Tuesday, January 31, 2012

Time to be Long this Silver Stock: SLW

After spending more than a year "digesting" big gains, Silver Wheaton (SLW) is ready to head higher...
Regular readers know we consider Silver Wheaton one of the premier silver plays in the market [2]. Silver Wheaton isn't your average mining stock. It doesn't operate mines or explore for mineral deposits. Instead, it finances lots of early-stage silver projects... and collects royalties when those projects start producing silver. This makes the company a diversified, leveraged way to profit [3] from rising silver prices.
In 2009, with shares [4] trading around $13, we noted how this stock was enjoying one of the strongest uptrends in the market... and could explode higher in a precious-metals bull market [5]. About two years after our note, SLW had tripled in price. But like all big moves, this one needed time to "digest" its gains before going higher. That's just how the market works.
You can see in the two-year chart below that SLW spent 2011 "digesting" in a volatile, sideways range... which frustrated both buyers and sellers. During this sideway move, sellers twice managed to knock SLW down near $27. The stock rebounded both times. As Steve recently noted in his True Wealth newsletter, SLW has a solid fundamental picture driving this uptrend. The technical picture is firming up as well. It's time to be long SLW.

Baltic Dry Index Signals Renewed Market Decline

Much has been said about the Baltic Dry Index over the course of the last four years, especially in light of the credit crisis and the effects it has had on the frequency of global shipping. Importing and exporting has never been quite the same since 2008, and this change is made most obvious through one of the few statistical measures left in the world that is not subject to direct manipulation by international corporate interests; the BDI. Today, the BDI is on the verge of making headlines once again, being that is plummeting like a wingless 747 into the swampy mire of what I believe will soon be historical lows.

The problem with the BDI is that it is little understood and often dismissed by less thoughtful economic analysts as a “volatile index” that is too “sensitive” to be used as a realistic indicator of future trends. What these analysts consistently seem to ignore is that regardless of their narrow opinion, the BDI has been proven to lead economic derision in the market movements of the past. That is to say, the BDI has been volatile exactly BECAUSE markets have been volatile and unstable, and is a far more accurate thermometer than those that most mainstream economists currently rely on. If only they would look back at the numbers further than one year ago, they might see their own folly more clearly.

Introduced in 1985, the Baltic Dry Index first and foremost is a measure of the global shipping rates of dry bulk goods, mostly consisting of vital raw materials used in the creation of other products. However, it is also a measure of demand for said materials in comparison to previous months and years. This is where we get into the predictive nature of the BDI…

In late 1986, for instance, the BDI fell to its lowest level on record, then, began a slow crawl towards moderate recovery, just before the Black Monday crash of 1987.

Coincidence? Not a chance. From 2001 to 2002, a similar sharp collapse in the BDI preceded a progressive drop in the Dow of around 4000 points, ending in a highly suspect (Fed engineered) illegitimate recovery. In 2008, the index fell to near record lows once again just before the derivatives and credit crisis hit stocks full force. To imply that the BDI is not a useful measure of future economic trends seems like an astonishingly ignorant proposition when one examines its very predictable behavior just before major financial downturns.

This is not to suggest that the BDI can be used as a way to play the stock market from day to day, or often even month to month. MSM analysts rarely look further than the next quarter when considering any financial issue, and that is why they don’t understand the BDI. If an index cannot be used by daytraders to make a quick buck in a short afternoon, then why bother with it at all, right? The BDI is not an accurate measure of the daily market gamble. It is, though, an accurate measure of where markets are headed in the long run and under extreme circumstances.

Over the course of the past month, the BDI has fallen around 65% from above 1600 to 726. Mainstream economists argue that the BDI’s fall in 2008 was a much higher percentage, and thus, a 65% drop is nothing to worry about. They fail to mention that shipping rates never recovered from the 2008 collapse, and have hovered in a sickly manner near lows reached during the initial credit bubble burst. By their logic, if the BDI was at 2, and fell to 1, this 50% drop should be shrugged off as inconsequential because it is not a substantial percentage of decline when compared to that which occurred in 2008, even though the index is standing at rock bottom. Yes, the useful idiots strike again…

Looking at the rate and the speed of decline this past month, it’s hard to argue that the current 65% drop is meaningless:

Another subversive argument against the BDI is the suggestion that it is not the demand for raw materials that is in decline, but the number of shipping vessels out of use that is growing. A smart person might suggest that these two problems are mutually connected. An MSM pundit would not.

In 2008, many ships were left to wallow in port without cargo, but this was due in large part to two circumstances. First, demand had fallen so much that too many ships were left to carry too little raw materials. Second, credit markets had sunk so intensely that many ships could not find trade financing necessary to take on cargo. In either case, the BDI still falls, and in either case, it still signals economic danger. The only way that the BDI could signal a major decline in shipping demand artificially or inaccurately is if a considerable number of ships under construction were suddenly released onto the market while there is no demand for them. There have been no mass increases or extreme changes in cargo fleets this past month, or at all since 2008, which means, the BDI’s decline has NOTHING to do with the number of ships in operation, and everything to do with decline in global demand.

What is the bottom line? The stark decline in the BDI today should be taken very seriously. Most similar declines have occurred right before or in tandem with economic instability and stock market upheaval. All the average person need do is look around themselves, and they will find a European Union in the midst of detrimental credit downgrades and on the verge of dissolving. They will find the U.S. on the brink of yet another national debt battle and hostage to a private Federal Reserve which has announced the possibility of a third QE stimulus package which will likely be the last before foreign creditors begin dumping our treasuries and our currency in protest. They will find BRIC and ASEAN nations moving quietly into multiple bilateral trade agreements which cut out the use of the dollar as a world reserve completely. Is it any wonder that the Baltic Dry Index is in such steep deterioration?

Along with this decline in global demand is tied another trend which many traditional deflationists and Keynesians find bewildering; inflation in commodities. Ultimately, the BDI is valuable because it shows an extreme faltering in the demand for typical industrial materials and bulk items, which allows us to contrast the increase in the prices of necessities. Global demand is waning, yet prices are holding at considerably high levels or are rising (a blatant sign of monetary devaluation). Indeed, the most practical conclusion would be that the monster of stagflation has been brought to life through the dark alchemy of criminal debt creation and uncontrolled fiat stimulus. Without the BDI, such disaster would be much more difficult to foresee, and far more shocking when its full weight finally falls upon us. It must be watched with care and vigilance…

Ralph Acampora: Stocks Headed For Higher Ground; Blue Chips Breaking Out

Ralph Acampora

Jim Puplava welcomes back noted technician Ralph Acampora this week. Ralph sees stocks headed higher, and is particularly bullish on the blue chip stocks, which are technically breaking out. In addition, Ryan Puplava checks in with a wrap-up of the markets, and Rob Bernard of the PFS Group discusses fixed income opportunities.

A Potential 30%-50% Gain in Mining Stocks

After months of waiting, it's finally time to trade copper from the long side... and potentially make 50% or more in copper stocks.

