25 in 2008), but underinvestment in the business started to create an opening for rivals to take market share.

Let's look at IBM (NYSE: IBM) as an example. While both firms focus on large enterprise contracts that entail management of all aspects of a client's technology base, IBM was investing heavily in software, noting that this value-added segment can bring more robust profit margins than simple hardware configurations. As a result, IBM generates 20% operating margins, while HP's enterprise unit generates 15% operating margins. A recent move to acquire Autonomy Corp. for $10 billion will boost HP's software efforts -- though HP vastly overpaid for it -- yet Whitman will acknowledge that HP needs to invest even more in software in 2012.

In the computer segment, HP was lauded for overtaking Dell (Nasdaq: DELL) as the world's top seller in 2006, but a lack of investments led the company to virtually miss the ongoing tablet-computer revolution. Still, HP's commanding size in the PC business gives it significant buying power in terms of components, which helps HP generate $2 billion in free cash flow from this business. A just-announced decision to retain this division (and likely step up investments in 2012) is a wise one, as computer sales are so closely intertwined with HP's other divisions such as printers and services.

The printer division, by the way, is a crown jewel, with 40% global market share (as much as Canon and Epson's combined share). The division's 16% operating margins (and $4 billion in annual operating cash flow) are the simple results of ongoing investments in printing technology. This is a lesson likely not lost on Whitman as she draws up plans to revive other parts of the business.

Analysts at Aurgia Securities have analyzed each of HP's divisions, assessing a comparable value for each against a set of peers. On a sum-of-the parts basis, they say shares could trade up to $47 from a current $27. Yet few will buy HP stock on this rationale. Instead, they want to see how Whitman can tinker with the business to restore HP's competitive positioning.

So how will this play out? A bit of counter-intuitive logic is necessary. Myopic investors often look to dump the stock of a company when it announces plans to step-up spending (reducing EPS guidance in the process). Yet HP is an exception. Let's assume the current 2012 EPS forecast of $4.70 a share needs to be slashed to $4 as spending rises. Well, the stock is still cheap, and would trade for just seven times that lowered figure. More important, the spending signals HP won't just sit on its hands anymore. It plans to remain relevant -- and thrive -- well into the future. Doubts about the future are what this cheap stock price is really telling you.

This lowered guidance is likely to come this winter as the new CEO "resets expectations." This is what all CEOs do, and it is widely expected from HP. To be sure, most investors will take a wait-and-see attitude to see how Whitman's strategy will play out. So shares of HP are unlikely to move back to the $40 mark very quickly. But over the course of 2012, there's no reason this stock can't move back to the mid-$40s (simply based on that sum-of-the-parts analysis that Auriga's analysts suggest).

Risks to Consider: Tech spending by corporations has held up fairly well in 2011 and is expected to remain robust. Any pullback in tech spending would keep HP from reaching new profit margin goals that are laid as out as any part of a business transformation.

Action to Take --> This is an absurdly cheap stock that is subject to very low expectations. Yet a considerable amount of strengths remain, and Whitman's turnaround task is not as steep as the lagging share price implies. Even if the plan takes longer to realize, shares are so cheap that they likely possess considerable downside protection. That 74% gain to reach Aurgia's price target should look tempting, yet keep in mind that this is only a play for the patient investor, because it's likely to be "three steps forward and two steps back" as HP slowly pivots back into investor favor.

Jay Taylor: Turning Hard Times Into Good Times

11/8/2011: Deflation: Making Sure It Doesn’t Happen Here

Eric Sprott talks to James Turk in Munich

ROUBINI: The Next MF Global Collapse Could Be Goldman Sachs

Nouriel Roubini was in fine form yesterday, scaring the bejeezus out of his followers on Twitter by saying that several huge financial institutions could collapse in the blink of an eye like MF Global.

These houses of cards, Roubini tweeted, include:

The problem, as Roubini has consistently warned, is the banks' dependence on short-term financing to maintain their long-term asset leverage and run their businesses.

What killed MF Global, Lehman Brothers, Bear Stearns, AIG, and other huge financial firms, after all, was the sudden refusal of short-term lenders to continue lending money to the firms.

Every day, the big Wall Street firms borrow tens of billions of dollars in low-cost short-term loans. They then use this money to make long-term bets on assets that yield more than the money costs to borrow. And then they happily keep the difference between the two.

