AdvisorShares’ Active ETF Assets Cross $100 Million

November 15th, 2010

On Nov 11th, AdvisorShares announced in a press release that the assets managed within its 4 actively-managed ETFs now exceed $100 million. AdvisorShares pioneered the launch of many unique strategies including long/short funds and global tactical funds that were previously accessible mainly through hedge funds with high barriers to entry for investors.

AdvisorShares’ current position marks a big leap from where it was earlier this year when the company only had one fund on the market whose asset growth had reached a plateau. The very first product that the firm launched was the Dent Tactical ETF (DENT: 20.4205 0.00%) which hit the market in September 2009 to much anticipation as the fund was managed by Harry Dent, known for “The Dent Method” which is used to forecast long-term economic trends. The fund had gathered $25 million by March 2010 but has since stopped growing with assets continuing to hover between $20-25 million. There was little of note coming from AdvisorShares after the launch of DENT for quite a while, until the Mars Hill Global Relative Value ETF (GRV: 24.7801 0.00%) and the WCM/BNY Mellon Focused Growth ADR ETF (AADR: 28.69 0.00%) were launched in July this year. Both were industry firsts with GRV being the first long/short relative value ETF while AADR was the first internationally focused actively-managed ETF. GRV in particular gained strong favour with investors as it gathered in excess of $40 million in assets in little over a month. The latest fund to be launched from AdvisorShares was the Cambria Global Tactical ETF (GTAA: 24.99 0.00%) in October, which is managed by another popular portfolio manager – Mebane Faber, the author of the book “The Ivy Portfolio”. GTAA has even left GRV in the dust, having already gathered $40 million in assets in about 2 weeks, in the process helping AdvisorShares’ total AUM exceed $100 million.

AdvisorShares has built up a reputation for bringing unconventional active strategies to investors which bear resemblance to hedge-fund style management instead of just plain-vanilla mandates. At the same time, it has also built up a reputation for bringing some very expensive products to market, with its “cheapest” Active ETF charging investors 1.25% in expenses with the most expensive at 1.56%. That is almost comparable to many active mutual funds, but from AdvisorShares’ point of view, it is charging for the unique strategies that it is providing investors access to. While it is still early years as a whole for the Active ETF space, the response that AdvisorShares’ is seeing for its more exotic long/short and tactical offerings may provide indications that investors do have an appetite for expensive products provided the strategy is unique enough.

Of course, at the end of the day, the long-term track record that the portfolio managers develop would likely end up being the biggest determinant of success for these active funds. In that regard, only one of AdvisorShares’ offerings, AADR, has been able to outperform its benchmark since inception. DENT and GRV have both underperformed their benchmarks by large margins. While not entirely fair to judge active manager on such a short time span, the managers will have to pull up their socks if the funds are to continue attracting assets.

AdvisorShares also has some more interesting products in the pipeline. The Peritus High Yield ETF (HLYD) is scheduled for launch in December and will be the first Active ETF to focus on the high yield bond market. Another is a short-only equity fund called the Active Bear ETF (HDGE). AdvisorShares is also collaborating with Strategic Investment Management (SiM) to plan two more actively-managed ETFs. That pipeline should ensure continuing activity from AdvisorShares in the next few months.

ETF, Mutual Fund

AdvisorShares’ Active ETF Assets Cross $100 Million

November 15th, 2010

On Nov 11th, AdvisorShares announced in a press release that the assets managed within its 4 actively-managed ETFs now exceed $100 million. AdvisorShares pioneered the launch of many unique strategies including long/short funds and global tactical funds that were previously accessible mainly through hedge funds with high barriers to entry for investors.

AdvisorShares’ current position marks a big leap from where it was earlier this year when the company only had one fund on the market whose asset growth had reached a plateau. The very first product that the firm launched was the Dent Tactical ETF (DENT: 20.4205 0.00%) which hit the market in September 2009 to much anticipation as the fund was managed by Harry Dent, known for “The Dent Method” which is used to forecast long-term economic trends. The fund had gathered $25 million by March 2010 but has since stopped growing with assets continuing to hover between $20-25 million. There was little of note coming from AdvisorShares after the launch of DENT for quite a while, until the Mars Hill Global Relative Value ETF (GRV: 24.7801 0.00%) and the WCM/BNY Mellon Focused Growth ADR ETF (AADR: 28.69 0.00%) were launched in July this year. Both were industry firsts with GRV being the first long/short relative value ETF while AADR was the first internationally focused actively-managed ETF. GRV in particular gained strong favour with investors as it gathered in excess of $40 million in assets in little over a month. The latest fund to be launched from AdvisorShares was the Cambria Global Tactical ETF (GTAA: 24.99 0.00%) in October, which is managed by another popular portfolio manager – Mebane Faber, the author of the book “The Ivy Portfolio”. GTAA has even left GRV in the dust, having already gathered $40 million in assets in about 2 weeks, in the process helping AdvisorShares’ total AUM exceed $100 million.

AdvisorShares has built up a reputation for bringing unconventional active strategies to investors which bear resemblance to hedge-fund style management instead of just plain-vanilla mandates. At the same time, it has also built up a reputation for bringing some very expensive products to market, with its “cheapest” Active ETF charging investors 1.25% in expenses with the most expensive at 1.56%. That is almost comparable to many active mutual funds, but from AdvisorShares’ point of view, it is charging for the unique strategies that it is providing investors access to. While it is still early years as a whole for the Active ETF space, the response that AdvisorShares’ is seeing for its more exotic long/short and tactical offerings may provide indications that investors do have an appetite for expensive products provided the strategy is unique enough.

Of course, at the end of the day, the long-term track record that the portfolio managers develop would likely end up being the biggest determinant of success for these active funds. In that regard, only one of AdvisorShares’ offerings, AADR, has been able to outperform its benchmark since inception. DENT and GRV have both underperformed their benchmarks by large margins. While not entirely fair to judge active manager on such a short time span, the managers will have to pull up their socks if the funds are to continue attracting assets.

AdvisorShares also has some more interesting products in the pipeline. The Peritus High Yield ETF (HLYD) is scheduled for launch in December and will be the first Active ETF to focus on the high yield bond market. Another is a short-only equity fund called the Active Bear ETF (HDGE). AdvisorShares is also collaborating with Strategic Investment Management (SiM) to plan two more actively-managed ETFs. That pipeline should ensure continuing activity from AdvisorShares in the next few months.

ETF, Mutual Fund

Chart of the Week: Uptick in the Jobs Picture

November 15th, 2010

Lost in all of the attention paid to Ireland, China, Cisco (CSCO) and the week’s other headline grabbers was some signs of progress on the jobs front, specifically in the area of the weekly jobless claims data.

This week’s chart of the week shows initial and continuing jobless claims since 2000 as a percentage of total covered employment in order to adjust for the changing size of the workforce. Note that while initial claims (solid red line) peaked first in March 2009, they have been in a holding period for the last year or so. Continuing claims (dotted blue line) peaked three months later and initially showed a sharper decline. While continuing claims began to form a plateau earlier in the year, the last month or so has seen noticeable improvement, with the trend line now dropping below the gray rectangle which marks the recent consolidation area.

This improvement could be a precursor to some downward movement in the unemployment rate, which may show up as early as in this month’s data.

Related posts:

[source: Bureau of Labor Statistics]
Disclosure(s): none



Read more here:
Chart of the Week: Uptick in the Jobs Picture

Uncategorized

Chart of the Week: Uptick in the Jobs Picture

November 15th, 2010

Lost in all of the attention paid to Ireland, China, Cisco (CSCO) and the week’s other headline grabbers was some signs of progress on the jobs front, specifically in the area of the weekly jobless claims data.

