Featured Trades: (QUANTITATIVE EASING)
1) Bring on the Bernanke Put! It is now clear that the Fed's unprecedented message last week implying that public enemy number was deflation, not inflation, has given a green light to global risk accumulation of every description. Any further slowdown in the economy will now be met with aggressive quantitative easing. Although I don't spend vast amounts of time dissecting Fed statements, the words are unequivocal:
"The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate."
Never was so much said by so few words.
It is rare that everything goes up at once, but that is exactly what we got, with stocks, bonds, foreign currencies, commodities all rallying hard. Coming into the Fall, I did have some concerns that asset classes that performed well over the summer, like emerging stock markets, precious metals, and the grains, might sell off on any American stock market strength, as managers rotate money from outperforming groups to laggards.
It was not to be. On Friday, the 23 point leap in the S&P 500 was matched by gold punching through $1,300, silver hitting another 30 year high above $21, the grains tacking on 5%, and most emerging markets reaching either six month highs or all time highs.
Who was not invited to this love fest? Financial stocks, where a weak housing market continues to wreak havoc with balance sheets, whether they publicly admit it or not. The US dollar was also missing in action, since any quantitative easing is certain to fan the inflationary fires down the road. The euro has blasted through to a multi month high, and the British pound is threatening the same.
I warned readers that the markets were primed for a move like this (click here for 'My Equity Scenario for the Rest of 2010'). All of the seasonal and historical indicators were predicting that in an election year like this one, six months of famine in the equity markets would then be followed by six months of feast. It looks like the S&P 500 now has a free pass to make a run to the 200 week moving average at 1,200, and possibly the high for the year at 1220. After that we'll see how real this is, for stocks anyway.
Party away like there's no tomorrow, but keep an eye on the door as usual, and keep snugging up those stops on US equities. Use the strength in long dated Treasuries to unload what you still own.
Helicopter Ben Says It's Party Time
Featured Trades: (GOLD), (GG), (GLD)
SPDR Gold Trust Shares
2) What's Next for Gold? Now that gold has hit my target for the year of $1,300, it is time to pause and reassess. A nice reversal may take place after the November election, especially if the Republicans take the house. While their promises to reduce the deficit are gold negative, the fact is that their tax cutting proposals are more likely to lead to bigger deficits, not smaller ones. With only 18% of the Federal budget discretionary, and the rest tied up in defense spending and entitlements, the amount of spending cuts they are proposing are impossible. Even if we eliminated all discretionary spending, the government would still be hugely in the red.
Another factor that could lean on gold prices would be a rise in capital gains taxes from 15% to 20% passed by Congress during the lame duck session. That would trigger a stampede to take profits in all asset classes before the year end. With gold up 35% this year and at the top of the list of performers, it could get hit with a serious bout of profit taking.
None of this changes the long term fundamental case for gold. The current environment of negative real interest rates is the dream scenario for the yellow metal. The last time this happened was during the seventies, when gold moved from $34/ounce to $900. As long as interest rates and stay low, you can expect gold to continue its rise. Goldcorp (GG) CEO, Charles Jeannes, says he believes we will see a $1,500 print sometime '?in the next one or two years.' Goldcorp is one of the largest gold producers in the world.
Although not many have noticed, the re-emergence of inflation has already started. Anyone who looks at the blistering prices rises of wheat, corn, soybeans, sugar, iron ore, coal, and other key raw materials can't look me straight in the eye and say there's no inflation. Of course the last place you will find it is in government statistics, a deep lagging indicator.
The Fall is always the peak demand time of year for the yellow metal, and the Fed's recent move towards QEII is likely to give the barbarous relic a shot of steroids. The only question here is whether a $100 pull-back starts here, at $1,350, $1,400, or even $1,500. When it does, you can expect a ton of buying waiting for it below from central banks, institutional investors, ETF's, and individuals alike.
Featured Trades: (EWZ), (PBR), (OIL)
Brazil iShares ETF
3) Why You Should Buy Brazil's Petrobras. I often get asked why I haven't been more positive about Brazil (EWZ). The answer is twofold; an upcoming election was about to bring a regime change in the high growth country, and there was a huge supply overhang from the upcoming secondary equity offering from Petrobras (PBR), the largest in history.
That turned out to be a good call, with the main market dropping 6% so far in 2010, when most emerging markets were going to the moon.? PBR has been a great short, dropping 31% from its peak.
