Stocks & Equities

The Market Surprises

The major indices reached multi-year highs with the Dow breaking solidly through the 13,000-point barrier, the SP 500 edging over 1,400, and the Nasdaq Composite ploughing past 3,000 all in the same week. The market is now up over 30% from its October 2011 bottoms and nearly reaching 4-year highs.sc

When you look at technicals, the market is pointing to higher prices.  

We enjoyed straight days firmly above the old highs of 1370 earlier in the week, which helps confirm the recent breakout. With the recent softening of the bond market, this technical sign may help provide the catalyst for the next leg higher.  

The recent sell off in the bond market means we are likely near the end of a 30-year bond rally. Over the last 30 years, rates have been going lower making the bond market a safe and profitable haven for investors – especially with the recent economic volatility.  

But rates are now bouncing up from historic lows.  

That means bond investors will start losing money for the first time in a LONG TIME. As stocks make new highs, naturally bond funds will see outflows and stock funds will see inflows. This fresh money coming into the stock market could help push the market up to higher highs.  

 

(From a timing perspective, this doesn’t mean the outflows from bonds will diverge into stocks right away. We’ve also had some surprisingly strong gains over the last few weeks which may signal a short term sell off. However, over the next few months, we may see more gains in the market up until May as predicted in the paragraph from above.)

U.S. gross domestic product (GDP) expanded an average 2.4 percent per quarter in the 2 1/2 years since the recession ended in 2009. While that means the world’s largest economy hasn’t had a smaller post-recession recovery rate since at least the 1940s, it also means there is room to climb higher when compared to past events. In the 2003 bull market, GDP rose 2.7 percent on average, before the S&P 500 surged 102 percent. In the 1982 rally, the rate was 5.7 percent with equities more than tripling during that cycle.  

Does that mean we’re about to see the markets climb even higher?

When you have a market that has performed so well so fast, it’s really hard to jump in. From a psychological standpoint, there is by far a better chance for the market to head down rather than up. But from a technical standpoint, the market is looking to climb higher.

If we breach the 2007 highs and stay above there, we could be in for another strong bull market rally.

The one biggest concern scaring investors is the volume in trades that has been pushing the market higher. Trading at the New York Stock Exchange declined to the lowest level since 1999 last month, with the average volume over the 50 days ending Jan. 25 slowing to 838.4 million shares. The value of stocks changing hands dropped to $24.9 billion, a 50-day average not seen since at least 2005.  

Keep an eye on bond outflows – the more this sell off continues, the greater chance the volumes in the equities market will increase on the buy side.

The Bigger Picture

The problem with our market today is that investors are reacting to daily news events. I have said this many times before. If you’re a day trader and have time to trade the news, this is the market for you.  

But for most investors, waking up at the break of dawn and trading in front of a computer screen all day doesn’t work. That’s when you have to look at the big picture. The big picture is the real reason the markets are moving the way they are.

Right now, the markets are moving because of easy money and slightly better economic numbers.

The world continues to print more money – whether it’s a direct infusion of liquidity, operation twist or giving banks money at negative real interest rates.  

Bernanke just told us last week that interest rates will remain at current low levels until late 2014 and that operation twist will continue. That means free money for at least another two years. While he suggests that there is no QE for now, he surely did not say there won’t be another one coming. The Fed will continue to play a major role this year.    

There is so much printed money being flooded into the world and the stock market likes that type of liquidity. World money supply has soared dramatically over the past two years. Eventually, the piper will need to be paid. In the meantime, this liquidity has built a foundation under the stock market.

The IMF just said Greece will need more money – even though it just got hundreds of billions weeks ago. Brazil has promised to keep interest rates low for at least another year. Every week I stress that free money will continue to pour in around the world. But do you know how bad this situation really is?

The World’s Best and Worst Example

It took the U.S., the world’s largest debtor nation, more than 200 years for its own debt to reach $1 trillion. In the past four years alone, this debt has soared by over $5 trillion.  

