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Market Overview
CMV can not recall a period in our economic and political history (which spans over 50 years for your editor) where such an opaque and convoluted picture confounds the investor. We take pride in making sense out of nonsense, clarity out of confusion and reason out of rhyme. In short, our value to you has been to connect the dots and offer you a vision of what the future holds. We face history-making challenges in the months and years ahead. Our hope is that our experience is begetting wisdom and we all will find security in an un-secure world.
As we near the end of the third quarter of 2012, US stocks are nearing all-time highs and most money managers are sitting on double-digit gains thanks, in part, to central banks that have flooded their markets with cheap money. According to a WSJ article (September 24, 2012) some managers are considering taking profits and sitting out the remainder of the year. At Brown Brothers-Harriman, the firm’s mutual fund BBH Core Select is up 18.4% YTD and G. Scott Clemons a chief strategist for the firm says, “the market has gotten ahead of itself,” and we’re booking some profits. The DOW is up 10% at 13,437 and is close to its’ all-time peak of 14,164 set in October 2007. The S&P 500 Index is up 14.6% YTD and has gained almost 30% over a year ago when the fit hit the shan and we experienced the most volatile equity markets in recent history.
Michael Santoli, in his column Streetwise in Barron’s (September 24, 2012) cautions investors against complacency. Pointing to the double-digit gains YTD, he reports that bullish sentiment exceeds the bears by 30% and is a clear warning sign that the equity markets are overbought. The driving force behind this move, of course, is the maxim, “Don’t fight the Fed,” which at present is purposely bullish for stocks. Investors and money managers are assuming that the Fed stimulus (QE 3) will work its’ magic and the market will continue higher. But, it may not. (Read Paul Brodsky’s assessment page 7). That possibility has led Alan Abelson to pen his outlook in his Barron’s column “Up & Down Wall Street” (September 24, 2012) asking, “Headed For A Blowout?” One of Abelson’s undisclosed savvy sources believes that the Fed’s action on top of an already over bought market will pave the way for a “blowoff ending to this phase of the rise.” Abelson also warns that high-frequency trading (HFT) could exacerbate the downturn and turn it into a rout.
One of the prime examples of an activity that contributes to the convoluted economic picture is, believe it or not, auto sales and loans. An August 14, 2012 WSJ headline reads, “A Green Light For Car Loans.” At the end of the second quarter, auto loans will total $725 billion which is 5.7% above a year ago and the highest level since the first quarter of 2009 when auto “repos” became one of the nation’s few job opportunities. Tim Lentz, the chief executive at Toyota Motor Corp., said “The banks are getting into auto loans because they have the money. We are seeing more sub-prime, which is good.” Those few words are a harbinger of things to come. Memories are so short. Lending to unqualified borrowers was the “killer app” five years ago but the bankers always justify their underwriting on the premise that “it’s different this time” – It Is Not.
The WSJ piece by Neil Shah indicates that borrowers are taking out loans as long as 72 to 84 months which means, of course, that most buyers are immediately underwater on the loan as soon as they drive off the lot. General Motors just announced that it has made a bid for Ally Financials Inc.’s international operations. You may not recall that it was GMAC, the predecessor to Ally, that GM used to fund its’ sub-prime auto loans during the pseudo real estate boom just five years ago. The volume of auto loan securities (packages of loans) this year is about 30% above 2006 pre-crisis levels. But, all the auto industry sees is an annual projection of 14.1 million units and it could care less how many loans could go bad and how many cars are repossessed. They miss the macro point.
There’s another insight into the automobile industry that is possibly a CMV exclusive. GM (Government Motors) has tooled up to meet what they perceive to be this burgeoning demand for cars. They say that the average car on the road is 11 years old and demand will continue for years at this level. GM overestimated demand and didn’t grasp the fallout from the sub-prime home and auto loans in 2007 and will repeat the same mistake. Add to this that GM is tooled up primarily to meet the demand of its union workers for full employment and not the market. CMV’s forecast is that GM will be bankrupt again. That’s what occurs when you have central planners running a business and a government.
