Gold Correction Is Over: Alf Field

There is a strong probability that the correction in the price of gold has been completed. This article has four separate sections. They are:

1. The Elliott Wave (EW) justification for thinking that the correction in gold is over.

2. Why corrections happen in gold from a fundamental viewpoint.

3. The extent to which manipulation affects the gold price.

4. A possible “black swan” event that could trigger a gold price surge.

Justification for the end of the gold price correction:

In EW terms, the correction consists of three waves, an A wave down, a B wave rally and a final C wave decline. There is usually a relationship between the A and C waves. Often they are equal or have a Fibonacci connection. The chart below is of the gold price using PM fixings:

In this case, the A and C waves are equal in percentage terms at 14.5% and 14.7%. The overall decline from $1895 to $1531 is -$364 or -19.2%. My speech to the Sydney Gold Symposium last November – link at http://www.symposium.net.au/files/4ec58abcb729a.pdf – showed that the largest corrections in the previous Intermediate wave from $700 to $1895 were about 12% in PM fixings. The forecast was that the current correction from $1895 would be one degree of magnitude larger than 12%. A decline of 19.2% qualifies as one degree larger than 12%.

An interesting observation is that if 12% is multiplied by the Fibonacci relationship of 1.618, the result is 19.4%, very close to the actual 19.2% decline for the correction. The chart below is of the gold price in Comex 2mth forward prices:

The Gold Symposium speech suggested that the correction would be between 21% and 26% in spot gold prices. The actual decline was from $1920 to $1523, a loss of -$397, or -20.7%. This is just below the target range but qualifies as one degree larger than the 14% corrections in the previous up move from $680 to $1913.

The C wave of the correction in the chart above reveals some symmetrical subdivisions which confirm that the C wave was completed at $1523 on 29 December 2012. With all the minor waves in place and with the correction being of the correct size, that should be the end of both the correction and Intermediate Wave II.

The probability of this analysis being correct is high, perhaps 75%? Smaller probabilities allow for: (i) this to be an A wave of a larger magnitude correction; (ii) the current correction becoming more complex, perhaps reaching the lower price targets (e.g. -26%); and (iii) the possibility of deflation, defaults and depression emerging, also testing lower price targets.

The up move just starting should thus be Intermediate Wave III of Major Wave THREE, the longest and strongest portion of the bull market. The gain in Intermediate Wave I from $680 to $1913 was 181%. The gain in Intermediate Wave III should be larger, at least a 200% gain. A gain of this magnitude starting from $1523 targets a price over $4,500. The largest corrections on the way to this target, of which there should be two, should be in the 12% to 14% range.

Why Gold is prone to numerous corrections:

Gold is unique amongst metals, partly because it is not consumed, but also because it has some unusual qualities. It has no utility value. One cannot eat it or drink it. It earns no income, does not corrode and does not tarnish. Other qualities include divisibility (a quantity of gold can be divided into smaller quantities) and it is fungible, (one ounce of gold can be substituted for another ounce of gold of the same degree of fineness). There are large stocks of gold available and new annual production has generally been less than 2% of the stock of gold. These are the very qualities that caused gold to be used as money over the millennia.

Other metals and commodities are produced for consumption. When their stocks build up due to supply exceeding demand, holders become forced sellers due to the cost of storage or due to spoilage. Thus the price of the commodity drops to a level where marginal producers go out of business until demand exceeds supply. Then stock levels decline until they are exhausted and conditions of shortage prevail. This results in sharply rising prices for that commodity, eventually attracting new suppliers. In soft commodities, weather conditions can also play havoc with stock levels, causing dramatic price changes.

The point is that with all commodities other than gold, stock levels are important determinants in the price of the commodity. Gold has been accumulated over the years because it was money or as a hedge against a range of fiscal, economic and political risks. The stock of gold relative to new annual gold production has always been high.

In 1971, when the $35 per ounce link between the US dollar and gold was severed, it was assumed that all the gold produced throughout prior history was about 90,000t. This is a rubbery figure and should probably be a higher number. As it is not important to this discussion, we will use 90,000t as a starting point. Over the centuries some gold was lost or was no longer available to the market. If we assume that about 15,000t was lost, it means that in 1971 about 75,000t of gold was available to the market. New production in 1971 was 1,450t, less than 2% of the available stock of gold.

One reliable figure available in 1971 was that gold held by central banks and official institutions was about 37,000t. By deduction, the remaining 38,000t of the available stock must have been owned by investor/hoarders in the form of bullion, coins or jewelry. New production of 1,450t in 1971 was meaningless when compared to stocks of 75,000t. The future gold price was going to be determined by what existing holders of gold did with their stocks and what the level of demand would be from new buyers. For several reasons there was considerable new buying of gold during the 1970’s, resulting in a sharply rising gold price.

Fast forwarding 40 years to our current situation, new mine production over this past 40 year period may have been about 90,000t, of which perhaps 10,000t has been lost or consumed by industry or in jewelry not suitable for reclamation. That leaves 80,000t to be added to the 1971 estimated stock level of 75,000t, giving a current total gold stock of 155,000t. Recent annual production has been about 2,500t, which is still under 2% of the available stock.

Whereas the gold owned by central banks and official institutions in 1971 was a reliable amount of about 37,000t, we no longer have accurate figures for gold held by official sources. We know that central banks have reduced their holdings over the years, either by selling or leasing.