The U.S. is currently running deficits of over $1 trillion per year, which means this number will only keep growing. The U.S. has no way to pay this debt off – not without making major cuts that will lead to a revolt. When you consider that millions of baby boomers are now reaching retirement age and will be drawing on social security, the debt levels will continue to grow even faster than it has in the past four years.  

That’s a scary thought.

If you look at U.S. total debt, the U.S. is now at about 400% debt to GDP ratio. Morgan Stanley says there’s “no historical precedent” for an economy that goes over 250% of its debt to GDP ratio without a crisis or huge inflation.  

So when will it be time to pay the piper? When will this all come crumbling down? I don’t know. For now, politicians will continue to do what they’re doing. They’ll continue to patch things up by printing more money to pay for expenses, including paying the interest on their loans. They’ll continue to sell their debt to any nation that can afford to buy it.  

Most people think that China is the number one holder of U.S. debt and Japan number two. Those people are wrong. The number one spot belongs to the Fed – by more than half a trillion dollars.  

In the long run, all of this money printing and cheap money will devalue the dollar – especially against the purchasing power of gold.

(for now, we may see strength in the dollar relative to other currencies such as the Euro but this is based on its value relative to other currencies and not the purchasing power for assets such as gold and silver)

While gold and silver have recently experienced a selloff, these represent buying opportunities in the big scheme of things. I stick with my prediction that gold will be above $2000 and silver above $40 before the year is over.  

The truth will eventually unfold. Take every opportunity to protect your wealth.

In the end, “He who has the gold makes the rules.”

Until next week,

APPLE IS NOW BIGGER THAN THE ENTIRE U.S. RETAIL SECTOR….

File this one under the “check back in 10 years” folder.  This is a stat that will blow your mind.  Apple’s market cap is now bigger than the ENTIRE U.S. retail sector.  Now, I wouldn’t short AAPL in a million years, but these are the sorts of crazy stats that make you think “hmmm, is this really sustainable?”

As ZeroHedge says: “A company whose value is dependent on the continued success of two key products, now has a larger market capitalization (at $542 billion), than the entire US retail sector (as defined by the S&P 500). Little to add here”. 

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Michael Campbell Suggested Reading: “Why I Am Leaving Goldman Sachs”

Michael is going to comment on the subject in this article in tomorrow’s Market Minute and he’d like anyone who listens to have this article posted here to refer too. “TODAY is my last day at Goldman Sachs. After 12 years, the environment now is as toxic and destructive as I have ever seen it.” (Greg Smith is resigning today as a Goldman Sachs executive director and head of the firm’s United States equity derivatives business in Europe, the Middle East and Africa.)

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(Click on image or HERE to read the whole article or continue reading below)

Why I Am Leaving Goldman Sachs

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money. Goldman Sachs is one of the world’s largest and most important investment banks and it is too integral to global finance to continue to act this way. The firm has veered so far from the place I joined right out of college that I can no longer in good conscience say that I identify with what it stands for.

It might sound surprising to a skeptical public, but culture was always a vital part of Goldman Sachs’s success. It revolved around teamwork, integrity, a spirit of humility, and always doing right by our clients. The culture was the secret sauce that made this place great and allowed us to earn our clients’ trust for 143 years. It wasn’t just about making money; this alone will not sustain a firm for so long. It had something to do with pride and belief in the organization. I am sad to say that I look around today and see virtually no trace of the culture that made me love working for this firm for many years. I no longer have the pride, or the belief.

But this was not always the case. For more than a decade I recruited and mentored candidates through our grueling interview process. I was selected as one of 10 people (out of a firm of more than 30,000) to appear on our recruiting video, which is played on every college campus we visit around the world. In 2006 I managed the summer intern program in sales and trading in New York for the 80 college students who made the cut, out of the thousands who applied.

I knew it was time to leave when I realized I could no longer look students in the eye and tell them what a great place this was to work.

Over the course of my career I have had the privilege of advising two of the largest hedge funds on the planet, five of the largest asset managers in the United States, and three of the most prominent sovereign wealth funds in the Middle East and Asia. My clients have a total asset base of more than a trillion dollars. I have always taken a lot of pride in advising my clients to do what I believe is right for them, even if it means less money for the firm. This view is becoming increasingly unpopular at Goldman Sachs. Another sign that it was time to leave.