Copper is one of the world's most useful building materials. It's a good conductor of heat and electricity. It's easily stretched and shaped... and it's resistant to corrosion. That's why the metal is in almost everything around you... from computers and refrigerators to plumbing and automobiles.

As my colleague Brian Hunt often points out, this "in everything" attribute makes the metal rise and fall with perceptions toward the global economy [2].

Last year, copper busted. Nobody wanted to own the stuff because of fears over the global economy. Copper fell from $4.40 per pound to $3.10 per pound. You can see this bust in the two-year chart below...

Now look to the right side of the chart. You'll see that the plunging copper price has stabilized... and just rallied to a multi-month high around $3.80 per pound. You can thank China for this rally...

China imported 406,937 metric tons of copper in December. That marked the seventh-straight increase in monthly imports. It's also 78% higher than China's copper imports last December.

#-ad_banner-#This continued consumption has helped send copper to its highest point in four months. And supplies are getting scarce...

The inventory [3] of copper in London Metal Exchange warehouses is at a three-year low. That's incredibly bullish [4] for this trend.

Even so, the headlines are screaming economic doom and gloom. Greece can't complete a bailout deal. France is in a full-blown recession [5]. The U.S. economy remains on the ropes. Some market [6] forecasters even say a depression [7] is in the cards.

The bears might eventually be right. But always keep in mind: The world has a way of not ending. And the time to buy an asset [8] is when pessimism is high.

That's why copper is an interesting trade at these levels. The price is down big since early 2011, but it's experiencing a bit of price strength now. And many copper miners are beaten-down and cheap.

Take Freeport-McMoRan, for example. Freeport is the world's biggest copper producer. It owns the world's best "trophy" copper asset: Indonesia's Grasberg mine. Freeport is giant: $41 billion in market value [9]. And it yields 2%.

Over the last year, its stock is down 20%. Freeport's peers have seen their share prices drop between 20% and 40% over that same 12-month span. Should the world simply "not end," copper could easily go back over $4 per pound and force a big recovery in these copper miners. If Freeport rallies back to its 2011 high, it'd be a 35% gain from here.

If you make a trade here, keep a stop loss near the late-2011 lows to protect your capital. That way, you lose just a little if copper declines. But I think 2012 will surprise the bears... especially when it comes to resource stocks.

Right now, copper stocks are in the dumps... Should the economy simply muddle along, these stocks could experience a solid rally. That's why it's time to jump back into copper miners.

Don Yacktman: How He Beats the Overall Stock Market

Great Investor Don Yacktman, founder and co-manager of the Yacktman Fund tells us how he continues to beat the overall stock market landing in the top one percent of all large cap mutual funds over the past one, three, five and ten year periods. Such outstanding performance was recently recognized by Morningstar, the mutual fund rating firm, that nominated Yacktman for Domestic Manager of 2011.

Time to Ride the Commodity Bull

Long time readers know that I am a long-term commodity bull. Moreover, I have been writing on the theme of global healing for a few weeks. Despite last week's disappointing US GDP report, I am seeing signs that it may be time to get on the commodity bull for a ride. Both sentiment and momentum indicators are lining up for another upleg in commodity prices.

First of all, sentiment measures indicate that commodity prices are at levels suggesting accumulation. This chart from Mary Ann Bartels of BoA/Merrill Lynch (Note: the depictions of bull and bear phases are mine, not hers) shows that large speculators, who are mainly hedge funds, have moved off a crowded long in commodity prices. The chart was produced by aggregating the Commitment of Data reports for all futures exchange traded commodities in the CRB Index.

CRB Large Spec
CRB Large Spec

My depiction of the bull and bear phases show that during the bear phases, neutral readings are good times to fade the rally. On the other hand, neutral readings are good opportunity to accumulate positions during the bull phases. The bull and bear phases is best exemplified by the chart of the bellwether of gold prices, which bottomed in 2002 along with the rest of the commodity complex.


Just because there is a neutral signal from this is a good time to accumulate positions doesn't mean that there isn't more downside to commodity prices. To see some near-term upside, you need a catalyst.

Bullish CAT guidance the bullish catalyst?

I have offered that one of the key indicators to watch for market direction is to watch the corporate guidance and the body language from management during 1Q earnings season. A bullish catalyst appeared last week when Caterpillar, which is a cyclical company that does business worldwide, reported and gave guidance that was very upbeat :

We expect improving world economic growth to increase demand for commodities. Our outlook assumes most commodity prices will increase slightly in 2012 and continue at levels that encourage investment. We expect that copper will average over $4 per pound, Central Appalachian coal about $75 per ton and West Texas Intermediate crude oil about $100 per barrel. In particular, mining will be a source of growth in 2012 and growth will be so high that supply will have a tough time with meeting demand:

We expect mining to continue to be strong globally, and we have a sizable order backlog for mining equipment. We expect sales to increase in 2012 and are in the process of adding production capacity for many of our mining products. However, we expect sales to be constrained by capacity throughout 2012. Moreover, the WSJ showed that the American economy continues to grow despite last week's disappointing GDP report:

US economy picks up steam
US economy picks up steam

CAT was bullish on the outlook for US housing:

We expect total U.S. construction spending, which, net of inflation, has declined since 2004, to finally begin to recover in 2012. We project a 1.5-percent increase in infrastructure-related construction and a 5-percent increase in nonresidential building construction. We are expecting housing starts of at least 700 thousand units in 2012, up from 607 thousand units in 2011. They were sanguine on Europe because of ECB support of the eurozone:

The Eurozone public debt crisis has been a lingering negative, but it is unlikely to trigger a worldwide recession. The Eurozone will likely have at least two quarters of weak, possibly negative growth, but should begin to improve in the second half of 2012. For 2012, our outlook assumes economic growth for the Eurozone near zero and growth of about half of a percentage point for Europe in total.

Our expectation for improvement of European growth in the second half of 2012 rests on a continued easing by the European Central Bank (ECB). The ECB has recently lowered interest rates and could cut rates further in 2012. CAT also saw sufficient growth in China to support construction demand and commodity growth:

China took its first easing action in late 2011, and we expect that further easing is likely. We expect China's economy will grow 8.5 percent in 2012, sufficient for growth in construction and increased commodity demand. In addition, Joe Weisenthal highlighted some of the positive long-term fundamental drivers of Chinese commodity demand, namely a population that is rapidly becoming more affluent, which will raise demand for the consumer good life, such as electricity:

Chart of the Day - Old Dominion Freight Line (ODFL)

The "Chart of the Day" is Old Dominion Freight Line (ODFL), which showed up on Friday's Barchart "All Time High" list. Old Dominion on Friday posted an all-time high of $42.15 and closed up 0.17%. TrendSpotter has been Long since Jan 19 at $41.28. In recent news on the stock, FTR's Truck Loading Index in December was up +5.3% y/y. SunTrust Robinson on Jan 7 initiated coverage on Old Dominion with a Neutral. Old Dominion Freight Line, with a market cap of $2.4 billion, is a motor carrier transporting primarily less-than-truckload shipments of general commodities, including consumer goods, textiles and capital goods to a diversified customer base.


