Friday, December 23, 2011
The Fallen Four
It will come as no surprise to many that this year's worst performing Dow Jones member is Bank of America (NYSE:BAC) who shares have fallen some 60% in 2011. Thanks to a financial crisis in Europe and continued fears over the litigation that hangs over the company's mortgages, investors have dumped shares en masse. Number two on the list is aluminum giant Alcoa (NYSE:AA), down over 40% in 2011. Shares now trade for around $9 valuing the business at less than 10 times earnings and about 63% of book value. (For related reading, see The 4 Basic Elements Of Stock Value.)
Filling up the next two slots for worst performing DJIA stocks in 2011 are tech giant Hewlett Packard (NYSE:HPQ) and investment bank JP Morgan (NYSE:JPM). HP's mishaps have been headline grabbers all year. First it was the ouster of CEO Mark Hurd, followed by a new CEO who was quickly fired for committing more than one strategic blunder. The result was a 40% drop in the stock. JP Morgan, part of the overall financial sell off, is down over 20% in 2011.
Will the Strategy Work?
While buying an asset simply because it has fallen in price over a 365-day period is no sound strategy, buying a quality asset because the price is below intrinsic value can be. It just so happens that Bank of America is a big holding for value investor Bruce Berkowitz. The bet has yet to work out, but Berkowitz is a patient man and previously made a small fortune by betting on financials in the 1990s. Hewlett Packard was a big buy for value investor Seth Klarman in the third quarter of 2011. Klarman's $465 million HP stake makes HP Baupost's second-largest position, suggesting that Klarman sees great upside potential for HP.
The Bottom Line
Whether or not you subscribe to the Dogs of the Dow theory, it's not often that names on the list turn out to be huge investments for some savvy investors. But it turns out that going in 2012, the strategy may work out better than most expect.
The past few months have been tough for those holding precious metals stocks, PM futures contracts or physical bullion. With silver is trading down 41%, precious metals stocks down 30% and gold 15%. It has people scratching their head.
The question everyone keeps asking is when can I buy gold and silver?
Unfortunately that is not a simple answer. With what is unfolding across the pond and the bullish outlook for the US Dollar index the next move is a coin toss. That being said, I do feel a large move brewing in the market place so I am preparing for fireworks in the first quarter of 2012.
If you step back and look at the weekly trend charts of the dollar index and the SP500 index you will see the strength in the dollar along with a possible top in equities forming. What these charts are telling is that in the next 3 months we should know if stocks and commodities are going to start another multi-month rally or roll over and start a bear market sell off.
With the holiday season nearing, hedge fund managers sitting on the sidelines just waiting for their year end performance bonuses, I cannot see any large sell off start until January. Sell offs in the market require strong volume and the second half of December is not a time of heavy trading volume.
This leaves us with a light volume holiday season, major issues overseas and no big money players willing to cause waves.
So let’s take a quick look at the charts as to where the line in the sand it for the dollar index, gold and silver.
Dollar Index Daily Chart
This week we have seen a strong shift of money out of risk on assets (Bonds) and into risk off (Stocks). This shift is happening before the dollar has broken down indicating the dollar may be topping and could be an early warning of higher stocks prices going into year end. Also note that light volume market conditions also favour higher prices.
Gold Price Daily Chart
Gold could still head lower but at this point it is holding a key support level. If we see the dollar breakdown below its green support trendline then I expect gold to have a firm bounce to the $1675 – $1700.
Silver Price Daily Chart
Silver continues to hold a key support level. If the dollar breaks down the silver should bounce to the $31.50 – $32 area. But if the dollar continues to rally then silver and gold may drop sharply.
Mid-Week Trend Conclusion:
In short, I think the best thing to do is enjoy the holiday season with family and friends. Trading right now is not that great and with the market giving mixed signals. I am keeping my eyes on the market in case it flashes a low risk setup and I will keep you informed if we get one.