How did we get here? The firm changed the way it thought about leadership. Leadership used to be about ideas, setting an example and doing the right thing. Today, if you make enough money for the firm (and are not currently an ax murderer) you will be promoted into a position of influence.

What are three quick ways to become a leader? a) Execute on the firm’s “axes,” which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) “Hunt Elephants.” In English: get your clients — some of whom are sophisticated, and some of whom aren’t — to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don’t like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym.

…..read next page HERE


(Updated) Mark Leibovit’s Daily Stock Comment & A Gold Comment

STOCK MARKET SUMMARY upated after today’s close +  a Gold Comment immediately below saying…. “one of the best gold market timers around, is Mark Leibovit”

Mark SaysTime is running out for the current (stock rally), but the intermediate trend for 2012 is still bullish”

Equities exploded higher yet again today as the news seems to be all good. For the session the Dow was up 217.97 at 13,177.68, the S&P 500 was up 24.86 at 1395.95, and the Nasdaq Composite was up 56.22 at 3039.88. Volume increased over Monday and breadth was strong.

Well folks, in a normal market this would smell like a top. Markets explode higher yet again after a prolonged run – and all the news is GREAT! Retail sales strong, key banks pass stress tests (did anyone expect otherwise?), unemployment is down, 200,000 new jobs were created last nonth, Europe’s problems are on their way to being solved, etc. It seems the ‘wall of worry’ that the market has been climbing is being dismantled brick by brick.

While this latest rally looks suspect from a contrarian standpoint, we must wait for price and volume to confirm any reversals that may develop. Until then, the trend is higher.

Equities opened strong and finished stronger as news of the bank stress tests were released two days early after the Fed announced no change in interest rates with inflation not being a major threat.

Financials exploded higher as the release of the bank stress tests removed an element of uncertainty and forced shorts to cover positions. Also news that JP Morgan Chase is increasing their dividend and initiating a $15 billion stock buyback program brought in a rush of buyers late in the session. JPM closed 7.03% higher at 43.39.

Better than expected retail sales got stocks off to a solid start this morning. February retail sales rose by 1.1% vs. consensus of 1.0%. Excluding autos, retail sales were up 0.9% vs. consensus of 0.6%.

The FOMC opted to leave its fed funds target rate at 0.00% to 0.25%. The statement said that economic conditions, including low rates of resource utilization and a subdued outlook for inflation, are likely to warrant exceptionally low levels for the fed funds rate at least through late 2014.

In individual stock news, Molycorp shares gained 3.2 percent to $30.82.

Shares of Urban Outfitters Inc fell 5.3 percent to $27.95 after the company said it expects margins to continue to be pressured.

———————————————

Canadian News

Canadian equities moved higher after an upbeat FOMC statement and strong U.S. retail sales.

The S&P/TSX composite index gained 109.68 points to 12,537.69 as nine of its 10 main sectors posted gains. Materials stocks sank 0.4 percent on weak gold bullion prices.

Broad market gains were led by energy company Suncor Energy which gained 2.6 percent to C$34.04, and financial company Royal Bank of Canada which gained 2.2 percent to C$58.00.

The Fed didn’t signal any change in its plan to keep interest rates low which stoked optimism about the economy. That in turn put upward pressure on oil and copper prices, which impacted energy and base-metal mining shares.

Mining stocks were strong, led by gains in Teck Resources as its shares gained nearly 3 percent to C$36.53 while First Quantum advanced 3.3 percent to C$21.13.

The dollar was stronger despite all of the hoopla in the equity market. The U.S. Dollar Index was up .243 at 80.133.

Precious metals were lower today as gold sank on liquidation as the risk trade is firmly on at this point. Spot gold was off 27.50 at 1673.30. Silver was off .18 at 33.43, platinum was off 10 at 1684, and palladium was up 1 at 701.

Copper posted strong gains on the great news throughout the session as the May contract settled .0650 higher at 3.9025.

