Thursday, December 15, 2011

Is the Gold Bull Really Dead?

by Greg Hunter’s

Economist Dennis Gartman announced in his newsletter, yesterday, that he has sold all of his gold. I don’t know if it was physical or paper gold in an ETF (exchange traded fund), but it is gone. According to Bloomberg, Gartman said, “Since the early autumn here in the Northern Hemisphere gold has failed to make a new high. . . . Each high has been progressively lower than the previous high, and now we’ve confirmation that the new interim low is lower than the previous low. We have the beginnings of a real bear market, and the death of a bull.” Mr. Gartman thinks so much damage has been done to the price of gold and to market psychology that, in his words, “. . . wholesale liquidation, and perhaps forced liquidation, shall be the outcome.” (Click here to read the complete Bloomberg story featuring Mr. Gartman’s call on Au.)

I think Mr. Gartman is a trader at heart, but there is a big difference between a gold trader and a gold investor. Traders are usually looking at the short term, and in the short term, Gartman is probably correct. The price of gold will probably sell off some more before this move is through, but the gold bull is hardly finished. I say this because of two main reasons. Unprecedented global debt is reason number one. More debt has been created than ever before in human history.

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Eric Sprott Talks to James West

click here for video

Citi Predicts Gold At $3400 In "The Next Two Years", Potential For Move As High As $6000

Following today's margin call anticipating, liquidation-driven rout in gold, the weak hands are, as the saying goes, puking up blood. Which may not be a bad thing - after all, sometimes a catharsis is needed to get people away from potentially toxic paper exposure which very likely has been hypothecated repeatedly via the same channels we discussed last week when exposing the MF Global-HSBC "commingled gold" lawsuit. But what about the future? Well, nobody can ever predict it, but at least we can sometimes look at charts in an attempt to glean a pattern. Which is why we present the just released slide deck from Citi's FX Technicals group titled "The 12 Chart of Christmas" which has some blockbuster predictions about the coming year, chief among them is without doubt the firm's outlook on gold which they see at $2400 in the second half of 2012, and moving "toward $3400 over the next 2 years or so." So for those looking at today's price action, consider it an opportunity to roll out of paper exposure and into gold, because the more deflationary the environment gets, the more eager the central planning cabal will be to add a zero (which in our day and age of primarily electronic money can be done with the flip of a switch) to the end of every worthless piece of monetary equivalent paper in circulation. And that's a 100% certainty.

From Citi:

While we remain cautious on Gold in the near term and believe that we could correct lower towards $1,600 and possibly re-test the $1,550 area we continue to believe that the bull market remains intact. As with the Equity market we believe that 2012 may be reminiscent of 1978 when Gold rallied nearly 50% off the 1977 close. Such a move would likely put Gold in the $2,300-2,400 area in the 2nd half of 2012.

On a longer term basis we expect even higher levels and target a move towards $3,400 over the next 2 years or so. We are not yet on board with the idea of a move with the same magnitude as seen in 1970-1980 when the last spike in Dec 1979-Jan 1980 saw Gold almost double in price as Russia invaded Afghanistan. Such a dynamic would suggest a move above $6,000 but we prefer to take a more conservative stance and look for a move similar to that seen without that final event driven push at the high which was a “blowout top” in Jan. 1980.

Kyle Bass On Rehypothecation And Other Keynesian Endgame Scenarios

from ZeroHedge and CNBC:

If readers have the sense there has been a deluge of Kyle Bass reading (and viewing) materials on Zero Hedge in the past two weeks, it is because there has been: and why not – after all, unlike all other cheap talking heads, and know-nothing pundits who merely need a suit to make an appearance on one of the TV’s financial comedy channels, Kyle has been consistent in the most important thing – telling the truth. Today, he took his resurgent popularity to CNBC which always knows which way the winds blow, and told David Faber more or less everything that Zero Hedge readers know already about Europe’s collapse, on why the ECB will print but only after a default, and about the inevitable global debt restructuring. There was a twist: as most regulars here know, the key topic of the past week, of December, and potentially of 2011, is the limitless “fractional Prime Broker lending” of assets-cum-liabilities (and when it comes to the realization that one’s gold itself may be rehypothecated, via GLD, it is no surprise why paper gold is plunging, with the expected delayed effect of slow comprehension) in an infinite loop of daisy chained counterparty exposure, also known as rehypothecation. Which is precisely what what Bass touches on 9 minutes 30 seconds into the interview when the discussion shifts to “shortening collateral chains.” Must watch for everyone who enjoys not being lied to.

