The Daily Reckoning February 8th
As singer-songwriter, Aimee Mann, poetically observes, “The moth [will] beat his wings ’til he burns them black”
…and so will many individual investors.
The dazzling glow of a rallying stock market draws them to the flame of “easy” winnings. But just about the time the winnings become seductively easy, the scent of scorched wings fills the air. Share prices tumble and zillions of investor-moths scorch their savings.
This process repeats as predictably as…well…a moth to a flame…
The telltale signs of a too-hot market are only certain in retrospect. But that doesn’t mean you can’t feel the heat building up ahead of time. The classic signs of an overheated market include both technical and anecdotal phenomena. A technical sign of a topping market would be something like a multi-year low in the VIX Index of implied volatility…or low levels of cash in equity mutual funds. An anecdotal sign would be something like a cab driver telling you his favorite stocks…or a celebrity flaunting his/her stock-trading savvy.
As it happens, some of these signs are evident today, in the here and now. The VIX Index — also known as the “Fear Gauge” — just hit its lowest level since right before the market peak of 2007. Cash levels in mutual funds total little more than 3% of total assets — the lowest level ever recorded! The last two times cash levels dipped below the 4% mark (1999 and 2007), stocks tumbled shortly thereafter.
As troubling as these technical signs may be, they lack gravitas without corroborating anecdotal evidence. We all have our favorites, but almost no type of anecdotal evidence terrifies as viscerally and persuasively, as “the celebrity-turned-stock-expert.”
During the waning days of the epic tech-stock bubble of 1999, for example, Barbara Streisand made headlines as a self-proclaimed stock market wizard.
“Barbra Streisand was talking with her good friend Donna Karan on the phone last fall,” Fortune Magazine reported in June of 1999, “and she told Karan she’d made $130,000 on eBay stock in just one month. Karan was duly impressed. As Streisand tells it, ‘She said, “Oh, can you do that for me? I’ll give you a million dollars to invest for me.” And I said, “You’re crazy, why would you do that?” She said, “Well, it sounds like you’re making so much money, so do it for me.” So I said, “I’ll do it if you’re willing to lose it. Are you willing to lose a million dollars? That’s the only way I’m willing to do this.”’
“The result was stunning,” Fortune continued, “After five months of intense trading, Streisand managed to nearly double her friend’s stake, to $1.8 million.”
The stock market tumbled a few months later. As for Streisand’s post-bubble investment acumen, both she and the Internet are eerily silent. The stock-trading exploits of the legendary songbird have all but disappeared from the public record.
Not to worry, fifteen year-old actress, Rachel Fox, has become the celebrity stock-trader du jour! Fox, who describes herself as “one of the only 15-year old stock-trading actresses around,” reveals that she “makes a lot of money doing it.”
“I make over 64% per year on my investments,” says Fox in the fifth episode of her video series, “Fox on Stocks.” And if you wish to learn how to emulate her investing success, the teenage actress explains, just tune in to Fox on Stocks.
Lesson One (which you can find at minute 1:56 in the video clip below): “Break out your iPhone…” Intrigued? Then check out the entire video for yourself:
Your editor wishes the cheery Miss Fox continuing success, both on the big screen and on the small iPhone screen that’s running her stock market app. But while racking up 64% returns, your editor hopes Miss Fox will remember that stocks sometimes go down. Or, to rephrase that observation in 2013 bull market terms, stocks don’t always always go up. And they especially don’t always always go up when almost everyone has convinced themselves that they do.
Where are stocks going from here? Your editor has no idea. In fact, like a jilted spouse, he is often the last to know. That said, he has observed that stock market lows rarely coincide with multi-year-low VIX readings, all-time low cash levels in mutual funds and “how to” investment advice from Hollywood celebrities.
What is the best single thing you can do for your children? Send them to Asia for school so they can get a good education and learn Mandarin.
Or so says a thinker and investor Jim Rogers.
Some investors achieve the status of being legends, their opinions on all matters of economics and politics sought by everyone. Rogers is an example of that in our time, and for good reason.
His life began in rural Alabama. Then he became an intellectual and professor. Enticed by Wall Street, he tried his hand at the markets and won. He then became a world traveler who set world records, and then became a best selling author.
It was my pleasure to be invited to moderate a private forum in Atlanta, Georgia, at which Rogers was the guest of honor. I got to ask the questions in front of an audience of financial professionals I’ve always want to ask him. We had lots of fun.
