Daily Updates

Ed Note: Michael Berry has written some gripping copy in the last few days.

This Time it’s Different

1. “This time it’s different” is a phrase, more than any other, which is found amongst the smoking wreckage of past investment bubbles. The dot-com and housing bubbles are only the most recent examples. However, it’s worth examining this phrase again in light of the storm that global financial markets are currently weathering. Many of us in the commodity space got caught short by the severity of the downturn in 2008. We can remember more than a few junior mining company CEOs who told us horror stories of flirting with bankruptcy.


We’re of the opinion that the correction we’re witnessing in gold now is a temporary correction in an otherwise secular bull market. We base this on the thinking that the underlying forces perpetuating this gold bull market are still intact. Read more HERE …

 

World Markets Down in Lockstep

2. The 3rd Quarter of 2011 ended on Friday, September 30. The world’s markets were down – lockstep. Of the world’s 38 major equity markets 35 fell, some more, some less with an average decline of almost 1%. US equity market declines averaged a heady 2.53%. North and South American markets declined 1.65% on average. Russia was off almost 3%. Only markets in Israel, New Zealand, Bangkok and Taiwan, of the 38, achieved positive returns. 82% of the 3rd quarter’s decline occurred in August and September.  Read more HERE …


The New Credit Cycle

2. 1. The bottom line is, has always been, that the end of a credit crisis and the beginning of a new credit cycle cannot occur until all the debts have been repaid or forgiven. 1.

The Edge Of Chaos, is an out of print book but worth a read. In it author Bernice Cohen holds the simple prescription for the solution. She says “all debts must be settled.” Such a process can be drawn out and painful or quick and painful.
But our leaders, on both sides of the aisle, have abrogated the duty to solve the world’s massive debt problem. I am not claiming this will be an easy task. Because politics is involved in the decision of debt resolution and as a society we our addicted to debt, any painless solution is unlikely. Read more HERE …


1. Volatility Here To Stay
Dennis thinks that volatility in markets is getting worse and that the era of buying something for the long term is not only gone he doesn’t think it will be back in his lifetime. Another change has been in his personal trading size, “its smaller, smaller, it all gets smaller. You have to focus, and I think everybody has to keep their noses to the grindstone, get smaller or get out. 
2. The Bear Market in Government
The backdrop that all the major markets in Western Democracies are struggling with is a bear market in Government complicated by demographic shifts. ” The problem that we have in the West is that with the exception of the United States, Canada and maybe Australia, we are getting very old and we’re depopulating and that makes for a very uncomfortable, very difficult retirement circumstance. A welfare circumstance. You have fewer and fewer workers and more and more and older retirees. That’s the problem and it’s a problem everywhere around the west. Furthermore, this problem is not going to go away, in fact it’s going to get much worse. The only way to resolve the problem is to employ draconian measures, Governments raising the retirement ages dramatically and they are going to have to do it very quickly. They’re going to have to tell people even if they’re 63 that they are not going to be able to retire for four or five more years. Those people need to stay working so that they can pay into old age social security benefits. Then you have the back end problem that is older workers who continue to stay on the job would normally be coming out of the pipeline and making way for younger workers to replace them. That’s not going to happen. Simply put, aging circumstances,  retirement accounts that have for many been decimated and Governments out of money means the only thing you as an individual can do is continue to work and hope that you can put some more money aside for your retirement.”

