Friday, March 8, 2013

As The US & Now The World Tip Back Into Recession Stocks Explode Higher

The following excellent graph from recession alert shows the percentage of the 41 largest OECD countries around the world that tipped into GDP contraction last quarter. The blue line tracking it down shows those that have been contracting for 2 straight quarters. In essence, the "world" has tipped back into recession seen last in 2008.

There are some parts of the world where the the idea of an economic slowdown does not seem possible even though it is occurring around them every day. One of those places is the United States where stocks magically levitate every day in a new world where real fundamentals, earnings, or economic strength have no impact on share prices (until they do, and then God help those that have been sucked back into the artificial mirage).

Lakshman Achuthan discussed this topic on Bloomberg this week where he was once again brought out to the mainstream media wolves where they try to attack a premise that "an economy cannot be slowing if a stock market bubble is expanding." Achuthan calmly and patiently counters with both facts and real economic data.

He notes that in 1980, 1945, and 1926 stock prices rose through a recession that was in place. Most real world, non-bubble stock price indicators, show growth slowing.

Wednesday, March 6, 2013

Stanley Druckenmiller Discusses The Fed's Exit Strategy (Hint: There Is None)

Great discussion with Stanley Druckenmiller, one of the all time greats in the financial industry, on CNBC this week. He discusses his thoughts on stocks, bonds, and the dangers he sees ahead.

Wheel Of Distraction Meets The Record DOW

Wheel Of Distraction:

The DOW's New Record High:

The New Normal:

Political Translator:

Sequester Panic:

The Pre-End Period:

CNBC Interview: Jim Rickards On Currency Wars & Rising Stocks

Tuesday, March 5, 2013

A Visual Look At Gold Mining Shares

The following excellent chart from James Turk shows the largest gold mining index, the XAU, priced in gold going back decades. It shows the relative over or undervaluation of the mining stocks relative to the commodity that they produce and sell. It would seem as if the price of gold rising or falling in general would provide a similar, stable change to the companies that mine it. What we have seen recently is the greatest divergence in history.

While physical gold has trended sideways for close to two years, the price of mining shares have completely collapsed relative to gold. This chart goes through March 1, and March 4 (yesterday) gold was essentially flat while most stocks were down at least another 3%. Just incredible.

When events like this occur you almost begin to wonder how much further gold stocks can fall relative to their basic fundamentals such as earnings? Many of the larger stocks pay a dividend, allowing investors to capture an income stream while they wait for stocks to recover.

How much longer can the irrationality in the market persist? The answer, of course, is much longer, but anyone who does not believe that gold will completely collapse in price (what the miners have priced in) have to take a long look at the chart above.

Sunday, March 3, 2013

Speculators Take Huge Short Position On Gold: China Continues To Accumulate

The following chart from John Hathaway sums up in the current sentiment toward gold in one simple picture.  Last week we discussed the Daily Sentiment Index moving toward 94% bearish in precious metals (it got down to 97%), as well as the pure desperation (potential buying opportunity) in precious metal mining shares.. Today we have the commitment of traders gold short position which has gone parabolic as every trader around the world bets that gold is going lower.

Meanwhile across the pond in Asia, the chart below shows that China continues to take advantage of every downdraft in paper pricing to accumulate real physical metal. While no one discusses this important story today it will become very important when we reach the final chapter of the currency wars and need to re-structure the entire global monetary system.

It's important to note that a new monetary system is not going to bring "the end of the world" or some sort of apocalypse. It is just going to bring a change, and I believe this will be a change for the better for the general populace of the world.

Those that have studied financial history know that a reserve currency status does not last forever. If you base your investment beliefs around the idea that the U.S. dollar will always be the reserve currency, you are taking a very short-sighted view.

The following graph shows the change in reserve currency status over the centuries.

The monetary system takes a new form and re-shapes itself on average every 40 years. The current system was put in place in August, 1971. China is simply placing their pieces on the chess board for the inevitable change, not the end of the world.

When China announces their new gold holdings it is going to shock many participants in the market. The following shows the IMF's official gold holdings by country, but China has not updated their holdings since April 2009. I believe they have at least double what is listed below as of this writing and perhaps more. Their goal is to quietly accumulate without triggering any alarm in the market (we can only track various import data such as the graph above).

My advice? Think like China. Think beyond the current quarter of earnings announcements from Apple, IBM, and Walmart. Think about the end game and then work backwards in order to position yourself correctly.

"He who has the gold, makes the rules."

     - Theodore Roosevelt

Stocks Approach New Highs As Global Economy Contracts

Every day people and business owners remain very confused about what is actually going on in the economy. They can feel that nothing is actually getting better, and in most cases continues to get worse, yet they turn on the news to read about new highs in the DOW and try to rationalize in their minds what is happening. 

Here is what is actually taking place around the world in the most recent data on GDP growth:

U.K. -.3% (Contracting)
Japan -.1% (Contracting)
Germany -.6% (Contracting)
France -.3% (Contracting)
Italy -.9% (Contracting)
U.S. 0% (Revised up to no growth after initially posting contraction)

This global GDP contraction has pushed global trade close to moving back into negative territory as it did in late 2008.

What about China? China has been promised to be the engine of global growth that would help pull the stagnating developed world out of their debt induced coma. The problem is that instead of China pulling the world up, the weight on the global contraction is slowing China. The following shows their GDP growth since 2007, a stead decline:

I came across some interesting comments this week published by the ECRI group discussing how the economy looked just days before the Lehman Brothers collapse. It shows how when you drive down the road looking in the rear view mirror, as people in the financial markets are once again doing today, it can prove very dangerous based on what could be coming ahead.

"Think back to 2008, a couple of days before the Lehman failure. Looking at the data in hand, you would see GDP growth at about 1% in Q1 and 3% in Q2. More specifically, Q2 GDP growth had just been revised up on August 28 from 1.9% to 3.3%, sparking a 212-point Dow rally that day."

The New York Times article from that day read: "Economic Growth Revised Higher." Here was the chart of GDP growth investors were looking at on August 28, 2008, just moments before stocks were ready to enter free fall.

Today we are looking at the fourth quarter 2012 GDP numbers listed above showing the global contraction already in place yet investors are more optimistic than almost any other time in history. Things do not feel like late 2008, they feel like late 2007. At that time no one could pin point any kind of danger ahead. It was widely regarded that any trouble could be immediately solved by the Federal Reserve lowering interest rates. Today that same attitude is in place only investors believe all problems can be solved with larger doses of QE.

Hedge funds today are now more bullish than they were in late 2007.
The following chart provides a historical review of P/E ratios on the S&P 500 going back to 1900. It shows that historically the 22 range (red line) was the peak point in stock market cycles while 7 (green line) marked the low end. Today we are just under 20.

I like to buy assets when they are undervalued and hated. Stocks today are overvalued and loved. Can they become more overvalued and more loved? Of course. History shows that irrationality in the markets tend to go on much longer than rational participants can imagine while they watch in real time. The madness of the crowd has once again set in. While I wait for opportunities today, I raise cash in a fund that earns me a 0.1% return. This is considered insane due the "wasted return" I am missing on stock dividends and long term bonds. I believe that when gravity sets in, a 0.1% return will look very attractive.