Managing Expectations: Why Gold Should Thrive

Sunday, April 8th, 2012

Man­ag­ing Expec­ta­tions: Why Gold Should Thrive

By Frank Holmes
CEO and Chief Invest­ment Offi­cer
U.S. Global Investors

It’s been a chal­leng­ing week for gold investors. As I often say, invest­ing, like life, is about man­ag­ing expec­ta­tions. Over the past 11 years dur­ing gold’s spec­tac­u­lar bull run, investors should remem­ber that price action can go both ways. What helps is to look at the his­tor­i­cal rise and fall of gold.  For exam­ple, look­ing at the past decade of one-day 5 per­cent drops in gold, you can see that this event is pretty rare. In 2006, gold dropped more than 5 per­cent in a day only two times. In 2008, there were three such events. Another one occurred at the end of this February.

The 1.7 per­cent drop expe­ri­enced over the past month shouldn’t sur­prise gold investors given the sea­sonal pat­tern for gold. Whereas gold rises nearly 2 per­cent in both Jan­u­ary and Feb­ru­ary, over the past 11 years, it’s been a non-event for gold to cor­rect in March.

In addi­tion, it’s a good reminder that bul­lion has his­tor­i­cally been less volatile than the stock mar­ket: the 12-month rolling volatil­ity over the past 10 years for gold was 13 per­cent. For the S&P 500 Index, the 12-month rolling volatil­ity over the same period was 19 percent.

This March, there seemed to be one main dri­ver eight thou­sand miles away neg­a­tively affect­ing gold prices. I often say that gov­ern­ment pol­icy is a pre­cur­sor to change, and fis­cal gov­ern­ment pol­icy strongly affected the Love Trade in India last month. To trim its cur­rent account deficit, India’s finance min­is­ter pro­posed dou­bling the cus­toms tax on the pre­cious metal. It was soon reported that jew­el­ers closed shops in protest.

As a result, gold imports into the world’s largest gold mar­ket fell 55 percent.

It’s not the cus­toms tax that has the gold shops boy­cotting, says UBS Invest­ment Research firm. Jew­el­ers’ “prime gripe is with the new 1 per­cent excise duty on unbranded jew­elry” lead­ing to a greater record­ing of gold trans­ac­tions, which means more reg­u­la­tion and red tape. What’s so egre­gious to jew­el­ers is the excise tax will be retroac­tive so those shop own­ers hold­ing old gold stocks will have to pay duty on those as well, says UBS.

I believe this is only a tem­po­rary sell-off for India. As I often dis­cuss in my pre­sen­ta­tions, tra­di­tional fes­ti­vals and hol­i­days drive gold demand in India because of their strong his­tory with gold. With their love for the yel­low metal, Indi­ans hold the belief that gold “will per­pet­u­ally rise,” although there are cer­tain buy­ers that wait for a “psy­cho­log­i­cally impor­tant $1,600 level,” keep­ing in mind the strength of the rupee, says UBS.

While the sea­sonal Love Trade period for gold gen­er­ally falls between August and Feb­ru­ary, an impor­tant hol­i­day is com­ing up which has his­tor­i­cally dri­ven higher sales of gold. Akshaya Tri­tiya fes­ti­val occurs on April 24 this year. This is an impor­tant occa­sion for Hin­dus, cel­e­brated annu­ally in late April or early May, depend­ing on the Hindu cal­en­dar. Buy­ing and wear­ing of gold jew­elry is impor­tant on this day, as UBS says it’s one of the two “biggest gold buy­ing events” in the Hindu cal­en­dar. The sec­ond event is Dhanteras, which occurs dur­ing the peak sea­son­al­ity period for the yel­low metal.

How impor­tant is this fes­ti­val for the gold mar­ket? UBS ana­lyzed the buy­ing data from India last year when Indi­ans cel­e­brated Akshaya Tri­tiya fes­ti­val on May 6. It found that “phys­i­cal sales to India peaked four days before­hand.” Also, “sales were con­sis­tently above aver­age for 13 work­ing days” before the fes­ti­val because local banks and jew­el­ers restocked their inventory.

Two fac­tors need to change to help sales in India this year, warns UBS. The firm says the jew­el­ers’ strike needs to end, and, accord­ing to one local who talked with UBS, it would help gold sales if the price of oil would reverse—this would “relieve some of the cur­rent account pres­sure and per­haps allow for more flex­i­bil­ity with regard to gold imports.”

What won’t change over the long-term is Indi­ans’ gold-buying behav­ior: Indi­ans “have an exten­sive cul­tural tie to gold” and this “is not chang­ing,” says UBS.

Fear Trade for Gold is Still Alive
The world has been expe­ri­enc­ing the largest liq­uid­ity boom, as the cen­tral banks’ seven-month eas­ing binge con­tin­ues. Over this time, ISI counted 127 dif­fer­ent stim­u­la­tive poli­cies, such as print­ing money, low­er­ing inter­est rates and other eas­ing mea­sures, taken by gov­ern­ments around the world.

The pol­icy shifts helped carry the equity mar­ket a long way from the low on March 9, 2009. At the time, we noted in a spe­cial Investor Alert that there were sig­nif­i­cant gov­ern­ment pol­icy changes that sig­naled the mar­ket had hit rock bot­tom. Accord­ing to USA Today, from the 2009 bot­tom through the end of the first quar­ter, the S&P 500 Index increased more than 100 per­cent. No won­der U.S. equity investors are singing.

How­ever, the side effect of the abun­dance of print­ing by the cen­tral banks in the U.S., Europe, Japan and Eng­land has bloated bal­ance sheets amount­ing to nearly $9 tril­lion. This is dou­ble the amount that it was three and a half years ago, says Ian McAv­ity in his recent Delib­er­a­tions on World Mar­kets, as the print­ing presses have pumped our mon­e­tary sys­tem full of liq­uid­ity. This is merely “kick­ing the can down the road,” as cen­tral banks will have to deal with the over­hang later, says Ian.

This has his­tor­i­cally been a strong pos­i­tive cat­a­lyst for gold. An ana­lyst at the Eco­nom­ics and Finance Fanatic blog put together a visual that illus­trates just how strong of a cat­a­lyst the non­stop print­ing of money is. The chart com­pares the U.S. adjusted mon­e­tary base since 1990 with the “surg­ing” price of gold. As you can see below, the amount of money in the U.S. sys­tem climbed to extra­or­di­nary heights since 2008, with gold fol­low­ing the same path.

The eco­nomic chal­lenges of the U.S. and euro­zone “promise to be a pro­longed one with slug­gish eco­nomic growth,” says the blog, and easy mon­e­tary poli­cies will likely be the rem­edy for awhile. I believe this pro­vides a strong case that any pull­back in the gold price appears to be a buy­ing oppor­tu­nity. Ian says, “Tax uncer­tainty, fes­ter­ing toxic debt that’s out there but out of sight and impos­si­ble debt ser­vice abil­ity loom­ing? I’ll stick with gold and sleep bet­ter at night.”

U.S. investors might sleep bet­ter at night with an allo­ca­tion to gold in the face of con­tin­ued neg­a­tive real inter­est rates. The chart below shows how gold has his­tor­i­cally climbed when inter­est rates fell below zero per­cent, with a “strong cor­re­la­tion from 1977–84, and again recently when rates turned neg­a­tive in early 2008,” accord­ing to Des­jardins Cap­i­tal Markets.

The U.S. has not made any cuts in enti­tle­ments which make up 60 per­cent of the deficit. There have been no changes in fis­cal pol­icy and no change in cur­rent mon­e­tary pol­icy. Ian McAv­ity says these fac­tors together make “the most pow­er­ful argu­ment in favor of con­vert­ing that paper into gold.”

What would have to change to make me turn bear­ish? I believe the fol­low­ing three actions would need to be taken:

1. Real inter­est rates would have to increase 2 per­cent above the CPI in the U.S. and Europe
2. GDP per capita in Chin­dia would need to fall, neg­a­tively affect­ing the Love Trade
3. Sub­stan­tial fis­cal cuts would need to be made in enti­tle­ment pro­grams in the U.S. and Europe

I believe there is a low prob­a­bil­ity of these events occur­ring any time soon, so in this envi­ron­ment, gold should thrive.

Tags: Bull Run, Bullion, Chief Investment Officer, China, Current Account Deficit, Driver Eight, Excise Duty, Finance Minister, Frank Holmes, Gold, Gold Imports, Gold Investors, Gold Market, Gold Prices, Government Policy, India, Investment Research, Managing Expectations, Precious Metal, Seasonal Pattern, Thousand Miles, U S Global Investors, Volatility
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Gold Market Radar (April 9, 2012)

Sunday, April 8th, 2012

Gold Mar­ket Radar (April 9, 2012)

For the week, spot gold closed at $1,631.23 down $37.12 per ounce, or 2.2 per­cent. Gold stocks, as mea­sured by the NYSE Arca Gold BUGS Index, fell 6.8 per­cent. The U.S. Trade-Weighted Dol­lar Index jumped 1.3 per­cent for the week.

Strengths

• Fol­low­ing the release of Fed min­utes that indi­cated sen­ti­ment towards renewed stim­u­lus pro­grams was not imme­di­ately press­ing, the pull­back in bul­lion prices stim­u­lated strong phys­i­cal demand from India on Wednes­day. Deal­ers reported that buy­ing demand was the strongest since March 14. His­tor­i­cally, Indian buy­ers have been fairly price-sensitive to buy­ing when they per­ceive pric­ing is at bar­gain levels.
• Rand­gold Resources, Mali's largest investor, and Angl­o­Gold Ashanti, Africa's largest gold pro­ducer, said on Wednes­day they had enough sup­plies of fuel to sit out any imme­di­ate changes in the way they do busi­ness with respect to the coup d’état in Mali.
• Mark Bris­tow of Rand­gold Resources said the com­pany, which sources two-thirds of its gold from Mali, had no prob­lem bring­ing in fuel and ship­ping gold despite bor­der clo­sures by the 15-state Eco­nomic Com­mu­nity of West African States designed to squeeze Mali's econ­omy. Gold com­pa­nies with mines in Mali are play­ing down the risk of bor­der clo­sures and fall­out from sanc­tions imposed on the West African nation after a coup last month.

Weak­nesses

• Gold’s recent decline has also been based on India’s nation­wide jeweler’s strike to protest a tax on non-branded orna­ments. The strike is in its 19th day today. The coun­try was the world's second-largest bul­lion con­sumer in the fourth quarter.
• Gold imports into India tum­bled more than 55 per­cent in March. The pres­i­dent of the Bom­bay Bul­lion Asso­ci­a­tion notes that the coun­try imported just 15 to 20 tonnes of gold in March as com­pared to the 45 to 55 tonnes that is usu­ally imported on a monthly basis. He added that the high price of the pre­cious metal also deterred fresh pur­chases in the first quarter.
• The com­bined jew­el­ers strike in India plus the com­ments that the Fed­eral Reserve was unlikely to pro­vide more stim­uli for the econ­omy, sent many gold stocks to 52-week lows this week. In addi­tion, this sit­u­a­tion was exac­er­bated by a large fund com­plex in Canada that had a change in own­er­ship, with the new man­age­ment insti­tut­ing whole­sale changes for many of the firm’s port­fo­lios, dump­ing mil­lions of shares of gold-mining and oil stocks.

Oppor­tu­ni­ties

• An upcom­ing Hindu fes­ti­val, Akshaya Tri­tiya, held on April 24, may be the cat­a­lyst that brings the jeweler’s strike in India to an end and moves gold prices higher in April. In terms of impor­tant fes­ti­vals, the Akshaya Tri­tiya fes­ti­val and Dhanteras are the two biggest gold-buying events in the Hindu cal­en­dar. These are essen­tial buy­ing occa­sions that jew­el­ers won't want to miss, espe­cially after the strike-inflicted drop in rev­enues in March.
• Accord­ing to an analy­sis of the Chi­nese gold mar­ket, growth in aggre­gate demand from jew­elry buy­ers, pri­vate investors, and the People's Bank of China will con­tinue to out­pace growth in total sup­ply from mine pro­duc­tion and sec­ondary sources. Fur­ther­more, it sug­gests that the country's gold pro­duc­tion and con­sump­tion are both far higher than fig­ures sug­gest, but also that this gold will not find its way back on to the global marketplace.
• With both domes­tic sup­ply and demand rel­a­tively price inelas­tic, the mar­ket will require a grow­ing stream of imports, which will be avail­able only at higher prices. Despite bul­lion prices hav­ing moved up from $300 to more than $1,600 over the last decade, world gold mine pro­duc­tion is essen­tially unchanged.

Threats

• The Mozam­bi­can gov­ern­ment is seek­ing to guar­an­tee that the sale of shares in min­ing com­pa­nies whose assets are in the coun­try should bring finan­cial ben­e­fits to the coun­try. A team of offi­cials from the Min­istries of Min­eral Resources and of Finance has been set up to work on how to tax these sales. The new law, which is expected to be sub­mit­ted to the country’s par­lia­ment, will stip­u­late that the trans­mis­sion of min­ing rights and titles must oblig­a­to­rily take place in Mozam­bique and any pub­lic offer of shares must be announced in the Mozam­bi­can press.
• Ongo­ing con­flicts in Eritrea and the threat of addi­tional sanc­tions pose sig­nif­i­cant risks to the country’s min­ing sec­tor and those com­pa­nies oper­at­ing within the bor­ders. The coun­try is cur­rently the tar­get of U.N. sanc­tions, its hos­til­i­ties with neigh­bor­ing Ethiopia have reignited in recent months, it faces seri­ous infra­struc­ture issues (par­tic­u­larly with regards to water), and its author­i­tar­ian government’s mil­i­tary and geopo­lit­i­cal ambi­tions are unsus­tain­able. So while Eritrea’s min­eral deposits are attrac­tive, it will remain one of the riskier min­ing juris­dic­tions in Africa for the fore­see­able future.
• A Roman­ian court annulled a zon­ing plan that fur­ther delayed the devel­op­ment of Gabriel Resources’ Rosia Mon­tana project. The project has been a favorite for a num­ber of non-governmental orga­ni­za­tions to rally around to pre­vent the devel­op­ment of the mine. React­ing to the news today, Gabriel’s share price plunged 23 percent.

