Econintersect Combined RSS Feed

Coincident Data Providing Confirmation of Improving Economy

Sat, 25 Feb 2012 06:19:16 +0000

Written by Steven Hansen

On Friday on CNBC, ECRI renewed their recession call - now saying a recession should hit by mid-year 2012. Supporting evidence for this call was based on coincident data's growth rate-of-change was falling to historical recession levels. There is no data in my world that is suggesting a USA recession. Econintersect focuses on elements of economic releases (and not the headlines) which historically have led economic cycles. Econintersect's analysis are based change of rate of growth as can be evidenced by our posts analyzing economic data. And for the most part, these economic elements are suggesting the economy is improving - but also are indicating the growth rate of change is degrading or flat. But in all cases to date, the growth rate of change is above historical rate-of-change which would indicate an upcoming recession. Most readers focus on the headlines of economic releases - jobs up, jobs down, industrial production up, industrial production down, trade up, trade down. Pundits grab these headlines and spout, then the markets react. Many of these pundits and most readers cannot assign a relative importance to individual headlines anyway. Read more »

Quick First Look at the Alert Mechanism Report

Sat, 25 Feb 2012 06:13:44 +0000

by Dirk Ehnts

The regulation adopted last year by the European Union has led to the first Alert Mechanism Report (AMR) of the European Union being published this week. The document and the legislation behind it are interesting because it runs counter to the idea that sovereign debt has caused the crisis. The European Commission was pointing out in 2009 and 2010 already that macroeconomic imbalances were the mechanism driving the crisis. Therefore, understanding this mechanism is crucial. In the following I will evaluate some issues raised by the AMR and refer back to the regulation when necessary.Read more »

SEC Scam

Sat, 25 Feb 2012 04:23:39 +0000

Econintersect: No, the SEC (Securities and Exchange Commission) is not a scam, nor are they conducting or promoting any scams. But someone (or several entities) are trying to conduct scams while claiming to be the SEC. Recently there has been a scam that involves e-mail from someone representing to be the SEC Office of the Whistleblower. The e-mail requests that the recipient click on a link provided to supply information that could avoid an investigation. The link leads to “malicious software,” according to a message posted on the SEC website.

Final February 2012 Michigan Consumer Sentiment At 12 Month High

Sat, 25 Feb 2012 00:38:02 +0000

by Doug Short, Advisor Perspectives/dshort.com

The University of Michigan Consumer Sentiment Index final report for February came in at 75.3, a rebound from the 72.5 preliminary report and the highest reading since February a year ago. Today's number was above the Briefing.com's consensus forecast of 73.0 and Briefing.com's 73.5. See the chart below for a long-term perspective on this widely watched index. Because the sentiment index has trended upward since its inception in 1978, I've added a linear regression to help understand the pattern of reversion to the trend. I've also highlighted recessions and included real GDP to help evaluate the correlation between the Michigan Consumer Sentiment Index and the broader economy. Read more »

New Home Sales Better than Headlines in January 2012

Fri, 24 Feb 2012 21:21:15 +0000

Written by John Lounsbury and Steven Hansen

Another data release where the previous month was changed enough to negate that month's analysis. In any event, last month now looks better - and new home sales volumes are up or equal for the fourth month in a row. This continues to indicate new home sales may be at the bottom of the decline which began in 2005. Let us start with perspective - new home sales are less than 1/4 of the peak values seen in 2005 - and are running at levels last seen in the 1970's (non seasonally adjusted data). But still, the last 6 months have been stronger than 2010 sales. Read more »

American Democracy: What Went Wrong and When?

Fri, 24 Feb 2012 05:12:16 +0000

Written by Frank Li

This is the sixth article of the series: “Towards An Ideal Form of Government”.

In my 2/10/2012 post (“What is America, Anyway?”), I stated:

“Simply put, America has already sacrificed too much capitalism for democracy! For details, wait for my article: ‘American democracy: what went wrong and when?’ in two weeks.”

Here is that article! I will examine American democracy from 1776 to today, in terms of what went wrong and when.

A note: Armchair generals can point out “what’s wrong” about anything, especially for a vast subject like America (e.g. Here’s What’s Wrong with America). I think I am uniquely qualified to do so, because I believe I have most accurately identified the root cause of many of America’s ills and proposed the best solution. In other words, nit picking is allowed only after you have offered a credible solution!Read more »

Weekly Summary for Week Ending 17 February 2012

Fri, 24 Feb 2012 05:06:26 +0000

Written by Mark Bern

I tend to write the majority of my article on dominant companies with a strong history of rising dividends. But I also write about companies with a growth objective as well. In addition, I often recommend using the sale of options as tools to manage a portfolio, taking most of the emotion out of the decision-making process and enhancing the income stream at the same time.

China and the Global Crisis

Fri, 24 Feb 2012 04:59:20 +0000

by Michael Pettis

This posting is from the January 30 issue of my newsletter, and so ignores recent events in Chongqing, but of course those events make my discussion of the political debate entry all the more relevant, I think. Before getting to the policy debate, I want to mention that in late January Caixin, one of my favorite magazines, had an interview with Liu Mingkang, former China Banking Regulation Commission chairman. In it Liu says:

I’ve said in the past that this economic crisis will spread from the United States to Europe and finally land in Asia. Now we can see that it’s already begun influencing Asia.

Views Vary on European Economic Outlook

Fri, 24 Feb 2012 04:53:14 +0000

Econintersect: In its latest projections, the European Commission, the European Union's executive body, forecast a 0.3 percent contraction in the eurozone economy for 2012, with Greece's economy leading the way downward with a massive 4.4 percent decline, according to the Associated Press. But ECB (European Central Bank) president Mario Draghi said this week that the Eurozone economy is on the mend after a very weak ending to 2011 (Reuters). Observers may wonder if the Commission is flinching at shadows or if Draghi is whistling by the graveyard. If both are correct then the final numbers for the fourth quarter will have to be grim indeed to have an 0.3% decline for the year 2012 actually look like a “recovery.”

Tavakoli: Thousands of Bank Execs Should be in Prison

Fri, 24 Feb 2012 04:00:19 +0000

Econintersect: Financial consultant Janet Tavakoli has issued scathing condemnation of the lack of action against financial fraud, which she says go right to the top of major financial institutions. Tavakoli is the author of a book “The New Robber Barons” which discusses the details of the financial crisis and criminal activities associated therewith. Frequent readers at Global Economic Intersection will recognize these problems from the writings of Prof. William K. Black economist and white collar crime criminologist at the University of Missouri Kansas City. Watch a First Business News interview of Tavakoli after the ‘Read more’ break.

Week Ending 18February2012: Rail Volumes Contract, May Have Economic Implications

Thu, 23 Feb 2012 19:12:03 +0000

Econintersect: Week 7 of 2012 ending 18February 2012 shows rail traffic contracted significantly over 2011 levels according to data released by the American Association of Railroads (AAR).