I am still bearish on gold and silver longer term but the next week or so its likely we see higher prices.Be aware that Monday is a holiday and once January arrives the market could go crazy again. If you want all my swing trades that I personally do be sure to join my alert service
Lelde Smits: Hello I’m Lelde Smits for Australia’s Finance News Network and joining me today from Singapore is American investor and author, Jim Rogers. Jim, welcome to FNN and thanks so much for your time. Now for the benefit of our Australian audience, why did you choose to leave your homeland and set up in Singapore?
Jim Rogers: The main reason Lelde is that I’ve got two children who I want to grow up speaking perfect Mandarin. In my view the 21stcentury will be the century of China. I couldn’t keep up the Mandarin in New York, as much as I wanted to. You know, many parents do strange things for their children, they move near football coaches or music teachers or good schools. We moved to Singapore to maintain the Mandarin.
Lelde Smits: And why Singapore when you had all of Asia to choose from?
Jim Rogers: We looked at the Chinese speaking cities in China but the problem was the ones where we wanted to live are too polluted. I love Shanghai, I love Hong Kong, but the pollution is just too horrible. Singapore is the best of all worlds.
Lelde Smits: Well you’re clearly an investor with your eyes on global horizons, but what’s your outlook for global growth stepping into next year?
Jim Rogers: Well Lelde, I’m not too optimistic about what’s going to be happening in the world in the next two or three years, and maybe even longer. We have serious problems in the United States. You know, in 2002 we had an economic slowdown, 2008 was even worse because the debt was so much higher. The next time around the debt is going to be staggeringly higher. So, the problems are going to continue to get worse until somebody solves the basic underlying problem of too much spending and too much debt.
Lelde Smits: Could you elaborate on that Jim; If you believe problems are going to get worse because of too much spending and debt, what do you believe is the biggest risk to global growth in 2012?
Jim Rogers: Well definitely too much debt is, in a nutshell yes - I mean the biggest risk of course is the Central Bank in the US which keeps printing money. But they’re printing all that money as a result of the debt. So we have big problems of money printing, debt, too much consumption – be careful.
Lelde Smits: You recently returned from the States, how are folks there feeling about the economy?
Jim Rogers: I was surprised at how much optimism there is. Everybody still seems to think everything is still going to be OK. I guess they’ve been thinking that we’ve all been brought up that everything would be OK in next year or two, and it has been OK for the past 20 or 30 years. Unfortunately I think that’s false optimism and I would have been more impressed if I’d seen a lot of depressed people, but I see optimistic people. (click for video)
When investors look for exciting investment destinations, countries like Malaysia, Peru and China often top their lists. Funds like the iShares MSCI Malaysia Index (NYSE:EWM) have surged as investors have looked towards the exotic to find gains. Still, as these emerging nations continue to grow, their demand for natural resources remains insatiable. Our often ignored neighbor to the North with its vast supply of natural resources, may make it just as an exciting proposition as Estonia.
Boasting the world's second largest oil reserves behind Saudi Arabia, Canada could be investors' developed ticket into emerging markets. The nation could almost be viewed as a commodities hyper-market, providing all the necessary ingredients that fast-growing countries in Asia and South America need to build infrastructure and support increased consumerism.Major exports including oil, grains, industrial and precious metals are all set to increase. Analysts forecast a nearly 57% increase in Canadian exports to Asian-Pacific nations this year. Furthermore, while Canada is known for its energy and minerals resources including the rich oil sands of Alberta, the nation is also an agricultural superstar.
The country is one of the world's largest producers and exporters of wheat, canola and fertilizer. As the planet continues to grip with food crunches and shortages, these agricultural exports will ultimately help boost Canada's bottom line.For investors interested in adding some Canadian exposure into their portfolio, the iShares MSCI Canada Index ETF (ARCA:EWC) would be a nice straight forward choice.