Then there’s the “Fiscal Cliff” which is not the same precipice where granny meets her demise in the Mediscare ad. This one is the metaphor for the fallout from the consequences of the Budget Control Act of 2011. The Bush tax cuts and automatic spending cuts will expire on December 31, 2012 unless the president and/or Congress intervenes. You’ll recall that Congress and the president failed to reach an agreement on a plan to cut the budget deficit by $1.2 trillion over 10 years last year. If no action is taken, the tax rates will rise to where they were on Bill Clinton’s watch and there will be deep cuts in defense and 1,000 other government programs including Medicare.
David Kelly, global strategist for JP Morgan funds says that “neither side has the guts to let this happen” but CMV is of a mind that the present administration would welcome a crisis, and given another four years they’ll play hardball . Angst over this issue is sufficient cause to roil the markets.
Closely related to the above is business owner sentiment. The 340,000-members of the National Federation of Independent Business (NFIB) compiles an Optimism Index as reported by its members each month. It’s meaningful because small businesses account for nearly one-half of all private sector GDP and more than half of all private sector employment. According to Gene Epstein’s article in the September 17, 2012 issue of Barron’s, the August index was 91.2 up from a low of 82.0 at the bottom of the recession in 2009. That compares to the lows of a little over 80.0 during the recessions of 1974-75 and 1980. The August reading is trending down about 2.0 points from its’ 2012 high of 93.0, which NFIB attributes to:
● Fear about the future.
● Uncertainty over economic conditions
● Uncertainty over government actions.
Other concerns are fears of taxes, soaring federal debt and the potential cost of ObamaCare. Small business is the true engine of growth and employment in this country. It’s impossible to imagine an economic recovery from this sector who have been told that “they didn’t build it”(their business).
Morgan Stanley has just produced the chart below that indicates that global export growth has collapsed which ties into the recent report from Fed-Ex on the decline in their shipments. The fall in the Baltic-Dry Index of ship cargo supports the conclusion that not only are China’s exports slowing dramatically, all trade is plunging towards the level of January 2009. It begs the question, what is the catalyst that will reverse this trend?
One indicator that we can all relate to is the recent action by Bank of America to lay off an additional 16,000 employees prior to year end. On a local basis, our nearby branch has closed all drive-up windows and has upped most checking account fees 20% or more. We expect a large percentage of branch offices in the Phoenix metro area to close by the end of the year as BofA transitions to virtual banking and personal relationship with the giant will cease to exist. The bank’s acquisition of Countrywide Financial is the main cause and the bank just settled another massive lawsuit. It has paid $2.43 billion for claims it misled shareholders in its’ purchase of Merrill Lynch.
In looking at the global macro picture one has to be cognizant of the amount of pure ANGER that now is running rampant throughout the world. The Muslim Brotherhood has succeeded in inciting its’ brothers to a level of rage that may result in an all-out war in the mid-east and could result in an attempt to wipe Israel off the map. Our President refers to the coming storm there as a “bump in the road.” A road to nowhere? A riot recently in a Chinese electronics factory triggered unrest amongst 2000 workers that left 40 people injured and hospitalized. 5000 police were called to the scene which could be replicated elsewhere as worker discontent spreads throughout the country. The Chinese magic dragon is going “puff.” In South Africa miners went on strike which resulted in deaths of hundreds of workers precipitated by demands for increases in pay and benefits. South Africa only 10 years ago was the leading producer of gold and platinum in the world. Today it is only a remnant of its’ former self despite the rise in prices.
In the US, we see a microcosm of anger every day. The continual harangue, foul language, and absurd behavior by our politicians and public figures has made civil discourse virtually impossible. It is any wonder that our children have no respect for parents, teachers and authority of any kind and resolve their issues with guns and fistfights in full view of citizens who have no desire to intervene? We’re a society that is at a tipping point and has a government at present that neither has the resources nor the will to change the inevitable course of events. We’re not experiencing a bump in the road. We’re at the fork in the road. Do we choose a turn to the right or continue to the left? We’ll know in five weeks but that won’t be the end of the anger. A crisis looms ahead and a catharsis will follow that will save America from the enemy within. Freedom will be lost before the nation realizes what we once possessed.