VIX Still Priced For Depression Risk


Since the spike in VIX in October of last year, short-dated volatility (and correlation) has dropped significantly, but the vol term-structure has steepened, and long-dated volatility remains stubbornly high. Goldman Sachs updates their volatility debt cycle thesis today and so far we are following the typical cycle post-volatility-spike - realized vols drop, short-term implied vols drop, term structure steepens, long-term vols drop - leaving them focused on both the implications of the current low levels of short-term vol and the high-levels of long-term vol. In brief, short-term volatility reflects very closely the current macro environment (GDP growth, ISM, high-yield, and Goldman's models) but longer-dated volatility trades significantly worse. The front of the volatility curve is in-line with the economics, the back is still pricing in potential damage. The volatility (variance swaps) market is expecting realized volatility to be very high over the next 5-10 years - the only time this has happened was during The Great Depression.

The four-stage model of post vol spike market behavior is very useful (if not somewhat obvious) in considering where we are in terms of sentiment. (more)

Learn These 4 Profitable Chart Patterns

If you’re just starting out as a trader, the sheer number of technical analysis [2] patterns can be downright overwhelming. With literally hundreds of patterns to look for anytime you analyze a chart, it’s no surprise that new technical traders often suffer from analysis paralysis when they’re just starting out.

But it doesn’t have to be that way…

Today, I’d like to show you four simple chart patterns that could help you find your next profitable trade in 2012.

In his book, The Definitive Guide to Point and Figure, Jeremy du Plessis argues that:

“Some authors go on to list tables of patterns, but the need to learn patterns indicates a lack of true understanding of how a pattern is created. There is no point in trying to learn dozens of patterns; it is better to understand what causes them.”

As a market [3] technician, that’s one of my favorite quotes. When it comes to chart patterns, it’s absolutely true that rote memorization will only get you so far. Instead, it pays (literally) to understand how and why patterns are created.

At their most simple construction, patterns are just different arrangements of support, resistance, and trend lines. While I won’t get into too much detail over how those individual building blocks work, you should be able to see a lot in common with the four patterns I’m about to show you. So, rather than trying to memorize the pattern on these four formations, memorize the combination of support, resistance, and trendlines that combine to create them…

1. Ascending Triangle [4]

First up is the ascending triangle, a bullish [5] pattern that’s formed by a horizontal resistance level to the upside, and uptrending support below shares [6]. Those two technical levels form a shape that resembled a right triangle. As shares bounce in between them, they get squeezed closer and closer to a breakout above that resistance level. When the breakout happens, it’s a strong buy signal for shares.

The bearish [7] opposite of the ascending triangle is a descending triangle [8]. In a descending triangle, shares have horizontal support and downtrending resistance. The shorting signal comes when that horizontal support level [9] gets broken.

2. Head and Shoulders [10]

One of the most well-known technical formations is the head and shoulders top. It’s a bearish pattern that’s identified by a peak (the head), with smaller peaks on each side (the shoulders). Even though the head-and-shoulders is likely the most well known technical pattern, it’s still a valuable one: an academic study conducted by the Federal Reserve Board of New York found that the results of 10,000 computer-simulated head-and-shoulders trades resulted in “profits [that] would have been both statistically and economically significant.”

On the opposite side is the inverse head and shoulders, which, as the name implies, is just a flipped version of the head and shoulders top. It’s a bullish pattern.

In both cases, the trade signal comes when shares push through the neckline (sometimes called “shoulder level”) in the chart above.

3. Consolidation [11]

A consolidation channel (sometimes called an “If/Then Trade”) is a channel that’s bounded by both a horizontal resistance level and a horizontal support level. Frequently, consolidation channels come after large moves. They’re an opportunity for a stock to bleed off some volatility and for traders to think about their next moves. Unlike the other patterns we’ve looked at, this setup doesn’t have any directional bias until it triggers.

The trigger happens when shares push outside of the channel. When that happens, the high probability move is to take a position in the direction of the breakout.

4. Double Top

Finally, we’ll look at the double top; as the name implies, it’s a topping pattern (thus it’s bearish). The double top can be identified by two swing highs that peak at approximately the same price level — that price level is a strong resistance level, above which there’s a glut of supply of shares that overwhelms buying pressure. A double top becomes a short signal when shares push through the intermediate trough that separates the tops.

Not surprisingly, a pattern called a double bottom [12] is the bullish opposite of the double top.

While we’re hardly taking an exhaustive look at all of the potential patterns that you may encounter in the market, these four patterns provide a good sample of how the building blocks of support, resistance, and trend create actionable patterns. By keeping these four patterns in mind the next time you look at a chart, you’ll be better able to spot [13] other, more unconventional setups than traders who resort to rote memorization.

Monday, January 30, 2012

The Fed, the S&P 500, & Why Gold Is Shining Bright

“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

~ Thomas Jefferson ~

Well here we are, caught between resistance in the S&P 500 around the 1,330 area and support around the 1,300 price level. My last two articles have discussed why I was expecting a top in the coming days and weeks ahead, but prices just continued to work higher.

One of the things that I pride myself in as a person who trades and writes about financial markets in public is that I am always honest. If I blow a call I fess up and admit it. When I have made mistakes in the past, I always try to learn something new from them and I discuss losing trades publicly with readers and members of my service.

This time is different. I honestly do not know if I am going to be right or wrong. The price action in the S&P 500 Thursday was certainly bearish short term, but a back test of 1,300 or possibly even 1,280 could give rise to a Phoenix. Granted, the Phoenix is nothing more than Ben Bernanke’s pet, but that is a topic for a different time.

I have scanned through my list of indicators which discuss sentiment based on momentum, put/call ratio, the advance/decline line, Bullish Percent Indicators, and several ratio based indicators and they are all SCREAMING that a top is near. The interesting thing about the previous statement is that it would have been true a week ago and mostly true two weeks ago, yet prices have continued to climb.

The daily chart of the S&P 500 Index demonstrates the recent price action that has continued to climb the “Wall of Worry” for several weeks:

S&P 500 Daily Chart

The culmination of the massive run higher for the S&P 500 was the dovish comments coming from Ben Bernanke during Wednesday’s press release and press conference.

The U.S. & European Central Banks are seemingly in a perpetual race to debase their underlying fiat currencies. The race will not end well. In fact, this type of situation smells like a Ponzi scheme where Ben Bernanke and Mario Draghi (ECB President) are the wizards behind the curtains. Their loose monetary policies and forced reflation are synthetic drugs that juice risk assets higher and ultimately Mr. Market will have his vengeance in due time.

At this point, it seems like Ben Bernanke will do anything to juice equity prices higher. I think his hope is that they will be able to artificially keep the game going until the recovery is on a more sound footing. However, when the entire recovery is predicated on cheap money and liquidity and is not supported by organic economic growth it just prolongs the inevitable disaster.

As an example, the daily chart of the Dow Jones Industrial Average is shown below. I would point out that that Dow came within 35 points (0.27%) from testing the 2011 highs. Furthermore, the Thursday high for the Dow was only 1,356 points (10.55%) from reaching the all-time 2007 October high.