Tags: African Nation, Anglogold Ashanti, Border Closures, Bullion Prices, Canadian Market, China, Coup D, Dollar Index, Economic Community, Gold, Gold Bugs, Gold Companies, Gold Imports, Gold Market, Gold Producer, gold stocks, India, Mark Bristow, Market Radar, Mining, Nyse Arca, Pullback, Quar, Randgold Resources, Spot Gold
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Energy and Natural Resources Market Radar (April 9, 2012)

Sunday, April 8th, 2012

Energy and Nat­ural Resources Mar­ket Radar (April 9, 2012)

Strengths

• Saudi Ara­bia is likely to main­tain high oil pro­duc­tion in the event con­sumer coun­tries release emer­gency stocks, but it will not seek to lure buy­ers for more oil by dis­count­ing its crude, indus­try sources said. Spare capac­ity has fallen below 2 mil­lion bar­rels per day which typ­i­cally is a sign of a tight oil market.
• Palm oil gained to the high­est level in more than a year on spec­u­la­tion that buy­ing from China, the biggest user of cook­ing oils, may increase when local mar­kets reopen this week after a three-day hol­i­day. June-delivery palm oil rose as much as 1.2 per­cent to 3,574 ring­git ($1,167) a met­ric ton on the Malaysia Deriv­a­tives Exchange, the high­est for a most-active con­tract since March 9 last year. Finan­cial mar­kets in China were closed from April 2 for pub­lic hol­i­days. Palm oil advanced 2.9 per­cent in two days after a U.S gov­ern­ment sur­vey showed soy­bean acreage in the world’s largest pro­ducer will decline. Palm oil and soy­bean oil are sub­sti­tutes in food and fuel uses.
• Also in agri­cul­ture, soy­beans jumped 3.5 per­cent after the U.S. Depart­ment of Agri­cul­ture cut the acreage to 73.9 mil­lion acres which is the low­est since 2007. Soy­beans advanced 17.1 per­cent in the first quar­ter and were the best-performing agri­cul­ture com­mod­ity year to date as dry weather con­di­tions in South Amer­ica hurt crops.
• The Sun reports that stores are hik­ing the price of Easter eggs — even though the cost of pro­duc­ing them has fallen. Since peak­ing two years ago, cocoa prices have plunged by a third. But Easter egg favorites are still up in price.

Weak­nesses

• A slump in coal exports con­tributed to another monthly trade deficit for Aus­tralia. Exports were down to their low­est level in a year at A$24.4 bil­lion as coal exports plunged 21 per­cent to A$3.4 bil­lion, the low­est since March 2011. Hard cok­ing coal exports were down $597 mil­lion, 27 per­cent, hurt by vol­umes down 27 per­cent. Ther­mal coal export vol­umes were down 16 per­cent and prices were down 4 per­cent, imply­ing a 19 per­cent drop in dol­lar terms.
• While gold pro­duc­ers in Mali sig­nal min­ing oper­a­tions have so far gone unaf­fected by a recent mil­i­tary coup d'état and an ongo­ing rebel insur­gency in the country's north, juniors, inter­me­di­ates and majors alike have sus­pended work at Malian explo­ration projects cit­ing, among other rea­sons, fuel-supply risk and flight of for­eign per­son­nel. The lat­est notice of sus­pen­sion of explo­ration oper­a­tions comes from inter­me­di­ate pro­ducer IAMGOLD.
• Bloomberg news reported wan­ing demand for gaso­line is putting the U.S. on course to miss a tar­get for ethanol use for the first time, sig­nal­ing no let-up in the slide in prices. A 2007 U.S. law requires refin­ers to mix 13.2 bil­lion gal­lons of renew­able prod­ucts with motor fuels in 2012, up 4.8 per­cent from last year. Gaso­line demand aver­aged over four weeks fell 3.8 per­cent from a year ear­lier, the U.S. Energy Depart­ment reported this week.

Oppor­tu­ni­ties

• Global food prices rose in March for a third suc­ces­sive month, dri­ven by gains in grains and veg­etable oils, the United Nations' Food and Agri­cul­ture Organ­i­sa­tion (FAO) said on Thurs­day, putting food infla­tion firmly back on the eco­nomic agenda. Food prices hit record highs in Feb­ru­ary 2011 and stoked protests con­nected to the Arab Spring wave of civil unrest in some north African and mid­dle east­ern coun­tries. They then receded but started to grow again in Jan­u­ary. An FAO index that mea­sures monthly price changes for a food bas­ket of cere­als, oilseeds, dairy, meat and sugar, aver­aged 215.9 points in March, up from a revised 215.4 points in Feb­ru­ary, FAO data showed. Its Cereal Price Index aver­aged 227 points in March, up from Feb­ru­ary, with maize prices show­ing gains, sup­ported by low inven­to­ries and a strong soy­bean mar­ket, the FAO said. "You can see prices in the near term ris­ing even fur­ther," FAO's senior econ­o­mist and grain ana­lyst Abdol­reza Abbass­ian told Reuters before the index update.
• China is mulling a new round of sub­si­dies for the home appli­ance sec­tor that may help sup­port cop­per demand this year accord­ing to Hu Xiao­hong, an offi­cial with China House­hold Elec­tri­cal Appli­ances Asso­ci­a­tion. Sub­si­dies for the pur­chase of energy-saving mod­els of air con­di­tion­ers and tele­vi­sions are being con­sid­ered. Last year, air-conditioner man­u­fac­tur­ers were the second-largest con­sumers of cop­per in China, behind the power sec­tor com­pris­ing 15 per­cent of consumption.
• Chi­nese alu­minum pro­ducer Chalco is said to be buy­ing a con­trol­ling stake in a Mon­go­lian coal miner. Chi­nese alu­minum pro­ducer Chalco has agreed to buy 56–60 per­cent of South­Gobi Resources at $4.89/share (a 29 per­cent pre­mium over SouthGobi’s clos­ing price) from Ivan­hoe Mines. Chi­nese min­ers have increased ini­tia­tives to acquire over­seas nat­ural resources assets as the deal sug­gests. Chalco is diver­si­fy­ing its expo­sure out of alu­minum and is invest­ing in other resources as well; how­ever, this coal will help in secur­ing coal for its alu­minum pro­duc­tion, too.
• In cok­ing coal, BHP Bil­li­ton has declared force majeure on coal ship­ments from its Bowen Basin coal mines in Aus­tralia due to a con­tin­ued work­ers' strike and heavy rain­fall. The indus­trial action at the BHP Billiton-Mitsubishi Alliance (BMA) oper­ated Bowen Basin coal mines has clearly inten­si­fied, adding to the rolling work stop­pages expe­ri­enced since June 2011. BMA-operated coal mines together pro­duced 38.2 mil­lion tonnes of cok­ing coal, account­ing for 14 per­cent of the global cok­ing coal trade and 29 per­cent of Aus­tralian cok­ing coal exports in 2011.

Threats

• Despite some con­fu­sion, an indus­try min­istry offi­cial said this week that Indone­sia plans to impose a 25 per­cent export tax on coal and base met­als this year, jump­ing to 50 per­cent in 2013, as the major pro­ducer of raw mate­ri­als looks to boost domes­tic invest­ment and take a big­ger slice of min­ing prof­its. If imposed, the tax would add to a raft of reg­u­la­tions announced this year that have caused con­fu­sion in Indonesia's min­ing sec­tor and wor­ried for­eign investors. It would hit the prof­its of both national and foreign-owned com­pa­nies and could also raise costs for importers. India, a major buyer of Indone­sian coal, said it would raise con­cerns about the pro­posed tax with Jakarta.
• States hop­ing to cap­i­tal­ize on their energy booms are run­ning into resis­tance from local offi­cials who want to be able to police the noise and indus­tri­al­iza­tion that accom­pany oil-and-gas drilling. Last Thurs­day, seven towns col­lec­tively sued Penn­syl­va­nia in state court to over­turn a law passed in Feb­ru­ary that pre­vents them from using their zon­ing author­ity to reg­u­late oil-and-gas devel­op­ment. The day before, an Ohio state sen­a­tor intro­duced leg­is­la­tion to grant local offi­cials more con­trol over where com­pa­nies can drill. The munic­i­pal­i­ties are fight­ing laws that bar them from reg­u­lat­ing drilling, enacted by state law­mak­ers who feared towns would stunt job-creation and a stream of tax revenue.
• Agri­money reported that “U.S. corn stocks may fall over 2011-12 up to 50 per­cent more than offi­cials are cur­rently fac­tor­ing in,” ana­lysts said, as they reacted to data show­ing inven­to­ries weaker-than-expected at the mid-year stage. The U.S. Depart­ment of Agri­cul­ture has fore­cast a 327 mil­lion bushel drop in inven­to­ries, to 801 mil­lion bushels, over the cur­rent sea­son, depleted by resilient domes­tic and export demand fol­low­ing a dis­ap­point­ing har­vest. How­ever, investors expected the fig­ure to be revised after inven­tory data, released on Fri­day, showed stocks as of March 1 at a multi-year low of 6.0 bil­lion bushels, and below mar­ket forecasts.
• Argentina’s Neuquen Province has revoked oil and gas con­ces­sions held by three com­pa­nies, Tecpetrol, Argenta Argentina and Petro­bras, because the com­pa­nies had not invested enough in pro­duc­tion at the oil fields, the province said in a state­ment. The con­ces­sions will be given to the provin­cial government's oil and gas com­pany, Gas y Petroleo del Neuquen.

Tags: Agriculture, China, Coal Exports, Cocoa Prices, Coking Coal, Consumer Countries, Cooking Oils, Department Of Agriculture, Dry Weather Conditions, Easter Egg, Easter Eggs, Food And Fuel, Gold, Government Survey, India, Industry Sources, Market Radar, Metric Ton, Mining, Oil Market, Palm Oil, Public Holidays, Soybean Acreage, Soybean Oil, Sun Reports
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Shifting Focus: Behind Country Valuations Today

Thursday, April 5th, 2012

by Russ Koes­terich, iShares

As the Euro­pean finan­cial cri­sis raged last fall, investors were closely mon­i­tor­ing met­rics like credit default swaps and yields on Ital­ian bonds to deter­mine where to place their coun­try bets.

But 2012 has brought some sta­bil­ity to the euro­zone and with it we’ve noticed a shift in the types of indi­ca­tors that investors should be track­ing when it comes to deter­min­ing coun­try val­u­a­tions — met­rics that show eco­nomic growth.

Yes, investors have always kept an eye on eco­nomic growth by track­ing met­rics like lead­ing indi­ca­tors, retail sales and indus­trial pro­duc­tion. But what Nelli Oster, an invest­ment strate­gist on my team, has noticed is that over the last six months, the sen­si­tiv­ity of coun­try val­u­a­tions to eco­nomic growth expec­ta­tions has intensified.

Per­haps six months ago investors were too con­sumed by wor­ries over Euro­pean sol­vency to focus on eco­nomic growth. But today, that appears to have changed as those wor­ries have less­ened and as eco­nomic growth has become more var­ied and harder to find.

Nelli’s research shows that the coun­try val­u­a­tions have become more sen­si­tive to how the near-term growth prospects for a coun­try com­pare to past trends. Take China as an exam­ple. In early March, the Chi­nese gov­ern­ment mod­estly low­ered its annual growth tar­get to 7.5% from 8%. While that is still a very healthy pace com­pared to the devel­oped world, it left investors more wor­ried about a slow­down in China — and the MSCI China index fell 6.9% in US dol­lars in March.

Nelli has also found that the val­u­a­tions of devel­oped mar­ket coun­tries have become more sen­si­tive to absolute growth lev­els, or how the near-term growth pro­jec­tion for a devel­oped coun­try com­pares to those for other devel­oped mar­kets. The growth pro­jec­tions Nelli ana­lyzed were gar­nered from lead­ing indicators.

She also noted that there’s more vari­a­tion in growth rates. Coun­tries such as the United States, Mex­ico and Japan are expected to grow faster rel­a­tive to their past trends than six months ago, while prospects for coun­tries such as Italy and Bel­gium have dete­ri­o­rated. As growth is more dif­fi­cult to find, investors seem will­ing to pay a larger pre­mium to access it.

For investors, the inten­si­fied empha­sis on growth means that in com­ing months, faster grow­ing coun­tries will likely be rewarded with higher returns, and the dif­fer­ence in returns between faster grow­ing coun­tries and slower grow­ing ones will likely stay elevated.

Of coun­tries expected to fare well rel­a­tive to their past growth trends – also tak­ing into account val­u­a­tions, cor­po­rate sec­tor prof­itabil­ity and risk­i­ness – I hold over­weight views of Nor­way and Rus­sia. Of coun­tries expected to slow down fur­ther, I hold under­weight views of Italy and India (poten­tial iShares solu­tions: AMEX: ENOR, NYSEARCA: ERUS).

Sources: Bloomberg, Worldscope

Dis­clo­sure: Author is long ERUS

Inter­na­tional invest­ments may involve risk of cap­i­tal loss from unfa­vor­able fluc­tu­a­tion in cur­rency val­ues, from dif­fer­ences in gen­er­ally accepted account­ing prin­ci­ples or from eco­nomic or polit­i­cal insta­bil­ity in other nations. Emerg­ing mar­kets involve height­ened risks related to the same fac­tors as well as increased volatil­ity and lower trad­ing vol­ume. Secu­ri­ties focus­ing on a sin­gle coun­try may be sub­ject to higher volatility.

Tags: China, Chinese Government, Credit Default Swaps, Developed Country, Economic Growth, ETF, ETFs, Eurozone, Growth Expectations, Growth Projection, Growth Projections, Growth Prospects, Growth Target, India, Investment Strategist, Ishares, Leading Indicators, Market Countries, Metrics, Mining, Msci China Index, Russia, Shifting Focus, Slowdown, Solvency, Valuations
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3 Trends to Watch for Global Investors

Thursday, April 5th, 2012

Bloomberg announced over the week­end that China’s man­u­fac­tur­ing grew at the fastest pace in a year. We fol­low the government’s Pur­chas­ing Man­agers’ Index (PMI) closely, as we believe it is a bet­ter indi­ca­tor of China’s domes­tic demand than the HSBC PMI. Whereas HSBC PMI sur­veys 400 small and mid-sized com­pa­nies, which are typ­i­cally export-oriented, the government’s PMI sur­veys 820 mostly large, state-owned enter­prises across 20 indus­tries.
Though man­u­fac­tur­ing activ­ity exceeded ana­lysts’ esti­mates, some China bears focused on the fact that the March 2012 num­ber is lower than the aver­age dur­ing the third month from 2005 through 2011. What’s impor­tant for investors to con­sider is that the trend is your friend: It is the fourth month in a row where the PMI landed above the three-month PMI, and shows the econ­omy is on the right path.

Below are three addi­tional con­struc­tive trends we see in China.