The Obama Myth - Debunked
On his August 26, 2012 podcast, The Myth Buster, (the alter-ego of the editor of CMV) reviewed the New York Times best seller The Amateur, written by Edward Klein. It is important to first establish that the author is not a “right-wing ideologue”, whose sole purpose is to defame the president. Klein is the former editor of the New York Times Magazine, the former foreign editor of Newsweek and the author of a number of books on the Kennedy family including The Love Story of Jack and Jackie Kennedy.
Klein interviewed about 200 people for this book, who have been close to the president. Ironically the title of this book was provided by Bill Clinton who said, “Barack Obama is an amateur.”
Here are a few of Klein’s observations:
● The president is inept in management and governance. He has no executive sense.
● The president does not learn from his mistakes.
● The president blames his problems on those he disagrees with.
● The president disregards old friends that are no longer useful to him.
● The president is thin-skinned and has the wrong temperament to be a chief executive.
● The president is more like Richard Nixon than his idol Franklin Delano Roosevelt. He’s an introvert, dismissive, paranoid and is prone to self-pity.
● The president doesn’t enjoy his job. He clings to his narcissistic view of the Presidency.
In one of the most revealing scenes in the book, Klein interviewed Steven Rogers, an African American who made a fortune in business before becoming the Grund Family Distinguished Professor of Entrepreneurship at Northwestern University’s Kellogg School of Management. Rogers contributed funds to the then senatorial candidate to pay off Obama’s unpaid un-successful run for Congress. Rogers made a request that Obama speak to his students after he was elected. Despite numerous calls to the Senator to set a date to speak to the students, Barack Obama did not respond. Rogers recalled Obama’s promise and the money he contributed. Obama’s reply? “Come on man, you should know better when politicians make promises.” Rogers replied, “You’re a dirty, rotten mother-f... what kind of shit are you trying to pull? F... you, you big-eared mother-f...” A year later, Obama finally spoke to the students. Rogers concluded, “What you have with Barack Obama is a lack of character.”
Read this book. As the publisher says on the inside flap, “You will never look at Barack Obama the same way again.”
Another critical insight into the man who occupies the oval office is Dinesh D’Souza’s documentary film “2016: Obama’s America.” This film was produced by Gerald Molen, who owns an Academy Award for “Schindler’s List.” (Your editor has met with Molen who has reviewed a screen-play adapted from a story written by your editor.) The film has had a wide showing through the AMC Theater chain which is now owned by the Chinese to the chagrin of Hollywood. Bill Goodykoontz of the Arizona Republic reviewed the film on August 31, 2012. Your editor responded as follows:
Bill Goodykoontz reviewed Dinesh D’Souza’s documentary 2016: Obama’s America in the August 31, 2012 Arizona Republic. “2016 a well-made but flawed Film.” The film was not flawed – the subject (Obama) is flawed. Goodykoontz should read “The Amateur” written by a fellow journalist Edward Klein, former editor-in-chief of the New Your Times Magazine. In one of Klein’s interviews with a former strong African-American supporter of the President in 2008, the author discovered one (of many) critical flaws. After the president failed to deliver on a promise to his supporter, the supporter told Klein, “What you have with Barack Obama is a lack of character.” Equally incisive, it was Bill Clinton who referred to the President as the “amateur.” Barack Obama is over his head as the occupant of the most powerful office in the world and contrary to Goodykoontz’ piece, the President’s “psychology and motivation” are the most informative feature of the film. Obama’s flawed ideology is not well-known to voters. – H. L. Quist
The point of this experience is that few Americans in 2008 had any knowledge of this man and the meaning of his message – “In 5 days we’re going to fundamentally change the United States of America.” Your editor knew Obama’s background and driving ideology and correctly labeled the candidate as a Marxist in his book How To Profit From The Coming Inflationary Boom. Despite the plethora of revelations and anecdotal evidence that has demonstrated the president’s vision for America, it appears that the nation may give this president four more years to finish the job he was “ordained” to do. Contrary to popular perception, however, this would not be a victory for the Democratic Party. This is no longer the party of FDR, Truman, JFK or Bill Clinton. This is the Obama Party. Daniel Hennniger of the WSJ writes (September 13, 2012):
The systemically alienated Obama Party more resembles the ancient anti-capitalist syndicate movements of continental Europe...an Obama victory wouldn’t just be a defeat of the GOP. It would be a defeat of the post World War II Democratic Party. And they know it. The progressive left has always wanted to put democratic liberalism over the cliff for decades. This is their best shot to get it done.”