Now Petrobras issue is done, and it is time to review the space. The company raised a staggering $70 billion, with the Chinese government coming in a major participant. The issue was priced so low that success was assured, despite its gargantuan size. Hedge funds and institutional investors whittled down their PBR weightings, hoping to cover their underweight on the deal. As the issue was generously oversubscribed, they are now scrambling to cover these shorts.
Petrobras will use the funds raised to develop their enormous Tupi offshore field, which is estimated to have 50 billion barrels of recoverable reserves. That will double the company's production to 3.9 million barrels a day by 2014, which is equivalent to 20% of American consumption. The company is well on its way to becoming the next oil major.
I think oil is a great place for the long term, and now is not a bad time to get in, as it has been one of the few underperforming commodities this year. I usually say buy the dips, but the dip in PBR has been going on for the past six months, so just buy now.
Featured Trades: (GLD), (SLV), (PPLT), (CU)
SPDR Gold Shares Trust ETF
iShares Silver Trust ETF
ETFS Physical Platinum Trust ETF
First Trust Global ISE Copper Trust ETF
1) Peak Gold Is Upon Us. If you had any doubt about what the driver has been for gold's meteoric rise to $1,300, take a look at the chart below showing the spike right at the Fed's announcement that QEII was in the cards. With the speed of a mainframe running the latest algorithm, this bid spread to the other precious metals and commodities as well.
Last week, gold ETF's purchased a staggering 16 tonnes of the yellow metal worth $582 million. The 800 pound gorilla, the (GLD) now owns $38.5 billion of the barbarous relic, making it the sixth largest owner in the world, ahead of Switzerland and China.
These are heady inflows into such a small space. All of the gold mined in human history, from King Solomon's mines to the bars still in Swiss bank vaults bearing Nazi eagles (I've seen them) would only fill 2.5 Olympic sized swimming pools. That amounts to 5.3 billion ounces, about $6.3 trillion at today's prices. For you trivia freaks out there, that is a cube with 65.5 feet on an edge.
Peak gold may well be upon us. Production has been falling for a decade, although it popped up to 83 million ounces last year worth $108 billion. That would rank gold 17th as a Fortune 500 company, along with Wells Fargo Bank (WFC), IBM (IBM), and drug store CVS Caremark (CVS). It is also only 2.8% of global public debt markets worth $39 trillion (click here for The Economist magazine's global public debt clock).
That is not much when you have the entire world bidding for it, governments and individuals alike. Talk about getting a camel through the eye of a needle! We may well see the bull market end only when those two asset classes, government bonds and gold, see outstanding values reach parity, implying a sixfold increase in gold prices from here to $7,800 an ounce.
No wonder buying is spilling out into the other precious metals, silver (SLV), platinum (PPLT), and palladium (PALL), as well as copper (CU) and other hard assets. As much as I love the gold inlays in my teeth, and sometimes leave waitresses quarter ounce gold eagles as tips at restaurants, this is the reason I have been stampeding readers into the yellow metal for the past 18 months.
This is not a riskless trade here. Obviously, there is a lot more downside potential at $1,300 than there was at $800, or $34. So if you get involved at this late date, better to play with near money calls spreads.
World Annual Gold Production 1970-2009
Can Your Fit Through the Eye of a Needle?
Featured Trades: (PALLADIUM), (PALL)
ETFS Physical Palladium Trust ETF
2) Palladium Explodes to the Upside. If you are thrilled about the recent performance of gold, you have to be absolutely ecstatic about the ballistic rise of palladium, which has soared by 33% in the past two months. Double dippers beware! Moves like this by industrial commodities do not occur in the face of a collapsing economy.
Palladium, named after Pallas, the Greek goddess of wisdom, has been mined in South America for over 1,000 years, was discovered as an element in 1804, and saw jewelry use start in 1939. But in 1975 it really came into its own when a nascent environmental movement got legislation passed requiring catalytic converters on all new American cars.
Toyota's USA's president, Jim Lentz, believes that the US car market will recover from the present 12 million annual units to 15 million by 2015. You can forget the drug induced haze of 20 million annual units free money brought us, returning in our lifetime. Fewer than one million of these will be hybrids or electrics. That means industry demand for catalytic converters is ramping up by 3 million units a year.
Which catalyst will the auto makers choose? Palladium at $539 an ounce or platinum at $1,642 an ounce? Hmmmm, let me think. They do have new management now, so maybe they'll figure it out. Some 80% of the world's palladium production comes from Russia and South Africa, dubious sources on the best of days. That means that a long position in this white metal gives you a free call on political instability in these two less than perfectly run countries.