For dividend investors, there are a number of Canadian companies that also yield dividends that are far more generous than EWC's 1.90%.
|Company||Dividend Yield||Market Cap||YTD Performance|
|Enerplus Corporation (NYSE:ERF)||8.90%||4.57B||-20.25%|
|Pengrowth Energy Corporation (NYSE:PGH)||8.00%||3.58B||-16.35%|
Provident Energy Ltd. (NYSE:PVX)
|TransAlta Corp (NYSE:TAC)||5.70%||4.56B||-4.86%|
While not exotic, Canada's supply of rich natural resources and sound financial system makes it a sound investment destination. Likewise, those interested in another source of dividends may want to take a closer look as well.
As 2011 draws to a close, it is clear that the U.S. economy is at least beginning to stabilize. Unemployment reached its lowest level since February during the final quarter of 2011, while the average U.S. household has also enjoyed having additional disposable income since the close of 2010. With the Social Security Administration (SSA) also announcing a 3.6% cost of living increase for benefits recipients in 2012, you could be forgiven for thinking that the next 12 months will provide considerable economic respite for households across the land.
Reasons for Caution
Despite the broadening beam of light at the end of the tunnel, the cost of living benefits increase is tempered by other government proposals for 2012. To begin with, the Medicare Part B premium is set to rise for the first time in three years, and there are fears that this may at least partially offset the increases in benefit. Not only this, but the maximum salary subject to social security tax is also set to rise from $106,800 to $110,100 in 2012, which will leave approximately 10 million U.S. citizens facing inflated tax liabilities.
Whether you work or are currently claiming social security benefits, it is becoming increasingly clear that 2012 may at best be a year of consolidation rather than considerable growth. This position is not helped by the financial crisis that is developing in Europe, which is providing a clear threat to the banking sector and economic growth as a whole. With this in mind, U.S. households need to remain prepared as they enter 2012, and take steps of their own to guard against a potential increase in the cost of living.
Inflation and the Rising Cost of Food
With issues of tax and medical insurance placed to one side, there are other more fundamental concerns that influence the day-to-day cost of living. Inflation and the cost of food are two relevant examples, and both have soared throughout 2011 while the economy has stalled and unemployment has remained uncomfortably high. While the cost of both items are unlikely to remain as high throughout 2012, many U.S. consumers will still need to adjust their budgets to account for expenditures that is out of proportion from their incomings.
In terms of food, becoming a smart shopper applies both to the outlets that you frequent and the way in which you select and purchase goods. Many retail outlets and supermarkets now have an online store and delivery function, and this allows you to shop in a considered manner and without the lure of impulse buys and a handily placed electronics isle. It is also important to look beyond the basic retail price of food items, as this alone does not indicate whether it provides value for money. Break its cost down into the price per unit or individual measurement, so that you can make a considered purchasing decision on the deals that you find.
There is mixed news for motorists and homeowners when it comes to fuel and heating costs. The national average price of gasoline is expected to drop to $3.10 per gallon by January 2012, and this trend should continue throughout the remainder of the year. However, truck drivers and commercial diesel users can expect the price of fuel to remain high due to an increase in the exports of diesel. The cost of household heating oil is also set to rise significantly throughout the first quarter of 2012, with a harsh winter set to take its toll on consumers' wallets and force prices skyward.
As a motorist or homeowner, now is the time to prepare for these cost hikes and make the necessary adjustments. With diesel prices unlikely to fall significantly throughout 2012 and beyond, it may be worth considering either converting your vehicles engine to run on gas or investing in a more fuel efficient model to get you from point A to B. In terms of energy usage within the home, consider implementing LED lighting throughout your property as opposed to standard fluorescent fittings, and be sure to seek out and engage new energy providers once your current deal has expired. These steps will help to reduce your annual lighting and heating bills significantly, and offset any increase in base prices.
