Saturday, December 24, 2011

2012 Outlook: Gold Is Battered, Bruised, But Not Beaten

Like a prizefighter who has taken a few upper cut blows, gold might be a bit woozy, but the metal’s longer-term uptrend is hardly on the ropes.

As in many financial sectors, gold’s price direction has been guided by headlines, particularly out of Europe on the sovereign debt situation, and the volatility caused by swiftly changing news has made many markets a bit punch-drunk.

The December price break for gold came as several events aligned. First, the market was never able to retest its all-time nominal high in August of $1,923.70 an ounce. Second, gold was one of the few star performers this year and when equity and other markets soured, money managers needed to raise cash to meet margin calls and shore up positions elsewhere. Third, with investors spooked by the continued inability for eurozone leaders to convincingly shore up their union, these investors sought safety in the most liquid vehicle available – cash – again pulling profits from gold.

Gold might be down about 16% from the August highs, but it’s still up roughly 14% from the 2010 settlement of $1,421.40, basis the nearby futures, which still makes it one of the best performers this year.

The yellow metal may be in a consolidation mode for the time being, resting and building a base to rally again, just like that prizefighter whose corner man keeps him in shape to go the distance.

Market watchers said the structural strength for gold remains intact, with most Western nations’ global interest rate policies falling or near zero, which makes the opportunity cost of holding gold negligible. The sovereign debt crisis in Europe still makes people nervous about holding fiat currencies. With the amount of liquidity floating around from quantitative easing programs from central banks like the Federal Reserve, fears that when the global economy starts to show decent growth again it will be difficult to rein in that stimulus.

Mark Leibovit, editor the VRTrader newsletter, said he remains overall bullish, but concedes the washout gold experienced in early December has done damage to technical charts.

“We might hit bottom in a month or so. How far it might go depends on how the technicals unfold. Short-term it’s held the September lows of $1,531. But we have to see it perform in both time and price to confirm it. What might it take do so? We’d need to see the equity market improve, Europe improve, and maybe a QE3,” he said, referring to a possible third quantitative easing by the Federal Reserve.

Leibovit said it’s possible that gold prices could have further room to fall, especially if a scenario unfolds like what happened following the bankruptcy of Lehman Brothers in September 2008. Price were already in a downdraft prior to the Lehman news, but a month later gold fell as far as $681, basis a front-month continuation futures chart.
This could happen if gold prices take out the $1,531 level, he said. In 2008 there was a 34% correction for gold. Based on that calculation, prices could drop to $1,270, Leibovit said.

Gold rebounded after the trip to sub-$700, but he pointed out that it still took about six months to confirm the bottom.

“We could see gold’s bottoming take anywhere from two to 12 months. But the bull market is still intact; we’ve seen these moves before. I think longer term $3,000 or $4,000 gold is possible in an inflationary environment,” he said.

BNP Paribas, which updated its precious metals forecast for 2012 on Dec. 20 to reflect the recent selloff, downgraded its outlook for gold prices by $250 an ounce to $1,775. The bank says “with high uncertainty likely to remain a major feature of the markets, gold could be vulnerable to further episodes of price correction.” However, they do not believe the bull market is over and are “still positive towards the gold price in 2012 and 2013.”

Sterling Smith, commodity trading adviser and senior market analyst at Country Hedging, said gold is putting in a bottom now, but said it will likely trade “sideways” for a while. The fundamentals for gold have not changed, he said.

“The EU problems will lead to some QE there and here maybe more mortgage-backed securities buys (by the Federal Reserve). If that happens, then it will help gold rise. Gold is still an asset; central bank buying will push it higher. Look six to nine months down the line and we can see gold back at $2,000,” he said.

While gold might benefit from any safe-haven buys at these lower price levels, the worries about Europe moving into a recession could cause the metal to be trapped in a tug-of-war, said Bob Siegel, president Cabot Capital Group, a money management firm.

“I see it range bound because it’s struggling to compete with the huge global concern that is the EU and the dampening effect on commodities. If it gets to be a depression (in Europe) it could get out of hand. Gold in the end is the ultimate store of value, though it is not as strong as some think it should be,” he said.

Gold is plagued by competing influences. The EU woes supports gold, but investors who seek liquidity pressure the metal, he said.


