Tuesday, May 8, 2012

Why I'm Watching Select Silver Producers

Eric Sprott says silver prices will triple.
Sprott is a legend in the resource industry. Many of his clients have become wealthy listening to his advice. He told them to buy gold about 10 years ago, for example, when the price was $250 an ounce. Today, gold trades over $1,600 an ounce, or 540% higher.
Over the past few years, Sprott has turned his attention to silver. He says it's "the investment of the decade." 
As you can see from the chart below, Sprott's forecast looked spot-on in early 2011. Silver prices pushed near $50 an ounce, halfway to his $100 price target [2].
However, silver prices have pulled back sharply since then. The metal is down more than 40% off its highs. It's trading below its 200-day moving average [3] (DMA), a simple trend indicator. That suggests the recent downward trend since March will continue.

Silver is not selling off because of weak fundamentals. Here's what Sprott has to say about silver's supply and demand metrics:
Annual production is about 900 million ounces per year, including recycling. Industrial usage alone will rise to 660 million ounces by 2015. That leaves only 240 million ounces for coinage, central bank [4] purchases, and investment.
And right now, coinage is surging. Data released by the U.S. Mint in February shows that silver coins have outpaced sales of gold coins more than 50 times over. In fact, according to several leading precious metal dealers, dollar sales of silver and gold reached parity for the first time in history.
I expect industrial usage to increase as well. Silver can be found in many electronic products, like mobile phones and computers. This industry is booming right now (just take a look at Apple's results). These devices have short life cycles. That means they need to be replaced every 18 months or so.
My advice is to start taking a look at the silver producers. Companies like Fortuna Silver, Silver Standard, and Endeavor Silver are down between 20% and 40% over the past three months. They are trading at historical low valuations.
These companies are low-cost producers. More important, they are expected to increase silver production by more than 30% by 2013.
Buying these companies could mean [5] huge returns if silver prices maintain the $30 an ounce level. If Sprott is right and silver prices begin pushing toward $100 an ounce, these companies could go up several hundred percent from these depressed levels.

It’s Official: Economy Heading Down

There has been so much bad economic news out, recently, I do not see how anyone with half a frontal lobe could say the economy is not in trouble.   Friday, new unemployment figures were announced, and a weak 119,000 jobs were created.  The rate fell to 8.1%, but only because more discouraged workers stopped looking for work and disappeared from the government’s data base.   In Friday’s report, economist John Williams of Shadowstats.com summed it all up by saying, “The headline U.3 unemployment rate dropped a statistically insignificant notch to 8.1% in April, from 8.2% in March, but the “good” news was anything but good.  The declining pace of headline unemployment reflected an accelerating increase in the number of the headline unemployed giving up looking for work, because there were no jobs to be had. . . . The SGS-Alternate Unemployment Measure, accordingly, notched higher in April to 22.3%, from 22.2% in March.” (Click here to go to the free section of Shawowstats.com.)  So, unemployment in the real world actually went up—not down.  According to outplacement firm Challenger, Gray & Christmas, planned job cuts rose 7.1% in April, and more than 40,000 more workers are going to be laid off.  (Click here for more on this story.)
Housing is another sad story.  Year-over-year housing prices continue to decline despite record low 30-year mortgage rates below 4%!  In the last two years alone, 1 million homeowners who bought houses lost money and are underwater.  In January, the Federal Reserve estimated 12 million Americans owed more than their homes were worth.  (Click here for more on that story.) Economist Robert Shiller of the Case-Shiller home price index lamented, two weeks ago, “I worry that we might not see a really major turnaround in our lifetimes.”

U.S. Equity Market Radar (May 7, 2012)