The Association of American Railroads (AAR) today reported a decline in weekly rail traffic for the week ending February 18, 2012, with U.S. railroads originating 281,989 carloads, down 5.2 percent compared with the same week last year. Intermodal volume for the week totaled 221,003 trailers and containers, down 5.6 percent compared with the same week last year.

The majority of the reason for the contraction is coal movements - which only effect the profitability of railroads, and not an economic indicator as coal is an alternative fuel. HOWEVER, intermodal is an economic indicator - and, a contraction of this data bears attention.

How Much More can AGCO Grow?

Thu, 23 Feb 2012 05:36:02 +0000

by Mark Bern, CPA, CFA

Editor's note: Global Economic Intersection welcomes Mark Bern, a frequently published author at Seeking Alpha on investment analysis, tactics and strategy. Mark will post investment analysis here on a regular basis, as well as summaries of his extensive work at Seeking Alpha.

AGCO Corporation (NYSE:AGCO) stock has experienced a stellar rally since its recent low near $30 in early October 2011. With the price at $53.17 (at the close on Friday, February 17, 2012), even after giving up some of the gains, this stock is up about 70% in less than five months. I can’t help but think about how appropriate it is that a company which serves the agricultural industry is a genuine growth company. But that is past history. What really matters to investors is what does the future hold?Read more »

Dangerous Addictions

Thu, 23 Feb 2012 05:28:59 +0000

by Elliott Morss

Several years back, I documented that drinking, drugs, and sex were the leading entertainment sectors globally. Not surprising – human nature. Everything in moderation is fine - we all dig our own graves, etc. But what happens when “entertainment” becomes addictive? Which are the most dangerous addictions? And what regions are most seriously addicted?

Beijing’s Great Bailout to Defuse Ticking Local Debt Bombs

Thu, 23 Feb 2012 05:24:04 +0000

By EconMatters

In the previous post, we briefly mentioned that

"....there could be some hidden debt bombs as a recent Bloomberg finding suggests that China's banks may be understating their exposure to runaway local borrowing by possibly billions of dollars that is raising fears of a government bailout."

Here are more details. It appears that, based on a Bloomberg News survey, the construction boom by many local governments as part of China's stimulus program that started in November 2008 have now become too big to complete and may require a bailout even bigger than the Euro debt crisis. Read more »

Obama Corporate Tax Proposal Draws GOP Fire

Thu, 23 Feb 2012 05:19:26 +0000

Econintersect: The Obama administration has announced a five point corporate tax reform plan that would reduce the top rate from 35% to 28%, with lower top rates for certain businesses. The White House claims the proposal would move the U.S. closer to a competitive corporate tax posture compared to the rest of the world. Critics have said that closer is not good enough, but that the top rate should be dropped to 25% which is the average for countries in the OECD (Organization for Economic Co-operation and Development). Some have called for the rates to be cut far below 25%. If the U.S. does not take action the country will be the developed country with the highest corporate income tax rate in the world as Japan has dropped its top rate to 30% effective in April.

ETF Probe Expands

Thu, 23 Feb 2012 03:52:09 +0000

Econintersect: The CES (Securities and Exchange Commission) is expanding its examination of possible manipulation of ETFs (electronically traded funds). Last year the SEC started an investigation of leveraged ETFs that allow investors to take positions that are nominally 2x or 3x a reference index, both positively (long) and negatively (short). The question at that time was whether the frequent trading of these vehicles was contributing to excessive market volatility. At the time a number of knowledgeable investment people were of the opinion that the likelihood that there was much effect when the leveraged products accounted for only 2-3% of all the money invested in all ETFs. (See Tom Lydon review, ETF Trends.) Click on cartoon for larger image.

Existing Home Sales: Is NAR Data Correct for January?

Wed, 22 Feb 2012 19:59:49 +0000

The National Association of Realtors (NAR) completely destroyed its December 2011 existing homes sales data and analysis with their January release today - and now they are saying their January 2012 data is better. At this point there is no doubt sales volumes are increasing - but the improvement originally conveyed in December makes the January "improvement" a step backwards. Home sales prices too were screwed up in December - at the time it seemed strange prices were shown as increasing. This is what we had said in our December analysis: Read more »

Investing Outlook February 2012

Wed, 22 Feb 2012 04:03:10 +0000

by MacroTides

The stock market has gotten off to a great start this year. Coupled with better than expected economic reports a surge of optimism has investors focused on how much higher the market is likely to rise, rather than whether it will fall. Various measures of investor sentiment reflect a disproportionate level of bullishness. As noted in our February 1 Special Update, we think the market is forming at least a short term high, and vulnerable to a 4% to 7% correction. Comparing investor’s bullish outlook to the actions of corporate insiders also provides a note of caution. According to Vickers Weekly, corporate insiders have been selling 8 times the dollar amount of their purchases. In late September, they were only selling $.80 forevery $1 of purchases. This suggests they think their stock prices have gotten ahead of where they think their businesses are going. This supports our view that the economy is likely to slow in coming months.Read more »

Euroland 2012-2016: Preparing for Renaissance With New Leaders and Institutions

Wed, 22 Feb 2012 03:58:12 +0000

Editor’s Note: This article is republished with permission of LEAP/E2020. See end of article for credits.

- Public announcement GEAB N°62 (17 February 2012) -

As anticipated by LEAP/E2020, the fear largely fed by the City of London and Wall Street of a Eurozone break-up over the Greek debt crisis proved unfounded. Euroland has come out of this violently conflictual episode with its "natural allies" much reinforced. According to our team, 2012 will mark the starting point for the perpetuation of a new global power, Euroland. However, this development remains conditional on the question of democratization that we analyze in this issue, through the three sequences of Euroland’s evolution 2012-2016. These five years will lead Europeans to profoundly influence a global geopolitical rebalancing whilst domestically a radical new phase of European integration is opening up in the coming months.
Read more »

Mumbai Market Surges, Led by Tata Motors

Wed, 22 Feb 2012 02:02:24 +0000

Econintersect: Not many people have been noticing but the Mumbai (Bombay) BSE Sensex has exploded to the upside in 2012, advancing more than 19% since the New Year began and over 21% from the market low on 20 December 2011. The advance has been led by Tata Motors (NYSE:TTM) gain of more than 60% so far in 2012 and more than 80% since late November.

Bloomberg reports that the luxury car market is what is boosting sales and profits for the company that is most famous for the tiny low cost sub sub-compact, the Nano. Jaguar and Land Rover have been racking up big gains in China, Russia and emerging markets in general.

Bill Black: Obama Is Not Getting Serious About Bank Fraud

Wed, 22 Feb 2012 01:53:06 +0000

Econintersect: Prof. William K. Black says that President Obama is doing far less than required to investigate and prosecute bank fraud. In an interview with The Real News, Black says that even with the latest announcements about new fraud investigation efforts the resources identified so far would have to be increased more than 1,000 fold (Econintersect math) to be of the same relative scale as the Savings & Loan crisis in the late 1980s to early 1990s. The math? This crisis is more than 70 times larger in inflation adjusted money terms and the number of investigators in the new task force is less than 1/20 of the number in the Savings and Loan investigation. The product, 20 x 70 (1,400) is a first order estimate of the present shortfall. The video follows the “Read more” break. (Click on cartoon for larger view.)

