Monday, August 22, 2011

Barron’s: Buy Emerging Markets

Where the Buys Are

Emerging markets are cheaper than their developed counterparts with far more growth. Earnings for the MSCI Emerging Markets index are expected to grow at 15% over the long term, versus 12% for MSCI World index.

Recent Change P/E** 2011**
Market Index Level YTD 1-Yr 3-Yr* 2011 2012 Price/Book
Brazil Bovespa 52,482.82 -23.30% -21.40% -0.10% 8.6 7.6 1.2
Comments: Latin America’s economic dynamo selling at relatively low valuation.
China Shanghai 2,534.36 -8.9 -4 5.1 11.7 9.7 1.8
Comments: Concerns of hard-landing for economy could be priced into stocks.
Russia RTS 1,535.72 -10.5 8.6 -2.4 5 4.7 0.9
Comments: Should benefit if oil stabilizes, and very cheap.
South Korea Kospi 1,744.88 -9.3 5.6 7.4 8.7 7.6 1.1
Comments: Some analysts expect 2011 GDP to grow a sturdy 5%.
Taiwan Taiex 7,342.96 -15.1 -3.9 6.7 12.9 10.7 1.5
Comments: Reasonably valued, big commodity exporter.
India Sensex 16,469.80 -19.7 -9.8 5.4 13.4 11.5 2.4
Comments: One of worst-performing markets this year but GDP still growing strong.
MSCI Emerging Markets 41,204.16 -14.5 -4.6 1.1 12.6 N/A 1.9
Comments: Impressive GDP growth, well-run economy merit premium valuation.
MSCI World 782.98 -12.8 -2.8 -6.5 14.4 N/A 1.8
*Annualzed. **Estimated. Sources: Bloomberg; MSCI

China, Brazil and South Korea, it bears noting, are among the biggest and most liquid markets in the developing world.

CNBC Business - July/August 2011

CNBC Business - July/August 2011
English | PDF | 132 Pages | 16.48 MB

CNBC Business (Formerly known as European Business) is the leading monthly business magazine written by Europeans for Europeans. It offers a unique, engaging view of the people and businesses driving the European economy. Each issue will feature exclusive interviews with big hitters, emerging entrepreneurs and players behind the scenes. CNBC Business will produce special annual reports on the Top European Executives and Top Companies within Europe. For Movers, Shakers and Dealmakers! Stay ahead of the competition with this monthly magazine with incisive articles on business in Europe and the personalities that drive the economy across the Atlantic.
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Technically Precious With Merv Burack

Gold in Blow-off Stage or a Lot More to Come?

Boy, you leave for a few days and all hell breaks loose. Gold is up some $200 since I last looked. Is this a “blow-off” stage or is there still a lot more to come?



Long term gold bugs should have been into gold long time ago. At the present time if one wants to buy gold this is a very risky time for that. The chart sure does look like a blow-off stage where gold goes sharply through the roof and that is the end of the bull for some time. The latest move is the sharpest rise (with the highest long term momentum reading) since May of 2006 after which gold took a year long lateral breather followed by a roller coaster ride into late 2008 before it finally started a new bull move. The “investor” who panicked and jumped in to get in on the gold move in May of 2006 found himself holding a non-performer for over two years. This type of “investor” probably got out in frustration before the next move, missing the next bull.

Trend: The gold price remains comfortably above its positive sloping long term moving average line. It is also far above its up trending long term channel (shown here in Commentary for week ending 29 July 2011) support line. It has also broken above its upper resistance line suggesting further a blow-off stage. Only time will tell.

Strength: The long term momentum indicator is deep inside its positive zone and above its positive sloping trigger line. As mentioned above, this momentum indicator is now at its highest level since May of 2006. Strong strength, maybe too strong.

Volume: The volume indicator is moving higher into new high territory, far above its May of 2006 level. It is comfortably above its positive trigger line.

At the Friday close the long term rating can only be BULLISH.


Over the past couple of months the intermediate term has taken a sharp upward direction. As yet there is no clear indication of a turn around.

Trend: Gold remains well above its positive sloping intermediate term moving average line. It is also well above an intermediate term up trend line from its first of July low.

Strength: The intermediate term momentum indicator remains in its positive zone above its positive trigger line. It has entered its overbought zone so one can expect some hesitation in the price move but as yet no turn around is being noted.

Volume: As noted in the long term section, the volume indicator has entered new all time highs and remains above its intermediate term positive trigger line.

As of the Friday close the intermediate term rating remains BULLISH. This is confirmed by the short term moving average line remaining above the intermediate term line.


Looking at the short term chart one can get either overly enthusiastic or very cautious at this point. Is the action a sign of things yet to come or is it a blow-off ready to disintegrate? Not being a fortune teller I’ll stick to what IS happening and leave the fortune telling to others.

