Archive for October, 2010

Update: Gold

Wednesday, October 27th, 2010


About a month ago, I posted on the blog that we were taking some profits in Gold as it had gotten ahead of itself and we anticipated that we’d see a pullback in price. The graph above was presented in that post with some annotations to help you see what I saw. I noted that the blue arrow in the RSI top grid showed an overbought condition that generally precedes a drop in price. I also showed you a green circled area in the Full Stockastics indicator that confirmed the RSI indicator (it was an orange circle in the original posting).

As you can see, the indicators worked as they should and the price of gold has fallen. It has not yet reached the original target we set (honestly, the price kept going up longer than I thought it might), so we are re-evaluating that target level. However, what is really interesting is the area of the graph I have indicated with the pink arrow pointing to the right. You can clearly see that the price is consolidating between the two moving average lines – and those lines are converging upon each other.

This convergence is called a volatility squeeze, and you will likely see a short-term big move one direction or the other. Which way? If the RSI was showing an oversold reading (a large area of the graph below the bottom line of the top grid that would look like the mirror image of the area indicated by the blue arrow) I’d tell you now was the time to be a buyer as the most likely direction of the move would be up. Unfortunately, we do not have that – which is confirmed by a low but not oversold reading in the Full Stochastics.

So, I’m going to go with my gut feeling of the sentiment I can see in the graph and say that the most likely move will be down to our original target – which happens to now coincide with the 89-day moving average line and the two June price highs. That should be a good low risk buying opportunity since the intermediate term indicators that I’ve annotated with diagonal blue lines show that their trend is still up. The only conflicting intermediate term indicator that is showing a conflicting reading is the MACD which is pointing to an intermediate term pullback. So, as always, we will evaluate the situation before we buy to make sure we are not blinded by our desire to move cash off the sidelines in an effort to increase our gold allocation in client accounts.

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Negative Interest Rates Have Arrived

Monday, October 25th, 2010


This might be a bit hard to read, but it is the daily treasury auction results showing that today’s issue of TIPs came out with a negative -0.55% interest rate.

The times are really changing.

Tony Crescenzi from PIMCO explains what this means: “investors in TIPS receive the real yield plus compensation for inflation, as measured by the consumer price index. In other words, while the yield on many TIPS is negative, investors in these securities expect a positive return overall, owing to expectations for inflation that are greater than the negative yield on these TIPS…Engineering a negative real interest rate environment helps the Fed to affect the medium-term and at the same time preserve the view that deflation will be avoided over the longer term such that the inflation rate normalizes, say at around 2.5%.”

Japan has lived with negative interest rates for years but their economy has not experienced a return to growth. Much of that comes from their extremely poor demographics that leads to significant numbers of savers and fewer spenders.

Can the same thing happen here? Our demographics are much better than Japan’s. Look at the graphic below:


You can see how over the years, the population of Japan has grown very top-heavy in the older generations as the younger generations did not replace themselves adequately.

Here is the population pyramid for the United States:


Notice how this one of the US is not nearly as top heavy as the one of Japan. That means there are consumers who help propel economic activity.

Next week, we get the elections and the likely beginning of additional Federal Reserve monetary stimulus through Quantitative Easing.

I believe the most likely result of further monetary stimulus will be to increase prices of base metal and commodity inputs into production that will ultimately lead to the cost-push inflation we all learned about in Econ 101 – all while unemployment remains high.

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Moving In Stereo

Thursday, October 21st, 2010


Sorry I’ve been away from the blog recently – I was at a conference for a week then spent a week in catch up mode and this week has been my board meeting week. Life used to be so much simpler.

I thought you might like to see the very close relationship between the Euro and the S&P 500. The Euro has turned into the “risk on” currency and all asset classes seem to move in conjunction with it – commodities, gold, stocks, emerging markets, everything. The logic behind the beta here is that as the Euro strengthens, money will leave the low yielding dollar treasuries and move into assets with higher return potential.

Currencies usually do not act like this, with a 20% move up in just a couple of months. In fact, the Euro is not the only currency that is rallying strongly in the past 60 days – the dollar is the only big loser as investors anticipate that additional monetary easing by the Federal Reserve will drive down bond rates.


In this bar graph, you can see that the dollar ( the blue bar that is the only one showing a loss ) has been sold strongly as money has moved into practically every other major currency extant.


Here is the technical chart on the dollar. To me, it looks like a short-term bottom has been put in – the technical indicators are strengthening and I think we could see a move back to the 80-81 level which will lead to a corresponding drop in the Euro – and a likely drop in risk assets.

We’ve been raising cash as this rally has extended itself – risk management is a key to success in investing – and we will redeploy that cash as the stock market moves back down from the current heights. Intermediate term, the market will likely continue to move up and down in the trading range we’ve discussed on this blog for several months.

This strategy has served our clients quite well as our trailing 12 month average return for our equity management clients is 16.50% compared to the broader market around 9.5%. Until the fundamentals in our economy are back on a growth path, the trading range is our likely future and implementing a successful investment strategy within the trading range is key to portfolio returns.

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60 Minutes / High Frequency Trading

Monday, October 11th, 2010

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Last night 60 Minutes had a story/expose on High Frequency Trading showing that 70% of all the activity on Wall Street happens via computers that own shares for seconds trying to skim a penny profit before selling.

There is nothing about this that is investing – no earnings growth analysis, no balance sheet strength review, no assessment of management’s skills and capabilities – it’s all just betting on the direction of a certain stock based upon previous price patterns.

And to top it off, they show that the computers get the price pattern data faster and sooner than individual traders giving them an unfair advantage to change the course of the market before individual investors can made a decision on the news.

Honestly, this is frightening and needs to be addressed. Mary Shapiro, the ball is in your court.