January 2012 CFNAI Shows Economy Expanding Above Historical Trend

Tue, 21 Feb 2012 19:18:20 +0000

The January 2012 Chicago Fed National Activity Index (CFNAI) release shows the 3 month moving average of +0.14 - indicating national economic activity was slightly above its historical trend. The index is approximately equal to the levels one year ago, and has broken out of the range channel it has languished in for the last 8 months. The Chicago Fed National Activity Index (CFNAI) is Econintersect’s primary coincident indicator tool as it provides a summary quantitative value for all the economic data being released. The data is not spun or explained - it is what it is. However, this index may not be accurate in real time (see caveats below) - and it did miss the start of the 2007 recession. Read more »

Lock-em-up-unless-they’re-bankers Kilmartin

Tue, 21 Feb 2012 08:51:36 +0000

by Guest Author Tom Sgouros

Striking a vital blow against accountability, Attorney General Peter Kilmartin endorsed the “50-state” settlement on foreclosure fraud yesterday, led by the Iowa Attorney General, Tom Miller. The settlement essentially allows banks to skip away from the crimes they committed in the course of foreclosing on a few million people’s houses.

To recap: this settlement has been over a year in the making, and is intended to clean things up in the real estate market, absolving banks of responsibility for their misdeeds in exchange for money that will go to principal reduction, and also doing some short sales and refinancing and payoffs to unjustly foreclosed borrowers. These are good things, but there is a problem. Read more »

Emerging Market Stocks with Dividends: Best of Both Worlds

Tue, 21 Feb 2012 08:40:24 +0000

Money Morning Article of the Week

by Martin Hutchinson, Global Investing Strategist, Money Morning

In today's market, dividend investing is the best way to achieve a decent income stream without taking on too much risk. On the other hand, this is also true: emerging markets give investors the benefit of the world's fastest economic growth.

Investors would be wise then to combine these two strategies by buying emerging markets stocks that pay steady dividends.

In practice, this is more difficult than it ought to be - but it's not impossible. In fact, as you'll learn later I have found numerous ways to profit from this best of both worlds strategy.Read more »

Options Have Leverage

Tue, 21 Feb 2012 08:10:45 +0000

Options are a good way to play the market with leverage. I have had many days where I have more than doubled my premium in a single day. Of course that goes both ways. I have lost more than the entire premium in a day more times than I care to think about. There are ways to enhance your chances of winning.

I prefer to sell options as opposed to buying them. Since options have an expiry date, they are a wasting asset, unlike the underlying security. This time value is called "decay". The more time left, the more it is worth. The closer it gets to expiry, the faster the decay.

Thanks to trading-plan.com for the chart.

As you can see the 30 days and less have a rapid decay. This is why I like to sell one week options. You would think that no one would buy these, but I trade them weekly with Market Vectors Gold Miners (GDX) and others, and have had great success. GDX is a gold ETF that holds the stocks of Barrack Gold Corp. (ABX), Goldcorp Inc. (GG), Newmont Mining Corp. (NEM), Yamana Gold Inc. (AUY), Kinross Gold Corp. (KGC) and many others. It has enough liquidity to make it easy to get in and out of contracts.

There is another reason to sell options as opposed to buying them. The chart below shows as a percentage how many option trades expire worthless.

As a seller of the option this is good news. If three out of four contracts expire worthless, wouldn't you like to be betting on the three out of four the seller gets vs the one out of four the buyer is getting?

Conclusion: In my opinion short term options are not a good choice to buy, but enhances your chances at success when you sell them.

Goldfinger

Original post blogged on b2evolution.

Bank Heads are Falling like Flies

Tue, 21 Feb 2012 08:02:27 +0000

by Guest Author Russell Huntley

Econintersect: What is going on in the world of banking? From The World Bank, to a couple of central banks to other banks around the world there has been a wave of resignations in recent weeks. Also, a head of state has resigned in disgrace and even the Vatican has had to deal with priests who have been conducting illegal activities out of theVatican's official bank. We can even conclude this report with a juicy rumor about a high profile CEO. Some of the resignations do not appear to be connected with scandal or performance issues, but others have connections to political controversy and some are clearly tainted.

Greek Deal Reached, Deeper Problems Ahead

Tue, 21 Feb 2012 05:54:24 +0000

Econintersect: Eurozone finance ministers have reached agreement on approval of a bail-out plan for Greece. Key to reaching the final agreement was pushing haircuts on Greek bondholders even deeper than had been previously worked out. This €130 billion bailout will be the second for Greece, following €110 billion that came in May 2010. It is clear from a “strictly confidential” report obtained by Peter Spiegel of the Financial Times that the Eurozone finance ministers expect that a third bailout will be necessary down the road, even in the “most optimistic scenario.”

The Week Ahead: Time for a Turn in Housing?

Mon, 20 Feb 2012 09:31:41 +0000

by Jeff Miller

Since the start of the Great Recession there has been little reason for enthusiasm about the US housing market. The home construction industry and related sectors have been a continuing drag on the recovery.

In my circle of friends I know of several first-time home purchases in the last couple of years. I was reminded of this last night when visiting my niece and her husband, seeing their beautiful new urban home and enjoying a wonderful "Restaurant Week" dinner at a place new to us all. It is too easy for us stodgy old analysts to forget that successful young people want their own homes. For them, the time to buy is now.

Regular readers know that I embrace the illustrative power of the anecdote, but I live on data. Taking a look at this week's calendar, I expect more media attention to the prospects for improvement in housing.

Out of the Garden of Europe and into the World Economy

Mon, 20 Feb 2012 09:06:42 +0000

by Macrotides

Monetary policy is a bit like watering a garden. Its nourishment is intended to foster growth and jobs, and when in full bloom, a rising standard of living for the majority of people in society. A functioning spigot (central bank) and nozzle at the end of the hose (banking system) are needed for monetary policy to water the economic garden. If either isn’t functioning properly, too much or too little water will flow from the financial system into the economy. Just as too much water can kill a healthy plant, too much money can cause inflation, erode the purchasing power of workers, and lower their standard of living. When too little money (credit) flows, economies contract, unemployment rises, and government tax revenue falls. Read more »

The Tangled History of Draghi, Greece, Goldman Sachs and Morgan Stanley

Mon, 20 Feb 2012 07:07:59 +0000

by Guest Author, ECB Watch

Herein we retrace the events of the Goldman-Greece-Draghi controversy and relate it to the Draghi-Morgan-Stantley disclosure issue. The June 2011 ECB President nomination hearing at the Committee on Economic and Monetary Affairs of the European Parliament will serve as a point of reference.

