Tuesday, July 26, 2011

Is Silver Heading for $100? (SLV, SIVR, DBS, SIL )

Since posting a high over $49.50 in late April, silver has been treading water at around $35/ounce. But there are several analysts who believe that the devil’s metal is looking good for another breakout that could push the price to $100/ounce, or perhaps even higher.

We’ve already looked at the possibility that a silver price above $40/ounce may be a death trap. But the possibility of $100/ounce silver is worth a look, too. Silver ETFs, including iShares Silver Trust (NYSE: SLV), ETFS Physical Silver Shares (NYSE: SIVR), PowerShares DB Silver (NYSE: DBS) and Global X Silver Miners ETF (NYSE: SIL), will react regardless of which way prices move.

Technical analysts at Citigroup Global Markets say that silver prices are following a trend begun in late 2001 that saw prices rise nearly six times before a March 2008 correction that pulled the price down by 60%. Since then, prices have recovered and once again tested the all-time high set in 1980. Citigroup analysts told Bloomberg, “If the final rally in the last bull market repeated then we can expect $100 over the long term.”

Another view on silver prices is related to the massive number of short contracts that will have to be covered if the price rises above $40/ounce. Demand for silver remains high, especially in China, where the trade in silver is not subject to Comex margin hikes. A small boost in price could quickly develop into an explosion of demand, putting a short squeeze into play and driving silver prices even higher.

A third view is that a fundamental supply shortfall will occur as stockpiles dwindle. Unlike gold, silver is consumed when used in some industrial applications, and industrial demand for silver is rising.

Finally, until permanent steps are taken to resolve Europe’s sovereign debt crisis and the US debt ceiling issue, demand for silver as a safe haven will also factor in the gray metal’s price.

The iShares Silver Trust (NYSE: SLV) moved above $39/share last week, before pulling back to close at $38.31 yesterday. The 52-week range is $17.06-$48.35.

The ETFS Physical Silver Shares (NYSE: SIVR) also peaked at slightly above $40 last week and closed yesterday at $39.07. The 52-week range is


The PowerShares DB Silver (NYSE: DBS) peaked last week at $70.94, and closed yesterday at $68.81. The 52-week range is $30.91-$86.98.

The Global X Silver Miners ETF (NYSE: SIL) posted a recent high of $27.75 last week and closed yesterday at $27.41. The 52-week range is $14.18-$31.34.

While the share prices of these silver ETFs are still wobbly, they are wobbling at a slightly higher level. Spot silver prices have posted an intra-day high of $39.97 this morning, about half an hour before US equity markets open. If silver closes at around $40/ounce today, next week should be very interesting.

Paul Ausick

Zillow Forecast: Case-Shiller Composite 20 to Drop 3.5% YoY, Rise 0.9% MoM in May

The May 10- and 20-City Composite Case-Shiller Home Price Indexes are set to be released tomorrow, July 26. Zillow has forecasted both of the non-seasonally adjusted indexes and derived the year-over-year and month-over-month values. To forecast the indices we used the current Zillow Home Value Index value for May, which we released almost three weeks ago, the April Case-Shiller home indices numbers and the national percentage for foreclosure re-sales in May.

We forecast that the Case-Shiller 20-City Composite Home Price Index will decline 3.5 percent on a year-over-year basis, but rise 0.9 percent on a month-over-month basis. For the Case-Shiller 10-City Composite Home Price Index, we forecast that it will show a decline of 2.9 percent on a year-over-year basis, while displaying an increase of 0.9 percent on a month-over-month basis.

These forecasts are for the non-seasonally adjusted series only, however, it is important to keep in mind that the Case-Shiller indices include foreclosure re-sales. We have previously addressed the shortcomings of these indices due to the inclusion of foreclosure re-sales. Our most recent analysis on this topic can be found here.

How I'd Trade These 3 Widely Held ETFs: XLF, XLE, EEM

Fighting the trend or entering the market late in a bull run are sure ways to earn mediocre returns, or worse. That's why prudent investors should use charting techniques to swing the odds in their favor.

To show you what that entails, I've provided a technical breakdown for three popular ETFs and how to trade them. But first, let me tell you what tactical asset allocation is and why it's vital for reducing risk and outperforming the market...

