Saturday, October 8, 2011
Robert Shapiro who advised Presidents Clinton and Obama and who currently advises the IMF predicts a cascading meltdown of the World's banking system starting with Sovereign debt in the Eurozone, affecting the UK then finally bringing down the global banking system. He says "If they cannot address this in a credible way I believe within perhaps 2 to 3 weeks we will have a meltdown in sovereign debt which will produce a meltdown across the European banking system. We are not just talking about a relatively small Belgian bank, ( DELXIA ) we are talking about the largest banks in the world, the largest banks in Germany, the largest banks in France, that will spread to the United Kingdom,in part through the sovereign debt to Ireland , it will spread everywhere because the global financial system is so interconnected. All those banks are counter-parties to every significant bank in the United States, and in Britain, and in Japan, and around the world. This would be a crisis that would be in my view more serious than the crisis in 2008." before he adds "... Well what we don't know is the state of credit default swaps held by banks against sovereign debt and against European banks, nor do we know the state of Credit Default Swaps held by British banks, nor are we certain of how serious the exposure of British banks is to the Ireland sovereign debt problems."
Volatility has been through the roof in the past couple of months, and as a result, the VIX is becoming a popular trading tool. Knowing how the VIX works can mean the difference between making significant profits in a tough market and losing your shirt. In today's Technical Primer, we'll take a look at what this technical metric tells us and at how to use it effectively in your trades.
It's worth starting off by explaining exactly what the VIX is. The VIX -- or more accurately, the Chicago Board Options Exchange Market Volatility Index -- is a measure of the implied volatility of S&P 500 index options. It's a measure of the volatility that's being priced into the market by investors.
That's a key distinction; the VIX isn't a statistical measure of market volatility. Because the VIX is based on what market participants think, it's subject to bias. That's a big reason for the index's moniker as the "fear gauge" -- it's a better indicator of how scared investors are right now than it is a meter of volatility in the stock market.
If you're looking for a way of measuring the amount of volatility in the market, there are plenty of tools available. Statistical measures of volatility, such as Bollinger bands or average true range, are a better option for investors who are looking to avoid the bias in the VIX.
Still, the VIX is popular for a reason: It can tell you quite a bit about market participants' mindsets. But what's it saying?
Interpreting the VIX
As I type now, the VIX is currently at 40.77. That number means that investors expect the broad market to swing 40.77% annualized over the next 30-days -- more simply, investors anticipate stocks to move 11.74% within the next month.
You can calculate the monthly expectations for the VIX yourself by taking its current value, then dividing by the square root of 12. (For those who are interested, it's because there are 12 months in the calendar year -- the square root is a result of the statistical definition of volatility.)
Remember, the VIX is a quantitative reading of fear in the market. The higher the number, the higher the price swing expectation in the S&P 500, and the higher the fear level in the market. Part of the reason for that is the bias that I mentioned earlier; historically, the VIX index reacts disproportionately to declines in the S&P 500. Put another way, given a loss of 5% in the S&P 500 followed by an offsetting gain of 6%, the VIX will generally decrease on day 2, even though volatility (the swing in price action) actually increased.
In other words, the VIX is inversely correlated with the S&P 500. That directional bias is important to remember when it comes time to use the VIX as a tool for real trading.
Trading the VIX
The VIX isn't just a measure of "fear" in the markets -- it's also a tradable instrument. Starting in 2004, traders have been able to get exposure to the VIX through futures, then futures options, and now exchange-traded products.
Trading the VIX became popular in the wake of the 2008 financial crisis because of its inverse correlation with the broad market. But there are some problems with trading the VIX directly.
The most accessible (and popular) VIX instrument is the iPath S&P 500 VIX Short-Term Futures ETN(VXX), an exchange traded note that most investors believe tracks the VIX Index. It doesn't. Instead, it attempts to track the performance of an index of VIX futures, as do all of the other VIX ETFs and ETNs out there.
That means that VXX is literally a derivative of a derivative of a derivative of a derivative. Having an exchange traded note that's so far removed from its "underlying" asset is problematic. The biggest issue is that VXX muffles the returns of the VIX itself. It's also important to remember the fact that the product is an ETN, which means that investors who hold VXX are exposed to counterparty risk.
Another concern with trading the VIX (in any of its forms) is that most traditional technical analysis techniques don't apply. That's because supply and demand in the market aren't the arbiters of the value of the VIX; the mathematical model is. Technicals work because they help traders identify pockets of supply and demand; those buying and selling pressures are irrelevant in the VIX because its underlying isn't price-based.