This week’s chart of the week shows initial and continuing jobless claims since 2000 as a percentage of total covered employment in order to adjust for the changing size of the workforce. Note that while initial claims (solid red line) peaked first in March 2009, they have been in a holding period for the last year or so. Continuing claims (dotted blue line) peaked three months later and initially showed a sharper decline. While continuing claims began to form a plateau earlier in the year, the last month or so has seen noticeable improvement, with the trend line now dropping below the gray rectangle which marks the recent consolidation area.

This improvement could be a precursor to some downward movement in the unemployment rate, which may show up as early as in this month’s data.

Related posts:

[source: Bureau of Labor Statistics]
Disclosure(s): none



Read more here:
Chart of the Week: Uptick in the Jobs Picture

Uncategorized

Dollar Continues to Control Gold, Oil & Equities

November 15th, 2010

Over the past few months it seems as though everything has been tied to the dollar. Simple inter-market analysis makes it obvious that almost everything in the financial market eventually has an affect on stocks and commodities in some way. But recently trading has really been all about the dollar. If you watch the SP500 and gold prices you will notice at times virtually every tick the dollar makes directly affects the price and direction of gold and the SP500 index.

Let’s take a look at some charts to see the underlying trends and what they are telling us…

Dollar Index – Daily Chart

As you can see the trend is clearly down. Currently the dollar is trying to find a bottom as it bounces and pierces the previous high. The question everyone wants to know is if the dollar is about to rally and reverse trends or was Friday’s pierce of the October high just a shake out before the next leg down?

Back in late August the dollar pierced the July high on an intraday basis (shake out) just before prices dropped sharply. I think this could very easily happen again but when you see what gold volume is doing, it’s a different story.

Those who follow me closely know I focus on trading with the underlying trend, but manage my risk by trading smaller position sizes when the market has more uncertainty than normal with is what we are currently experiencing.

GLD – Gold Fund – Daily Chart

Gold and the dollar are almost inverse charts when comparing the two. Gold happens to be testing a key support level and its going to be interesting to see how the price holds up going forward. The one thing that has me concerned is the amount of selling taking place. The chart shows heavy volume selling and could be warning us of a possible trend change in the dollar, gold, oil and equities in the coming weeks.

Again the trend for gold is still up, so I would not be trying to short it at this time, rather look to buy into dips until the market trend proves us wrong. That being said, with the selling volume giving off a negative vibe and the fact that gold has rallied for such a long time, any new positions should be very small…

Crude Oil – Daily Chart

Oil looks to be forming a possible cup and handle pattern. If the Dollar continues to consolidate for another 1-3 weeks and breaks down, then we should see the price of oil trade in the range shown on the chart and eventually breakout to the upside. I have a $95-100 price target on oil if the dollar continues to trend down. Until we see some type of handle form here I am not trading oil.

SPY – SP500 Fund – Daily Chart

The equities market looks to have had one of those days which spooked the herd. Friday the price dropped triggering protective stops with rising volume. I was watching the intraday chart as the SP500 broke below the weeks low, and this triggered protective stops which can be seen on the 1 minute charts. In an uptrend I prefer watching stops get triggered because it means traders are getting taking out of long positions and most likely looking to play the short side. When the masses become bearish on the market, that’s when I start looking to play the upside in a bull market (buy the dip).

The chart below clearly shows the days when the shake outs/running of the stops took place. Most traders were exiting their positions and/or going short because the chart looked bearish. One thing I find that helps my trading is that if the chart looks rally scary (bearish) then I start looking at a shorter term time frame for a possible entry point to go long using price and volume analysis.

Weekend Market Trend Trading Conclusion:

In short, I feel the market is at a critical point which will trigger a very strong movement in the coming days or weeks. Because the dollar, gold, oil and the equities market have had such big moves I think trading VERY DEFENSIVE is the only way to play right now. That means trading small position sizes. Right now I am trading 1/8 – 1/4 the amount of capital I generally use on a trade. Meaning if I typically put $40,000 to work, right now I am only taking positions valued at $10,000.

Remember not to anticipate trend reversals by taking a position early. Continue to trade with the underlying trend with small positions or skip a couple setups if you feel strongly of a possible reversal. Once the trend reverses and the volume confirms, only then should you be playing the new trend. Picking tops can be expensive and stressful.

Get My Daily Pre-Market Trading Analysis Videos, Intraday Updates & Trade Alerts Here: www.GoldAndOilGuy.com

Chris Vermeulen

Read more here:
Dollar Continues to Control Gold, Oil & Equities




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF

Dollar Continues to Control Gold, Oil & Equities

November 15th, 2010

Over the past few months it seems as though everything has been tied to the dollar. Simple inter-market analysis makes it obvious that almost everything in the financial market eventually has an affect on stocks and commodities in some way. But recently trading has really been all about the dollar. If you watch the SP500 and gold prices you will notice at times virtually every tick the dollar makes directly affects the price and direction of gold and the SP500 index.

Let’s take a look at some charts to see the underlying trends and what they are telling us…

Dollar Index – Daily Chart

As you can see the trend is clearly down. Currently the dollar is trying to find a bottom as it bounces and pierces the previous high. The question everyone wants to know is if the dollar is about to rally and reverse trends or was Friday’s pierce of the October high just a shake out before the next leg down?

Back in late August the dollar pierced the July high on an intraday basis (shake out) just before prices dropped sharply. I think this could very easily happen again but when you see what gold volume is doing, it’s a different story.

Those who follow me closely know I focus on trading with the underlying trend, but manage my risk by trading smaller position sizes when the market has more uncertainty than normal with is what we are currently experiencing.

GLD – Gold Fund – Daily Chart

Gold and the dollar are almost inverse charts when comparing the two. Gold happens to be testing a key support level and its going to be interesting to see how the price holds up going forward. The one thing that has me concerned is the amount of selling taking place. The chart shows heavy volume selling and could be warning us of a possible trend change in the dollar, gold, oil and equities in the coming weeks.

Again the trend for gold is still up, so I would not be trying to short it at this time, rather look to buy into dips until the market trend proves us wrong. That being said, with the selling volume giving off a negative vibe and the fact that gold has rallied for such a long time, any new positions should be very small…

Crude Oil – Daily Chart

Oil looks to be forming a possible cup and handle pattern. If the Dollar continues to consolidate for another 1-3 weeks and breaks down, then we should see the price of oil trade in the range shown on the chart and eventually breakout to the upside. I have a $95-100 price target on oil if the dollar continues to trend down. Until we see some type of handle form here I am not trading oil.

SPY – SP500 Fund – Daily Chart

The equities market looks to have had one of those days which spooked the herd. Friday the price dropped triggering protective stops with rising volume. I was watching the intraday chart as the SP500 broke below the weeks low, and this triggered protective stops which can be seen on the 1 minute charts. In an uptrend I prefer watching stops get triggered because it means traders are getting taking out of long positions and most likely looking to play the short side. When the masses become bearish on the market, that’s when I start looking to play the upside in a bull market (buy the dip).

The chart below clearly shows the days when the shake outs/running of the stops took place. Most traders were exiting their positions and/or going short because the chart looked bearish. One thing I find that helps my trading is that if the chart looks rally scary (bearish) then I start looking at a shorter term time frame for a possible entry point to go long using price and volume analysis.