Before the hearing

Prior to nomination hearing (June 2011), there had been a series of posts at Baseline Scenario (Simon Johnson, James Kwak), notably this one, raising the alarm about a possible connection to the falsification of Greek debt data while at Goldman Sachs. Apparently, Draghi felt compelled to clarify, in a statement released by the Central Bank of Italy (BOI).Read more »

Bangladesh Rickshaw Driver Builds Clinic

Mon, 20 Feb 2012 05:33:30 +0000

by Roger Erickson, with editorial comment

Econintersect: One rickshaw driver in Bangladesh, who saved for 30 years on $6 per day, founded a small hospital in the remote village of Tanhashadia. His efforts have made him a national celebrity and his clinic now treats 300 patients each day. The following video from Al Jezeera tells the story:

Trade Data: Is China Losing Its Steam?

Sun, 19 Feb 2012 08:49:03 +0000

by EconMatters

The latest January trade data of China showed the broadest measure of China's global trade surplus fell to a several-year low to around 2.7% of GDP. Export also collapsed to a negative 0.5% year-over-year in January, down from +13.4% in December. Imports looked even more dire with a 15.3% year-over-year decline.

Mortgage Settlement Plan is More Bank Bailout

Sun, 19 Feb 2012 08:15:43 +0000

Guest Author: Yves Smith, author of the best seller "Econned" and founder of the widely read blog Naked Capitalism, where this article first appeared with the title: Quelle Surprise! Taxpayers Will Be Paying for Part of Mortgage Settlement

The whole purpose of a settlement is that a party pays damages to rid themselves of liability, and the amount they pay (and “pay” can include the cost of reforming their conduct) is less than what they expect to suffer if they were sued and lost the case (otherwise, it would make more sense for them to fight). But in the topsy-turvy world of cream for the banks, crumbs for the rest of us, we have, in the words of Scott Simon, head of the mortgage business at bond fund manager Pimco, in an interview with MoneyNews, lots of victims paying for banks’ misdeeds: Read more »

Abandoning the Welfare State in Europe?

Sun, 19 Feb 2012 07:42:29 +0000

by Dirk Ehnts

When thinking about current economic problems in Europe, it is clear that we have had a problem with the adjustment in the euro zone. Some countries saw productivity rise faster than wages, other experienced the opposite. So, price levels are now “wrong” in the sense that current account balances are not sustainable. Germany net exports too much, the periphery still net imports too much. It seems now that the Troika is pushing ahead its agenda of abandoning all those ineffective structural rigidities. Here is the Economonitor:

The Greek minimum wage is apparently a point of contention between the Troika (ECB/EU/IMF) and the Greek government. The NY Times cites competitiveness gains as a rationale for the minimum wage cut:

The goal of any pay cuts would be to help make Greek workers, who are generally less productive than workers elsewhere in Europe, able to compete more effectively inside the euro zone, where countries share a common currency that does not allow devaluations to help even out differences in labor costs.

Huh? See below. The going line seems to be that the Greeks are lazy. They earn minimum government-negotiated wages without actually doing a whole lot because they’re uncompetitive. This is wrong; the data do not support this view.Read more »

Citi Fraud Settlement may have Fallen Short

Sun, 19 Feb 2012 06:50:53 +0000

Econintersect: Yesterday (February 17) GEI News reported on a Wednesday (February 15) article in The New York Times about a settlement of $158.3 million paid by Citigroup resulting from mortgage fraud that victimized the FHA (Federal Housing Administration).

Bloomberg reports that $31 million will go to whistleblower Sherry Hunt, an employee of Citigroup’s quality control team who personally filed the suit (which the government later joined) that led to the settlement. Hunt will pay attorney and legal fees out of that sum.

The FHA will receive $127 million, less any outside attorney fees and expenses.

Trefis: Week in Review 18 February 2012

Sat, 18 Feb 2012 18:36:57 +0000

by Trefis Staff

Below is a summary of the activity on Trefis during the past week that we thought you would find interesting. Trefis is a financial community structured around trends, forecasts and insights related to some of the most popular stocks in the US. It provides the unique feature of allowing the user to model future valuation based upon projected changes in components of each business. It also provides communication capabilities among members, including consensus of member analysis compared toTrefis staff analysis and blogging opportunities for members.

Click on graphic for larger image and go to Trefis for interactive page.Read more »

Less Growth Seen on Business Green Shoot

Sat, 18 Feb 2012 07:30:45 +0000

Greece continues to screw up the economic landscape. The unanswerable question remains how Greece will default. Greece (as well as its weak sisters) cannot survive without an overhaul of the basic structure of the Eurozone. No talks are underway to reform the basic Eurozone structure - only continuing efforts to slash budgets which will intensify the death spiral. It amazes me at the market continuing to react to "good" Eurozone news. There is no good news - only bad news in various degrees. Read more »

Options To Buying Gold Stocks

Sat, 18 Feb 2012 06:15:21 +0000

For those of you who like the idea of owning gold but don't want to hold stocks, there is another way to invest. Options are contracts that give the holder the right to buy or sell a stock or ETF at a certain price, by a certain date, for a certain amount of money called a premium.

Each call option contract gives the holder the right, but not an obligation, to buy 100 shares of the underlying equity at a price agreed upon anytime before the expiration date.
Each put option contract gives the owner the right, but not an obligation, to sell 100 shares of the underlying equity at price agreed upon anytime before the expiration date.

In reality most equities the options represent never change hands. The holder just cashes in any premium left whenever he feels like liquidating the option. Some equities are very volatile and premiums can move up or down more than 100% in a single day.

Below is a call option chart. The colored area and white area meet at the approximate value of the underlying equity, or what is called "at the money". The bid is the amount being offered for the option and the ask is what the seller is demanding. Last means the last price paid for that option, the change is in dollars and cents. Volume is the number of options traded at that strike price for the day. Open interest is the number of currently open options.

You can also be the house and sell both types of options. One word of caution. When you buy an option you can only lose the amount of the premium, plus fees for the transaction from your broker. When you sell an option you have unlimited liability. I have been upside down by over 600% at times, meaning I owed the owner of the contract over 6 times what he paid for it. When you sell an option you can only realize the premium price (100% of the cost of the contract). The chart for puts looks essentially the same as the calls chart.

My three favorites for trading are Market Vectors Gold Miners (GDX), SPDR Gold Trust (GLD), and iShares Silver Trust (SLV). I have a few rules when I trade options. The underlying equity must have good volume making it easy to get in and out of. If you pick a stock with no liquidity you may not be able to exit your trade when you want and the bid-ask gap can be huge. I want a stock or ETF that has close strike prices, one dollar or less increments. Some like GDX have half dollar strike prices which I really like. GDX also trades in weekly contracts meaning you can buy or sell an option with an 8 day length. Most options are in $5 increments and expire on the third Friday of each month. The weekly ones are available each Thursday with an 8 day length expiring the following Friday.