Generally, volatility is mean reverting. That means that it reaches extremes, but it eventually returns back to its "normal" zone. VIX traders are essentially trying to pin a timetable on when it'll get back to normal.
Investors with more sophisticated (and risk-driven) approaches may find value in gaining some exposure to the VIX. For aspiring traders, though, I wouldn't recommend it; while some professional traders can consistently trade the VIX successfully, they turn to a different toolbox to do it. If you're just looking for inverse correlations with the S&P 500, there are plenty of "safer" ways to do it. So, how can you use the VIX?
A Contrarian View of the VIX
For short-term traders, the VIX is a valuable metric that can color your market analysis. Because the VIX gives you a direct estimate of fear in the S&P 500, it's a priceless detail about market psychology that's quantified in real time.
It's also valuable for longer-term investors when viewed from a contrarian angle.
The old saying to "buy when the VIX is high and go when the VIX is low" has historically been pretty good advice. Because the VIX measures fear (and it's directional), extremes in the index can indicate the same sorts of extremes in sentiment that provide contrarian buying opportunities.
Yes, the VIX is a powerful tool that traders and investors can use to better understand what's going on in the market and increase their profits. But like any powerful tool, it can be incredibly damaging to your portfolio when applied incorrectly. Use the VIX for what it is, and you'll be better-prepared than the guy on the other side of the trade.
Next time, we'll add to your technical repertoire with another primer that will bring you closer to implementing technical analysis for your portfolio.
We connect with Darryl R. Schoon, a world wide leading monetary authority and expert on economic history. In a far reaching interview, Darryl lays the groundwork for understanding how we got where we are and where it’s all heading. Darryl published a widely disseminated paper in 2007 entitled, How To Survive The Crisis And Prosper In The Process, before almost anyone saw the financial collapse on the horizon. He explains why the banks run the government and why we wouldn’t be in the position we are, without the creation of a debt-based currency.
“The past few weeks turned out to be very difficult for equity markets overall, driven by erratic news-flow surrounding
macroeconomic data releases and the peripheral European debt situation. We think that this market regime with huge swings is likely to continue for the next couple of weeks and months.
Next week, the Q3 2011 earnings reporting season starts in the US, with Alcoa set to report its Q3 2011 results on 11
October 2011 after the close of trading. Earnings momentum has decelerated sharply ahead of the upcoming earnings
releases, led by materials and financials as well as by Switzerland and Europe. We are not sure if the Q3 2011 earnings releases will provide the catalysts to turn earnings momentum around, unless companies give very good and convincing outlook statements, and we bear in mind that revisions of outlook statements are always lagging.
So, valuation is indeed fairly attractive on various metrics, even if we take potentially lower earnings following
downgrades into consideration, and our analysis indicates that equity prices now discount a typical recession. However, we think sentiment needs to turn before any upside valuation can be fully realized. While we would not rush into equities right now, we think that investors that are underweight the asset class could potentially use periods of extreme weakness and risk aversion to selectively build up positions with stocks of sector/regions we like and also topics, which we like: Emerging markets and beaten-down stocks.”
They list several of the usual suspects on their overweight listing in the USA including: Chevron, Anadarko, Halliburton, Freeport-McMoran, GE, Deere, Starbucks, Coke, Kraft, Phillip Morris, Baxter, Pfizer, Microsoft, Google, Oracle and Apple.
Silver (SLV) just completed its second major correction this year after its parabolic rise and peak in April. The second decline that occurred over the last month has led silver to shedding nearly half its value. The decline over the last six months has pushed our silver indicator to the second most oversold value in a decade. Is this a major buying opportunity or are investors now catching a falling knife? The answer to that question hinges on what the dollar (UUP) does over the next several weeks.
Silver Deeply Oversold
Given the sharp selloff in silver over the last few months it’s not surprising to see silver in oversold territory, but how oversold is it relative to prior corrections? To show how extreme silver’s recent oversold condition is, our silver risk indicator below shows that silver is at its second most oversold reading in the past decade, with 2008 the only exception. Quite the whipsaw after our indicator showed the most overbought condition in silver in April, with our silver indicator exceeding the 2004, 2006, and 2008 peaks, and then to see the second most oversold reading six months later. Given the deeply oversold condition silver finds itself in, is now a good time to take advantage of the recent price decline? Yes and no.
If you compare the average path of the 2004, 2006, and 2008 corrections we should be putting in the final low for silver here and we could witness a sizable Q4 advance that sees silver rally north of $45/oz. My silver correction composite below suggests silver may trade sideways into middle October as it puts in a bottom before making a sizable run heading into the end of November. That said, I would recommend against throwing caution to the wind and scooping up silver right here.