Rogers’s big picture forecast is that the U.S. and the dollar are in the process of relinquishing their dominant position in world affairs to Asia. All throughout Asia, people are saving money, working long hours and asking for more work not less. In the United States, we are racking up more debt, saving less, working less, complaining more, and asking only for more goods and services from government.
Me and Jim Rogers in Atlanta, GeorgiaI was struck by how his analysis is so influenced by cultural observations. He pointed out that the Fed has contributed mightily to the wrecking of entrepreneurship in the U.S. Its low-interest rate policies are actively punishing savings. Its tax policies are punishing profitability and income earning. Its fiscal policies are encouraging dependence. Its educational practices are socializing another generation into laziness and dependence.
What a picture! As a result, he is urging young people to consider getting out. Get your passport, seek your education online, and find a position in Asia. Our great great grandparents uprooted themselves to seek a better life, and our children should consider doing the same. Travel is the first step. It opens up the world and helps us see new opportunities.
As for learning Mandarin, that’s what he is doing with his two daughters. He lives in Singapore in order to make sure this happens.
It’s radical stuff but he is walking the walk.
On the dollar, he is bearish. The Fed has been busying for five years trying to destroy the future of the dollar. Its policies have benefitted only insiders but made a mess out of the rest of the economic infrastructure. He thinks that 2008 was a mere warmup for what is coming down the line. What will replace the dollar? He is mildly optimistic about the Euro, temporarily bullish on the Russian ruble, and he is also feeling very good about precious metals like gold and silver.
On commodities, he is sticking by his known love for real stuff over fancy financial products. To his mind, the world food supply is not as plentiful as people believe. Farmers are in a more secure economic position than Wall Street stockjobbers. As for the legions of MBAs that the U.S. is producing, he finds them mostly worthless. A better credential to have is evidence that you can drive a tractor and get stuff to grow.
On bonds, he sees the end of the long bull market coming to an end. The yield curve only looks like it does due to massive intervention by the Fed. This artificiality cannot last. It won’t take much beyond a slight change in the pricing of long-term debt instruments to set off a chain of events that will blow up the Feds balance sheet and utterly wreck whatever stability that exists in the debt outlook for the U.S government. The debt cannot be paid now, but when the world decides that holding the debt is too risky and expensive, the bond bubble will explode, destroying many portfolios in the process. The new crisis will cause new policy panics and bring about a series of catastrophic decisions that will make 2008-2013 look like a mere prelude to the real action.
As for oil, he is bullish but not concerning the U.S. productive capacities. He is not very impressed by the predictions that shale and fracking change much at all, and sees many other regions of the world friendly to the whole industry.
As for technology, he sees the action leaving the U.S. and the world center of innovation emanating from Asia. In fact, he is not very impressed at all but much of the technological production of the U.S. over the last ten years.
A pretty dark picture? It would seem so, unless you speak Mandarin.
The moment of the evening that stands out to me the most really amounted to a brief musing on the whole subject of forecasting. Before offering his forecasts, he eloquently defended the whole enterprise of making predictions.
Predictions can never before scientific, he said. The future is always uncertain and subject to an infinite number of changing variables. Those who presume to have found the magic key to knowing the future — whether they are using high-powered mathematical models or the old-fashioned crystal ball — will be humbled. Human affairs are just that way, and there is no technology that can fix that.
Rogers said that he has been plenty wrong many times in his life.
At the same time, he continued, forecasts are unavoidable. It is not just stock pickers and economists who make forecasts. We all do. We must. We have to act now with the presumption that we have some inclining of what is around the corner.
Riffing on what he said, we go to school hoping to use our education later. We save money hoping to find things later on which we will spend it. We choose our personal associations based on the presumption that people won’t suddenly become different next week.
We all make choices anticipating the future, knowing full well that we could be wrong. We can’t be disabled by the knowledge that the future is essentially unknowable. If we fear that we are wrong to the point of inaction, we doom ourselves as acting persons. In this sense we are all investors, whether we are betting on stock symbols or not. We seek to make judgements that pay off down the line.
How do we make the future slightly less uncertain? How can we work toward making the best predictions? We seek out information. We try to make sure it is the highest quality information. We find many sources for our information. We evaluate it in light of our own education, experience, and intuition. Sometimes this information makes all the difference. Even so, there is no perfect foresight. We can be spectacularly right ten times, and calamitously wrong one time. Or it can be the reverse.
Having said that, he moved on to make the predictions above.
Somehow his small talk gave me a bit of boldness of my own. Having been heavily schooled in the Misesian tradition against statistical prediction making, I love headlines that make fun of economists and how often they are wrong.