Goldfinger

Original post blogged on b2evolution.

Citi Pays $158 Million Settlement for Fraud: Updated

Sat, 18 Feb 2012 05:44:15 +0000

Updated 19 February 2012

Econintersect: The news sneaked by with little notice on Wednesday (February 15). Citigroup (NYSE:C) agreed to pay $158.3 million to settle claims that its mortgage unit defrauded the government through the company’s actions over a six year period. According to The New York Times the government said that CitiMortgage had fraudulently certified 30,000 mortgages for FHA (Federal Housing Administration) insurance. Many certifications were “knowingly and recklessly false.” (Quotes were in the NYT article.) More than 1/3 of the improperly certified mortgages have gone into default so far. Almost half (47%) of the mortgages written in 2006 and 2007 have already defaulted. (Click on picture for huge enlargement of a prime quality foreclosure property.)

January 2012 Consumer Price Index Moderates, But Core Inflation Rises

Sat, 18 Feb 2012 04:45:20 +0000

by Steven Hansen and Doug Short

The Consumer Price Index (CPI-U) annual inflation rate fell to 2.9% in January 2012 from 3.0% in December. This was above the Econintersect expectation of 2.5%. Core inflation (CPI less food and energy) was rose slightly to 2.3% annual inflation [note that the Federal Reserve uses 2.0% core inflation as an inflation target]. There has been some hinting at the Fed that inflationary targets may be flexible at this time with so much economic slack, and the Fed statements continue to indicate they expect inflation to recede in the coming months. Read more »

January 2012 Leading Economic Index Forecasts Improving Economy

Fri, 17 Feb 2012 21:01:08 +0000

This is the second month of the "new" Leading Economic Index from The Conference Board, and after a month of review this index appears to be a significant tool useful for long-range outlook economic forecasts.

The Conference Board Leading Economic Index® (LEI) for the U.S. increased 0.4 percent in January to 94.9 (2004 = 100), following a 0.5 percent increase in December and a 0.3 percent increase in November.

This index is designed to forecast the economy six months in advance. Additional comments from the economists at The Conference Board add context to this positive outlook. Read more »

Week Ending 11February2012: Mixed Year-Over-Year Results

Fri, 17 Feb 2012 07:53:14 +0000

Econintersect: Week 6 of 2012 ending 11February 2012 shows rail traffic growing over 2011 levels according to data released by the American Association of Railroads (AAR).

The Association of American Railroads (AAR) today reported an mixed weekly rail traffic for the week ending February 11, 2012, with U.S. railroads originating 279,501 carloads, up 1.7 percent compared with the same week last year. Intermodal volume for the week totaled 227,207 trailers and containers, down 0.4 percent compared with the same week last year.

Container Movements Show Flat Start to 2012

Fri, 17 Feb 2012 03:36:13 +0000

Combined imports and export container shipment growth was literally zero year-over-year at the Ports of LA and Long Beach in January 2012. This is a flat start for the new year. Exports (which are an indicator of competitiveness and global economic growth) slightly contracted for the second time since August 2010. Read more »

February 2012 Philly Fed Survey Improves Slightly

Fri, 17 Feb 2012 03:24:33 +0000

The Philly Fed Business Outlook Survey headlines for February 2012 show the index again improved slightly - and it remains in expansion territory. Survey components new orders and unfilled orders have improved - with both now in expansion territory.

Responses from manufacturing firms polled for this month’s Business Outlook Survey suggest that regional manufacturing activity continued to expand in February. The survey’s broad indicators for general activity, new orders, and shipments all increased from their readings in January. Firms reported near-steady employment levels but an increase in average work hours. More firms reported higher input prices this month, and a sizable share of firms reported price increases for their own manufactured goods. The survey’s broad indicators of future activity fell from levels in recent months but continue to reflect optimism about future manufacturing growth.

PPI Continued to Moderate in January 2012

Thu, 16 Feb 2012 20:22:50 +0000

The Producer Price Index (PPI) finished goods prices increased 4.1% year-over-year in January 2012 (less than the 4.8% in December) - and increased 0.1% month-over-month. The PPI represents inflation pressure that could move into consumer prices - and the PPI continues to moderate. PPI finished goods also is showing moderating pressures from intermediate goods and crude goods price inflation - in fact the differential in the producer price chain has almost disappeared. The market had been expecting a 0.3% month-over-month increase in finished goods prices (compared to the 0.1% increase). Read more »

January 2012 Building Permits Indicates 2012 Will Be a Good Year

Thu, 16 Feb 2012 20:15:23 +0000

Residential building permits and construction completions in January 2012 show the industry rebound is continuing - and it is being fueled this month by both single family and apartments (structures with 5 or more units). US Census Headlines:

building permit up 0.7% month-over-month, up 19.0% year-over-year
construction completions down 12.0% month-over-month, up 4.1% year-over-year
the market expected 650K to 675K annualized housing permits versus the 676K reported

Econintersect Analysis:

Building permits are up 20.4% month-over-month, up 27.2% year-over-year.
construction completions are down 4.7% month-over-month, up 2.3% year-over-year.

Watchdog: Another Draghi Conflict of Interest Uncovered

Thu, 16 Feb 2012 06:16:06 +0000

by Guest Author, ECB Watch

Editor's note: This is breaking news presented with interspersed editorial comment.

From the report on the Council recommendation for appointment of Mario Draghi (pictured) to be the President of the European Central Bank (rapporteur: Sharon Bowles):

4. Do you have any business or financial holdings or any other commitments which might conflict you with your prospective duties, and are there any other relevant personal or other factors that need to be taken account of by the Parliament when considering your nomination?

[M. Graghi:] No.

Japan Seeks Seabed Methane Hydrate

Thu, 16 Feb 2012 06:13:10 +0000

Econintersect: Japan Oil, Gas and Metals National Corp has started drilling for a new energy source, methane hydrate, below the seabed at 1,000 meters depth about 70-80 km off the coast of the Atsumi Peninsula (Aichi Prefecture, east of Osaka) in the Philippine Sea. The deposits under the south central part of japan are estimated to be sufficient to supply more than 10 years of Japan’s natural gas supply needs. It is expected that the initial drilling will be completed this year and that production tests will be run first quarter of 2013. This will be the first commercial attempt to harvest natural gas from methane hydrates. Click on picture for larger image with caption.

Camouflage Trade in Silver

Thu, 16 Feb 2012 04:46:03 +0000

by Rick Ackerman, Rick's Picks

We’ve been known to keep odd hours, which, depending on the circumstances, can be good or bad when attempting to earn one’s daily bread trading. Sometimes it seems as though the best opportunities — meaning the ones that produce quick and easy gains with relatively little stress – occur in the dead of night. At other times, especially in the first hour or so after the opening bell, the low-hanging fruit positively beckons those who are able to stay cool while most other traders, too scared to act, are waiting for the dust to settle. We love it when the action is heated – wild, even — since this tends to drive most other traders to the sidelines. Let them sit on their thumbs, as far as we’re concerned – it just means easier pickings for us. When things get moving, the Hidden Pivot Method that we use to trade and forecast is especially good at identifying the “filet” of uptrends and downtrends. As such, the terms bullish or bearish apply only to the extent that the “impulse legs” that drive these trends are headed higher, or lower, in a given time frame.

