Saturday, March 30, 2013

Thursday, March 28, 2013

Some Positives in the Gold Complex

Gold is trading down below $1,600 an ounce again in today's trading, and as I stated before, I would not be surprised if gold or gold-related investments trade down again towards the bottom of the range. That said, I think there are some positive signs forming- aside from my timing models near the strong buy range- in the gold complex that lead me to conclude that a bottoming process is underway.

First, the recent performance of gold shares are showing strength relative to the price of gold. As I have shown in prior posts, the price of the gold/precious metal equities tend to lead the price of gold, which makes sense in some respects considering the more forward looking nature of equity investors. The following two graphs show the performance of Royal Gold (ticker RGLD), the Market Vectors Gold Miner Index (ticker GDX), the Phily Gold/Silver Index (ticker XAU) and Gold since February 20th and March 4th. Both of these dates mark significant near-term bottoms in both the price of gold and the gold equities.

Since February 20th

Since March 4th

Standing out is the outperformance of RGLD. As a brief review, RGLD is one of the best operators and most leveraged (to the price of gold that is) companies in the gold space. The company essentially acts as a broker for production of gold mining operations, contractually taking gold from miners at contracted prices and selling into the market at higher prices. RGLD operates an asset-light business model, and in fact only has 19 employees. This asset-light business model means the company's- by not having the same fixed cost operating leverage of gold miners, disproportionately benefit from rising gold prices. Due to this business model, RGLD's stock tends to move more inline with gold prices or in cases when investors are betting on a upturn in the industry, ahead of gold.

This has been the case over the last month. Since February 20th, RGLD's performance is ahead of the price of gold by 6x. Since March 4th, RGLD has outperformed the shiny yellow metal by just under 4x. Additionally, the price of the gold miner indexes (GDX and XAU) have been outperformed gold by more 300 basis points since the March 4th bottom in the shares.

There are also some somewhat positive indicators forming in the charts of the GDX and the Market Vectors Junior Gold Miner Index (ticker GDXJ).



There a few items of interest on both these charts. First, the trend of the RSI's on each diverged from the price of  ETF's back when they hit the short-term bottom in the beginning of March. This can be a positive indicator and could suggest a bottoming process is or soon will be underway. Additionally, the cash flow metrics on each have turned up while the A/D lines have stabilized. Lastly, the GDXJ is showing what I think is real strength here. The price rise that pushed the ETF over the $16 swing point came on higher volume, more so than comparable down turn just tow or three weeks prior. Additionally, the strength on the upside here appears to coming on increased volume.

Most importantly, the volume on the slight dip in the price over the last week has come on lighter volume levels. This suggests, to me, a stabilization in the shares before a potential turn up in the shares. These price/volume characteristics in the junior miners are important in my opinion. The junior miners tend to have more volatile earning streams versus their larger brethren. The positive volume characteristics here suggests that investors are growing more positive on the sector. 

Short-Trading Portfolio Update for Week Ending Mar 22

I am somewhat disappointed in the performance of the Short-Trading Portfolio in the most recently ended week. The portfolio lost 50 basis points in value versus a 25 basis point loss on the market. The loss in the latest week came from better price performance in shares of AAPL, USPH, and ESRX.

The latest performance week leaves the portfolio down 20 basis points on the year. This compares to the 9.2% gain in the S&P 500 over the same time frame. Since inception, the portfolio has gained 2.8% but is down about 500 percentage points relative to the market.

Long-Trading Portfolio Update for Week Ending Mar 22

For the most recently ended trading week, the Long-Trading Portfolio declined by 2.3 percentage points. This is compared to the 24 basis point loss on the S&P 500. The portfolio tends to be high beta, and can move significantly in any one week. That said and following this week, the portfolio has now declined 11.8% so far this year versus a 9.2% gain on the market. Since inception, the portfolio has lost 20 basis points in value versus an 8% gain on the market. The chart of the portfolio versus market indices can be seen below.

