Gold Digger's  Instablog

Both S&P500 and DJI have declined almost 2% in the past two sessions. This has given rise to swings in both US dollar index and oil prices. However, tendency of market participants to extrapolate the movement in oil prices to other commodities and base metals in particular is giving rise to some good buying opportunity in this sector. I believe that base metals including aluminum, iron ore and copper are presenting a good opportunity to go long (in the above order) in these metals through either direct or indirect plays. For indirect plays RTP, BHP, FCX and ETFs like UYM and XME. First reason is that base metal prices are not in the asset bubble domain that is showing up in oil prices for example. With oil being the most highly traded commodity it has a lot of speculators also. While oil prices have more than doubled from their March'09 lows on the other hand aluminum prices have risen from March'09 low of around $0.6/lb to only $0.86/lb recently. Iron ore prices are mostly controlled by miners directly so these companies have a better control over pricing to adjust to demand in a more profitable manner.
Second, but even more important in tendency of exaggerating the market moves as a result of short term US dollar index movement. US dollar has risen in past two sessions but this rebound is mainly due to pure technical and oversold situation. However, for US dollar only one theme remains intact and that is for its continuing decline against other major currencies. US government and federal reserve have not shown any true will or intention to stop the decline of its currency. And perhaps any decline in stock market takes away and iota of the remaining will to do so. Another factors that will contribute towards higher base metal prices is the race by most governments to print more of their money. I think these are a better inflation hedge as opposed to gold or other precious metals. So above companies and ETFs are a strong buy candidate on any weakness.
Another important sector for investment is in life and property insurance business. Most US companies in this sector have very good global exposure through subsidiaries or direct access. Some strong names are Prudential (PRU), Metlife (MET) and Lincoln (LNC). Though I would avoid pure health/medical insurance companies like Aetna (AET) and Humana (HUM) due to unexpected nature of government involvement resulting from administration's new health care proposals. But life insurance sector including PRU and MET are solid investments with a very stable business. There investments are somewhat tied to markets but both these companies have shown strong hedging policies and prudent investment models. Market for their products will rise even further as in fact, some life insurance policies will gain even more market share because they not only offer protection from unexpected life events but also provide income stream after retirement age. And given current market turmoil they will capture more market as common man tries to protect its future income. I rate these two companies as a buy candidate upon pullback.


Disclosure: No position in the tickers mentioned in this article at the time of writing. Will open new positions at attractive entry points in some of these companies.

S&P 500 (SPX) has risen too far and too fast thanks to all the liquidity overflowing in the markets. But it will be a prudent move for all the retail investors and people who actively manage their 401(k) to get out of the US stocks now. All the news of them sitting on the sidelines are a gimmick to lure the remaining retails investors into this frothy market and make profits from them. I don't think market has any more room to rise further unless governments are now switching their policies to directly invest in stocks. A quick look at the results of Bank of America (BAC), Citigroup  (C) and even Goldman Sachs (GS) is a clear indication of the frothiness of this market. These banks booked huge profits in the investment banking divisions while still bleeding in the actual core banking businesses. But given the 60% rise in S&P500 in past 6 months and almost 10% rise every month, does it come as a surprise that these banks made high profits in investment banking business? Not at all.
However, the significant question now is what lies after this. I wonder how many people believe that S&P500 will rise another 60% in the next 6 months and will repeat this performance over and over again in the foreseeable future. I personally don't believe in this scenario. In my opinion these banks will now be left with very modest, if any, profits in their investment banking division and still handle the mounting losses in their core banking business. So it would not be a big surprise if the results in next quarter (Q4) are very ugly again. Specially given that foreclosures in the past 3 months hit new record highs and unemployment rate in USA is still hovering around 9.8%.
I don't buy the growth story of India and China either because both these economies have not shown a true independence from the economies of US and other developed nations. In fact India is in a much worse shape given the highest valuation of BSE sensex among all emerging economies. Also India is a service industry driven economy which solely relies on growth in world business and not just basic consumers as opposed to China's cheap manufacturing driven economy.
Given the highly overbought situation of almost every market around the globe, I think investors will not be able to find man buyers if a downturn of even 10% takes place at these levels. This will clearly mount an enormous selling pressure on both stocks as well as commodities. So retail investors should start booking good profits when there are still buyers out there. I am very cautious about stocks in US and India and some metal and mining sectors like Gold and copper. Gold is an inflation hedge only as long as there is a possibility of return of the days of gold standard. Which in my opinion is highly remote possibility given the focus of governments all over the world in printing more of their money. Apart from that gold is simply a metal which has very minimal uses in our lives. So I see a significant downward pressure in gold prices and gold ETFs (GLD) at this point. So the best approach overall is to book profit while market is still going up and hold some cash.

