Friday, June 7, 2013

It’s Always A Confidence Game

QUESTION: I don’t understand the page 11 comments about German Hyperinflation and that it took place because capital was being hoarded and there was no lending?????
Can you clarify how price hyperinflation occurs if no one is spending or lending.

Because people were hoarding real money so there was none to be deposited in banks and thus there was a shortage of internationally accepted money. The Wiemar Republic was a communist revolutionary government that did not have the ability to borrow for who would lend anything to a government that was rejecting capitalism? Therefore, it was the complete lack of CONFIDENCE in the government that (1) caused the hoarding, and (2) caused the complete lack of credit preventing any bond issues. Consequently, the government could ONLY print money.

But the KEY that is overlooked is CONFIDENCE. All we hear is how the US will go into hyperinflation because of the Fed’s monetization. That is gibberish. Ask the average American is they trust government and the answer is still YES! Hyperinflation requires the wholesale collapse in the CONFIDENCE of government. That is not likely. We must crash and burn before that will happen. It is not what YOU believe, it is what the MAJORITY believe and they are NOT on board yet.
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Eric Sprott: Investment Perspective (June 2013)

Redemptions in the GLD are, oddly enough, Bullish for Gold

by Eric Sprott and Etienne Bordeleau, Sprott Asset Management
Recent outflows from physical gold exchange traded products (we use the SPDR Gold Shares, GLD) have been interpreted by the financial press as a sign of weakness in the demand for gold as an investment vehicle.1

However, a closer look at the evidence suggests otherwise: the largest outflows in the history of the GLD (see Figure 1) started well before the large drop in the price of gold we observed on April 15th, 2013 (-9%, which represents a 1 in 11 years event)2. In fact, the net redemption of shares of GLD started as early as the second week of January 2013 (on a 3-month cumulative rolling basis). In this note, we will explore the theory that it was the shortage of physical gold and the ensuing arbitrage opportunity that drove market participants to redeem shares of GLD.

So why are the bullion banks3 that act as Authorized Participants for GLD, a group that includes JP Morgan and HSBC and others (who by-the-way were mostly bearish on gold leading to the April Crash), redeeming so many shares of GLD?
One explanation could be that they are trying to match supply and demand so that the net asset value (NAV) of the ETF is in line with its price. Historically, we have observed that large movements in and out of the GLD are associated with large discounts/premiums to NAV (Figure 2). This is due to the constant creation/redemption of the shares to minimize the discrepancies between the ETF share price and the NAV. However, the recent wave of redemptions has occurred even while the premium to NAV has been very stable, hovering around 0% for most of the year.

Source: and Sprott Calculations.
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Slowdown in Canada Brings Even Odds of Recession Next Year

Most forecasters expect that growth in Canada will accelerate during the next few quarters. But a more sobering view comes from Montreal-based economist Peter Berezin at BCA Research.
by Peter Hadekal
Financial Sense

A slowdown is on the way and there’s a 50-50 chance of recession in Canada by the middle of next year, argues Berezin, managing editor of the monthly newsletter The Bank Credit Analyst.
Growth is likely to falter as the housing bubble deflates and as investment spending slows, especially in the natural resource sector.
If that happens, the Bank of Canada would have limited recourse to stimulate the economy with easier monetary policy since interest rates are already near historic lows.
In these circumstances, the Canadian dollar is likely to weaken during the next year while Canadian stocks are likely to underperform.
Continue Reading at…
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Guidewire Software Inc (NYSE: GWRE)

Guidewire Software, Inc. provides system software to the property and casualty (P&C) insurance industry primarily in the United States, Canada, and Australia. It provides Internet-based software platforms for core insurance operations, including underwriting and policy administration, claim management, and billing. The company's Guidewire InsuranceSuite includes PolicyCenter, an underwriting and policy administration application, which serves as a system-of-record that supports the entire policy lifecycle comprising product definition, underwriting, quoting, binding, issuances, endorsements, audits, cancellations and renewals; ClaimCenter, a claims management application for claim intake, assessment, settlement, and processing of claim-related financial transactions; and BillingCenter, a billing and receivables management application. It also offers add-on modules to its InsuranceSuite consisting of Rating Management, which enables P&C insurance carriers to manage the pricing of their insurance products; Reinsurance Management that allows P&C insurance carriers to execute their reinsurance strategy through their underwriting and claims processes. Its customers include insurance carriers for property and casualty, and workers compensation insurance.
Please take a look at the 1-year chart of GWRE (Guidewire Software, Inc.) below with my added notations:
1-year chart of GWRE (Guidewire Software, Inc.) After trading mostly sideways during the fall of last year, GWRE finally broke into a trend higher in January. Since that break, the stock has shown a commonality in the prices it tends to “bounce” on as it moves higher. In February the stock found support at $30 (blue) and then in April the stock bounced on $35 (red). Finally, in May the stock found support at $40 (green). So, as GWRE moves higher it tends to pull back to the most recent increment of $5 and find support there.
The Tale of the Tape: GWRE tends to find support on the “5's”. A trader could enter a long position at $40 with a stop placed under the level. If the stock were to break below that support the uptrend would most likely over and a short position would be recommended instead.
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Beat the S&P With 5 Stocks Everyone Else Hates: AZO, CRM, ICE, PAYX, WM