2008 Analog May Hold the Key
Looking at the most recent major correction in silver, the 2008 top, suggests some caution as of the three prior major corrections (04, 06, 08), the 2008 correction shows the closest resemblance to silver’s 2011 correction. As shown below, if silver continues to trace out its 2008 top, it may embark on a further correction beginning next week that could take it to the low $20/oz level heading into November.
So says Jared Cummans (www.CommodityHQ.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited ([ ]), abridged (…) and reformatted below for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.
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Cummans goes on to convey the following:
Silver has become an increasingly popular safe haven option as it comes with a cheaper price tag and a laundry list of practical uses in comparison to its sister precious metal. Gold’s main attraction.[however,] has been its astronomical returns over the past few years, creating handsome gains for a number of investors. Silver… has [also] had a prolific jump in prices, although its performance flew relatively under the radar of gold’s returns. While the SPDR Gold ETF (GLD) returned 23.99% and 29.27% in 2009 and 2010, the iShares Silver Trust (SLV) brought in returns of 47.29% and 82.14%, dwarfing the stellar performance from gold.
Though silver has put up some stunning numbers, the past few weeks have seen the metal sharply drop off, similar to what happened in May of this year. With the precious metal at its lowest price in months, and global volatility likely to stay, buying into silver at such low prices seems very enticing. Whether you’re looking to hop in at a low in silver, or you are just interested in diversifying your commodity holdings, we outline 25 viable options for adding exposure to silver:
Exchange Traded Funds (ETFs)
ETFs have been extremely effective for helping to spread commodities to a number of different investors. While it used to be that only futures traders were able to access the asset class, ETFs have helped the average Joe gain exposure to something like physical silver in a portfolio with just one simple fund. When it comes to silver exposure, there are ETFs for nearly every segment of the silver market, including physical bullion, futures and mining stocks:
1. Silver Trust (SLV): Without a doubt the most popular silver ETF and arguably the most popular way for investors to access this metal. SLV offers exposure to physical silver, straying away from the complexities and issues associated with silver exposure through futures or stocks. The fund has an average daily volume nearing 38 million and over $10 billion in assets. While SLV had been performing well, the silver slaughter that has taken effect recently dipped this fund into the red for 2011 returns.
2. Physical Silver Shares (SIVR): This fund also tracks physical silver bullion, making it a direct competitor to SLV. This ETF, however, undercuts its competition by 20 basis points when it comes to fees, creating an ultra-cheap option for silver exposure. Unfortunately it appears that SLV’s long track record outweighs its higher expenses, as SIVR has an ADV of 630,000 and assets of about $590 million; strong numbers on their own, but no match for what the aforementioned product brings to the table.
3. Silver Miners ETF (SIL): This product offers exposure to a number of popular silver mining, refining and exploration companies from around the world. Note that this ETF will typically represent a leveraged play on the metal, as miners typically have high betas in comparison the underlying metal.
4. UltraShort Silver (ZSL): Utilizing a futures strategy, this product seeks to return -200% of the daily performance of silver. While this fund will be subject to wild swings, its returns for September came in at approximately 37%, making for a unique opportunity if silver is slated to continue its drop.
5. Ultra Silver (AGQ): This product applies a 2X leverage to silver using forwards and futures to complete its task.
6. DB Silver Fund (DBS): For those looking for exposure to unleveraged futures, DBS is your fund. This product simply aims to follow a rules based benchmark that utilizes futures to reflect the performance of silver.
7. E-TRACS UBS Bloomberg CMCI Silver ETN (USV): This ETN invests in silver futures, but rather then offering exposure only to front-month futures, USV spreads its holdings across a number of contracts that mature anywhere from three months to five years out. Also note that because this is an ETN it will not encounter tracking error, but it will be at risk of its creditor (with its creditor being UBS, that might be of some concern to investors).
8. Pure Beta Precious Metals ETN (BLNG): This ETN uses a relatively unique methodology by investing in a basket of futures contracts on precious metals. Don’t let the name fool you, however, the product is split about 80/20 to gold and silver, with nothing left for platinum of palladium. This may be a good fund for those who are marginally interested in silver, but are more comfortable with gold.
9. Physical White Metal Basket Shares (WITE): WITE invests in all precious metals with the exception of gold. Offering physical exposure to silver (62%), platinum (28%), and palladium (10%), this may be a good product for those who like precious metals but are not necessarily married to any particular option.
10. Physical Precious Metal Basket Shares (GLTR): Similar to WITE, this fund offers physical exposure to precious metals, this time including gold. Silver takes home a 42% allocation, while the rest of the assets are spread among the remaining three precious commodities.