In good times, the banks come to take this funding for granted: They just keep rolling over their huge debts every day, repaying the old loans with the money from new ones.

When the overnight lenders suddenly get suspicious and the money disappears, however, it's as if the oxygen is suddenly sucked out of the room.

In additional tweets, Roubini argued that JP Morgan and Citigroup were actually less at risk because more of their funding comes from insured deposits. So that's some good news for you. Dan Freed of TheStreet has more on Roubini's tweeting.

If you don't understand this short-term funding dynamic, and the enormous risks it creates, read this excellent William Cohan article on how Jon Corzine just flew MF Global into a mountain

The Gold Investor’s Biggest Risk

By Jeff Clark, Casey Research

While we’re convinced that our gold and silver investments will pay off, they don’t come without risk. What do you suppose is the biggest risk we face? Another 2008-style selloff? Gold stocks never breaking out of their funk? Maybe a depression that slams our standard of living?

Though those things are possible, we at Casey Research don’t see that as your greatest threat:

“Your biggest risk is not that gold or silver may fall in price. Nor is it that gold stocks could take longer to catch fire than we think. Not even the prospect of the Greater Depression. No, your biggest risk is political. As bankrupt governments get increasingly desperate for revenue, any monetary asset held domestically could be a target. It is absolutely essential that every investor diversify themselves politically. In fact, at this point, it is the one action that should be taken before anything else.” – Doug Casey, September 2011

I know many reading this are prudent investors. You own gold and silver as solid protection against currency debasement, inflation, and faltering economies. You set aside cash for emergencies. You have strong exposure to gold stocks, both producers and juniors, positioned ahead of what is likely the next-favored asset class. You feel protected and poised to profit.

Yet, despite all this preparation, you remain exposed to one of the biggest risks.

Similar to holding a diversified portfolio at a bank without checking the institution’s solvency, many investors keep their entire stash of precious metals inside one political system without considering the potential trap they’ve set for themselves. While storing some of your gold outside your home country is not a panacea, it does offer one important thing: another layer of protection.

Consider the exposure of the typical US investor: 1) systemic risk, because both the bank and broker are US domiciled; 2) currency risk, as virtually every transaction is made in US dollars; 3) political risk, because they are left totally exposed to the whims of a single government; and, 4) economic risk, by being vulnerable to the breakdown of a single economy.

Viewed in this context, the average US investor has minimal diversification.

Get your FREE Bullion Weekly Report sponsored by NYSE

The remedy is to internationalize the storage of some of your precious metals. This act reduces four primary risks:

Confiscation: We don’t know the likelihood of another gold confiscation. But we do know that things are working against us – particularly for US citizens. With $14.7 trillion of debt and $115 trillion of unfunded liabilities, the US government will likely pursue heavy-handed solutions. Under the 1933 FDR “gold confiscation” in the US (the executive order was actually a forced delivery of citizens’ gold in exchange for cash), foreign-held gold was exempted.

Capital Controls: Many Casey editors think some form of capital controls lie ahead, limiting or eliminating a citizen’s ability to carry or send money abroad. If enacted, all your capital would be trapped inside the US and at the mercy of whatever taxing and regulating schemes the government might concoct. Although you might be able to leave the country, your assets could not travel with you.

Administrative Action: There are plenty of horror stories of asset seizure by a government agency without any notice or due process, possibly leaving the victim without the means to mount a legal defense. Having some gold or silver stored elsewhere provides what could be your only available source of funds in such a scenario.

Lack of Personal Control: Having gold and silver stored elsewhere adds to your options. You will have a source of funds available for business, entrepreneurial pursuits, investment, or pleasure.

Notice above we said these risks can be reduced, not eliminated. There is no perfect solution; US persons could, for example, be compelled to pay a “wealth tax” on assets held worldwide, or even repatriate them in a worst-case scenario. Absent a crystal ball, the political diversity of asset location is an essential strategy against an uncertain future.

Foreign-held assets also require greater awareness and planning:

  1. Access to your metal or sale proceeds may not be quick. Therefore, this option is for those with some gold and silver stored at or near home. We do not recommend storing all your precious metals overseas; that defeats one of its purposes, to have it handy for an emergency.
  2. While we think the US poses the greatest threat, a foreign government could move to control certain assets as well. The risk varies by country and is generally greater within the banking system than with private vaulting facilities.
  3. Understanding and complying with reporting requirements is essential.