Trend: There is no denying, the trend is most definitely to the up side, at least as far as the Friday close is concerned. Gold remains above its short term moving average line and the line is sloping upwards.

Strength: The short term momentum indicator is showing continued improvement in strength to the point that it is now entering its overbought zone. It has been there before, just a week ago. This time around, although the price is into new highs the momentum is now holding back and not yet into new highs. This may be a negative divergence but it’s too early to say. You need a reversal to know if in fact we had a divergence. I guess one might see the latest action as strength starting to diminish as the price continues to rise.

Volume: Remember my caution about volume action. One likes to see the volume increase as the up trend gets going BUT not increase after it has been going for some length of time. The lather suggests the masses getting in late and is too often near a top. This seems to be what we might have had here last week. This week the price continued higher but the volume dropped off, never an encouraging sign.

Despite all the cautionary signs, at the Friday close the rating remains BULLISH. This is confirmed by the very short term moving average line remaining above the short term line.

As for the immediate direction of least resistance, that should be to the up side but I just think things are too positive and a surprise is somewhere ahead, maybe immediately ahead. I’ll go with the lateral direction as a compromise.


Although the silver point and figure chart shows a bullish upside break a month back the price has really gone nowhere since. It has been in a basic lateral trend since the May plunge. The $43 level would be the next upside break and possibly more potent. Although silver closed on Friday at a new recovery high the intermediate term (my preferred time period) momentum indicator is still not at its new recovery highs. The price move seems to be ahead of the price strength. Something’s gotta give.


Trend: Silver remains above its positive sloping long term moving average line.

Strength: The long term momentum indicator remains in its positive zone and once more above a positive trigger line. As noted above with the intermediate term momentum indicator, the long term momentum indicator is lagging the price action and remains below its previous recovery highs.

Volume: The volume indicator continues to move in a long term lateral path but has moved above its positive sloping trigger line. As with the momentum indicator the volume indicator is lagging the price action.

Putting it all together, at the Friday close the long term rating remains BULLISH. However, there seem to be too many warnings of weakness in the move so one just might wait for better confirmation of the long term trend before jumping in with long term commitments.


Trend: Silver continues to move above its positive sloping intermediate term moving average line. The price has broken into new intermediate term highs but it remains to be seen if this is a true break or a false one.

Strength: The intermediate term momentum indicator is moving higher within its positive zone and above its positive trigger line. It is, however, lagging behind the price action indicating a loss of strength behind the move versus earlier moves. As always, this is only a warning and not a prediction.

Volume: As with the long term, the intermediate term volume indicator is moving slightly higher and is above its positive trigger line. However, it still remains below its actions from the past few months.

Still, despite the warnings and weakness shown by some of the indicators the intermediate term rating, as of the Friday close, remains BULLISH. This is confirmed by the short term moving average line remaining above the intermediate term line.


It’s always instructive to compare one commodity against another. It’s more instructive just to compare the chart performances of the two. Here we see the under performance of silver, since the plunge, versus the performance of gold for a similar time period. Silver has closed at a new recovery high but this is not yet confirmed by either the momentum or the volume action.

Trend: Silver closed above its positive sloping short term moving average line. The trend seems to be to the up side but it could use a little more strength behind the move to provide more confidence in its longevity.

Strength: The short term momentum is back in its positive zone and above its positive sloping trigger line.

Volume: The daily volume action remains low and not as yet an encouragement for further upside price action. Maybe the volume will pick-up but we will need to see it.

Despite the warnings, at the Friday close the short term rating remains BULLISH with the very short term moving average line confirming by remaining above the short term line.


Despite the very strong upside moves in gold and silver during the past week and a reasonable upside move by the various North American Gold Indices the Merv’s Indices held back on their moves. This suggests that as far as the stocks were concerned “investors” were in the game on the “quality” buy side but speculators were still holding back as far as the majority of stocks were concerned. THIS is not the actions of a bullish stock environment, at least not yet at this time. One should be very cautious when the speculators are holding back or not speculating. THEIR buying actions are suggestive of a bullish environment while the actions of “quality” “investors” are the actions of fear and worry (not long term sentiments). At the present time we have worry suggested from both camps.

As the gold chart earlier showed, gold is screaming “new all time highs”, “new all time highs”, BUT none of the major North American Indices, or any of the Merv’s Indices, are making new all time highs. As I have often suggested, the stocks are often the leading indicator of what the commodity is expected to do in the not too distant future.

Looking at the various Merv’s Indices they all have been going through a year long wide lateral trend with a few of them showing very clear potential head and shoulder patterns. Only the Penny Arcade Index is not following this scenario. It, however, is in a well definite down trend although it just might be ready to move sideways for a while.