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Gold Stocks: Still a Bargain

By Jeff Clark, Casey Research

We've been saying since September that gold producers are undervalued, and here are some data that show just how extreme the undervaluation is.

The following chart measures the stock prices of major and intermediate gold producers against their Net Asset Value, based on the daily price of gold. In the simplest terms, a company should be worth more as the product it sells rises in price faster than the cost of those sales. In this case, gold has doubled in price over the past three years while costs have not kept up, dramatically increasing the intrinsic value of a reasonably well-run gold producer. Yet look what the stocks have done when measured against this higher value.

In spite of a rising gold price, stock prices have steadily fallen. In fact, as the right axis shows, the industry is currently selling at a 20% discount to its Net Asset Value (as of October 21) – and historically, gold stocks trade at a premium.

Notice that gold stocks hit 1.6 times their NAVs just before the crash of 2008. Gold producers often trade at this level. If I'm right, companies will revert to historical premiums, meaning much higher stock prices than today.

These data don't tell us when prices will rise, nor do they signal that stocks can't trade lower. They are simply telling us that at this point in time, gold stocks represent a true bargain. Someday this won't be the case, and the opportunity to buy at current levels will be gone.

I'm convinced that in a year or two, we'll look back and be very happy with our positions.

2 of the World's Highest-Yielding Telecom Stocks: CEL, PHI

As an income investor, one of my favorite holdings is telecom stocks. Their stable business models and generous yields leave me at ease.

Dividends are also often higher than other sectors because of the strong cash flow these companies generate and their ability to return much of it to shareholders. In addition, telecoms tend to be resilient during downturns, so they usually make good defensive holdings. The logic is simple: most of us will cut discretionary spending in other areas before we would even consider getting rid of our cell phones and Internet access when times get tough.

Foreign telecoms are even more attractive -- they often yield more than their U.S. counterparts, while still offering an element of safety. Right now, though, I'm steering clear of European telecoms because they're a bit too volatile for my taste as a result of the region's ongoing economic crises.

Here are two foreign telecoms from other areas of the world that have caught my eye because of their dominant market positions and rich yields.

1. Cellcom Israel (NYSE: CEL)
Forward yield: 10%

Cellcom is Israel's leading cellular-service provider, with a 34% market share and more than 3.3 million subscribers. This company, along with Partners Communications (Nasdaq: PTNR) and Bezeq (IT: BEZQ), enjoy a virtual monopoly in Israel's $8 billion mobile phone market. This year, the Israeli government made reforms intended to reduce the market dominance of the "Big 3" by giving other telecoms incentives to expand their own networks. But barriers to entry remain high.

Israel's cellular-phone market is relatively mature, which means Cellcom isn't really a growth story. In fact, the company's earnings dropped 40% to $53 million in this year's third quarter in comparison with the same quarter last year. The decline was caused by price erosion and churn, the result of new rules making cell-phone contracts easier to terminate. Right now, for instance, all of Israel's cellular-service providers are experiencing churn rates of 7% or higher. But my guess is that churn rates will quickly fade, leaving dominant providers such as Cellcom still in control.

While Cellcom isn't a growth stock, the company is an impressive cash flow machine. Cellcom generates 34% EBITDA margins and has produced operating cash flow in excess of $453 million in the past 12 months. Return on investment (ROI), a key profit measure for telecoms, is an impressive 20.5%, or nearly three times the telecom industry average ROI of 7.5%. Cellcom has ample cash flow to cover dividend payments, which totaled $372 million in 2010.

Shares of Israeli telecoms are taking a beating this year because of investor fears regarding regulatory reform. Cellcom's price has dropped roughly 50% so far this year, and the stock is valued at just six times earnings (the stock currently trades for roughly $16). Despite a growth slowdown caused by regulatory reforms, analysts still look for Cellcom to produce 12% yearly earnings growth in the next five years. In addition to the stock's cheap valuation, Cellcom offers an eye-catching 9.6% forward dividend yield and the cash flow needed to sustain it.