A good friend of mine recently asked me how they should use asset allocation in diversifying their portfolio -- a harder question than it first appeared. Primarily, many chief investment officers look at their clients risk profile and time horizon to build a custom asset-allocation model. This particular method was wildly accepted as the standard way to approach asset allocation. However, the method alone has certain limitations when constructing a portfolio for a particular client in today's turbulent marketplace.

The new standard in building customized models is tactical asset allocation. This method considers the asset class and specific sectors within those asset classes. The belief being: allocating capital to sectors will help reduce risk and generate outperformance.

Asset allocation and tactically allocating to various sectors is all well and good, but it begs the question -- how does it protect investors and help them outperform the broader market? The answer lies in the fact that investors cannot position themselves effectively unless they are aware of what the markets are projecting.

Charting techniques along with various technical studies allow an investor to prudently define their allocation profile, risk parameters and profit objectives prior to making investment decisions. Understand that human behavior tends to be repetitious and predictable. Pricing patterns can be analyzed and efficiently forecasted, because investors consistently act in similar fashion over time.

To answer my friend's question, I performed a "technical" deep dive into three ETFs...

Financial Sector SPDR (NYSE: XLF) - Weekly
Intermediate Trend (12 Weeks): Negative

Since posting a high of $17.20, during the week of February 14, 2011, the Financial SPDR has been in a downtrend, underperforming against most other sectors. In addition, the 100-Day Moving Average Line (red) has been negatively sloped for the past seven weeks, implying the "crowd" is generally short this sector.

NOTE: The M. A. line has been guiding the near term overhead resistance. Additionally, the longer term outlook depicts a market which is trading just below the midpoint of a broad sideways channel, dating back to June 2009. Major resistance and support of the channel is denoted by the blue horizontal lines, and are represented by $17.50 & $13.20 respectively (see chart above). At this juncture, if you're looking to bargain hunt, use tight stops with no more than $0.50 per share at risk.

Energy Sector SPDR (NYSE: XLE) - Weekly
Intermediate Trend (12 Weeks): Positive

XLE fell 13% to $70.45 four weeks ago from a high near $81.00 during the last week of March. The dip lower was short lived, and the market is now threatening resistance near the $78.00 region. At this point, I would remain long Energy Sector SPDR, but would go net short if a Weekly Settlement (Friday close) below $74.70 is posted.

iShares Emerging Market Index (NYSE: EEM) - Weekly
Intermediate Trend (12 Weeks): Neutral

EEM has been trading within a $6.20 range for the past nine months, dating back to October 2010. The sideways channel, which was formed as a result of price consolidation, is defined by support at $44.25 and resistance at $50.45.

The current price action is somewhat neutral, trading near the mid-point of the channel. The 200-Day Moving Average Line (green) is neutral as well. To avoid a price retrace and test of key support at $44.25, a Weekly Settlement (Friday close) above 47.25 at minimum is required.

Action to take:
Financial Sector SPDR (NYSE: XLF) - If you're looking to bargain hunt, enter at current levels and use tight stops since the trend is still negative. Limit risk to $0.50 per share.

Energy Sector SPDR (NYSE: XLE) - I remain bullish on XLE, but would go net short if a Weekly Settlement below $74.70 is posted.

iShares Emerging Market Index (NYSE: EEM) - At this juncture, a Weekly Settlement above 47.25 is required, at minimum, to avoid a price retrace, and continue the current upside.

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Gold mining shares are better bets than gold - Franklin Templeton

Investors who are bullish on gold should consider buying shares of gold miners to gain the additional returns from greater efficiency in extracting the metal as well as the discovery of new mines, a Franklin Templeton fund manager said on Monday.

Fears of a possible U.S. debt default and uncertainty over the euro zone's debt crisis have led investors to pile into safe haven asset, driving spot gold price to a record high above $1,622 an ounce on Monday.

Steve Land, portfolio manager of the U.S. fund manager's Franklin Gold and Precious Metals Fund, think buyers of physical gold or exchange-traded funds linked to the yellow metal can get even better returns by investing in gold miners.

"Some of the upside with equities that you don't get with commodities is the potential for exploration success. We think there's a lot of value to be created on that side of the business in the current environment," Land told reporters.

For instance, high gold prices mean miners are seeing margins of about 60 percent, allowing them to generate significant free cash to explore for new deposits, expand their operations and pay higher dividends.

Gold mining firms that Land is bullish on include Canada's Nevsun Resources and Osisko Mining Corp , which he described as "earlier stage companies" with "land blocs that they haven't thoroughly explored".