Looking at new additions, I intend to add a position in Diane Shipping (ticker DSX) on a pullback in the stock. The stock recently hit the new high volume high screens and is now testing July 2011 swing point, where the stock broke on volume. The stock has shown very positive volume characteristics, indicating support coming into the stock (and the industry for that matter as competitor stocks are also running on volume).

The fundamental case for the DSX is that after years of overcapacity in the shipping industry, we are now starting to signs that this dynamic is turning, as order delivery rates slow while scrappage of older ships continues. Although more price leverage could be found in other industry names, I think DSX's balance sheet structure provides investors with some protection, considering the considerably cash position.

Wednesday, March 27, 2013

Long Valule Portfolio Update for Week Ending Mar 22

For the week ending March 22, the Long-Term Value Portfolio declined by 1%. This compares to the 24 basis points lost on the S&P 500, or more than a 75 basis points relative loss.

The latest weekly performance leaves the portfolio having gained 6.6 percentage year-to-date, or down 250 basis points relative to the S&P 500 over the same time period. Since inception, the portfolio has gained more than 14 percentage points, slightly lower than the performance on the S&P 500 over the same relative time period.

Despite decent gains in positions like DMND, TLP, or COP, the loss producing names more than offset the gainers. The largest sectors contributing to the loss were in the consumer groups and the healthcare sector. Specifically, positions in KEG, IVC, CHK, and ANN helped contribute to the relative loss.

VIX-Trading Portfolio Update for Week Ending Mar 22/VIX Model Update

In the most recently ended week, the VIX- Trading Portfolio lost 20 basis points in value, roughly in line with the performance of the S&P 500 over the same time period. Following the latest weekly performance, the portfolio has gained 6.8 percentage points year-to-date, 230 basis points less than the market's gain. Since inception, the portfolio has increased by 4.9 percentage points, 560 basis points less than the market.

Looking at the latest standardized VIX model, the model remains positively biased. The weighted average standardized VIX hovers just below -2. This is while the standardized skew remains below 0, suggesting a positive performance bias in equities over the short-term. That said, I remain cautious and will only accept market performance at this juncture, provided the trading action and lack of volume conviction as the S&P 500 trades up into high prices on weakening volume.

Equity Markets Gearing for Large Move- Cashin

I am siding on cautious/bearish side with a slight positive bias short-term. Either way, some good comments from Art Cashin.

Dollar Bears Are Not Wrong, Just Early- Schiff

An interview of Peter Schiff by Lauren Lyster.

I tend to agree that the dollar will fall..... at some point. However, I also think that the Federal Reserve is currently losing the currency race to the bottom, and the the dollar is benefit on a relative basis.

High Volume High 3/26 Edition

A few more name for consideration

Volume Off the High 3/26 Edition

Not many new names coming off the highs with volume....