Merv’s Precious Metals Indices Table

Well, that’s it for this week. Comments are always welcome and should be addressed to

By Merv Burak, CMT

Charting The Upcoming Recession, And Is Goldman Really Predicting A 2012 Year End S&P Range Of 700 – 900?

by Tyler Durden In his weekly chart packet, Goldman's high frequency strategist, David Kostin, who now changes his year end S&P targets almost as frequently as the firm's economic team changes its GDP forecast, once again gets decidedly fatalistic (very much like Citigroup did yesterday, and Morgan Stanley last week), and is now openly contemplating downside cases to his EPS forecast. And with 2012 EPS numbers thrown around like $91 based on what is certainly an upcoming (but for now still hypothetical) margin contraction, $82 based on a 2% drop (almost guaranteed) in GDP Y/Y, and $75 based on historical earnings plunges in a recession, it may be time to listen up, because apply a traditional contractionary multiple of about 9-10x, and you have yourself a tidy little range of 700 - 910 on the S&P in about a year, absent yet another round of fiscal and/or monetary stimulus. Kostin on the sensitivity between GDP and EPS:
Every 50 bp shift in 2012 GDP growth rate translates into about $2 per share in 2012 EPS. For example, if the US economy stalls and registers no growth in 2012, then our EPS forecast would equal $94, about $8 below our current estimate and 2% below 2011. If US GDP contracts by 2% on a year/year basis then 2012 EPS would fall to $82 reflecting a 14% decline from 2011. Many investors are surprised that the EPS sensitivity to GDP growth is not more sizeable. One explanation is that a meaningful portion of aggregate earnings is only modestly linked to GDP growth. Utilities, Telecom Services, Consumer Staples and Health Care will account for nearly 30% of 2012 EPS. We recognize that federal and state government austerity next year will likely have a negative impact on earnings for certain sub-sectors of Health Care. Information Technology, Energy, and Materials generate a large portion of their sales outside the US, in some cases more than 50%, and pricing for commodities reflects global supply and demand. These sectors account for 36% of our 2012 S&P 500 EPS.
For future gloating's sake, where is where Wall Street currently sees 2012 GDP: One thing we can guarantee: the consensus will not be reality 16 months from now. How about the predictive ability of margin contraction?
Every 50 bp swing in margins equates to $5 per share in S&P 500 EPS (assuming sales growth and Financials and Utilities EPS estimates are unchanged). If margins fall by 140 bp from current 8.9% then S&P 500 EPS would fall to $91, $11 or 11% below our existing 2012 EPS forecast of $102.
Note the assumptions which will never be realized if the bottom falls out. But the bigggest bear argument is not based on predicting the future (never Goldman's strong suit, unless the firm is actually defining it courtesy of its DC based tentacles), but based on the past:
Six profit cycles since 1974 show peak-to-trough declines in S&P 500 EPS averaged 22%. Most downturns ranged from 10% to 22% although the 2009 drop hit 58% led by a 157% collapse in Financials EPS. Sector level average peak-to-trough declines ranged from 8% growth (Consumer Staples) to 56% decline (Financials). If next year S&P 500 experiences a profit cycle decline similar in magnitude to prior contractions then earnings would fall by 22% to roughly $75 in 2012. Prior downturns typically occurred over 18 months.
End result: $75 EPS x 10 Multiple = 750 for the S&P. That distant runging noise is every Wall Street CEO calling Ben Bernanke at the same time. Full chartology: kickstart 8.20

A Run On Eurozone Banks?

The Calafia Beach Pundit raises an interesting question in relation to the recent surge in the US money supply which he suggests might be a reflection of a scramble into USD assets. More specifically, the argument would seem to be that a silent run on European banks is in the works as money is moved into perceived safe USD liquid assets.

As this chart of the M2 measure of money supply shows, it has gone on to experience a gigantic surge in the past seven weeks. M2 has risen almost $420 billion since the week of June 13th, on average almost 60 billion per week. To put this in perspective, annual M2 growth has averaged about 6% per year since 1995, and growth at this rate would translate into about $10 billion per week. In other words, M2 normally would have grown by $10 billion a week, but instead has grown six times faster. M2 has never grown this fast in a seven week period for at least the past 50 years. No matter how you look at it, this is a major event.

Where is the growth in M2 coming from? Virtually all of the increase can be traced to savings deposits (up $267 billion) and checking accounts (up $148 billion). Now we know why several large banks have announced they will now begin to charge customers who have over $50 million on deposit—they don't know what to do with all the money coming in.

Clearly, the theoretical argument is sound here. In a world populated by different paper currencies a surge in liquid deposit assets of the reserve currency in times of crisis reflects preference for liquidity and safety. However, the idea that money is now systematically fleeing Europe is new and disturbing. The news last week that the ECB had to supply 500 million USD to an un-named Eurozone bank has added further to the speculation.

However, there are two problems here. Firstly, as Simon Ward points out, the data does not quite support the idea of capital flight from the Eurozone. Especially, one would have expected the EUR/USD to have reacted strongly on a flight of the Eurozone to USD assets.