Central banks no longer publish accurate figures of their gold holdings, but for purposes of this discussion, let us assume that the current level is 30,000t, a decline of 7,000t from 1971 levels. The central bank sales of 7,000t must have been absorbed by the investor/hoarders, taking their adjusted total to 45,000t before adding the 80,000t of new production since 1971. That means that new buyers have entered the market over the past 40 years and have swelled the total gold held by investor/hoarders to perhaps 125,000t. (38,000+7,000+80,000). That is a lot of gold!

These numbers are guesstimates as there is no way to substantiate them. The important thing is that the trend indicates that investor/hoarders must own a considerable amount of gold, at least several times larger than the quantity held by central banks. Whenever gold goes to new all time high prices, all investor/hoarders have a profit on their holdings of gold. When the gold price rockets $400 per ounce from $1500 to $1900 in just seven weeks, as it did last July and August, the profits available to investor/hoarders are vast and mouth watering. Not surprisingly, many decide to take some profits while new buyers become cautious due to the rapid price rise.

The result is a correction in the gold price. This is a normal occurrence and will happen from time to time, especially when the gold price pushes to new highs. The natural result of a large stock of gold held by investor/hoarders is that occasional corrections must be expected.

Extent of manipulation in the gold market:

It is hard to visualize much manipulation in the physical market for gold when investor/hoarders own 125,000t and the volume traded is large. The futures market is another story. Gold futures trading became popular in the 1970’s when the price was freed from its $35 per ounce collar. It was possible to control a large amount of gold for a deposit of 10% or less, enabling punters to gear up their positions substantially.

There are many similarities between casinos and futures markets. In a casino the house holds the punter’s money and issues plastic chips for them to gamble with. The odds offered by the casino always favor the house so that there are always more losers than winners, the difference being the profit margin for the casino. In the futures market, every transaction requires someone else to take the opposite bet. Both parties put up the necessary deposits which are held by the market operator. Again losses will always exceed gains, the difference being accounted for by the brokerage and market costs.

In a casino, if one had an unlimited amount of money, one could devise a method of escalating bets so that when one eventually had a win, all prior losses would be recovered plus the desired percentage profit. For example, in roulette over a lengthy period all columns or dozens (the 2 to1 shots) come up slightly less than 33% of the time. A player betting on one of these with unlimited funds would know that sooner or later a winning bet would occur. When it does, the player recovers the cumulative losses plus the desired percentage profit. A foolproof system? Not quite. Casinos impose limits on each table for every bet, which prevents this.

In the futures market it is possible for players with unlimited funds to operate a similar system on the short side of the gold market. As explained in the previous section, corrections do happen in the gold market, especially after the price has risen to new highs. If the player knows that a correction will occur eventually, with unlimited funds he can increase his short position at higher prices until the correction happens. Then he closes his position, hopefully banking a profit.

This could be circumvented by imposing limits on the size of the position that a player can build, just as the casinos impose limits on each type of bet. This is extremely difficult to regulate and monitor in the futures markets. The authorities probably rely on the knowledge that every contract sold short has to be bought back at some time, thus the position is self-correcting. This is true, but the manipulation aspect occurs when the correction has started and the player with the big short position gives the market a nudge on the downside, triggering stop loss orders.

Most players on the long side are operating on margin. That is the attraction of the futures market, to gear up profits. These players are operating with limited funds, so they either have stop loss orders in place, which become market orders when triggered. Or they fail to provide additional cash when their brokers ask for more margin, which causes the broker to sell out their positions, once again placing sell orders “at market”.

“At market” orders are sold at whatever the best buying price is available at that time in the market. If this happens when markets are thin and the major markets are not operating, this can cause an avalanche of selling. The sharp downward spike on 26 September last year is typical of what can happen in these circumstances. That is the time when the “deep pockets” player will probably be covering his short position.

It should be obvious from this that the futures market is an extremely dangerous place in which to participate in the gold market. There are other risks that have only recently come to light regarding futures markets. Sticking with the casino analogy, assume that you have had a bit of luck in the casino and decide to cash in your plastic chips. When you get to the cashiers counter it is closed with a sign saying “Run out of money. Come back tomorrow morning”. You return the next day only to find a sign saying that the casino is bankrupt and is closed! Enquiries elicit the information that the cashier took all the casino’s money, went to a nearby casino and lost the lot.

In the futures market, the operator holds all the cash while the punters have contracts. The operator uses the cash to pay out the winners and cover expenses. Assume that the futures operator decides to take a risky position for the operator’s own benefit in another market but uses the cash contributed by the punters. The risky venture goes sour and the operator goes bankrupt. The punters are left high and dry. While all the facts have yet to emerge, it seems that this is possibly what caused the demise of MF Global.

As the world navigates this period of great financial and economic crisis, we need to be extremely vigilant and cautious with our investments. Be wary of paper claims on gold and always be conscious of the old saying: “Gear today, gone tomorrow”. Limit investments to what one can afford to pay for in cash.

A possible “black swan” event that could trigger a sharp gold rally:

To achieve the EW target of $4,500 on the next upward move will require something to trigger substantial new buying of gold. What could that event be? By definition, it will be a surprise to all market participants, a “black swan” event. That doesn’t prevent us from making a guess.

One likely area from which problems could emerge with very large numbers are derivatives. The Bank for International Settlements produces a list of outstanding derivatives twice a year. The latest report can be found at: http://www.bis.org/statistics/otcder/dt1920a.pdf. This reveals that the total notional value increased from $601 trillion (with a “t”) at December 2010 to $707 trillion at June 2011. Nearly all of the increase was accounted for by interest rate contracts which now have a notional value of $553 trillion, some 78% of the total.

