Wednesday, September 15, 2010

How to Invest in a Deflationary Environment,

Question: I've been reading a lot about deflation recently and am worried. Will any investments hold up well in a deflationary environment?

Answer: Although inflation grabbed all the headlines less than a year ago, it's downright tame right now. Instead, some market participants are concerned that we could confront a period of declining prices as the government's stimulus package winds down, particularly if unemployment stays high and the housing market stays in the doldrums. Some investors, such as DoubleLine's Jeffrey Gundlach, have argued in the past that deflation could be a near-term problem, followed by high inflation rates down the line.

Why It Hurts
At first blush, declining prices for stuff may not sound that bad, particularly for consumers who might be able to take advantage of lower prices for everything from groceries to LCD televisions. But a persistent need to slash prices can be bad for businesses and could ultimately lead to layoffs, reduced consumer spending, and declining prices for a broad swath of assets, from real estate to commodities. Those forces, in turn, could put pressure on corporate profits and stock prices.

Inflation is a force to be reckoned with, too. But it's deflation that really makes economists shudder. (more)

Military Study Warns of a Potentially Drastic Oil Crisis,

A study by a German military think tank has analyzed how "peak oil" might change the global economy. The internal draft document -- leaked on the Internet -- shows for the first time how carefully the German government has considered a potential energy crisis.

The term "peak oil" is used by energy experts to refer to a point in time when global oil reserves pass their zenith and production gradually begins to decline. This would result in a permanent supply crisis -- and fear of it can trigger turbulence in commodity markets and on stock exchanges.

The issue is so politically explosive that it's remarkable when an institution like the Bundeswehr, the German military, uses the term "peak oil" at all. But a military study currently circulating on the German blogosphere goes even further.

The study is a product of the Future Analysis department of the Bundeswehr Transformation Center, a think tank tasked with fixing a direction for the German military. The team of authors, led by Lieutenant Colonel Thomas Will, uses sometimes-dramatic language to depict the consequences of an irreversible depletion of raw materials. It warns of shifts in the global balance of power, of the formation of new relationships based on interdependency, of a decline in importance of the western industrial nations, of the "total collapse of the markets" and of serious political and economic crises. (more)

BNN: The Coming Famine

Headline looks at the global food crisis with Julian Cribb, author, "The Coming Famine: The Global Food Crisis and What We Can Do To Avoid It."

click here for video #1

click here for video #2

Gold Confiscation: Straws in the Wind,
In the emails that our readers at Casey Research send our way, questions and concerns about the possibility of gold confiscation rank high.

My somewhat standard response is that, yes, it’s possible, but that we should see straws in the wind well before it happened… allowing us to take measures to protect ourselves.

While I don’t want to make too big a deal about it, there have been clear signs of late that the U.S. government is taking an unhealthy interest in your gold.

My recent article “I Smell a VAT” touched on one such straw. The relevant point being that, thanks to a regulation slipped into the healthcare legislation, coin dealers – and all businesses, for that matter – will have to begin reporting any purchases of $600 or more from anyone, including clients selling back their gold.

While I think the overriding intent is to pave the road for the implementation of a value-added tax (VAT), there’s no question that the legislation simultaneously paints a target on the back of the free trade of precious metals. (more)

10 Reasons The "Death Of Equities" Is Real This Time

In conjunction with its "Man vs. Machine" special, CNBC released a survey today that showed widespread discontent among investors in the stock market.

Investors are dissatisfied with the exchanges, regulators, robot traders, and more.

Basically, as we've been writing about for a long time, equities are boring and dead. There's no excitement or enthusiasm for them.

And we think that might last for a while, unlike when in 1979 BusinessWeek's "Death Of Equities" cover augured the beginning of a gigantic bull market three years later. (more)

Precious Metals Market Commentary

METALS: December gold futures closed up $24.90 at $1,272.00 today. Prices closed near the session high today and soared to a fresh contract and all-time record high. A sharply lower U.S. dollar and some fresh safe- haven investment demand boosted gold higher today. A dour economic report coming out of Germany today spooked the markets in Europe, and that added to buying interest in gold. Now, look for price volatility in the gold market to heat up in the near term, with bigger daily price movements likely, both on the upside and on the downside. Gold bulls still have the strong overall near-term and longer-term technical advantage.

December silver futures closed up 30.9 cents at $20.46 an ounce today. Prices closed nearer the session high again today and scored another fresh 26-month high. The weaker U.S. dollar today, along with new highs in gold, prompted fresh speculative buying interest in the silver market. Silver bulls still have the solid near-term technical advantage. There are still no early technical clues to suggest a market top is close at hand.

December N.Y. copper closed down 120 points at 346.70 cents today. Prices closed near mid-range today and were pressured by some weak economic data coming out of Europe. The U.S. dollar index was sharply lower today, which did limit the downside in copper. The copper bulls still have the overall near-term technical advantage.

Why Is This Sector So Unloved?,

YEESH, WHAT THE HECK has happened to technology stocks? Investors lately have developed a distinct loathing for the sector, with large-cap tech singled out for special derision. The sector is experiencing a level of disdain that hasn't been seen for eons: Bernstein Research analyst Toni Sacconaghi pointed out in a fascinating research report last week that tech shares lately have dropped to their lowest valuation, relative to the S&P 500, in nearly 20 years.

Sacconaghi writes that tech stocks now trade at 1.0 times the S&P on a forward P/E basis, a valuation last seen in March 1991 and dramatically below the historical average since 1977 of 1.31 times. This comes while the cash on tech balance sheets is at or near record levels, both in absolute terms and relative to the stocks in the S&P.