The cold hard reality is that the president, once ensconced in the oval office for four more years, will revert to his ideological goal to fundamentally change America and any serious effort to create more jobs and grow the economy will be forgotten with unfilled promises. It will take decades to repair not only the economy but the Democratic Party.
The Game Of FLOG
FLOG is golf spelled backwards. Golfers endure a bit of self-flagellation so the term has relevance. But there are more important considerations worthy of a financial newsletter.
On the surface golf is, like other sports, enjoying a pinnacle of success as evidenced by the recent Fed-Ex Cup National Championship and the Ryder Cup. But, further investigation reveals that the sport that once boasted that 35 million Americans who considered themselves golfers (or floggers), is in steep decline and its’ causes are worth analyzing. The nation’s Mecca of golf, Phoenix, is a microcosm. The City owns and operates six golf courses. Once self-sustaining, since 1999 the courses have accumulated a $14.8 million operating deficit according to a recent report summarized in a September 5, 2012 article in the Arizona Republic.
The report cites that while the number of golf courses in Maricopa County has increased from 153 to 214 since 1990, the main cause of the deficit is the significant decrease in the number of players. No numbers of the rounds played was provided. The City is now considering a number of options including closing several courses and turning some into parks. Floggers are outraged but no one has ever accused those who chase a little white ball as being sane. CMV would like to offer some observations which are a picture into America’s future.
Muny Golf (public golf courses) is a venue for all citizens but especially working class Americans. (Your editor has enjoyed Muny Golf for over 50 years and could play anywhere.) As the average household income has shrunk from $54,932 per year in 1999 to $50,054 in 2011 (a drop of 8.9%) and unemployment is really more like 16% not 8%, many former players simply don’t have the time or money to take a half day off to enjoy this pastime. Many of the self-employed find themselves working on Saturdays. Golf is extremely time consuming, the equipment and fees are expensive and families must make choices. Golf has been eliminated from millions of American’s schedules. There is more at work here.
During the real estate bubble from 2003 to 2008, billions of dollars were invested in “trophy” golf courses – private and public, some built at outrageous costs of $2 million or more per hole, that required green fees of $200 per round or more and a maximum number of players just to meet debt service. Many of these exclusive venues are now bankrupt and are desperately competing for players at Muny rates and have captured Muny players.
The Professional Golfers Association (PGA) to its’ credit, through the 1stTEE Program, is introducing this character-building sport to young people nation-wide in hopes that kids will continue the incredibly rich tradition of the game. Going forward, however, the public’s enthusiasm for the game is going to wane and the dismal prospect of an Obama economy will take its toll. Sponsors are going to be more reluctant to guarantee escalating tournament costs especially for the Woman and Senior events and ultimately the player’s purses will begin to decline. A $10 million prize (Annuity) to the winner of the Fed-Ex Cup is a bit over the top, but strangely the nation’s number one flogger, who plays more golf than any other president, hasn’t cast aspersions on the wealthy players, although they can expect much higher taxes.
Stagflation Now?
Readers should recall that CMV has referred to the incomparable expertise of Paul Brodsky of QB Asset Management who has graced these pages numerous times. To your editor he truly is, all humor aside, the smartest guy in the room when it comes to trying to get a handle on US monetary policy. Paul’s September missive is aptly entitled, “No Pretense.”
QB’s analysis since 2007 has consistently forecast economic outcomes that most experts have considered unlikely. They were then, and today, proven accurate:
● Significant and ongoing monetary inflation.
● Policy-administered currency devaluation.
● Substantial global price inflation.
● An eventual change in how the 40 year old global monetary system is structured.