As we discovered in 2008, derivatives are benign until losses occur. Once losses emerged from credit default obligations, it was game on for the GFC. Interest rate derivatives protect banks from interest rate rises. Most banks borrow short but have large loan books at fixed rates for long periods. Thus a big rise in interest rates could trigger claims on these derivatives.

For the time being, rates seem to be locked at virtually zero in the USA, but this is not the case in Europe. Europeans are learning the lesson that rates rise when investors become concerned that the borrower can’t repay the amount borrowed, let alone the interest on the capital. When we drill down further into the BIS statistics at http://www.bis.org/statistics/otcder/dt21a21.pdf we discover that $219 trillion of the interest rate derivatives are denominated in Euros, compared with $170 trillion denominated in US Dollars.

If just 10% of the interest rate derivatives in Euro’s produce losses, the world’s banking system would be looking down the barrel of a loss of $22 trillion. That is enough to bankrupt the entire world’s banking system, something that the politicians of the world could not tolerate. What would a bail out of $22 trillion do to financial markets? What would it do to the gold price?

If it is not interest rates, there are $64 trillion of foreign exchange derivatives and a “mere” $32 trillion of credit default swaps outstanding that could produce “black swan” surprises.

Alf Field

12 January 2012

Deadly Dow 36,000 & The Secret History Of A 70% Market Loss

Some investors fear that the Dow may go to 4,000 or 5,000. Surely that would be bad, but there is a worse possibility to consider, which is that the Dow could go to 36,000 instead. Now, Dow 36,000 may sound like a "problem" that most investors would love to have! So what's the danger?

To demonstrate why Dow 36,000 could be a nightmare scenario, we will begin with a review of how 70% of stock investor wealth was annihilated the last time the US endured the combination of sustained high unemployment and high rates of monetary inflation. Using a series of simple steps, we will pierce through the generally accepted but false narrative about that market, and show how even with an assumption of "perfect" market timing - that is, buying on the best single day over a near 12 period, and selling on the best single day over an almost 10 year period - that the historical end result was still crippling investor losses, caused by three distinct wealth-destroying forces.

We will then move to today's financial world, and show how the little understood interplay between these same three deadly wealth destroyers could create the glittering illusion of wealth that would be Dow 36,000 - even while wiping out 80% of real investment values.

How Inflation Hid A 70% Market Loss: 1968-1982

History has already shown us what can happen to long term investment returns when persistent high inflation collides with stubborn high unemployment, resulting in stagflation. Consider the graph below. As shown in yellow, the Dow Jones Industrial Average reached 919 in May of 1968, and by August of 1982, had fallen to a level of 777, for a loss of 15%.

Many investors recall a previous "Lost Decade" for the stock market when the market stayed flat to somewhat down, moving sideways but never persistently up, and what is seen in yellow is consistent with that market perception.

Except - a 15% loss in a long-term sideways market isn't what happened at all, not when we look at what a dollar would buy. That is, a US dollar in 1982 was only worth 35 cents compared to what it would have bought in 1968, because the dollar had lost 65% of its value to inflation. (more)

Invest in Germany While It’s Down

The capital market turmoil of the second half of 2011 is finally starting to show up in Europe’s real economy. Initial estimates show German GDP shrinking 0.25% in the fourth quarter of 2011, dragging down the growth rate for the year to 3% (versus 3.7% last year). If the first quarter of this year proves to be sluggish, German GDP might shrink again — meaning the German economy officially would be in recession.

Few things scare investors like the dreaded “R” word. So, my next words might take readers by surprise: It’s time to buy German stocks.

Actions have consequences, of course. But a lack of action has consequences, too. By failing to take decisive action to stabilize the debt crisis and save the euro, Europe’s politicians have created a climate of uncertainty that has eroded confidence in the capital markets. There are consequences for this. Facing the unknown, companies postpone major new projects. Would-be workers don’t get hired. With employment stability in question, consumers avoid major purchases.

Consider Greece: With ejection from the eurozone still a distinct possibility, who in their right mind would take out a loan for a new business venture? You might well find yourself on the hook for a large loan in euros with nothing to repay it but worthless Greek drachmas.

Look at the Trees, Not the Forrest

Europe — and Germany in particular — might indeed fall into technical recession early this year. Or, a successful implementation of the EU fiscal discipline treaties might do enough to restore confidence and allow for a resumption of growth.

I don’t know which scenario will occur — and it doesn’t matter.

The relevant question is not whether German GDP grows by half a percent or shrinks by half a percent and meets the precise, technical definition of “recession” (two consecutive quarters of declining GDP). No successful value investor wastes their valuable time pondering a question this useless.

The relevant question is, at current prices, “Are German stocks positioned to deliver good returns in the years ahead?” I would answer with an emphatic “Yes.”

Looking at the German market from the top down, the iShares MSCI Germany Index Fund (NYSE:EWG) — the most popular vehicle for Americans investing in Germany — trades for just 9 times earnings and yields 3.5% in dividends. But drilling down to individual stocks, the story gets even more compelling.

Siemens (NYSE:SI), the global engineering juggernaut, makes up 11% of the ETF’s portfolio. Siemens did 73.5 billion euros in revenues in fiscal 2011 and had a healthy order backlog of 96 billion euros. Most importantly, a majority of Siemens’ revenue comes from outside of crisis-plagued Europe, nearly a third comes from emerging markets, and roughly 12% comes from China and India alone.

Looking at the financials, Siemens trades for just 9 times earnings and sports a 4% dividend — a dividend that has a history of growing. The company also has virtually no debt (its $19 billion in cash and equivalents are approximately equal to its long-term debt), so it should have the financial strength to survive whatever the financial crisis throws at it.