2. Philippines Long Distance Telephone (NYSE: PHI)
Yield: 6%

This company has 47.7 million cellular subscribers and provides a diverse range of telecommunications services across the Philippines, including wireless, fixed-line and information and communications technology. The investment case for Philippines Long Distance hinges on the long-term growth story for the Philippines.

The Philippines telecom market is basically split between Philippines Long Distance and a smaller rival, Globe Telecom. In my opinion, a great way to play call-center growth is to own Philippines Long Distance.

This country, along with South Korea, Vietnam and Turkey, is among the world's most promising emerging markets. The Philippines has a stable manufacturing and banking sector, and has become a major destination for offshore call centers. Well-known companies such as Wipro (NYSE: WIT), Siemens (NYSE: SI) and Accenture (NYSE: ACN) have already established call centers in the Philippines, greatly benefiting local telecoms. Industry forecasts are for 9.2% yearly growth in the Philippines call-center segment in the next several years.

Investments in network modernization and the U.S. dollar devaluation (about 26% of revenue is earned in dollars) caused the company's net income to decline 4% to $703.4 million in the first nine months of 2011 compared with the same period a year earlier. Free cash flow (i.e. cash flow after capital expenditures), however, rose 11% to $839.1 million from $746.8 million. EBITDA margins were exceptional at 59%, and the company has generated cash flow from operations totaling $1.8 billion in the past 12 months.

These solid numbers are more than enough to cover $938 million of annual dividend payments. Philippine Long Distance's share performance this year has roughly tracked the S&P's 2.7% gain, and is trading at a moderate price-to-earnings (P/E) multiple of 12.

The stock currently yields 6.4%. Dividends have risen 31% in the past five years, so it would not be unrealistic to see this payout rise in coming years.

Risks to Consider: Israel and the Philippines withhold taxes on dividends paid to foreigners, but the good news is you can reclaim this money in the form of a tax credit. Investors should also note currency risk is associated with both stocks. Current dividend rates aren't guaranteed, either. Unlike their U.S. counterparts, foreign companies often link payout directly to earnings, so dividend rates could vary greatly from one period to another. (That said, currency rates and dividend payouts could also work greatly in your favor.)

Action to take--> Between the two stocks, my top pick is Philippines Long Distance because of its rising free cash flow and robust cash flow coverage of the dividend. Cellcom is attractive based on its very generous yield, but I consider this stock somewhat riskier due to continued uncertainties regarding the long-term effect that Israel's regulatory reform will have on the country's telecom industry.

5 Things I Learned About Investing in 2011

There is intelligence and then there is wisdom. We are all born with intelligence, but we pick up wisdom along the way. I'm no more intelligent than when I got into this business 20 years ago, but hopefully, much wiser. The key evolution: I now develop far fewer mistaken assumptions about the stocks and industries I analyze. With this in mind, here are five things I learned in 2011 that will (presumably) make me wiser in the years to come...

1. Industry selection is far more important than stock selection
I spent too much time this year focusing on the best play in a particular industry. For example, I suggested Delta (NYSE: DAL) was the best airline stock to own for the coming year.

Yet the whole group really moves in tandem, and it would have been far wiser to suggest the right entry point for the group, and not the stock. Indeed Delta and the AMEX Airline index (XAL) have traded in virtual lockstep since that late July recommendation.

Of course, my expectation that AMR (NYSE: AMR) would run into financial distress highlights the value of assessing company-specific drivers -- especially on the short-side. But most of the time, there's more value in a top-down call on the right industry than the bottom-up call on the right stock.

2. Shun negative cash flow stocks when the economic environment remains uncertain
Throughout 2011, I recommended a few development-stage biotech stocks, including Celsion (Nasdaq: CLSN), Threshold Pharma (Nasdaq: THLD) and BioSante Pharmaceuticals (Nasdaq: BPAX). Each of these companies is in the process of testing novel new therapies and could -- one day -- be home-run picks. But these are the wrong kind of businesses for weak economies. These biotechs need serial capital injections to fund their clinical trials and, because they waited too long to raise fresh capital, their shares have gotten crushed. The outlook for 2012 is probably no better, so expect few new biotech ideas from me.