Dow Jones Industrial Average Daily Chart

I have argued for quite some time that the economy and the stock market are two different things. If Bernanke and his cronies succeed in reflating the financial markets and the Dow reaches its October 2007 high in the near term, more retail investors will regard equity markets as being rigged.

Who could blame them for viewing financial markets as a giant rigged casino that stands to win while they continue to lose their hard earned capital? We all recognize that the current economy is nowhere near as strong as it was in 2007. But alas, the regular retail investor does not recognize that the stock market and the economy do not portray the same meaning.

One specific underlying catalyst that has gone largely unnoticed by most of the financial media during this sharp run higher in stocks is the total lack of volume associated with the march higher. The NYSE volume over the past 2 months has been putrid when compared to historical norms.

As a trader, I am forced to take risk through a variety of trade structures. However, the idea that a crash could be coming seems hard pressed as long as Big Bad Ben is at the wheel.

If the Russell 2000 drops 10%, I am convinced that Ben will be out making announcements that the Fed stands ready to intervene with all of the supposed tools they have at their disposal. Let’s be honest here, they really have one tool comprised of 3 separate functions which are all a mechanism to increase liquidity in the overall system. To express this liquidity, the following chart from the Federal Reserve shows the M2 money supply levels:

Current M2 Money Supply

The 3 functions are the printing of currency, the monetization of U.S. Treasury debt (QE, QE2, QE2.5, Operation Twist), and exceptionally low interest rates (ZIRP) near 0 for an “extended period of time (2014).” Since monetary easing is all that the Federal Reserve has done since the financial crisis began, it begs to reason that the Federal Reserve has no other solutions or tools available. If they did, they seemingly would have used them by now.

The first bubble they created due to loose monetary policy was the massive bubble in oil in 2008. Fast forward to the present, and they are currently supporting another bubble in U.S. Treasury obligations. The bubble that they will create in the future when the game finally ends will be in precious metals. The precious metals bubble will be building while the Federal Reserve and the U.S. Treasury attempt to keep the Treasury Bond bubble from bursting.

At this point in time, if we continue down this path stocks will not protect investors adequately from inflation should the Treasury bubble burst. I would argue that the central planning and monetary policy we have seen the past few years continues in the United States and Europe that gold, silver, and other precious metals are likely to begin their own bubble of potentially epic proportions.

As the weekly chart of gold futures illustrates below, gold has recently pulled back sharply and has broken out. I will likely be looking for any pullbacks in gold as buying opportunities as long as support holds.

Gold Weekly Chart

In closing, for longer term investors the stock market might have some serious short term juice as cheap money and artificially low interest rates should juice returns. However, eventually equities will start to underperform. At that point, gold will be in the final stages of its bubble and the term parabolic could likely be applied.

If central banks around the world continue to print money there are only a few places to hide. Precious metals and other commodities like oil will vastly outperform stocks in the long run if the Dollar continues to slide. The real question we should be asking is who will win the race to debase, Draghi or Bernanke?

Gold Stocks To Rally Like During The Great Depression And Early 70s

Below, is an extract of my Gold Mining Fractal Analysis Report.

He answered and said unto them, When it is evening, ye say, It will be fair weather: for the sky is red. And in the morning, It will be foul weather to day: for the sky is red and lowering.”- Jesus Christ

During the Great Depression, at a certain point, gold stocks started a massive rally. While most things were going down in price, gold stocks made significant gains, becoming one of the best performing sectors during that time.

It was no coincidence that gold stocks performed as well as they did. Like all goods, gold stocks will thrive under the ideal conditions. During the Great Depression, those ideal conditions were present.

The purpose of this editorial is to look at what those conditions were, and identify a pattern that was present before and during those rallies. If we are able to identify those circumstances and pattern, we could look to see if they are present today, or in the future, in order to know when to expect a massive gold stocks rally. – end of extract.

I then go on to identify those ideal circumstances and patterns that were present before and during the great gold stocks rally. The conditions today are very similar to then, and is an ideal set-up for a most spectacular gold stocks rally over the coming months. Here, I would like to illustrate, by way of a chart, how the conditions were similar.

The gold stock rally of the 1930s coincided with major economic decline, as well as a significant increase in the real price of gold. Below, is a chart (from planbeconomics.com) of the long-term Gold/Oil ratio:

gold oil ratio long term

On the chart I have highlighted a peculiar pattern that exists just before the gold stocks rallies of the Great Depression and the early 70s. The pattern is basically:

  1. The peak in the stock market (DOW) and Dow/Gold ratio – point p
  2. Gold rallies significantly from about after 1 – point g
  3. After a significant bottom in the Gold/Oil ratio and after that ratio has been rising for quite some time.

Note that the yellow lines in the chart represent the point where the gold stocks really took off (broke out)

Currently, conditions are setting up in a similar manner to the Great Depression and the early 70s. We have a significant bottom in the long-term Gold/Oil ratio, we have had a peak of the Dow and the Dow/Gold ratio (in 1999) and we have had a gold rally that started after 1999, and is about to accelerate. We are also at a point where major economic decline can be expected (see my previous video), similar to the decline during the Great Depression.

So, it appears that we have conditions that are ideal for gold stocks to finally take the lead in this bull market.

Do the charts for these gold stocks agree?

Below, is a chart of the HUI (finance.yahoo.com):

HUI forecast

HUI Analysis

The HUI appears to have bottomed, and is currently embarking on a massive rally. The yellow line should be good support, should price fall back again. Buying close to the yellow line would also be a good long-term entry point. Please note that the green drawn line is just for illustration purpose, it is not meant to show exactly how the chart will play-out.

Fractal Analysis of the HUI – only for Premium Subscribers.

A scenario for the HUI, which is very likely, is that the HUI follows the example of silver’s rally from the $19 level to $49. I think this is very likely, since it seems that the HUI is now in a very similar situation to where silver was in August 2010.

Note that there is more detailed analysis (including fractal analysis) in the Gold Mining Fractal Analysis Report.

For more of this kind of analysis on silver and gold, you are welcome to subscribe to my free silver and gold newsletter or premium service. I have also recently completed a fractal analysis report for gold and silver .

Warm regards and God bless,


Randgold Should Forge Ahead After Consolidation

Randgold Resources (NASDAQ:GOLD) — For months, gold bullion prices have been running ahead of the gold mining stocks. But miners forged ahead in Q3 as higher earnings from increasingly better bullion prices improved their outlook.

With that rise in the price of gold bullion, Randgold is estimated to increase revenues by 108% in 2011, and looks for an increase of 38% in 2012. Earnings are expected to rebound to $6.74 in 2012 from $3.52 in 2011, and S&P has a “four-star buy” on GOLD with a price target of $140 within 12 months.

Technically the pullback from $120 and the successful consolidation at $110 offers buyers an excellent opportunity to purchase this quality mining stock at a discounted price.

The trading target for GOLD is $120 with a longer-term projected target of $150, as the recent decision by the Fed to keep interest rates low until at least late 2014 is a boost to most commodities, including gold.