Stocks [and Warrants - see links below]
Investing the equity side of the equation isn’t a pure play on the metal, but it can make for a number of interesting opportunities that other investment vehicles simply don’t offer. Equities that focus on metals will most often consist of mining, exploration or refining companies which can offer a number of advantages over other options. A fair amount of these companies offer strong dividend options and high liquidity for traders of all kinds:
11. Silver Wheaton (SLW): Perhaps the most popular silver stock, SLW is the world’s largest silver streaming company. Silver streaming is the process by which one company purchases a mining firm’s silver production to refine and distribute the silver. As silver is a typical byproduct of mining, a number of companies benefit from selling the silver to other streaming firms, especially if their business model is focused on something like copper. The stock trades over 8.5 million shares daily and has a market cap of $10.4 billion. [It also has a long-term warrant "U" that does not expire until September 2013 for those interested in leveraging the amount of dollars deployed in the company and leveraging their investment return vis-a-vis the stock.]
12. Pan American Silver (PAAS): Founded in 1994, this mining company is stationed in Vancouver but runs operations all over the world. It has a healthy average volume of approximately 1.325 million and a market cap just under $3 billion. The company produces more than 24.3 million ounces of the precious metal in 2010 and hopes to meet that mark again in 2011.
13. Silvercorp Metals Inc (SVM): Though this company is based in Vancouver, it primarily focuses on operations in China, as it is the leading silver producer there. Due to its heavy ties to China, the stock should also be thought of as something of an emerging market play as policies and trends in the developing economy can have a major impact on the Silvercorp. SVM is immensely popular, with an ADV of 6.5 million and AUM of $1.39 billion. Note that the stock pays out a healthy dividend yield of 1.1%.
14. Endeavour Silver Corporation (EXK): With a market cap of just $760 million, this fund represents a small-cap play for investors searching for the high risk/return potential this stock could offer. EXK conducts its principal operations in Chile and Mexico.
15. First Majestic Silver (AG): Another small cap play, First Majestic engages in the production, exploration and acquisition of silver with a focus on Mexico. The company owns a number of other miners, one of which is home to mining areas amounting to nearly 70,000 hectares. The fund trades actively, with an ADV of 1.7 million and a market cap of $1.6 billion.
16. Great Panther Silver (GPL): The smallest stock thus far on the list, GPL takes in assets of just $336 million though it still has a nice daily volume of 1.9 million. Investors should note that the stock has a current P/E ratio of 39.84, well above the majority of miners in this category. The company focuses its operations in Mexico and also produces gold, lead and zinc.
17. Coeur d`Alene Mines Corporation (CDE): With a market cap of $1.9 billion, the stock is able to boast an ADV of 2.4 million, though similar to GPL, it has an alarmingly high P/E ratio of 81.87. The company was founded in 1928, and currently manages operations in South America, Mexico, the U.S. and Australia.
18. Hecla Mining Company (HL): This stock is fairly popular among investors as it enjoys daily volumes around 8.7 million. The company has their business in a number of metals, but when it comes to silver, Hecla sells unrefined bullion bars to custom smelters along with its mining operations, making this stock something of a jack-of-all-trades.
Silver bullion is perhaps the safest and most hassle-free way to maintain silver exposure. The biggest issue when holding physical bullion comes from purchasing the metal itself, which can run up costs exponentially depending on the amount that someone wishes to purchase. Silver bullion allows an investor to know exactly where their money went, what it is worth, and immediate access to the metal should they ever need it. Silver also runs at a much cheaper cost than gold, allowing investors of all shapes and sizes to maintain exposure to bullion:
19. Coins: Coins can range anywhere from one ounce to several ounces. They are typically designed with unique logos and are the most accessible way for investors to own physical bullion
20. Bars: These are meant only for big investors in the precious metal and are the mainstays of central banks around the world. The standard silver bars weighs in at 1,000 ounces and at a current price of around $30/oz., that would make on bar worth $30,000. Similar to coins, bars come in all shapes in sizes, allowing heavy hitters to purchase bars that can dwarf the standard size.
Futures were the original method for obtaining exposure to commodities. These contracts can be difficult to understand and require a rather complex futures account, so they are not meant for the average investor. For those who fully understand the nuances of these contracts, futures can be one of the most powerful trading tools for an investor, as they offer exposure that, in some cases, can be found nowhere else in the market. The following futures are offered on the COMEX via the CME Group:
21. Silver: These futures are the standard method for obtaining futures exposure for silver. Contracts range anywhere from front-month all the way to 2016, allowing for speculative plays for any near-term time period. Each contract is representative of 5,000 troy ounces and are denominated in U.S. dollars and cents. These futures are also optionable.
