Market and Meaning is my weekly update on market movements and their meaning for you as an investor. Market and Meaning is normally reserved for premium subscribers but is currently being offered for free to all our readers. As always, everything here represents my personal views and not official recommendations, please do your own due diligence and come to your own conclusions.
If you are new to Market and Meaning or investing in general, this newsletter may seem a bit overwhelming. No need to worry, I have you covered on that front. First thing to do, skip down to the section, "What does all of this mean for the investor?" Read this section, along with the section above it that discusses what moves I've recently made in stocks. Everything below these sections details any moves or changes in my thoughts on gold, silver, and Bitcoin. As always, questions are enthusiastically welcomed in the comments section.
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This week saw the Dow climb back over 17,000 with a strong 2% gain on the week. A few weeks ago we were fretting the large 2%+ drop in the Dow only to see those loses all but erased. This marks the second or third time (I'm beginning to lose track) that investors have gathered their collective breath in anticipation of the long-awaited 10%+ correction. Again, the correction has eluded us. This may sound like good news, but the sooner this correction comes, the sooner we can shake-off our "YELLOW ALERT" in Taylor Swift-like fashion. The fear of a correction is keeping the breaks on a stronger bull move, in my view.
U.S. Federal Reserve Chair Janet Yellen gave a speech this week that brought about as much clarity as a 1920's west Texas dust storm. She introduced as many as 19 indicators that the Fed will begin using to monitor the labor-market. This is a big shift from simply tracking the unemployment rate.
The most important bit of info is when interest rates are likely to begin rising. Not much change here, an increase to 0.25% is expected next June, 0.5% by next September, and potentially 0.75% by the end of 2015. Of course, this could all change if the Fed sees any notable shift in the direction of the labor-market.
European Central Bank President Mario Draghi also gave a speech this week. Eurozone unemployment is at 11.5% with a low of 5% in Germany and a high of 25% in Spain. Draghi claims the problem is a mix of cyclical and structural issues. With the ECB balance sheet shrinking and struggling countries like Spain left with no ability to devalue their currency to regain international competitiveness, the most likely path is stagnation and deflation. For those of you wondering, that's bad news. These terms often go hand-in-hand with "recession" and "depression."
Raghuram Rajan, the governor of the Reserve Bank of India, has established a reputation for being one of the more insightful, sober, and honest central bankers of the world. In 2005, he warned of an increasingly risky environment that eventually led to the financial crisis a few years later. That warning was not received too kindly. Recently, Rajan warned of our vulnerability to another major financial crisis, which he claims (and we agree) that economists are not taking seriously "at a time when the world is less capable of bearing the cost." He added that the problem is primarily, "from asset prices due to financial risk-taking."
In the midst of this warning, main street investors poured more than $18 billion back into stocks this week, the highest amount all summer. This comes as bullish sentiment readings are reaching new high marks. The American Association of Individual Investors (AAII) sentiment survey is reading over 46%, which puts it at 7% over the long-term average. It would be overly dramatic to say that investors are playing the fiddle as Rome burns, but it does feel that way at times.
The Central Bank of Brazil continues to add billions of dollars into its banking system. This week they added $4.5 billion, the second such injection in three weeks. The country is grasping to bolster the country's struggling economy as October elections draw near. Analysts do not expect this spending to provide any significant help.
In Iraq, the Islamic militants calling themselves the "Islamic State" were dealt one of their first major defeats. The Iraqi Kurds and Iraqi Army drove back the militants from their occupation of a major dam, with the help of U.S. airstrikes. This all came in the same week as the militants broadcasted their beheading of American journalist James Foley. Our prayers go out to Foley's family and friends. It appears that Foley's death could finally bring enough attention to the suffering and chaos in Iraq to lead to helpful Western intervention. This intervention will most likely come in the form of ongoing airstrikes.
The ceasefire between Israel and the Palestinian terrorist group known as Hamas has broken down. Hamas continues to sacrifice the people of Palestine on the alter of their hatred of Israel, as they have throughout this conflict. The breaking of the cease-fire is disappointing, but the fighting has remained well below the more intense combat in recent months.
Fighting in eastern Ukraine remains intense as the Ukrainian army and pro-Russian militants wrestle for control of key cities there. Vladimir Putin and Ukranian President Petro Poroshenko have plans to meet next week to discuss the fighting in Ukraine and energy concerns. Ukraine is heavily dependent upon Russia's natural gas for heating during the bitter winter cold.
The unrest in Ferguson, Missouri was labeled a "state of emergency" by the Missouri governor. While this has not been a situation with impact on financial markets, it is one that we should all take note of. Regardless of our views on what did or did not happen, may we all learn from this that hate is never the answer for hate. As Nelson Mandela modeled for the world so many years ago, only forgiveness can bring the needed healing. It is my hope and prayer that our nation can known a healing such as this.
Samsung has followed Google (GOOG, GOOGL) into the fight for market share in the "Internet of Things." Samsung purchased U.S. air conditioner distributor Quietside. This will help Samsung strengthen the company's "smart home" business.
Google also announced plans that it will officially begin offering accounts to kids under the age of 13. Parents will have the ability to set up controls and a kids-friendly version of YouTube will be rolled out. Most large internet companies have historically been hesitant to market pre-teens due to online privacy protection for children.