Trade of the Day – Randgold Resources (NASDAQ:GOLD)

Chart of the Day - Digital Realty Trust (DLR)

The "Chart of the Day" is Digital Realty Trust (DLR), which showed up on Thursday's Barchart "All Time High" list. DLR on Thursday posted a new all-time high of $69.87 and closed up 1.09%. TrendSpotter has been Long since Oct 18 at $58.92. In recent news on the stock, Collins Stewart on Jan 19 initiated coverage with a Neutral and a target of $65. KeyBanc on Jan 12 downgraded DLR to Hold from Buy due to valuation but raised its target price to $68 from $66. Digital Realty Trust, with a market cap of $7.1 billion, owns, acquires, repositions and manages technology-related real estate, mainly data centers.


Chris Martenson Interviews John Mauldin: “It’s Time to Make the Hard Decisions”

US Weekly Economic Calendar

time (et) report period Actual forecast previous
8:30 am Personal income Dec. 0.4% 0.1%
8:30 am Consumer spending Dec. 0.1% 0.1%
8:30 am Core PCE price index Dec. 0.1% 0.1%
10:30 am Texas manufacturing index Jan. -- -3.0
2 pm Senior loan officer survey Jan.
Tuesday, JAN. 31
8:30 am Employment cost index 4Q 0.4% 0.3%
9 am Case-Shiller home prices Nov. -- -1.2%
9:45 am Chicago PMI Jan. 61.5% 62.5%
10 am Consumer confidence Jan. 68.0 64.5
Wednesday, FEB. 1
8:15 am ADP employment report Jan. -- 325,000
10 am ISM Jan. 54.9% 53.9%
10 am Construction spending Dec.
0.3% 1.2%
TBA Motor vehicle sales Jan. 13.5 mln 13.5 mln
Thursday, FEB. 2
8:30 a.m. Jobless claims 1-28
370,000 377,000
8:30 am Productivity 4Q 0.6% 2.3%
8:30 am Unit labor costs 4Q 0.8% -2.5%
8:30 am Nonfarm payrolls Jan. 125,000 200,000
8:30 am Unemployment rate Jan. 8.5% 8.5%
8:30 am Average hourly earnings Jan. 0.2% 0.2%
10 am ISM services Jan. 53.5% 52.6%
10 am Factory orders Dec. 1.4% 1.8%

Saturday, January 28, 2012

Don’t Buy a Home OR Home Builder Stocks! Says Schoenberger

The housing sector was hit with a major setback in the latest new home sales data released on Thursday. The most recent snapshot showed sales slid 2.2% last month compared to November. December's weakness dragged on the entire year, making 2011 the weakest on record for sales of new homes in the U.S., and prices dropped 12.8% year-over-year.

Home Builder Stocks Under Pressure After Weak New Home Sales

Meanwhile, home builder stocks (XHB), a sector up 12% so far in 2012, took a hit on this data, raising questions about the validity of their year-to-date rally. Stocks like Lennar (LEN), Ryland (RYL), D.R. Horton (DHI), Pulte (PHM), and Toll Brothers (TOL) all pulled back roughly 2-3% on the data.

According to Todd Schoenberger, managing director at LandColt Trading, you shouldn't have touched these home builder stocks anyway. He explains in the attached video why the fundamentals of the housing market are still too broken to consider investing in the sector through home building stocks, and through traditional home ownership for that matter.

Schoenberger points to the U.S. homeownership rate which is currently at 66%. He believes this is too high, especially compared it to the historical average of 64%.

"You still have too many people that own homes that should not be owning a home right now," he says. "Those are your toxic mortgages that you hear about."

Is Now a Good Time to Buy a Home?

Combine this with excess supply on the market and historically low 30-year fixed mortgage rates, and you only see Schoenberger's case grow stronger. He sees oversupply creating further home price depreciation and mortgage rates that will only move lower.

"So why would you go out now to buy a home?" he asks Jeff Macke. "You can buy probably the same home a year or two from now with a 20% discount with a cheaper mortgage rate… And as a result of that thesis, that is why you want to stay away from home builders."

Simple, straightforward, and gloomy. So when will the housing depression begin to turn around?

Schoenberger turns to Fed Chairman Ben Bernanke as his magic 8-ball. Last August, Bernanke & Co. announced that the federal funds rate would remain near zero through mid-2013. However, just Wednesday the Fed updated that outlook, extending the time line out through late 2014.

Thus, Schoenberger's bottom line prediction: "Spring of 2014 will be the time that you would start to consider to buy a home," says Schoenberger.

The 10 Rules For Your Emergency Food Pantry

Those of you who plan to take the first steps toward preparing for emergencies may feel a bit overwhelmed at where to begin. After all, there is a lot of food to choose from at the grocery stores. Many websites, including this one encourage families to start buying small amounts of food related preparedness items each time they go shopping. This way, your budget is not dramatically affected.

Food storage calculators are a great tool to incorporate in your preparedness planning, and can help you understand how much food your family will need for a given emergency. The food storage calculations can also be printed out and used as an inventory list to keep you on track in terms of what preparedness supplies you have and will need.

To make the most of your emergency food supply, keep these essential food pantry rules in mind before purchasing:

