The Bottom Line
The current short term correction in equity indices and sectors is setting up a buy opportunity. Technical signs of a bottom to the current correction have yet to appear. Please be patient. The charts will let us know when new money can enter the market. The focus is on economically sensitive equities and ETFs that have favourable seasonal characteristics. Prospects for gains beyond the correction are significant.

….read 48 Charts & analysis HERE

Gasoline Prices: Heading Higher!

U.S. and Canadian unleaded gasoline prices are about to enter into a period of seasonal strength. Will they move higher again this year?

U.S. wholesale unleaded gasoline prices have a period of seasonal strength from the end of January to the end of April. The trade has been profitable in nine of the past 10 periods for an average gain per period of 22.6%. Assuming that the $0.68 per gallon retail mark up on the wholesale price of gasoline remains the same and assuming the 22.6% gain per period occurs again, the average retail price of regular unleaded gasoline in the U.S. will rise from $3.11 to $3.66 U.S. per gallon by the end of April. Because Canadian regular unleaded gasoline prices are closely tied to U.S. prices, the Canadian price, assuming no change in the Canadian Dollar, is slated to increase from $1.13 Cdn. to $1.33 Cdn. per litre.

A major reason for seasonal strength is a decline in inventories in the U.S. starting in February and climaxing in May when the summer driving season begins. Inventories usually decline during this period because refiners are slowing refined product output when converting production from heating oil for the winter heating season to unleaded gasoline for the summer driving season. Refiners also complete their annual maintenance programs during this period. Breakdowns in refineries frequently occur during this period including fires and explosions.

Last week, the U.S. Environmental Protection Agency (EPA) announced changes that are expected to boost the retail price of unleaded gasoline significantly by spring. Last October, the EPA confirmed the safe use of a blend consisting of 15 percent ethanol and 85 percent gasoline for all light-duty motor vehicles manufactured since 2007. The recommended use for vehicles manufactured from 2001 to 2006 was a blend consisting of 10 percent ethanol and 90 percent gasoline. Last week the EPA expanded the October decision confirming the safe use of the blend better known as E15 for vehicles manufactured from 2001 to 2006.

The decision poses a challenge and an additional cost for U.S. gasoline producers. Additional E15 production requires a change in configuration for refiners, expands the need for larger storage facilities, raises marketing costs and requires additional distribution facilities. Blended gasoline cannot be transported through pipelines due to its corrosive characteristics and must be stored and transported separately from unblended gasoline. At best, maintaining gasoline inventories at historic levels will be a significant challenge this spring.

The winners of the EPA’s decision are America’s corn farmers and the ethanol industry. Corn is the main feedstock for production of ethanol. Corn slated for ethanol production is expected to rise to 4.9 billion bushels in 2011, or approximately 36 percent of total U.S. corn production, versus 600,000 bushels, or 6 percent of total production, in 2001. Corn prices already have escalated prior to the EPA’s announcement. The EPA’s decision places additional upside pressure on corn and ethanol prices.

Opposition to the EPA’s decision comes from the auto industry, cattle ranchers, food companies, owners of cars manufactured prior to 2007, and, ironically, environmental groups.

On the charts the wholesale price of gasoline has an attractive intermediate technical profile. It is in an intermediate uptrend and trades above its 50 and 200 day moving averages. Short term momentum indicators are overbought.

Now is a good time for Canadian “snow birds” to drive to the southern U.S. for their winter holiday before gasoline prices begin to ramp up.

One way to invest in gasoline is to own an Exchange Traded Fund that tracks U.S. gasoline prices. The United States Gasoline Fund, trading under symbol UGA on the New York Stock Exchange, reflects the changes in percentage terms of the spot price of gasoline.

Another way to invest in the phenomenon is to own Canadian and U.S. energy equities and related Exchange Traded Funds. Energy equities are more sensitive to changes in gasoline prices than to changes in crude oil prices. Seasonal influences for the sector turn positive in the second half of February. Traders are watching gasoline inventory levels closely for a reason to invest in the energy sector. February historically has been an opportune time to look for a technical entry point for the seasonal trade.

Jon and Don Vialoux are authors of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. Reports are available at www.timingthemarket.ca and www.equityclock.com . Follow us on Twitter@EquityClock.

The 2011 Annual Forecast Model (AFM)’ (VR Forecaster Report) is now on sale at the VRtrader.com website and covers cyclical projections for the Dow Industrials, the TSX, Gold, Crude Oil, Ten Year Interest Rate Yields and the US Dollar Index. The Model has been published since 1987 and has garnered a respectable following among traders and investors seeking an overall ‘timing’ tool for the major markets. Here is the link:

https://www.vrtrader.com/subscribe/index.asp

The AFM will be posted on the website the first week of February.