Weekend Market Trend Trading Conclusion:

In short, I feel the market is at a critical point which will trigger a very strong movement in the coming days or weeks. Because the dollar, gold, oil and the equities market have had such big moves I think trading VERY DEFENSIVE is the only way to play right now. That means trading small position sizes. Right now I am trading 1/8 – 1/4 the amount of capital I generally use on a trade. Meaning if I typically put $40,000 to work, right now I am only taking positions valued at $10,000.

Remember not to anticipate trend reversals by taking a position early. Continue to trade with the underlying trend with small positions or skip a couple setups if you feel strongly of a possible reversal. Once the trend reverses and the volume confirms, only then should you be playing the new trend. Picking tops can be expensive and stressful.

Get My Daily Pre-Market Trading Analysis Videos, Intraday Updates & Trade Alerts Here: www.GoldAndOilGuy.com

Chris Vermeulen

Read more here:
Dollar Continues to Control Gold, Oil & Equities




Chris Vermeulen is a full time daytrader and swing trader specializing in trading (NYSE:GLD), (NYSE:GDX), XGD.TO, (NYSE:SLV) and (NYSE:USO). I provide my trading charts, market insight and trading signals to members of my newsletter service. If you have any questions feel free to send me an email: Chris@TheGoldAndOilGuy.com This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

Commodities, ETF

Top ETF Gainers of the Week to Watch

November 15th, 2010

In a down week for indices world-wide, the top ETF gainers for the period were primarily short ETFs, with some strength in the energy sector evident.  Oddly enough, following the widely anticipated QE2 announcement, Treasuries have been selling off, presumably because markets had widely anticipated the announcement and were perhaps hoping for something more substantial on the order of another full Trillion dollars in purchases.

Those who foresaw the government debt reversal and shorted Treasury ETFs had a good week.  Meantime, gold and silver had wild swings, with silver’s move initially precipitated by margin requirement surprise announcements, but further bolstered by US Dollar strength in what appears to be the next Euro crisis – Ireland.

Elsewhere, Obama’s trip abroad failed to yield a free trade agreement with South Korea, there was much criticism from abroad on the US QE2 initiative, there were some really shocking cuts recommended from the US deficit panel, and the tech bellwether Cisco (CSCO) saw its shares hammered in an earnings call in which its outlook was less than hopeful.  With these events, we saw the following top performing ETFs in both the non-leveraged and leveraged segments:

Non-Leveraged ETFs

GAZ – Barclays iPath Natural Gas ETN – Up 11% – Energy has been a hot story of late, even with other commodities taking a breather this week.  This natural gas ETN (exchange traded note) has been moving quickly, but note that ETNs can trade at a premium to the net asset value of their underlying assets, and GAZ is showing a premium of over 20%.  A reversion to the mean alone would surprise investors.  GAZ is actually down 38% YTD.

VXX – iPath S&P 500 VIX Short Term Futures ETN -Up 7% – This ETN trades on the VIX, otherwise known as the fear index.  In any down week, one could anticipate VXX will show a positive return.  This often makes for a good long trade when markets are collapsing and volatility is spiking, but as a long-term investment, VXX isn’t really suitable for most portfolios.  Volatility is not an asset class and can’t reasonably be assumed to appreciate indefinitely.  YTD, VXX is down over 65%.

XOP – S&P Oil and Gas Exploration – Up 3% - This ETF was up on both stronger oil prices (aside from Friday) and M&A activity in the sector, including Chevron (CVX) and Atlas (ATLS). With multinationals flush with cash, investors are certainly speculating on more such activity.  XOP is up 16% on the year.

Leveraged ETFs:

DRV - Direxion Real Estate Bear 3X – Up 15% – Real estate outfits took it on the chin last week in the face of more downward home price data in many metro markets and no signs of life in the economy at large.  With more on leveraged ETF performance below, note that DRV has lost 2/3 its value just YTD.

EDZ - Direxion Emerging Markets Bear 3X – Up 13% – With emerging markets tending to be more volatile than western markets, many countries in the emerging markets sectors showed huge losses on the week on the heels of China trying to cool things down with further rate increases and global jitters over the latest Greece in the EU – Ireland.  Given the strength we’ve seen overall for emerging markets on the year, the 3X inverse EDZ is down over 50% YTD.

ERX – Direxion Energy Daily 3X – Up 4% – One of the sole long ETF sectors on the week, ERX gained on the heels of oil and natural gas continuing to rise, driving exploration and refiners higher.  As mentioned above, with some M&A activity in the sector, speculation on other deals drove shares of many firms higher as well, in spite of a drop in oil prices on Friday.

* I always highlight that leveraged ETFs are undesirable as  long-term investment due to the decay in value that occurs over time from daily resets.  This is a mathematical certainty that investors often don’t research or understand up front, check out real-life example leverage ETF decay examples showing why they continuously reverse split for more.

Disclosure: No positions in any ETFs for equities referenced in article.

Commodities, ETF, Real Estate

Top ETF Gainers of the Week to Watch

November 15th, 2010

In a down week for indices world-wide, the top ETF gainers for the period were primarily short ETFs, with some strength in the energy sector evident.  Oddly enough, following the widely anticipated QE2 announcement, Treasuries have been selling off, presumably because markets had widely anticipated the announcement and were perhaps hoping for something more substantial on the order of another full Trillion dollars in purchases.

Those who foresaw the government debt reversal and shorted Treasury ETFs had a good week.  Meantime, gold and silver had wild swings, with silver’s move initially precipitated by margin requirement surprise announcements, but further bolstered by US Dollar strength in what appears to be the next Euro crisis – Ireland.

Elsewhere, Obama’s trip abroad failed to yield a free trade agreement with South Korea, there was much criticism from abroad on the US QE2 initiative, there were some really shocking cuts recommended from the US deficit panel, and the tech bellwether Cisco (CSCO) saw its shares hammered in an earnings call in which its outlook was less than hopeful.  With these events, we saw the following top performing ETFs in both the non-leveraged and leveraged segments:

Non-Leveraged ETFs

GAZ – Barclays iPath Natural Gas ETN – Up 11% – Energy has been a hot story of late, even with other commodities taking a breather this week.  This natural gas ETN (exchange traded note) has been moving quickly, but note that ETNs can trade at a premium to the net asset value of their underlying assets, and GAZ is showing a premium of over 20%.  A reversion to the mean alone would surprise investors.  GAZ is actually down 38% YTD.

VXX – iPath S&P 500 VIX Short Term Futures ETN -Up 7% – This ETN trades on the VIX, otherwise known as the fear index.  In any down week, one could anticipate VXX will show a positive return.  This often makes for a good long trade when markets are collapsing and volatility is spiking, but as a long-term investment, VXX isn’t really suitable for most portfolios.  Volatility is not an asset class and can’t reasonably be assumed to appreciate indefinitely.  YTD, VXX is down over 65%.

XOP – S&P Oil and Gas Exploration – Up 3% - This ETF was up on both stronger oil prices (aside from Friday) and M&A activity in the sector, including Chevron (CVX) and Atlas (ATLS). With multinationals flush with cash, investors are certainly speculating on more such activity.  XOP is up 16% on the year.

Leveraged ETFs:

DRV - Direxion Real Estate Bear 3X – Up 15% – Real estate outfits took it on the chin last week in the face of more downward home price data in many metro markets and no signs of life in the economy at large.  With more on leveraged ETF performance below, note that DRV has lost 2/3 its value just YTD.

EDZ - Direxion Emerging Markets Bear 3X – Up 13% – With emerging markets tending to be more volatile than western markets, many countries in the emerging markets sectors showed huge losses on the week on the heels of China trying to cool things down with further rate increases and global jitters over the latest Greece in the EU – Ireland.  Given the strength we’ve seen overall for emerging markets on the year, the 3X inverse EDZ is down over 50% YTD.