Disclosure: No position at the time of writing in the stocks and ETFs discussed in this article.

Financial markets are purely dominated by speculators these days with most traders slush with free or almost free money. What can be better than an opportunity to borrow dollars at 0.5% and make at least 4-5% every day from those borrowed dollars. That's why we see up or down spikes of 1-2% in equities markets every day. Now combine that with 2x and 3x ETFs (DDM and DXD) and market traders can make a bunch. Though I don't see it helping individual investors in any way because unfortunately they don't have direct access to these low teaser rates set by central banks around the world. But then who cares about them. They don't contribute millions of dollars towards political campaigns and lobbying. So real mandate of central banks is to help just market makers make a lot of money. Rest all is swept under the carpet. For example, there was some noise about Goldman Sachs (GS) benefiting from huge treasury bailout of AIG. But nobody remembers that anymore. I remember Bloomberg asking Federal Reserve to provide names of beneficiaries of emergency lending facilities and amount of such lending to each financial institution. Federal Reserve Bank's response in the court was that it will jeopardize nascent recovery in financial markets and that "some financial institutions will be hurt irreversibly". So lets not talk about that either. Similarly nobody wants to look at the balance sheets of those banks anymore as long as they have access to unlimited funding provided by Federal Reserve. All this is in the hope that if you keep sweeping everything under the carpet then eventually it will disappear. However, I believe that just by closing the eyes balance sheets don't improve and a savvy investors should always look for such opportunities where other are falling for the trap. So no matter what Fed says, I don't think Citi (C) and Bank of America (BAC) have any intrinsic value remaining for equity holders to warrant a $4 and $17 price tag. Problem is that Fed thinks it can assume all the massive credit risk on the balance sheet of these banks without the world noticing it. I don't buy that theory from Ben Bernanke anyday. Either he will create a long term fundamental rout of US Dollar or he will have to choose the right path and acknowledge the fact that credit for masses within the US has to be brought down significantly. Today job loss figure was 216,000 instead of market's expectation of 230,000 and market seems to be celebrating it while turning the blind eye to other alarming number of unemployment rate reaching 9.7%. In my opinion later figure is far more important than the first figure for two reasons. First, 216000 is still a job 'loss' and not job 'additions'. So the fact that it was 14000 less than expected seems utterly insignificant to me. Second, unemployment rate is a more sticky figure because most of the jobs that were lost in this cycle will be very hard to replace in the near future. Due to the boom in stock markets and credit euphoria until 2007, most of the companies were overstaffed and over producing. That scenario may never comeback or is at least years away. But stock tradrers slush with cash at 0.5% would not like to wait that long when money can be made in both up and down stock moves. So I think markets are getting primed for a significant pullback. Now stocks may not fall to March 2009 lows but around 20% pullback in US stocks from here seems highly likely. And world markets will follow the pullback for sometime until they can prove that their economies are now significantly decoupled from US consumers.

Disclosure: No position is GS, AIG, DDM or DXD at the time of writing. I might open a position in DDM or DXD.

Overnight there was a huge sell-off in China with CSI 300 Index down around 4.96%. But I don't think it should affect US equities badly because what we are seeing in China is exactly what some analysts and investors including myself fear about governments' intervention in free markets. Money that China's government was providing in the form of stimulus was directly getting plowed into the Chinese stock market and Chinese real estate market. That is why we were noticing the steepest rise in CSI 300 index and ofcourse China's GDP soaring (because of real estate demand). But that is exactly how bubbles get created. What happens is that the last person in (who normally has to be the most leveraged also) will try to be the first person out. And then the chain reaction triggers.
But I think US equities have not seen such a huge flow of stimulus money directly flowing into the stock market. So any sell off reaction triggered by China should only see a muted response in US markets, if any. I think US will soon be grappling with a different problem if lawmakers don't take prudent measures immediately after economy is seen somewhat stabilized. US dollar is under huge pressure and any slack from government to rein in the supply will have the consequences of huge dollar devaluation. In any case, all these arguments point commodities stocks and mining sector as the huge beneficiary. I have had a buy rating on some of the stocks in metals sector (UYM) and am adding them to portfolio.
Other stocks that I think are a good buy specially after their recent pullback are the solar sector stocks (TAN). Renewable energy is the future, there is absolutely no doubt about that. The best stock in that sector is First Solar (FSLR). With around $600 million debt and debt/equity ration of 0.12 I think this company has lower debt levels than its peers. With stock almost 30% down from its recent highs of $175, its a great buy. The reason stocks is being hammered is because other analysts believe that company can not maintain it growth rate. I disagree with that. I think those analysts don't realize that solar industry is still in its nascent state. There are ample growth opportunities for companies which are technology leaders in this area as First Solar (FSLR). Recent agreement between First Solar and Southern California Electric for a 550 megawatt solar plant is a clear indication that solar industry is growing and chinese manufacturers are not as big a threat in this area as others want us to believe. And with analysts expectations already down, FSLR can beat them with a huge positive in the next quarters. I have always maintained a portfolio with stocks for future growth and not with the past glory. Metal, mining and solar are the stocks for future growth. I would rate them a buy.

