Marc Courtenay's  Instablog

Fed Chairman Ben S. Bernanke said after a Nov. 16 speech in New York that it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.

My favorite charts to exemplify this is the 1-year chart on GE and Bank of America (NYSE:BAC). Here they are, one on top of the other. Considering their debt issues (and trillions in derivatives), is it not obvious that they are very over-valued? Didn't Bernanke hear Meredith Whitney's interview with Maria B. on CNBC this week? Are these not super-inflated bubbles?


You would see the same thing if you saw the chart for Citigroup (NYSE:C).

The other "tale" about the stock market is that a declining dollar is actually good for the stock market. That is the perception and it fundamentally makes sense. From my point-of-view, the tale of the stock market is one riddled with a "hidden agenda". Exchange specialists and exchange insiders buy very low in plummeting times like March 2009, and they short stocks and sell their own inventory when the stock market gets way over-valued (which Bernanke, on some level, knows we are at, else why would he say the over-valuation is "not obvious" when it surely is).

Recently, Mr.Bernanke made a passing reference to the dollar. He didn't say much. Here's the whole quote:

The foreign exchange value of the dollar has moved over a wide range during the past year or so. When financial stresses were most pronounced, a flight to the deepest and most liquid capital markets resulted in a marked increase in the dollar. More recently, as financial market functioning has improved and global economic activity has stabilized, these safe haven flows have abated, and the dollar has accordingly retraced its gains. The Federal Reserve will continue to monitor these developments closely. We are attentive to the implications of changes in the value of the dollar and will continue to formulate policy to guard against risks to our dual mandate to foster both maximum employment and price stability. Our commitment to our dual objectives, together with the underlying strengths of the U.S. economy, will help ensure that the dollar is strong and a source of global financial stability.

Their "dual objectives" seems to be obvious. In truth there is absolutely nothing there that suggests the Fed is planning to do anything about the weak dollar. In fact, all he's doing is justifying the recent decline in the dollar. (No wonder gold and silver is rallying...they represent the only strong "currencies").

Their other objective is to virtually force people to invest in the stock market for hope of some dividends and capital gains. The fed has helped make the stock market "the only game in town" (although the commodity market has done well too).

Another "market" that is so out-of-whack it isn't funny is the municipal bond market. My colleague Robert Williams, who happens to be the Executive Editor for Investment U and The Oxford Club pointed out some realities there to ponder:

"Something's amiss in the municipal bond market. Year-to-date, "munies" have behaved more like momentum stocks than their intended purpose of providing a safe yield.

"Consider this: A handful of closed-end muni funds have averaged a 46% return so far this year.

"The rally, of course, was borne out of the financial crisis, when investors and institutions alike went furiously scrambling to safety.

"The novice move was into cash. But the smart money flowed strategically into the bond market. And a lot of the action was in municipal bonds. (The junk bond market is similarly overheated.)

"What's noteworthy, however, is that when the market's sanity returned in March, the muni rally chugged on. Counterintuitive, to say the least.

"So what gives? The stimulus package.

"Specifically, sales of "Build America Bonds," created under President Obama's economic stimulus package, rose 28% in the third quarter, as municipalities chased the bonds' abilities to lower interest costs.

"More than $51 billion of such bonds have been issued since their inception.

"The federal government pays sellers 35% of their interest cost. The subsidy is needed by states coping with an 8.2% annual decline in tax collections in the first half," according to a Bloomberg report.

"Clearly, the bonds are propping up the muni market. (The effect they're having is quite intriguing. But beyond the scope of this article.)

"For now, just take note that the federal Build America subsidy is only available for bonds issued by before midnight on December 31, 2010. Beyond that, all bets are off. (Can you say "thud?")"

Take a look at the 1 year chart on PowerShares Insured National Muni Bond ETF (NYSE:PZA) as an example of the muni-bond bubble off the lows of a year ago:

Similar charts for other muni funds such as IMS, BMT, and MUB. With the state of California in fiscal crisis, it won't surprise you to see the PowerShares Insured Muni California Bond ETF (NYSE:PWZ) also looks quite frothy:


The stock market is seriously overvalued, but the Fed-induced, media-massaged "hope and hype" rally probably has at least another month to go.

The municipal bond market looks like a blimp (think "The Hindenberg") ready to crash and burn. At best, both the stock and municipal bond market are ripe for a big correction, which will actually layout another very good buying opportunity.