3. No Safe Haven(s)
“All correlations have gone to one, everything is going up together, everything is going down together. Isn’t it amazing that you see days when gold falls and stocks fall, gold rallies and stocks rally, crude oil falls and stocks fall, crude oil rallies and stocks rally, everything has gone to a correlation of one and so therefore trying to find a place for safety doesn’t exist. The only place of safety is cash and you’re not paid to hold much cash here in the States. A one year T bill earns you two tens of 1% and it’s not worth the paperwork to make the trade.  You might have a positive yield on the instrument but the brokerage firm or the bank that you hold them would charge you enough money that the return is negative.”
4. Inflation or Deflation
“When I’m asked the question will there be inflation or will there be deflation my response is yes. There’ s downward pressure upon the wages and generally that’s going to be deflationary while the monetary authorities really have no choice but to try to inflate out of the debt structure which tends to put upward pressure upon commodity prices on balance and gold prices particularly.”
5. Gold
I’ll still be bullish in the long run of gold because I think the only thing that the monetary authorities can do is continue to expand supply reserves in the system, denigrating their own currencies generally and that tends to work to the benefit of the gold market. I’m primarily long gold in Euro terms, I’m long gold and short the Euro and ostensibly because of the problems that the Europeans are now facing and I don’t think those problems are going to go away. Gold in dollar terms has cost a lot of money in the last three weeks, gold in Euros has lost money but it’s lost demonstrably less. Over the course of last year, gold in Euros has actually been demonstrably better than gold in dollar terms and I think it hedges away some of the attendant risks during the trading session, during the trading week and during the trading month. I’m comfortable with that trade, I like that trade and Friday, yesterday we started to see gold actually getting strong again in Euro terms, which I thought was most impressive. In the last six weeks you had an awful lot of hedge funds in New York who had on the bull long equities and we’re long gold too, gold being the supposed hedge. They thought if the equities market ever tumbled, the gold would go rallying violently upward in the last quarter and instead, equities stumbled and gold fell with it and those guys found themselves in a very disconcerting position.
6. Equities
I’m afraid we are on a bear market in equities and I think we’ve been in a bear market now for about six months. What I’m really afraid of is I tend to look at things in a technical perspective and it looks like were in mid-point after the sharp tumble of two months, three months ago. So I argue that if we start breaking down on the S&P, and I think we are, we’re going to take the S&P down probably to somewhere between 940 to 980. Right now we’re trading above 1150.
7. Commodities
Well, I think for the first time I’m actually going to see the commodity market do what they’re supposed to do. Some will go up, some will go down and I don’t think they’re all going to go up or all go down together. I can be reasonably bullish of wheat at this point because the seasonal’s point to it. Livestock places are probably going to continue to make new and newer highs because grain prices have been reasonably expensive and it has forced a lot of cattle feeders, especially out west, to liquidate their herds. They just can’t afford to feed this price of corn to livestock. Next year literally there will be so little beef around, prices are going to get egregiously high. Cattle prices have been making new and newer highs along the way and they are probably going to continue to do so.

8. Biggest Fears
a) My biggest fear as far as governments are concerned, is that they will try to balance budgets by raising taxes and history shows that every time you raise marginal tax rates, you get less revenue, not more. So, that’s really my great fear is that they’ll start to do something to balance the budgets, they’ll raise taxes in order to do it and all they’ll do is create more problems, not less.
b) My biggest fear for investors is that they will Average into a bad position. That’s it. People will think that they see value, they’ll average down into a bear market and it’ll go against them.
The Gartman Letter is a daily commentary on the global capital markets and addresses political, economic, and technical trends from both long-term and short-term perspectives. His subscribers include leading banks, brokerage firms, hedge funds, mutual funds, and energy and grain trading firms from around the world.

Market Buzz – Canadian Economy Shows Slight Sign of Growth in July But Investors Remain Uncertain

The TSX Composite index closed on Friday, September 30th, at 11,624 points, down 62 points, or 0.5% for the day, but up 1.4% for the week.

Canadian GDP numbers were released on Friday indicating that the economy grew 0.3% in the month of July. The numbers were roughly in line with economists’ forecasts supporting expectations that GDP growth for the third quarter will be in the region of 2.0%, after a dismal Q2 which recorded an economic contraction of 0.4%. Recession, which is technically defined as two consecutive quarters of negative economic growth, may or may not be thwarted in the short term, but recent economic indicators may be pointing to the direction of another and potentially more troublesome culprit – growth recession. A growth recession occurs when the economy does not expand or contract but simply remains stagnant.

Some may be familiar with the term with respect to commentary coming out of Japan. The island nation has spent much of the last 15 years battling this unyielding foe. In a typical recession, the economy experiences contraction which has the eventual impact of restoring balance to the economy, thus repositioning it for future growth. While the conventional recession can be quite painful for those that lose their jobs, homes, and lifestyles, the pain has traditionally been temporary, lasting on average anywhere from six to 18 months (at least over the recent past). In the growth recession, the rebalancing of the economy may not occur as quickly, resulting in a less severe but for more prolonged state of economic stagnation, such as has been the case for Japan. This does not mean that low growth inevitably results in decade long recessions, as the developed world has seen these occurrences come and go without the lasting impact. Nonetheless, these are far from conventional times and we are not of the opinion that anyone can state inequitably where the economy will be in the next two to five years.