In a word: sure. But much depends on the strength of the dollar, physical demand out of Asia and any new crises that may develop.

The forecast for gold to return to seeing a “two” as the front number in 2012 is shared by several investment banks. Morgan Stanley, TD Securities, Bank of America-Merrill Lynch and SEB Merchant Banking are among some of the banks who see gold either averaging above $2,000 or at least trading to that level at some time during next year.

Based on gold prices around $1,600, a move to $2,000 would be about a 23% rise.
Leibovit said he sees inflation coming down the road, the question is, “when does it kick in?”

Gold could continue to weaken into January, but he said gold investors need to consider a longer term view than six months or even a year. They should be taking at least a three to five year perspective.

Tom Winmill, portfolio manager of the Midas Fund, said there’s a good chance for gold to see another strong year.

“It’s very possible that it can be very strong year after year after year. We think the key component to gold is that it’s denominated in dollars. How high it can go will be dependent on how much money is created. With the two QEs, $2.2 trillion was created. There will be more money created down the road…. We (the U.S.) will be adding more money because we are borrowing. The borrowing represents the future creation of new money,” he said.

For 2012, Winmill is forecasting $1,950 by the end of the year, with a high of $2,200 and a low of $1,650.

The low interest rate environment is important to the gold outlook, Winmill said. “You can’t view rates in a vacuum – at Midas we view inflation rate next to the real yield…. The two-year bonds yield is 25 basis points. The 12 month CPI is (3.2%), so the negative real rate is (3%). That is destroying savings. Our view is as people become more aware of the destruction of wealth they will there will be a stampede into hard assets – gold, diamonds, real estate,” he said.

4 Cheap Agriculture Stocks for 2012: POT, CF, DE, AGCO

After several years of strong earnings growth and skyrocketing share prices, suddenly the agriculture stocks don't look so hot.

The sell off began earlier in 2011 and hasn't stopped. As a result, the fertilizers and the farm equipment manufacturers are now dirt cheap as investors have fled the sector.

What's going on? Didn't we just hear that the emerging market middle class is spending more on food and is adopting the western diet which means higher food prices from here until the end of time?

Supply and Demand Story Still Intact

Nothing has changed in the supply/demand story. Farmers are still running full throttle even though 2011 was a record year for farming income in the United States. The outlook is still very positive for further growth in 2012.

In the farming equipment category, demand is expected to remain strong, especially for high horsepower equipment. Farm-machinery sales are projected to rise between 5% and 10% in 2012.

With the agriculture stocks being beaten down in the last few months, that means this could be an opportunity to buy into the agriculture sector at very attractive levels.

The following four companies have solid earnings with some growth expected in 2012. But they are also extremely cheap, with forward P/Es well under the S&P 500 average of 12.7.

4 Cheap Agriculture Stocks for 2012

1. Potash Corporation (POT)

Potash is one of the largest fertilizer companies in the world. This Zacks #3 Rank (hold) produces about 20% of the world's potash as well as phosphates and nitrogen.

Forward P/E: 10.9
2011 expected EPS growth: 80%
2012 expected EPS growth: 19%

2. CF Industries Holdings (CF)

CF Industries is the second largest nitrogen fertilizer maker in the world. This Zacks #2 Rank (buy) is also the third largest publicly traded phosphate producer. With a low single digit P/E, this is the cheapest the stock has been, on a valuation basis, since the Great Recession.

Forward P/E: 6.1
2011 expected EPS growth: 162%
2012 expected EPS growth: 2%

3. Deere & Company (DE)

Deere manufactures farm and construction equipment in 30 countries worldwide. This Zacks #2 Rank (buy) has been in business since 1837. It just posted a record fiscal 2011. It's bullish on fiscal 2012 as well.

Forward P/E: 9.9
Fiscal 2012 expected EPS growth: 17.2%
Fiscal 2013 expected EPS growth: 6.7%


AGCO manufactures agriculture equipment, including tractors, combines, sprayers and forage equipment through distributors in 140 counties. The CEO recently commented that demand is still strong in the emerging markets.