ERX – Direxion Energy Daily 3X – Up 4% – One of the sole long ETF sectors on the week, ERX gained on the heels of oil and natural gas continuing to rise, driving exploration and refiners higher.  As mentioned above, with some M&A activity in the sector, speculation on other deals drove shares of many firms higher as well, in spite of a drop in oil prices on Friday.

* I always highlight that leveraged ETFs are undesirable as  long-term investment due to the decay in value that occurs over time from daily resets.  This is a mathematical certainty that investors often don’t research or understand up front, check out real-life example leverage ETF decay examples showing why they continuously reverse split for more.

Disclosure: No positions in any ETFs for equities referenced in article.

Commodities, ETF, Real Estate

Quick Sector Rotation Insights from the September Low

November 14th, 2010

The S&P 500 bottomed (recent swing low) at the 1,040 level at the end of August/start of September and has rallied almost non-stop to the 1,230 area.

Two quick questions come to mind – how have the individual sectors performed, and what does this say about the broader market?

Let’s take a look:

When doing any sort of Sector Comparison, it’s best to start with a grouping of sectors into two categories – the OFFENSIVE (or aggressive) sectors and the DEFENSIVE sectors.

I always make that distinction when I do Sector Rotation updates.

Offensive Sectors – as shown through AMEX Sector SPDRs – include Financials, Consumer Discretionary, Technology, Industrials, and Materials.

As you can see from the grid above (via StockCharts), the Offensive Sectors have in some case almost doubled the percentage gains of the Defensive Sectors (Consumer Staples, Health Care, and Utilities).

That’s what you’d expect, and it suggests bullish strength for the broader market – as in, according to the model, this is what you would expect to see from a broad Bullish Expansion phase.

Of course, there is one little outlier and it’s the Energy (XLE) sector, which is up 23% from the late September lows (to present).

According to the Sector Rotation Model, when energy is the best performer, it’s usually a danger or caution sign, as energy prices start to ‘overheat’ in the midst of a broad expansion which serves almost as a tax on consumers and businesses.

It’s something to keep an eye on, but for the moment – or at least looking at the early September to mid-November rally – the Model is showing bullish confirming strength.

It suggests that – as long as the rally continues – investors would look to be positioned in the Offensive Sectors, though what happens at the key resistance at 1,230 is key.

A firm break above 1,230 is a call for repositioning bullishly (according to the model), given that price could stall at the key 1,230 level.  It’s an example of how to combine index expectations and key levels with the Sector Rotation Model (which gives a broader look at the S&P 500 Index).

Keep a watch on Energy and the Offensive Sectors – and leading stocks in those sectors – until proven otherwise.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Quick Sector Rotation Insights from the September Low

Uncategorized

Quick Sector Rotation Insights from the September Low

November 14th, 2010

The S&P 500 bottomed (recent swing low) at the 1,040 level at the end of August/start of September and has rallied almost non-stop to the 1,230 area.

Two quick questions come to mind – how have the individual sectors performed, and what does this say about the broader market?

Let’s take a look:

When doing any sort of Sector Comparison, it’s best to start with a grouping of sectors into two categories – the OFFENSIVE (or aggressive) sectors and the DEFENSIVE sectors.

I always make that distinction when I do Sector Rotation updates.

Offensive Sectors – as shown through AMEX Sector SPDRs – include Financials, Consumer Discretionary, Technology, Industrials, and Materials.

As you can see from the grid above (via StockCharts), the Offensive Sectors have in some case almost doubled the percentage gains of the Defensive Sectors (Consumer Staples, Health Care, and Utilities).

That’s what you’d expect, and it suggests bullish strength for the broader market – as in, according to the model, this is what you would expect to see from a broad Bullish Expansion phase.

Of course, there is one little outlier and it’s the Energy (XLE) sector, which is up 23% from the late September lows (to present).

According to the Sector Rotation Model, when energy is the best performer, it’s usually a danger or caution sign, as energy prices start to ‘overheat’ in the midst of a broad expansion which serves almost as a tax on consumers and businesses.

It’s something to keep an eye on, but for the moment – or at least looking at the early September to mid-November rally – the Model is showing bullish confirming strength.

It suggests that – as long as the rally continues – investors would look to be positioned in the Offensive Sectors, though what happens at the key resistance at 1,230 is key.

A firm break above 1,230 is a call for repositioning bullishly (according to the model), given that price could stall at the key 1,230 level.  It’s an example of how to combine index expectations and key levels with the Sector Rotation Model (which gives a broader look at the S&P 500 Index).

Keep a watch on Energy and the Offensive Sectors – and leading stocks in those sectors – until proven otherwise.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

Read more here:
Quick Sector Rotation Insights from the September Low

Uncategorized

Dazzling Bargains in Commodities

November 14th, 2010

Sean Brodrick

Tomorrow is your last day for Weiss Research’s extremely timely online presentation by Martin Weiss and Monty Agarwal and ALSO the day they’re closing enrollment in the service that tracks Martin’s $1 million portfolio. (Click here to view now.)

Missing it would be unfortunate because one of the three major asset classes where they’re investing Martin’s money is the same area where I see the most dazzling bargains — in commodities.

Let me ask you this: Is gold a bargain at $1,400 an ounce? Is crude oil a screaming deal at $85 a barrel?

Absolutely!

In fact, I think the prices of many commodities such as gold, crude oil, wheat, soybeans, copper and silver will continue to climb over the next year … and will be much higher just 18 months from now.

Today, I’ll tell you why that is. And why, even if you’re only starting to invest in commodities right now, you could make a heck of a lot of money going forward.

After All, A New Commodities Supercycle Is Here!

There are distinct cycles in the commodity markets, and the last big bull market started a decade ago with gold.

But don’t worry, you haven’t missed the boat. Commodity bull markets typically last 18 to 21 years!

Moreover, I don’t think this is an average commodity bull market. I think it’s a “commodity supercycle” — a much longer period in which commodity prices absolutely soar.

This is a rare and powerful event, indeed. In fact, there have been only two supercycles in the last 150 years:

  • Commodities Supercycle #1 saw the Industrial Revolution create powerful and sustainable demand for raw materials for 33 years between 1885 and 1918.
  • Commodities Supercycle #2 started after World War II and ran for 29 years between 1946 and 1975 as the reconstruction of Europe and Japan helped set off a global commodity price explosion.

So what’s fueling Commodities Supercycle #3?

Ravenous demand from emerging markets around the world for copper, aluminum, steel, coal and more is ramping up. China, Russia, the Middle East, India, Brazil and others are devouring raw materials as they build up their economies.

In fact, Merrill Lynch forecasts that more than $6 trillion will be spent on infrastructure improvements over the next three years — with 80 percent being invested in the BRIC countries (Brazil, Russia, India, China).

South Africa will spend $115 billion; Mexico, $140 billion; Brazil, $517 billion. In Russia and the Middle East, expect $500 billion and $586 billion, respectively. China, meanwhile, will spend more than all of the others combined — $3.8 trillion — mostly on water, environment, transportation and energy.

Plus, there are two more forces at work here:

Force #1: A flood of money from central banks desperate to keep their tottering economies afloat is lifting the boats of all hard assets.

Why?

Because while printing presses can manufacture money, they can’t create more hard assets. That’s why we call gold, silver, oil and other commodities “real wealth.”

Force #2: The easy-to-access deposits of many basic commodities have already been discovered and used up.

