Saturday, November 24, 2012

Sixth Myths About the Stock Market: Birinyi

The notoriously bullish Birinyi Associates wants to set the record straight: The recent stock-market slide isn’t a reason to panic.

A plethora of investors and strategists have cautioned that the market’s recent pullback could portend an even bigger correction, perhaps even the start of a new bear market. Concerns about the looming fiscal cliff top the list of worries for investors.

But, as Jeffrey Rubin at Birinyi points out in a note to clients, there have been plenty of 5%-to-10% pullbacks throughout the years that have come and gone without much harm being done. Since the March 2009 bottom, the S&P 500 has had 17 falls of at least 5%, according to Rubin.

The market has recovered from each one of them.

“While our view is unchanged and we remain positive, we do recognize how each correction feels like the start of a new bear market,” Rubin says. “With the decline some new and some not new ideas are being bounced around in support of the negative case. We thought we would take this opportunity to review the accuracy of some of the arguments for the negative thesis.”

Without further ado, Rubin presents six myths about the stock market:  (more)

Michael Berry: When Picking Mineral Stocks, It’s Management, Management, Management

by George S. Mack
The Gold Report

Michael Berry believes the declining dollar is the real driver behind the gains in gold and silver and that silver is undervalued relative to gold. In this interview with The Gold Report, Berry, co-founder of Discovery Investing and pioneer of the Discovery Investing Scoreboard, discusses the factors that are now driving valuation and highlights some micro-cap stocks that the market has ignored.
The Gold Report: When you look at the PHLX Gold/Silver Index (XAU) between mid-May and mid-July, there’s a perfectly beautiful double bottom. It looked like a big W. Since the beginning of October all commodities have broken down a bit, but that double bottom was so pronounced. Do you attach any significance to it?
Michael Berry: George, when we used to see a “W” pattern we would say “WOW” and when we identified a double top “M” we would say “Mother”! There is a dominant secular quality-of-life cycle in the world, a very long-term cycle, so in the short run, we’re going to have runs up and then declines. The Federal Reserve is going to continue to attempt to inflate and devalue the dollar value relative to other currencies and relative to gold and silver. And it is going to do it for the next three to five years, for however long it takes. Just take a look at Japan for a view of the future. My sense is that there’s a very firm bottom on both gold and silver that has been identified by the double bottom you are referring to.
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Gold and Silver Outperforming General Equities For The First Time Since 2011

The U.S. election results are in.  The people have chosen.  Subscribers are well aware of the changing rules of the game will conform to the latest economic developments.  There may well be a period of negativity relating to the general markets due to the U.S. election, Fiscal Cliff and Year End Tax Loss Selling.  We may see both parties come to some sort of conciliatory agreement to save the holiday season.  This is known after the election as the Honeymoon Phase, when previously antagonistic parties feel the need to think “Can’t We All Just Get Along!”
What should investors in the precious metals market do next on this wave of Obama’s win?  The way we see it is to wait for any initial reaction of pessimism to subside.  Precious metal devotees are a special breed that still must operate within basic rules of the game.  What is the market signaling to us?
Immediately after Obama’s victory, there has been a selloff in the general market.  Note carefully that gold and silver has held up well despite a significant decline in the Dow Jones Industrial Average and S&P 500.  The market will do whatever it can to confuse, misdirect and obfuscate.  The recent decline in the S&P500 not only was unmatched by the action in gold, but we note silver is outperforming as well.
What could the recent market response tell us as to what our next move in the gold market might be?   Possibly, reverting to one of our favorite mantras: “Patience and Fortitude”.
We may well be witnessing negativity as being the abdication of disgruntled Romney supporters.  This is generally the standard reaction of depressed players quitting the scene at the wrong time.  But, hey, this is a psychologically skewed, emotional reaction to leaving the battlefield.
Napolean was famous for having said, “One engages then one waits.”  Similarly, as precious metal players we have taken our positions and hopefully buy and hold along the secular upward charts may turn out to be the prudent course.

High Yield: Be Sure to Understand the Risk

Much has been written about today’s prolonged low interest rate environment and how it has prompted many investors to seek out riskier assets in an attempt to generate a return that exceeds inflation. One big beneficiary of this trend has been high yield. This year through the end of September, $38 billion has flowed into high yield mutual funds and ETFs, and last week, Russ cautionedthat high yield was looking expensive.
Most investors are aware that high yield bonds have greater credit risk than many other fixed income sectors.  But what might be less appreciated – especially by investors who are new to high yield — is how challenging high yield liquidity can be at times, and how rapidly high yield bond prices can fall in a deteriorating market.
Take a look at the chart below. It’s a six-month snapshot of the 2008 financial crisis, and it illustrates how bid/offer spreads on high yield bonds may widen as the market deteriorates. The dark blue line shows the market value of the Barclays US Corporate High Yield Index.  The light blue line shows the average bid/offer spread of bonds in the high yield market.  Notice how the market sell-off was accompanied by rising transaction costs for high yield securities.

Investors also need to understand the high yield market’s “equity-like” characteristics. For instance, when high yield sells off, it tends to do so in a “risk-off” market in which other higher risk investments, like equities, are also selling off. This drop in value during a stock market decline can be an unwanted surprise for investors who expect the bond portion of their portfolio to rise in value during a risk-off market and to help shelter the overall portfolio from the impact of a market dislocation.