What the Federal Reserve and the Obama Administration would like us to believe (especially prior to the election) is that Quantitative Easing (QE 1, 2 and now 3) will create economic growth. In Brodsky’s opinion, there is “no correlation linking base money growth to sustainable real output growth.” He goes on to say that, “base money inflation may ostensibly bring forward the time [shorten the time] until a new credit cycle can begin, such a policy raises global resource pricing coincidentally. Resource providers have the incentive to raise prices immediately, yet there is no such market driven incentive among consumers to increase borrowing.” The bottom line? QE debt monetization will not provide economic stimulus which is exactly what’s happening as the third quarter GDP numbers will demonstrate. (Second Quarter GDP has already been revised down to 1.3% from 1.7%.)
What will be the outcome of Bernanke’s (and the global central banks) QE policy? Global Stagflation – which is “stagnant or contracting global real output coincident with substantially rising prices of commodities and rising input costs of finished goods.” The worst of all possible worlds. Somewhat similar to the early 1980s with the exception that interest rates were at historic highs then and savers had the benefit of 15% Treasury and CD yields to live on.
The solution to the dilemma faced by all the central banks and especially the US Federal Reserve, is the eventual need to collateralize their currencies. Given this recent massive expansion of the base money supply at $40 billion/month to the end of 2014, the US Shadow Gold Price will rise from Paul’s estimate a year ago of $10,000/oz to about $15,000/oz. You will recall that the Brodsky Plan would require that the Fed acquire all the outstanding gold from US citizens with newly-printed dollars which would stabilize the value of the USD by de-leveraging the monetary system. Bernanke and this Federal Reserve will be loathe to implement this solution until their “one-trick pony” takes its’ last gasp.
Editor’s Notes:
Tyler Durden at ZeroHedge.com says that in addition to the $40 billion per month in the Fed’s purchase of mortgage-backed securities, it will also buy $45 billion per month in US Treasuries therefore the Fed’s balance sheet will balloon from $2.8 trillion currently to $4 trillion by December 31, 2013. If this doesn’t disturb you (and your children) you simply do not understand the problem and you are not prepared for the consequences. Do not hesitate to call me if you need more insight into this critical topic.
Updates
Healthcare
You may recall that CMV advanced a potential solution to the healthcare crisis that looms ahead under ObamaCare. We advocated a Two Tier Healthcare System in our August issue. John C. Goodman, who is the President of the National Center for Policy Analysis and author of Priceless: Curing the Health Care Crisis, wrote an op-ed piece in the August 15, 2012 WSJ entitled “Why The Doctor Can’t See You”, in which he stated, “The demand for healthcare under ObamaCare will increase dramatically. The supply of physicians won’t. Get ready for a two-tier system of medical care.” CMV had no knowledge of Mr. Goodman and his position on this key issue. It is comforting to your editor to know that our observations have merit.
The Code of The West
Your editor’s book How To Profit From The Coming Inflationary Boom: And Avoid The Next Crash introduced the reader to James P. Owen who, motivated by the financial industry’s loss of ethics and moral compass, wrote several books dealing with the issue that has become a plague in America. His latest book is Cowboy Values: Recapturing What American Once Stood For,
In the September 22, 2012 issue of the WSJ an article by Holly Finn featured Owen and the impact he has had introducing his cowboy inspired program through his Center for Cowboy Ethics and Leadership to students of all ages. Finn’s piece was, in part, highlighted by the recent scandal at Harvard University where 125 students were under investigation for cheating in a class entitled (we’re not making this up) “Introduction to Congress.”
Ethics and the Code of the West should be mandatory in all schools but the progressives will prevent it from happening. When someone in the future pens the Rise and Fall of The Great American Empire, the root cause will be the breakdown of ethics and the rule of law.
Mediscare
The persistent TV image of a Paul Ryan look-alike throwing grannie in a wheel chair off a cliff is just one of the despicable ads by the progressive leaning group – The Agenda Agency – that attempts to portray the Republicans as the enemy of all seniors who will see their Medicare benefits severely slashed if the Romney-Ryan ticket wins the election. As CMV reported the “mediscare” tactics have backfired when it was revealed that it is ObamaCare that actually slashes $716 billion from Medicare.