1. China Returns Poised to Revert to the Mean

Over the past few years, Chi­nese stocks have lagged com­pared to their emerg­ing mar­ket peers. How­ever, the Peri­odic Table of Emerg­ing Mar­kets per­fectly illus­trates how last year’s loser can be this year’s win­ner. His­tor­i­cally, every emerg­ing coun­try has expe­ri­enced wide price fluc­tu­a­tions from year to year. Over time, though, each coun­try tends to revert to the mean.

In the visual below, we high­lighted China’s per­for­mance pat­tern over the past 10 years. Chi­nese stocks landed in the top half four out of 10 years—2002, 2003, 2006 and 2007. In 2003, China climbed an astound­ing 163 per­cent; in 2007, it was the top emerg­ing mar­ket again, return­ing nearly 60 per­cent.
Since then, the coun­try has fallen to the bot­tom half of the chart. If you apply the prin­ci­ple of mean rever­sion, his­tory appears to favor China land­ing in the top half dur­ing this Year of the Dragon.

See the orig­i­nal Peri­odic Table of Emerg­ing Mar­kets here.

2. Liq­uid­ity Cycle Could Ben­e­fit Stocks

Yet China lead­ers won’t leave its suc­cess to pure luck. If the Dragon doesn’t breathe fire into mar­kets, it may be a shot of liq­uid­ity injected by pol­icy eas­ing that could drive stock prices higher. Macro­eco­nomic the­ory states that when a country’s money sup­ply exceeds eco­nomic growth, the excess liq­uid­ity tends to drive up asset prices, includ­ing stocks.

BCA Research doc­u­mented this trend in China over the past eight years. The research firm com­pared the dif­fer­ence between the change in money sup­ply growth and nom­i­nal GDP growth and Chi­nese stock prices. In both instances when the change in excess liq­uid­ity fell to a low, so did stocks. Con­versely, the rise of money sup­ply growth com­pared to GDP growth “coin­cided with major ral­lies” for China’s stock mar­ket, accord­ing to BCA.

Today, it appears that the change in excess liq­uid­ity is just begin­ning to bounce off another low, as are stocks, indi­cat­ing another poten­tial inflec­tion point.

3. Incen­tive to Main­tain Growth

BCA hedges China’s pos­si­ble stock advance­ment in the short-term if signs of eco­nomic improve­ment con­tinue because they “reduce the odds of aggres­sive pol­icy eas­ing.” A few weeks ago, I dis­cussed how investors seemed to over­look China’s focused macro pol­icy strat­egy, with its actions delib­er­ate and pur­pose­ful. This year, the gov­ern­ment has extra incen­tive to sus­tain mean­ing­ful growth as it tran­si­tions to a new lead­er­ship by the end of the year. As Pres­i­dent Hu Jin­tao and Pre­mier Wen Jiabao depart, Xi Jin­ping and Li Keqiang are expected to take over.

Look­ing at his­tor­i­cal GDP growth per year since 1978, Deutsche Bank finds there’s prece­dence for this idea. Dur­ing the fifth year of the lead­er­ship tran­si­tion cycle, “high or sta­ble” GDP growth was main­tained, with the excep­tion being the Asian Finan­cial Cri­sis in 1997.

These trends will be cov­ered in my upcom­ing web­cast on China with CLSA’s Andy Roth­man. Join us as we dis­cuss what investors should expect from China in terms of long-term GDP growth, fixed asset invest­ment, exports and the hous­ing market.

When I was in Sin­ga­pore at the Asia Min­ing Con­gress last week, I was for­tu­nate to be among a group of sharp and intel­li­gent experts across the finan­cial and min­ing indus­tries. A China bull pre­sent­ing an excel­lent case for the coun­try was Jing Ulrich, JP Morgan’s man­ag­ing direc­tor and chair­man of China equi­ties and com­modi­ties group. She’s the Oprah Win­frey of the invest­ment world, as for the past three years, Forbes Mag­a­zine has ranked her among the 50 Most Pow­er­ful Women in Business.

Ulrich expressed sim­i­lar views toward China and its polit­i­cal will in a recent “Hands-On China Report” fol­low­ing her atten­dance at the China Devel­op­ment Forum in Bei­jing. She said that the gov­ern­ment min­is­ters empha­sized their com­mit­ment to rebal­anc­ing the econ­omy toward con­sump­tion. While “fun­da­men­tals are cur­rently sound, the nation must mod­ify its ‘imbal­anced, unco­or­di­nated and unsus­tain­able’ course of devel­op­ment,” says Ulrich. What investors should remem­ber is that the gov­ern­ment had the finan­cial resources to effect this change and con­sid­ered it impor­tant to main­tain sus­tain­able growth.

All opin­ions expressed and data pro­vided are sub­ject to change with­out notice. Some of these opin­ions may not be appro­pri­ate to every investor. The Pur­chas­ing Manager’s Index is an indi­ca­tor of the eco­nomic health of the man­u­fac­tur­ing sec­tor. The PMI index is based on five major indi­ca­tors: new orders, inven­tory lev­els, pro­duc­tion, sup­plier deliv­er­ies and the employ­ment envi­ron­ment. The Hang Seng China Enter­prises Index is a capitalization-weighted index com­prised of state-owned Chi­nese com­pa­nies (H-Shares) listed on the Hong Kong Stock Exchange and included in HSMLCI index (Hang Seng Main­land Com­pos­ite Index).

Tags: 10 Years, China, Chinese Stocks, Commodities, Commodity, Dragon, Economy, Emerging Market, Emerging Markets, Estimates, Global Investors, Gold, History China, India, liquidity, Loser, Mining, Pace, Periodic Table, Pmi, Price Fluctuations, Principle, Purchasing Managers Index, State Owned Enterprises, Surveys, Year Of The Dragon
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“Shrugging Off Bad News!” (Saut)

Tuesday, April 3rd, 2012

“Shrug­ging Off Bad News!”

by Jef­frey Saut, Chief Invest­ment Strate­gist, Ray­mond James

April 2, 2012

Most traders, and investors, seem to become con­vinced of the gen­uine­ness of a move­ment in either direc­tion only when it approaches a cul­mi­na­tion. . . . One reli­able indi­ca­tion of the start of an upward swing is afforded when, after a period of declin­ing prices or, less fre­quently, dull­ness, the mar­ket advances or refuses to go down fol­low­ing the receipt of bad news. News can sel­dom be uti­lized by the pub­lic for mar­ket pur­poses, even when its authen­tic­ity is beyond ques­tion. For instance, if tomor­row morning’s news­pa­pers should announce the death of the Pres­i­dent or the fail­ure of a great ‘cor­ner house,’ or the com­plete destruc­tion of Gary, Indi­ana, it is more likely that stocks sold on the news would bring the low­est prices of the day, for the very good rea­son that each seller would be com­pet­ing with thou­sands of other sell­ers who would have learned the news at the same time.

... One-Way Pock­ets, by Don Guyon; 1917

One of my early men­tors in this busi­ness was Lucien Hooper; strate­gist, ana­lyst, econ­o­mist, stock mar­ket his­to­rian, the longest con­tribut­ing colum­nist to Forbes, and my friend. I can hear his sage words like it was yes­ter­day. The year was 1971, and we had just walked across the floor of the Amer­i­can Stock Exchange. As we headed down the atten­dant stair­case for lunch at “Harry at the Amex” Lucien said, “Jef­frey, when mar­kets ignore bad news, that’s good news!” Said state­ment has stuck with me ever since; and, it is just as true today as it was 41 years ago. Fast for­ward, over the past few weeks the equity mar­kets have had to endure a plethora of bad news – China’s slow­ing econ­omy, ris­ing inter­est rates, $4.00 per gal­lon gaso­line, a dys­func­tional gov­ern­ment, Iran, etc., yet the equity mar­kets have refused to sur­ren­der much ground. Last week was no excep­tion, for despite the neg­a­tive news back­drop the senior index (INDU/13212.04) gained 1%. Such action remains con­sis­tent with my mantra for this year, “You can get cau­tious, but DO NOT get bear­ish.” How­ever, many investors are either bear­ish, or frozen like a deer in the head­lights of a car, hav­ing been stung in last year’s June – August angst because they didn’t man­age the risk when they should have.

Recall, it was in March/April of last year that I rec­om­mended rais­ing cash. At the time the major “push back” from accounts was, “The stock mar­ket is going up, why should I raise cash?” And that was the exact rea­son you should have been rais­ing cash and rebal­anc­ing port­fo­lios. Most did not heed that strat­egy and sub­se­quently suf­fered through a ~20% decline only to liq­ui­date their port­fo­lios around August 8th when the equity mar­kets were in the process of bot­tom­ing. At the time I was actu­ally rec­om­mend­ing putting cash back to work based on the fact that we were expe­ri­enc­ing a cli­mac­tic capit­u­la­tion of his­toric pro­por­tions. Indeed, at the August 8th “low” less than 2% of all stocks traded were “up” on the day. As writ­ten, “You have to go back to May 13, 1940 to find another ses­sion whereby less than 2% of all stocks traded were ‘green’ on the day. Inter­est­ingly, on 5/13/40 the Ger­man army punched a 60-mile wide hole in the Mag­inot Line and invaded France, leav­ing every­one think­ing, “It’s the end of the world as we know it!”

Luck­ily, at those August lows, I began using the anal­ogy of the declines that occurred in Octo­ber 1978 and Octo­ber 1979 (see the charts on page 3). Those late-1970s Octo­ber declines came out of the blue, and were equally as debil­i­tat­ing as the June – August 2011 affair. They also ended with a sell­ing cli­max like that seen on August 8, 2011. As writ­ten at the time, post the selling-climax the sub­se­quent trad­ing pat­terns of Octo­ber 1978 and 1979 saw a bot­tom­ing sequence that left the senior index bob­bing and weav­ing for seven to eight weeks fol­lowed by an “under­cut low” (a low below the selling-climax low) that was for buy­ing. Study­ing the atten­dant charts shows the cor­re­la­tion between the Octo­ber 1978 and 1979 bot­tom­ing sequences and last year’s bot­tom­ing sequence, which is what gave me the con­vic­tion to rec­om­mend buy­ing the Octo­ber 4, 2011 “under­cut low.” Since then, I have been pretty bull­ish, save my cau­tion of the past num­ber of weeks. Indeed, for the past month I have averred that the over­bought con­di­tion of the indices could be cor­rected in one of two ways. They could either cor­rect with the per­func­tory 5–8% pull­back, or they could trade side­ways while the stock market’s over­bought con­di­tion was cor­rected, and the market’s inter­nal energy was rebuilt. Obvi­ously, at least so far, it has been a side­ways affair, which brings us to the start of the new quarter.

So, what’s in store going for­ward? I believe the Fed­eral Reserve wants Wall Street to inflate; and, with the Pres­i­den­tial elec­tions loom­ing, Pres­i­dent Obama will likely do every­thing in his power to keep the stock mar­ket ebul­lient. Thus, investors should be pre­pared for fur­ther poli­cies designed to stim­u­late the econ­omy, which should allow stocks to travel higher even if they do pause, or stum­ble, in the near-term on con­cerns the fun­da­men­tals are turn­ing squir­relly. Nev­er­the­less, what many investors don’t under­stand is that in the short/intermediate-term there is not a lin­ear rela­tion­ship between the fun­da­men­tals and the stock market’s direc­tion­al­ity. Man­i­festly, it is the dilu­tion of our cur­rency, with a con­cur­rent decline in its value due to a mas­sive increase in the money sup­ply, which is caus­ing money to flow into assets of all kinds, includ­ing stocks. And that, ladies and gen­tle­men, is the nat­ural reac­tion to the flood of liq­uid­ity injected into the sys­tem by the world’s cen­tral banks. I don’t think it will end any­time soon.

Mean­while, the over­bought con­di­tion, as reflected by the NYSE McClel­lan Oscil­la­tor, that got us wor­ried fol­low­ing the end of the “buy­ing stam­pede” at the end of Jan­u­ary, has been cor­rected; and the stock market’s inter­nal energy is being rebuilt. Ver­ily, our daily inter­nal energy indi­ca­tor has lifted from a “totally used up” 30 read­ing on March 19th to 50 as of last Fri­day. For a full charge of energy that indi­ca­tor needs to be above 55. The weekly energy indi­ca­tor, how­ever, is still around the 30 level. Hereto, for a full charge of energy the weekly needs to be above 55. Accord­ingly, my sense is that the equity mar­kets need another few weeks of con­va­lesc­ing, prob­a­bly in a range between 1385 and 1420 basis the S&P 500 (SPX/1408.47), before they are ready to re-rally. The big test for this week should be Friday’s employ­ment report, which is antic­i­pated to be bad. Still, as long as the SPX resides above 1385 the bull­ish case remains intact.

Speak­ing to the econ­omy, while last week’s +3% GDP report was in the fore­front, less noticed was the GDI report. Sur­pris­ingly, the Gross Domes­tic Income report rose a larger than expected 4.4%. This is not an unim­por­tant obser­va­tion because the GDI mea­sures all the wages and prof­its in the econ­omy while the GDP mea­sures only spend­ing. The­o­ret­i­cally, the GDP and GDI reports should be the same. To me, this is just fur­ther evi­dence that the econ­omy is not sink­ing back into reces­sion. Another boost for the equity mar­kets last week seemed to be the tone of the ques­tion­ing by the Supremes sug­gest­ing Oba­macare may be in more trou­ble than expected. Such news con­tin­ues to be a night­mare for the under­in­vested crowd; and the world remains pro­foundly under­in­vested in U.S. equities.

The call for this week: March came in like a bear, but went out like a bull, cap­ping the best first quar­ter since 1998. For the quar­ter the SPX gained 11.99% for its 10th best start of the year ever. For me it was almost like déjà vu as I recalled the best first quar­ter of my life­time, which was 1975’s surge of 21.59%. Why déjà vu? Well, it is because I began writ­ing strat­egy In Novem­ber of 1974 with the line, “I believe now is the time to accu­mu­late stocks.” At the time the Dow was trad­ing below 600, hav­ing fallen from its March high of 891 for a 34% decline. Sim­i­larly, on Octo­ber 3, 2011, in a report titled ”Under­cut Low” I rec­om­mended buy­ing stocks fol­low­ing the Dow’s decline of ~20%. As stated at the time, “I have been adamant since March 2009 that like the ‘nom­i­nal’ price low of Decem­ber 1974 this wide-swinging trad­ing range mar­ket saw its nom­i­nal price in March 2009. Last Octo­ber I sug­gested what we could cur­rently be expe­ri­enc­ing is sim­i­lar to the “val­u­a­tion” low of August 1982 because the SPX was trad­ing below 10x for­ward earn­ings esti­mates with an earn­ings yield of over 10%, ren­der­ing an equity risk pre­mium of more than 8% for val­u­a­tion met­rics not seen in decades. I still believe that is the case.

