Wednesday, August 3, 2011

GOLD IS GOOD, SOME COMMODITIES, THEN THE REST

Here are a few comments from Faber.  I think I'm in agreement with him but there are limits to this.  I think timing is everything now and we are in for more ups and downs that will make the casual observer sick to their stomach.  I give the stock market 6 to 8 months and we will then begin our descent to challenge the market lows from 2008 and 2009 in calendar year 2012.



So we've retraced all of the gains for 2011 and the S&P500 today went back into negative territory for the year for a few hours.  Buyers returned and they clawed their way into positive territory for the 2011.  In the midst of this, a lot of damage has been done to charts AND to the psyche of many investors. 

LAST WORDS ON DEFAULT AND THE DEBT CEILING (FOR NOW TILL SEPTEMBER)
Many are howling that the Congressional radicals had something to do with this and the argument over the debt ceiling and potential default put our country at risk and harmed the market.  Truthfully, the entire process was a theatrical production that was crafted and twisted to "get the deal done", but also jam folks into treasuries (we can't have interest rates getting out of control can we?).  The best way to get investors to have an appetite for treasuries is a good sell off in stocks.  Guess what we got?  A good sell off in stocks! 

I want to also dispel a myth about the impact of a credit downgrade in the USA.  First of all, a downgrade is going to happen.  At some point even the rating agencies can't ignore the glaring truth of math or they will get their fill of arm twisting and bribery and finally do what is necessary.  Once we do get downgraded, the world won't end.  In fact, much to the surprise of many, we'll probably see our yields for treasuries go even lower!  It sounds absurd, but it has happened in Japan and Canada.  Now having said that, it isn't all a nothing burger, there will probably be many, many nasty ramifications that come in the "unintended consequences" bucket with a downgrade.  The after shocks are probably why we are seeing a huge hesitation from Moody's and Standard and Poors.  The overnight repo market and the money markets could have some significant disruptions as changes to the US Government's AAA ratings could create havoc.  Remember, mutual funds and pension funds often have limitations on the types of instruments that can be held, including the types of collateral and credit rating of the issuer.

Last thing about the title of this section.  You may have wondered why I mentioned that this is the last mention of the default and debt ceiling talk till September when we just got a deal done that will take us through 2012.  Well two things.  First, we are spending money way too fast and will burn through the appropriated $400 Billion that has been allocated for 2011 well before the end of the year.  Second, the Super Congress subcommittee is required to make their report known by Thanksgiving and an up or down vote must be held.  We'll begin to hear about out of control spending and default again by then.

POSITIONING TODAY FOR THE 6 MONTH PERIOD
So what are we to do?  Are we to hide away and wait for the beginning of the fall?  Maybe.  But realistically we must find some way to make money between now and then and there are going to be some good opportunities in the midst of the decline.  Faber's calls for investments in precious metals really is another call for investing in UN-paper currencies.  He sees the USD and the Euro falling and it seems this has been the trend for a while. 

Think this through.  Many think that if we see a strong dollar we cannot have an increase in commodities.  Perhaps that is not true, in fact we saw a preview of this on Tuesday with the large sell off in the markets.  The USD increased and gold also rocketed higher.  In conjunction with this we saw the Euro fall as the bond market continued to worry about the solvency of the Eurozone.   I have another post in the queue that supports this and highlights that people are pulling their money out of anything and everything in Europe and buying gold.  Their act of repudiation of the Euro in favor of gold is pushing the metal higher and the Euro lower.  While the Euro falls other more stable currencies are moving higher.  The Swiss central bank intervened today attempting to get people out of the Swiss Franc by lowering interest rates today.

Is it tough to buy gold here at its record highs?  Yes, of course it is.  I can only recommend purchasing over periods of time rather than loading up all at once.  Like Faber mentions, if gold drops, take advantage of the price opportunity (ask buyers of silver at $32).

COMMODITIES
If US growth is slowing and China and Brazil and all the emerging markets are waning how can purchases of commodities be a good bet?  All of those things are true, but I'm still convinced that there are going to be opportunities in "hard stuff" that performs relatively well despite a fall of global markets.  Remember central banks are in a race to zero and the Fed can win at that game.  If they continue with stimulus like QE III, QE IV and more in all of their manifestations, the dollar will fall.  Dollar denominated commodities will at least counteract that drop with a rise (yet there may be a fall due to declining emergings I know).  Oil, grains, livestock, fertilizers, and those rare earths might be the play. 

EQUITIES?
The falling currency gives us another reason to pick up some select US and global equities that have two characteristics.  First, we are interested in companies that work with these commodities and own them.  Second, we want to obtain those companies that pay decent dividends.  RIO, BHP, COP, CVX, FCX all fit in this category.  How have earnings this quarter been so decent in the midst of a US slowdown that seems to be accelerating?  The reason is that many of these large companies are so diversified that they are truly global in nature.  A good example is Intel.  (No, don't buy this one!)  Intel sells more than 80% of its products outside the US!  Intel is no longer a US company and we must remember this.

OTHER THOUGHTS
Now I know at least one reader that will retort that higher oil and gas prices will cause a bigger stall in the US economy as it will be a significant headwind to any growth.  He is absolutely correct, but as the dollar falls there is only one direction for oil and gas, and that is up.  Clearly this all factors in to my assertion that we are winding down the "good times" and only have a limited period before a sustained decline begins.

I did end up buying some other stuff today as well and I will post some thoughts on those trades in the coming days.  We all need to use stops and even if we have a sustained bounce all traders must keep the Euro contagion issue in mind.  We are very close to unraveling over there and you must have risk controls on at all times.   

GOATMUG

Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at http://www.goatmug.blogspot.com/