Now comes the revelation that the organization that was ostensibly the most ardent advocate for seniors, the American Association of Retired Persons (AARP) was in fact working against its’ constituents to pass ObamaCare.
Thanks to the investigative journalism of the WSJ’s Kimberley A. Strassel (Potomac Watch, September 21, 2012) the ugly truth is that the AARP was one of the strongest lobbyists for ObamaCare that not only slashes $716 billion from Medicare, it strips seniors of choice of coverage and sets the stage for rationing (CMV August 2012). AARP did this despite an overwhelming majority of its’ 37 million members age 50 and over who were opposed to the healthcare bill. Strassel reported that 71 pages of e-mails show that AARP management was taking “orders” from the Administration to keep its’ board ‘inline’ and pledging fealty to “the cause.” Many former key AARP officials involved in this charade now work for the Obama administration.
Sector Overview
1. Cash & Fixed Income
The Treasury market is having a difficult time trying to determine what direction the economy will take after Ben Bernanke’s open-ended QE 3 program was announced. Initially after the details were revealed yields rose and bonds lost value. After the brief euphoria wore off and the equity market weakened, rates declined and bonds rallied, with the 10 Year T-Note finishing the month with a yield of 1.64% which signals economic deceleration and recession.* Be sure to focus on our review of Paul Brodsky’s outlook on the US monetary dilemma that will dictate the direction of this Sector in the future. Another factor is the election. CMV is of the opinion that if the president is re-elected, the fixed income market and US Treasuries in particular could sell off big time as rising interest rates in the future would likely puncture the massive bond bubble.
*Editor’s Note: This trend reversed on September 27th on news from China and the EU.
2. US Equities
CMV has adequately covered this Sector in MARKET OVERVIEW. As we go to press the market is showing signs of weakness and the election and events in the EU and China will be a key factor going forward.
3. International Equities
It’s becoming painfully evident that the China economy and society is experiencing considerable duress. The riot at the Hon Hoi Precision Industry Co., which is the world’s largest contract maker of electronics products for such clients as Apple, Inc., and Dell, Inc., illustrates that Chinese manufacturers are wrestling with increasing demands from angry workers and declining revenues. There have been previous problems at this facility which employs 79,000 workers which has experienced numerous suicides in its’ workforce, falling to their deaths from the roof of the plant. Demanding 60 hour work weeks and poor working conditions appear to be the root causes of the problem. China’s Shanghai Composite Index has fallen about 67% from its’ October 2007 peak and the question remains whether or not the recently announced government infrastructure stimulus plan will work, or is a collapse eminent. See the chart on the next page (not visible on blog - join the yahoo group to view charts).
An anomaly has occurred in SE Asia. Indonesia’s economy is expanding at a 6.4% pace but stocks are up just 5% YTD even trailing the MSCI Asia ex-Japan Index. Real property prices are booming and the minimum wage is rising faster than inflation. Little known to investors, Indonesia is rapidly becoming a hot-bed for gold mining with more discoveries made there in the past couple of years.
As CMV goes to press, anger and riots are breaking out in Greece – again. The Greeks simply do not get it. When the EU finally cuts the umbilical cord, government and union jobs and salaries will stop. When the Soviet Union suddenly collapsed in 1998 unemployment skyrocketed and workers salaries and benefits stopped. The treasury was out of rubles. There even was a 6 to 9 month period where the Soviet military wasn’t paid! There is this grand global misconception that all governments including the US will have the funds to pay salaries, pensions and entitlements. Countries can go bankrupt and can’t borrow anymore. History is replete with examples. Next in line? Venezuela. Hugo Chavez, another Marxist, has destroyed the economy but he’ll probably win re-election because Chavez controls all media in the country.
4. Hard Assets
In August we reported that strange things were happening in the oil patch. Things have become even stranger. Given Bernanke’s QE 3 and the prospect for a disruption of supply of oil from the mid-east, the stage was set for rising crude prices. Suddenly however, the price of oil and gasoline began to fall. First, Saudi Arabia announced that it would increase production to make certain that there would not be a supply disruption to the US and secondly, the Administration announced that it would tap the Strategic Petroleum Reserve here in the US. Bingo! Crude prices immediately began to decline to below $90/BBL. You don’t suppose that the coming election had anything to do with lower prices, do you? That unforgettable photo of Barack Obama bowing to the King of Saudi Arabia also comes to mind but surely that can’t be a factor?