Click here to enlarge

Copy­right © Ray­mond James

Tags: American Stock Exchange, Amex, Bad News, Chief Investment Strategist, China, Culmination, Don Guyon, Gary Indiana, Genuineness, Hooper, India, jeffrey saut, Lucien, Negative News, One Way Pockets, Plethora, Raymond James, Rising Interest Rates, Sage Words, Stock Market, Time One, Upward Swing
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Shifting Winds-Turbulence Ahead? (Sonders)

Monday, April 2nd, 2012

Shift­ing Winds-Turbulence Ahead?

March 30, 2012

by Liz Ann Son­ders,Senior Vice Pres­i­dent, Chief Invest­ment Strate­gist, Charles Schwab & Co., Inc., and,
Brad Sorensen, CFA, Direc­tor of Mar­ket and Sec­tor Analy­sis, Schwab Cen­ter for Finan­cial Research, and
Michelle Gib­ley, CFA, Direc­tor of Inter­na­tional Research, Schwab Cen­ter for Finan­cial Research

Key Points

• Trea­sury yields have moved some­what higher, while stocks have largely con­tin­ued to rise. Some recent cor­re­la­tions appear to be break­ing down, which could lead to some increased volatil­ity but we remain rel­a­tively con­fi­dent in the equity mar­ket. Per­cep­tion as to the next poten­tial moves by the Fed­eral Reserve appeared to be shift­ing, but Chair­man Bernanke reit­er­ated their easy mon­e­tary stance. Uncer­tainty is ris­ing and the Fed’s goal of increased clar­ity through more trans­par­ent com­mu­ni­ca­tion is under increased scrutiny.
• Liq­uid­ity con­cerns in Europe have eased but eco­nomic risks remain ele­vated, while Spain and Italy face deal with their ongo­ing debt crises. Mean­while, fears remain about a hard land­ing in China, although we have a more san­guine view.

Are we start­ing the return to a more "nor­mal" mar­ket envi­ron­ment? It's too early to tell but we are begin­ning to see lower volatil­ity and asset class cor­re­la­tions. Con­tribut­ing to this more sta­ble envi­ron­ment is a shift­ing of Fed expec­ta­tions and increased investor con­fi­dence about US eco­nomic expan­sion. How­ever, we acknowl­edge that such a shift will likely cause some near-term tur­bu­lence in the mar­ket, espe­cially given ele­vated bull­ish investor sen­ti­ment (a con­trar­ian indi­ca­tor). The mar­ket has also become tech­ni­cally extended after its roughly 30% rally since early Octo­ber 2011, and could be due for a breather. Addi­tion­ally, an uncer­tain earn­ings sea­son is approach­ing, oil prices con­tinue to be con­cern­ing, and the siren song of "sell in May" is likely to be heard again. We believe any con­sol­i­da­tion is likely to be shal­low and could bring back some of the "wall of worry" that the mar­ket loves to climb.

One of this year’s ear­lier trends had been stocks mov­ing higher, but Trea­sury bond yields remain­ing near record lows, indi­cat­ing both con­tin­ued con­cern about the sus­tain­abil­ity of the eco­nomic expan­sion, and the con­fi­dence that the Fed­eral Reserve would con­tinue its extremely accom­moda­tive mon­e­tary stance for the fore­see­able future. Recently, we’ve seen Trea­sury yields move up from those record lows, while stocks con­tin­ued to move higher. This could be the begin­ning of a shift in investor atti­tudes as con­fi­dence in the eco­nomic expan­sion may be grow­ing lead­ing to skep­ti­cism that the Fed can main­tain its cur­rent pol­icy stance through 2014.

Yields Move Higher—For Pos­i­tive Reasons

Source: Fact­Set, Fed­eral Reserve. As of Mar. 27, 2012.

While it's too early to say this is the start of a trend of yields mov­ing inex­orably higher, it does appear that the retail investor could begin to shift some assets from bond funds and cash into equi­ties. This could feed the next leg up in the equity rally.

Eco­nomic Transition

Part of the impe­tus behind the retail investor warm­ing up to equi­ties may be the improve­ment in eco­nomic data—especially as it relates to jobs and hous­ing. But here too we may be enter­ing a tran­si­tion phase as year-over-year com­par­isons become more dif­fi­cult and sub­stan­tial gains become harder to come by. Hous­ing data con­tin­ues to be mixed and although ini­tial job­less claims recently hit their low­est level in three years, the pace of the recov­ery in jobs could slow. This could con­tribute to near-term volatil­ity, but we do believe in the sus­tain­abil­ity of the eco­nomic expan­sion, which should help to sup­port equity prices through the bal­ance of 2012.

Jobs pic­ture con­tin­ues to improve

Source: Fact­Set, U.S. Dept. of Labor. As of Mar. 27, 2012.

Hous­ing is not off to the races and likely won’t see a sharp bounce off of the bot­tom, but we are see­ing encour­ag­ing signs. Although exist­ing home sales fell 0.9% month-over-month in Feb­ru­ary, it was still the best Feb­ru­ary read­ing in five years and sales were up 8.8% over a year ago. Mean­while, hous­ing starts fell 1.1% but forward-looking build­ing per­mits rose 5.1%, to the high­est level since Octo­ber 2008. And while hous­ing remains extremely afford­able based on his­tor­i­cal lev­els, mort­gage rates have moved mod­estly higher. Some­what counter-intuitively this could con­tribute to fur­ther improve­ment of the hous­ing mar­ket as the prospect of rates actu­ally mov­ing higher may push poten­tial pur­chasers who had been sit­ting on the fence toward action.

Other eco­nomic data con­tin­ues to show growth in the econ­omy, although there are some poten­tial chinks that we are watch­ing closely. The Empire Man­u­fac­tur­ing Index moved to its high­est level since June 2010 while the Philly Fed Index rose to its best read­ing since April 2011. How­ever, the for­ward look­ing new orders com­po­nent of both reports moved lower. While not overly con­cern­ing yet, it’s some­thing we’re keep­ing an eye on.

Addi­tion­ally, the Index of Lead­ing Eco­nomic Indi­ca­tors rose 0.7% in Feb­ru­ary, mark­ing the fifth-straight month of improve­ment. The National Fed­er­a­tion of Inde­pen­dent Busi­nesses Index moved higher, indi­cat­ing improv­ing small busi­ness con­fi­dence. Finally, retail sales moved 1.1% higher; while ex-autos and gas they moved 0.6% higher and the pre­vi­ous month was also revised upward, indi­cat­ing the Amer­i­can con­sumer con­tin­ues to spur activity.

Fed Stance Shifting?

This con­tin­ued improv­ing data may be con­tribut­ing to a shift in the per­cep­tion of the future of Fed pol­icy. While the recent Fed meet­ing kept pol­icy the same and con­tin­ued to pre­dict near zero inter­est rates through at least late 2014, they did upgrade their out­look of the econ­omy slightly. Also, sev­eral Fed mem­bers have said they believe higher inter­est rates may be needed sooner than cur­rently offi­cially pre­dicted. The fed funds futures mar­ket has the first rate hike com­ing at least six months before the end of 2014. And finally, dur­ing Chair­man Bernanke’s recent tes­ti­mony on Capi­tol Hill, he did noth­ing to indi­cate another round of quan­ti­ta­tive eas­ing was in the cards, lead­ing investors to believe the Fed's con­fi­dence in the eco­nomic expan­sion may be grow­ing. How­ever, in a sub­se­quent speech, he reit­er­ated his belief that the econ­omy and job mar­ket would con­tinue to need Fed assis­tance, throw­ing a lit­tle more uncer­tainty into the equa­tion. We are encour­aged at these glim­mers of hope and believe that a return to more nor­mal pol­icy sooner rather than later would be appropriate.

Europe’s debt cri­sis merely on pause

The sec­ond Greek bailout was com­pleted on March 20 with mar­kets hardly bat­ting an eye. But the euro­zone sov­er­eign debt cri­sis is far from over—it is merely on pause and there is still risk of future outbreaks.

Where could sov­er­eign debt con­cerns arise?

• Greece and Por­tu­gal could need addi­tional bailouts;
• Ire­land could ask for debt for­give­ness to bol­ster a pub­lic vote for the fis­cal pact;
• France’s gen­eral elec­tion could result in a change of lead­er­ship from Sarkozy to Hollande.

How­ever, we feel these poten­tial events are unlikely to result in a broad con­ta­gion out­break. On the other hand, Spain and Italy have the abil­ity to heat up con­cerns and risk aver­sion due to their large debts and economies. Italy’s econ­omy has grown less than the euro­zone aver­age over the past decade and reforms are needed to improve com­pet­i­tive­ness and enhance growth prospects. Ital­ian Prime Min­is­ter Monti needs to keep mak­ing progress to main­tain investor con­fi­dence, and watered down labor reforms may not have a last­ing effect.

How­ever, Italy has some pos­i­tive attrib­utes, includ­ing a wealthy pri­vate sec­tor with a per capita net worth more than three times higher than the other Euro­pean periph­eral coun­tries, accord­ing to BCA Research, giv­ing them the abil­ity to fund debt locally. As such, Italy’s debt tends to be in stronger, longer-term, hands. Addi­tion­ally, Italy has a pri­mary bud­get sur­plus – a sur­plus before debt pay­ments – as well as long debt maturities.

Spain's hous­ing bub­ble still deflating

Source: Fact­Set, S&P/Case-Shiller, Bank of Spain. As Mar. 27, 2012. Indexed to 100 = 1/1/1996.

Spain on the other hand has a more uncer­tain and risky out­look. While Spain’s cur­rent gov­ern­ment debt load is smaller than Italy’s as a per­cent­age of gross domes­tic prod­uct (GDP), it has an ele­vated deficit, high and ris­ing unem­ploy­ment and a hous­ing bub­ble that is still deflat­ing. A risk is that the large amount of pri­vate sec­tor debt could incur more losses for banks, poten­tially requir­ing cash infu­sions from the gov­ern­ment. Addi­tion­ally, instead of mak­ing deficit-reduction progress, Spain has backpedaled; now tar­get­ing a higher deficit to end 2012 than envi­sioned a few months ago.

Pos­i­tively, Euro­pean pol­i­cy­mak­ers are doing their part to con­tain risks, from the Euro­pean Cen­tral Bank's three-year loans and Germany's recent will­ing­ness to com­bine the tem­po­rary Euro­pean Finan­cial Sta­bil­ity Facil­ity (EFSF) with the longer-term Euro­pean Sta­bil­ity Mech­a­nism (ESM) that comes into effect in July. How­ever, an even big­ger fire­wall may even­tu­ally be needed.

Europe drag­ging down global growth

The lin­ger­ing effects of the sov­er­eign debt cri­sis on the Euro­pean econ­omy con­tinue. The renewed down­turn of euro­zone pur­chas­ing man­ager indexes in March indi­cate the econ­omy is still frag­ile and it could take some time before growth reac­cel­er­ates. A hob­bled Euro­pean bank­ing sys­tem remains at the heart of the slow­down. Bank bal­ance sheets likely don't have enough excess cap­i­tal to expand lend­ing and banks have responded by tight­en­ing lend­ing stan­dards. Lend­ing is the lifeblood of eco­nomic growth and a severe reduc­tion in lend­ing is likely to restrain activity.

In terms of invest­ment impli­ca­tions, the out­look for Euro­pean stocks is mixed. Val­u­a­tions appear attrac­tive and we believe cor­re­la­tions will decline and investors will dif­fer­en­ti­ate across mar­kets. Mar­kets with stronger economies such as Ger­many could do bet­ter, while those with weaker eco­nomic out­looks, like Spain, could lag. The Ital­ian stock mar­ket falls in the mid­dle, as a neg­a­tive eco­nomic out­look is off­set by high pri­vate sec­tor wealth.

Should we worry about China?

There are plenty of bear­ish sto­ries about China these days and China remains a puz­zle to many. The lack of trans­parency and the view that news is fil­tered and man­aged helps fuel the fears.

We believe the truth lies some­where between the bear­ish and bull­ish case. We still believe that a hard land­ing is unlikely and that mar­kets are at times over-reacting to data that is really not new news. Exam­ples include the 7.5% growth tar­get for 2012 when the Five-Year Plan issued a year ago envi­sioned a 7% rate over the full period; and com­ments from BHP Bil­li­ton that demand for iron ore would drop to single-digits, which was not sig­nif­i­cantly dif­fer­ent than what they had said in the past.

Even reports that China's man­u­fac­tur­ing pur­chas­ing man­ager index (PMI) is in con­trac­tion ter­ri­tory are a mis­nomer. The PMI sur­vey is a dif­fu­sion index—a read­ing below 50 indi­cates more peo­ple say things are slower ver­sus last month than faster—in other words, below aver­age activ­ity. In a fast grow­ing econ­omy such as China, this does not nec­es­sar­ily equate to a contraction.

Man­u­fac­tur­ing in China slowing

Source: Fact­Set, Markit. As Mar. 27, 2012.

We have believed for some time that China's econ­omy would con­tinue to slow, but that a sharp drop in infla­tion and money sup­ply would allow stim­u­lus to be enacted that could reac­cel­er­ate growth later in 2012. How­ever, we are dis­cour­aged by so far mod­est pol­icy eas­ing amid signs of accel­er­ated slowing.

In par­tic­u­lar, the report that prof­its for Chi­nese indus­trial com­pa­nies fell 5.2% dur­ing the first two months of 2012 was worse than we expected. Granted, this fig­ure was after prof­its gained 34.3% a year ear­lier and is dur­ing a sea­son­ally weak period, so it may not be a last­ing trend, but is concerning.

The Chi­nese gov­ern­ment typ­i­cally takes grad­ual moves, but the slow pace of response while eco­nomic data is mov­ing faster indi­cates the gov­ern­ment could slip behind the eco­nomic momen­tum, then strug­gle to gain ground. China’s econ­omy is now the second-largest glob­ally and is becom­ing tougher to micro-manage – the risk of a pol­icy mis­take is grow­ing. We’re not ready to change our view as we believe we’re still in the early innings of the slow­down, but have a wary eye on pol­icy response.

An event that could have longer-term impli­ca­tions is the com­ing polit­i­cal changeover at year's end. Con­cerns have arisen after the party chief in Chongqing, one of China's biggest cities, was sacked in March. This is the high­est level offi­cial removed in over two decades. There appears to be increas­ing strains within the Com­mu­nist party about whether to move toward reforms or tighten con­trol. We'll be mon­i­tor­ing this over the com­ing year.

Read more inter­na­tional research at www.schwab.com/oninternational.