A Silver trade that we put out to subscribers Wednesday night February 1 implictly required them to pay close attention to impulse legs on the very lesser charts. Here’s what we advised (and keep in mind that although the jargon is technical, it is geared to the many hundreds of subscribers who have taken the Hidden Pivot Course): “March Silver appears to be building thrust for a shot at 35.535, the ‘D’ target of the pattern shown in the thumbnail mini-inset. The 34.235 midpoint resistance that would need to be surpassed first is above Tuesday’s spike high, so we’ll need to make our move below that level, camouflage-style, if we’re going to get aboard with a minimum of stress. For that purpose, I suggest leveraging a B-C pullback from just above the obscure, look-to-the-left peak at 34.030 shown in the larger chart. The ‘X’ entry trigger could come up quickly, so a state of nimble alertness may be the key to getting executed.”

The recommendation is much easier to understand if you look at the chart. What it boils down to is that a small pullback from just above the obscure peak ‘F’ had the potential to set up a juicy buying opportunity. This is exactly what occurred yesterday morning, and the relevant retracement is labeled B-C. A four-contract trade initiated at the subsequent buy signal (aka ‘X’) could have been worth as much as $3100 for about 72 minutes of work. After the trade triggered, we established a “tracking position” to follow it to completion, since a subscriber in the Rick’s Picks chat room reported having done the trade. We advised exiting the last piece of it on the swoon to J, but by then we were looking for a way to catch the next leg up – to the 35.535 target mentioned above. That’s a “Hidden Pivot” resistance, as well as our minimum upside objective for the near term.

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About the Author

Rick Ackerman is the founder of Rick's Picks, an online publication which publishes stock, commodity, and mini-index trading recommendations and forecasts based on a proprietary technical analysis method that took more than ten years to develop and hone.

Original post blogged on b2evolution.

USA Home Prices and Rents Climbing in February 2012

Thu, 16 Feb 2012 01:13:23 +0000

by Guest Author Scott Sambucci, Altos Research

"The latest home prices data shows that a stable market in January is leading to an up month in February. Rents and newly listed property prices all climbing weekly."

Like Giants fans around the country still celebrating a big win, the housing markets seem to want to play the role of the triumphant underdog. Rolling into February 2012, the housing market has a set of reasonably bullish signals. But is it too early to celebrate? Read more »

January 2012 FOMC Minutes: Adding Context to Meeting Statement

Wed, 15 Feb 2012 23:29:50 +0000

Econintersect: Looking into the minds of the members of the Federal Open Market Committee (FOMC) gives insights on how they view the economy. The January 25, 2012 meeting statement provided the actions taken, but the meeting minutes released today provides the detailed discussion.

Econintersect noted from the meeting statement:

No new programs were announced - and the FOMC voted to continue doing whatever they were doing- although the FOMC extended its outlook when the next rate increase was possible to the end of 2014 (18 month extension). Most of the difference in this January meeting statement amounts to word engineering - changing words to other words having the same meaning.

Econintersect considers any interest rate policy projections beyond a few months to be speculation and the 18 month extension of current policy could have been no change or 36 months with no change in significance.

Industrial Production Is Much Better than Headlines in January 2012

Wed, 15 Feb 2012 23:23:04 +0000

The headlines say Industrial Production (IP) was unchanged in January 2012 and up 3.4% year-over-year. Econintersect analysis is down 0.4% month-over-month while up 2.8% year-over-year. The market was expecting a month-over-month increase of 0.1% to 0.6% (vs the headline 0.0%). IP headline data has three parts - manufacturing, mining and utilities. In the January 2012 report, manufacturing was up 4.5%, mining up 5.8% and utilities were down 7.5% (all percentages year-over-year). Note that utilities are 10.9% of the industrial production index. The year-over-year rate of growth for IP has degraded since October 2011 (second derivative)- yet the manufacturing component of IP (which tracks the economy) has a slightly positive rate of growth since May 2010. The "sick" part of IP is utilities which is causing the overall index to misrepresent the true state of the economy. Read more »

February 2012 Empire State Survey Exceeds Pundits’ Expectations

Wed, 15 Feb 2012 16:34:15 +0000

The Empire State Manufacturing Survey (manufacturing in New York State) in February 2012 continued on its third month of climb from negative territory. Manufacturing expansion is indicated by positive numbers to this index:

The index rose six points to 19.5. This index is at the highest level since June 2010.
Expectation was for a readings between 14.0 to 15.0

This index is now improving, and well above levels associated with past recessions. As a subjective statement, this index is showing manufacturing has entered "moderate" expansion territory. Read more »

CoreLogic Reports 830,000 Completed Foreclosures in 2011

Wed, 15 Feb 2012 06:48:25 +0000

Econintersect: CoreLogic reports that 1.4 million homes, or 3.4% of all homes with a mortgage, were in the foreclosure inventory as of December 2011. The amount of completed foreclosures fell from 1.1 million in 2010 to 830,000 in 2011. Since September 2008, there have been 3.2 million foreclosures. Other highlights from the report:

The percent of homeowners nationally who were more than 90 days late on their mortgage payment, including homes in foreclosure and REO, was 7.3 percent for December 2011 compared to 7.8 percent for December 2010, and 7.2 percent in November 2011.

Obama Budget Would Beef Up Ineffective SEC

Wed, 15 Feb 2012 06:44:33 +0000

Econintersect: The 2013 proposed budget from the Obama administration calls for an increase in the appropriation for the SEC (Securities and Exchange Commission) of 18.55% to $1.566 billion. One significant area of activity would increase the number of examiners who inspect investment advisors, private-equity and hedge funds. Another area of increased emphasis would involve the activities of ETFs (exchange trade funds) and of money market funds. The increase in funding is required to carry out the implementation of activities mandated under the Dodd-Frank act, according to the White House. Any increase in funding for the SEC is expected to face strong opposition from Republicans in Congress who have been critical of the lack of effectiveness of the agency.Read more »

FINRA: Yield Chasing a Concern

Wed, 15 Feb 2012 06:42:56 +0000

Econintersect: FINRA (Financial Industry Regulatory Authority, an industry self-regulatory organization) has issued a 16-page compliance alert to broker-dealers under its purview. The letter outlined the 2012 watch list for business and sales practices aimed at consumers. The organization’s top concerns address the risk that investors face with some high-yield investments and the lack of liquidity that may exist with other options. FINRA also cautioned against failing to classify cash flow returns because it is “particularly important so investors know when returns are being paid from their own principal or from capital raised in subsequent offerings” rather than from interest or dividends from earnings.Read more »

BLS Experiments With New Data Series: Now I Am Confused

Wed, 15 Feb 2012 06:39:56 +0000

[This post has been revised - see note at bottom] The Bureau of Labor Statistics (BLS) currently does not break down employment numbers by size of firm - and Econintersect has been relying on the data published by ADP in their monthly employment reports. However, the BLS is now thinking of providing this breakdown.