Yes, we can find more oil, for example. But to get it out of the ground, we have to come up with new, cutting-edge technologies — such as in the Bakken oil shale or such as drilling offshore wells as deep as Mt. Everest is high.

So we can find more resources, but it’s not cheap. And the further and further we have to stretch to get new deposits, the higher and higher the costs — and prices we’ll pay.

You can see why a new commodities supercycle is here.

And while prices have already doubled, there’s no reason they can’t triple or quadruple!

Keep in mind that the last two supercycles pushed commodity prices higher for an average of 31 years.

Increasing Demand from Overseas Consumers
Will Only Stoke the Supercycle Fires Further …

Only a generation ago, most people in China were riding bicycles. Now, China is the biggest auto market in the world. And the Chinese are hopping into their cars to go buy air conditioners, refrigerators and Western food.

They want to eat, drive and live like Americans. In fact, everybody does!

Asia boasts fully HALF of the world’s population. And they are all traveling on a similar path — from austerity and rice bowls to prosperity and all-you-can eat buffets.

The restaurants are air-conditioned, and the consumer electronics are state-of-the-art. To me, that means their road to the future is paved with steel and aluminum, oil and coal, silver and copper.

Not long ago, some scientists figured out that if everyone in the world wanted to live like Americans, we’d need to find three more Earths to supply all the raw materials. That means commodity prices are headed higher, higher and HIGHER!

Just take a look at what’s happening in individual commodities markets right now …

Silver: As of Thursday, November 4, the U.S. Mint had sold more American Silver Eagle bullion coins in 2010 than in any other year of the coin’s history. October sales combined with the 255,000 already sold in November lifted 2010 Silver Eagle bullion coin sales to 28,885,500.

What’s more, every pullback in silver brings in new buying. On Wednesday, when silver dropped $2 an ounce, sales of Eagles soared to 675,000 on a single day.

My new target for silver: $50 an ounce!

Gold: Gold eagle sales are soaring as well, and worries over European sovereign debt are keeping the fires lit under the yellow metal. Demand for gold is rising among investors large and small, as well as central banks.

I now expect gold to go to $2,500 an ounce.

Copper: The red metal just hit a new record high because copper exports from Chile are under pressure, even as demand for copper in China ramps up enormously.

Result: The industrial metal, which is used in plumbing, heating, electrical and telecommunications wiring, has rocketed by around 50 percent since June to a new peak.

Oil: Global demand is rising, U.S. supplies are falling as our economy improves, and Chinese demand is insatiable. Is that bullish for oil prices? Heck, yeah!

In fact, I think crude oil is going to $105 a barrel in the next six months!

And agricultural commodities like soybeans and cotton are exploding higher, too!

Look, the math of the commodity bull market is simple:

You add the massive new demand in Asia with rapidly dwindling supplies, then multiply it by the rapidly growing amount of paper money in the world.

What you’re left with is the potential for this supercycle to drive prices to all-time highs … then, to all-time inflation-adjusted highs … and ultimately, beyond.

What’s important here is that big bull markets like this one usually don’t provide “perfect” entry points. Those who are waiting for the “ideal” place to enter the commodity supercycle may have a long and frustrating wait..

You can sit on your hands and watch the parade of profits pass you by. Or you can join in. The choice is yours.

Reminder: If you want to learn how veteran hedge fund manager Monty Agarwal is investing $1,000,000 of Martin’s money, tomorrow is your last day to view their special presentation. After tomorrow (Monday 11/15), not only will you miss this extremely valuable information, it will be impossible for you to join them. Click on this link.

Yours for trading profits,

Sean

Related posts:

  1. Nine Beaten-Down ETF Bargains
  2. Give Thanks for Dividend Bargains
  3. Gold up $41! Commodities, currencies exploding higher!

Read more here:
Dazzling Bargains in Commodities

Commodities, ETF, Mutual Fund, Uncategorized

Dazzling Bargains in Commodities

November 14th, 2010

Sean Brodrick

Tomorrow is your last day for Weiss Research’s extremely timely online presentation by Martin Weiss and Monty Agarwal and ALSO the day they’re closing enrollment in the service that tracks Martin’s $1 million portfolio. (Click here to view now.)

Missing it would be unfortunate because one of the three major asset classes where they’re investing Martin’s money is the same area where I see the most dazzling bargains — in commodities.

Let me ask you this: Is gold a bargain at $1,400 an ounce? Is crude oil a screaming deal at $85 a barrel?

Absolutely!

In fact, I think the prices of many commodities such as gold, crude oil, wheat, soybeans, copper and silver will continue to climb over the next year … and will be much higher just 18 months from now.

Today, I’ll tell you why that is. And why, even if you’re only starting to invest in commodities right now, you could make a heck of a lot of money going forward.

After All, A New Commodities Supercycle Is Here!

There are distinct cycles in the commodity markets, and the last big bull market started a decade ago with gold.

But don’t worry, you haven’t missed the boat. Commodity bull markets typically last 18 to 21 years!

Moreover, I don’t think this is an average commodity bull market. I think it’s a “commodity supercycle” — a much longer period in which commodity prices absolutely soar.

This is a rare and powerful event, indeed. In fact, there have been only two supercycles in the last 150 years:

  • Commodities Supercycle #1 saw the Industrial Revolution create powerful and sustainable demand for raw materials for 33 years between 1885 and 1918.
  • Commodities Supercycle #2 started after World War II and ran for 29 years between 1946 and 1975 as the reconstruction of Europe and Japan helped set off a global commodity price explosion.

So what’s fueling Commodities Supercycle #3?

Ravenous demand from emerging markets around the world for copper, aluminum, steel, coal and more is ramping up. China, Russia, the Middle East, India, Brazil and others are devouring raw materials as they build up their economies.

In fact, Merrill Lynch forecasts that more than $6 trillion will be spent on infrastructure improvements over the next three years — with 80 percent being invested in the BRIC countries (Brazil, Russia, India, China).

South Africa will spend $115 billion; Mexico, $140 billion; Brazil, $517 billion. In Russia and the Middle East, expect $500 billion and $586 billion, respectively. China, meanwhile, will spend more than all of the others combined — $3.8 trillion — mostly on water, environment, transportation and energy.

Plus, there are two more forces at work here:

Force #1: A flood of money from central banks desperate to keep their tottering economies afloat is lifting the boats of all hard assets.

Why?

Because while printing presses can manufacture money, they can’t create more hard assets. That’s why we call gold, silver, oil and other commodities “real wealth.”

Force #2: The easy-to-access deposits of many basic commodities have already been discovered and used up.

Yes, we can find more oil, for example. But to get it out of the ground, we have to come up with new, cutting-edge technologies — such as in the Bakken oil shale or such as drilling offshore wells as deep as Mt. Everest is high.

So we can find more resources, but it’s not cheap. And the further and further we have to stretch to get new deposits, the higher and higher the costs — and prices we’ll pay.

You can see why a new commodities supercycle is here.

And while prices have already doubled, there’s no reason they can’t triple or quadruple!

Keep in mind that the last two supercycles pushed commodity prices higher for an average of 31 years.

Increasing Demand from Overseas Consumers
Will Only Stoke the Supercycle Fires Further …

Only a generation ago, most people in China were riding bicycles. Now, China is the biggest auto market in the world. And the Chinese are hopping into their cars to go buy air conditioners, refrigerators and Western food.

They want to eat, drive and live like Americans. In fact, everybody does!

Asia boasts fully HALF of the world’s population. And they are all traveling on a similar path — from austerity and rice bowls to prosperity and all-you-can eat buffets.