Current TIMER DIGEST Signals:

Gold – Bull – The current correction found temporary support at 1307.90 in Spot Gold and 26.55+ in Spot Silver. As you know, I repeatedly warned you a short-term top was in place since the early December Negative Leibovit Volume Reversal signal. However, with the ‘wind at out back’ insofar as a 20 year up cycle, I am less interested in playing the short-side and more interested in simply better timing new long purchases. Here, the market looks higher, especially with positive ‘seasonality’ due in February. I cannot predict how far this rally will take us, but if we do not see new highs in the next few weeks, the next correction could be deeper as I discussed in my Dan Dorman interview. Down the road, I am sticking with targets that range from 1500 to 3000+. We were due for a correction and in recent years we’ve seen some pretty nasty ones that is par for the course in what historically is a very volatile market.

Bonds – Neutral – Technicals call for a continuing Bear, that is, higher interest rates insofar as the long Treasuries are concerned. Should equities experience a sharp correction in the first quarter, a bond rally should afford us an opportunity to play the short-side (inverse ETFs).

Big Gold Pop Apt to Follow Gold Drop

Dan Dorfman interviews Mark leibovit

Even Superman has his bad days. We saw that last Sunday when the New England Patriots, widely viewed as the Superman of football, were beaten by the underdog New York Jets.

We saw it again in recent months when gold, the investment arena’s Superman, switched from the man of steel to a powder puff after racking up 10 straight years of gains (30% last year) during which it shot up more than six fold from $228 an ounce in 2001 to a recent all-time high in early December of $1,432.50. But since then, the yellow metal, which is looking quite toppy,has backtracked to around $1,350.

This decline, though hardly awesome, has led to a series of warnings, such as “the gold bubble is about to burst” and “a collapse in gold is imminent.”

One of the country’s dogged trackers of precious metals, a skilled market timer who warned of the recent gold selloff, is online investment adviser, Mark Leibovit, editor of the VR Gold Letter in Sedona, AZ. His latest thoughts: More gold weakness could be in the works into March which might knock down the price 10% to 25% from its recent high (which raises the prospects of a possible drop to as low as roughly $1,070).

But after the gold drop, he sees a likely gold pop.

The metal, as Leibovit sees it, has to overcome the lack of strong upside volume and the recent resistance to re-establish its short-term uptrend. As a result, he’s sitting on the sidelines insofar as his trading position is concerned. “We always run the risk of a shakeout and where and when it ends is anybody’s guess,” he says.

Famed global commodities investor Jim Rogers is also hoisting warning flags, noting that gold is overdue for a rest and is likely headed lower over the short run.

Shortly after gold crossed $1,000 an ounce in September of 2009, Leibovit made what I thought was an off-the-wall forecast: “Gold will never again trade below $1,000 an ounce in our lifetime!” he told me.

Since the fluctuating metal is on a constant see-saw, how, I wondered, could he be so cocksure about the stability of such a volatile investment? Also in the back of my mind was what George Soros once told me over breakfast many years ago — namely, “owning gold is like playing poker” and who about a year ago described the metal as “the ultimate asset bubble.”

Nonetheless, Leibovit is sticking to his guns about his bold forecast. “The wind is at gold’s back,” he says. “We’re in a big 20-year up cycle that has another 10 years to go.” He also views the recent drop in gold as a gift — an opportunity to buy the metal cheaper.

Although he holds out the possibility of a near-term drop in gold to around $1,070, he thinks a more realistic low during this period is between $1,250 and $1,300. By year-end, he figures the metal will be trading at a new high of around $1,600, on the way a few years out to between $2,000 and $3,000. He’s also a bull on silver, which he sees rising from its current price of $28.75 to $36 by the end of 2011.

Adding to gold’s allure at this juncture, Leibovit points out, are a bevy of worries and demand factors… Chief among them:

— Continued quesions about the longevity of the euro.

— A near-certain resumption of a sizable decline in the dollar, which Leibovit argues is “terminal over the long term,” in large measure reflecting $80 trillion of funded and unfunded debt that will never be repaid.

— The inevitability of higher inflation stemming from 24/7 money printing around the globe and ballooning commodity prices.

— Increasing global demand for gold, notably from China and India.

— America’s loss of worldwide leadership as the baton is being passed to China, which is in the process of strengthening its military. A cold war between the U.S. and China is inevitable, Leibovit believes.

His favorite gold investment is the Central Fund of Canada, which holds gold and silver bullion. He also likes Agnico Gold mines Ltd., Market Vectors Junior Gold Miners ETF and Northern Dynasty.

Leibovit’s bottom line on the metal: Don’t let the bubble talk or the recent weakness scare you away. It’s still the best financial bullet vest around because the fundamentals remain so positive that gold in the long run still looks penthouse bound.

In brief, gold, looking ahead, still looks golden.

What do you think? E-mail me at Dandordan@aol.com.