Another smart pick is Daimler AG (PINK:DDAIF) — the maker of the iconic Mercedes-Benz, among other luxury brands. Mercedes is the premier global luxury automobile. And it is a fantastic way to get “backdoor” exposure to emerging markets. China already is the world’s largest consumer of the high-end S-Class, and China accounted for 18% of all Mercedes cars sold this past quarter. In trucks, the numbers are even better. More than half of Daimler truck sales come from Asia and Latin America.

Investors fret that 45% of Daimler’s auto sales come from Western Europe, but it does not worry me. Daimler’s high-income customers are less at risk of financial distress than the average European. But even if the atmosphere of austerity makes a dent in European sales, the stock price offers more than a sufficient margin of safety. DDAIF shares trade for less than 7 times earnings and yield nearly 6%.

Value investors often are “early” in their trades, and this might yet prove to be the case in Germany. The pattern of the past year has been for European stocks to rise in the weeks leading up to a major policy summit only to come crashing down when the summit fails to meet expectations. Only time will tell how the market reacts to the fiscal discipline treaty when it is officially announced later this month.

Still, when you buy iconic, first-rate companies trading at prices not seen in a generation, you don’t have to get the timing exactly right. You can be a little early or a little late and still do just fine. And right now, I recommend investors use any short-term setbacks to accumulate shares of Germany’s finest multinational companies. German blue chips might be investors’ best bet for triple-digit gains over the next 12 to 24 months.

Fiat Money Explained

Stillwater Mining Or North American Palladium?: PAL, PALL, PPLT, SWC

There used to be a couple of good options for investors seeking a pure play on miners in the platinum metals group. Those were Stillwater Mining Company (NYSE:SWC) and North American Palladium Ltd. (AMEX:PAL). Stillwater chose to follow a broader trend where miners attempt to diversify their portfolio of assets, and has become more leveraged to copper and gold than platinum metals. Now, there's really only one choice for investors seeking direct exposure to a platinum metals miner.

Demand Firm, Supply Glut Exhausted
Platinum and palladium, like gold and silver, are precious metals. But these metals don't trade all that similarly to their more widely recognized stores of value. In fact, platinum and palladium are extremely sensitive to fluctuations in the business cycle, and the stock prices of miners of these metals are highly correlated to industrial usage.

Platinum, which is a relatively scarce resource, has a variety of uses, including jewelry fabrication, industrial, electronic and chemical applications. Platinum prices rebounded sharply after the financial crisis. Yet the ETFS Physical Platinum Shares (ARCA:PPLT) is down roughly 7% over the past two years as underlying platinum prices have softened. There could be value in this exchange-traded fund (ETF) if the recent decline in platinum prices triggers increased demand, particularly given a good year of auto sales.

Palladium, a less well-known metal, is found primarily in Russia, South Africa, Montana and Ontario. Palladium prices peaked at the turn of the century above $1,000 per troy ounce on anticipated demand for its use in catalytic converters that reduce exhaust emissions. Over 50% of palladium demand derives from the automobile industry. In addition, palladium is used in electronics, dental and refining products.

During the 2000s, the Russian government flooded the market by selling off huge stockpiles of palladium left over from the Soviet era. Prices plummeted within a few years of the peak, and once again during the financial crisis. Since then, palladium is one of the hottest metals. Over the past two years, ETFS Physical Palladium Shares (ARCA:PALL) is up around 46% over the past two years, topping the approximate 43% rally from the SPDR Gold Trust ETF (ARCA:GLD). There's speculation that the Soviet stockpiles may be exhausted and the supply-demand relationship is now tilted in palladium's favor. This is a big positive for miners. (For more information on investing in metals, read A Beginner's Guide To Precious Metals.)

North American Stands Alone
Stillwater, the largest American miner of palladium and platinum, benefited from firmer prices during the third quarter. Net income jumped from just under $5.9 million in the same period last year to roughly $40.7 million, on approximately a 77% year-over-year increase in revenues. The good quarterly results were much needed. Shares of Stillwater were hammered over the summer after the company announced the acquisition of Canadian miner Peregrine Metals for about $487 million. The market was not pleased. Post-acquisition, the company is more leveraged to copper and gold, rather than the platinum group of metals.

Meanwhile, North American Palladium still primarily mines for platinum and palladium, although it does produce gold and other base metals. The company has recovered from a disastrous first quarter earlier in 2011, announcing in the November earnings report that the company will begin mining the LDI palladium mine via shaft during the fourth quarter of 2012. With several mine expansions and developments coming online this year, it should be able to deliver consistent earnings growth. The stock could capture investors looking for a miner of platinum and palladium now that Stillwater is spread out.

The Bottom Line
Most investors look to gold, a metal that has had quite a run over the past few years, for commodity asset allocation. With the dollar strengthening on the breaking back of the euro, that play has risks. Alternatively, the platinum group of metals (which does have some inflation hedge pricing) is heavily influenced by industrial demand. That positioning could be an important catalyst for Stillwater and North American.

There are some headwinds. Platinum prices are down sharply since the last quarter and that could hurt revenues. Longer-term, in the transition towards electric vehicles that have no emissions, palladium is not needed. However, electric vehicles still represent a very small percentage of total sales and will likely remain so for some time.

In aggregate, these miners should be able to grow revenues as the demand for platinum metals is strong. Investors may not be done beating up Stillwater for the Peregrine acquisition. Although the mining segment does offer relative value after a very difficult 2011, and Stillwater has rebounded nicely off the 52-week low. More importantly, Stillwater is no longer a pure play on platinum metals. North American Palladium offers direct exposure to platinum and palladium, and the earnings capability of a well-positioned miner.