  1. Caloric intake is an important factor in survival. In any disaster situation, you want to avoid malnutrition. Having foods stored to prevent this health issue will keep you at your optimum health. Stock up on foods that provide you with essential nutrients to maintain body functions, proteins and carbohydrates, fats for energy, as well as foods that are not high in salt (the more salty your food is, the more water you will drink). To calculate how many calories you will need in your diet, click here.
  2. Consider buying multifunctional food items. Items that can serve more than one purpose will help your finances, as well as save precious space in the food storage pantry. Items such as oats, pasta, rice, wheat and beans are some great low-cost foods will serve a variety of uses.
  3. Store high energy snacks to help boost energy levels. Eating snacks that are high in complex carbohydrates and protein will provide you with a guaranteed energy boost. High energy snacks such as nuts, peanut butter, crackers, granola bars and trail mix can be stored for up to 1 year and will help keep energy levels and spirits high in an emergency scenario.
  4. Bring on the protein! Protein is an essential ingredient in our daily diets and cannot be omitted out of a survival diet. Canned meat is a good source of protein and can also help you maintain your energy level. Meats such as tuna, ham, chicken and spam are great additions to the food pantry and are multifunctional. (Remember, the oil in canned meat can be used as an emergency candle.) Beans are another great source of protein, and when beans are accompanied with rice, it makes a complete protein which provides all the amino acids needed to survive. One serving of beans and rice provides 19.9 g, or 40 percent of your daily vitamins.
  5. Don’t forget the basics. Essential staples such as cooking oil, flour, cornmeal, salt, sugar, spices, baking soda, baking powder and vinegar should not be overlooked. If they are present in your kitchen, they should likewise be present in the emergency food supply.
  6. Convenience helps in stressful situations. Many moms know that boxed dinners can be a lifesaver when you are in a time crunch. Having some pre-packaged dinners and meals-to-grab during emergency scenarios will help you begin acclimating yourself to cooking in a grid down scenario as well as can help provide some comfort at the same time. Personally speaking, my family has the “just add water” pancake mixes, corn breads and drink mixes that are a great convenience.
  7. Variety’s the very spice of life, that gives it all it’s pleasure. Variety in your food pantry is important and can prevent the monotony that comes with eating the same foods day in and day out. Having a well rounded food storage will cut down on culinary boredom, as well as balance your diet. Further, stocking up on a variety of spices will also enhance your food pantry.
  8. Find comfort in the little things. Have some comfort food items that provide enjoyment to the family. Items such as popcorn, sweet cereals, hard candy, juice boxes, pickles, applesauce, pudding, cookies could be a great way to provide a bit of normalcy to the emergency situation you may face.
  9. Have backs up for your backs ups. Compressed food bars are lightweight, taste good and are nutritious. Having food bars as a back up to your existing food supply can provide you with peace of mind knowing you have an alternative to turn to if you run out of food. Further, these are great additions to your 72-hour bag or bug out vehicle. A review of the different types of bars can be read here or you can practice your survival skills and make your own with this recipe. MRE’s are another alternative food choice to turn to if you happen to run out of food in your pantry. Although many have turned their nose up at MRE’s (due to their high amounts of preservatives), they will provide you with sufficient calories and nutrition when it counts. Note: These should not be the only items in your food supply. Over time, you could become nutrient and vitamin deficient.
  10. Rotate and resupply when needed. Any items bought for the food storage closet should be used, rotated and resupplied. This is the best way to have the freshest foods available in the event that a disaster occurs. When organizing food reserves place the item that has the earliest expiration date in the front so that it is used first. FIFO is a well known acronym used in the restaurant business that stands for, “First In, First Out,” and can be incorporated in your food storage endeavors. Do an inventory check every 6 months to make sure that canned goods, preserves and other storage items are within their expiration dates.

Keeping the above considerations in mind when purchasing your food supply will provide your family with a well rounded food pantry stocked with an array of foods that will assist in promoting a healthy diet. Not listed in the suggestions is water. You must have water to survive. To learn more about potable water, click here. It would be prudent to have a 2-week supply of water on hand, as well as a water filtration device to rely on for extended disasters.

Prepping is a passion for some. For others it is the most efficient way to keep their family as safe as possible. For further resources and a list of essential items for your emergency supply, click here.

Is Now The Time To Move Away From Major U.S. Cities?

As the U.S. economy falls apart and as the world becomes increasingly unstable, more Americans than ever are becoming "preppers". It is estimated that there are at least two million preppers in the United States today, but nobody really knows. The truth is that it is hard to take a poll because a lot of preppers simply do not talk about their preparations. Your neighbor could be storing up food in the garage or in an extra bedroom and you might never even know it. An increasing number of Americans are convinced that we are on the verge of some really bad things happening. But will just storing up some extra food and supplies be enough? What is going to happen if we see widespread rioting in major U.S. cities like George Soros is predicting? What is going to happen if the economy totally falls to pieces and our city centers descend into anarchy like we saw in New Orleans during the aftermath of Hurricane Katrina? In some major U.S. cities such as Detroit, looting is already rampant. There are some sections of Detroit where entire blocks of houses are being slowly dismantled by thieves and stripped of anything valuable. Sadly, the economy is going to get a lot worse than it is at the moment. So is now the time to move away from major U.S. cities? Should preppers be seeking safer locations for themselves and their families? Those are legitimate questions.

According to a recent Gallup poll, satisfaction with the government is now at an all-time low. Americans are rapidly losing faith in virtually every major institution in society.

Anger and frustration are rising to very dangerous levels, and we are rapidly approaching a boiling point.

When people feel as though they have lost everything, they get desperate.

And desperate people do desperate things.

In many communities in the United States today, crime has become so terrifying that people are literally sleeping with their guns.

The following is a story from Rancho Cordova, California that one of my readers recently sent me.... (more)

George Soros Shares His View on Europe

What the Bond Market Knows That You Don’t

by Matt Tucker, iShares

A picture is worth a thousand words:

Equity Performance vs. Bond Yields

Source: Bloomberg (1/13/11-1/16/12)

On the back of improving US economic data, equities have rallied off of autumn lows, and yet US Treasury yields have continued to surf bottom with the 10-year note trading below 2% for the first time on record. Why haven’t interest rates recovered in support of improving data? Do US Treasury investors know something that equity investors don’t?

The answer may lie across the pond in Europe. The European crisis intensified significantly in the fall, causing equity markets (and most risky assets for that matter) to sell off and US Treasury rates to fall, despite the August downgrade.

The chart below shows the on-the-run credit default swap contract for a basket of European sovereign credits, including the peripheral countries. As the chart shows, spreads widened significantly in late summer / early fall and have yet to recede meaningfully, despite grinding progress on the political front and some prominent actions by the European Central Bank to stabilize liquidity.

Source: Bloomberg

While the United States certainly has well publicized fiscal problems, it is, as our colleague Jeff Rosenberg of BlackRock Fundamental Fixed Income states, “the best house in a bad neighborhood.” To this point, Russ Koesterich estimates that the fair level of rates for the US Treasury 10-year yield based upon historical economic relationships is around 2.5-3%. The current yield of ~1.85% essentially reflects a liquidity or “safety” premium that investors are willing to pay in order to have relative safety in the neighborhood (protection money, if you will). Additionally, the Fed continues with Operation Twist, which is intentionally designed to keep a lid on longer term US Treasury rates (in response to concerns that the European overhang could damage the fragile US recovery).

How long will US Treasuries stay at this level, and will they eventually move up to reflect tentatively improving economic conditions in the United States? It all depends upon Europe. If the European situation deteriorates from here, US equities will almost certainly retreat, and US Treasury investors will look justified in having accepted a low yield, since it was low in anticipation of this risk. In that situation, US Treasury yields could move even lower.

If Europe claws its way out of the worst potential outcome and gets to a point of relative stability, the liquidity premium in US Treasuries will likely dissipate and yields may move to more fundamentally justified levels. But for now, it does appear that bond market and equity market investors are making very different bets.

Natural Gas Prices Up: Is There Still Time to Buy?

Natural gas has gotten a much needed boost over the last couple weeks, rising over 15% after a catastrophic drop in the last year. The rally came in reaction to Chesapeake Energy's (CHK) announcement that it was cutting capital expenditures by more than 2/3's from last year, suggesting lower supplies. In addition, President Obama suggested in his State of the Union address that he'd seek to use more natural gas as a bridge between crude and renewables, suggesting stronger demand.

As econ 101 taught us: less supply + more demand = higher prices. So what's the trade now that the tape has digested these news items and rallied sharply?

Rich Ilczyszyn, founder of iiTrader.com likes natural gas here and suggests the U.S. Natural Gas fund (UNG) as a way for retail investors to play. "UNG is definitely something I'd take a look at here," he says in the attached clip, and offers two bullish catalysts to support the idea:

1. The huge downtrend has been accompanied by massive shorts. When shorts are forced to cover it "scoots the market up," as Ilczyszyn puts it, leading to gains building on gains, particularly when there's a fundamental basis for the move.