22. E-mini Silver: These contracts, which are not optionable, trade in much lower volumes, but represent a much smaller size of just 1,000 troy ounces, making them more accessible to smaller investors.
23. miNY Silver: Offering a nice middle ground for investors, these futures represent 2,500 troy ounces for those that fall between the two previously mentioned options.
Mutual funds have long been one of the most popular ways to gain exposure to a number of assets. They are something of dinosaurs when it comes to investing, as a number of funds have long successful track records that other securities simply cannot compete with. The mutual fund space has tens of thousands of options and a number of those offer exposure to silver. Perhaps the biggest draw to this sector is the high dividend yields that a number of mutual funds tend to offer. Investors should note that most of these products require minimum investments in order to discourage less-serious, and ultra-small investors:
24. Permanent Portfolio (PRPFX): Taking home the coveted five star rating from Morningstar, this fund has more than outperformed its category, and with an unheard of expense ratio of just 77 basis points; dirt cheap by mutual fund standards. The fund has total assets of $15.7 billion and pays out a dividend yield of just 0.58%.
25. Vanguard Precious Metals and Mining (VGPMX): This fund may be a great option for value investors as it pays out a dividend of 4.30%. VGPMX has a market cap of $5.2 billion and an absurdly low expense ratio of just 0.27% but requires a minimum investment of $3,000.
Spain had its foreign and local currency long-term issuer default ratings cut to AA- from AA+, while Italy had the same set of ratings lowered to A+ from AA-, Fitch said in statements today. The outlook for both countries is negative. Fitch also maintained Portugal’s rating at BBB-, saying it would complete a review of that ranking in the fourth quarter.
Belgium had its Aa1 local and foreign currency government bond ratings placed on review for possible downgrade by Moody’s Investors Service, which cited the financing environment for euro sovereigns and increasing risks to economic growth.
The downgrades for Spain and Italy reflect “the intensification of the euro zone crisis,” Fitch said, citing risks to Spain’s “fiscal-consolidation” efforts. “A credible and comprehensive solution to the crisis is politically and technically complex and will take time to put in place and to earn the trust of investors.”
Spain and Italy are scrambling to avoid the fallout from the debt crisis as Greece moves closer to default. Borrowing costs for both nations surged to euro-era record highs in August, prompting the European Central Bank to prop up their bonds on the secondary market.
“There are two things Italy needs to do. One is to work on reacquiring a sufficient level of international credibility to maintain its financial house in order,” Fiat SpA (F) Chief Executive Officer Sergio Marchionne said after a speech in Montreal today. “The other thing that you need is to increase the purchasing capability of the Italian public.”
Fitch’s cut of Italy was its first since October 2006. It follows downgrades of Italy by Moody’s Investors Service on Oct. 4 and Standard & Poor’s on Sept. 19, which both cited concerns that the country’s weak economic growth means it will struggle to reduce Europe’s second-largest debt, at about 120 percent of gross domestic product.
Spain’s rating, which was AAA until 2010, has now been lowered twice by Fitch as the deepest austerity measures in three decades fail to convince investors the nation can stem the surge in its debt burden. Moody’s also warned “all but the strongest euro-area sovereigns” are likely to see further downgrades, when it cut Italy’s rating for the first time in almost two decades.(more)
With troubles in Europe's banking system threatening to contaminate the global financial system, it's beginning to look a lot like 2008 to many observers. History doesn't repeat, but it often rhymes which is why Robert Wiedemer of Absolute Investment Management believes investors need to prepare for another 2008-style maelstrom -- or something even worse.
"I do think we'll have another meltdown within 2 to 4 years," Wiedemer says, forecasting major averages will fall "quite a bit" below their March 2009 lows.
The money manager and author does not, however, forecast an imminent decline or crash to S&P 666 (the 2009 low) and below. "We're going net long if we see the Fed printing money again, which I think is likely," he says. "After that, the sugar high will wear off and we'll be net short."
In Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown, Wiedemer details how to navigate through the market's gyration via what he calls the "Dynamic Diversified Aftershock Portfolio" that includes dividend stocks, gold, bonds, inverse ETFs, agricultural commodities and some foreign currency.
"You not only have to be diversified but dynamic," he says. For example, Wiedemer is currently long Treasuries but expects to get short in the not-so-distant future when that market turns.
"It's a bubble economy, fundamentally," he says. "Stocks in another year or two will be valued very different then they are today because the rest of the economy is going down. The forecast is not very good for the future."