It’s just thrilling and fabulous to see big shots laid low by the relentless surprises of real life. Nothing gives me a kick more than to see a model blow up. To see arrogant know-it-alls — especially bureaucrats and politicians — explode in the face of reality that refuses to conform to their outlook restores my faith in prospects of human liberty.
But we can go too far with this line of thinking. We can’t just decline to forecast.
Education and learning improve our ability to forecast, certainly qualitatively but even quantitatively.
As just one example — one that Rogers returned to several times — was the believe on the part of the Fed and the Treasure through two presidential administrations that their stimulus was bring higher economic growth and low unemployment. It hasn’t happened. Rogers hasn’t been surprised by this, and I haven’t either. Anyone who has read deeply in the classical and Austrian traditions of economics could have seen this coming.
Our predictions have been better than theirs.
The beauty of having access to a great investor with a proven record is that you can know that his skills are likely to be more finely honed than the average person on the street. No one is infallible but some predictions — we can predict — are likely to be true more often than other predictions.
I said earlier that his soliloquy on forecasting inspired me. So let me forge ahead with some of my own. I don’t see any of the food problems that he sees. With massive federal subsidies and vast technological improvements in farming, we have far too many, not too few, farmers. Many dismiss the technological innovations over the last years as superficial, but I disagree. I think Facebook, Twitter, Google, and smartphones as some of the greatest productive capital ever created.
As for the the coming Asian century, that could be right. But unlike the 19th and 20th centuries, the age of the superpower is over. One region’s prosperity doesn’t come at anyone else’s expense. Everyone can win in a world without borders and wars, and that is the world I believe is being born today. As for the dollar and the fiscal disaster, I’m a Rogerian in most every way.
The beauty of investor-intellectuals is that their ideas are tested in the real world. That’s what makes them different from the tenured professors running the universities. A man like Jim Rogers might not be right on all things; no one can be. But in the balance, I would take his forecasts over a thousand econometricians without nothing at stake in the outcome.
Original article posted on Laissez-Faire Today
It’s amazing that no one is talking about this.
“China’s demand is robust” they’ll say. “China may overtake India as the top gold consumer” they’ll add. “Exports rise year over year” the chatter continues.
But no one, and I mean no one, in the mainstream is calling a spade a spade. China is hoarding gold at a rate never seen before – like modern day conquistadors. Only today, unlike in the time of the conquistadors, the blood trail is tough to follow, as are the shipfuls of gold.
It’s an egregious rake, though. And while the mainstream media fails to cover this huge story, we’ll do our best to figure out just how much gold China is holding…
It all comes down to a little Chinese math.
Remember, the last “official” announcement detailing China’s gold holdings was in 2009 – ringing in a total of 1,054 tonnes. Compared to their previous official holding, announced six years prior, the new total represented a dramatic 75% increase in Chinese gold holdings.
Much time has passed since the latest official announcement – and China’s gold holdings have surely risen higher. Indeed, a year ago, when we touched base on this topic, we ascertained that China was likely holding 3,300 tonnes of gold – that’s about three times the current “official” holdings.
Flash forward to today and the strategic Middle Kingdom is surely holding even more gold. Just take a look at their import patterns over the last 12 months…
As you can see, and likely know if you’re an Agora Financial reader, imports via Hong Kong have been off the charts lately. Indeed, last year set a record for imports to mainland china.
But that’s only part of the story. This morning I took the time to add up all the imports along with production stats to give us a clear idea of just how much gold China is holding behind the curtain.
Starting at the time of China’s last official announcement, we’d need to add another 2,873 tonnes to China’s “official” holdings, just to account for imports and domestic production alone. That would put China’s current “known” holdings at 3,927 – well above Germany as the second largest gold holding nation in the world.
And do you think Germany’s ears are starting to burn? You betcha! Why do you think we saw that news earlier this year that Germany is auditing its gold holdings and repatriating some of its gold held out of country? It’s all about the Chinese math!
But here’s the kicker.
When you start adding up the stealthy, hard-to-track sources of gold – black market gold from Africa and South America (and maybe Iran) exports, global gold mining from semi-national Chinese firms or buyouts, and the idea that China is urging their own citizens to hoard gold – you’ll notice that China’s gold hoard is closer to 7,000 tonnes, or more!
Take a look:
By my calculations China could be sitting on more than 7,000 tonnes of gold, today. A lot of which comes from “stealthy” acquisitions that the mainstream won’t dare talk about: stealthy exporting, potential nationalization of the citizens gold, and gold transfers from mining buyouts, just to name a few.