Forward P/E: 9.5
Fiscal 2011 expected EPS growth: 88.4%
Fiscal 2013 expected EPS growth: 13.4%

Feeding the World

Diets and food consumption patterns are changing as the global middle class grows. Yet the agriculture stocks have sold off like no one is going to be eating tomorrow. With valuations as low as they are, the agriculture stocks are a good value buy heading into 2012.

William O’Neil Offers Six Market Signals to Look For Before Investing in 2012

It has sort of been an “IBD” kind of day around here … in this post the founder of Investor’s Business Daily (and “godfather” of CANSLIM) William O’Neil takes to Forbes to discuss the 6 Market Signals he wants to see before going “all in bull” in 2012. I am not as focused on ‘the big bang’ market signal as the CANSLIM devotees – I tend to take my signals from the action of the individual stocks…. when a good lot of them begin acting healthy (outside of defensive sectors) my radar starts perking up. Devout CANSLIMers on the other hand look for a Follow Through Day (FTD) as explained:

.a day where a major index is up at least 1.7% in price with higher volume than the previous day. A great example is the NASDAQ FTD on October 18, 1990. Typically this occurs 4-7 days after a new rally begins and significantly increases the chances of a sustainable uptrend. No bull market has ever started without one.


Here are Mr. O’Neil’s thoughts:

Don’t get me wrong, I’d love to have a good market to operate in. But before investing aggressively on the long side in 2012, investors should be looking for the environment to prove itself in the following ways:

  • A FTD, as described above, accompanied by leading stocks breaking out from sound consolidation areas (recognizable chart patterns).
  • Because the market environment has been so poor, I’d like to see a second FTD. Given the lack of conviction seen in individual stock breakouts and weak rally attempts lately, the next market rally needs to prove itself, in a big way.
  • I’d like to see at least one real catalyst. None of the major economic or political issues weighing on the market have been resolved.
  • I’d also like to see more new issues in the IPO market. (splashy IPOs such as Zynga and LinkedIn aren’t enough)
  • New leadership should be emerging in traditional growth industry groups (such as, financial, technology, retail).
  • Fewer short setups on leading growth stocks and more constructive long chart patterns.

Keep in mind these are not predictions, but rather expectations that may or may not be met. Until they are, keep your powder dry and your watch list fresh. Our day will come.

Facebook's Stock Has Gone Flat On The Private Markets

Shares of Facebook have gone totally flat in the private market of SharesPost.

SharesPost said today it completed an auction of 150,000 shares at $32.00 per share, giving it an implied valuation of $80 billion. It's been sitting at that valuation for a few months now.

Maybe once Facebook opens up its books, investors will see great growth, and the valuation will rise.

Volatility Index: Has Fear Subsided or Just Seasonality

Levels of the CBOE Volatility Index (VIX) have been steadily creeping lower. Fear in our minds has certainly not subsided, despite the “Bazooka” introduced by Europe and the not so steady rise in equity prices. We haven’t seen these levels of VIX (i.e. Sub 21) since July of 2011. As a matter of fact, the recent pattern in the VIX is very similar to that of what developed between May of 2010 until April of 2011. During this time period the market moved higher by approximately 25-30% after shaking out all the extreme volatility.

One could make the argument that with the unemployment levels improving and the Fed’s continued Zero Interest Rate Policy (ZIRP) that these levels are warranted. However, the spreads on the VIX Futures contracts paint a very different story. Most seem to be pricing in the fact that volatility will increase after the first of the year. As it stands, there is currently an almost 20% premium between the VIX Index and the front month futures contract that expires January 2012. The VIX index is currently trading at approximately $21 and the front month future is at $25.20. See table below for other futures expirations.

Water Stocks Worth Watching In 2012 : CGW, ERII, FIW, ITT, MSEX, PHO, PIO, TTEK, WTS, YORW

Despite the fact that water consumption has doubled the rate of population growth, investors still pay zero attention to the essential commodity. Over the past year, water-related equities have fallen right along with the rest of the market. Sector measures like the PowerShares Water Resources (ARCA:PHO) sit closer to their 52-week lows rather than their highs.

However, the long-term picture for water-related firms is still quite rosy. As incomes and populations in a variety of emerging nations continue to rise, the demand for water is also increasing. These incomes are moving water beyond the basic requirements needed for drinking, cooking and hygiene. Analysts estimate that over the next 20 years, India is expected to see its water demand more than double and China's will rise by 30%. The World Resources Institute projects that overall water demand will increase by more than 50% over the next 15 years in emerging market nations and by more than 15% in developed markets.