Also known as the 'poor man's platinum,' demand for palladium for jewelry in China has been soaring with the growth of the middle class. On top of this, you can add $387 million of new demand from the palladium ETF (PALL) launched in January, which will soak up a hefty 10% of the world's production.
Those set up to trade the futures can play the Decembers contract, where a margin of $3,713 gets you a 100 ounce exposure worth $53,900. If you are looking for something to stash in your gun safe, bury in the backyard, or give to the grandkids on their college graduation, get physical. You can buy 100 ounce bars at $50 over spot, or Royal Canadian Mint one ounce .9995% fine palladium Maple Leaf coins at $50 over spot. And yes, you can even buy them on Amazon by clicking here.
Featured Trades: (COTTON), (BAL)
iPath Dow Jones-AIG Cotton Total Return Subindex ETN
3) My Big Miss in Cotton. Those lowriders you have been buying your girlfriend every Christmas are about to get a lot more expensive.? Since the Great Ag Boom of 2010 started in May, the white staple has rocketed 38% to over $1/pound, a 15 year high, and only the second time since the Civil War that it has broken the buck. The cotton ETN (BAL), is up an eye popping 60%.
Rapidly rising standards of living have encouraged demand for cotton to explode in China and India. Heavy rains in China, the world's largest producer, have caused much of this year's crop to rot, and local traders have been paying as much as $1.45/pound. Imports of cotton into the Middle Kingdom have doubled this year.
Much of the crop in Pakistan was destroyed by their recent floods, and India has imposed an export ban. Mills in the US and Europe are now hoarding bales to head off further shortages and price increases. In recent months, the futures exchanges have increased margin requirements to keep hedge funds at bay, which are believed to have doubled long positions in recent months. This has put the squeeze on producers and middlemen alike.
As much as I try, I can't catch each move in every commodity in the world all the time. Instead, I'll take the lessons home that the world economy may be stronger than we realize, and that long predicted inflation is approaching, just not from the direction that we expect.
Featured Trades: (QUANTITATIVE EASING II), (BEN BERNANKE), (TBT)
SPDR Gold Trust Shares ETF
iShares Silver Trust ETF
Market Vectors Coal ETF
1) Bring on the Conspiracy Theories! There is a wonderful conspiracy theory propagated by Tea Partiers that has been making the rounds in the financial markets for the past several months. In a desperate attempt to salvage the November election, president Obama has ordered Fed governor Ben Bernanke to flood the system with $2 trillion of liquidity. This is the QEII you have been hearing so much about. The move will give the economy a much needed shot in the arm that will enable the Democrats to retain control of both houses of Congress. Two more years of Obamanomics will then follow.
The only problem with this theory is that it is complete hogwash. For a start, Ben Bernanke is a Republican originally appointed by President Bush. Then there is Fed independence to consider. The board of governors is well stocked with enough conservatives, like Richard Fisher (click here for my chat with him), to make such a politically inspired maneuver impossible. If the Fed weren't set up this way, it would become a political football kicked back and forth with every election. Congress would order the stimulus machine to be stuck permanently in the 'ON' position.
You also have to ask the question of whether QEII will make any difference at all to the economy. With banks desperately seeking to deleverage and unwilling to lend, the level of interest rates today is truly irrelevant. The 35 million homeowners with negative equity, about 25% of the total, certainly aren't going to be refinancing anytime soon. Much of the drag on the economy springs from the sorry state of the real estate market (click here for 'Years of Pain to Come In Residential Real Estate'), so there is little the Fed can do, unless it starts buying millions of houses and burning them down.
Personally, I think the American central bank is out of bullets, and that any such gestures would amount to pushing on a string. Believe me, I have been watching the Japanese do this for 20 years, to no effect. There is one thing the Fed does understand, and that is that any QEII implemented now would be highly inflationary down the road. This fits nicely with my (TBT) recommendations.
But hey, as I learned in my journalism days, never let the truth get in the way of a good story. My late editor at The Economist, the brilliant Peter Martin, taught me that belief will trump fact every time. Facts change, opinions don't. That totally works for me, because this theory on the true motivations of the Fed is driving cash into hard assets at an unprecedented rate, commodities and companies that I have been pounding the table about for the past 18 months. I made that call because it dovetailed nicely with global macroeconomic trends which I see continuing for another decade. Most people get invited to dinners. I get invited to mines.
If the market wants to run the prices of my assets up for the wrong reasons, I say bring it on! The dollars I am making as a result are just as good at the bar.