Disclosure: Increasing exposure in the sectors discussed here. No position as of now in FSLR.

Today market is seeing a sell-off in equities because of alignment of expectations which had outpaced the true improvement in world economy. However, I believe that long term growth story for metal and mining sector is still intact. The reason is that these companies are sitting on real assets which have any long term value. So while fools rush in to buy Bank of America (BAC), savvy investors should rush in to buy metal and mining stocks whenever they are unreasonably discounted on a day like today. First reason is: While BAC is a solely US based company, the economy which is in the deepest trouble and will stay so for any foreseeable future, mining and metal companies are the true global plays. In fact these days most of the demand for their products is coming from emerging economies rather than already developed ones. And by definition, emerging means that's where the growth lies. Secondly: I believe that after this competition for printing money is over, true value for any currency will be determined based on the real growth in that country and its ability to buy hard assets in natural resources. I know it sounds somewhat like reverting to gold standard but governments will have to devise a fair mechanism to value the GDP and benchmark it with a common denominator. Becuase if not, then every nation will try to print unlimited anount of its currency to keep the GDP high and create bubbles in its own economy as well as its effects on other economies also.
However, by commodities I don't mean all commodities. That excludes crude oil and natural gas. Because most of the demand, around 25% of it, for crude oil currently comes from United States. And with current changes in US auto markets and economy as well, that demand is going to reduce in future. While for sometime, emerging economies will be compensating for it, but as they develop their own mass transit system (read it as demand for other commodities again) and introduce stricter fuel economy standards, their oil demand will start declining soon. Natural Gas is a different story from demand side equation. It is a supply side phenomenon. There is just so much supply of Natural Gas available that I don't see any pricing pressure developing in its favor in the foreseeable future.

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Today metal and mining stocks are seeing some weakness with XME down about 3%. This perhaps is primarily driven in part by market view about economic receovery and in part by Chinese rambling about Rio Tinto (RTP). RTP shares are in particularly down about 5.8%. But I personally think that any weakness in metal and mining stocks is a buying opportunity. Adding them to the portfolio by utilizing any weakness will provide a great boost to portfolio. The reason is that these companies are the only ones which are actually sitting on the most tangible and valuable resources (because of sheer limited supply of them) in the world.
Any recovery however small and limited it might be will have to buoy the demand for these scarce resources. So both RTP, FCX and BHP are definitely a buy for our portfolios. Especially RTP with today's weakness. There is some nervousness in investors about RTP due to comment from a Chinese official. But the swift denial from other Chinese officials about the authority of the comments I think clearly reflects intentions of China to pressurize Rio Tinto into coming to the discussion table. This is a lot of politics but investors should note that these events started after RTP denied China government's majority owned Chinalco (ACH) to offer a stake in the company. But China clearly realizes that importing iron ore from Australia is much cheaper for it then any other major producers like Brazil simply due to its geographical location and transporation costs. So I don't think China will have any othe viable alternative to import iron ore in the near future. And in any case we have to remmber that China represents only a fractional part of iron ore business operations for Rio Tinto. The other good thing is that it's ADR is not available to retail investors for shorting and thus avoids any false panic situation to be created. So I am putting a buy on RTP especially given that its stock is down about 25% from recent highs. This is a great stock with 2 year target for ADRs of $240 (in weak economic recovery scenario) and $285 (in strong economic recovery scenario).
Other focus for the future investment is on gold stocks including Goldcorp (GG) and Freeport (FCX). I believe that inflation or no inflation, we are sitting in a global economic environment where focus will soon be turning from fiat (paper money) economy to currency values being determined by precious metals. A total conversion may not happen in the near future but some sort of alignment is definitely in the order as soon as the global economy stabilizes and governments can spend more time in analyzing the root cause of current credit problems emanating from United States. So instead of buying gold directly and worrying about its storage, I would rather suugest to invest in gold stocks like GG and FCX.
These stocks are perhaps the best assets for forward looking portfolios. I would still stay away from paper money driven bank stocks like Bank of America (BAC), Wells Fargo (WFC) and Morgan Stanley (MS) specially given that bank stocks have rallied almost 30% in the past month alone.

Disclosure: No position in stocks discussed in the article at the time of writing. I'll add RTP and FCX to my portfolio soon at a good entry point.