Impor­tant Disclosures

The MSCI EAFE® Index (Europe, Aus­trala­sia, Far East) is a free float-adjusted mar­ket cap­i­tal­iza­tion index that is designed to mea­sure devel­oped mar­ket equity per­for­mance, exclud­ing the United States and Canada. As of May 27, 2010, the MSCI EAFE Index con­sisted of the fol­low­ing 22 devel­oped mar­ket coun­try indexes: Aus­tralia, Aus­tria, Bel­gium, Den­mark, Fin­land, France, Ger­many, Greece, Hong Kong, Ire­land, Israel, Italy, Japan, the Nether­lands, New Zealand, Nor­way, Por­tu­gal, Sin­ga­pore, Spain, Swe­den, Switzer­land and the United Kingdom.The MSCI Emerg­ing Mar­kets IndexSM is a free float-adjusted mar­ket cap­i­tal­iza­tion index that is designed to mea­sure equity mar­ket per­for­mance in the global emerg­ing mar­kets. As of May 27, 2010, the MSCI Emerg­ing Mar­kets Index con­sisted of the fol­low­ing 21 emerging-market coun­try indexes: Brazil, Chile, China, Colom­bia, the Czech Repub­lic, Egypt, Hun­gary, India, Indone­sia, Korea, Malaysia, Mex­ico, Morocco, Peru, Philip­pines, Poland, Rus­sia, South Africa, Tai­wan, Thai­land and Turkey.The S&P 500® index is an index of widely traded stocks.Indexes are unman­aged, do not incur fees or expenses and can­not be invested in directly.Past per­for­mance is no guar­an­tee of future results.Investing in sec­tors may involve a greater degree of risk than invest­ments with broader diversification.International invest­ments are sub­ject to addi­tional risks such as cur­rency fluc­tu­a­tions, polit­i­cal insta­bil­ity and the poten­tial for illiq­uid mar­kets. Invest­ing in emerg­ing mar­kets can accen­tu­ate these risks.The infor­ma­tion con­tained herein is obtained from sources believed to be reli­able, but its accu­racy or com­plete­ness is not guar­an­teed. This report is for infor­ma­tional pur­poses only and is not a solic­i­ta­tion or a rec­om­men­da­tion that any par­tic­u­lar investor should pur­chase or sell any par­tic­u­lar secu­rity. Schwab does not assess the suit­abil­ity or the poten­tial value of any par­tic­u­lar invest­ment. All expres­sions of opin­ions are sub­ject to change with­out notice. The Schwab Cen­ter for Finan­cial Research is a divi­sion of Charles Schwab & Co., Inc.

Tags: asset class, Bernanke, Brazil, Canadian Market, Charles Schwab, Chief Investment Strategist, China, Contrarian Indicator, Earnings Season, Economic Expansion, Economic Risks, India, Investor Confidence, Investor Sentiment, Liz Ann, Market Environment, Market Perception, Monetary Stance, Russia, Sanguine View, Senior Vice President, Siren Song, Stable Environment, Transparent Communication, Treasury Yields
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First Quarter Asset Class Performance (Bespoke)

Monday, April 2nd, 2012

Below is our key ETF matrix that high­lights the per­for­mance of var­i­ous asset classes dur­ing the first quar­ter.  As shown, the best per­form­ing ETF in the entire matrix was the Finan­cials (XLF) with a first quar­ter gain of 21.5%.  India (INP) ranks sec­ond with a gain of 21.13%, fol­lowed by Ger­many (EWG) at 21.12% and the Nas­daq 100 (QQQ) at 20.99%.  The worst per­form­ing ETF in Q1 was nat­ural gas (UNG) with a decline of 38.89%.  The 20+ Year Trea­sury ETF (TLT) and the Yen (FXY) did the sec­ond and third worst with respec­tive declines of 7.46% and 7.15%.

Look­ing for more info on this mar­ket?  Each Friday, members of our Bespoke sub­scrip­tion ser­vices receive our Week in Review newslet­ter.  This report pro­vides Bespoke's cur­rent mar­ket thoughts through com­men­tary and the unique graphs and charts that our clients have come to love.  If you're look­ing to get a bet­ter grasp of the mar­ket, sub­scribe to one of our mem­ber­ship pack­ages today and down­load our Week in Review newsletter.

Tags: asset class, Asset Classes, Class Performance, Current Market, Decline, Declines, Ewg, First Quarter, Graphs And Charts, Grasp, India, Inp, Market Thoughts, Membership Packages, Nasdaq 100, Natural Gas, Qqq, Subscription Services, Tlt, Xlf, Yen
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Does China Hold the Winning Ticket?

Sunday, April 1st, 2012

By Frank Holmes, CEO and Chief Invest­ment Offi­cer, U.S. Global Investors

The odds of win­ning tonight’s Mega Mil­lions jack­pot are 1 in 175,711,536. This remote chance hasn’t stopped peo­ple from lin­ing up to buy a ticket, as the “what-if-I-win” idea seems so thrilling.

Some bears may think the odds of China being the win­ner among emerg­ing mar­kets in 2012 are also remote. Over the past few years, Chi­nese stocks have lagged com­pared to its emerg­ing mar­ket peers. How­ever, the Peri­odic Table of Emerg­ing Mar­ketsper­fectly illus­trates: last year’s loser can be this year’s win­ner. His­tor­i­cally, every emerg­ing coun­try has expe­ri­enced wide price fluc­tu­a­tions from year to year. Over time, though, each coun­try tends to revert to the mean.

In the visual below, we high­lighted China’s per­for­mance pat­tern over the past 10 years. Chi­nese stocks landed in the top half four out of 10 years—2002, 2003, 2006 and 2007. In 2003, China climbed an astound­ing 163 per­cent; in 2007, it was the top emerg­ing mar­ket again, return­ing nearly 60 percent.

Since then, the coun­try has fallen to the bot­tom half of the chart. If you apply the prin­ci­ple of mean rever­sion, his­tory appears to favor China land­ing on top dur­ing this Year of the Dragon.

See the orig­i­nal Peri­odic Table of Emerg­ing Mar­kets here.

Unlike the lot­tery sys­tem, China won’t leave its suc­cess to pure luck. If the Dragon doesn’t breathe fire into mar­kets, it may be a shot of liq­uid­ity injected by pol­icy eas­ing that could drive stock prices higher. Macro­eco­nomic the­ory states that when a country’s money sup­ply exceeds eco­nomic growth, the excess liq­uid­ity tends to drive up asset prices, includ­ing stocks.

BCA Research doc­u­mented this trend in China over the past eight years. The research firm com­pared the dif­fer­ence between the change in money sup­ply growth and nom­i­nal GDP growth and Chi­nese stock prices. In both instances when the change in excess liq­uid­ity fell to a low, so did stocks. Con­versely, the rise of money sup­ply growth com­pared to GDP growth “coin­cided with major ral­lies” for China’s stock mar­ket, accord­ing to BCA.

Today, it appears that the change in excess liq­uid­ity is just begin­ning to bounce off another low, as are stocks, indi­cat­ing another poten­tial inflec­tion point.

BCA hedges China’s pos­si­ble stock advance­ment in the short-term if signs of eco­nomic improve­ment con­tinue because they “reduce the odds of aggres­sive pol­icy eas­ing.” A few weeks ago, I dis­cussed how investors seemed to over­look China’s focused macro pol­icy strat­egy, with its actions delib­er­ate and pur­pose­ful. This year, the gov­ern­ment has extra incen­tive to sus­tain mean­ing­ful growth as it tran­si­tions to a new lead­er­ship by the end of the year. As Pres­i­dent Hu Jin­tao and Pre­mier Wen Jiabao depart, Xi Jin­ping and Li Keqiang are expected to take over.

Look­ing at his­tor­i­cal GDP growth per year since 1978, Deutsche Bank finds there’s prece­dence for this idea. Dur­ing the fifth year of the lead­er­ship tran­si­tion cycle, “high or sta­ble” GDP growth was main­tained, with the excep­tion being the Asian Finan­cial Cri­sis in 1997.

When I was in Sin­ga­pore at the Asia Min­ing Con­gress this week, I was for­tu­nate to be among a group of sharp and intel­li­gent experts across the finan­cial and min­ing indus­tries. One China bull pre­sent­ing an excel­lent case for the coun­try was Jing Ulrich, JP Morgan’s man­ag­ing direc­tor and chair­man of China equi­ties and com­modi­ties group. She’s the Oprah Win­frey of the invest­ment world, as for the past three years, Forbes Mag­a­zine has ranked her among the 50 Most Pow­er­ful Women in Business.

Ulrich expressed sim­i­lar views toward China and its polit­i­cal will in a recent “Hands-On China Report” fol­low­ing her atten­dance at the China Devel­op­ment Forum in Bei­jing. She said that the gov­ern­ment min­is­ters empha­sized their com­mit­ment to rebal­anc­ing the econ­omy toward con­sump­tion. While “fun­da­men­tals are cur­rently sound, the nation must mod­ify its ‘imbal­anced, unco­or­di­nated and unsus­tain­able’ course of devel­op­ment,” says Ulrich. Impor­tantly, the gov­ern­ment had the finan­cial resources to effect this change and con­sid­ered it impor­tant to main­tain sus­tain­able growth, writes Ulrich.

The ups and downs of this road toward a consumption-led econ­omy are top­ics I’ll cover in next week’s web­cast on China. I will be joined by CLSA’s Andy Roth­man. Together, we’ll dis­cuss what investors should expect from China in terms of long-term GDP growth, fixed asset invest­ment, exports and the hous­ing mar­ket. Be sure to sign up now.

Copy­right © U.S. Global Investors

Tags: Asset Prices, Chief Investment Officer, China, Chinese Stock, Chinese Stocks, Commodities, Commodity, Emerging Market, Emerging Markets, Excess Liquidity, Frank Holmes, Gold, India, Lottery System, Macroeconomic Theory, Mega Millions, Mining, Money Supply Growth, Nominal Gdp Growth, Periodic Table, Price Fluctuations, Ris, Stock Prices, Theory States, U S Global Investors, Year Of The Dragon
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Gold Market Radar (April 2, 2012)

Sunday, April 1st, 2012

Gold Mar­ket Radar (April 2, 2012)

For the week, spot gold closed at $1,668.90 up $6.45 per ounce, or 0.4 per­cent. How­ever, gold stocks, as mea­sured by the NYSE Arca Gold BUGS Index, fell 0.4 per­cent. The U.S. Trade-Weighted Dol­lar Index slid 0.5 per­cent for the week.

Strengths

• Early in the week, com­ments from Fed­eral Reserve Chair­man Ben Bernanke sug­gested the need for con­tin­ued accom­moda­tive mon­e­tary pol­icy. This brought prospects of QE3 back onto the hori­zon and helped pro­vide a floor to the recent down­swing in gold prices.
• Queen­ston Min­ing sold their joint ven­ture prop­erty to Kirk­land Lake Gold for $60 mil­lion and a roy­alty this week. Fac­tor­ing in this $60 mil­lion, the com­pany now has $120 mil­lion in cash and cash equiv­a­lents on their bal­ance sheet. This will be used to fund explo­ration and advance the fea­si­bil­ity study of the Beaver Creek project. The mar­ket reacted pos­i­tively to this and the stock out­per­formed the major gold indexes for the week.
• AuRico Gold sold two small gold mines in Aus­tralia to Croc­o­dile Gold this week. This came as no sur­prise to the mar­ket as AuRico had been talk­ing about the sale of their assets before. The total amount of the sale is $105 mil­lion (Cana­dian), or $0.32 per share. In our eyes, AuRico sold their mines for too lit­tle, but when you con­sider the increas­ing oper­at­ing costs for the company’s Aus­tralian assets, it was the right thing to do strategically.

Weak­nesses

• Fol­low­ing 12 days of protests by gold traders across India, the Indian gov­ern­ment has said that it will review the tax on ‘unbranded’ gold jew­elry. For­mer finance min­ster Yash­want Sinha pressed for a roll­back of the excise duty on non­branded jew­elry, and called for doing away with the newly required Per­ma­nent Account Num­ber (PAN) card to doc­u­ment any gold jew­elry pur­chases worth greater than roughly $4000. The PAN card allows the gov­ern­ment to track sig­nif­i­cant gold pur­chases and would have to be doc­u­mented on an individual’s income tax returns.
• Speak­ing to the Indian par­lia­ment, Pranab Mukher­jee said, “I know it (gold) is part of our cul­ture … but the import of gold of such mag­ni­tude strains bal­ance of pay­ments and affects exchange rate of the rupee through impact­ing supply-demand bal­ance of for­eign exchange.” He went on fur­ther to express his con­cern over the out­flow of pre­cious for­eign exchange on the import of “dead assets that cause prob­lems in the coun­try.” We think Mukher­jee may be con­fused as to which is asset, gold or the rupee, is the “dead” one.
• Cen­terra Gold took a hit this week, down 15 per­cent on Tues­day alone, on news that ice and waste move­ment has halted pro­duc­tion at their Kum­tor mine. In response to the dis­rup­tion, the com­pany revised and reduced its 2012 gold pro­duc­tion by 33 per­cent to 570,000–625,000 ounces. The news proved to be a great buy­ing oppor­tu­nity as Cen­terra fin­ished the week only down 1.8 percent.

Oppor­tu­ni­ties

• Gold­man Sachs urged traders to buy gold in a research note this week. The company’s research shows U.S. real inter­est rates as the pri­mary dri­ver of U.S. dollar-denominated gold prices. Their mod­els sug­gest the cur­rent level of real inter­est rates would be con­sis­tent with the cur­rent trad­ing range of gold prices. As they look for­ward how­ever, their U.S. econ­o­mists expect sub­dued growth and fur­ther eas­ing by the Fed­eral Reserve in 2012. They fore­cast this would push the market’s expec­ta­tions of real inter­est rates back down near zero and gold prices back to $1,840 an ounce.
• Franco-Nevada Corp CEO David Har­quail said that with share prices lag­ging, min­ers are wary of turn­ing to equity mar­kets to raise money and are explor­ing all alter­na­tives such as stream deals or roy­al­ties. The lat­ter are at an all-time high, but with most deals hap­pen­ing in the mid-tier mar­ket, ones over $500 mil­lion will be few and far between. We have a feel­ing there will be a num­ber of roy­alty streams locked-in this upcom­ing year.
• In an inter­view with the Gold Report, Brent Cook com­mented on some trends he has noticed gold sec­tor. He empha­sized that com­pa­nies are start­ing to rec­og­nize that qual­ity of a min­eral deposit super­sedes size. “Grade, or more suc­cinctly mar­gin, is get­ting more and more impor­tant ... These junior com­pa­nies with these large, low-grade, low-margin deposits are then doomed to build.” On a supply-demand basis though, all signs point to gold going up. Brent says that 83 mil­lion ounces are being mined annu­ally right now while only 20–30 mil­lion ounces are being found per year. This gap between pro­duc­tion and dis­cov­ery is not being filled and can only point to a bet­ter gold environment.