The Current Employment Statistics (CES) program is examining the feasibility of publishing monthly CES employment, hours, and earnings estimates by firm size. Currently, BLS publishes the first preliminary CES employment estimates for a given month at selected industry detail. Subsequent estimates for that month are published in more industry detail with the following month’s first estimates. Research suggests that the available sample may make it feasible to publish monthly size-class employment estimates by major industry sector together with the first preliminary estimates. Employment change by firm size would add a valuable dimension of detail to understanding current employment trends.

Silver Miners: The Other Precious Metal

Mon, 13 Feb 2012 08:35:41 +0000

Silver and silver miners offer some of the best appreciation opportunities in the near future. There are many stocks and ETF's to chose from, however there are very few pure silver plays. Silver is mined mostly as a by-product, therefore the mining companies usually have more than one product. Most common metals mined with silver are copper, nickel, gold, zinc, and lead. Currently Mexico is the world's largest producer.

Let's start by taking a look at silver and silver miners as a group. If your timing was good there was substantial upside to your investment, especially if you invested in the top silver miners. iShares Silver Trust (SLV) represents investing in the metal and the miners ETF Global x Silver Miners (SIL) are shown on the Yahoo chart below.

I am not a fan of buying mining stocks with an ETF as a good mining stock will usually outperform the indices. And the miners as a group have underperformed the metal in 2011. However, a concern is diversity, so buy more than one stock when investing.

Starting With the Elephants in the Room

Freeport-McMoRan Copper & Gold (FCX) is primarily a gold and copper miner with mines in North and South America. It's market cap is by far the biggest of the miners I will cover at 42 Billion. The on-line data shows they have 325 million ounces of proven silver. I am not a fan of extra large companies. They usually have little room to increase their profitability. FCX delivered a -16% for the past year. The other big miner is Silver Wheaton Corp. (SLW). This is one big company that I love. It has agreements with 14 miners to deliver silver. Some are located in less than desirable countries, but unlike other companies they only purchase the silver, not mine it. SLW only delivered a 3% gain last year, but I feel this company will rebound in the coming year. It was up almost 40% at one point in 2011 and I feel it could repeat.

Silver Miner Smaller Caps

The rest of the miners have smaller caps. Pan American Silver Corp. (PAAS) is still large at $2.5 Billion market cap. I have written about this company in the past as I am definitely not a fan. They have mines in countries that have not been friendly to them and their shares show it.

Silvercorp Metals Inc. (SVM) is another favorite even though the returns for last year (-39%) were ugly. At one point their stock price dropped by more than 20% due to an anonymous letter that accused them of fraud, an allegation they denied. There was a speculation that someone wanted the stock price to drop so they could purchase it cheap. That is exactly what happened - the stock rebounded.

Another stock I like is First Majestic Silver Corp. (AG). It has a market cap of 2 Billion with it's mines in Mexico. This is one of my top favorites- and last year it was up 45%. It is one of the 2 pure silver plays, along with Endeavour Silver Corp. (EXK), that I am reviewing. EXK has 2 mines in Mexico and a market cap of $935 Million. It was up a giant 58% for the year. These 2 stocks are a must own.

A past favorite is Hecla (HL). They had a dismal year, down 45%. They disposed their holdings in Venezuela and it hurt them. Possibly they could rebound in the future, but they are not a buy in my opinion at the moment.

Yes, There is a Fast Lane

For those who like to live in the fast lane there are 2 ETF's that can offer a thrill ride. Pro Shares Ultra Silver (AGQ) is a 2X play on the price of silver. They use swaps, futures and options to achieve their results. If you think silver is tanking you can purchase Pro Shares Ultra Short Silver (ZSL) that gives you 2X leverage to the down side.

Goldfinger (aka Silverfinger)

Original post blogged on b2evolution.

Gold Miners: Sorting out the Best

Fri, 10 Feb 2012 04:37:38 +0000

Gold is one of my favorite metals. I have been following, researching, and successfully trading and investing in gold, gold stocks and options for many years. The last ten years have been a traders dream. In two out of the last four years I have more than doubled my trading account. There are very few segments of investing that I know of that have done as well over that period of time. In each of those ten years the price of gold has been higher at the end of the year than at the beginning of that year. In some cases the appreciation has been over 30%, and one could have done much better than that if gold was bought on the dips.

The Big Guys (Large Caps)

I used to like GoldCorp (GG) before the merger with Glamis, but the results of combining two low production cost stocks have not been impressive. Newmont Mining (NEM) and especially Agnico-Eagle Mines (AEM) have not performed well lately but are still good stocks if you like the large caps . I do not like Barrack Gold (ABX). ABX management sold forward a large portion of their gold until 2009. In 2009 they issued 81 million shares to raise 3 billion dollars. The estimate is they spent 1.9 billion to eliminate all of their hedges which was a waste of money and drain on the earnings of the company. Their stock is only up 3% for the last year while gold soared.

Relatively Smaller Caps

Some of my favorites are Yamana Gold (AUY), Jaguar Mining (JAG) and New Gold (NGD). They have performed very well lately and are relatively small compared to Barrick's 49 billion market cap. Most of the time the smaller cap stocks perform better than large caps. It is much easier to double your profit when your profit is low to begin with. A company like Barrack would have a difficult time doubling it's bottom line. Here is a Yahoo 1 year chart my 3 best performers.

Eldorado Gold (EGO), Kinross Gold (KGC), and Northern Dynasty Minerals (NAK) are all good stocks too. The first 2 are companies with working mines. The third is not in operation yet. NAK is located in Alaska and is in the process of getting permits and putting infrastructure in place. It is one of the largest gold (and other metals) mining sites in the world. The estimates of metals in the ground are enormous, but it is not producing anything yet. This is a very volatile stock which offers fantastic appreciation. I bought this stock at $2 a few years ago and watched it go to over $20. It has been hit extremely hard in this latest gold downturn, but I expect it to take off again. This would be my favorite stock to try to hit a home run.

EGO, and KGC are not buys at the moment, but I would keep my eye on them. In my next post I will give an overview of silver stocks.

Goldfinger

Original post blogged on b2evolution.

Geo-Political Problems Effecting Miner Profitability

Tue, 07 Feb 2012 09:47:22 +0000

Buying gold and silver mining stocks has never been harder. In the past you had to discern how well the company was run, what is their mining cost per ounce, how much metal did they have in the ground, what is their market cap, past market history, whether the underlying metal was in an up or down trend, and do they give a dividend. Now you must know the countries the mines are in, the political atmosphere of that country as well as how much exposure that miner has in those countries.