This is What a Chart Should Look Like
Great News for Hard Assets
Featured Trades: (COFFEE), (JO), (COCOA), (SBUX)
2) The Markets Develop a Caffeine Habit. Since my last piece on coffee two months ago (click here), the ETF for aromatic commodity (JO) has tacked on 23%, and 42% since I put out my watershed call (click here for 'Going Back Into the Ags').
But this may just be the down payment. Weather in primary producer, Latin America, has been poor. US coffee stockpiles are now at 10 year lows. Major producer Vietnam is threatening to cease exports and start hoarding, as Russia has already done with wheat. Although prices are now at 13 year highs, we may get even more of a jolt out of this trade.
Has anyone thought about shorting Starbucks (SBUX) on this news? They can't keep passing prices on to consumers forever in this deflationary world.? What is the one agricultural commodity that has gone down this summer? Ironically, it is cocoa, where a single hedge fund attempted to corner and create a short squeeze, unsuccessfully, it would appear (click here for 'Hedge Fund Corners the Cocoa Market' ).? Better start stocking up on those 50 pound bags of coffee beans at Costco.
Stockpiling for That Caffeine Habit
Featured Trades: (COPPER), (FCX), (GLD), (KOL), (BHP), (ECH)
3) Upgrading Copper. They say that imitation is the sincerest form of flattery, so I felt like puffing out my chest yesterday when Goldman Sachs (GS) announced an upgrade of Freeport McMoran (FCX), posting a six month target of $96/share. (FCX) is one of the world's largest copper producers, and has a nice little gold business on the side, as the two are often found together. The Vampire Squid said that demand from China was unrelenting, would continue into the foreseeable future, and that it was not all about stockpiling.
I always welcome more investors joining the bandwagon after I have established a position much lower down. Their report adds confirmation to my recent piece on the red metal (click here for 'Is Copper the New Red Gold'). It also bodes well for my call on Chile (ECH) (click here for 'Chile is Looking Hot'). Long time readers know that I have been bullish on copper all year, listing it in my 2010 Annual Asset Review as one of the commodities that will outperform for the next decade (click here for that report).
Like all other hard assets, copper is a direct beneficiary of the QE II rumors now sweeping the financial markets (see above). In the old days, such a move by the Fed ritually delivered strong bond prices and a weak dollar. In the 'new normal' it also triggers a tidal wave of buying things that hurt if you drop them on your foot, like precious metals (GLD), (SLV) industrial metals, coal (KOL), and iron ore (BHP).
These are the 'new dollars' with the unique attributes that they can't be made with a printing press, aren't being made anymore, and the number of potential consumers is growing by 175,000 a day. If you don't believe me, then check out the World Population Clock by clicking here.
Gotta Love Those Hard Assets
Featured Trades: (EMERGING MARKET CURRECIES), (FXC), (FXA)
Currency Shares Canadian Dollar Trust ETF
Currency Shares Australian Dollar Trust ETF
4) Emerging Market Currencies Are on Fire. If you think that emerging stock markets have been hot this year, take a look at their currencies, which are all blasting through to new all time highs. The Malaysian ringgit is up 11.1% against the buck this year, the Thai baht has appreciated by 8.9%, and the Singapore dollar has jumped by 6.8%.
The central banks of these countries have tried to stem the inflows to maintain export competitiveness, as Japan has done, to no avail. The ocean of money pouring in from the big hedge funds has just been too great. Friends who are using 5X leverage modest for the foreign exchange market are reporting windfall returns.
For me, this move was a no brainer to see coming, as internationally strong economies are the basis, not only for bull markets in equities, but virile currencies as well (click here for 'Time to Play the Minor Asian Currencies'). Unfortunately, there are no dedicated currency ETF's for these relatively illiquid currencies, as there thankfully are for the Canadian (FXC) and Australian (FXA) dollars. At least not yet, anyway.
The great thing for the investors in these countries, like Singapore (EWS) (click here for 'Singapore Sizzles' ), and Thailand (TF) (click here for that call) is that this creates a double leveraged effect on profits. Rising foreign shares are worth even more when their currencies are increasing in value too.
Even the Chinese Yuan (renminbi) has been strong, with the People's Bank of China kicking and screaming all the way. Concerns about a generalized dollar collapse have driven the ETF (CYB) up 2% this month. Like everything else in the emerging world, these currencies are overbought for the short term, but should continue to power on for another decade.
Hey Baby, Can You Spare a Baht?