Military intelligence from a number of un-named and confidential sources indicate that Israel is preparing for war with Iran and other Arab countries. CMV believes that an OCTOBER SURPRISE could be eminent. If Russia and China come to the support of Iran, Egypt and others, the situation could become very ugly – quickly. Despite the president’s ‘intervention’ the price of crude could skyrocket.
Natural Gas has also been on a roller-coaster. After declining in early September to around $2.80/BTU it suddenly reversed direction and again exceeded $3.20/BTU as we write. Copper and the base metal complex initially rallied when Bernanke waved his magic wand but as the China Syndrome worsened, this Sector also took a hit. (See #7 Commodities for reversal.)
5. Precious Metals
There was a remarkable anomaly in the Precious Metals Group (PMG) over the past 5 months unrecognized by analysts. You may recall that it was August 22, 2011 when gold (Au) reached its’ top in nominal terms at $1,921/oz and that’s the specific day that it broke from its’ double top formation and began the steep decline to the $1,550/oz area by the end of the year. There was little movement during the first eight months of 2012 and Larry Edelson of Weiss Research called for Au to break its’ 2011 low and plummet to $1,420/oz or lower. As late as August 14 this year, Au was range bound at $1,580/oz. Suddenly, however, the sentiment changed. Moved by Bernanke’s QE 3 subtle verbiage, Au broke out and by August 22, 2012 Au reached $1,680/oz and rocketed to about $1,780/oz as we write. So, August 22nd was a bellwether day. It just happened to be your editor’s 50th Wedding Anniversary which means little to the reader but was a double entendre for your editor and spouse.
CMV’s key inflection point was $1,640/oz which was our BUY signal. Remarkably, James Dines (the Original Gold Bug) sent out an Investors Warning Bulletin on August 22nd predicting that gold and silver upside breakouts would launch an assault on their previous all-time highs. See Chart on next page (join the yahoo group to view the charts on the CMV).
Silver (Ag) followed its’ big brother and also broke out from a morbid trading range. On July 1, 2012, Ag was only $26.40/oz. Taking the lead from Bernanke, Ag soared to about $35/oz by August 22nd. Rumors in the commodity pits indicate that JP Morgan-Chase Bank could be indicted for its role in manipulating the silver market as reported by CMV for years. It has been reported by Eric Sprott (Sprott Asset Management) and others that the stated supply of silver bullion in warehouses simply does not exist. It this lid blows off, Ag could skyrocket. Sprott calls for $150/oz within a year whether the JPM scam is revealed or not.
Jim Dines and CMV are on the same wave. That’s understandable since we’ve regarded Jim as a mentor for over 40 years. As the third quarter is about to end the winds and the putrid oder of DEFLATION strikes our senses. The sudden drop in yield of US Treasuries and the consolidation in Au and Ag are indicators that the markets are reversing from commodity inflation to contraction. Dines and CMV agree on a critical point. The threat of DEFLATION will ramp-up the printing presses even more and there will be, as Dines says, “the sudden eruption of INFLATION in the coming rush to unload dollars.” In other words, don’t take the “head fake” the market is giving us (prior to September 27th). Dines adds “Printing even more money during a deflation leads to a ‘surprising’ eructation of hyperinflation and remember later that we were the first ones to obstreperously have used that word...” Sorry Jim, CMV has used the term for three years but we won’t quibble with our mentor.
6. Commodities
September 27, 2012 marked the first uptick since July in this Sector represented by the MSCI All-Country World Index. The S&P GSCI gauge of 24 commodities gained one percent on this date on bets that China would do more to stimulate its’ economy which would increase imports of raw materials. The Shanghai Composite rallied 2.6% on the news that China’s central bank added 365 billion yuan ($58 billion) to its’ financial system. At present, CMV is taking the position that all the global stimulus will accomplish what all the bankers and politicians want – asset inflation.