Given the long-term bullishness towards the water theme, investors may want to consider adding that type of stock to a 2012 portfolio. Here are some stocks and funds to watch for in the coming year.

Desalination Growth
Abundant natural gas and renewable energy has many nations now turning to desalination as a way to solve their water problems. Analysts at Pike Research estimate that cumulative investment in new plants will reach $87.8 billion worldwide from 2010 to 2016. This bodes well for engineering and construction firm, Tetra Tech (Nasdaq:TTEK). The company has been designing desalination facilities in Florida since the 1990s and developed California's first desalination plant. The firm continues to expand globally as well. In addition, Energy Recovery (Nasdaq:ERII) designs and manufactures products that allow plants to capture lost power, often with up to 98% efficiency. These two stocks offer an interesting pair to play the growth in worldwide desalination.

Big Dividends in Water Utilities
Investors who are looking for income can find plenty of opportunities in the water sector. Middlesex Water (Nasdaq:MSEX) currently yields about 4% and has increased its dividend in each of the last 39 years. Similarly, The York Water Company (Nasdaq:YORW) just paid its 564th quarterly dividend and yields 3.2%. Both offer investors a wide range of infrastructure assets as well as water-reservoir exposure. These firms should continue to see outperformance as more portfolio focus is put on equity income.

The ETF Plays
Finally, for investors wanting to take advantage of the entire spectrum, there are plenty of exchange-traded funds (ETFs) that invest in the sector. The First Trust ISE Water Index Fund (ARCA:FIW) tracks the top 36 water stocks and has been the best performer in the category this year. The fund features a variety of water-equities including ITT (NYSE:ITT) and Watts Water (NYSE:WTS). Investors looking for more of a global focus can refer to the Guggenheim S&P Global Water Index (ARCA:CGW) and PowerShares Global Water (ARCA:PIO).

The Bottom Line
Despite the pressures facing our water systems, investors continue to ignore the precious commodity. Going into 2012, stocks within the sector offer a unique investment that should pay off in spades. Adding some of the previous funds or individual equities makes an ideal play in the New Year.

Mother Jones USA - January/February 2012

Mother Jones USA - January/February 2012
English | 72 pages | HQ PDF | 60,8 Mb

Mother Jones is an independent, nonprofit magazine dedicated to bringing you smart, fearless journalism. Winner of the 2008 National Magazine Award for General Excellence, MoJo is committed to gutsy, no-holds-barred investigative reporting that asks tough questions and gives you real answers. Mother Jones is uncensored, irreverent, not beholden to special interests -- and obligated only to you.

read it here

The 2012 Outlook For The U.S. Dollar And The Euro

Much of the recent strength in the U.S. dollar can be linked to a flight to quality move, in light of growing evidence that growth in the global economy is slowing. However, compared to the fundamentals of Europe and Asia, the fundamentals surrounding the U.S. are more favorable. For example, recent U.S. housing data has been impressive. November housing starts increased 9.3% to 685,000, when 635,000 were anticipated and building permits were up 5.7% to 681,000, when 635,000 were estimated. The starts number was the highest since April 2010 and the permits figure was the best since March 2010.

U.S. Housing Starts and Building Permits
Prepared by Trang Nguyen

The technical aspects of the U.S. dollar have improved since a major bottom for the year was made in late April. Since that low point, the value of the greenback has steadily marched upward. Another reason to be bullish on the U.S. dollar is the upside breakout with follow through from the downtrend line that came in at the 74.55 level. Futures are now closing in on a double top at the 81.52-81.63 area that was formed in late 2010 to the early 2011 period.

Chart provided by APEX

While the U.S. economy has recently shown relatively modest growth, there are fears that the European economy could fare worse with the distinct possibility of recession. Recently, European Central Bank President Mario Draghi said, "What we are observing now is slow growth heading for a mild recession." In addition, Jean-Claude Juncker, who is the head of the euro area finance ministers, said the euro region is "on the brink of recession." Many analysts believe the recently agreed to euro area financial rescue measures might be coming too late to prevent a second recession in the euro zone in four years.