Think of it this way. Right now the U.S. is tightening sanctions on Iranian oil exports.
There’s a huge thrust by the U.S. to curb monetary flows into Iran – so the U.S. has more than a few eggheads figuring this out, too. But even with all of the press coverage and government collaboration, do you really think Iranian oil exports are grinding to a halt?
I don’t. Sure the “official” exports are heading lower – but on the back end of that there is a massive amount of Iranian oil hitting the market.
Now let’s switch back to our discussion on China. There aren’t any sanctions on China’s gold imports, nor do we have any government agencies or global-collaborations attempting to stop China’s gold moves.
That said, if Iran can export oil when we don’t want them to, just imagine what kind of show China is putting on behind the scenes without a peep from the U.S. government! The amount of under-the-radar gold coming from Africa and South America has the potential to be enormous.
Frankly, name any country in Africa — with gold in the ground — and I bet you there are Chinese nationals on the ground digging or, at minimum, setting the ground work for black-market trade agreements.
On that end, you could fit enough bullion into a dingy to shift the global market for gold. But I’ll be the first to tell you the Chinese aren’t showing up to Africa’s gold-holding nations in a dingy – instead, they’re stopping by with cargo ships. Lots of em.
Ha, and here’s another little anecdote for you…
A few years back I sold my old car. In the process I had a lot of “colorful” characters show up at my house. They’d try to lowball me or pose a “trade” for my car (man, the kind of people that you find on the internet these days!) But when it was all said and done I ended up selling my beat-up, 13-year old car to the highest bidder. He was happy to pay for it, too.
After we did some paperwork I asked him if it was for him or his family, he casually said “nope.”
“I’ll be shipping this car via cargo ship to Africa, there’s a huge market for old cars there and this is one of the top selling models” he said. Forget selling the old car to a high-schooler, my car was headed overseas!
What’s this got to do with the whole China gold debate?
Well, believe it or not the developing world in Africa wants to keep developing. Whether they get old cars from the U.S. or cheap goods from China they are willing to pay good money (or good gold) for imports.
And China is at no lack for tradable merchandise – just check your local dollar store.
I’m shaking my head as I type right now. Just imagine a cargo ship filled with what’s essentially five, dollar stores-worth of merchandise — plastic soccer balls, wanna-be Barbie dolls, cheap tool sets, you name it. When that ship shows up on the shores of an emerging African nation and empties its cargo (to the happy locals), there’s NO WAY that boat is going back to China empty. More and more I bet it’s filled up with local resources that China craves – one of which is surely GOLD.
So you see, China is getting far more gold than it’s leading on – I bet there are thousands of tonnes that are unaccounted for. Heck, officially China says it hasn’t added an ounce of gold to its holdings for almost four years! That’s laughable. And it’s also profitable to those that see the writing on the wall.
So add it all up. China is the world’s leading gold producer and also the world’s leading gold importer. And surprisingly their official gold holdings haven’t risen an ounce in over three years.
It’s like the annoying guy at the poker table that hides his casino chips in his lap, waiting to pounce. But unlike a game of poker, the stakes are much higher in the global currency market.
Better start studying your Chinese math. After all, how much gold you have?
Keep your boots muddy,
Original article posted on Daily Resource Hunter
I like to tell people that Greece’s stock market was one of the world’s best performers in 2012. It surprises them, like a squirt of water in the ear. It goes against the unexamined idea — held by so many — that you have to have a “good” economy to do well in the stocks of that economy. Yet every year, the markets of the world prove that naïve assumption false. We can use this bias to ferret out the possible best performers of 2013.
First, here is a list of the best-performing markets of 2012. You’ll see, in addition to Greece, there were lots of “bad” economies on the list — Venezuela, Egypt and Pakistan in particular stand out.
This is not to say that you should invest in lousy economies. It simply shows that “the economy” and “the stock market” can do very different things. Most people spend far too much time getting lost in the abstractions of macroeconomics — such as GDP — when there are better and simpler methods for gauging investment appeal.
The best method of all may be “price paid for value received.” Greek stocks, for example, simply got ridiculously cheap. Even now, Greece is among the cheapest stock markets in the world. On a trailing price-earnings ratio, the market trades for just 10 times last year’s very depressed earnings. But on a cyclically adjusted basis — that is, looking at a 10-year average earnings rate — the market trades for less than 3 times earnings.
As an aside, one of the cheapest big markets in the world right now is Russia. The trailing price-earnings ratio of that market is just under 6. The lazy man’s way to play Russia is to buy the ETF that trades under the ticker “RSX.”