Tuesday, March 26, 2013

Expect More Tumoil in Currencies- Rogers

The Stimulus Trap- Schiff

By Peter Schiff

For years we have been warned by Keynesian economists to fear the so-called "liquidity trap," an economic cul-de-sac that can suck down an economy like a tar pit swallowing a mastodon. They argue that economies grow because banks lend and consumers spend. But a "liquidity trap," they argue, convinces consumers not to consume and businesses not to borrow. The resulting combination of slack demand and falling prices creates a pernicious cycle that cannot be overcome by the ordinary forces that create growth, like savings or investment. They say that a liquidity trap can even resist the extraordinary force of monetary stimulus by rendering cash injections into useless "string pushing." Some of these economists suggest that its power can only be countered by a world war or other fortunately timed event that leads to otherwise politically unattainable levels of government spending.
Putting aside the dubious proposition that the human desire to strive and succeed can be permanently short-circuited by an economic contraction, and that modest expected price declines can quell our desire to consume, the Keynesians have overlooked a much more dangerous and demonstrable pitfall of their own creation: something that I call "The Stimulus Trap." This condition occurs when an economy becomes addicted to the monetary stimulus provided by a central bank, and as a result fails to restructure itself in a manner that will allow for robust, and sustainable, growth. The trap redirects capital into non-productive sectors and starves those areas of the economy that could lead an economic rebirth. The condition is characterized by anemic growth and deteriorating underlying economic fundamentals which is often masked by inflation or asset price bubbles (I look at how stimulus has impacted the U.S. stock market in the March edition of my newsletter).
Japan has been caught in such a stimulus trap for more than a decade. Following a stock and housing market boom of unsustainable proportions in the 1980s, the Japanese economy spectacularly imploded in 1991. The crash initiated a "lost decade" of de-leveraging and contraction. But beginning in 2001, the Bank of Japan unveiled a series of unconventional policies that it describes as "quantitative easing," which involved pushing interest rates to zero, flooding commercial banks with excess liquidity, and buying unprecedented quantities of government bonds, asset-backed securities, and corporate debt. Although Japan has been technically in recovery ever since, its performance is but a shadow of the roaring growth that typified the 40 years prior to 1991. Recently, conditions in Japan have deteriorated further and the underlying imbalances have gotten progressively worse. Yet despite this, the new government is set to double down on the failed policies of the last decade.
I believe that the United States is now following Japan into the mire. After the crash of 2008, we implemented nearly the same set of policies as did Japan in 2001. In the past two years, despite the surging stock market and apparently declining unemployment rate, the size and scope of these efforts have increased. But as is the case in Japan, we can clearly witness how the stimulus has perpetuated stagnation. (See my analysis of the new plans of the Japanese government).   
In 2008, one of the country's biggest problems was that we had over-leveraged too many non-productive sectors of the economy. For instance, we irresponsibly lent far too much money to people to buy over-priced real estate. Since then, the problem has gotten worse. Currently the process of writing, securitizing, and buying home mortgages has been essentially nationalized. Fannie Mae and Freddie Mac (which are now officially government agencies) write and package the vast majority of new home mortgages, which are then guaranteed (almost exclusively) through the Federal Housing Administration, and then sold to the Federal Reserve. According to a tally by ProPublica, these government entities bought or insured more than nine out of 10 home mortgages originated last year, a $1.3 trillion business. Compare this to 2006, when the government share was only three in 10. As a result of this, our lending is far more irresponsible than it has ever been.
In the fourth quarter of 2012, 44% of all FHA borrowers either had no credit score or a score of 679 or lower. In addition, the overwhelming majority of FHA guaranteed loans are being made at 95% or greater loan-to-value. This means down payments are an afterthought. Under the FHA's Home Affordable Refinance Program (HARP), loans are now even extended to underwater borrowers whose mortgages may be worth far more than their homes. As a result, the FHA could be exposed to enormous losses in the event of future housing market downturns. Such an outcome would be likely if mortgage interest rates were ever to rise even modestly from their current low levels. 