3. If some think there is a looming glut in a given industry, then they're probably right
Early in 2011, a small chorus of voices suggested the solar-power industry and the natural-gas producers were engaged in a battle to ramp up output that would wreak havoc. They were right, and as a result, prices for solar panels and natural gas fell and fell some more. In the solar space, a few companies are now flirting with bankruptcy. In the natural-gas industry, few near-term drivers exist to brighten the industry outlook. When the shakeout comes and supply finally falls to the level of demand, these will be appealing industries, but they're surely dead money until then.

Supply and demand will always be the key factor driving profits in any industry, and I let this concept get away from me when looking at company-specific dynamics in these energy subsectors.

4. The next quarter always matters
In years past, investors tended to focus on the year ahead and would buy stocks that would likely post solid results down the road. This is not the case anymore. These days, investors will punish a stock if the current quarter is weak, no matter how good the longer-term view may be.

In September, I took a bullish view of Micron Technology (Nasdaq: MU), noting the stock was very cheap at less than 75% of tangible book value. I noted shares had recently been weak "due to a slowdown in demand for DRAM [or dynamic random access memory], which caused a glut of chips. The good news is pricing is likely to improve later this year."

Later this year?

I failed to acknowledge the reality that Micron still had another bad quarter ahead of it. The chart below shows how that played out. You could have actually bought this stock for less than $5 if you waited for the fourth quarter to roll in. Everyone knew it was coming, but I mistakenly assumed investors would look beyond that event.

5. Valuations matter
This is a lesson I absorbed years ago, but it's worth repeating for those investors who made this same mistake in 2011. If a stock has a really rich valuation, then you shouldn't own it. The risk is far greater than the reward at a time when so many other stocks sport very low valuations. For every Chipotle Mexican Grill (NYSE: CMG), for example, which manages to stay aloft at 60 times trailing earnings, you also may find a Netflix (Nasdaq: NFLX), OpenTable (Nasdaq: OPEN) or Sodastream (Nasdaq: SODA), which ended up falling 77%, 69% and 56%, respectively from their 52-week highs as lofty growth expectations couldn't be met.

I'd much rather own a stock like SodaStream once it's no longer being chased by momentum investors. [You can read my take on whether I think that's happened or not in this article.]

Action to Take--> How will these lessons affect my outlook for 2012? Well, expect a continued focus on inexpensively-valued stocks and an ongoing search for potential short candidates that may be imperiled by a still-weak economy. The short- to mid-term outlook calls for pivoting between buying opportunities when the market slumps badly and profit-taking whenever the market is in the midst of an extended upward move. A similar approach may be the wise route for you next year as well.

McAlvany Weekly Commentary

Father/Son Powwow in Hawaii: Don and David McAlvany Strategize on Current Observations

A Look at This Week’s Show:
-A meltdown in Europe is a prelude to collapse in the west.
-Being “pro-gold” is really admitting an anti-fiat concern.
-Will war be the ultimate end of this depression (as it was the last time)?

Until the Comex Dies…

I spoke briefly with ‘Ranting’ Andy Hoffman at Miles Frankiln to get his take on the smoldering ash that is the paper precious metals market today. I asked him what he thinks is at the root of this dramatic body slam in the prices of the metals.

I don’t have all of the answers, but I sure have a heck of a lot of questions. Is this new revelation of hypothecation and rehypothecation starting to wake everyone up to the dangers of paper, I asked. Could any of us have guessed that the corruption and leverage in the system was this bad, just a couple of months ago, pre-MF Global?

Andy responded:

“Today has nothing to do with re-hypothecation, other than the fact the PAPER market volume has been COLLAPSING for years, and will only do so more as people flee the fraudulent COMEX, in turn making it thinner and thus more susceptible to manipulation. Until the COMEX dies….”

Former Ambassador: ‘US to Control Iraq Oil Always’

Jim Sinclair: Why Gold Was Smashed & What’s Next

from King World News:

With gold trading down over $60 and silver lower by more than $2, today King World News interviewed legendary Jim Sinclair. When asked about the action in gold, Sinclair stated, “Statements made by Mrs. Merkel, in Germany, this morning would have us believe that both the US Fed and Germany’s influence on the ECB would result in a willingness to accept a severe deflation, rather than willingness to accept a severe inflation. The selling (in gold) sent some of the fundamental guys out of their positions in gold, which affected the technicals.”

Jim Sinclair continues: Read More @