The restaurants are air-conditioned, and the consumer electronics are state-of-the-art. To me, that means their road to the future is paved with steel and aluminum, oil and coal, silver and copper.

Not long ago, some scientists figured out that if everyone in the world wanted to live like Americans, we’d need to find three more Earths to supply all the raw materials. That means commodity prices are headed higher, higher and HIGHER!

Just take a look at what’s happening in individual commodities markets right now …

Silver: As of Thursday, November 4, the U.S. Mint had sold more American Silver Eagle bullion coins in 2010 than in any other year of the coin’s history. October sales combined with the 255,000 already sold in November lifted 2010 Silver Eagle bullion coin sales to 28,885,500.

What’s more, every pullback in silver brings in new buying. On Wednesday, when silver dropped $2 an ounce, sales of Eagles soared to 675,000 on a single day.

My new target for silver: $50 an ounce!

Gold: Gold eagle sales are soaring as well, and worries over European sovereign debt are keeping the fires lit under the yellow metal. Demand for gold is rising among investors large and small, as well as central banks.

I now expect gold to go to $2,500 an ounce.

Copper: The red metal just hit a new record high because copper exports from Chile are under pressure, even as demand for copper in China ramps up enormously.

Result: The industrial metal, which is used in plumbing, heating, electrical and telecommunications wiring, has rocketed by around 50 percent since June to a new peak.

Oil: Global demand is rising, U.S. supplies are falling as our economy improves, and Chinese demand is insatiable. Is that bullish for oil prices? Heck, yeah!

In fact, I think crude oil is going to $105 a barrel in the next six months!

And agricultural commodities like soybeans and cotton are exploding higher, too!

Look, the math of the commodity bull market is simple:

You add the massive new demand in Asia with rapidly dwindling supplies, then multiply it by the rapidly growing amount of paper money in the world.

What you’re left with is the potential for this supercycle to drive prices to all-time highs … then, to all-time inflation-adjusted highs … and ultimately, beyond.

What’s important here is that big bull markets like this one usually don’t provide “perfect” entry points. Those who are waiting for the “ideal” place to enter the commodity supercycle may have a long and frustrating wait..

You can sit on your hands and watch the parade of profits pass you by. Or you can join in. The choice is yours.

Reminder: If you want to learn how veteran hedge fund manager Monty Agarwal is investing $1,000,000 of Martin’s money, tomorrow is your last day to view their special presentation. After tomorrow (Monday 11/15), not only will you miss this extremely valuable information, it will be impossible for you to join them. Click on this link.

Yours for trading profits,

Sean

Related posts:

  1. Nine Beaten-Down ETF Bargains
  2. Give Thanks for Dividend Bargains
  3. Gold up $41! Commodities, currencies exploding higher!

Read more here:
Dazzling Bargains in Commodities

Commodities, ETF, Mutual Fund, Uncategorized

The Tale of André Prenner, a Parable for our Times (Part Two of Two)

November 14th, 2010

Today, we take a brief pause from our normal economic and financial market commentary with this tale of common sense economic calculation and action. And no, we do not believe that the world is any more complex than we present it here. If you want to understand economics, you need first understand two things: That the human condition is one of scarcity and uncertainty; and that absent rational economic calculation and a certain degree of passionate risk-taking, nothing good can ever come of it.

Continued from here…

At least there was still plenty of demand for basic bread, which provided for a reliable if less profitable business. This period lasted nearly two years. Yeoville Bakers was never at serious risk of bankruptcy, in large part due to Andrés swift reaction to the downturn. But it had been a hard time nonetheless and taught André some important lessons. When he felt the time was right and sensed rising demand once again, he returned to his passion of baking gourmet European breads and re-hired most of his former employees, several of whom had made do with odd jobs in the interim. Business began to grow again, but André was a bit more of a businessman now and a bit less of a passionate visionary. Yes, he had now managed to save a good deal of money, but he told himself he would always be cautious, never expand too quickly and always make certain he had the flexibility to change and/or reduce operations as required to face challenging circumstances.

It was three decades later when things got really bad. Not only was the nation in recession; tax and regulatory policies had made André’s business considerably more costly to run. Although he had not expanded the business by much in recent years, he now had to employ three accountants to handle Yeoville Bakers’ more complicated affairs. The US Department of Agriculture (USDA) was now quite active in screening foreign grain and flour imports for bad quality or what they sometimes referred to as “irregularities”, as if André or his more experienced staff would be unable to determine quality for themselves. The Commerce Department occasionally imposed foreign duties because of what they called “dumping” which to André seemed rather arbitrary. And the regular or, on rare occasion, surprise inspections of his own facilities, imposed a cost unseen by anyone but André and his core team, who always needed to be prepared just in case, with any and all requested documents, tours of facilities, product samples, etc.

As such, running the business had become more complex, with supplies harder to secure, prices more volatile and higher overhead costs. Adding to the challenges, it was now difficult to hire new employees, not because of a shortage of those able or willing to do quality work; rather, because payroll taxes and required healthcare and other benefits were much higher than before. Also, he had had some difficulty reducing staff during the most recent downturn, with one employee accusing Yeoville Bakers of unfair dismissal, including claims of workplace discrimination. The ensuing legal tangle was resolved in favor of Yeoville Bakers but cost André much valuable management time and taught him an important lesson about how careful he needed to be when hiring new staff. Unless he was absolutely certain that they were qualified, reliable and unlikely to complain if let go, he wouldn’t hire anyone, no matter how rosy future business prospects.

So now, André found himself facing the familiar situation of slack demand he had faced several times before in his long career, but he lacked the flexibility to respond as effectively. It was one morning when he was contemplating what, exactly, he should do in the current instance, when he received an email from the Small Business Administration (SBA) offering him a loan.

Now this had never happened before. André knew of many businesses that had received government subsidized loans through the years. Most of those businesses had grown and thrived, at least for a time.
But he could not recall the SBA offering loans pro-actively in this way. It was the businesses that normally did the asking. So why was this happening? Could it have something to do with what he had heard about many banks turning small businesses down for new loans? Or cutting existing lines of credit? Everyone knew that banks had lost a huge pile on residential and commercial lending. Although André had no use for a loan at present, he was intrigued by the very existence of the program and inquired anyway, picking up the phone.

“Small Business Administration, new loans division, may I help you?”

“Yes, I’m calling to inquire about an email I received offering me a low-interest loan. Please could you let me know some of the terms and conditions, as well as the purpose of the program?”

“Of course. We are offering subsidized loans to small businesses that can demonstrate that their access to credit has been reduced, or that have viable expansion plans yet cannot get access to new credit. Specific terms and conditions vary with the size and proposed use of the loan. Those uses pertaining to environmental or green technologies receive the most favorable terms. The overall purpose of the program, other than supporting small businesses generally, is to ensure that credit is available, in particular for investment related to environmental or green technologies.”

“Thank you.”
“Have you recently been denied credit?”
“No.”
“Do you have plans to expand your business?”
“No.”
“What then is the reason for your inquiry?”
“Just curious, thank you.”
“Well if your circumstances change, please don’t hesitate to give us a call.”
“Thank you. I will do so. Goodbye.”
“Goodbye.”