In fact, losses on low-quality mortgages have already left the FHA with $16 billion in losses. To close the gap, it has had to raise the insurance premiums it charges to borrowers. With those premiums expected to rise again next month, many fear that marginal borrowers could be priced out of the market. But rather than learning from its mistakes, the government just announced that Fannie Mae would pick up the slack, lowering its lending standards to match the ones that had led to losses at the FHA. In other words, we haven't solved the problem of bad lending - we have simply made it bigger and nationalized it. 
The overall financial sector is equally addicted to cheap money. Banks have seen strong earnings and rising share prices in recent years. But their businesses have largely focused on the simple process of capturing the spread between the zero percent cost of Fed capital and the 3% yield of long term Treasury debt and government insured mortgage backed securities. As a result, banks are not making productive private sector loans to businesses. Instead, the capital is being used to pump up the already bloated housing and government sectors.
Corporate profits are indeed high at the moment, but much of that success comes from the extremely low borrowing costs and extremely high leverage. Investors chasing any kind of yield they can find are pouring money into companies with dubious prospects. This January, yields on junk rated debt fell below 6% for the first time. Currently they are approaching 5.5%. Consumers are using cheap money to buy on credit. Savings rates are now hitting post-recession lows.
Lastly (but certainly not least), the Federal government is now totally dependent on the Fed's largess.  Without the Fed buying the bulk of Treasury debt, interest rates would likely rise, thereby increasing the cost of servicing the massive national debt.  While Congress and the media have focused on the $85 billion in annual cuts earmarked in the "Sequester," an increase of Treasury yields to 5% (3% higher than current levels) on the $16 trillion in outstanding government debt would translate to $480 billion per year of increased interest payments. Such an increase would force a tough choice between raising taxes, cutting domestic spending or reducing interest payments sent abroad for debt service. If foreign creditors begin to doubt that America has the resolve to make the hard choices, they may refuse to roll-over maturing obligations, forcing the government to actually repay principal.  With trillions maturing each year, actual repayment is mathematically impossible.
But for now most people feel that the transition is underway to a healthy economy. The prevailing debate is when and how the Fed will let the economy fly on its own. Many of the top market analysts have great faith that Ben Bernanke can pull the monetary tablecloth off the table without disturbing the dishes. Those who hold this view fail to understand that the United States is caught in a stimulus trap from which there is no easy exit. How can the Fed wean the economy from stimulus when stimulus IS the economy?  In truth, the trick Bernanke must actually perform is to pull the table out from beneath the cloth, leaving both the cloth and the dishes suspended in air. (Read how Iceland confronted its own crisis while avoiding the stimulus trap).
What would happen to the Treasury market if the Federal Reserve, by far the biggest buyer and largest holder of Treasury bonds, became a net seller? Who will be there to keep the sell off from becoming an interest rate spiking rout? It may sound absurd to those of us who remember the economy before the crash, but our new economy can't tolerate "sky high" rates of four or five percent. What would happen to the housing market and the stock market if interest rates were to return to those traditional levels? The red ink would flow in rivers. With yields rising and asset prices falling, how long would it take before the Fed reverses course and serves up another round of stimulus? Not long at all.
That means any talk of an exit strategy is just that, talk.  Not only can the Fed not exit, but it will have to delve further into the stimulus abyss.  While doing so, the Fed will continuously insist that the exit lies just behind an ever moving horizon. It will repeat this mantra until a currency crisis finally forces a painful exit.
Unfortunately, the longer the Fed waits to exit, the more painful the exit will be. But trading long-term pain for short-term gain is the Fed's specialty. In the meantime, Wall Street watches in uncomprehending stupor as the economy settles deeper and deeper into the stimulus trap. 
Peter Schiff is the CEO and Chief Global Strategist of Euro Pacific Capital, best-selling author and host of syndicated Peter Schiff Show.