As a further aside, note the outstanding performance of the Thai stock market. I visited Thailand in October 2011. When I came back, the story I was most excited about was the one that led off my November 2011 issue of Mayer’s Special Situations, “My Meeting with the Warren Buffett of Thailand.” I urged my subscribers to invest in Doug Barnett’s Thai Focused Equity Fund. It was not a light commitment. The minimum investment was (and is) $100,000. But those subscribers who took me up on it should be very happy today. Doug’s fund returned 45% in 2012. The overall Thai market rose 36% last year.
While I was in Bangkok in October 2011, the Thai stock market was the worst-performing market in Asia. But that’s right when things started turning around. Last year, it was the best-performing market in Asia.
In markets, worst-to-first is a more common occurrence that you might think. If you’re interested in 2013’s best-performing markets, one of the first places to look is the worst-performing markets of the year of 2012.
So in that spirit, here are the worst-performing markets in the world of 2012:
Of these, Bangladesh is interesting. My friends at Leopard Capital — a band of value-seeking globe-trotters with funds in Haiti and Cambodia — are high on Bangladesh. The economy is growing rapidly. There are 160 million people in Bangladesh and about 90 million are under the age of 25.
In Leopard’s view, Bangladesh has what it takes to be in the front rank of high-growth economies for years to come. Yes, low labor costs are part of it. But Bangladesh also enjoys the lowest gas prices in Asia — a 50% discount to peers — thanks to huge natural gas reserves. It also enjoys a strategic location tucked between China and India. It has easy access to the heavy traffic of the Indian Ocean’s maritime trade.
Its people have rising levels of disposable income and high literacy rates among the working-age population. The country is also undergoing the kind of rapid migration to the cities that we saw in China and India as those economies took off. By the U.N.’s forecast, Dhaka will be the world’s fifth largest city by 2019. There is no easy way to play Bangladesh that I know of, but I will keep my eyes open.
Chile is another intriguing case, weakened in 2012 by its ties to commodities and copper, in particular. Last year, I visited Chile and spent some time exploring Santiago, but mostly Antofagasta and points north in the Atacama Desert, where most of the mining takes place. The biggest copper mine in the world, Escondida, is in Chile. I toured this mine, courtesy of Foraco (FAR:tsx), whose rigs work on the sprawling site.
While Chile is a commodity-driven story, it is not only a resource-driven story. One of the other things I did while in Chile was visit wineries. Vina Concha y Toro is the largest winemaker in the country, and the stock trades on the NYSE under the ticker VCO. It is a top-quality company that never seems to get really cheap, but today is 16% off its high and trading for reasonable multiples, given the quality of the business.
In any event, this exercise — which I undertake every year — proves out a number of other useful ideas. Chief among them is that “bad” economies do not always mean “bad” stock markets, and that the worst performing markets often rebound to find a place among the best performing markets the following year.
The headlines say you’ve been duped…
Corporate insiders are unloading shares at a wild pace just as average investors start to buy again. That’s right — the folks who know the most about the inner-workings of their companies don’t see a lot to cheer about in this market.
So they’re selling you stock and hitting the road…
How bad is it?
According to a report published by Argus Research, the sell-to-buy ratio for shares listed on the New York Stock Exchange registers at a staggering 9.2-to-1.
It gets worse. The last time this insider indicator was this lopsided was July 2011, according to Mark Hulbert. That was just before the debt ceiling debacle sent the market into a tailspin…
On the surface, these are scary numbers. In fact, the financial media has beaten the drum about the steady uptick of insider sales for weeks.
Now that the market is consolidating, worries are intensifying.
But hang on just a minute…
However bearish the numbers might appear on the surface, it’s a bad idea to use insider selling as your personal sell signal for the market at-large. If you did, you would have sold out in December (missing the entire post-fiscal cliff rally) as the ratio topped 8-to-1.
Also, it’s important to note that broad-based insider selling ticks higher when the market makes a strong push due to the triggering of stock options and other selling plans. Not all of the sales can be attributed to bearish outlooks.
This particular set of insider selling numbers could be skewed by some advantageous profit taking, according to Grace L. Williams over at Barron’s. Williams has tracked numerous cluster sells in larger companies that he attributes to selling into strength, while also noting that there are smaller companies out there where “convicted buying” is happening…
So should you expect a market crash as insiders head for the exits?
When the sell-to-buy ratio has hit these extremes in the past, Hulbert notes that the broad market has dropped an average of 2.1% over the next month. That’s right in line with a reasonable pullback after a strong January rally.