André hung up the phone and thought to himself. “So this is the way the government goes about trying to restore economic growth: First, they cut interest rates to near zero, following the residential and subsequent commercial real estate bust. But apparently that isn’t enough to stabilize the big banks, several of which are at risk of failure, so the central bank bails them out, assuming some illiquid, toxic debt that André knows will never be sold back into the market. Then the government enacts a massive stimulus plan, which seems primarily to funnel money to a bunch of big businesses with strong connections to government, most of which probably have little difficulty accessing credit. But none of this seems to help smaller businesses, which is where most hiring in the economy normally takes place and where worker productivity tends to be highest. So now it appears they’ve got some fancy new program to extend credit to small businesses, but the favored terms are reserved for those that are keen to invest in the sorts of projects that the government wants, for whatever reason, and which are already being done in some shape or form by the large, government-connected businesses that received most of the stimulus money in the first place.”

“In the meantime, they have raised payroll taxes, in part to pay for increasing healthcare costs. The state has also raised sales taxes to cover an unprecedented revenue shortfall. They are threatening now to raise income and corporate taxes. The regulatory regime was already uncertain and is likely to become more so as Congress seems unable to resist the temptation to respond to each new lobbying effort by this industry group or that. Workplace discrimination suits are now so commonplace that I need to do full background checks on potential employees to make certain that, in the case I need to let one of them go, they are unlikely to take legal action. Customer demand remains weak as unemployment remains high.  Now my input costs are soaring because of the weak dollar–which I understand is the result of so-called “quantitative easing”–which pushes up global grains prices. These costs I can only partially, if at all, pass on to my customers, implying lower margins and profitability ahead.”

“And these guys think that I, a small-town baker, might be interested in a loan? In expanding my business? In hiring new workers? Business is risky enough in good times. It is riskier in bad times. But even in the bad times–and I’ve had a few–there have been occasional opportunities to hire a good employee; acquire some good equipment at a low price from another bakery closing its doors; adjust the product line to better suit changing consumer attitudes. Yet now, not only are times bad; the uncertainty is higher than ever and the priority of the government is really not about getting the economy going again with sensible, sustainable, predictable tax and regulatory policy but rather about subsiding their pet programs and government-connected firms, which in the end is only going to raise the overall economic debt burden, implying even higher tax rates in future. No thanks.”

He went for a long walk and thought. The next day he went for another long walk and thought some more. He spoke to a few other small businessmen he knew who were getting by but not doing particularly well. He shared a few thoughts with his wife and with the two oldest of his three children.  And he made a decision, perhaps the most difficult of his life.

The next day, after he arrived at work, he assembled all of his senior employees in his office. He let them know that he was going to put the business up for sale. If they wanted, they could buy him out over time, financing the purchase with a loan that he would provide at a low interest rate. He was retiring, he said.

“This seems rather sudden,” said one of his assistant managers.

“No, actually, it’s not. It is the result of trends that have been in place for a long time. It’s just that I think about things differently than I used to. I’m getting older. And as you get older you begin to realize that some things may change for the better, some for the worse, but some things don’t change at all. I’m tired of waiting for some things to change. I’ve had enough. It’s your turn now. Good luck.”

His employees were stunned. They respected the man, who had a fine reputation. He had kept his business profitable and, more often than not, growing, for over 40 years. And now it was their turn. They were going to need good luck all right. Lots of it.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Tale of André Prenner, a Parable for our Times (Part Two of Two) originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Tale of André Prenner, a Parable for our Times (Part Two of Two)




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Real Estate, Uncategorized

The Tale of André Prenner, a Parable for our Times (Part Two of Two)

November 14th, 2010

Today, we take a brief pause from our normal economic and financial market commentary with this tale of common sense economic calculation and action. And no, we do not believe that the world is any more complex than we present it here. If you want to understand economics, you need first understand two things: That the human condition is one of scarcity and uncertainty; and that absent rational economic calculation and a certain degree of passionate risk-taking, nothing good can ever come of it.

Continued from here…

At least there was still plenty of demand for basic bread, which provided for a reliable if less profitable business. This period lasted nearly two years. Yeoville Bakers was never at serious risk of bankruptcy, in large part due to Andrés swift reaction to the downturn. But it had been a hard time nonetheless and taught André some important lessons. When he felt the time was right and sensed rising demand once again, he returned to his passion of baking gourmet European breads and re-hired most of his former employees, several of whom had made do with odd jobs in the interim. Business began to grow again, but André was a bit more of a businessman now and a bit less of a passionate visionary. Yes, he had now managed to save a good deal of money, but he told himself he would always be cautious, never expand too quickly and always make certain he had the flexibility to change and/or reduce operations as required to face challenging circumstances.

It was three decades later when things got really bad. Not only was the nation in recession; tax and regulatory policies had made André’s business considerably more costly to run. Although he had not expanded the business by much in recent years, he now had to employ three accountants to handle Yeoville Bakers’ more complicated affairs. The US Department of Agriculture (USDA) was now quite active in screening foreign grain and flour imports for bad quality or what they sometimes referred to as “irregularities”, as if André or his more experienced staff would be unable to determine quality for themselves. The Commerce Department occasionally imposed foreign duties because of what they called “dumping” which to André seemed rather arbitrary. And the regular or, on rare occasion, surprise inspections of his own facilities, imposed a cost unseen by anyone but André and his core team, who always needed to be prepared just in case, with any and all requested documents, tours of facilities, product samples, etc.

As such, running the business had become more complex, with supplies harder to secure, prices more volatile and higher overhead costs. Adding to the challenges, it was now difficult to hire new employees, not because of a shortage of those able or willing to do quality work; rather, because payroll taxes and required healthcare and other benefits were much higher than before. Also, he had had some difficulty reducing staff during the most recent downturn, with one employee accusing Yeoville Bakers of unfair dismissal, including claims of workplace discrimination. The ensuing legal tangle was resolved in favor of Yeoville Bakers but cost André much valuable management time and taught him an important lesson about how careful he needed to be when hiring new staff. Unless he was absolutely certain that they were qualified, reliable and unlikely to complain if let go, he wouldn’t hire anyone, no matter how rosy future business prospects.

So now, André found himself facing the familiar situation of slack demand he had faced several times before in his long career, but he lacked the flexibility to respond as effectively. It was one morning when he was contemplating what, exactly, he should do in the current instance, when he received an email from the Small Business Administration (SBA) offering him a loan.

Now this had never happened before. André knew of many businesses that had received government subsidized loans through the years. Most of those businesses had grown and thrived, at least for a time.
But he could not recall the SBA offering loans pro-actively in this way. It was the businesses that normally did the asking. So why was this happening? Could it have something to do with what he had heard about many banks turning small businesses down for new loans? Or cutting existing lines of credit? Everyone knew that banks had lost a huge pile on residential and commercial lending. Although André had no use for a loan at present, he was intrigued by the very existence of the program and inquired anyway, picking up the phone.

“Small Business Administration, new loans division, may I help you?”

“Yes, I’m calling to inquire about an email I received offering me a low-interest loan. Please could you let me know some of the terms and conditions, as well as the purpose of the program?”

“Of course. We are offering subsidized loans to small businesses that can demonstrate that their access to credit has been reduced, or that have viable expansion plans yet cannot get access to new credit. Specific terms and conditions vary with the size and proposed use of the loan. Those uses pertaining to environmental or green technologies receive the most favorable terms. The overall purpose of the program, other than supporting small businesses generally, is to ensure that credit is available, in particular for investment related to environmental or green technologies.”

“Thank you.”
“Have you recently been denied credit?”
“No.”
“Do you have plans to expand your business?”
“No.”
“What then is the reason for your inquiry?”
“Just curious, thank you.”
“Well if your circumstances change, please don’t hesitate to give us a call.”
“Thank you. I will do so. Goodbye.”
“Goodbye.”