The Bottom Line
With all this information in mind, it should be clear that while the cost of living in the U.S. for 2012 may well fall from this year's highs, it will still remain out of proportion from the average household income. This means that families and consumers must tighten their belts and consolidate for the next 12 months, and offset their own cost of living increases by adopting sound financial practices.
December 19, 2011 - 8:02am
The latest short position report for stocks was released earlier in the week for positions held as of Nov 30. This was the report that I had speculated would show a decline in the short position of SLV, the big silver Exchange Traded Fund (ETF). Contrary to my expectations, the short position for SLV increased by more than 2.2 million shares to 25.2 million shares. This represents almost 25 million ounces of silver. http://www.shortsqueeze.com/?symbol=slv&submit=Short+Quote%99
I had originally speculated that the short position in SLV would be lower in this report because the price of silver had experienced a fairly significant decline of roughly 10% ($34 to $31) within the reporting period. Most often, similar to what occurs on the COMEX, short positions expand on price increases and decline on price sell-offs. This is at the heart of the silver manipulation. To illustrate that point, the headline number in the CFTC’s Commitment of Traders Reports (COTs), the total net commercial short position, declined by 5,500 contracts from Nov 15 to Nov 29. The total COMEX commercial net position reduction was the equivalent of 27.5 million ounces, representing a 21% reduction over the two weeks. The reduction in the COMEX commercial short position was ten times greater than was the increase in the SLV short position in equivalent silver ounces, just to keep this in proper perspective. To be sure, had the COMEX commercial short position increased during that silver price decline as did the SLV, then I would have really been surprised; but that didn’t happen. Overall, the commercials were able to rig lower prices and speculative long liquidation as is their custom.
Still, I find the increase in the short position of SLV to be odd. During the reporting period, the price of gold also declined as much as $100. In contrast to the increase in SLV, the short position in GLD, the big gold ETF declined by 30% in the period from 22 million shares held short to just more than 15 million shares. The much smaller gold ETF, IAU, run by BlackRock (which is also the sponsor of SLV) witnessed a decline in its short position of 75%. (You can verify the specific numbers in the above link by inserting the stock symbols). (more)
By keeping all your assets in the country where you live, you commit, ahead of time, to ratify whatever policy your home government might adopt, no matter how objectionable, unreasonable or pernicious that policy happens to be. If the next new mandate is "Register today to get a nail pounded into your head," you're already signed up.
Americans, by and large, run all their affairs within the confines of the US. The US economy is so large and so varied that it's easy to assume that everything you want to do with your wealth can be done without crossing any borders. And people in the US, like people anywhere, live with the habits and attitudes developed over generations. They're only human. In the case of Americans, those habits grew out of long experience with a government that was small and that generally practiced the rare virtue of following its own laws. In a happy exception to mankind's experience with rulers, there was little to fear from it.
Stay at home is still the norm for Americans, but it's a norm that is slowly fading. Every billion-dollar tick of the government debt clock, every expansion of the government's regulatory apparatus, every overreaching judicial decision made in the name of a compelling public need, every inversion of protection for citizens into license for the state and every intellectually tortured discovery of a new meaning in the Constitution's 4,400 old words leaves a few thousand more people wondering how prudent it is to consign all their eggs to a single national basket. Encounters with high-handed IRS agents and eager TSA gropers do nothing to ease that concern. And for those who listen thoughtfully, the messages from our designated leaders and their would-be replacements only hurry the dawning sense of unease.