Crude oil settled 0.37 higher at 106.71.

Good Night.

Gold Comment from Dan Dorfman of Trim Tabs Lauding Mark Leibovit’s Timing Excellence (and current caution)

TrimTabs Money Blog

Gold Bulls Fear More Grief, Maybe a $200 Dive

By Dan Dorfman

Don’t get suckered! There are times when gold can turn into fool’s gold. This could be one of those times. In other words, gold stands out as an exciting investment for the long run, but looms as a potential dog of an investment for the short run.

Those essentially are the cautionary suggestions from a couple of outspoken and generally buoyant long-time gold bulls. More specifically, they’re saying if you’re tempted to take a flier on the precious metal in the hopes of buying it on the cheap after its wicked $130-an-ounce decline over five days that sent it skidding to around $1,660, your timing could be for the birds.

Their basic view is that the recent thunderstorms in the gold market-largely a reflection of a hint from Federal Reserve chairman Ben Bernanke that further quantitative easing might not be in the cards, Greek debt fears and a firming of the greenback-may be far from over. The inference is clear, namely gold could head down again before it heads up.

Our other wary long-term gold bull, one of the best gold market timers around, is Mark Leibovit, editor of the Arizona-based Leibovit VR Gold Letter. His view: gold shares are weakening and we need a confirmation of a bottom before jumping back in. “I would step aside till the dust settles,” he says. Another current negative, he notes, is the seasonal factor, a reference to the fact that gold often tops out in February or March, remains stagnant for about 90 to 120 days and then resumes its advance in the late summer.

For the longer term, though, Leibovit, who sees a full-scale confrontation between Israel and Iran before the end of May, says gold remains on a buy signal, but he emphasizes he would only buy the volatile metal here on weakness and cautions “it’s definitely not for the faint of heart.”

Before year end, though, he sees a gold reversal, with the metal, reflecting all the well known positive fundamentals, in particular global round-the-clock money printing, climbing to $2,000 or more. Among his favorite gold plays are Canadian Mapleleaf coins, Central Fund of Canada and a Canadian exchange-traded fund backed by the Royal Canadian Mint, an ETF that trades on the Toronto Stock Exchange under the symbol MNT and enables its investors to take delivery of their physical assets.

Marks Stock Comment before today’s opening

STOCKS – ACTION ALERT – SELL (Time is running out for the current rally, but the intermediate trend for 2012 is still bullish)

Today is both ‘Turnaround Tuesday’ and FOMC day likely triggering a rally following a down day on Monday. I have unfulfilled upside targets in the S&P 500 between 1395 and 1445, but felt a shakeout back to first 1323 and possibly 1270 were doable this Spring. We may still rally into the end of the month or early April and I could be early in my SELL signal. One of the key indexes to watch is the Russell 2000 which displayed several short-term sell signals in my work in February ahead of the early March sell-off. It is now rebounding and a breakout above 833.02 (the February 6 high) especially on volume would likely be coincident with new rally highs elsewhere. We are also watching the key Dow Transports which also topped out in early February at 5384.15, now 5144.28. New market highs, however, does not negate the chances of still seeing a sharp correction in the Spring, but this time coming from higher ground rather than current levels.

Screen shot 2012-03-13 at 5.27.20 PMThe Dow Daily below:

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Tse Daily Chart 3/13/12

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Over the years, we have discussed the various ways that companies utilize their free cash flow to generate a return for their shareholders. In our small-cap universe, we have traditionally focused on companies that reinvest their earnings back into the business to generate sustainable growth. More recently the markets have started focusing on companies that payout their cash flow to shareholders in the form of dividends or distributions. Even better are those companies that generate so much cash that they can afford to invest in growth as well as pay a dividend. But there is also a third method of allocating capital that is often misused and even more often misunderstood – share repurchases (buybacks).

The consensus is mixed on whether or not share repurchases are in fact a viable strategy for generating shareholder returns. When a company has excess cash and they believe their shares are undervalued, they will often issue a normal course issuer bid which allows them to purchase and cancel a predetermined maximum number of shares of their own company. The idea is that if you believe that your own company will provide you with the best risk-adjusted return on your capital then why would you invest your capital anywhere else.