Highlighting the problems in the euro area is the increase in yields demanded by investors of the sovereign debt of Italy, Spain and France. Recently the yield on Spanish 10-year debt hit a euro-era record high of 6.78%. Some analysts believe Spain will soon be having the same financial problems that Italy is experiencing. The yield on Italian 10-year debt remains just under the "point of no return" 7% area. A yield above 7% for a sustained period is thought to eventually precipitate the need for a bailout from the European Union. Recently, Fitch Ratings lowered the credit outlook of France and put Italy and Spain on review for a possible downgrade.

There was news that the European Central Bank is loaning 523 euro area financial institutions, a record amount of funds, totaling 489 billion euros, for three years. Analysts were anticipating the amount of the loans would total only 293 billion euros. The loaning process has already started. It is a our belief that the larger amount of funding asked for by euro area banks is bearish for the euro because it is an indication of financial distress.

Almost a mirror image of the weekly U.S. dollar index chart is the weekly chart of the euro. Late last week the currency of the euro zone dropped below the 1.30 level for the first time since the beginning of the year.

Chart provided by APEX


Interest rate differential expectations are more bullish for the U.S. dollar compared to the euro. While the Federal Reserve has virtually no room to lower interest rates below the current level of between zero to 25 basis points, the European Central Bank has plenty of room to lower interest rates further. The ongoing financial problems in the euro area are likely to remain well into next year and beyond, which will be the fuel for a flight to quality flow of funds to the greenback.

Although there is no shortage of economic and political problems in the U.S. and the euro area, it appears that the problems in the euro area are much more severe. In the longer term, the euro is likely to continue to be pressured by increasing prospects of a recession in Europe, sovereign debt downgrades, along with bearish interest rate differentials.

The main trend for the U.S. dollar is higher and the main trend for the euro is lower.

Chart of the Day - Sherwin-Williams (SHW)

The "Chart of the Day" is Sherwin-Williams (SHW), which showed up on Thursday's Barchart "All Time High" list. Sherwin-Williams on Thursday posted a new all-time high of $88.87 and closed up 1.22%. TrendSpotter was long on Sherwin-Williams from October through early-December, turned neutral in mid-December, and then issued a new Buy signal this past Tuesday at $86.85. In recent news on the stock, Sherwin-Williams on Oct 25 reported Q3 EPS of $1.71, above the consensus of $1.69. The company on Oct 24 announced a settlement with the IRS regarding the company's employee stock ownership plan, which resulted in a charge of $75 million to earnings. Sherwin-Williams, with a market cap of $9 billion, sells paint, coatings and related products. Well known brands include Sherwin- Williams, Dutch Boy, Pratt & Lambert, Martin-Senour, Thompson's, Minwax and Krylon.


The Three R’s of Investing

The Three R’s of Investing

by Mark Seidner, Managing Director, PIMCO

  • ​The inability to achieve sustainable levels of economic growth raises the risk of recession in many developed world economies.
  • Under financial repression, market interest rates are kept very low for a very long time period with the hope of stimulating investment, but repression also starves savers to the benefit of borrowers.
  • Increasing risk with an uncertain distribution of possible outcomes should lead to caution regarding traditional models and asset allocation practices.

Volatile and manic movements are becoming commonplace in the financial markets. The pendulum that perpetually swings between optimism and pessimism is changing direction more frequently, driven by extrapolation of the latest economic data point, political rumblings and rumors.

We are aware of the traditional three R’s that constitute the foundation of elementary education: Reading, wRiting and aRithmetic. Investors, however, should increasingly be wary of the three R’s that impact investment outcomes today and in the period ahead: Recession, Repression and Risk.

In the aftermath of the global financial crisis, PIMCO identified the forces of deleveraging, reregulation and deglobalization that act as restraints on potential economic growth for developed world economies. These are increasingly compounded by strained public sector balance sheets and political forces that tend to polarize rather than unite. The result in many countries is a lack of automatic stabilizers that are so necessary in an increasingly volatile economic environment. Normally, political forces respond to economic and financial market outcomes. In the current environment, political actions (or inactions) drive economic and financial market results. Look no further than the debt ceiling debacle and subsequent complete failure of the super committee in the United States and the inability of European leaders to make necessary progress in resolving the sovereign debt crisis.