7. Real Estate
CMV readily admits that our forecasts for a residential real estate recovery was a bit premature but our vision has been realized. In late September the S&P Case Schiller 20 City Index reported the strongest gains since 2005 with home pries rising 5.9% YTD. In Phoenix Case Schiller reported that home prices have recovered 14.4% from the trough (low) in September 2011, but local experts report higher gains. CMV first reported almost two years ago that investors were aggressively buying foreclosures in the $100,000 price range and we’ve seen strong activity rapidly move up the “food chain” since then. Remarkably, according to the Cromford Daily Observation, there were 60 luxury homes over $1,000,000 sold in Maricopa County in August and the “shadow inventory” of these higher priced homes mow represents only a 15 day supply. As a result, home builders are buying lots and cranking out homes. The shares of homebuilders have more than tripled on average since their 2009 low. In its’ last quarter Lenmar Corp. sold 3,222 houses, up 20% YTD. In CMV’s opinion two psychological factors are also contributing to demand. One, buyers and investors are getting “anxious” feeling that they may have missed an opportunity, and two, the fear of US dollar devaluation is driving money into hard assets. The residential real estate market is telling us that the asset inflation boom has begun. There is now a growing opportunity to repair devastated balance sheets and get ready for the next crash. Stay tuned. Timing will be everything.
8. Special Situations
This Sector, which features mostly microcap stocks, remains out of favor and requires patience for those who are already in this space and opportunity for those who are seeking potential outsized gains in the months ahead. Let’s take each Sub-Sector and try to put each in its’ perspective:
Gold and Silver
The reality is that both of these resources are rapidly diminishing (as CMV has reported), grades are lower and costs of the miners are escalating. The mining companies need larger amounts and higher grades of proven ore in the ground. CGA Mining was just acquired for $1.1 billion to expand the buyer’s resource. The miners have to project their needs 10 to 20 years out in the future to remain viable. The risk in the explorers is that their efforts don’t turn up a deposit that is large or rich enough to warrant a buyer’s interest. CMV sees a rapidly approaching time when there will be a mad rush to acquire proven deposits.
Platinum & Palladium
We reported earlier that one of the world’s largest platinum miners in South Africa, operated by Lonium PLC, had been shut down by striking miners who were demanding a triple increase in wages. This is the mine where 34 protestors were killed last month. Platinum and palladium are not only precious metals, they are also a critical component in catalytic converters for automobiles to prevent exhaust pollution. CMV sees a situation here that will ultimately result in the failure and closure of some of these mines and the principal production will come from Russia.
Rare Earths
Jim Dines (The Dines Letter), who was also the original REE BUG, said in his September letter that “...there also should be a resurgence in the Rare Earths...” China still controls 95% of the world’s supply but the US has two companies that soon will be able to supply domestic manufacturers. These shares have rebounded nicely.
Uranium
Investors continue to ignore the fact that annual mining supply can not meet demand and contrary to perception the number of nuclear reactors will grow world-wide and the price of U3O8 will accelerate. The use of coal is in rapid decline. Natural Gas is on an uptrend and energy needs can’t be met by solar, wind and other alternatives.
Oil
New technologies and new opportunities are expanding in the Bakken Formation in Montana.
Potash
CMV foresees a food shortage aggravated by the drought in the mid-west and increasing demand. Demand for fertilizer both for the next season and beyond are very bullish for this product.
Graphite, Vanadium & Beryllium
Please refer to our July issue for a snap shot of these “new age” materials. Here are some recent and exciting developments. A US microcap has filed a patent application for a “vanadium oxide purification process which will allow the refinement of the element for use on electrolyte for mass storage batteries.” Picture a battery as large as a house that can serve as an alternative or backup energy source for an electrical grid serving a large population. The company has the only vanadium mine in the US.
In just one growing market for EV automobiles, demand for graphite and graphene will exceed all supply produced globally by 2020.
Copper alloys and high performance beryllium aluminum castings are providing new uses for nuclear power, automotive, oil and gas, electronics and aerospace.
If you want to learn more, please give me a call at (602) 840-4117. At a time of crisis there’s always opportunity.
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