ProShares Debuts Specialized Inflation ETFs

ProShares launched the ProShares 30 Year TIPS/TSY Spread (NYSE: RINF - News) and the ProShares Short 30 Year TIPS/TSY Spread (NYSE: FINF - News). Both ETFs are designed to provide exposure to breakeven inflation, which is a widely followed measure of inflation expectations.

RINF seeks to match the performance of the Dow Jones Credit Suisse 30-Year Inflation Breakeven Index, before fees and expenses. FINF aims for inverse of the daily performance of the Dow Jones Credit Suisse 30-Year Inflation Breakeven Index, before fees and expenses.

'Many investors are focused on inflation and closely follow breakeven inflation, a common yardstick for inflation expectations,' said Michael L. Sapir, Chairman and CEO of ProShare Advisors LLC, ProShares' investment advisor. 'We are pleased to offer investors the first ETFs linked to this important economic indicator.'

Breakeven inflation aims to isolate the market's expectation of inflation implied by the difference in yields between Treasury Inflation Protected Security (TIPS) and Treasury bonds. The Dow Jones Credit Suisse 30-Year Inflation Breakeven Index tracks the returns of a long position in 30-year TIPS and a short position in Treasury bonds.

Both ProShares ETFs charge annual expenses of 0.75%.

AdvisorShares Offers New Sector ETF In other ETF news, AdvisorShares launched a sector ETF called the AdvisorShares Rockledge SectorSAM ETF (NYSEArca: SSAM - News). The sector fund's strategy is designed to invest in the top performing U.S. industry sectors, while hedging by short selling the sectors expected to have the lowest or negative returns

New York-based Rockledge Advisors is the portfolio manager of SSAM. The company will use its proprietary quantitative analytical system known as the Sector Scoring and Allocation Methodology which helps Rockledge determine specific conditions in both economic and business cycles. Rockledge evaluates whether a sector is cheap or expensive, given the cycle relative to the rest of the market and will invest (be long) in the undervalued sectors while avoiding (be short) the overvalued sectors.

SSAM's net expense ratio is 1.50%.

Alex Gurvich, Co-Founder of Rockledge and portfolio manager of SSAM said, 'The U.S. economy goes through various growth cycles, which means there should be relative sector variation at all times. We rotate investments between the U.S. economic sectors based on our proprietary evaluation in order to try and outperform the overall market. We believe that the prudent investor, who understands the risk vs. reward tradeoff, should be looking at sector investing vs. individual stocks. Holding a position in a sector can provide inherent diversification while reducing individual company risk.'

AdvisorShares is based in Bethesda, MD.

PowerShares Adds Low Vol ETFs

InvescoPowerShares added an emerging markets and international developed equity ETF that attempts to minimize stock market volatility.

'Given today's market environment, investors are naturally seeking better ways to reduce volatility in their portfolios,' said Ben Fulton, Invesco PowerShares managing director of global ETFs. 'We believe the PowerShares family of low volatility ETFs may provide investors a degree of protection in down cycles while still participating in upward trending cycles, and have the potential to improve risk-adjusted returns over the long term.'

The PowerShares S&P Emerging Markets Low Volatility Portfolio (NYSEArca: EELV - News) contains 200 of the least volatile stocks within the S&P BMI Emerging Markets Low Volatility Index.

The S&P Emerging BMI Plus LargeMid Cap Index includes all publicly listed equity securities with float-adjusted market values of at least $100 million and annual dollar value traded of at least $50 million from the following countries: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, South Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand and Turkey.

The PowerShares S&P International Developed Low Volatility Portfolio (NYSEArca: IDLV - News) contains 200 of the least volatile stocks within the S&P BMI International Developed Low Volatility Index.

The S&P Developed ex US and South Korea LargeMid Cap BMI Index includes all publicly listed equity securities with float adjusted market values of at least $100 million and annual dollar value traded of at least $50 million from the following countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

EELV's annual expense ratio after the temporary fee waiver is 0.29%, while IDLV charges 0.25%.

Put Your Long-term Dollars in Utilities

Buy iShares Dow Jones Utilities Index Fund on break below 50-day moving average.

iShares Dow Jones Utilities Index Fund (NYSE:IDU) — This ETF seeks to mimic the return of the Dow Jones Utility Index. At least 90% of its assets are in depository receipts that represent the index. And the index is composed of electricity, gas, water stocks, etc.

Last year, this ETF had a return of 18.6%. It currently pays a dividend of $2.90, providing a dividend yield of 3.37%.

Technically IDU is in a powerful bull channel, which keeps pace with its 50-day moving average. It is resting on that line now, and so any break below it would be an excellent opportunity to make a long-term investment in the utility sector.

How To Protect Your Stock Investments In The Event Your Broker Dealer Goes Bankrupt

Deeply bothered by the MF Global(MFG) collapse, I spent the entire month of December researching a report which I’ve now released, entitled, “BulletProof Shares” – How To Protect Your Stock Investments From Broker Bankruptcy & Theft.

The reason I began researching and ultimately put this paper together was simple: fear. As a stock investor, I became afraid to continue holding my stock investments in the financial system. My investigations into this matter were both shocking and relieving as I’ve previously reported, for the reason that all the financial “safe guards” to protect investors from losses are flimsy at best. I’m indirectly referring to the SIPC when I say that by the way. I discovered that in the economic “good times”, the SIPC carries around a billion dollars in capital, which is raised from annual member company dues. But in bad economic times such as we’re in now, member companies go bankrupt and many fall behind in their annual contributions–while at the same time broker bankruptcies increase, putting a tightening financial noose on the entire organization.