And note that whatever it is that ails tech is widespread, with similarly depressed valuations afflicting hardware, software and services companies alike. Not least, keep in mind that the valuation compression has largely taken place over just the past few years–at the end of 2007, tech stocks traded at 1.32 time the S&P multiple on forward earnings, right in line with the sector's historical average. (more)

Jay Taylor: Turning Hard Times Into Good Times

click here for audio

4 Reasons to Be Long Oil - And Nothing Else

Oil recently dipped to 3 month lows on fears about global demand and currently hovers around $72 dollars a barrel (as of August 31st). Meanwhile, global economic and geopolitical concerns continue to lend themselves to a higher price per barrel in the coming year. The recent decline in the price of oil presents the investor an opportune speculative and defensive window, especially if oil continue to tracks demand destruction rather than inflationary pressures.

1. Big Oil provides high yields in a low yield deflationary environment.

The 1-yr UST pays .27% interest while the benchmark 10-yr UST recently dipped to an absurdly low 2.5% annual rate. Oil companies’ dividends far surpass these returns:

  • ExxonMobil (XOM)- 3.0%
  • ConocoPhillips (COP): 4.10%
  • Chevron (CVX): 3.90%
  • Total S.A. (TOT) 5.0%*
  • Statoil ASA (STO): 4.10%*
  • Royal Dutch Shell (RDS-B): 6.50%*
  • CNOOC (CEO): 2.90%*

*subject to foreign taxes

A $1,000 investment today in US Treasuries will profit $288 by 2020 while a similar investment in ConocoPhillips (assuming dividend is not reinvested) will guarantee at least yield a profit of $400. Although this ignores the security of the original capital investment, oil companies are currently “cheap”. (more)

John Williams Sees The Onset Of Hyperinflation In As Little As 6 To 9 Months As Fed "Tap Dances On A Land Mine"

John Williams, arguably one of the best trackers of real, unmanipulated government data via his Shadow Stats blog, has just released a note to clients in which he warns that hyperinflation may hit as soon as 6 to 9 months from today. With so many established economists and pundits seeing nothing but deflation as far as the eye can see, and the Fed doing all in its power to halt the deleveraging cycle, both in the open and shadow economies, what is Williams' argument? Read on. Incidentally, even if some fellow bloggers disagree with Mr. Williams' assesment, we believe it is in our readers' best interest to have them make up their own mind on this most critical economic development.


Systemic Turmoil is Unthinkable, Unacceptable but Unavoidable. Pardon the use of the Aerosmith lyrics in the opening headers, but the image of tap-dancing on a land mine pretty much describes what the Federal Reserve and the U.S. Government have been doing in order to prevent a systemic collapse in the last couple of years. Now, as business activity sinks anew, much expanded supportive measures will be needed to maintain short-term systemic stability. Such official actions, however, in combination with global perceptions of limited U.S. fiscal flexibility, likely will trigger massive flight from the U.S. dollar and force the Federal Reserve into heavy monetization of otherwise unwanted U.S. Treasury debt. When that land mine explodes — probably within the next six-to-nine months, the onset of a U.S. hyperinflation will be in place, with severe economic, social and political consequences that will follow. The Hyperinflation Special Report is referenced for broad background. The general outlook is not changed. (more)

The Case for Investing in Commodities

US News and World Report,

Diversification is one of the most important rules of investing. If you invest in a range of different asset classes, such as stocks and bonds, losses in one may be offset by gains in another. Investing in commodities--whether it's oil, gold, or pork bellies--is yet another way to achieve broader diversification.

"We believe they have a role in just about every client's portfolio--aggressive, conservative, or anything in between," says Jerry Miccolis, coauthor of Asset Allocation For Dummies and principal and chief investment officer of wealth management firm Brinton Eaton. "The reason is that they typically zig when the more traditional investments zag."

[See top-rated funds by category ranked by U.S. News Score.]

Many advisers recommend commodities funds to their clients, in part because it's easier than ever to invest in commodities. The emergence of investing options like exchange-traded funds has made what was once an exotic asset class more accessible. "Commodities are now more broadly recognized as an asset class that investors and advisers have access to, and everybody is trying to figure out how much they should allocate to them in their portfolio and in what form," says Tom Lydon, editor of

For many investment advisers, the case for commodities goes further than diversification. Commodities are commonly used as a hedge against inflation, which some experts say could become an issue over the long term. Rapidly growing emerging economies including China and India will increase demand for commodities as well. Some advisers recommend a portfolio allocation of 5 and 10 percent to commodities, depending on clients' investing time horizon and risk tolerance. It's important to be cautious, though, as commodities can be an extremely volatile asset class. (more)

Scott Koyich: Oil & Gas Upside Potential

The Energy Report: What's your macro overview on the energy sector and which companies do you like in that sector?

Scott Koyich: On a macro basis, we are in a very tough time in the world today. It's now more important than ever to protect capital and to focus your investment choices. In the energy sector, oil has corrected dramatically in the past weeks. That's due to both nervousness around storage numbers and global consumer and industrial demand. This has left a worldwide bearish feeling surrounding the commodity. It's my opinion the OPEC countries need to balance their budgets on an $85/barrel oil price and I think we will see it hover around there going forward.

Natural gas prices have been in the dog house for quite some time in North America due to lack of industrial demand and the perceived abundance of supply from the unconventional discoveries in the U.S. and growing supplies of liquefied natural gas (LNG) worldwide.

The cycles normalize, eventually, and will turn in a positive direction; therefore, if you pick companies with strong management, balance sheets, asset bases and discount-to-enterprise value, your portfolio should do well on the turnaround. (more)