"It's the idea that you can grow your business faster than what's happening in the gold industry," he said.

Land's fund, which started in April last year, has gained 20.2 percent as at end-May, beating the FTSE Gold Mines Index's 12.8 percent rise over the same period.

His returns have, however, lagged spot gold prices that have surged about 30 percent over the same period.

As of the end of June, 4.6 percent of the Franklin gold and precious metals fund was invested in Nevsun Resources and about 4.4 percent in Osisko Mining.

Its largest investment is in Australia's biggest gold producer Newcrest Mining .

The Franklin fund also holds stakes in Randgold Resources and Goldcorp Inc , all of which enjoy above-average industry growth, Land said.

McDonald’s Shares — 3 Pros, 3 Cons: MCD

Despite its massive size, McDonald’s (NYSE:MCD) continues to cook up great results. In the latest quarter, announced last Friday, revenue increased by 16% to $6.9 billion and the company’s profit came to $1.4 billion.

Investors have definitely been impressed: Last year, shares of McDonald’s gained 26.6%. And this year, the return is 11.4%.

However, the valuation isn’t cheap, coming to about 19 times earnings. So should investors be cautious? Or will McDonald’s find ways to keep up its momentum?

Let’s take a look at the pros and cons:


Global play. About 60% of McDonald’s revenue comes from outside the US. What’s more, the footprint ranges across Europe, Asia and Africa. As should be no surprise, however, McDonald’s is getting lots of traction in China.

The franchise system also is critical to the company’s success. It essentially allows McDonald’s to scale its operations without using large amounts of capital.

Innovation. McDonald’s has a long history testing new concepts, like the drive-through window and the McMuffin. This creativity has been a key competitive advantage. In fact, McDonald’s has been able to attack some large market opportunities, such as going after Starbucks (Nasdaq:SBUX). McDonald’s also has been smart to offer healthier items, such as smoothies and salads.

Value. With a discount strategy, McDonald’s is benefiting from the slow economy. Even if there is more growth in the back half of the year, it is a likely that consumers will remain focused on things like the dollar menu.


Competition. McDonald’s must deal with extremely tough rivals, like Burger King and Subway. Interestingly enough, Yum Brands (NYSE:YUM) is putting lots of pressure on the company in China.

Saturation. In markets like the U.S., it is getting tougher to grow (in the latest quarter, sales increased by 4%). The fact is that McDonald’s already has a large number of locations. It has been able to find clever ways to find opportunities, such as with its new menu items, but it will get harder and harder to do this.

Inflation. While McDonald’s has the scale to negotiate better terms for its supplies, the company is feeling the pressure from input costs. To this end, it has increased prices two times this year. There are limits to how far McDonald’s can push this.


Even with slow growth in the U.S. and tough competition, McDonald’s is still positioned nicely to provide steady growth for the long run. In addition, with its large cash flows, the company will have the resources to continue to innovate.

McDonald’s also has a decent dividend, which comes to 2.8%. In light of the benefits, the pros outweigh the cons on the stock.

Crude Is Going Back to $150, Own Big Oil Stocks: Fund Manager

It was a hot July in 1969, when Blood, Sweat & Tears immortalized the phrase "what goes up, must come down" when their hit song "Spinning Wheel" got all the way to #2 on the charts.

Today, more than 40 years later, it is still hot and July but that famous phrase looks set for a slight revision, at least as it applies to the price of oil and the outlook of fund manager Tim Parker. If there were a new version, it might go something like "what goes up, could come down, but not for long."

"Despite the high (crude) prices we saw earlier in the year" the T. Rowe Price New Era Fund (PRNEX) manager says, "developing markets like China, India etc really didn't show any break in demand." This is why he is "constructive" on oil for the medium-term, can't rule out a decline in the short-term, but worried about the longer term when he thinks prices will reach an "untenable" level of $150 a barrel again, perhaps not until 2014.

"There's always risk to the demand side. If there's another global financial crisis, demand will fall sharply," Parker says while acknowledging about 55% of his fund is invested in Energy sector stocks (XLE). Ultimately, he says when oil prices reach those record-high 2008 levels, "you price out demand" but that's a problem for a later day.

"This is a multiple year trade ahead for oil I don't think we're talking a year or two. More like 2, 3, or 4 years," says Parker.