Easily Severing Broker Dealer Counter Party Risk and Removing Your Shares From The Financial System

The relieving aspect of my research was the discovery of how easy and simple it actually is to protect and remove stock investments from broker dealer’s custodial possession and the financial system itself. By default, stocks are always purchased under the “street name registration”when you purchase them with a broker dealer. This means the stocks are held in custody under the name of the broker dealer you’re using. The two alternative methods which serve to “de-risk” your shares from counter party risks in the system, are “direct registration” and “paper share certification”.

Direct registration and paper share certification are covered in depth in“BulletProof Shares”. It took hundreds of hours of research pouring through the internet, and speaking with dozens of transfer agents, brokers, and public companies. While I highly recommend stock investors purchase a copy of “BulletProof Shares,” I’d also like to point out that anybody can use these methods at no cost, provided they do the research on their own. All my data was acquired from public sources and companies which happily hand it out(some less happily than others I might add) for free. So the question for most people is simply a matter of value vs time. Spend a couple bucks and save a few hundred hours, or spend a few hundred hours and save a couple bucks. The choice is yours. (more)

European Downgrade: Doom & Gloom? (with Marc Faber)

Marc Faber, editor and publisher of the Gloom, Boom & Doom Report, discusses the S&P downgrade of France and other European countries. He believes they should be downgraded even further.

Tips For When To Buy, Sell Or Hold

As a broker, sometimes you need to make snap decisions. Should you buy, sell or hold that stock? You won't always have time to consult your firm's stock analysts, interview management or read lengthy research reports to make a decision. So what do you do? One simple trick is to look at the company's last two earnings reports. In this article, we'll point to key information that will help you make good decisions under pressure.

Increasing Sales
Is the company growing its sales, and if so, is the sales growth real, or related to one-time events? This means you'll have to read the entire press release to both take in what management said about the quarter, as well as look at the numbers. Did the company experience internal growth, or did it sell an asset or experience some other windfall that makes it seem like it's growing?

In general, it's a good idea to look at smaller companies (in the $100 million to $1 billion in sales range) that are growing in excess of 10% annually. When looking at larger companies, their sales should be growing by at least 3% to be of interest. Lastly, compare a company's growth in sales not only from last year, but from last quarter (both year-over-year and sequentially). If quarterly sales have exhibited an upward trend, it's usually another good sign.

Improving Margins
The sales line is improving. Is its cost of goods sold line item, or its selling, general and administrative expense line on its income statement going up at a faster rate? If so, it could be because the company is just entering into a new business or launching a new product and is experiencing some growing pains or paying for some start-up costs. However, this could also mean that the company is doing a poor job of managing its expenses. Management's discussion of the quarterly results will help you glean that information.

Guidance
Many companies offer Wall Street some sort of guidance on future earnings. Has the company recently increased or decreased its future (earnings) guidance? Are the numbers the company is expecting better or worse than what Wall Street analysts are expecting? This information will give you an idea of whether the company has the potential to "wow" The Street, or if it is more likely to disappoint with its future numbers.

Delving a bit deeper into the psychology behind earnings guidance, if a company ups its guidance for the current quarter, but downplays expectations beyond that, its stock will probably sell off. Conversely, if a company reduces its estimates for the current quarter, but raises its full year estimate, the common stock will probably take off. As a rule of thumb, keep your eye on the long term, because in most instances, Wall Street will overlook a short-term stumble if it is convinced that there may be a tangible catalyst on the horizon.

Stock Buyback Programs
Is the company repurchasing stock in the open market? When companies buy back their stock rather than use the cash to make acquisitions or pay dividends, it's usually a good sign that management feels the stock is undervalued. Repurchase programs will probably be mentioned in the press release.

That said, in some cases management may have ulterior motives behind buying back shares. Some management teams do it to reduce total share count in the public domain, in order to improve financial ratios or boost earnings, thus making the company more attractive to the analyst community. Other buyback programs are instituted as a public relations ploy to get investors to think the stock is worth more.

Share repurchase programs are usually a good sign that better times may lie ahead. Just ask yourself, would you rather buy a company that is repurchasing its stock near its 52-week low, or one that refuses to buy back shares in spite of having the cash to do so?

Rising Share Count
Ideally, you want to see the total number of outstanding shares staying the same or falling, perhaps as a result of a repurchase program. This way, future earnings are spread across fewer shares, making earnings per share higher. As shares outstanding increases, earnings are divided among a larger pool of investors and become diluted, decreasing your potential for profit.

New Products
In a short period of time, it's almost impossible to determine whether a product will be a winner or not. However, it could be a big mistake to overlook these stocks, because new products will often garner a lot of attention from both consumers and investors. This often helps move the share price higher in the near term. In addition, the company has probably already spent a huge amount of money on R&D and initial promotions as it positions itself to take in a whole lot of money with fewer (namely R&D) expenses.

Take, for example, Apple's release of the iPod in 2001. Initially, some investors and analysts were skeptical of whether the company would be able to deliver meaningful revenues from this product. However, the product turned out to be highly successful; the company's growth in past years was propelled by the iPod's success; the company shipped out 42.6 million iPods in 2011, alone. New products don't always turn out to be cash cows for the companies that produce them, but if you get in on a good one early, there can be a dramatic potential for profit.