2013's market climb has earned the moniker of the "most hated stock rally" -- and for good reason. Since stocks started their latest uptrend in November, sentiment has been pointed markedly away from U.S. stocks. But betting on the rally that everyone hated has paid off: the S&P 500 is up more than 14% year-to-date.

That same approach works well with the market's most hated individual stocks right now too.

That's not just my opinion -- the data bears it out. Going back over the last decade, buying heavily shorted large and mid-cap stocks (the top two quartiles of all shortable stocks by market capitalization) would have beaten the S&P 500 by 9.28% each and every year. That's some material outperformance during a decade when decent returns were very hard to come by.

When I say that investors "hate" a stock, I'm talking about its short interest. A stock with a high level of shorting indicates that there are a lot of people willing to bet on a decline in its share price -- and not many willing to buy. One of the best indicators of just how high a short-squeezed stock could go is the short interest ratio, which estimates the number of days it would take for short-sellers to cover their positions. The higher the short ratio, the higher the potential profits when the shorts get squeezed. (more)

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Gold, Silver & Precious Metal Miners Signals

It has been a very long couple of years for the precious metal bugs. The price of gold, silver and their related mining stocks have bucked the broad market up trend and instead have been sinking to the bottom in terms of performance.
Earlier this week I posted a detailed report on the broad stock market and how it looks as though it‘s uptrend will be coming to an end sooner than later. The good news is that precious metals have the exact flip side of that outlook. They appear to be bottoming as they churn at support zones.
While metals and miners remain in a down trend it is important to recognize and prepare for a reversal in the coming weeks or months. Let’s take a look at the charts for a visual of where price is currently trading along with my analysis overlaid.

Weekly Price of Gold Futures:

Gold has been under heavy selling pressure this year and it still may not be over. The technical patterns on the chart show continued weakness down to the $1300USD per once which would cleanse the market of remaining long positions before price rockets towards $1600+ per ounce.
There is a second major support zone drawn on the chart which is a worst case scenario. But this would likely on happen if US equities start another major leg higher and rally through the summer.

Weekly Price of Silver Futures:

Silver is a little different than gold in terms of where it stands from a technical analysis point of view. The recent 10% dip in price which shows on the chart as a long lower candle stick wick took place on very light volume. This to me shows the majority of weak positions have been shaken out of silver. Gold has not done this yet and it typically happens before a bottom is put in.
While I figure gold will make one more minor new low, silver I feel will drift sideways to lower during until gold works the bugs out of the chart.

Silver Mining Stock ETF – Weekly Chart:

Silver miners are oversold and trading at both horizontal support and its down support trendline. Volume remains light meaning traders and investors are not that interested in them down where and it should just be a matter of time (weeks/months) before they build a basing pattern and start to rally.

Gold Mining Stock ETF – Weekly Chart:

Gold mining stocks continue to be sold by investors with volume rising and price falls. Fear remains in control but that may not last much longer.

Gold Junior Mining Stock ETF – Weekly Chart:

Gold junior miners are in the same boat with the big boys. Overall gold and gold miners are still being sold while silver and silver stocks are firming up.

Precious Metals Trading Conclusion:

In the coming weeks we should see the broad stock market top out and for gold miners along with precious metals bottom. There are some decent gains to be had in this sector for the second half of the year but it will remain very dicey at best.
If selling in the broad market becomes intense and triggers a full blown bear market money will be pulled out of most investments as cash is king. Gold is likely to hold up the best in terms of percentage points but mining stocks will get sucked down along with all other stocks for a period of time. This scenario is not likely to be of any issue for a few months yet but it’s something to remember.
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