The bottom line, though, is that foreign-held precious metals can mitigate risk and give you more options. And as your metal holdings grows, diversification becomes more crucial.

Given our current rapacious climate, it’s likely that simply buying gold won’t be enough. We strongly suggest every investor diversify one’s bullion storage outside their current political regime. The option may not be available someday, leaving you vulnerable without a secondary source of bullion.

We advise taking advantage of the opportunity before it is gone.

[There are ways to invest in gold without paying current prices for the metal itself. Learn how big investment funds are accomplishing this today… and how you can do it, too, to maximize your profit potential.]

Barclays Says Italy Is Finished: "Mathematically Beyond Point Of No Return"

Euphoria may have returned briefly courtesy of yet another promise for a resignation that will likely not be effectuated for weeks or months, if at all, and already someone has done the math on what the events in the past several days reveal for Italy. That someone is Barcalys, the math is not pretty, and the conclusion is that "Italy is now mathematically beyond point of no return."

Summary from Barclays Capital inst sales:

1) At this point, it seems Italy is now mathematically beyond point of no return
2) While reforms are necessary, in and of itself not be enough to prevent crisis
3) Reason? Simple math--growth and austerity not enough to offset cost of debt
4) On our ests, yields above 5.5% is inflection point where game is over
5) The danger:high rates reinforce stability concerns, leading to higher rates
6) and deeper conviction of a self sustaining credit event and eventual default
7) We think decisions at eurozone summit is step forward but EFSF not adequate
8) Time has run out--policy reforms not sufficient to break neg mkt dynamics
9) Investors do not have the patience to wait for austerity, growth to work
10) And rate of change in negatives not enuff to offset slow drip of positives
11) Conclusion: We think ECB needs to step up to the plate, print and buy bonds
12) At the moment ECB remains unwilling to be lender last resort on scale needed
13) But frankly will have hand forced by market given massive systemic risk

Hint:Not Good.Sell EUR, Buy Gold

The broader referenced report can be found here.

And the assocaited powerpoint is below:

Barclays Capital BARCAP Tuesday Credit Call Big Trouble in Big Italy

The One Thing Missing From This Rally

To those focusing on technical analysis, yesterday afternoon’s 180-point rally following a weak morning made little sense. But the focus is on Europe, and rumors of new unnamed capital sources for an investment fund designed to buy sovereign bonds were enough to bring out the momentum players who drove the U.S. dollar down and stocks up.

After a morning of losses, the Dow Jones Industrial Average rallied to close up 0.71%, the S&P 500 rose 0.63%, and the Nasdaq gained 0.34%. But volume was lacking with just 782 million shares trading on the NYSE and 458 million shares on the Nasdaq. And with advancers leading decliners on the Big Board, and decliners ahead on the Nasdaq, the lack of leadership was obvious.

SPX Chart
Click to EnlargeTrade of the Day Chart Key

The S&P 500 is currently stuck in a trading range that is roughly defined by its 20-day moving average (green line) at 1,235 and the 200-day moving average at 1,273. A break under the green line should result in a test of the 50-day moving average at 1,197 (blue line), and a break above the red line will likely run into strong selling at around 1,300. In the middle of this jumble of lines is the former neckline at 1,260, which for the last three days has restrained an advance. (Find out how to play this with options.)

The lack of volume is an indication of a key missing ingredient that is required to move stocks higher — and that is commitment. And the momentum indicator supports this view with a downward sloping trendline that is now just a mere dot from going negative. High-volume breakouts are normally not preceded by mediocre momentum.

And two investments motivated by fear rose yesterday: Both the 10-year U.S. Treasury notes and 30-year bonds rose in price, while Italy’s bond prices fell and yields rose to over 6.4%.

GLD Chart
Click to Enlarge

Gold — the traditional hedge — continued its break from the 50-day moving average with a breakaway gap and a close at the high of the day. And crude oil headed higher for the fourth consecutive session with some floor traders and analysts suggesting that oil is becoming more of a “recessionary play, similar to gold, rather than a leading indicator of risk,” according to The Wall Street Journal.