Scaling the Great Pyramid

At least according to their story,  a group of Russian tourists, under threat of two years+ in prison, scaled the Great Pyramid in Egypt and the security guards were none-the-wiser. They posted the pictures to prove it.



More here.

Regardless if their story is true, the pictures from the top of the Great Pyramid as amazing.

Rothbard on Recessions, Recoveries, and Bailouts

“It should be clear that any governmental interference with the depression process can only prolong it, thus making things worse from almost everyone’s point of view. Since the depression process is the recovery process, any halting or slowing down of the process impedes the advent of recovery. The depression readjustments must work themselves out before recovery can be complete. The more these readjustments are delayed, the longer the depression will have to last, and the longer complete recovery is postponed.”

–Murray N. Rothbard, Man, Economy, and State with Power and Market

Meanwhile While US Investors Stick Their Head in the Sand.....

Private assets are being taken to bailout bad debts. Don't let anyone fool you, The Cyprus economy may be small, but so was the subprime housing market. Although the country's banks have been 'bailed out', the terms of the rescue appear to set a dangerous precedent. First they will seize the assets and deposits of large depositors, only to change the definition of what large means. If you do not believe me, a Eurozone chief has said just as much. As reported by The Telegraph.....

The new policy will alarm hundreds of thousands of British expatriates who live and have transferred their savings, proceeds from house sales and other assets to eurozone bank accounts in countries such as France, Spain and Italy.
The euro fell on global markets after Jeroen Dijsselbloem, the Dutch chairman of the eurozone, announced that the heavy losses inflicted on depositors in Cyprus would be the template for future banking crises across Europe.
"If there is a risk in a bank, our first question should be 'Okay, what are you in the bank going to do about that? What can you do to recapitalise yourself?'," he said.
"If the bank can't do it, then we'll talk to the shareholders and the bondholders, we'll ask them to contribute in recapitalising the bank, and if necessary the uninsured deposit holders."
Ditching a three-year-old policy of protecting senior bondholders and large depositors, over €100,000, in banks, Mr Dijsselbloem argued that the lack of market contagion surrounding Cyprus showed that private investors could now be hit to pay for bad banking debts.

Additionally, the same view reported by Bloomberg.

The message that stakeholders of all stripes can be coerced into helping a cash-strapped nation may make investors more skittish they’ll be targeted if Slovenia, Italy, Spain or even Greece again is next in line to need help. The risk is that bank runs and bond market selloffs become more likely the moment a country applies for a new rescue, said economists and academics from Nicosia to New York.

“We now have a new type of rule and everyone within the euro zone has to sit down and see what that implies for their own finances,” Nobel laureate Christopher Pissarides, an adviser to the Cypriot government, told “The Pulse” on Bloomberg Television.

In my opinion, it will just be a matter of time before this 'rescue' is emulated not only in Europe, but where ever there is a banking crisis. 

High Volume High 3/25 Edition

A few media related names making new high volume highs.

Volume Off the High 3/25 Edition

Just two names selling off of recent highs with volume, one a former new higher volume high.

Monday, March 25, 2013

Process Vs. Analysis

This is some very interesting research on the decision making process. More can be found here.

While we often make decisions with our gut, these decisions leave us susceptible to biases. To counter the gut decision a lot of organizations gather data and analyze decisions. The widespread belief is that analysis reduces biases.

But is putting your faith in analysis any better than using your gut? What does the evidence say? Is there a better way?

Dan Lovallo and Olivier Sibony set to find out. Lovallo is a professor at the University of Sydney and Olivier is a director at McKinsey & Company. Together they studied 1,048 “major” business decisions over five years.

What they discovered will surprise you.

Most of the decisions were not made based on gut calls but rather rigorous analysis. In short, most people did the all the leg work we think we’re supposed to do: they delivered large quantities of detailed analysis. Yet this wasn’t enough. “Our research indicates that, contrary to what one might assume, good analysis in the hands of managers who have good judgment won’t naturally yield good decisions.”

These two quotes by Warren Buffett and Charlie Munger explain how analysis can easily go astray.
I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections … — Warren Buffett

[Projections] are put together by people who have an interest in a particular outcome, have a subconscious bias, and its apparent precision makes it fallacious. They remind me of Mark Twain’s saying, ‘A mine is a hole in the ground owned by a liar.’ Projections in America are often a lie, although not an intentional one, but the worst kind because the forecaster often believes them himself. — Charlie Munger

But Lovallo and Sibony didn’t only look at analysis, they also asked executives about the process. Did they, for example, “explicitly explore and discuss major uncertainties or discuss viewpoints that contradicted the senior leader’s?”

So what matters more, process or analysis? After comparing the results they determined that “process mattered more than analysis—by a factor of six.

Price/Volume Diffusion Rolling Over but Still Positively Weighted

The Price/Volume Diffusion Index (PVDI) I track is rolling over. This is as volume on the upside is weakening while downside volume picks up. The latest PVDI is 61.25, down more than 6 points from the month ago reading of 67.5 and nearly 13 points lower than the 74.2 demarcation three months ago. This leads me to conclude that demand continues to wane as stocks prices turn ever higher. That said, demarcations over 50 tend to, on a historical basis, suggest higher future prices. This leads me to conclude that although the rally in equities is weakening, that the bias remains to the upside.

The following is the latest updated chart for the PVDI

Additionally, the rolling summation index continues to track higher. This is a confirmation that the market's bias remains to the upside.