Warren Buffet recently said in his 2012 letter to shareholders (http://www.berkshirehathaway.com/letters/2011ltr.pdf) that in addition to generating strong earnings growth he also typically hopes that the stock prices of the companies he purchases languish in the markets for several years after he buys them. Using an example of IBM, he explained that if the company were to spend $50 billion over a 5 year period to repurchase its shares that his current interest of 5.5% in the company would growth to 7% if the share price were to average $200 over the period, but only 6.5% if the share price where to average $300. Since Warren has no intention of selling his shares during that period his best case scenario would be if the cash flow remained strong but the stock price plummeted. This is a wide diversion from the mentality of many retail investors who require constant validation from the market in the form of appreciating stock prices.

The reason that share repurchases are often criticized is because they are very commonly misused. Very often companies will publicly disclose that they have received exchange approval to proceed with a share buyback but then fail to repurchase any shares. The hope is that the announcement alone will garner investor interest. The more common problem is when share repurchases are made by companies that are not undervalued. Warren Buffet said, “I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company’s intrinsic business value, conservatively calculated. We have witnessed many bouts of repurchasing that failed our second test.” The CEO and Board of Directors commonly have a tendency to view their own company as undervalued, particularly if it has suffered a large decline in the share price. This bias can lead firms to repurchase stock when it is in fact overvalued, an activity which has the impact of destroying shareholder value.

The key to assessing a share repurchase strategy is to analyze the metrics of the individual situation. Does this company have the available liquidity to repurchase shares? Is the company clearly undervalued on the basis of free cash flow and will a share repurchase have the intended impact of improving performance on a per share basis? If the answer to these questions is yes then a share repurchase may be a very viable strategy for creating shareholder value long term.

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KeyStone’s Latest Reports Section


The Wall Street Whiz Kid on Bull Markets -Dangers & Critical Action to Take

Peter Grandich  said very clearly to Michael Campbell in early December we would see a bull move in the US Stock Market and we did, 11 weeks in a row. He advised his readers to get long because:
 
1. The market had every reason to go down and it didn’t.
 
2. We were entering a seasonally favorable period.
 
3. There was a belief we’d at least get a Santa Claus rally. 
 
Subsequently, once we got past Christmas it looked to him like the market still wanted to go higher, and he even suggested to his readers that in this rally we might even squeak out a marginal new all-time highs in the Dow & S&P. 
 

What Now

To be clear, he didn’t think we’d have a 3-5 years bull market joy. Indeed, on friday March 2nd he put out the “yellow caution flag” to his readers. Peter sees danger in what he sees as an imminent and inevitable conflict with Iran that will hit this elevated stock market that has been getting within shouting distance of Dow and S&P all-time highs. 
 
In short he thinks we will see the end of what he thinks is “a countertrend rally in a secular bear market that actually started in the fall of 2007.”

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Timing and signs that this scenario is in fact playing out. 
 
1. An inevitable  large scale military confrontation in the middle east occurs. Peter feels there is no way that Israel can live with an enemy that has sworn it wants to eliminate all of Israel with nuclear weapons. He thinks that whether or not Israel has to act alone, whether or not their action is successful, its only a question of when and it seems to him that the window for action is getting very small. A matter of weeks to a few months from Israel taking action. “That doesn’t mean the that the day this happens the market will tank and never come back again, but it will be the beginning of a major geopolitical change that will take months if not years to play out and be a net negative simply because of the fragile economies that are in the world today. One fragile economy being the US and another is a good part of Europe.” 
 
2. “The US is past the point of no return. The US doesn’t produce enough cash flow after they pay for their bills to pay off the interest let alone the principle of the debt the US has outstanding. Inevitably one of three things has to happen, part of the debt will be reneged, part of it will be renegotiated, and part of it will be monetized as the Fed is doing now.”  Bottom line, there is not a very bright picture for general equities past the next few weeks or months. “We’ve had a nice rally, if you are still long equities that are not related to metals congratulations, but now is not the time to be getting into them, now is the time to be selling.” 
 