Warren Buffett sold-off much of his oil company investments during the second quarter of this year. He sold large portions of his stakes in ConocoPhillips (COP), Phillips 66 (PSX), and National Oilwell Varco (NOV).
Sears (SHLD) was called "one of the worst service stores in America" by Credit Suisse (CS) this week as it burned through another $747 million on its way to losing $573 million in the second quarter. If my personal experience is any indication, I agree with CS on this one. Contrast that with Home Depot (HD) who just named a new CEO and continues to see great growth. Having recently purchased a home, I had the opportunity to see both companies through the eyes of a customer and the experience was night and day in favor of HD. I cringe every time I remember that I cratered and bought a major appliance from Sears.
As for my personal portfolio, no moves this week. I've been on pause as I am already very long stocks right now and want to be cautious during the "YELLOW ALERT." I recently revealed a new position in InvenSense (INVN), a recent pick from PTT Forensics. I encourage you to read the full article, New Position Announcement: InvenSense. I expect solid gains on INVN over the next year, perhaps even a double in a strong bullish case. My solar positions have grown to make up over 10% of my portfolio all-together, mostly made up of some promising picks from PTT Solar. Glu Mobile (GLUU) continues to be my largest position and my thesis of a $10 price target remains unchanged. I also released a few update articles on GLUU and GT Advanced Technologies (GTAT): Portfolio Updates: Glu Mobile and GT Advanced Technologies and New Product for GT Advanced Technologies.
What does all of this mean for the investor? I appreciate greatly the warnings of Rajan. Central bankers and economists of the Western world are very afraid of saying anything that could destabilize financial markets, regardless of how true it may be. For them to acknowledge a problem would also mean to acknowledge fault. After all, it has somehow become their job to keep our nations economically healthy. Rajan appears to be above these short-sighted mindsets. I stand with Rajan and his concerns that asset prices (ex: stocks) are being inflated by monetary policy, not so much by the economy. Eventually, I expect this will end badly. I also think this is still a bit out in the future, potentially as much as 1-3 years. One of my key indicators continues to be euphoria. When fear is gone, it's time to sell.
Global unrest continues to cause concern. There are several global issues that could erupt at any time and any of them would cause markets to shutter. This is all part of being informed, knowing your risk tolerance, and never panicking. Let's stick together as we look to do our best in navigating the markets.
Current Market Outlook: YELLOW ALERT
"When will this 'YELLOW ALERT' go away?!" This is what I imagine all of you saying at this point. Rest assured, I feel the same way. The only certain thing that will buck this alert is a correction of 10% or more. The lack of a correction of this size for a long time is a big reason for the concern many investors have. Apart from that happening, we're taking things one-step at a time.
The Current Market Outlook is like my traffic light for investing. Green means all systems go, yellow means to be cautious, and red means we believe there are major reasons to be concerned.
Gold (GLD) closed at $1280.80/oz and Silver (SLV) at $19.40/oz. for the week. Both are down for the week, but the most notable decline is in gold. Silver has already seen a notable decline and gold appears to catching on to silver's act. I expect further downside; likely below $1200 or lower in the near future.
My opinion on gold and silver holds firm. As I have said for some time now, I are still looking for one more big drop. Gold below $1200 is a good range for me, but I am hopeful for even lower toward the $1000 range. I thought these lows could come by now, but that appears to not be the case. I am now looking at this larger drop, potentially below $900 or more, sometime in the next six to eight months. At the same time, I am preparing for the possibility this drop may never fully materialize.
That said, if I did not own any physical gold or silver, I would consider the current prices to be a very good entry point for long-term investment. One of my favorite gold sources recently said that he expects the metals to at least double from current levels in coming years calling this a "generational buying opportunity." It is important to reiterate that I am talking about owning physical gold and silver coins and bars, not stocks or ETFs. My favorite coins are U.S minted Silver and Gold Eagles, they are universally recognized and offer tax protection. For information on how to buy gold and silver, please see "How To Buy Gold And Silver."
Bitcoin is sitting at around $504.03. The crypto-currency has taken a dive of late and even dipped below $480 this week before recovering. This all comes after an extended period of stabilization. Overstock (OSTK) plans on accepting Bitcoin for international sales beginning in September. This marks the largest retailer to adopt the currency since January. Expedia (EXPE) and Dell have already adopted Bitcoin. I am currently holding my small Bitcoin position and have plans to buy or sell any more at the moment.
I continue to urge caution as we still think Bitcoin is a lottery ticket that could grow 10-100x or more and could even more easily go to $0. Caution and small amounts of money are strongly advised. For information on how to buy Bitcoin as well as my views on investing in it, please see my article, "How To Buy Bitcoin."
Disclosure: I am long GLUU and INVN and own gold and silver bars and coins as well as some Bitcoin.
Disclaimer: This article is for information purposes only. There are risks involved with investing including loss of principal. All readers must be responsible for and make their own investing decisions. Each reader bears the full responsibility for any decision to buy, sell, or hold any securities, precious metals, real estate, or other asset class as well as any decision regarding the starting or running of a business. Nothing in this newsletter is to be considered a formal recommendation. Investor in the Family LLC makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed by Investor in the Family LLC will be met. Please see full Disclaimer.
Disclosure: The author is long GLUU, INVN, GTAT.
Additional disclosure: I also own gold and silver bars and coins as well as some Bitcoin.