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Horrible numbers, downgrades across the world, and investors running scared…again.
Is it just me, or is it time to take an early summer vacation?
It has not been a great start to the month:
- Economists have downgraded US’ Q2 GDP growth expectations by 0.5%
- Moody’s has once again downgraded Greece’s credit rating, now to Caa1 from B1 and has even given 50% odds for a default within the next five years.
- China’s PMI numbers were extremely weak, showing the slowest pace in nine months.
- Case Shiller’s housing data has now confirmed that the double dip is officially here for home prices across much of the US. The National Index fell 4.2% over the first quarter alone, and is down 5.1% compared to its year-ago level. Home prices continue on their downward spiral with no relief in sight.
With all of the money spent through all of the US’ loose fiscal policies, nothing has changed.
In recent letters, I talked about the stock markets climb and the low volume volatility (see Age of America Over?). Volume still remains extremely low, particularly on days where we move to the upside. We saw this again in recent weeks as investors were seen taking risk off the table, while bargain hunters made their move.
The recent rally on low volume could be a result of investors pricing in a potential QE3. It could be bargain hunters making their move. But who is right?
The truth is, we won’t really know that until we get closer to US’ Labour Day, when we really see the impact of the end of QE2. I expect volatility to remain for the next couple of months but it’s very likely we’re in a trading range in this market – one that’s characterized by low volume.
Simply put, if you’re trading for the short term, be cautious – not paranoid.
We’re in a seasonably challenging marketplace.
Historically, during the months of May through October, the markets are up only 1% with much of these gains towards the later end of the spectrum. Compare that with the months of November through April, where we get a near 7% pop. If you combine the seasonable marketplace with continued uncertainty of the economies around the world and Bernanke’s next move, you’re going to havea lot of worries on your hand if you’re playing the short term bull.
If you’re a technical trader, you would know we’re close to the 50-day moving average on the indices. If it doesn’t’ hold – and there’s a good possibility that it won’t – look to the 1295 level of the S&P500 as the next level of support. This is the 5% decline threshold and an important retracement level.
Still, we’re only talking about a very mild decline. So while the recent worldwide economic numbers don’t look so good and everyone remains on tilt with Bernanke’s next move, I wouldn’t worry too much.
When you look at markets that have declined 5% or more in the short term, 81 of the 84 recent instances have recovered everything they lost in a median of 14 months or less. So unless we’re headed for a mega meltdown, it would be better to buy then to bail on weakness – especially if you have a longer time investment horizon.
While there has been a lot of talk about great investments in emerging markets, I like staying closer to home.
Most of the emerging markets are dealing with rising inflation, including China. Many of them are tightening monetary policy, and as a result, their equity markets have struggled. In Europe, you have the debt problem while Japan is dealing with reconstruction. As difficult as the US’ problems are, I still think the N. American markets are the most attractive.
Over the next few months, being defensive won’t hurt. That doesn’t mean you have to stay out of the markets. Companies with strong balance sheets in the utilities, telecom, and healthcare with nice dividend yields are a great way to play the markets before we resume investing in the global growth story through technology and industrials.
Gold, Silver, and Oil
The Dollar has started to weaken in the last couple of weeks and that’s likely going to give commodities a little bit of a floor. Energy is weak, copper is weak, so don’t expect too much in the short run. But once we get through the summer and gain new traction, commodities will once again be a great place to be.
While it may be too early to pull the trigger, the selloff has given some opportunities for longer term profits. I do see better entry points for the markets, both in the commodities sector and for general equities. Be patient, be defensive, and be ready to make a move when it happens.
Oil prices are very much dependant on the economy and what the economic outlook is. There are some analysts that say that oil is going to $130-$140, but I think the economy is too weak at this point. I like oil and gas equities over oil itself for a better risk/reward return.
As I have mentioned in past letters, both gold and silver should continue to rise. While there is often a strong correlation between the Dollar and gold itself, this correlation has become more of a formality than anything.
Gold, while traded as an investment on ETF’s, is a preserver of wealth. It is a currency that the world recognizes as a safe haven against economic turmoil and an armour against the frivolous spending and printing of paper money brought on by the bankers.
Gold as a currency is real.
Earlier in the year, I talked about how gold was as good as cash when exchanges around the world began to accept gold as collateral for certain trades (see The Banks Are In). But gold as a currency has now gone one step further.
Utah just became the first US state to recognize gold as legal tender. Its Legal Tender Act of 2011 allows U.S. minted gold and silver coins to be recognized as legal tender in the value that reflects the market price for gold and silver.
The Federal Reserve has a stranglehold on the US, so the chances of the US moving toward a gold or silver-backed currency is slim – at least in the near term.
But while the US itself may not move in that direction, individual states just might. Utah isn’t the only state to push for precious metals as legal tender.
The following states are just some examples of US States that have introduced, but not passed, precious metals as legal tender:
- North Carolina introduced a bill that would have the state issue its own legal tender backed by the gold and silver in the state’s treasury.
- South Carolina introduced a bill that advocated a return to gold and silver as legal tender
- Minnesota introduced a bill to “designate gold and silver coin as official ‘legal tender’ in payment of debts under certain circumstances.” The bill said, “the currency emitted by the Federal Reserve System [i.e. the US dollar] has created and threatens to create increasing instability in the governmental finances and private economy of the state of Minnesota.”
- Georgia introduced a bill that would have the state government only accept US minted gold and silver coins for payment (i.e. tax payments).
- Idaho through House Bill 622 proposes use of gold and silver as currency.
- Colorado, through the Colorado Honest Money act, proposes the use of gold and gold electronic currency for payment of state obligations.
- Missouri proposed to advocate the use of gold and gold electronic currency in the payment of state taxes fees, fines, and other obligations; labor compensation, payment of principal and interest on loans, and resolution of court judgments.
If you think it’s only the US States encouraing movement away from the Dollar, think again.
A while back, I talked about how China and Russia have formed an agreement to use their respective currencies for bilateral trade, skipping over the world`s reserve currency, the US dollar (see It’s Already Here). They are not the only powerful nations moving away from the world’s reserve currency to make trades…
The Greatest War in History
For those with any knowledge of US history, the battle between the bankers and the US government has been raging on since the birth of the US. While it’s easy to blame the US government, we cannot forget that the Government has been battling its own war against unaudited paper currency for decades upon decades.
With the world on its feet and powerful nations fighting back, have the bankers gone too far this time?
War is fought with money. And we’re in the biggest financial war history has ever seen.
“I have two great enemies, the Southern Army in front of me and the financial institutions in the rear. Of the two the one in my rear is my greatest foe.” – Abraham Lincoln, 1865
Until next week,
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