Threats

• Still no con­clu­sion or real pro­gres­sion out of Mali, but Rand­gold Resources CEO Mark Bris­tow said that the Bamako air­port has reopened and the bor­ders are open for all traf­fic. He main­tained that the company’s Loulo com­plex was replen­ished with fuel sup­plies over the week­end and that all three of the Rand­gold mines in Mali were oper­at­ing in full.
• Ren­Cap Secu­ri­ties held a spe­cial con­fer­ence call on the sit­u­a­tion in Mali. Their con­sul­tant expects eco­nomic pressure–primarily in the form of sanc­tions and sus­pended West­ern aid–to be the pri­mary out­side inter­ven­tion in Mali. This could ham­per import and export activ­ity, though the rebels have promised to tran­si­tion to new elections.
• How­ever, no timetable exists for the tran­si­tion and given the rebels’ lack of orga­ni­za­tion; they may be tempted to stay in power for a period of months in order to found a polit­i­cal party. This could mean that sanc­tions have the time to truly bite. Any such sanc­tions, how­ever, would be leaky by virtue of the lack of bureau­cratic capa­bil­ity to enforce them among Mali’s neighbors.

Tags: Beaver Creek, Canadian, Canadian Market, Cash And Cash Equivalents, Dollar Index, Feasibility Study, Federal Reserve Chairman, Federal Reserve Chairman Ben Bernanke, Gold, Gold Bugs, Gold Jewelry, Gold Market, Gold Mines In Australia, Gold Prices, gold stocks, Gold Traders, Income Tax Returns, India, Jewelry Purchases, Kirkland Lake Gold, Market Radar, Mines In Australia, Mining, Nyse Arca, Spot Gold
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Energy and Natural Resources Market Radar (April 2, 2012)

Sunday, April 1st, 2012

Energy and Nat­ural Resources Mar­ket Radar (April 2, 2012)

Strengths

• Recent data trends sup­port the Global Resources Fund (PSPFX) man­agers’ long-term invest­ment theme of higher food, agri­cul­tural com­mod­ity and land prices. After surg­ing over 6 per­cent on Fri­day, corn futures closed flat for the week at $6.44 per bushel. The Fri­day surge came after new gov­ern­ment data was released show­ing a drop in the amount of corn in stor­age. This raised con­cerns that corn sup­plies will remain tight and prices high in the near term.
• Iraq’s cen­tral gov­ern­ment has approved pay­ment of close to $560 mil­lion to oil pro­duc­ers in the autonomous Kur­dish region after Kur­dish author­i­ties threat­ened to halt exports due to a lack of pay­ments from Bagh­dad. Mean­while, Iraqi oil sales are head­ing toward a post-war high this month as a new Per­sian Gulf ship­ping out­let pro­vides a long-awaited boost to export capacity.
• Indian oil con­sump­tion increased by 67 thou­sand bar­rels per day (2.1 per­cent) on a year-over-year basis in Feb­ru­ary, the second-highest level on record. This was the fifth-straight month where demand totaled more than 3 mil­lion bar­rels per day, high­light­ing the country’s steady increase in oil con­sump­tion. Dri­ven by improv­ing indus­trial activ­ity and con­tin­ued pen­e­tra­tion of diesel in the auto­mo­bile sec­tor, diesel sales, which make up over one-third of Indian demand, increased by 8 per­cent year-over-year to 1.423 mil­lion bar­rels per day, the second-highest level ever.
• U.S. crude con­sump­tion is hold­ing up at around 14.55 mil­lion bar­rels per day, a 3 per­cent year-over-year rise so far this year. Despite high gaso­line prices, growth is expected to rise by 1.9 per­cent quarter-over-quarter and 5 per­cent year-over-year.

Weak­nesses

• The supply-side of the alu­minum mar­ket has expe­ri­enced a sharp bifur­cat­ing trend between China and the rest of the world so far in 2012 fol­low­ing sev­eral capac­ity cut­backs in North Amer­ica and Europe at the turn of the year. Data from the Inter­na­tional Alu­minum Insti­tute (IAI) showed that global alu­minum out­put exclud­ing China fell to 68,900 tons in Feb­ru­ary, the low­est level since Decem­ber 2010 and the first year-over-year decline since the begin­ning of that year.
• Barclay’s Com­modi­ties Research vis­ited China last week and met with a range of cop­per mar­ket fab­ri­ca­tors, smelters and phys­i­cal traders. Their key take­away was that spot demand for cop­per is weak and improve­ment in the sec­ond quar­ter may be tepid. Sen­ti­ment among cop­per fab­ri­ca­tors is neg­a­tive because orders have been slow to improve. Inven­to­ries of cop­per cath­odes are low, but inven­to­ries of fin­ished prod­uct are higher than usual for this time of year.

Oppor­tu­ni­ties

• The gov­ern­ment of Tan­za­nia plans to invite oil oper­a­tors to bid for 16 new off­shore blocks under a new licens­ing round sched­uled for Sep­tem­ber 2012.
• There are a num­ber of ana­lysts who now believe soy­beans can increase to $14-$15 per bushel by late May, due to South America’s har­vest progress and result. This drove Oil World to refine its fore­cast, say­ing that there was a "high prob­a­bil­ity that soy­beans will exceed $14 per bushel for the July 2012 con­tract." The com­ments came in a report that fore­casted world soy­bean inven­to­ries to plunge 20 per­cent to 60.6 mil­lion tons in 2011-12. This is a much steeper drop off than the 12.5 per­cent tum­ble expected by the U.S. Depart­ment of Agriculture.
• Despite price declines, Indonesia's coal pro­duc­tion is expected to rise up to 5 per­cent from a year ear­lier to 390 mil­lion tons in 2012. "This year we esti­mate that pro­duc­tion will reach 380–390 mil­lion tons even though prices have gone down," said Supri­atna Suhala, deputy chair­man and exec­u­tive direc­tor of the APBI-Indonesia Coal Min­ing Asso­ci­a­tion. Indone­sia, the world's top ther­mal coal exporter, pro­duced 370 mil­lion tons of coal in 2011. Suhala also fore­casted that Indonesia's domes­tic coal con­sump­tion would jump 15 per­cent to 75 mil­lion tons in 2012.

Threats

• On Tues­day, the Obama admin­is­tra­tion announced long-awaited rules to limit carbon-dioxide emis­sions from new power plants. The rules will effec­tively block the con­struc­tion of new coal-burning plants and make nat­ural gas even more attrac­tive as a fuel for gen­er­at­ing elec­tric­ity. The rules, which have been in the works since late 2009, will add more stress to the belea­guered coal-mining sec­tor while encour­ag­ing devel­op­ment of renew­able energy. The rules will also cer­tainly add to Repub­li­can com­plaints of reg­u­la­tory over­reach by the Obama admin­is­tra­tion ahead of the Novem­ber elec­tions. The rules face seri­ous oppo­si­tion in Con­gress and the legal under­pin­nings are already being chal­lenged in court.
• The pro­posed Vol­cker rule crack­down on trad­ing and invest­ing by banks could cause gaso­line, elec­tric­ity and nat­ural gas prices to rise, accord­ing to a new report from IHS. With the report, HIS is seek­ing to gauge the rule's impact on energy com­pa­nies and mar­kets, includ­ing oil refiner­ies, nat­ural gas pro­duc­ers, and elec­tric­ity providers. The report's authors said large banks play a key role in help­ing a vari­ety of energy com­pa­nies’ hedge risk and engage in timely trades on com­mod­ity exchanges. Accord­ing to the report, any reduc­tion in the banks' abil­ity to play this role because of the Vol­cker rule will cause the cost of doing busi­ness to rise and that will lead to higher energy prices for consumers.
• Four weeks before the country’s pres­i­den­tial elec­tion, France is in talks with the U.S. and Britain on a pos­si­ble release of strate­gic oil stocks to push fuel prices lower.
• Barclay’s Com­modi­ties Research also noted that although imports of cop­per are likely to remain strong in March and pos­si­bly April, they will likely trail off until later in the year. Over­all, they believe that short-term Chi­nese demand is likely to dis­ap­point before begin­ning on a recov­ery tra­jec­tory later in the sec­ond quar­ter. They also believe that imports will weaken until bonded stocks are run down, pos­si­bly in the third quar­ter of this year.

Tags: agricultural, Agricultural Commodity, Agriculture, Automobile Sector, Bushel, Commodities, Commodity, Corn Futures, Data Trends, Diesel Sales, Gasoline Prices, Global Resources, Government Data, India, Indian Oil, Iraqi Oil Sales, Kurdish Region, Long Term Investment, Market Radar, Mining, Oil Consumption, Oil Producers, Persian Gulf, Resources Fund, S Central, Shipping Outlet
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The World's A Little Richer

Saturday, March 31st, 2012

Imag­ine your daily con­sump­tion cost­ing you less than a cup of Star­bucks. About 1.3 bil­lion peo­ple around the world live this real­ity. The good news is that it’s the low­est num­ber of peo­ple ever.

The World Bank released an update to its con­sump­tion poverty esti­mates in devel­op­ing coun­tries, and for the first time ever, the orga­ni­za­tion found progress in all the regions they track. In terms of the num­ber and per­cent­age of peo­ple liv­ing on $1.25 a day (on a pur­chas­ing power par­ity) at 2005 prices in 130 devel­op­ing coun­tries, the world is a lit­tle richer.

The area see­ing “dra­matic progress” was East Asia, reports the World Bank. Back in the 1980s, this region had the world’s high­est inci­dence of poverty. Nearly 80 per­cent of peo­ple lived on less than $1.25 each day; In 2008, the num­ber dropped to 14 percent.

Across these poor­est coun­tries, in 1981, 70 per­cent of peo­ple were liv­ing on less than $2 a day; 2008 data shows that the fig­ure has fallen to just above 40 per­cent. Whereas just over 50 per­cent of peo­ple in the poor­est coun­tries were liv­ing on less than $1.25 a day in 1981, only about 25 per­cent are today.

I dis­cussed the impor­tance of this ris­ing con­sumer with CNBC’s Squawk Box Asia’s Mar­tin Soong and Lisa Oake this week. I stopped by their stu­dios while I was in Sin­ga­pore to dis­cuss my thoughts on the con­tin­u­ing build-out of emerg­ing markets.

Watch it now.

By click­ing the link above, you will be directed to a third-party web­site. U.S. Global Investors does not endorse all infor­ma­tion sup­plied by this web­site and is not respon­si­ble for its con­tent. All opin­ions expressed and data pro­vided are sub­ject to change with­out notice. Some of these opin­ions may not be appro­pri­ate to every investor.

The S&P/ASX 200 Index is a market-capitalization weighted and float-adjusted stock mar­ket index of Aus­tralian stocks listed on the Aus­tralian Secu­ri­ties Exchange. E-7 are the seven most pop­u­lous emerg­ing mar­ket countries—China, India, Indone­sia, Brazil, Pak­istan, Rus­sia and Mexico.

Tags: Asx 200, Australian Securities, Australian Stocks, Brazil, Cnbc, Dramatic Progress, East Asia, Emerging Market Countries, India, India Indonesia, Market Capitalization, Martin Soong, Oake, Paki, Poorest Countries, Poverty Estimates, Purchasing Power Parity, Russia, S Martin, Squawk Box, Starbucks, Stock Market Index, U S Global Investors
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What Your Handwriting Says About Your Health, and other Weekend Reads

Friday, March 30th, 2012

Here are this week's read­ing diver­sions for your per­sonal enlight­en­ment. Have an awe­some (earth hour, Sat­ur­day 8:30 p.m.) week­end!

Juice pH and Why the Right Alkaline-Acid Lev­els Are So Important

A urine test that is less than 6.8 shows you are becom­ing too acid, and a urine test read­ing over 7.5 means you are becom­ing too alka­line. When your pH goes too far into the acid range cells will become poi­soned by toxic acidic waste caus­ing many cells to die off. This cell die off will lead too cat­a­strophic illness.

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Top 3 Foods For Long Life

If you don't like cooked cab­bage, you can eat coleslaw or shred raw cab­bage on your salad. You should eat some of your cab­bage raw any­way because cook­ing can reduce some of the health benefits.

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Brand vs. Generic: When It Mat­ters (And What To Do When It Does) | Psy­chol­ogy Today

I recently met a rep from a well-known chem­i­cal com­pany (whose name I won't men­tion) who had trav­eled to India to visit their generic drugs plant.  "Let me tell you some­thing," she said. "Any­one that says that generic drugs are the same as brand name is lying."  She went on to tell me how appalling the plant con­di­tions were, and that there were major safety and con­t­a­m­i­na­tion concerns.

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Evo­lu­tion­ary Rea­son For Runner's High?

Researchers had humans and dogs—both natural-born runners—jog a half hour on a tread­mill. Then they sam­pled their blood for endo­cannabi­noids, some of the com­pounds thought to trig­ger the runner's high. As expected, humans and dogs had much higher lev­els after the run. But when ferrets—a seden­tary species—took the same 30-minute trot, they had no spike in those feel-good molecules.

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Dr. Susanne Ben­nett: Are These Com­mon Foods Caus­ing Your Allergies?

The cor­rect diet can dra­mat­i­cally reduce your allergy symp­toms. Our day one goal is to elim­i­nate allergy-inducing foods and replace them with health­ier choices.

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Chem­i­cals in Car­pets, Non-Stick Pans Tied to Thy­roid Dis­ease — Health News — Health.com

The researchers cau­tioned that while the data show an asso­ci­a­tion between the chem­i­cals and thy­roid dis­ease, they do not prove cause and effect, mean­ing there could be other expla­na­tions for why peo­ple with high lev­els of the com­pounds in their blood had more thy­roid disease.

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Celiac and Crohn’s Dis­ease May Share Genetic Risk Fac­tors — Health News — Health.com

Celiac dis­ease, which makes it hard to absorb nutri­ents prop­erly, is an inher­ited autoim­mune dis­ease in which the lin­ing of the small intes­tine is dam­aged by gluten and other pro­tein found in wheat and some other grains. Crohn’s dis­ease is a form of inflam­ma­tory bowel disease.

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Lone­li­ness Hurts the Heart — Heart Dis­ease — Health.com

Peo­ple who lack a strong net­work of friends and fam­ily are at greater risk of developing—and dying from—heart dis­ease, research shows. Accord­ing to some stud­ies, the risk of soli­tude is com­pa­ra­ble to that posed by high cho­les­terol, high blood pres­sure, and even smoking.