The best strategy for an uncertain market is to keep a long-term focus and remember that opportunities exist even in low growth environments. Warren Buffet once said that he would never buy a stock that he would not be comfortable holding if the market shut down for the next five years. What he means is that when he invests, he bases his decision on the fundamental value of the underlying company relative to his purchase price. If the investment is made in a quality, profitable business, at a reasonable for discounted price, then the investor will likely still generate a long-term return, notwithstanding the short-term oscillations of the market. It also helps if the business is spinning off some of this cash flow to investors in the form of a dividend.

Looniversity – CANSLIM – 7 Steps to Identify Potentially Great Stocks

Developed by William O’Neil, the co-founder of Investor’s Business Daily, CANSLIM is a philosophy of screening, purchasing, and selling common stock. While the name may sound like a new “Canadian Weight Loss Supplement,” this seven-letter acronym is actually one of the more successful investment strategies.

Below (in a nutshell) are the seven components which the CANSLIM strategy focuses on:

C = Current quarterly earnings per share. Earnings must be up at least 18-20 per cent.

A = Annual earnings per share. They should show meaningful growth (15 per cent or greater) for the past five years.

N = New things. Buy companies with new products, new management, or significant new changes in industry conditions. Most importantly, buy stocks when they start to make new highs in price. Forget cheap stocks; they are that way for a reason.

S = Shares outstanding. This should be a small and reasonable number. You are not looking for an older company with a large capitalization.

L = Leaders. Buy market leaders, avoid laggards.

I = Institutional sponsorship. Buy stocks with at least a few institutional sponsors who have better than average recent performance records.

M = Market direction. The market will determine whether you win or lose, so learn to interpret the daily general market indexes (price and volume changes) and action of the individual market leaders. It is important you know how to determine the market’s overall current direction.

Put it to Us?

Q. A friend recently bought some “zero coupon” bonds. Can you explain what they are?

 

– Johanna Johnson; Calgary, Alberta

A. Zero coupon bonds were introduced to the fixed-income market in mid 1982. At the time, they were quite a unique concept in the marketplace.

While most municipal bonds provide semi-annual interest payments (coupons), zero coupon bonds, as their name suggests, have no “coupon” or periodic interest payments. Instead, the investor receives one payment (at maturity) that is equal to the principal invested plus the interest earned, compounded semi-annually, at a stated yield.

Zero coupon bonds are sold at a substantial discount from the face amount. When a zero coupon bond matures, the investor receives the full face amount of the bond. For example, a bond with a face amount of $20,000 maturing in 20 years may be purchased for roughly $6,757. At the end of the 20 years, the investor will receive $20,000. The difference between $20,000 and $6,757 represents the interest. This example is based on an interest rate of 5.5 per cent which compounds automatically until the bond matures.

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Jenny McConnell,

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This week, Stockscores.com founder Tyler Bollhorn discusses the difference between Alpha and Beta stocks and provides his outlook for Stocks, Gold and Oil.

US car sales rose strongly in September, with gloom over economic prospects offset by consumers’ need to replace old vehicles, easier credit conditions and an improved supply of Japanese vehicles, the FT reports . According to preliminary data, http://ftalphaville.ft.com/thecut/2011/10/04/691716/us-car-sales-rebound…

Global stocks fell to a 15-month low on Tuesday, Reuters reports, pinning Asian stocks near a 16-month low, as investors shed riskier assets on growing doubts over Greece’s ability to avoid default, fuelling fears of global financial turmoil and recession. http://ftalphaville.ft.com/thecut/2011/10/04/691656/stocks-

Qatar Holding, an arm of the gulf state’s sovereign wealth fund, is planning to create a standalone investment vehicle to buy stakes in, or take over, gold companies, reports the FT. According to several people familiar with the fund’s plans, http://ftalphaville.ft.com/thecut/2011/10/03/691556/qatar-holding-to-cre…


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