2. It's a relatively low-risk trade, in his view.

Those who've been long natural gas over the last few years may take issue here. To be clea, Ilczyszyn isn't saying there isn't danger that the perennial "next big thing" can't continue it's trend lower, just that natural gas isn't going to go to zero, and sees your downside risk that $2.

Ilczyszyn is targeting a move into the $3's and possible as high as $4/btu. As he says, the days of natural gas in the teens may be over but it's not going below $2. In what remains a somewhat dodgy market in the big picture a potential move greater than 30% is nothing to sneeze at.

Trading The MACD Divergence

Moving average convergence divergence (MACD), invented in 1979 by Gerald Appeal, is one of the most popular technical indicators in trading. The MACD is appreciated by traders the world over for its simplicity and flexibility because it can be used either as a trend or momentum indicator.

Trading divergence is a popular way to use the MACD histogram (which we explain below), but, unfortunately, the divergence trade is not very accurate - it fails more than it succeeds. To explore what may be a more logical method of trading the MACD divergence, we look at using the MACD histogram for both trade entry and trade exit signals (instead of only entry), and how currency traders are uniquely positioned to take advantage of such a strategy.

MACD: An Overview
The concept behind the MACD is fairly straightforward. Essentially, it calculates the difference between an instrument's 26-day and 12-day exponential moving averages (EMA). Of the two moving averages that make up the MACD, the 12-day EMA is obviously the faster one, while the 26-day is slower. In the calculation of their values, both moving averages use the closing prices of whatever period is measured. On the MACD chart, a nine-day EMA of the MACD itself is plotted as well, and it acts as a trigger for buy and sell decisions. The MACD generates a bullish signal when it moves above its own nine-day EMA, and it sends a sell sign when it moves below its nine-day EMA.

The MACD histogram is an elegant visual representation of the difference between the MACD and its nine-day EMA. The histogram is positive when the MACD is above its nine-day EMA and negative when the MACD is below its nine-day EMA. If prices are rising, the histogram grows larger as the speed of the price movement accelerates, and contracts as price movement decelerates. The same principle works in reverse as prices are falling. See Figure 1 for a good example of a MACD histogram in action.

Figure 1: MACD histogram. As price action (top part of the screen) accelerates to the downside, the MACD histogram (in the lower part of the screen) makes new lows
Source: FXTrek Intellicharts

The MACD histogram is the main reason why so many traders rely on this indicator to measure momentum, because it responds to the speed of price movement. Indeed, most traders use the MACD indicator more frequently to gauge the strength of the price move than to determine the direction of a trend.
Trading Divergence
As we mentioned earlier, trading divergence is a classic way in which the MACD histogram is used. One of the most common setups is to find chart points at which price makes a new swing high or a new swing low, but the MACD histogram does not, indicating a divergence between price and momentum. Figure 2 illustrates a typical divergence trade.

Figure 2: A typical (negative) divergence trade using a MACD histogram. At the right-hand circle on the price chart, the price movements make a new swing high, but at the corresponding circled point on the MACD histogram, the MACD histogram is unable to exceed its previous high of 0.3307. (The histogram reached this high at the point indicated by the lower left-hand circle.) The divergence is a signal that the price is about to reverse at the new high, and as such, it is a signal for the trader to enter into a short position.
Source: Source: FXTrek Intellicharts

Unfortunately, the divergence trade is not very accurate, as it fails more times than it succeeds. Prices frequently have several final bursts up or down that trigger stops and force traders out of position just before the move actually makes a sustained turn and the trade becomes profitable. Figure 3 demonstrates a typical divergence fakeout, which has frustrated scores of traders over the years.
Figure 3: A typical divergence fakeout. Strong divergence is illustrated by the right circle (at the bottom of the chart) by the vertical line, but traders who set their stops at swing highs would have been taken out of the trade before it turned in their direction.
Source: Source: FXTrek Intellicharts

One of the reasons that traders often lose with this set up is they enter a trade on a signal from the MACD indicator but exit it based on the move in price. Since the MACD histogram is a derivative of price and is not price itself, this approach is, in effect, the trading version of mixing apples and oranges.

Using the MACD Histogram for Both Entry and Exit

To resolve the inconsistency between entry and exit, a trader can use the MACD histogram for both trade entry and trade exit signals. To do so, the trader trading the negative divergence takes a partial short position at the initial point of divergence, but instead of setting the stop at the nearest swing high based on price, he or she instead stops out the trade only if the high of the MACD histogram exceeds its previous swing high, indicating that momentum is actually accelerating and the trader is truly wrong on the trade. If, on the other hand, the MACD histogram does not generate a new swing high, the trader then adds to his or her initial position, continually achieving a higher average price for the short.

Currency traders are uniquely positioned to take advantage of this strategy because with this strategy, the larger the position, the larger the potential gains once the price reverses - and in Forex (FX), you can implement this strategy with any size of position and not have to worry about influencing price. (Traders can execute transactions as large as 100,000 units or as little as 1,000 units for the same typical spread of three to five points in the major pairs.)

In effect, this strategy requires the trader to average up as prices temporarily move against him or her. This, however, is typically not considered a good strategy. Many trading books have derisively dubbed such a technique as "adding to your losers." However, in this case the trader has a logical reason for doing so - the MACD histogram has shown divergence, which indicates that momentum is waning and price may soon turn. In effect, the trader is trying to call the bluff between the seeming strength of immediate price action and the MACD readings that hint at weakness ahead. Still, a well-prepared trader using the advantages of fixed costs in FX, by properly averaging up the trade, can withstand the temporary drawdowns until price turns in his or her favor. Figure 4 illustrates this strategy in action.

Figure 4: The chart indicates where price makes successive highs but the MACD histogram does not - foreshadowing the decline that eventually comes. By averaging up his or her short, the trader eventually earns a handsome profit as we see the price making a sustained reversal after the final point of divergence.
Source: Source: FXTrek Intellicharts

The Bottom Line
Like life, trading is rarely black and white. Some rules that traders agree on blindly, such as never adding to a loser, can be successfully broken to achieve extraordinary profits. However, a logical, methodical approach for violating these important money management rules needs to be established before attempting to capture gains. In the case of the MACD histogram, trading the indicator instead of the price offers a new way to trade an old idea - divergence. Applying this method to the FX market, which allows effortless scaling up of positions, makes this idea even more intriguing to day traders and position traders alike.

Ellis Martin Report With JSMineset Co-Founder David Duval

James Dines: Gold to Challenge Last Year’s Highs in 2012 on the Way to $3,000 oz. and Beyond

James Dines

Jim is pleased to welcome back James Dines of The Dines Letter to discuss his forecast for 2012. In an interview covering many subjects, Mr. Dines believes gold shares will catch up to the gold price, Chinese growth won’t be enough to bail out the world’s economies, and that nothing will save the world until a currency link to gold is reinstated and enforced.