In the meantime, he prefers the Oil Service (^OIH) plays at this phase of the cycle and fittingly Schlumberger (SLB) is his single biggest holding, accounting for 5% of his portfolio.

He says offshore and international spending growth will benefit the world's largest oil services company and feels that a better strategy than speculating purely on the direction of crude.

Parker says "oil prices can go higher but not double or triple like a few years ago, so it is better to rely on the cash flow of companies rather than the price of oil to drive earnings higher."

FMC Technologies (FTI) is another top services holding he likes.

He also likes the long-term prospects for Natural Gas, especially companies that deal with LNG due to its exposure to the kitchens of Asia. Here a name like BG Group (BG.L) makes the cut. Parker calls the formerly named British Gas "the world's largest freelance LNG player" that also has fast growing oil and gas exploration and production portfolio. "So you got that strong cash flow from the LNG business which gives it the flexability to spend. It's just a really well manged well positioned company," he says.

This on a day when analysts are saying BP (BP) would be worth much more if broken up and sold piece by piece; a valid but unlikely scenario according to Parker.

"I don't think it's likely. BP has too proud a culture. If they were to do it, they would have done it at the heights of Macondo (Gulf of Mexico spill)". He also says the idea of raising tons of cash then having "plaintiffs come after me" makes a break-up unappealing and unlikely too.

He says he doesn't currently own BP but probably will at some point in the future. He does, however own major oil names like Royal Dutch (RDS-A), Chevron (CVX), and Exxon Mobil (XOM).

"I own them partially for that stability, that ballast there is a lot of volatility in natural resources and I like those good dividends and strong balance sheets to mute some of that volatility. It just takes a little bit of that churn out of my stomach," says Parker.

Greece default ‘virtually 100 percent’

Moody’s Investors Service again downgraded Greece’s credit standing Monday, setting the stage for a likely declaration that the country is in default as a newly approved rescue planmoves forward.

In the first review by a ratings agency of the plan approved by European leaders last week, Moody’s cast doubt on the long-term impact on the conditions under which heavily indebted euro zone countries will be able to borrow money.

The ratings service said the plan does improve Greece’s financial prospects for the next few years and probably will stop the problems in that country from undermining confidence in weaker nations such as Ireland and Portugal — diminishing the risk that Europe’s financial troubles will spiral into a broader crisis.

But the fact that Greece is likely to default on one or more of its outstanding bonds sets a “negative precedent” that will diminish faith in other nations. Now that the 17-nation euro zone has shown it is open to a default, Moody’s said, it is more likely that other nations might try to follow suit.

European officials have tried to anticipate that possibility, and declared last week that the new program for Greece — a combination of $150 billion in new loans and expected concessions from private bondholders — won’t be repeated for other countries.

The many positive aspects of the plan, Moody’s said, needed to be judged against “the negative implications of this precedent-setting package should any country face financing challenges similar in severity to Greece’s. On balance, Moody’s says that, for creditors of such countries, the negatives will outweigh the positives.”

Details of last week’s agreement are still to be worked out. The International Monetary Fund must review and approve an expected increase in its lending to Greece. Greek finance minister Evangelos Venizelos is in Washington on Monday for meetings at the IMF and the U.S. Treasury to continue talks about the new package.

The opinion by Moody’s gives the most concrete glimpse so far of how the three major bond rating agencies, key players in the unfolding Greek and euro zone crisis, will interpret last week’s action by European leaders.

The good news: The default by Greece won’t be “disorderly,” but will proceed on a step-by-step basis as banks and other private investors sign up for a bond exchange program negotiated on the behalf of major financial institutions by the Institute of International Finance.

The private-sector contribution will lower Greece’s need for cash in coming years by an estimated $70 billion, which the IIF said amounts to about a 20 percent cut in the value of the bonds that will be exchanged. As big investors make those exchanges, Moody’s said the likelihood of a default declaration “is virtually 100 percent” on those particular bond issues.

The good news, however, is that the agency said it would then reevaluate all of Greece’s other outstanding bonds, and any new ones, on the basis of a financial situation that would have been strengthened.

The E.U. program and proposed debt exchanges “will increase the likelihood that Greece will be able to stabilize and eventually reduce its overall debt burden,” Moody’s said. “The support package for Greece also benefits all euro area sovereigns by containing the severe near-term contagion risk that would likely have followed a disorderly payment default.”