Language Use
Read the press release. What is your impression of what occurred in the quarter? Was it a positive report in which management talked about "opportunities" and relished its past growth, or did management talk about the many "challenges" facing the company? Was its earnings guidance raised or lowered? Are there any new potential catalysts such as new products or potential acquisition candidates that management is talking about that might help drive the stock higher? The language that is used in these press releases is very deliberate. It is reviewed by many eyes in the both the press and the legal departments. An upbeat report is an especially good sign, while a report containing muted language should be viewed with suspicion.

A word of warning: Reports that are overly upbeat should be viewed with caution as well. If a company fails to deliver what it has previously promised or falls short of its future expectations, the stock is likely to be clobbered.

Technical Indicators
Next, look at the stock chart for the last year and last five years. Are there seasonal variations in the stock price? Does it typically trade higher or lower in certain parts of the year? This could be valuable information.

Is the stock trading above or below its 50- and 200-day moving averages? Determine the trend this stock is trading in. Is it a thinly traded stock, or does it trade millions of shares per day? Has the volume recently increased or decreased? Decreasing volume could be a sign of less interest in the shares, which could cause a decline in share price. Increases are generally favorable if the underlying fundamentals are solid, meaning the company has solid growth opportunities and is well capitalized.

The 10,000-Foot View
Beyond the last couple of press releases, consider the macro trends that might impact the stock. Are rising interest rates, higher taxes or buying patterns within the industry going to have an impact on the stock? Is there some other external factor, such as an industry-wide downturn, that might affect the company? These considerations are just as important as the fundamentals and the technical indicators.

For example, consider the situation at Continental Airlines in 2006. The company was in fairly good shape, but higher fuel costs and concerns with the number of bankruptcies within the industry seemed to be holding the stock down. Therefore, even though Continental was expected to grow its earnings in excess of 50% over the next year, in spite of dismal prospects, the stock remained unpopular among the investment community and eventually ended in Continental's merger with United Airlines in 2010. Taking a 10,000-foot view of the company will allow you to take in the external factors that could keep a stock from being profitable.

The Bottom Line
By necessity, investors and their brokers often need to analyze companies on the fly. Zeroing in on the information listed above should allow you to make sense of the company's prospects while avoiding a rash decision.

Eric Sprott: "The Financial System Is A Farce"

From Eric Sprott and David Baker

The Financial System is a Farce: Part Three

2011 was a merry-go-round of more bailouts, more deferrals and more denial. Everyone is tired of the Eurozone. It’s not fixable. There’s too much debt. The politicians don’t know what’s going on. Nothing has structurally changed. We’re still on the wrong path. There’s more global debt than there was a year ago, and it’s the same old song: extend and pretend, extend and pretend,… around and around we go,… and it isn’t fun anymore.

Just as we wrote back in October 2007, and again in September 2008, we feel compelled to state the obvious: that the financial system is a farce. It’s a complete, cyclical farce that defies all efforts to right itself. This past year continued the farcical tradition with some notable scandals, deferrals and interventions that underscored the system’s continuing addiction to government interference. With the glaring exception of US Treasuries and the US dollar (which are admittedly two of our least favourite asset classes), it was not a year that rewarded stock picking or safe-haven assets. Many developments during the year bordered on the ridiculous, and despite some positive news out of the US, we saw little to test our bearish view. If anything, our view was continually re-affirmed.

Let’s start with MF Global. With more than two months passed since the scandal broke, federal officials are still unable to find the estimated US$1.2 billion of missing customer funds.¹ The whole episode has been a disaster for the CME, the self-regulatory body in charge of making sure the futures brokers play by the rules. Normally in instances of broker bankruptcy, the CME is supposed to backstop client accounts and keep them liquid – i.e., allow them to continue trading while the bankruptcy gets settled. It never happened in this case. Client accounts were frozen for weeks. Funds have remained missing for months – an eternity for clients who were caught short. The great shock was watching how inept and incapable the CME was in 1) preventing the fraud in the first place and 2) recovering client assets during the aftermath. The CME essentially copped out of their responsibility, offering little more than some perfunctory press releases along the way. They were also surprisingly quick to offer excuses for their non-action. According to CME, it really wasn’t their fault, since CME had “no control over the disposition of customer segregated funds that are held by MF Global and not by CME Clearing”.² Their on-site review of MF Global’s operations the week before its bankruptcy suggested that the brokerage firm was in full compliance of all the rules, so it wasn’t really the CME’s problem. But of course it was their problem. That’s what the CME is there for – to protect clients in cases of fraud or bankruptcy. To protect the “integrity of the exchange”.

In the weeks that have passed, a curious web of transactions have surfaced between MF Global, JP Morgan and Goldman Sachs. Before its bankruptcy, MF Global had been drawing down a $1.2 billion revolving line of credit with JP Morgan. In bankruptcy court, JP Morgan was able to negotiate a lien on some of MF Global’s assets in exchange for paying $8 million towards bankruptcy costs. According to Reuters, “The lien puts JPMorgan’s interests ahead of MF Global customers who have not yet received an estimated $900 million worth of money from their accounts, which remain frozen as regulators search for missing funds.”³ It is also alleged that JP Morgan accepted a roughly $200 million transfer from MF Global the day before its bankruptcy to cover an overdraft in MF Global’s trading account held with them (it still isn’t clear if JP Morgan has the cash).⁴ MF Global also appears to have sold hundreds of millions worth of securities to Goldman Sachs in the days leading up to its collapse, but did not immediately receive payment for them from the MF Global’s clearing firm, none other than JP Morgan.

