Tuesday, September 2: Week in Review

by: Jonathan Cavuoto

One of the more enlightening facts we share with you this week stems from our recognition that the stock markets last week continued to pummel investors with “death by 1,000 cuts’…slow torture. In fact, upon closer analysis, it has been this way most of the year.

Fact: of this year’s 284 point decline in the tech-laden NASDAQ Stock Market, to 2368 from 2652, 92% of that decline took place in the month of January alone. You could have dropped your cable subscription to CNBC or Bloomberg in January, and still be up-to-date.

For a perspective on the broader market, the S&P500, which represents over 75% of the market value of all public companies in the USA, almost half (48%) of this year’s 185 point decline (from 1468) in the S&P 500 happened in January. (Here’s a link to get the raw historical data.)

This phenomenon can be partly explained by the uncertainties that were already in the public domain at the start of the year…the 2008 Presidential Election and the Collapse of the Sub-prime Mortgage Market, to name a few. In January, the Bear Stearns debacle was still 4-6 weeks away, but street-savvy institutional investors already knew.

It is always worthwhile to know what institutional investors are doing. Unfortunately, nothing macro-economically since the beginning of the year has given the stock markets reason to rebound. And it gets worse ---

---as if the Iraqi Occupation, the War in Afghanistan and political turmoil within our only ally in that area, Pakistan, weren’t enough, add to that the bombing earlier this month of South Ossetia by the former Soviet satellite, Georgia. This act of aggression brought in the Russian troops, probably motivated by the commercial reality that Georgia has oil production and an oil pipeline.   

World Peace has never been more elusive…!

We are certain that stocks will resume a position as one of the best asset classes to own in order to preserve capital and accumulate wealth. But this resumption is months away (don’t sign up for Bloomberg just yet), and the current adjustments underway are worldwide.

One example, Bank of China recently announced it had disposed of 25% of its holdings in Fannie Mae (FNM) and Freddie Mac (FRE)… here’s the link to that news.

The other asset class very much in vogue, heretofore, real estate, is also up the proverbial creek without a paddle. Specifically, the much followed (and hallowed) Case-Shiller Index which tracks residential housing values, reported a 15.3% drop in the price of housing nationwide. This is the largest decline in the value of housing since the index was compiled by economists Karl Case and Robert Shiller in the 1980s…! Here’s a link to that latest news. 

Amidst all of this, my premier suggestion in last week’s newsletter was that if you, as an individual investor, share the view that rising inflation, a depreciating US dollar and a diminished US and worldwide economic outlook means higher prices for precious metals, then the best course of investment action is to accumulate physical silver and gold in a manner that suits your financial circumstances. This is called wealth management.

Again, citing institutional investor activity --- the Rand Refinery announced that it had an order for 5,000 ounces (approximately $4,500,000) of gold from an institutional buyer out of Switzerland. That order cleaned out inventory until September 3rd. While this isn’t our idea of gradual accumulation, we do offer this news as market confirmation of our suggestion last week. Here’s the link on that gold order.

Institutional investors are always at the forefront of undertaking new investment directions, so monitoring these new areas of investment is essential for two reasons --- in addition to telling us what they are doing, it also tells us what they are NOT doing…and one thing they are NOT doing is buying stocks…! What’s new in this regard --- owning hog farms in China. Here’s that link.

And the headlines are: GOLDMAN SACHS, PROMINENT US INVESTMENT BANKER, buying Hoggeries in China. Investment banks, first and foremost, invest their funds where it will produce the highest financial return. Right now, that doesn’t mean buying stocks, or even distress-priced mortgage debt, as the financial news media speculated last week…but hog farms in China.

We wouldn’t be surprised if Goldman Sachs (NYSE:GS) was the buyer of those 5,000 ounces of gold, using someone in Switzerland as a beard for the transaction…!

In closing, here are some snippets from around the web, and the links.

The Los Angeles Times editorial, August 28th:

Faced with the imminent collapse of Bear Stearns, leaders of the Fed used taxpayer guarantees to persuade JPMorganChase to scoop up the troubled investment bank…and with investors fleeing Fannie Mae and Freddie Mac…Congress has promised tax dollars to rescue the mortgage giants. Now, US automakers want in on this gravy train (italics are my own paraphrase). When government intervenes, it tells businesses that they don’t have to be smart, farsighted or nimble, they just have to be large.

Dow Theory Letters, Richard Russell:

The world is now going through the deleveraging of the greatest credit mountain in human history. What are the implications? First, there’s a dash for cash throughout the world. Big, sophisticated money sees what’s going on, and they want cash. Second, when this realization hits, the next big move will be into the only reliable cash outside of the central bank system. That move will be to gold.

Finally, the Aden Forecast, Pam and Mary Anne Aden:

Gold, for example, could have a good sized rise from here but not necessarily surpass the July 15 high near $989. Silver is similar; it's stabilizing above $12.80 (basis December). It would start to look like a renewed rise is underway above $14.50, and especially above $15.50.

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