Recently some countries have levied taxes and royalties (Australia, Argentina, Bolivia and Peru) while others have outright nationalized mines (Venezuela). With the world economy deteriorating many governments are looking for new revenue sources.

Three of my old favorite mining stocks are in some of these countries. SLW, AUY, and PAAS. I still believe SLW is a very good company and their exposure is not so great that the company would be dealt a crippling blow if it's subsidiaries in Argentina and Peru were to become nonprofitable. The stock is only up 5% in the last 12 months, mostly due to the price of silver tanking the last few months of 2011.

AUY has mines in Brazil, Chile, Argentina, Mexico and Colombia. At least two of these counties have new encumbrances on the mining companies. I believe AUY is a very good company and still a buy, but it has more exposure to government pressures than SLW and therefore not as good a buy as before the new laws. Still it was up 45% in the last 12 months.

PAAS is affected the most by the new rules. They have mines in Mexico, Peru, Argentina, and Bolivia. At least three of these countries are affecting the mining operations of this company. As you can see from this Yahoo chart the stock is down 30% in the last year while silver (SLV) was up 14%.

In my next post I will give you some of my favorite mining stocks with little or no downside due to Geo-political problems.

Goldfinger

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Original post blogged on b2evolution.

Gold Trading: Why We Do Not Swing for the Fence

Thu, 02 Feb 2012 05:02:38 +0000

by Guest Author Rick Ackerman, Rick’s Picks

Although we’d be thrilled to be able to brag a year from now that a trade we recently advised in Natural Gas futures caught a bear-market low within two cents, we’re not prepared to bet the farm on it. Similarly, a winning gold trade that got stopped out earlier in the week may have caused us to miss a moon shot, but we’re not about to look back. For when all is said and done, we’d rather not be prayerfully holding our breath or losing sleep as gold in particular swoons, leaps, caroms and careens its way higher.

Aggravation and stress aside, on a simple risk:reward basis there is never justification for buy-and-hold speculation. Yeah, we’ve heard the story about the commodity whiz who made $50 million riding a brahma bull in soybeans/cattle futures/crude oil all the way to the top. But the guy couldn’t possibly have made all of that money without experiencing devastating setbacks along the way. And he could not have kept doubling down on subsequent trades without giving it all back. In our book, it is slowly but surely that wins the race, and the massage we preach to subscribers and students who take the Hidden Pivot Course is to never risk more than $1 to make $3. This applies along the entire route of a trade, from entry to exit. Moreover, we recommend that positions be constantly “worked” so that s trader’s hard-won gains will not be entirely and constantly at risk.

How does that advice relate to the chart above? To begin with, when we advised buying eight gold contracts in two places below current levels, we “knew” exactly how much we stood to make on the trade because our proprietary technical indicators said a 1771.50 target would be reached come hell or high water. We took partial profits when the futures rose as anticipated, but we reluctantly kissed the last piece of our position goodbye when it tripped a stop-loss during a particularly vicious after-hours swoon. Although our confidence in the 1771.50 target had verged on certitude – still verges on certitude — we were not about to let ego and greed supersede the boring math of sound risk management. And that is why we exited the last 25% of our long position when the futures did their fake kamikaze dive. Now, although it could prove difficult to climb back aboard (as we intend to do), the hard work and diligence that may be required is preferable to seeing our profits gyrate wildly from day to day, and possibly evaporating entirely if price action turns even more rabid.

While we’re on the subject of managing risk, there is one more elemental point to be gleaned from the chart. Notice that April Gold made a series of marginal new highs over the last week or so. If one were long at the first of those highs – 1734.50 on January 26 – he’d have made an additional $8.50 per ounce (on a 100-oz. contract) by holding the position till 1743.00 was achieved the next day. However, the intervening swoon to 1717.20 would have subjected the trader to a paper loss of $17.30 per ounce – more than twice the gain that would have resulted from holding peak-to-peak. Although holding the position for another two days would have gotten one to the next, 1750.60, for a further gain of $7.50, the intervening swoon to 1718.80 would have subjected the trader to a paper loss four times that, or $31.80. What this implies is that, over the course of the trade, the trader gambled more than $4 to make $1.

You don’t need to be a trader to understand why taking those kind of odds will never make you rich. And it is why we prefer to move in and out of long positions as gold moves higher rather than swinging for the fences with a buy-and-hold, damn-the-torpedoes swagger. No bull market is going to be so generous and accommodating that traders can simply forget about their positions and let them run. While it’s possible to strike it rich once or even twice with that approach, the odds that you will eventually go bust are overwhelming.

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About the Author

Is the founder of Rick's Picks, an online publication which publishes stock, commodity, and mini-index trading recommendations and forecasts based on a proprietary technical analysis method that took more than ten years to develop and hone.

Original post blogged on b2evolution.

Are Gold Miners About to Break Out?

Wed, 01 Feb 2012 04:12:06 +0000

In the last year gold (shown below as the ETF NYSE:GLD), has been up 25% more than NYSE:GDX, an ETF basket of gold stocks. There have been many reasons for this. Miners have had:

higher energy costs - mining costs have a high proportion of fuel costs,
more regulation,
higher taxes,and
higher cost of maintaining permits - as well as permitting out new mines, and
marginal reserve extraction costs are higher.
New gold mines generally have higher costs for infrastructure and permits.

Will this divergence reverse? Many pundits have suggested this divergence is like a rubber band - and at some point the gap will close.

The divergence between gold and gold miner stocks is shown on this one year Yahoo chart:

With spot gold selling more than $1,700 an ounce one would believe miners should be doing very well. However, the spot price does not reflect directly on the miners. Miners do not sell significant amounts of gold on the spot market - some enter into future contracts at a set price, while others negotiate with major buyers near the time the gold production can be delivered. In either event, miners' production is generally sold at prices below the spot price.

Another factor is that production costs are not fixed. As the price of gold improves, many miners are able to mine previously unprofitable areas. In other words, the higher gold goes - generally the higher gold production costs will go.

Each mining company has its own cost basis and as a result mining companies can very greatly in profitability. This means that stock selection can have a major impact on investment return.

The above graph shows that in 2011 has shown gold miners acting somewhat like broad stock indices such as the Russell 2000 (^RUT) and the S&P 500 (^GSPC), while gold (GLD) has a mind of its own. However, so far in the new year gold miners are performing nearly as well as gold.

Gold Miners are simply manufacturers and, to a large degree, act like any other manufacturer in balancing profitability and costs. It is unlikely that miners as a group will outperform gold going forward. Note that this is a generality, as each miner is different and some lower cost producers could do very well.

I love miners - and traders can profit by riding the volatility, and identifying outstanding performers. Gold miners are too varied to be grouped and bought in a single ETF such as GDX for a reasonable return. My future posts will suggest possible moves to profit with specific miners.

Goldfinger

Original post blogged on b2evolution.