André hung up the phone and thought to himself. “So this is the way the government goes about trying to restore economic growth: First, they cut interest rates to near zero, following the residential and subsequent commercial real estate bust. But apparently that isn’t enough to stabilize the big banks, several of which are at risk of failure, so the central bank bails them out, assuming some illiquid, toxic debt that André knows will never be sold back into the market. Then the government enacts a massive stimulus plan, which seems primarily to funnel money to a bunch of big businesses with strong connections to government, most of which probably have little difficulty accessing credit. But none of this seems to help smaller businesses, which is where most hiring in the economy normally takes place and where worker productivity tends to be highest. So now it appears they’ve got some fancy new program to extend credit to small businesses, but the favored terms are reserved for those that are keen to invest in the sorts of projects that the government wants, for whatever reason, and which are already being done in some shape or form by the large, government-connected businesses that received most of the stimulus money in the first place.”

“In the meantime, they have raised payroll taxes, in part to pay for increasing healthcare costs. The state has also raised sales taxes to cover an unprecedented revenue shortfall. They are threatening now to raise income and corporate taxes. The regulatory regime was already uncertain and is likely to become more so as Congress seems unable to resist the temptation to respond to each new lobbying effort by this industry group or that. Workplace discrimination suits are now so commonplace that I need to do full background checks on potential employees to make certain that, in the case I need to let one of them go, they are unlikely to take legal action. Customer demand remains weak as unemployment remains high.  Now my input costs are soaring because of the weak dollar–which I understand is the result of so-called “quantitative easing”–which pushes up global grains prices. These costs I can only partially, if at all, pass on to my customers, implying lower margins and profitability ahead.”

“And these guys think that I, a small-town baker, might be interested in a loan? In expanding my business? In hiring new workers? Business is risky enough in good times. It is riskier in bad times. But even in the bad times–and I’ve had a few–there have been occasional opportunities to hire a good employee; acquire some good equipment at a low price from another bakery closing its doors; adjust the product line to better suit changing consumer attitudes. Yet now, not only are times bad; the uncertainty is higher than ever and the priority of the government is really not about getting the economy going again with sensible, sustainable, predictable tax and regulatory policy but rather about subsiding their pet programs and government-connected firms, which in the end is only going to raise the overall economic debt burden, implying even higher tax rates in future. No thanks.”

He went for a long walk and thought. The next day he went for another long walk and thought some more. He spoke to a few other small businessmen he knew who were getting by but not doing particularly well. He shared a few thoughts with his wife and with the two oldest of his three children.  And he made a decision, perhaps the most difficult of his life.

The next day, after he arrived at work, he assembled all of his senior employees in his office. He let them know that he was going to put the business up for sale. If they wanted, they could buy him out over time, financing the purchase with a loan that he would provide at a low interest rate. He was retiring, he said.

“This seems rather sudden,” said one of his assistant managers.

“No, actually, it’s not. It is the result of trends that have been in place for a long time. It’s just that I think about things differently than I used to. I’m getting older. And as you get older you begin to realize that some things may change for the better, some for the worse, but some things don’t change at all. I’m tired of waiting for some things to change. I’ve had enough. It’s your turn now. Good luck.”

His employees were stunned. They respected the man, who had a fine reputation. He had kept his business profitable and, more often than not, growing, for over 40 years. And now it was their turn. They were going to need good luck all right. Lots of it.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Tale of André Prenner, a Parable for our Times (Part Two of Two) originally appeared in the Daily Reckoning. The Daily Reckoning, offers a uniquely refreshing, perspective on the global economy, investing, gold, stocks and today’s markets. Its been called “the most entertaining read of the day.”

Read more here:
The Tale of André Prenner, a Parable for our Times (Part Two of Two)




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Real Estate, Uncategorized

The Best Gold Stock to Own Today

November 13th, 2010

The Best Gold Stock to Own Today

Gold and gold stocks have been the rage lately, as the price of gold reaches new highs. However, not all gold stocks are the same. Some have vast reserves of proven gold in the ground. Others have lower productions costs that give them an edge. Using three of the best major gold mining companies as a guide, let's explore how these factors can guide your selection of the best gold stock to own.

Proven and probable reserves
Like treasure hunters, gold miners know there is gold somewhere. The proven and probable number of ounces of gold in the ground is the company's treasure — only they know where it is.

“Proven” means they know how many ounces of gold are in the ground for sure. “Probable” indicates there is a statistical probability there are so many ounces in the ground. Geologists use standard procedures to derive the probable number of ounces.

The more ounces of gold that a company has in its proven and probable column, the more it should be worth. Updated annually, in 2009, Barrick Gold Corporation (NYSE: ABX) had 139,751,000 ounces of proven and probable gold in the ground, substantially more than Newmont Mining Corporation (NYSE: NEM), with 91,800,000 ounces and Goldcorp (NYSE: GG), with 48,470,000. With so much more gold in the ground, Barrick should be more valuable to investors.

If we take the enterprise value of the company, which represent's the company's value if it were to be acquired, divided by the number of proven and probable ounces in reserve, we can identify how the market values an ounce of the company's gold in the ground, known as Enterprise Value / Reserve Ounce (EVO). At the end of 2009, Goldcorp's reserves were valued at $63.18 per ounce, while Barrick's were less than half that number at $31.58, with Newmont achieving the lowest valuation at $27.39.

From this, you could imply that Newmont is the best opportunity, since the market places the lowest value on the gold it has in the ground.

But what about the cost to mine that gold?

Low cost producer
Remember, the market sets the price for gold — not the mining companies. The companies that produce their gold at the lowest cost per ounce make more money.

Mining for gold is a capital, labor and energy-intensive business. According to the GFMS, a precious metals consultancy based in London, the average cost to produce an ounce of gold has risen above $500.

Most gold mines extract other metals and minerals found when they mine for gold. Copper and silver are the most common. According to the Gold Institute Production Cost Standard, the best way to measure what it costs for a company to produce an ounce of gold is to subtract out the price received from the sale of other metals, known in the industry as the Cash Cost (by-product).

For the trailing 12 months ending in September 2010, Goldcorp leads the way, with by-product costs of $317 an ounce, well below the average cost and that of its large competitors. This price is up from $295 for the 12 months ending in December 2009.

Barrick has a slightly higher cost per ounce of $346, down from $363 for all of 2009, on the strength of its copper production. Subtracting the sale of copper from the gold helps to lower production costs.

Newmont realized a cost of $478 an ounce, down from $526 an ounce for 2009. Newmont is benefiting from a rather large amount of copper by-product in its reserves. As copper prices expand with the economy, it will have a greater influence on a number of gold miners.

In this case, Goldcorp is the clear winner, with Barrick coming in second. Newmont will see its by-product cost for gold fall as it reaps the rewards of higher copper prices.

Valuing gold companies
As we have seen, the market value of a gold company's reserve varies significantly. Without going into detail, this depends largely on the cost to extract the gold from the ground. It also varies with the value investors place on other metals the company might have in reserve and produce. Putting these together gives us a simple way to compare gold mining companies.

The plot below shows the Enterprise Value / Reserve Ounce (EVO) vs. the Cash Cost to Produce (by-product) gold.

Investors want to see a gold company move from the upper left part of this graph down and to the lower right. When this happens, it means the value of the enterprise goes up along with the miner's stock price.

Goldcorp wins on both dimensions, though it might not have much more room to improve. [Nathan Slaughter, Chief Strategist of our Market Advisor newsletter, turned his readers on to Goldcorp just in time. Now, they're sitting on a +58% gain.]

Uncategorized

Copyright 2009-2015 MarketDailyNews.COM

LOG