U.S. Equity Mar­ket Radar (May 7, 2012)
The S&P 500 Index declined 2.44 per­cent this week. Telecom­mu­ni­ca­tion ser­vices and util­i­ties out­per­formed as investors sought higher div­i­dend yields in the wake of higher mar­ket volatil­ity.  The S&P 500 suf­fered its worst weekly decline since Decem­ber as the mar­ket digested a slew of eco­nomic releases, which on aver­age came in slightly below expectations.
S&P 500 Economic Sectors
  • AT&T and Ver­i­zon led the telecom­mu­ni­ca­tion ser­vice sec­tor for a sec­ond week, as investors sought the rel­a­tive safety of mar­ket lead­ing div­i­dend yields.
  • Util­i­ties also per­formed well dur­ing this “risk off’ week, par­tic­u­larly as the 10-year U.S. Trea­sury yield sank to just 1.88 percent.
  • The defen­sive con­sumer sta­ples sec­tor out­per­formed the broader mar­ket with rel­a­tively small decline of 0.52 per­cent.  Whole Foods Mar­ket and Archer-Daniels gained 7.8 per­cent and 3.8 per­cent, respec­tively, dur­ing a chal­leng­ing trad­ing week.
  • Notably, infor­ma­tion tech­nol­ogy trailed the S&P 500 Index this week by 131 basis points, and was the worst-performing sec­tor within the broad mar­ket. Accord­ingly, Apple declined by 6.3 per­cent over the last five days.
  • Energy and Mate­ri­als lagged the mar­ket as the price of crude oil dropped below $100 a bar­rel and the Thomp­son Reuters/Jefferies Com­mod­ity Index fell by 2.7 per­cent this week on soft employ­ment data and eco­nomic growth con­cerns.  Dia­mond Off­shore Drilling fell 4.6 per­cent dur­ing the week.
  • Despite down­side volatil­ity dur­ing the week, the home­build­ing sub­sec­tor con­tin­ues to per­form well, hit­ting a new 52-week high, and fin­ish­ing the week rel­a­tively flat in a down market.
  • The U.S. remains a bright spot in the global econ­omy and exter­nal shocks from Europe or Asia can’t be ruled out.

CHART OF THE DAY: The Last Time Wall Street Strategists Felt This Way, Stocks Surged Like Crazy

Bank of America's U.S. equity strategy team just boosted its year end target on the S&P 500 to 1,450 from 1,400.
One reason for this bullish upgrade was a change in the firm's Sell-Side Indicator.  According to the firm's research, Wall Street's strategists are now "extremely bearish" and they are underweight equities.
  Because this is a contrarian indicator, BofA sees this as bullish sign for stocks.
chart of the day, sell side consensus indicator, may 2012

Commodities Back in Bear Territory

With Europe mired in reces­sion and eco­nomic data in the US turn­ing soft in recent weeks, the com­modi­ties sec­tor has taken it on the chin recently.  With a decline of close to 2% today, the CRB Com­modi­ties index is once again down more than 20% from its highs in 2011.

The Smart Way to Trade Silver: 200%-Plus Upside with Limited Risk

Right now could be the perfect time to profit [2] from silver. In fact, I think traders could make 200%-plus if silver hits my target price. Let me explain...
Silver lost its luster after the 2011 rally peaked just below the ballyhooed bull [3] target at the all-time high at $50 an ounce set in 1980.  The drop from $48 to the $26 January 2012 lows measures a 45% decline from the heights just one year ago this month.
As a side note, if you adjust that record price for inflation [4] over the 30+ years the real upside target for Silver sits significantly higher at $139.19.  
The iShares Silver Exchange Traded Fund (NYSE: SLV [5]) represents one ounce per share.  With the current price holding roughly around the $30 support area the reward to risk ratio may once again be in the longs favor.

The seven-month trading channel between $34 and $30 could be a setup for an SLV price breakout.  A rally run above the resistance top projects a $4 move, the width of the channel, to $38 and the back up to the original September breakdown area.  #-ad_banner-#
That $38 target is also the halfway bounce of the 2011 highs to this years lows which is a healthy 25% plus higher from here.  Only a weekly close below the December/January congestion action at $28 would reset the bullish [3] base.
As you can see, there's plent of upside left in silver. However, there's a better way to profit from silver than buying SLV. A SLV long call option [6] can provide the staying power in a potential larger trend extension.  More importantly, the maximum risk is the premium paid for buying the option [7].
The Options Way: Unlimited Upside Potential with Limited Risk  
One major advantage of using long options instead of buying or selling shares is putting up much less money to control 100 shares -- that's the power of leverage [8].
Choosing an option can sometimes be a daunting task with all of the choices and expirations.  Simply put, traders want to buy a high probability option that has enough time to be right.
The option strike price [9] is the level at which you have the right to buy without any obligation [10] to do so.  In reality, you rarely convert the option into shares. Simply sell the option you bought to exit the trade for gain or loss. 
There are two rules options traders need to follow to be successful.
Rule One:  Choose an option with 70%-plus probability.  The Delta [11] is a measurement of how well the option reacts to movement in the underlying security. It is important to buy options that payoff from only a modest price move.  There is no need to ONLY make money on the all but infrequent price explosion.
Any trade has a fifty/fifty chance of success.  Buying options ITM options increase that probability. That Delta also approximates the odds that the option will be In The Money [12] at expiration. Buying better options are more expensive, but they are worth it -- the chances of success are mathematically superior to buying cheap, long shot Out Of The Money lottery tickets that rarely ever pay off. 
With SLV trading at $30.00, for example, an In The Money $26 strike option currently has $4.00 in real or intrinsic value [13]. The remainder of any premium is the time value [14] of the option.
Rule Two: Buy more time until expiration than you may need -- at least three to six months for the trade to develop. Time is an investor's greatest asset [15] when you have completely limited the exposure risks.
Traders often buy too little time for the trade to develop. Nothing is more frustrating than being right but only after the option has expired premature to the market [16] move.
Trade Setup: I recommend the October SLV $26 Call at $5.00 or less. A close below $28 on a weekly basis or the loss of half of the option premium would trigger an exit.
Looking at the SLV chart above, the $26 level coincides with the 52-week low [17] support.  This option strike gives you the right to buy at the lowest point for the year.  The October option gives the bull trend near six months for development.