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The 14 best sup­ple­ments for men | The Health & Well­ness Blog

In the May 2012 issue of Cana­dian Liv­ing, we're fea­tur­ing a great story on the best sup­ple­ments for women. I'm sure you'll love the arti­cle and find it really use­ful. I never know what sup­ple­ments I should be tak­ing, but now I will know! Be sure to pick up a copy of the issue when it's on news­stands on April 2.

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The 100 Foods Dr. Oz Wants in Your Shop­ping Cart

It's the only gro­cery list you'll ever need. Dr. Oz cov­ers every­thing from pro­duce to desserts to keep your kitchen stocked with only the health­i­est foods. Print this list and take it on your next trip to the supermarket.

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What Your Hand­writ­ing Says About Your Health

Hand­writ­ing is about the brain, not the hand.  Nerve impulses travel down the arm, into the hand, direct­ing the fin­gers to maneu­ver the pen. When the ink hits the paper, it actu­ally reveals the com­plex inner work­ings inside the writer’s body mind and spirit. A deeply trained graphol­o­gist can spot imbal­ances in hand­writ­ing that reveal imbal­ances in the body mind and spirit.

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Reflex­ol­ogy 101

Reflex­ol­ogy reduces stress (a major con­tribut­ing fac­tor to dis­ease), enhances the body's abil­ity to heal itself, and bal­ances both body and soul. Research shows that a sin­gle reflex­ol­ogy ses­sion can cre­ate relax­ation, reduce anx­i­ety, dimin­ish pain, improve blood flow and decrease high blood pressure.

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Tags: Acid Levels, Allergy Symptoms, Cabbage Salad, Canadian, Canadian Market, Carpets, Catastrophic Illness, Chemical Company, Common Foods, Cooked Cabbage, Correct Diet, Diversions, Ferrets, Generic Drugs, Half Hour, Handwriting, Health Benefits, Health News, India, News Health, One Goal, Personal Enlightenment, Psychology Today, Thyroid Disease, Treadmill, Urine Test
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How to Access the EM Consumer? Think Small (Koesterich)

Friday, March 30th, 2012

“If every­one in China length­ened their shirt tails by a foot, the tex­tile mills of Eng­land would spin for a year.” That’s what one Eng­lish­man report­edly said nearly two cen­turies ago about the prospect of sell­ing to, and prof­it­ing from, con­sumers in emerg­ing markets.

Today, not much has changed. In a world in which most devel­oped mar­kets are strug­gling with too much debt and too lit­tle growth, few themes get investors more excited than the prospect of ben­e­fit­ting from the bil­lions of rel­a­tively debt-free con­sumers in emerg­ing mar­kets. Across the globe, emerg­ing mar­ket growth con­tin­ues to cre­ate hun­dreds of mil­lions of new middle-class con­sumers. By 2025 China, India and Brazil are respec­tively expected to be the 2^nd, 4^th, and 9^th largest con­sumer mar­kets in the world.

How­ever, access­ing emerg­ing mar­ket con­sumers may not be as sim­ple as just own­ing broad emerg­ing mar­ket funds. In fact, investors who are look­ing to specif­i­cally gain expo­sure to emerg­ing mar­ket domes­tic con­sump­tion may want to con­sider the small cap seg­ment of that mar­ket. Here’s why.

The com­pa­nies that tend to dom­i­nate broad emerg­ing mar­ket indices are large, multi-national firms that are often more lev­ered to the global eco­nomic cycle than to local con­sump­tion. Such com­pa­nies, for instance, make up roughly two-thirds of the MSCI World Emerg­ing Mar­ket Index. Just con­sider the sec­tors that dom­i­nate that index: Finan­cials (24% of the index), energy (15%), tech­nol­ogy (14%) and mate­ri­als (13%).

In con­trast, small cap emerg­ing mar­ket indices tend to pro­vide a more con­cen­trated expo­sure to domes­tic demand. These indices are less dom­i­nated by large, global cycli­cal plays and have a higher con­cen­tra­tion of com­pa­nies in indus­tries with a local fla­vor, such as cap­i­tal goods, real estate, con­sumer dis­cre­tionary, and food and beverages.

To be sure, I’m not sug­gest­ing that investors aban­don emerg­ing mar­ket large cap stocks. As I’ve been advo­cat­ing since the end of 2011, there are both short– and long-term ratio­nales for over­weight­ing cer­tain emerg­ing mar­kets.

In the near term, I expect emerg­ing mar­ket coun­tries to out­per­form based on low rel­a­tive val­u­a­tions, falling infla­tion and stronger growth. Longer term, emerg­ing mar­ket stocks are likely to ben­e­fit from falling emerg­ing mar­ket volatil­ity and ris­ing devel­oped mar­ket volatil­ity. How­ever, if you’re specif­i­cally try­ing to cap­ture, and profit from, the sec­u­lar rise of emerg­ing mar­ket mid­dle class con­sumers, it’s worth con­sid­er­ing that small cap stocks pro­vide a more tar­geted expo­sure. I pre­fer to access emerg­ing mar­ket small caps through the iShares MSCI Emerg­ing Mar­kets Small Cap Index Fund (NYSEARCA: EEMS), which has a rel­a­tively high weight to con­sumer dis­cre­tionary stocks and real estate man­age­ment and devel­op­ment, as well as the iShares MSCI China Small Cap Index Fund (NYSEARCA: ECNS) and the iShares MSCI Brazil Small Cap Index Fund (NYSEARCA: EWZS) for more tar­geted access to Chi­nese and Brazil­ian small caps.

Source: Bloomberg

In addi­tion to the nor­mal risks asso­ci­ated with invest­ing, inter­na­tional invest­ments may involve risk of cap­i­tal loss from unfa­vor­able fluc­tu­a­tion in cur­rency val­ues, from dif­fer­ences in gen­er­ally accepted account­ing prin­ci­ples or from eco­nomic or polit­i­cal insta­bil­ity in other nations. Emerg­ing mar­kets involve height­ened risks related to the same fac­tors as well as increased volatil­ity and lower trad­ing vol­ume. Investme

Tags: Billions, Brazil, Cap Stocks, Capital Goods, Centuries, Concentration, Consumer Markets, Domestic Consumption, Economic Cycle, Emerging Market Funds, Emerging Market Indices, Emerging Markets, Englishman, Food And Beverages, India, Market Consumers, Market Index, Middle Class, Msci World, Small Cap, Textile Mills, Two Thirds
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Bernanke's Problem with the Gold Standard

Wednesday, March 28th, 2012

by Axel Merk, Merk Funds

In his new lec­ture series, Fed­eral Reserve (Fed) Chair­man Ben Bernanke is going out of his way to dis­cuss the "prob­lems with the gold stan­dard." To a cen­tral banker, the gold stan­dard may be con­sid­ered "com­pe­ti­tion," as their power would likely be greatly dimin­ished if the U.S. were on a gold stan­dard. The Fed, Bernanke argues, is the answer to the prob­lems of the gold stan­dard. We respect­fully dis­agree. We dis­agree because the Fed ought to look at a dif­fer­ent problem.

Bernanke lists price sta­bil­ity and finan­cial sta­bil­ity as key objec­tives of the Fed. Focus­ing on the lat­ter one first, the Fed was estab­lished to reduce the risk of finan­cial pan­ics. Bernanke points out:

"A finan­cial panic is pos­si­ble in any sit­u­a­tion where longer-term, illiq­uid assets are financed by short-term, liq­uid lia­bil­i­ties; and in which short-term lenders or depos­i­tors may lose con­fi­dence in the institution(s) they are financ­ing or become wor­ried that oth­ers may lose confidence."

Bernanke goes on to blame the gold stan­dard for the pan­ics. While he is cer­tainly not alone in his view – indeed, his very lec­ture to stu­dents at George Wash­ing­ton Uni­ver­sity is pro­mot­ing that view to a new gen­er­a­tion of econ­o­mists -, we beg to differ.

Banks — by def­i­n­i­tion — have a matu­rity mis­match, mak­ing long-term loans, tak­ing short-term deposits. As such, banks are prone to finan­cial pan­ics as described by Bernanke. To mit­i­gate the risk of finan­cial pan­ics, cen­tral banks can do what the Fed is doing, namely to be a lender of last resort. Alter­na­tively, cen­tral banks can focus on the core issue, the struc­tural "prob­lem of bank­ing." Fol­low­ing the Fed's approach, there are inher­ent moral haz­ard issues – incen­tives for finan­cial insti­tu­tions to increase lever­age, to become too-big-to-fail. To address a panic that might hap­pen any­way, the Fed would dou­ble down (pro­vide more liq­uid­ity), poten­tially exac­er­bat­ing future bank­ing pan­ics. After yet another cri­sis, new rules are intro­duced to reg­u­late banks. The result­ing finan­cial sys­tem may not be safer, but it will increase bar­ri­ers to entry, fur­ther bol­ster­ing the lead­er­ship posi­tion of exist­ing, too-big-to-fail banks. With all the gov­ern­ment guar­an­tees and too-big-to-fail con­cerns, banks might then be reg­u­lated in an attempt to have them act more like util­i­ties. Ulti­mately, that might make the finan­cial sys­tem more sta­ble, but will sti­fle eco­nomic growth. Finan­cial insti­tu­tions, as much as we have mixed feel­ings about their con­duct, are vital to finance eco­nomic growth, as they facil­i­tate risk tak­ing and investment.

The prob­lem of all finan­cial pan­ics is not the gold stan­dard — oth­er­wise, the panic of 2008 would not have hap­pened. The prob­lem of finan­cial pan­ics is — again — that "longer-term, illiq­uid assets are financed by short-term, liq­uid lia­bil­i­ties." Miss­ing from Bernanke's def­i­n­i­tion is a key addi­tional attribute, lever­age. A matu­rity mis­match with­out lever­age might cause a lender to go bust, but — in our inter­pre­ta­tion — does not qual­ify as a panic when a lim­ited num­ber of depos­i­tors are affected. The "panic" and the "con­ta­gion" may occur when lever­age is employed, as it cre­ates a dis­pro­por­tion­ate num­ber of cred­i­tors (includ­ing con­sumers with cash deposits).

There's a bet­ter way. To avoid hav­ing finan­cial insti­tu­tions serve as “panic” incu­ba­tors, reg­u­la­tion should address the core of the issue. Bernanke shouldn’t use gold, as a scape­goat for all that was wrong with the U.S. econ­omy pre­vi­ously, to jus­tify a license to print money. First, fail­ure must be an option; indi­vid­u­als and busi­nesses must be allowed to make mis­takes and suf­fer the con­se­quences. The role of the reg­u­la­tor, in our opin­ion, is to avoid an event where someone's mis­take wrecks the entire system.

The eas­i­est way to achieve a more sta­ble finan­cial sys­tem is to reduce incen­tives for lever­age. A straight­for­ward method is through mark-to-market account­ing and a require­ment to post col­lat­eral for lever­aged trans­ac­tions. The finan­cial indus­try lob­bies against this, argu­ing that hold­ing a posi­tion to matu­rity ren­ders mark-to-market account­ing redun­dant. Con­sider the fol­low­ing exam­ple, which high­lights the impli­ca­tion: assume a spec­u­la­tor before the finan­cial cri­sis took a lever­aged bet that oil prices — at the time trad­ing at $80 a bar­rel — would go down to $40 a bar­rel. In the “ideal world” accord­ing to the banks, this spec­u­la­tor would not have been required to post col­lat­eral and would have been proven right when oil (briefly) dropped to $40 a bar­rel after the finan­cial cri­sis. In real­ity how­ever, as oil prices soared to $140 a bar­rel before declin­ing, the typ­i­cal spec­u­la­tor would have been forced to post an ever larger amount of col­lat­eral; likely, the speculator's bro­ker­age firm would have closed out the posi­tion, as the spec­u­la­tor ran out of money. The spec­u­la­tor lost money because he was unable to meet a mar­gin call; impor­tantly, though, the sys­tem remained intact. The spec­u­la­tor might com­plain: the price ulti­mately fell to $40! But such whin­ing is futile because the rules of engage­ment were known ahead of time. As such, the spec­u­la­tor had an incen­tive to use less (or no) lever­age. The bank's atti­tude, in con­trast, incu­bates pan­ics. In this exam­ple, reg­u­lated exchanges exist. But even with­out reg­u­lated exchanges or eas­ily priced secu­ri­ties, sim­i­lar con­cepts can be developed.

Another way to make finan­cial firms more panic prone is to require them to issue stag­gered sub­or­di­nated debt. Rather than rely­ing heav­ily on short-term fund­ing (retail deposits or inter-bank fund­ing mar­kets), banks should be required to stag­ger the matu­ri­ties of their own fund­ing over years. If, say, each year 10% of their loan port­fo­lio needs to be refi­nanced, then — in times of finan­cial tur­moil — it might become exor­bi­tantly expen­sive for a bank to finance that 10% of their loan port­fo­lio. A bank should be able to shrink its loan port­fo­lio by 10% in a year in an orderly fash­ion, with­out jeop­ar­diz­ing the sur­vival of the firm or spread­ing exces­sive risks through­out the finan­cial sys­tem. Note that this is a market-based mech­a­nism to police the finan­cial system.

These con­cepts reduce lever­age in the sys­tem. And that's the point, as lever­age is the mother of all pan­ics. The con­cepts pre­sented above will not solve all the chal­lenges of bank­ing, but blam­ing "the prob­lem of the gold stan­dard" for finan­cial pan­ics is — in our analy­sis — premature.

Mod­ern cen­tral bank­ing is not the answer to mit­i­gate the risk of finan­cial pan­ics because the cost for this per­ceived safety is enor­mous. As a result of respond­ing to each poten­tial panic with ever more "liq­uid­ity", entire gov­ern­ments are now put at risk when a cri­sis flares up.

Beyond that, cen­tral banks have done a hor­ri­ble job in con­tain­ing infla­tion. The wis­dom of cen­tral bank­ing is that 2% infla­tion is con­sid­ered an envi­ron­ment of sta­ble prices. At 2%, a level often touted as a “price sta­ble envi­ron­ment”, the pur­chas­ing power of $100 is reduced to $55 over a 30-year period. It's a cruel tax on the pub­lic. What’s more, in prac­tice, coun­tries with a fiat cur­rency sys­tem have gen­er­ally been unable to keep long-term infla­tion below 2%.