One final hint: If the "smart money" is about to short the stock market in a big way, shouldn't we be following their example? Shouldn't the average investor look for ways to "piggy back" on the methods and traditions that have allowed the stock exchange insiders to make tons of money for themselves and their biggest customers... whether the markets go up or whether they go down?

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! - Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

DISCLOSURE: I currently own only C and none of the funds mentioned.

First let's start with a very cool chart. It shows us the Dow Jones Industrial Average (DJIA) performance if we valued that performance in gold grams. It speaks to the erosion of the value of the dollar and what the DJIA is really worth in terms of gold.
DOW's 10 Year Performance:
Many thanks to our friends at PricedinGold.com (pricedingold.com) for allowing us to share this with you. They have many other great charts to show both the stock market's and commodities' "true value" when priced in gold.

That's why I've said for years everyone should have purchased at least a gold ETF like GLD at some point and held on to most of it. Is it too late? Probably not in the long-run, but that's for another story and another day.

That being said, most of us who like to buy stocks and commodities when they are "on sale" and at bargain-basement prices are holding on to cash. So are two technology companies worth looking at.

Taiwan Semiconductor Manufacturing Company (NYSE:TSM) which engages in manufacturing, selling, packaging, testing, and computer-aided designing various integrated circuits and other semiconductor devices, as well as manufacturing masks.

It offers a range of wafer fabrication processes, including processes to manufacture complementary metal oxide silicon (CMOS) logic, mixed-signal, radio frequency, embedded memory, BiCMOS mixed-signal, and other semiconductors.

Well, they are sitting on a sheet-load of cash. In fact, it's over $5.6 billion in total cash which includes almost $2.5 billion of levered free cash flow (ttm) and only $214 million in debt. Their profit margin and operating margin (ttm) are around 26% in spite of the worldwide economic slump.

As Taiwan grapples with an economic slowdown, a new administration is pursuing unprecedented trade deals with arch-rival mainland China, a move necessary for Taiwan's future but also threatening its current de-facto independence.Despite its small size and a population of just about 23 million, the island has managed to become the world's top manufacturer of semiconductors, notebook computers, and flat-panel screens, as well as the planet's No. 2 chip designer, according to a recent report from MarketWatch.

And thanks to a recent settlement, TSM will now own close to 10% of Semiconductor Manufacturing International Corp. (NYSE:SMI) a Shanghai, China which, together with its subsidiaries, engages in the computer-aided design, manufacture, packaging, testing, and trade of integrated circuits.

It provides wafer fabrication services for various devices that include logic technologies, such as logic, mixed signal, RF, and high voltage circuits; memory technologies comprising dynamic random access memory, static random access memory, flash, and electrically erasable programmable read-only memory; and specialty technologies consisting of liquid crystal on silicon and CMOS image sensor.

The company also manufactures logic, mixed-signal and radio frequency, high voltage, memory, and specialty semiconductors, as well as manufactures and designs semiconductor masks. In addition, SMIC provides various services, including libraries and circuit design blocks, design support, mask-making, wafer probing, gold/solder bumping, redistribution layer manufacturing, assembly, and testing.

SMI is trading for only 70% (.69) of its Book Value, but the big story is that SMI will pay TSM a nice cash settlement paid over 4 years and a big chunk of SMI shares. This just makes TSM a stronger, financially healthier company with lots of opportunities in their business to expand throughout mainland China and Asia. and TSM is currently paying a dividend with a yield-to-price of around 3.4%.

The other company that has my attention, although it certainly isn't cash-rich, is Brocade Communications (Nasdaq:BRCD). My friend Louis Basenese, the Senior Analyst at The Oxford Club who is also the editor of the Takeover Trader shared the following with me on Friday that says quite a bit about the BRCD situation:

"This week's announcement that Hewlett-Packard (NYSE:HPQ) is acquiring 3Com put a dent in shares of Brocade Communications Systems (Nasdaq: BRCD). Everyone expected HP to buy Brocade instead.

"But don't think because HP passed, Brocade's attractiveness changed one iota. If anything, the dip in prices makes a deal more compelling for Oracle (ORCL), Dell, Juniper Networks (JNPR) and other potential suitors. They can now scoop up the maker of networking gear for 13% less.

"Granted, Oracle said it's not interested either. But a cheaper price can always change a buyer's mind. And playing hard to get could be a negotiating tactic. Time will tell.

"With over $260 billion in cash on the collective balance sheets of technology companies, and a mighty consolidation wave already gripping the industry, Brocade remains a prime takeover target."