Scott Grannis, for example, argues that US money demand has been boosted by massive capital flight from the Eurozone as investors anticipate a break-up of the single currency. The US money supply gain, however, has not, to date, been fully offset by Eurozone weakness – G7 monetary growth, therefore, has risen. Eurozone figures for July, released next week, could conceivably change the story but would need to show a large decline to offset US strength.

The Grannis theory of a huge capital inflow to the US from Europe, in any case, is inconsistent with the stability of the euro / dollar exchange rate in recent weeks.

Of course, someone else could be doing the bid on the EUR/USD (Voldemort?) but more specifically we should also observe a blow out in the Eurozone interbank spreads and while we may still see this in the coming weeks we have not seen anything resembling 2008 levels of panic.

Secondly, Simon Ward points out that even if you adjust for a plausible measure of liquidity preference money growth in the US is still strong which suggests that we cannot linearly equate a spike in the US money supply with capital flight from the Eurozone.

Another point worth considering here is that while the USD certainly must still be considered a safe haven other currencies have taken up this role especially in the wake of the debt ceiling debacle which saw the US lose its triple A rating from S&P. The CBP points out in the comments section;

(...) it's true that the euro isn't falling against the dollar, but both are falling against gold, the swiss franc, and the japanese yen. With currencies, everything is relative.

Especially the ascend of the CHF has seen the Swiss National Bank retort to more or less desperate measures to rid its currency of its safe haven status as it deems the Swissie to be severely overvalued.

At the end of the day, the answer must be found in deposit growth in the Eurozone. We have observed for a while how the periphery has been bleeding deposits which logically have been moving to the core (or so I assume). But generally, the total stock of money in the Eurozone has been volatile around a flat trend since 2008 which makes it difficult to interpret spikes and dips in the data. I will be looking closely at Eurozone deposit data next and will report back if I find something interesting.

Harry Dent - The Great Depression Ahead

New York Times Best Selling author of "The Great Depression Ahead:How to Prosper in the Crash that Follows the Greatest Boom in History", Economist specializing in demographics, Harry Dent predicts deflation coming with prices of real estate continuing to fall but he is bullish on the US dollar and not so much on Gold , Harry Dent is a fan of the Australian economist Steve Keen who has been warning about a Deflation for years . Dent says we are in for a major crash just ahead, and a decade-long economic slump based on population demographics. The peak of the baby boomers' spending was from 1983 to 2007, and that's why we are seeing a cyclical drop off in the economy, he explained. "All this government stimulus isn't going to work because you can't get older people to spend their money," he added. Dent predicted that real estate values will continue to fall another 20-30% between 2012-2015, before prices are stabilized. Debt needs to be restructured, and the "government should only reward banks that write down loans that free up consumers," he suggested. He also advised people to sell their stocks later this year, and get as liquid as possible, as he sees the Dow falling as low as 3300. Interestingly, he believes that the dollar will retain or go up in value during the crash. Based on demographics, he foresees a new global economic boom beginning somewhere between 2020--2022.Harry S. Dent, Jr.lays out the steps in our economic journey, including how we got to this point, the changes we are going through, and what to expect in the years to come. As always, there are great investments available, as long as you know what to look for! Mr. Dent is the developer of The Dent Method - an economic forecasting approach based on changes in demographic trends

Smart Money - September 2011

Smart Money - September 2011
English | PDF | 96 pages | 40.4MB

SmartMoney comes to you straight from the editors of the Wall Street Journal, the best financial reporters in the business. Every issue brings you the information you need to know to deal with markets and protecting your wealth. Turn to SmartMoney for no-nonsense advice you can put into action.

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US Weekly Economic Calendar

Last Week
DateTime (ET)StatisticForActualBriefing ForecastMarket ExpectsPriorRevised From
Aug 2310:00 AMNew Home SalesJul-300K310K312K-
Aug 247:00 AMMBA Mortgage Index08/20-NANA+4.1%-
Aug 248:30 AMDurable OrdersJul-2.5%2.0%-1.9%-2.1%
Aug 248:30 AMDurable Orders -ex TransporationJul--0.6%-0.4%0.4%0.1%
Aug 2410:00 AMFHFA Housing Price IndexJun-NANA0.4%-
Aug 2410:30 AMCrude Inventories08/20-NANA4.233M-
Aug 258:30 AMInitial Claims08/20-400K400K408K-
Aug 258:30 AMContinuing Claims08/13-3700K3700K3702K-
Aug 268:30 AMGDP - Second EstimateQ2-1.0%1.1%1.3%-
Aug 268:30 AMGDP Deflator - Second EstimateQ2-2.4%2.3%2.3%-
Aug 269:55 AMMichigan Sentiment - FinalAug-55.255.454.9-