Stubbornly high unemployment and underemployment rates, stagnant income levels and growing unrest are the consequence.

In capitalist, or market-based economies, the inability to achieve sustainable levels of economic growth that fuel virtuous cycles of spending, investment and employment growth raises the risk that vicious cycles ensue, resulting in an ever-present risk of recession.

As a result, one hears concerns for an upcoming lost decade in many developed world economies growing louder and louder.

Financial repression is a simple concept with profound implications. Under financial repression, market interest rates are kept very low for a very long time period, starving savers to the benefit of borrowers. The hope goes beyond creditors subsidizing debtors. It is also to stimulate risk-taking, investment activity and economic growth.

The best means of managing mounting public sector debt levels is to generate real economic growth. If real growth is elusive, nominal growth rates fueled by inflation above average borrowing costs will reduce debt-to-GDP ratios. Two simultaneous conditions are necessary: Growth, either real or nominal, and low government borrowing costs.

In August 2011, the Standard & Poor’s rating agency decided to downgrade the rating of United States Treasury debt from the top tier AAA to AA+. What seemed like critically important news was quickly overshadowed the following week when the Federal Reserve announced a shift in communication strategy. In every statement since March 2009, the Fed had stated that “economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Then on August 9, 2011, the language changed to “economic conditions…are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

The message to savers and investors was clear. For savers, there will be no income in bank accounts or money market funds for at least two years and likely longer. For investors, there is no means of achieving a positive real (or nominal for that fact) real rate of return on the presumed risk-free interest rate.

The market impact was immediate. The two-year U.S. Treasury note, which offered an average yield of 0.75% from March 2009 through July 2011, fell to about 0.25%.

The new commitment language is repressive to savers and low duration investors. Operation Twist, the Fed’s subsequent plan to adjust its balance sheet by selling Treasury notes with maturities less than three years and buying T-notes and T-bonds longer than six years, is repressive to all Treasury investors.

The 30-year U.S. Treasury currently yields little more than 3%. That is a fixed, nominal return with no growth potential and is eroded by any prospect of inflation. The reward does not seem compelling, and with price volatility over 20%, neither does the risk.

Risk and Implications
The continuous concern about recession and the increasing role of policymakers and other non-commercial participants in financial markets increases risks dramatically.

PIMCO frames this increasing element of risk in financial market and economic outcomes in the probabilistic context of a normal distribution, one that now has a flatter distribution of potential outcomes with fatter tails.

At PIMCO, we constantly ask questions in order to anticipate the full range of potential developments. Key questions include: What if the concept of a change in the distribution of expected outcomes does not go far enough? What are the implications of an environment characterized by a more pronounced set of outcomes exhibiting markedly distinct and contrasting forms? How should investors respond in an environment where what is considered an average outcome or expectation becomes the least probable event and the rare becomes commonplace?

Uncertainty and volatility can be paralyzing, and understandably so. But rather than become frozen with fear, now is the time to recognize regime change and consider making structural modifications.

The heightened risk of recession increases the importance of a strong balance sheet as volatile economic outcomes will likely have a magnified impact on the success and failure of countries, companies and individuals. In the near term, investment success will largely be defined as avoiding the risk of permanent principal loss by stress testing across meaningful possible tail events. Differentiated outcomes and failure are a near certainty. Capitalizing on distressed situations – most likely first in Europe and then elsewhere – will differentiate investment results over a longer time horizon.

Repression requires a keen focus on income, particularly in a world where aging demographics increase the need for known cash flow when traditional sources such as government bonds do not suffice.

Increasing risk with an uncertain distribution of possible outcomes should lead to caution regarding traditional models and asset allocation practices. A significant element in the investment management industry is built on the notion of a normal distribution. If the shape or characteristics of the distribution are questioned, then many related concepts – such as mean reversion and rebalancing – must also be questioned. Price change is not nearly sufficient as a signal for portfolio action. Price analysis accompanied by fundamental outlook is necessary.

Portfolios constructed with a carefully selected and diverse set of return drivers, a focus on income and a forward-looking approach to risk management may be able to avoid the pitfalls of the three R’s and increase the probability of navigating an increasingly uncertain economic and financial market environment.