"H-P acquiring 3Com [is] a negative for switching and routing competitors long term," wrote Jayson Noland, an analyst at R.W. Baird, in a note released this week.

"Implications are most negative for Brocade given speculation H-P would acquire it, plus increased competition for the [company's] Foundry portfolio."

Brocade is a longtime partner of H-P, which rebrands the company's storage switches, although there had been talk that of a similar deal for Brocade's IP networking products.

"H-P buying 3Com takes a Brocade IP OEM deal or acquisition off the table," wrote Noland, but adds that this could also strengthen Brocade's OEM relationship with blue-chip company IBM.

Some analysts are going to continue to spin the H-P rejection of BRCD in a negative light, but there's plenty of reasons to believe there is light at the end of the tunnel for a future benefit for BRCD.

The storage maker has been on something of an upswing recently, raising its 2010 revenue forecast.

"We believe that Brocade will continue to be H-P's preferred supplier for storage switches," wrote Kaushik Roy, an analyst at Wedbush, adding that there are still gaps in H-P's portfolio.

The tech bellwether, for example, lacks a switch offering Fibre Channel over Ethernet (FCoE), which is seen as key in companies' efforts to reduce cabling. "H-P will continue to rely on Brocade's FCoE products to offer converged Ethernet solutions," said Roy.

Even with the 3Com bombshell, the analyst says that Brocade is unlikely to reduce its bullish 2010 revenueand earnings estimates.

"H-P's potential partnership with Brocade for its Ethernet products was not officially announced," he explained. "We therefore believe that management would not have to bring down any of its future revenue estimates."

Brocade, which reports its October results on Nov. 24., is still in a relatively strong position, according to Roy, who maintained his $12 price target and outperform rating for the company.

But when all is said and done, do any of us really know what TSM and BRCD is worth or how these shares will perform in the weeks ahead? Absolutely not, but it sure appears that the brokerage community and analysts are mainly bullish about their chances.

Frankly of the two, I like TSM the most, and it has a lot to do with not only what they manufacture but that they have two fists full of cash--and over the months ahead in this old world, cash will be king (yet often subservient to the monetary "emperor" gold).

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! - Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

DISCLOSURE: I currently own some GLD,TSM and BRCD

  

                    

 
     

When surveying the financial and economic landscape of November 2009 it isn't that hard to get "the big picture". It seems to me that the manipulations and the activities of the "Smart Money", a.k.a the Exchange Insiders, the Specialists and their array of big banking clientel makes it abundantly clear that they want the stock market and precious metals market to remain in "bubble mode" for awhile longer. There are many opinion and myths about it all floating around. This concerns me.

Alfred Goldman, the wise old sage of the former brokerage firm called A.G. Edwards and Sons had a saying that I always liked: "It's not the snake you see that bites you, it's the snake you don't see." He wanted to warn customers that we can easily become distracted by all the noise, all the "talking heads" and myriad opinions and miss what is really going on.

So I have a question for you. Do you still think the stock market and the precious metals markets are an orderly, auction-based market that responds to the forces of "modern portfolio theory" and the best interests of investors?

Another question might be: Since we made it through the scariest months of September and October with not much damage to the DJIA, the S&P 500, the Russell 1000 Financial Index (symbol:RIFIN) and the precious metals markets, is it "up-up-and-away" from here?

Our most followed Seeking Alpha contributor David Fry had an interesting comment in his Friday Roundup:  

"RBS economist Stephen Stanley wrote today’s employment report was “a mild disappointment”. It’s easy to say with his firm and others, plied with cheap money from a generous Fed. And, that’s really the issue. The liquidity bubble for Da Boyz is creating a stock bubble. Like all bubbles it will have an ugly end. But with cash and bond yields low, going for higher returns in equities is an easier; “make hay while the sun shines” choice. So, spin bad news and go for returns in stocks."

Once again we see the underlying reality that what we see and hear about the economy and the stock market doesn't necessarily correlate to why stock prices or the price of gold goes up and down. For now, keeping interest rates low and creating the myth that the stock market or the precious metals market can't suddenly and dramatically fall, is working it's magic.

I keep my eyes on companies like Alcoa, GE, Proctor& Gamble, Boeing, JPMorganChase, Goldman Sachs, Google, Apple, Texas Instruments, Chevron, Exxon, Chesapeake Energy,Dupont,NYSE Euronext, Barrick Gold and Freeport McMoRan Copper and Gold. I want to see the hourly and daily volume, and what appears to be driving each of these very popular stocks.