To be fair, on November 22nd, the CME did offer to pledge $550 million as a guarantee to the SIPC Trustee in the event that they did not recover all of the missing client funds, but we cynically wonder if that pledge was made after they finally figured out where all the money had gone. The CME seems to have had a good idea by early December, based on comments made by Commodity Futures Trading Commission (CFTC) member, Jill Sommers.⁵ The bottom line is that MF Global’s client interests and security appear to have been side-stepped to buy time for bigger, more important players to cover their losses (asses), and that is not the way the regulatory system is supposed to function.

We’re not naïve – we know the government will always protect the interests of the big banks over paltry retail investors, but do they have to be so brazen about it? The MF Global episode is basically shameless. Then there’s Dodd-Frank. Remember Dodd-Frank? It’s the massive financial regulatory reform act that was signed into law by President Obama back in 2010. We are certainly not fans of cumbersome overregulation, but in its essence, Dodd-Frank was supposed to provide a new framework to address the potential failure of a too-big-to-fail bank. There’s nothing wrong with that. Given the sheer size of the off-balance sheet derivatives market, we don’t see a problem with at least attempting to prepare for another large scale banking failure in the US. But almost two years later, we have to laugh at how little of the Dodd-Frank framework has actually been implemented. According to law firm Davis Polk, a mere 21% of the act’s 400 rulemaking requirements have become finalized since the law passed in July 2010. Of the 200 Dodd-Frank rulemaking requirement deadlines that have already passed, 74.5% of them have been missed to date.⁶ The lawyers must be having a field day with all the paperwork.

One part of the Dodd-Frank story that interests us is the CFTC positions limits rule set to go into effect on January 17, 2012. The new position limits are aimed at preventing excessive speculation in the commodity markets which are believed by many, including ourselves, to have driven wild fluctuations in the gold and silver spot price over the past decade. Position limits are an obvious threat to large futures speculators like the big banks, so it was no surprise when two Wall Street lobby groups, the Securities Industry and Financial Markets Association (SIFMA) and the International Swaps and Derivatives Association (ISDA) launched a lawsuit against the CFTC demanding that the new rules on commodity trading be thrown out, or at the very least, delayed. The CFTC voted on the request to delay implementation and officially rebuffed it on January 4th, which is a heartening development in an otherwise cynical saga.⁷ Back in December, however, the CFTC had already quietly waived the position limit filing requirements on all CME participants until May 31, 2012.⁸ So even if the new rules go into effect this month, banks won’t have to report their position levels until May 31st either way. Given the lobby groups’ outstanding lawsuit against the new rules, combined with the CFTC’s apparent tendency to grant temporary reprieves, we don’t expect the new position limit rules to be enforced any time soon. Once summer approaches, there will probably be more delays and more deferrals, granting the big players plenty of time to protect themselves. Extend and pretend. Delay and defer. That’s the song we sing on the merry-go-round.

Then there’s Europe and the European Central Bank (ECB). Back in December, the mighty ECB had to step in with yet another massive liquidity injection to avert a total meltdown in the EU banking system. On December 21st, they flooded 523 separate EU banks with a “Long Term Refinancing Operation” (LTRO) program totaling €489.1 billion ($626 billion).⁹ The program consists of loans that are due in three years and will charge an accommodating 1% interest rate. The liquidity injection will allow the EU banks to participate in a delightfully convenient carry-trade whereby they can take the borrowed money at 1% interest and invest it in various sovereign debt auctions that will likely pay them 3% or higher. The banks will keep the difference in profit, and the EU PIIGS countries get to breathe easier knowing they’ll be able to sell their garbage paper to the EU banks at suppressed rates as long as the LTRO loan money lasts. And the best part? It doesn’t involve any money printing, so there’s really no risk of inflation, you see? So just so we’re on the same page, if everything goes according to plan this year, European sovereign governments will fund their debt auctions with borrowed money lent to them by over 500 European banks who have themselves borrowed hundreds of billions of euros from the European Central Bank,… who as far as we can tell, borrowed those euros from the various EU sovereign states (or simply printed them). Do you get it? Do you see the circularity? Do you see the can being kicked down the road? And guess what? Since €489.1 billion is clearly not enough to avert disaster this year (most EU banks are so undercapitalized they’ve simply parked the borrowed LTRO money back with the ECB at 0.25% interest), the ECB has promised to launch another LTRO injection this coming February!¹⁰ No wonder gold was down in December. They completely solved the European debt crisis!

Last but not least, we must mention an alarming component of this year’s National Defense Authorization Act (NDAA) that was quietly signed into law by President Obama on December 31st, 2011. This year’s defense bill, officially known as Senate Bill 1867, includes a specific provision that seems to grant the US government the power to detain accused terrorists, including US citizens, indefinitely, without trial.^11,12 There has been much uproar and confusion over the language used in the sections of the Bill related to the subject, and it’s still not clear how the Bill will change the existing laws related to terrorism detention in the US, but it doesn’t bode well for constitutional freedom within the country. There’s obviously no direct market impact to the legislation, but we mention it only to remind investors how quickly the rules can change when governments feel vulnerable. ‘Political risk’ should no longer only be applied to mining investments in third world countries. In 2012, it may apply to us all.

It’s very difficult to predict what lies in store for the stock market this year. Anything could happen. Government intervention in the financial system has never been more extreme. We hope the examples above have shed some light on that. As we enter 2012, there are significant debt-related financial risks festering within the three great economic theatres of the world: the US, Europe and China. The market may rally, it could crash, it could tread water, we just don’t know. A lot will depend on how the central banks react. But we are eager to maintain the positioning that we held in 2011. We will maintain our exposure to precious metals equities and bullion. We will maintain our large gross short weightings in our hedge funds. We are confident that they will protect us on this farcical merry-go-round that seems to spin faster and faster with every passing day.