Specific worries include exposure to predatory lawsuits, especially claims that could draw extra go-power by association with politically favored causes or legally favored groups; fear of where income tax rates might climb; the prospect of losing a family business in a regulatory battle or simply through estate tax; the fragility of financial institutions that have operated for forty years with the assurance that the Federal Reserve would rescue them from any folly; the possibility that a government desperate to protect the dollar from collapse might impose foreign exchange controls or capital controls; the memory and precedent of the forced gold sales of 1933; and the thought that a government floundering in deficits might start pilfering from IRAs and other pension plans. (more)
After 2011's recent pause, the new year could again see the construction stocks seeing large gains. The latest jobs package from the Obama administration included $30 billion for modernizing public schools, $27 billion for the highway system, $9 billion for rail systems and $15 billion for the rehabilitation of homes, businesses and communities. The jobs package also creates a $10 billion National Infrastructure Bank that would provide funding for infrastructure projects. While the overall jobs bill is destined for the trash pile, both Republicans and Democrats have expressed concerns towards rebuilding the United State's infrastructure and could salvage that component from the bill.
In addition, China's $410 billion Sovereign Wealth fund (CIC) now plans to invest in the infrastructure of developed countries, starting with the United Kingdom. The CIC is eye-balling toll-road, bridge and alternative energy improvements in the United States. Elsewhere, the rest of the world continues to expand its efforts across the infrastructure arena. The World Bank's Private Participation In Infrastructure Database reports more than 4,300 different projects currently underway in low-to middle-income nations across the globe.
For forward thinking investors, the recent downturn in construction related equities could signal an interesting buying opportunity for 2012. Here are some stocks to watch and consider for the new year.
Slowing Nuclear Ambitions
As Japan suffered the double disaster of earthquake and tsunami, the nuclear power industry took a huge hit this past March. The resulting meltdown at the Fukushima Daiichi nuclear power plant resulted in a variety of developed nations reevaluating their power portfolios. However, nuclear energy continues to gain acceptance across a variety of emerging nations. Both Fluor (NYSE:FLR) and Shaw Group (NYSE:SHAW) as the two leading contractors in the space, suffered in the face of the disaster. But, the two could be a great buy as the emerging world ramps up its plans. Fluor and Shaw trade for forward P/E's of about 13 and 9, respectively.
Natural Gas Grows
The abundance of natural gas drilling in the United States is certainly propelling infrastructure investment in the area forward. According to a study by ICF International, more than $8.2 billion per year of midstream natural gas investment will need to be spent by the United States and Canada until 2035. Construction company MasTec's (NYSE:MTZ) purchase of Fabcor gives it more exposure to pipeline construction services and customers like gas producers such as EnCana (NYSE:ECA). Similarly, investors can look at pipeline specialist Willbros Group (NYSE:WG) and Foster Wheeler (Nasdaq:FWLT), who recently began construction on the 35 billion-cubic-foot Ryckman Creek natural gas capacity storage facility in Wyoming.
Boosting the Grid
Many of our nation's best renewable energy resources are considered location constrained. These resources pertain to certain climatic, geologic or topographic features that are not near major concentrations of electricity consumers. In order to tap into those resources, vast improvements to our aging transmission network are needed. Analysts estimate that total transmission spending will be around $240 billion to $320 billion by 2030. As one of leading firms dedicated to the grid, Quanta Services (NYSE:PWR) recently won a major project for the construction of transmission infrastructure for Edison International (NYSE:EIX). Similarly, MYR Group (Nasdaq:MYRG) offers an interesting transmission play as well.
The Bottom Line
With 2011 bringing the withdrawal of economic stimulus for infrastructure, the heavy construction sector saw its fortunes fade. However as more dollars are spent globally on infrastructure, the sector could see outperformance once again. For long-term investors, there is still plenty to like in the sector.
Technically IBM had been advancing in a bull channel, but upside breaks have been followed by sharp corrections.
On Dec. 13, the Trade of the Day commented that revenues are expected to rise 3.5% in 2012 versus 7.5% this year, and “thus IBM may be somewhat overpriced at $192.”
I went on to say, “Owners of IBM should consider writing options on the stock, and those thinking of investing should wait for a pullback to under $180.”
Now at $181.47, and with an intraday low under $180, IBM is so close to our buy point that it should be bought at the current price. The trading target for the stock is $195, but it could rise to over $220 in 2012.