Listening to the Spin Doctors on CNBC or Bloomberg, as well as the interviews that are often available on Yahoo! Finance gives me some idea of the prevailing consensus and "schizophrenia" that drives the emotions of the investing public. No wonder so many people are confused and turn to actors like Jim Cramer (although he is a very well-connected Goldman Sachs alumnus) to try to make sense on current market conditions.

Having read the books of the late Richard Ney, I continue to benefit from the monthly reports that are posted by my friend and "Ney student" Richard Wendling at The Bear Facts Specialist Report (www.bearfactsspecialistreport.com).

Ney and Wendling have reminded realists and seekers of truth to keep their eye on "the ball" and to know what "the ball" actually is. These reports help us to see the market forces and the Smart Money from a unique, historical perspective.

Legendary Hedge Fund Manager Kenneth Gerbino of Beverly Hills weighed in on the current misunderstandings on the markets in an interview he gave to the Mineweb.com folks. You can read the entire interview at Mineweb or at my site. I just wanted to give you a sample of what he wrote. It reminds us that myths, misperceptions and conventionally unaware thinking can set any investor up for some nasty disappointments and unexpected outcomes.
 

PROBLEMS THAT COULD ARISE

More »

Many of us wonder if inflation is going to take off anytime soon. That, as well as the devaluation of the dollar has moved billions of dollars into precious metals ETFs like GLD and SLV.

Even the Central Fund of Canada (AMEX:CEF), which is selling for about a 10% premium above its net asset value (NAV), has a market cap of over $2.5 billion. It's a closed-end fund that actually buys, stores and insures the gold and silver it uses to establish the NAV for the shareholders.

ASA Ltd (NYSE:ASA), a relatively small closed-end fund which invests in many "things" related to precious metals as well as the metals themselves as seen their market cap rise to over one-half billion dollars, and since the lows of November 2008 its share price has more than doubled.

Folks usually buy precious metals for 3 reasons. First, as a hedge against inflation. Secondly, as a "substitute currency-buying power protector" when confidence in paper currencies are eroding. The third reason is as "insurance" against the unseen catastrophe, disaster or financial panic.

That brings us to the Mayan Calendar. There's a growing group of unique people who think that the Mayan Calendar, and a few other exotic symbols, predicts some enormous global changes in the year 2012. There are even some financial gurus who buy into that kind of thinking (remember Y2K).

Well, my crystal ball only predicts things slightly past the end of my nose, so that is why I tend to invest with 2 major criteria. First, I want to be buying or selling what the "Smart Money" and the "Exchange Specialists" are buying and selling. Secondly, I do like a hedge against uncertainty and those random "Black Swan events". With that second criterion in mind, I'd like that hedge to have historically intrinsic value and be very much in demand.

That's why I like to own precious metals and the proxies for precious metals. I even like the stocks and ETFs of the precious metals producers. That's why I own a small amount of GDX, Silver Wheaton (NYSE:SLW), Compania de Minas Buenaventura (NYSE:BVN), Freeport McMoRan Gold & Copper (NYSE:FCX) IAM Gold (NYSE:IAG) and I'm trying to buy a little Silver Standard Resources (Nasdaq:SSRI) below $20 a share.

Back to the subject of inflation, frankly I don't see much in the near-term. I see quite a bit of over-supply, whether we look at housing, natural gas or automobiles. There's a lot of oil stored out there too, and although the price of oil is high right now, it's hard to understand why it should stay this high. $70 a barrel ought to be the near-term average from the supply figures I'm reading.

Inflation is coming in the future and the monetary policies in the G-20 countries virtually assure it. Black Swan events and the rise and fall of the dollar will factor into the deflation versus inflation debate over the next few years as well. How soon inflation will be a major problem is a tough call.

My colleague Terry Coxon who is an editor for the Casey Report and who has a great deal of experience and insight on investing, put this whole topic into perspective today and I'll conclude this article with his words:

Investment Implications

The big plus about the Mayan calendar is that, right or wrong, it is very definite about things. Human civilization will come to an end, I'm told, on Dec. 21, 2012 – not on the 20th and not on the 22nd. There was no room for monetarists in those step-sided pyramids, but there still are few what-to-do implications from the monetarist findings.