 Bonds 

“Over the next 10 years, the worst investment will be US bonds.” He saw a study this week from a very independent, reliable group that inflation is running in the US between 5 and 7%. Peter believes that study and thinks no-one should believe that inflation is running at 1.6% as the government would have us believe. He doesn’t see how over the next 10 years with bonds yielding 2%, how anybody that buys and holds could end up making money. He would sooner be in general equities, before he would have any ownership of bonds right now. 

“The dramatic lowering of interest rates far below where they should have been literally destroyed or seriously damaged 10’s if not 100’s of millions of Americans and others who would have normally been dependent on fixed income and been able to live out their retirement. The lowering of interest rates resulted in a quest, as Ron Paul said, of destroying the currency and destroying America.
 
This destruction of the Bond Market is the pivotal moment of our time, and we are seeing right now the ramifications of what happens when confidence leaves a bond market in countries like Greece, Portugal, Spanish and Italy. There is an absolute ticking time bomb waiting to explode in the states, and Peter doesn’t see how people can think that it can happen in all of those European countries and not for some reason fail to happen in America too. 
 
One positive, Peter thinks that when bonds start to sell off it will probably initially support the stock market. 
 
The Eye of the Hurricane 
 
“The US is going to have to address the real political time bomb that’s coming, and that is the changing of the US retirement system, changes that will be forced on Social Security and Medicare”. Peter urges us to enjoy what he calls the eye of the hurricane, “we had our first wave in the financial crisis of 2008 and that we are now in this eye of the hurricane where the sun has popped out and things are starting to feel pretty good again. Noting that hope is a great spiritual strategy but also the worst investment strategy, he thinks that in the next several months to perhaps early in the next year “we will be back in the grips of something very serious and that its going to have to get a lot worse before it can begin to get better.” 
 
“I refuse to leave our children with a debt they cannot repay”Obama 02/29/2009
 
As low as interest rates are, the US is paying 4 billion a week on interest payments alone, and the kicker is that if they keep going on the trend that they are that figure will change to 10 billion a week within 4 years, or 552 billon a year in interest at a minimum (assuming rates do not rise). Given rates have risen tremendously in Greece, Italy, Spain and Portugal, it seem highly unlikely that rates will not rise in the US over the next 4 years and that weekly figure could be very low. 
 
How do Individuals Protect themselves?
 
Seniors in the States have seen all the worst things that can happen. They have seen fairly secure, good reliable interest income disappear, they have seen the value of their  housing go from always rising annually to collapsing to levels where a houses that cost $300,000 in 2007 can be bought for less than half that now. Even nice little 2  Bedroom Bungalows can now be bought for less than $35,000. Now they are being told that their AAA medicare plan is going to change and they are going to have to start paying a lot more for it. 
 
Action Items
 
1. He urges everyone, particularly young people, that debt is now more than ever a 4 letter word and if you do nothing more for the rest of your investment life than pare down your debt and get out of debt completely you will not only have a great financial reward but the mental aspect of being debt free can’t be underestimated. 
 
2. Get out of the US Dollar since as the worlds reserve currency is backed by a country that is in even worse shape than Europe. Peter has recently converted “a bunch of my Capital” into Canadian dollars. 
 
3. The US is no longer the economic engine that pulls the rest of the world around. There are other countries, India, China, Brazil and he recommends that action be taken and investments made in equities that do the majority of their business in these countries. 
 
4. For preservation of Capital he recommends the Gold Market. Its been the best investment for the last 10 years and he thinks it has another 4-5 years to run. As for the Flash Crash, Peter believes it gave investors an opportunity to get involved in Gold at good prices. As an alternative, if you can’t pull the trigger here then buy when Gold breaks the $1,800 level. 
 
5. While Peter thinks that Silver will outperform Gold over the next few months, ultimately he likes and recommends you buy Gold. 

To listen to the entire Peter Grandich interview with Michael Campbell go to this player you will find in the centre of the masthead of any Moneytalks page:

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