January 29, 2010

Global Market Comments
January 29, 2010

Featured Trades: (McCARTHY HEARINGS),
(GOLD), (ABX), (PCY), (LQD)


1)'Have you no shame, sir?' That is what I expected Treasury secretary Tim Geithner to cry out during his congressional grilling today. The circus was preceded by a Republican congressmen holding up emails for the cameras proving Geithner's perfidy in the AIG bailout, but was unable to tell us exactly what was in them. Is Whitaker Chambers going to testify next? Are we going to be led to a pumpkin patch?  No, I'm not old enough to remember the red scare and the 1954 McCarthy hearings, although I know that many of you readers are. It was all comic theater listening to the conservative minority attempt to blame Geithner for the financial crisis they created, the bail out that Bush's Treasury secretary initiated, and the bill that was passed on to Obama. Where were these people demanding full disclosure in October, 2008?  The farther we move away from those cataclysmic days, the more people come up to me saying we should have let all the banks go under and dealt with the aftermath. They don't understand that a decade long Great Depression II was staring us in the face. I can remember enough of the stories my parents and grandparents told me about those difficult days to know that it is something I'd rather not suffer through myself. You can't blame these people for being upset, as it was they who were abandoned by their leaders and left drifting in the wind. Somehow the party of fiscal rectitude morphed from Dr. Jekyll to Mr. Hyde as soon as it got into office in 2001, and raced to double the national debt to $11 trillion as fast as possible. It all makes me want to throw the remote at my TV and cry. I don't understand why Republicans think blaming Democrats for Republican sins is going to get them anywhere. Antics like this are certain to guarantee another seven years of the one party state. Adjust your portfolio accordingly. Enough ranting and raving for today.

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2) If you are wondering about the long term prospects for gold, just ask the guy who has the biggest bet in the market. That would be Peter Munk, founder and CEO of Barrick Gold (ABX). His company produced the 8 million ounces of the barbaric relic last year, has the world's largest reserves, and mined 6 billion ounces of copper as a sideline. In September, Munk set the cat among the pigeons when his company announced that it would take off its gold hedges at a cost of $5 billion. The move provided the launching pad for a 25% spike up in gold to a new all time high. Munk's confident explanation was that the long term future of the yellow metal was so secure that the hedges were no longer needed to smooth out his company's earnings. No other asset class was up every year for the past decade. Investors are so scared from the events of the financial crisis, with banks dropping like flies and fund managers blowing up right and left, that it will influence their investment decisions for decades. That means building a core holding of gold to protect against the next crisis, whether it ever comes or not. Munk recommended against short term trading the shares of gold miners, but to keep a permanent asset allocation to the sector. Uncertainty is rising, is now a permanent feature of the investment landscape, and a short term rally in the stock market isn't going to change that. The rise of middle class gold buyers in emerging markets is also something that isn't going away in our lifetime. 'They make cheap suits in China, but not cheap gold,' he said. Munk's comments reconfirm my own view that we may see some sideways action in precious metals for six months before the next blast up to a new high, getting us closer to my own target of $2,300. Better take another look at gold futures, coins, bullion, the ETF (GOLD), and ABX shares themselves.

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3) Last year, I suggested emerging market sovereign debt ETF's as safe, high yielding investments in which to hide out in case the equity markets swoon again. The stock mrket looked pretty grizzly last week, so let's see how they performed. The Invesco PowerShares Emerging Market Sovereign Debt ETF (PCY), which has 40% of its assets in Latin American bonds and 31% in Asia, was more or less unchanged. The two year old fund now boasts $451 million in market cap and pays a handy 6.29% dividend. This beats the daylights out of the one basis point you currently earn for cash, the 3.65% yield on 10 year Treasuries, and still exceeds the 5.37% dividend on the iShares Investment Grade Bond ETN (LQD), which buys predominantly single 'A' US corporates. The big difference here is that the countries that make up the PCY have a much rosier future of credit upgrades to look forward to. It turns out that many emerging markets have little or no debt, because until recently, investors thought their credit quality was too poor. No doubt a history of defaults in Brazil and Argentina in the seventies and eighties is at the back of their minds. Not so for the US, which has bond issuance going through the roof, and downgrade noises growing ever louder. A price appreciation of 125% over the past year tells you this is not exactly an undiscovered concept. Still, it is something to keep on your 'buy on dips' list.

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4) News Flash: As I write, the S&P 500 has broken the 50 day moving average, an event that usually presages larger falls to come. Of course, you already knew this was going to happen when Charles Nenner warned you in his December 12 interview with me on Hedge Fund Radio, when he gave an exact date of January 7 for the market peak. He predicted that the market would fall 10%-20% from there. I reminded you again in my December 16 summary of the radio interview (click here ). I gave you a heads up one more time with my January 4 Annual Asset Allocation Review with my piece entitled I'd Rather Get a Poke in the Eye With a Sharp Stick Than Buy Equities. As it turned out, the S&P 500 peaked on January 11, which is close enough for government work. The Euro has also broken through to the $1.39 handle, and the dollar surrogates of crude, gold, and copper are also weak, as they should be in the face of a carry trade unwind. Commentators are blaming Obama's State of the Union speech. The reality is that stocks were just too damn expensive, can't be justified by the economy's weak fundamentals, and only got this high because of the free money given speculators by the Fed. Since everything else Charles forecast is coming true, you better listen to his interview on Hedge Fund Radio one more time by clicking here
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'To stand back and let it burn is irresponsible,' said Treasury secretary
Tim Geithner during congressional hearings.

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