Stocks That Benefit From A Weak Dollar : COP, KBR, TCK, XOM

There's a lot of talk today about the future of the dollar. If left unchecked or without an appropriate exit strategy, our massive stimulus programs will have a crippling effect on the value of the dollar. It's simple economics: if you increase supply without a similar increase in demand, the price of your product drops.

What to Consider
Exporters benefit when their home currency weakens relative to the rest of the world because their trading partners can now buy their product for less. This is why China's currency has been undervalued for years. The Chinese government does not let the yuan float freely, which leads many to cite that as the reason China's exports are so incredibly cheap.

Oil and gold also benefit from a weak dollar. Gold is often perceived as a safe haven during periods of asset devaluation. Oil benefits because it's priced in dollars. As we've seen with the oil price over the past few months, that indeed seems to be the case.

Quality Always Matters
So commodity businesses that have pricing power and U.S. companies that do brisk business abroad benefit from a weaker dollar. But let me go on record as saying over the long run, it's not beneficial for a country to continually suffer from a weak currency. In the case of the U.S., that rings even more true since the greenback is regarded as the world's premier currency.

Nonetheless, major oil companies like ConocoPhillips (NYSE:COP) and ExxonMobil (NYSE:XOM) that have substantial operations abroad will be OK. And since a weak dollar also benefits the price of oil, the majors doubly benefit. Construction and engineering firm KBR (NYSE:KBR), a virtually debt-free $4.8 billion company, does a bulk of its work overseas. And because the bulk of KBR's work comes from government agencies, the company continues to prosper as best as one can during a recession.

Foreign Investing
Another option is investing in businesses located outside the U.S. that earn money in other currencies that are likely to strengthen against the U.S. dollar. But such a move poses some risk because the other currency must appreciate and the company needs to maintain its profitability. So while the Japanese yen has gotten stronger against the greenback lately, many Japanese businesses have a tough time of it.

Nations like Brazil and Australia, which are rich in commodities, are expected to resume a healthy GDP going forward. Up north in Canada, you have commodity giant Teck Resources (NYSE:TCK), which does business all over the world and has the Canadian dollar as the functional currency.

Bottom Line
It's never wise to make any investment based solely on a single macro bet, especially if the prices aren't bargains. But if the dollar does weaken long-term, then businesses with characteristics like those above will benefit.

The Key To High Returns Is A Disciplined Strategy

Having a disciplined investment strategy differentiates the professional from the do-it-yourself investor. An investment strategy does not have to be complicated. If you were to sum up Warren Buffett's investing strategy it might be to "buy good businesses at a fair price with the intention of holding them forever." An investment strategy helps provide focus and ensures emotions are held in check when making decisions. Having an investment strategy for both asset mix and security will provide discipline to be a successful investor over the long term. In this article, we will look at different investment strategies and how you can pick the right one for you.

Strategic Asset Mix
Central to any investment plan is the strategic or long-term asset mix. In general, its purpose is to capture the benefits of diversification and the advantages of investing in assets that have a low correlation to each other. The strategic asset mix is essentially the link between your long-term investment goals and the capital markets.

Many investors want to keep the current asset mix of their portfolios close to their strategic asset mix. A simple rebalancing strategy is all that is required. Typically, as each asset class will perform differently over time, the asset mix will deviate from the strategic asset mix.

For example, a balanced portfolio of 60% equity and 40% fixed income could become 70% equity and 30% fixed income after a strong stock market. Rebalancing would require selling equities and using the proceeds to buy fixed-income assets, so the asset mix then will get back to the long-term asset mix. The rebalancing could be done on a regular basis, semiannually, annually or when an asset class deviates by a set percentage.

A rebalancing strategy is effectively a sell high, buy low strategy, because it will always sell the assets that have been the best relative performers and buy the assets with relatively weak performance.

Tactical Asset Allocation
A tactical asset mix strategy attempts to add value by overweighting the asset classes that are expected to outperform, and underweighting those asset classes that are expected to underperform.

As an example, if an investor believes that over the next year the U.S. equities market will be weak, the investor might decide to underweight his exposure to equities and overweight cash or bonds. Unlike a rebalancing strategy, which is mechanical, tactical asset allocation requires some forecasting ability to make the correct decisions.

Security Selection Strategies
There is no shortage of strategies to choose from when buying and selling stocks. Countless books have been written describing many strategies in detail. Strategies range from growth, to value and momentum. There are fundamentally based strategies, as well as technical or quantitative strategies. There are also top-down and bottom-up strategies.

Each type of strategy will have its proponents, but any logical, rational strategy that is followed consistently is always better than no strategy at all. The value is in the disciplined approach a strategy provides.

Developing Your Strategy
The value of an investing strategy is not in the strategy itself, but in how it is followed and implemented.

In investing, there are two different approaches: a top-down or a bottom-up approach. In a top-down approach, the investor analyzes the major factors that will influence the capital market and the companies in it. The main factors will be the overall economy, monetary and fiscal policy, demographic changes, inflation, industrial sector trends and interest rates. Other investors will take a bottom-up approach, analyzing individual companies, their financial statements, growth prospects and industry trends.

One approach is not necessarily better than the other. However, depending on your own interests, knowledge and experience, one approach might be more appropriate for you. As an example, an economist will likely take a top-down approach to investing and an accountant might feel more comfortable with a bottom-up approach. Your orientation to analyzing investments will determine the types of investment strategies to follow.

In addition, the amount of time you are able to commit to your investment program determines the type of strategies to use and how much of the investment decision-making you will delegate. For example, with limited time, an investor might build a portfolio using a few exchanged-traded funds (ETFs) and then rebalance once a year. Similarly, the investor might have all of their investments in a couple of balanced funds or have their funds managed by a discretionary money manager.

Information and knowledge are important to the success of any investment strategy. One should identify the sources of data, investment commentary or investment research. The biggest challenge as an investor is to be able to filter out truly useful information from the needless noise. A disciplined investment strategy forces you to focus on the information that is important for your decision-making process.

Delegating Decision Making
Recognize the fact that it is difficult to do it all when it comes to investing. If you have a well-diversified portfolio and you invest in the major assets classes - and maybe some of the sub-asset classes as well - you are not likely to be able to actively manage all your investments effectively, unless you have a lot of time to allocate. The question then becomes, what to do yourself and what to delegate to others. It is important to stick to your strengths and interests and delegate out the asset classes in which you have a limited expertise.

As an example, an investor might feel confident trading large cap value stocks. As such, this person should concentrate their efforts on that asset class and delegate the investment management of other asset classes to someone else. Investors have several choices here, including active or passive management of the funds or assets they are looking to delegate. From the passive management side, you can find an advisor to handle the areas that you have little time to manage or research; you could also purchase a mutual fund or an ETF that provides exposure to these areas.

The Bottom Line
Having an investment strategy for both asset mix and security selection is important to ensure consistent success as an investor. Having the discipline to follow an investment strategy is more important than the actual strategy chosen. Equally important to any strategy, is determining what to manage yourself and what to delegate to others.