Meet The Man Behind The Liquidating Hedge Fund That Blew Up The Gold Market

Over the past several weeks there had been rumors that the reason for the precipitous drop in gold was primarily driven by a hedge fund liquidating its futures positions. This has now been confirmed:

Here is this week’s Market Buzz, Looniversity and Put it to Us? columns

Thanks

Market Buzz – Resource Strong TSX Weathers Storm, MOSAID DRIPs

Once again, Toronto’s heavily weighted resource sector insulated the S&P TSX index from the deep equities losses in the United States and emerging markets, where investors sold in reaction to street battles between protesters and Egyptian security forces and fears that the unrest would spread.

Rising energy and materials shares, spurred by surging oil and gold prices, kept Toronto’s main stock index in positive territory on Friday, fending off the selloff that hit stock markets around the world in the wake of the unrest in Egypt.

Oil prices surged as benchmark oil rose US$3.70, or 4.3 per cent, to settle at US$89.34 a barrel on the New York Mercantile Exchange. Oil rose as high as US$89.73 a barrel at one point.

Prices shot up about $2 a barrel in less than half an hour at midday after the White House expressed its concern about the violence in Egypt. The U.S. State Department advised Americans to avoid non-essential travel to Egypt and many airlines cancelled flights in and out of the country.

A quick note from our Canadian Small-Cap Coverage Universe (www.keystocks.com) – MOSAID Technologies Incorporated, Canada’s leading intellectual property company, announced that Toronto Stock Exchange has accepted notice of the establishment of MOSAID Dividend Reinvestment Plan.

The Plan allows qualified shareholders to acquire additional MOSAID shares by reinvesting any cash dividends paid on their respective shareholdings, without payment of brokerage or administration fees.

Since 2005, MOSAID has demonstrated a track record of continuous dividend payments to shareholders. Management stated that the company’s history of dividend payments, when coupled with the new Dividend Reinvestment Plan, provides shareholders with an effective method of building their investment in MOSAID. We tend to agree and are in favour of plans such as this in good companies.

An information package and enrolment form will be mailed to registered shareholders. An information package only will be mailed to beneficial shareholders, who should contact their financial intermediary to arrange enrolment. A copy of the Dividend Reinvestment Plan is now available on the Investor Relations section of the company’s web site.

Looniversity – Consumer Confidence 101

If you’ve ever watched the markets with even a modest degree of interest, you’ve probably heard of the Consumer Confidence Index (CCI). Ever wonder what the heck it is? Let us put you at ease. In the U.S. (most widely quoted), the CCI is put out by the Consumer Confidence Board and is based on a survey that samples 5,000 households. The CCI is considered one of the most accurate indicators of confidence. It looks at factors including wages, interest rates, spending habits, and even goes as far as calculating the number of “help wanted” ads in newspapers to detect how tight the job market is.

The basic idea behind consumer confidence is that the better the consumers’ current and economic prospects appear, the more likely he/she is to spend and the more he/she spends, the better it is for the overall economy. Of course, the opposite is also true.

When evaluating the index, many people pay close attention to trends or the moving average over the past three to six months. Should the index move above or below the moving average, it is a good indication that consumer confidence is significant. Month-to-month changes are not considered to have as great an impact as the overall trend.

The CCI is watched closely by the U.S. Federal Reserve when determining interest rates, which affect stock prices. Lowering interest rates makes it easier to borrow, which ultimately supports consumer spending and higher confidence – something the stock markets get a warm and fuzzy feeling about.

Put it to Us?

Q. What is a company’s “current ratio”?

– Samantha Miller; Calgary, Alberta

A. The current ratio compares all of a company’s current assets to its current liabilities. In the financial world, the term “current” means less than one year. So, current assets include cash, accounts receivable, inventory, prepaid expenses, and other assets that can be converted to cash within one year. Current liabilities include short-term debt, interest, accounts payable, and any other outstanding liabilities that are due within a year’s time.

When calculating this ratio, you are essentially trying to determine whether a company can meet its short-term obligations. It will likely be able to do so if the ratio is above 1; if the ratio is less than 1, the company may fall short, so some alarm bells are raised. For industries that generally have a large portion of current assets tied up in inventory, a ratio of 1.5 (or even 2) might be a better standard. When analyzing the current ratio, as when looking at any ratio, an investor should make comparisons between companies that operate in the same industry. Different industries have different dynamics and cross comparisons can be somewhat meaningless.

KeyStone’s Latest Reports Section

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Staple Consumer Products Company Announces 16.7% Increase in January 2011 Distribution and Internal Restructuring, Yield 5.54% – Maintain Rating Despite 200%+ Gain for KeyStone Clients (Flash Update)
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IP Company’s Q2 2011 EPS Exceed Expectation, Strong Cash Position & Yields 3.7% – Share Price Jump