Let’s look at two examples of this kind of dislocated market: the 2008 financial crisis and the US Treasury downgrade in August 2011.  Over the past five years (October 2007 – October 2012), the correlation between high yield and the S&P 500 has been approximately 0.62.* However, during the onset of the financial crisis from 9/15/08 – 10/15/08 this correlation increased to 0.79.  More recently, in the aftermath of the US Treasury downgrade during August 2011 the correlation jumped to a whopping 0.97 – meaning that high yield and equities were moving almost in lockstep with one another.

What does this mean for investors?  High yield can be a good asset class for building yield into a portfolio, but it does not have the same diversification properties that are often looked for in a bond investment. This is especially true during falling equity markets when such diversification may be desired most. This is not to say that investors should shun high yield as an asset class. Indeed, any higher yielding asset is likely to exhibit similar behavior. Rather, investors should set realistic expectations for yield targets and obtain that yield from diversified sources (e.g., high yield bonds, EM bonds, dividend stocks, long duration US Treasuries or corporates).

In the end, yield is never free.  It is just a question of what risks an investor wants to take and how they construct their portfolio.

*Correlations were calculated using daily observations between the market price of HYG and the S&P 500.

We're Headed For A Disaster Of Biblical Proportions

Last year, legendary investor Jeremy Grantham of GMO published a treatise on exploding commodity prices.

He also offered a startlingly depressing outlook for the future of humanity.

Grantham believes the world has undergone a permanent "paradigm shift" in which the number of people on Earth has finally and permanently outstripped the planet's ability to support us.

The phenomenon of ever-more humans using a finite supply of natural resources cannot continue forever, Grantham says--and the prices of metals, hydrocarbons (oil), and food are now beginning to reflect that.

Grantham believes that the planet can only sustainably support about 1.5 billion humans, versus the 7 billion on Earth right now (heading to 10-12 billion). For all of history except the last 200 years, the human population has been controlled via the limits of the food supply. Grantham thinks that, eventually, the same force will come into play again. The hope of the optimists, of course, is that science will find a solution to this problem, the way it has for the past 150 years. Let's hope so. In the meantime, here's a snapshot of Grantham's argument, along with his key points at the end.

In the past 200 years, the world population has exploded--just as Malthus predicted. What Malthus did not foresee was the discovery of oil and other natural resources, which have (temporarily) supported this population explosion. Those resources are now getting used up.. (more)

Hyperinflation and Complete Collapse – Nick Barisheff

by Greg Hunter, USAWatchdog:

Asset manager Nick Barisheff says, “There’s never been a fiat currency in history that didn’t end in hyperinflation and complete collapse.” Barisheff thinks that Treasury Secretary Tim Geithner’s most recent call to have an “unlimited debt ceiling” for the U.S. was “just telling the truth.” That’s essentially what we have now with “open-ended” money printing by the Fed. Barisheff adds, “All it’s doing is postponing a problem . . . it makes it bigger and eventually it blows up.” Forget about remedies for the economy, it’s too late. Barisheff says, “We’ve passed the point of this getting fixed.” Barisheff thinks if the Fed’s gold holdings are ever audited, there will be a “gigantic short-covering rally . . . multiple bankruptcies . . . and a massive loss of confidence” in the dollar because much of the gold is gone or leased out. Barisheff thinks the gold price could be “easily double” right now. That’s because Barisheff believes, “What’s kept the price down is the artificial leased gold going onto the markets.” Join Greg Hunter as he goes One-on-One with Nick Barisheff, CEO of the $650 million Bullion Management Group.
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This Is What We Are Looking At Directly In Front Of Us

from King World News
With continued volatility in global markets, top Citi analyst Tom Fitzpatrick put together a group of charts and commentary to help put things in perspective for investors around the world. There are a series of fascinating charts in this piece. Fitzpatrick also takes a trip back in time to use as a roadmap for the future.
Here is what top Citi analyst Fitzpatrick said in his latest report, along with powerful charts: “The suggestion from these charts remains that of: A sluggish economy with some inflation dangers creeping in and rising unemployment i.e stagflation in a dynamic that shows a number of similarities to the 1970’s.
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Hunt brothers sacrificed to save the US dollar says Mike Maloney

Mike Maloney, founder of and author of the Guide to Investing in Gold and Silver talks to GoldMoney’s Alasdair Macleod. They discuss why gold is not in a bubble and talk about the potential for the silver price and how the end of the precious metals bull market in 1980 came about.

Maloney states that there will be a great financial crisis within this decade with the fear of subsequent political upheaval. Looking at the acceleration in the money supply both men agree that gold remains undervalued and under-owned.  They talk about possible issues with gold ETFs and point out the need to own actual physical bullion instead of paper claims on gold in order to avoid counterparty risk.

Maloney emphasises that compared to the bull market in the 1980s, the current bull market in gold is taking place on a global stage with much higher participation and therefore price potential.

Maloney is very bullish on silver and expects the gold to silver ratio to narrow towards 12:1 as the market will try to rebalance the value of those two currencies according to their rarity. At some point gold will get too expensive for the common man making silver the more affordable option. They also discuss how much impact the Hunt brothers actually had on the price of silver in 1980 and how the bull market ended.