The maximum loss is limited to the $500 paid per option contract. The upside, on the other hand, is unlimited.
The trade breaks even if SLV is trading at $31 at expiration ($26 strike plus $5 option premium = $31). That is just a dollar above SLV’s current price. If shares hit my $38 price target [18], the option investment would more than double,  a gain of at least 200%.

Hedge Funds Betting Against the Eurozone: Why You Should Worry

Some of the world's most prominent hedge fund managers are betting against the eurozone -- and not just the peripheral countries everyone knows are in trouble. They're taking positions against the core countries, economies that -- until now -- everyone has assumed were rock-solid.

Here's a primer on the world of hedge funds and why the latest developments in the recently resurgent eurozone crisis are yet another warning shot across America's economic bow.

How the Other Percent Invests

Put simply, hedge funds are investment funds for the wealthy. You and I put our money into mutual funds, which a fund manager watches over, moving investor money into and out of a portfolio of stocks, bonds, and other investment vehicles as he or she sees fit in order to maximize the fund's return.

Hedge funds are private investment funds that are typically open only to a limited number of investors and require a large minimum investment to participate.

Hedge fund managers use a range of advanced investment strategies to maximize investor return, including leveraged, derivative, and long positions, as well as what are known as "short" positions. "Going short" means betting that a stock, security, or other investment vehicle is going to decrease in value, rather than go up. "Going long," or betting an investment will increase in value, is the much more commonly taken position.

Say It Ain't So, Angela

Most of us know the big names in the eurozone that have gotten into serious financial trouble over the last few years.
  • Ireland had to be rescued by other eurozone members when its debt-fueled property bubble collapsed, pushing the country to the verge of sovereign bankruptcy.
  • Greece also had to be bailed out (twice) when it's sovereign-debt bubble burst, leaving it a hair's breadth away from default.
  • Spain is most recently in the news, as its own debt-fueled property bubble and fiscal problems are sending the cost of its debt to near-unsustainable levels.
  • Even France has been looked at suspiciously by the bond markets for a while.
But Financial Times is reporting that a group of hedge fund managers are now shorting some of the core countries in the eurozone, including Germany and the Netherlands, even though bond yields in those countries -- the gauge for measuring a country's fiscal and financial health -- are still at record or near-record lows.

In a nutshell, some of the world's best-paid, most-seasoned, and savviest investors are sufficiently convinced of the underlying sickness of even the most apparently stable eurozone countries that they're placing serious bets on their potential collapse. John Paulson, the billionaire who made his name (and his money) by shorting the U.S. mortgage securities market in the run up to the 2008 financial meltdown, is one of the hedge fund managers reported to be shorting Germany.

Who Rescues the Rescuer?

The financial crisis, which began here in the U.S., may still be roiling across the Atlantic.

Europe is sick. The U.K. has just slipped back into recession. Spain has, too, along with recently suffering another downgrade on its sovereign debt by ratings agency Standard & Poor's, which sent its bond yields back above 6% -- the danger zone. While the U.S. unemployment rate is still above 8%, it appears to be coming down. And while GDP growth of 2.2% is nothing to write home about, the U.S. economy is growing.

But Europe and America are inextricably linked. To a great extent, as goes Europe, so goes the U.S. American banks still have an undetermined amount of exposure to eurozone banks. The potential economic debt-market shock waves produced by the default of any of the larger European countries could send the American economy back into recession.

This is why the thought of Germany's economy going south is truly terrifying. Germany is the eurozone's biggest economy and, along with France, has orchestrated and made the biggest contributions to the above-mentioned rescues.

But who comes to the rescue when the rescuer needs rescuing?