Bernanke warns of defla­tion. To the saver, defla­tion is a gift. Not to the debtor. In a debt dri­ven world, defla­tion stran­gles the econ­omy. Gov­ern­ments don't like defla­tion as income taxes and cap­i­tal gains taxes are eroded. In a defla­tion­ary world, gov­ern­ments would need to rely more on sales taxes (or value added taxes): grad­u­ally reduced rev­enue in a defla­tion­ary envi­ron­ment would be okay as the pur­chas­ing power of those tax rev­enues would increase. That assumes, of course, that the gov­ern­ment car­ries a low debt bur­den — defla­tion would be a good incen­tive to limit spend­ing. Get the pic­ture why gov­ern­ments don't like deflation?

Read John Butler's new book
The Golden Rev­o­lu­tion: How to Pre­pare for the Com­ing Global Gold Standard

With infla­tion, peo­ple have an "incen­tive" to work harder, to take on risks, just to retain their pur­chas­ing power, the sta­tus quo. What about the pur­suit of hap­pi­ness? The idea that if you earn money and save, you can retire and live off your sav­ings? We con­sider it quite an impo­si­tion that unelected offi­cials have such sway over our stan­dard of living.

Bernanke also attacks the gold stan­dard for caus­ing havoc in the cur­rency mar­kets. Please sub­scribe to our newslet­ter to be informed as we pro­vide food for thought about the rela­tion­ship between gold and cur­ren­cies. We will also dis­cuss what investors may want to do in a world that has moved fur­ther and fur­ther away from the gold stan­dard. Sub­scribe to Merk Insights by click­ing here. Also, please click here to reg­is­ter for the Merk Webi­nar: Quar­ter 1 Update on the Econ­omy and Cur­ren­cies which will take place on Thurs­day, April 19th at 4:15pm EF / 1:15pm PT. We man­age the Merk Funds, includ­ing the Merk Hard Cur­rency Fund. To learn more about the Funds, please visit www.merkfunds.com.

Axel Merk

Man­ager of the Merk Hard Cur­rency Fund, Asian Cur­rency Fund, Absolute Return Cur­rency Fund, and Cur­rency Enhanced U.S. Equity Fund, www.merkfunds.com

Axel Merk, Pres­i­dent & CIO of Merk Invest­ments, LLC, is an expert on hard money, macro trends and inter­na­tional invest­ing. He is con­sid­ered an author­ity on currencies.

The Merk Hard Cur­rency Fund (MERKX) seeks to profit from a rise in hard cur­ren­cies ver­sus the U.S. dol­lar. Hard cur­ren­cies are cur­ren­cies backed by sound mon­e­tary pol­icy; sound mon­e­tary pol­icy focuses on price stability.

The Merk Asian Cur­rency Fund (MEAFX) seeks to profit from a rise in Asian cur­ren­cies ver­sus the U.S. dol­lar. The Fund typ­i­cally invests in a bas­ket of Asian cur­ren­cies that may include, but are not lim­ited to, the cur­ren­cies of China, Hong Kong, Japan, India, Indone­sia, Malaysia, the Philip­pines, Sin­ga­pore, South Korea, Tai­wan and Thailand.

The Merk Absolute Return Cur­rency Fund (MABFX) seeks to gen­er­ate pos­i­tive absolute returns by invest­ing in cur­ren­cies. The Fund is a pure-play on cur­ren­cies, aim­ing to profit regard­less of the direc­tion of the U.S. dol­lar or tra­di­tional asset classes.

The Merk Cur­rency Enhanced U.S. Equity Fund (MUSFX) seeks to gen­er­ate total returns that exceed that of the S&P 500 Index. By employ­ing a cur­rency over­lay, the Merk Cur­rency Enhanced U.S. Equity Fund actively man­ages U.S. dol­lar and other cur­rency risk while con­cur­rently pro­vid­ing invest­ment expo­sure to the S&P 500.

The Funds may be appro­pri­ate for you if you are pur­su­ing a long-term goal with a cur­rency com­po­nent to your port­fo­lio; are will­ing to tol­er­ate the risks asso­ci­ated with invest­ments in for­eign cur­ren­cies; or are look­ing for a way to poten­tially mit­i­gate down­side risk in or profit from a sec­u­lar bear mar­ket. For more infor­ma­tion on the Funds and to down­load a prospec­tus, please visit www.merkfunds.com.

Investors should con­sider the invest­ment objec­tives, risks and charges and expenses of the Merk Funds care­fully before invest­ing. This and other infor­ma­tion is in the prospec­tus, a copy of which may be obtained by vis­it­ing the Funds' web­site at www.merkfunds.com or call­ing 866-MERK FUND. Please read the prospec­tus care­fully before you invest.

Since the Funds pri­mar­ily invest in for­eign cur­ren­cies, changes in cur­rency exchange rates affect the value of what the Funds own and the price of the Funds' shares. Invest­ing in for­eign instru­ments bears a greater risk than invest­ing in domes­tic instru­ments for rea­sons such as volatil­ity of cur­rency exchange rates and, in some cases, lim­ited geo­graphic focus, polit­i­cal and eco­nomic insta­bil­ity, emerg­ing mar­ket risk, and rel­a­tively illiq­uid mar­kets. The Funds are sub­ject to inter­est rate risk, which is the risk that debt secu­ri­ties in the Funds' port­fo­lio will decline in value because of increases in mar­ket inter­est rates. The Funds may also invest in deriv­a­tive secu­ri­ties, such as for– ward con­tracts, which can be volatile and involve var­i­ous types and degrees of risk. If the U.S. dol­lar fluc­tu­ates in value against cur­ren­cies the Funds are exposed to, your invest­ment may also fluc­tu­ate in value. The Merk Cur­rency Enhanced U.S. Equity Fund may invest in exchange traded funds ("ETFs"). Like stocks, ETFs are sub­ject to fluc­tu­a­tions in mar­ket value, may trade at prices above or below net asset value and are sub­ject to direct, as well as indi­rect fees and expenses. As a non-diversified fund, the Merk Hard Cur­rency Fund will be sub­ject to more invest­ment risk and poten­tial for volatil­ity than a diver­si­fied fund because its port­fo­lio may, at times, focus on a lim­ited num­ber of issuers. For a more com­plete dis­cus­sion of these and other Fund risks please refer to the Funds' prospectuses.

This report was pre­pared by Merk Invest­ments LLC, and reflects the cur­rent opin­ion of the authors. It is based upon sources and data believed to be accu­rate and reli­able. Opin­ions and forward-looking state­ments expressed are sub­ject to change with­out notice. This infor­ma­tion does not con­sti­tute invest­ment advice. Fore­side Fund Ser­vices, LLC, distributor.

Copy­right © Merk Funds

Tags: Ben Bernanke, Central Banks, Core Issue, Depositors, ETF, ETFs, Fed Chairman, Financial Institutions, Financial Panic, Financial Panics, Financial Stability, George Washington University, Gold Standard, Hazard Issues, Illiquid Assets, India, Key Objectives, Lecture Series, Lender Of Last Resort, Long Term Loans, Moral Hazard, Price Stability, Short Term Deposits, Term Lenders
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The Emerging Market Growth Story Continues (ING)

Tuesday, March 20th, 2012

by Dou­glas Coté, ING

We have dis­cussed the pos­si­bil­ity, and risk, of a hard land­ing in China (growth slow­ing to less than 7%), but what has been going on in some of the other BRIC’s like India and Brazil? Right now India is in the midst of bud­get nego­ti­a­tions which would reign in its gross fis­cal deficit to 5.9% of GDP (total debt is around 50% of GDP). India’s GDP growth is expected to sub­side to 6.9% after two solid years of greater than 8% growth. A global slow­down as well as high oil prices have con­tributed to the decrease. How­ever, Indian finan­cial offi­cials expect a return to 9% plus growth in the future. Mean­while Brazil has just over­taken the U.K. to become the sixth largest econ­omy in the world. Brazil grew 2.7% in 2011 com­pared to U.K.’s mea­ger .8%. And with sub­stan­tial oil and gas reserves fuel­ing their exports, Brazil has their eye on num­ber 5. You can find some key sta­tis­tics about India and Brazil as well as other emerg­ing mar­kets on page 33 of the Global Per­spec­tives book.

Click on images below for PDF

Copy­right © ING Invest­ment Management

Tags: Brazil, BRIC, Budget Negotiations, Economy, Emerging Market, Emerging Markets, Financial Officials, Fiscal Deficit, Gas Reserves, GDP, GDP Growth, Global Perspectives, Global Slowdown, India, Ing, Ing Investment Management, Key Statistics, Midst, Nbsp, Oil and Gas, Oil Prices, risk
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Most Overbought ETFs (Bespoke)

Friday, February 24th, 2012

Tags: Asset Classes, Commodity, Dbs, Energy Exploration, Etn, Exploration And Production, India, Inp, Moving Averages, Silver Fund, Stock, Xop
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YTD 2012 Country Stock Market Performance

Friday, January 27th, 2012

Below is a table high­light­ing the year to date stock mar­ket returns for 78 coun­tries around the world.  Of the 78 coun­tries shown, 59 (75%) are in the black for the year, while 19 are in the red.  Twelve coun­tries have posted dou­ble digit gains already in 2012, with Argentina lead­ing the way at 18.11%.  Rus­sia ranks sec­ond with a gain of 13.70%, fol­lowed by Hun­gary in third and Greece (yes, Greece) in fourth.

The US cur­rently ranks 33rd on the list with a gain of 4.73% year to date.  The US ranks fourth among G7 coun­tries behind Ger­many (10.88%), Italy (6.77%) and France (6.44%).  The UK has been the worst per­form­ing G7 coun­try so far in 2012 with a gain of 4%.

Last year the BRICs were sig­nif­i­cant under­per­form­ers ver­sus the rest of the world, but they've bounced back so far in 2012.  As men­tioned above, Rus­sia is up 13.70% year to date, which is the best of the BRICs.  Brazil ranks sec­ond with a gain of 10.92%, India isn't far behind at 10.50%, and China ranks fourth with a gain of 5.44%.

Tags: Argentina, Brazil, BRICs, China, Countries Around The World, Country Stock, France 6, G7 Countries, G7 Country, Greece, Hungary, India, Italy, Leading The Way, Rest Of The World, Russia, Stock Market Performance, Stock Market Returns, Stock Performance, Year To Date
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India's Stock Market Tanks (Bespoke)

Thursday, November 24th, 2011

by Bespoke Invest­ment Group

As shown below, India's SENSEX (the main stock mar­ket index in India) has com­pletely fallen out of bed over the past few weeks.  Since gap­ping sharply higher on Octo­ber 27th, the index is down 12.33%.  Today the SENSEX expe­ri­enced a major break­down as it col­lapsed below key sup­port lev­els that were formed by the index's August and early Octo­ber lows.  This break­down has many say­ing "Look out belooooooow!"

Copy­right © Bespoke Invest­ment Group

Tags: Copyright, India, Investment Group, Lows, Main Stock, Major Breakdown, Market Tanks, Sensex, Stock Index, Stock Investment, Stock Market Index, Stock Tanks
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Growth Falters, with Exception of Japan — Global PMI Scorecard (Oct 2011)

Monday, November 7th, 2011

Growth in global eco­nomic activ­ity fal­tered in Octo­ber after accel­er­at­ing in Sep­tem­ber. The global man­u­fac­tur­ing sec­tor slipped into reces­sion ter­ri­tory while growth in the ser­vices sec­tor slowed markedly.

The JP Mor­gan Global Com­pos­ite Index fell to 51.4 after ris­ing to 52.0 in Sep­tem­ber from 51.5 in August. The drop in the com­pos­ite PMI is mainly attrib­uted to a sig­nif­i­cant drop in my cal­cu­lated GDP-weighted PMI for the Euro­zone to 46.6 from 48.7 in Sep­tem­ber. Germany’s com­pos­ite PMI at a 27-month low indi­cates that eco­nomic activ­ity in the pri­vate sec­tor has vir­tu­ally stag­nated while eco­nomic activ­ity in France, Italy and Spain at 28 to 30-month lows has con­tracted severely. Growth in the U.K. weak­ened con­sid­er­ably to stag­na­tion levels.

My GDP-weighted Com­pos­ite ISM PMI for the U.S. in Octo­ber eased to 52.4 from 52.7 in Sep­tem­ber, indi­cat­ing con­tin­ued but below-par growth.

Growth in China also eased on a non-seasonally as well as a sea­son­ally adjusted basis.

Japan was the excep­tion to the rule among devel­oped economies. Accord­ing to Markit, Japan­ese pri­vate sec­tor activ­ity rose for the first time since Feb­ru­ary as the com­pos­ite out­put index breached the neu­tral 50.0 thresh­old. The com­pos­ite PMI jumped from a con­tract­ing 47.0 to a high­est read­ing of 52.4 since data were first com­piled in Sep­tem­ber 2007.

Eco­nomic activ­ity in emerg­ing economies improved some­what. Brazil has returned to growth again. Growth in India and Rus­sia edged up mar­gin­ally while the con­trac­tion in Hong Kong eased markedly.

Sources: Markit; CFLP*; ISM**; US Busi­ness Activ­ity Index***; Plexus Asset Management.

The JP Mor­gan Global Ser­vices PMI for Octo­ber eased to 51.8 from 52.6 in Sep­tem­ber on the back of a sig­nif­i­cant deep­en­ing in the con­trac­tion in the Euro­zone and espe­cially France, Italy and Spain. The Ger­mans are hold­ing out, though, and have man­aged to eke out some growth from con­tract­ing in Sep­tem­ber. The ser­vices sec­tor in the U.K. con­tin­ues to exhibit some growth but at a reduced rate, while growth in Ire­land accel­er­ated slightly. Australia’s ser­vices sec­tor is under the water again while growth in the ser­vices sec­tor in China is weak­en­ing. The U.S.’s ISM non-manufacturing PMI con­tin­ued its slightly weaker trend with the PMI mar­gin­ally lower at 52.9 from 53.0 in Sep­tem­ber. How­ever, it sur­prised the mar­ket on the down­side as the con­sen­sus was for a rise to 53.5. The Busi­ness Activ­ity Index fell sharply from a robust 57.1 to 53.8.

Among the BRICS coun­tries Brazil made a huge turn­around as its ser­vices PMI jumped to 53.6 from 50.5 in Sep­tem­ber. Rus­sia expe­ri­enced a slight accel­er­a­tion in growth but the con­trac­tion in India’s ser­vices sec­tor has deepened.

Tags: Activity Index, Adjusted Basis, Brazil, Business Activity, Composite Index, Composite Output, Contraction, Emerging Economies, Eurozone, Exception To The Rule, Global Economic Activity, Global Services, India, Ism, Jp Morgan, Lows, Manufacturing Sector, Output Index, Private Sector Activity, Scorecard, Services Pmi, Stagnation
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