1. When you hear would-be opinion leaders cite the current absence of rising prices at the supermarket as proof that all the new money isn't a source of inflation, don't believe them. It is much too early for the inflation bomb to be going off, even though the powder has been packed and the fuse has been lit.
2. If the large and growing federal deficits and the Federal Reserve's unprecedentedly easy policies tempt you to leverage up on inflation-sensitive assets, such as gold, give the idea a second thought. It likely will be a year or more until price inflation becomes obvious and undeniable (which is what it would take to bring the general public into the gold market). In the meantime, your inflation-sensitive assets could get paddled rudely as the deleveraging that began last year continues.
3. Read points 1 and 2 again to make sure they have sunk in.
   

For at least the next year, the simple, fire-and-forget strategy is 50-50 gold and cash – gold for what looks to be inevitable but on its own schedule, cash to be ready for the bargains that may show up while we're waiting for the inevitable to arrive.

DISCLOSURE: I own GLD, SLV, CEF, GDX,SLW,BVN, and IAG.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! - Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

"JPM’s profit soars 583% year over year" wrote my colleague Keith Fitz-Gerald. MS reported a net income of $757 million, compared with a $159 million net loss in the second quarter and the year-earlier profit of $7.7 billion. For common shareholders, the firm had net income of $498 million, a 38-cent-a-share profit that beat analysts' expectations by 11 cents and sent Morgan Stanley shares up earlier today.

Now here's an ETF idea a colleague mentioned to me today (not Keith) that one might want to consider very carefully. It involves the UltraShort Financial Proshares (NYSE:SKF) and Ultra Financials Proshares (NYSE:UYG).

SKF (on the short side) and UYG (on the long side) seeks daily investment results, before fees and expenses, which correspond to twice the daily performance of the Dow Jones U.S. Financials index.

The funds normally invest 80% of assets in financial instruments with economic characteristics that should be twice the return of the index (SKF short, UYG long). It may employ leveraged investment techniques in seeking its investment objective.

This is for very short-term traders who want to attempt to catch a short-term trend in the financial sector. Read and study about them carefully, know about their "holdings" (10 financial stocks make up over half the weighted value of the DJ U.S. Financials index) and realize they use derivatives like "total return swaps" to meet their objectives.

There is "counter-party risk", and like I said, these are meant for short-term, aggressive traders who think there will be volatility in the financial sector and want to capitalize on it. These kind of ETFs are not in any way like typical stock ETFs or investments.

Check out the chart of what SKF and UYG have done over the past 3 months and the second chart is the past 5 days. It is nothing short of educational.


Disclosure: I'm only long one financial stock right now, Citigroup (NYSE:C) and I haven't personally tried SKF and UYG yet, but I'm getting tempted, especially with SKF.

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please remember investments can fall as well as rise. And they will! - Advanced Investor Technologies LLC accepts no responsibility for any loss or damage resulting directly or indirectly from the use of this content.

"The market can stay irrational longer than you can stay solvent." – John Maynard Keynes

On Friday October 16th, while the stock markets in the US were in a mini-decline, I decided to buy more of two of my favorite "takeover target technolgy stocks", NetApp Inc. (Nasdaq:NTAP), and Brocade Communications (Nasdaq:BRCD).

Why? Mainly because that day they were "on sale" and because in all my reading and personal investigation I've concluded they would be a good fit with some bigger acquirers like IBM or Hewlitt-Packard Company (NYSE:HPQ).

I also bought a technology company that appears to have a great balance sheet and plenty of cash, EMC (NYSE:EMC). This in spite of the fact that all three of these stocks have had an impressive run-up this year off their March lows.

Whether it was a rational or irrational decision on my part, you can judge and time will tell, but if I decide to sell them today (the dreaded date of Monday, Oct. 19th), I will make a least a small profit.

You see, I've come to believe that the famous comment by John Maynard Keynes happens to be a reality, whether we can accept it or not.
 

That is why we all need investment disciplines, and what is said above proves it. Most of the times we can't even trust our senses or emotions when it comes to the markets and our own investing prowess. The warnings of Professor Keynes and Mr. Rogers (not the one who welcomes us to "his neighborhood").

 

"You can put the warning from Keynes and Rogers to real-world use by [deciding to using trailing stop losses]. Go ahead and take a contrarian position at the extremes. But always have an "uncle" point to limit losses in case the crowd keeps pushing prices in a crazy direction" Brian opined.
 

This is very relevant to what we are living and experiencing right here, right now.