Sunday, May 20, 2012
This Week in Barrons – 5-20-2012 Sell in May and Go Away? This isn't your typical "Sell in May and Go away". This market downturn has very little (if anything) to do with investors starting to book vacations and trading desks getting thin. This downturn has everything to do with Europe, overwhelming debts, no jobs, falling housing, and the biggest reason of all – the effects of the QE's having run their course. But honestly, the entire globe is slowing (especially Europe), and people with very little money don't tend to buy a lot of goods and services. Consider these facts: - “A hurricane is approaching," says a Chinese official, “where 8 of 10 of the country's largest shipbuilders have yet to receive an order this year.” - This week’s upward revision makes the Bureau of Labor and Statistics (BLS) a perfect 20 for 20 this year in needing to revise higher the previous week's jobless claims number. - This week’s Philly Fed Business Activity index came in at -5.8 versus an expected 10.0. New Orders came in at -1.2 versus an expected 2.7. - We learned that Hewlett Packard (HPQ) is planning massive layoffs that, along with an early retirement program and attrition, could reduce its workforce by 10% to 15%. - We also learned that in Chinese real estate: April Housing starts were down 14.4% year over year, Office starts declined 21%, Land sales were down 54.7%, and Foreign funding of property development declined 80.8%! People fear this may push the Chinese economy into a hard landing. The problem with nobody buying anything is the domino effect. When there is no buying, there is no production and therefore fewer jobs. So, like a cancer it spreads. Now, our politicians obviously know that printing money out of the clear blue is bad. But they also know that without freshly printed money to jam into the banks, the economy will grind to a halt. Will they let the economy grind to a halt, and let the too big to fail – FAIL, or will they take the tough road and increase interest rates, put the EPA back into the ground, and really do what's necessary to fix a failed economy? To me the choice is simple, they're going to print money and announce more QE (more stimulus). The only thing I don't know is when. How far down are they willing to let the market fall before Bernanke comes out with an announcement? The current version of QE (called Operation Twist) is set to expire in June. Thus far, The Ben Bernanke has hinted to us that he has many tools to employ and will jump in if the economy looks like it's weakening. But thus far, despite some pretty horrid economic news, he has kept his powder dry. I have to think that it's going to hit in early June, as they announce the program that will replace the twist. If he rolls out a really big package, then we should see the market run back up and threaten the triple top at 13,000. But what if it's not that big – then that would be ugly. Everyone knows that Greece and Spain are shot, Europe is fading, and China is slowing. Everyone also knows that the U.S. is much weaker than the numbers suggest. Therefore, I think that the next stimulus package will be a monster, but until it hits we are going to fade. We may see a couple hundred point counter bounce, but overall we are sinking. Some folks have asked about Gold and silver – and why they are not moving up? One reason is that because the Euro is so weak, the dollar is relatively strong, and most gold is priced in dollars. So when the dollar is firm, gold slides, but it is deeper than that. JA wrote in showing us a nice article by Greg Canavan hi-liting: - If gold weren’t such a crucial part of global finance, it wouldn't be such a huge market. Gold is crucial regardless of what Warren Buffet or The Ben Bernanke say. Therefore, the day physical gold leaves the banking system is the day when the paper dollar based system dies. - At this point the value of physical gold is many multiples of the current price, and many would not be surprised to see trading halted and gold re-priced much higher over the course of a weekend – as has been done throughout history. - This current pullback in the gold price has not been as severe as past episodes, and the pullback is suggesting that physical gold is increasingly in demand. Many monetary systems are being brought into question – and when this happens (regardless of what the price tells you) – physical gold is the only asset without counterparty risk. - So if you’re thinking of selling your gold – be strong – and think about what you will be swapping it for. You will be going short on 6,000 years of history and long on a 41-year paper and credit based experiment. - A very low gold price is not in a government's interest because physical gold would leave the system and end the paper money game. So governments simply try to control gold's rise, making sure it doesn't throw off too much of a red alert signal. - For the gold price to genuinely fall, we need to see a rise in REAL interest rates. In a world buckling under the weight of debt at all levels, that is just not going to happen. So, I look at this as just more "noise" in the overall picture. I might have gold and silver wrong. I was told I had it wrong at $400, $500, $700, and $1,000. Yet I'm just too dumb to understand why it's wrong, so I continue to buy it. Some have asked: “What if Romney wins?” Do you really think he is going to do the tough things that need to be done? There are only two choices: the tough love, tough medicine we need, or more bogus dollar printing until hyperinflation takes over. I say they pick printing, and history is on my side. The Market What a week. We came into the week with the news that JP Morgan managed to lose $3 Billion. Yes, grand master Jamie Dimon (the guru of finance) didn't know his "whale" trader had placed them with so much risk that $3 Billion could go poof? Give me a break! A “whale” might lose $100 Million and Jamie not know about it – but $3 Billion – not a chance! Of course he immediately had to rush out and tell folks why the banks don't need any more regulations, and it was just a big, bad bet. The market was particularly nasty this week as it didn’t like: Europe, Greece, Spain’s banks on the edge of absolute insolvency, not even the Facebook IPO! You know a market is really nasty, when the single biggest collection of Wall Street wizards couldn't keep it green on the day the biggest IPO in a decade hit the wires. So, are we destined to the dustbin of DOW 7K, or is this just ‘Sell in May, and Go away’? There are areas of the market that got "sold silly". Look at the mining ETF’s like GDX and GDXJ that had been beaten unmercifully. The coal sector represented by KOL has also been getting hammered. Some of these areas are ripe for a nice bounce, but what about the overall market? If you're comfy believing that established technical patterns are really still in place, then it's possible we're looking at a move higher soon. But I'm in a separate camp. I say this market can't do squat in a meaningful way if The Ben Bernanke doesn't come out with some form of replacement for “Operation Twist”. My feeling is that we are indeed overdue for a bounce, maybe even a few hundred points. But after that we will continue lower until we hear from the Feds. My guess is that The Ben Bernanke is going to unleash a massive program (one that drives the market up to possibly all new highs) right in time for Obama to say: "See I fixed it". So, when the announcement hits we want to be very long in the market. But until it does, be very careful, and take a look at the most beat up of the sectors. Tips: We continued picking up mining shares last week as the sector has been beaten bloody and there's no reason they're so low. We bought more physical gold and silver. DS urged us to acquire more EXK and we did. Currently I’m holding: - GDXJ at 19.50 (currently 18.71) – stop removed temporarily - GDX at 41.72 (currently 41.58) – stop removed temporarily - EXK at 7.96 (currently 7.96) – no stop - GLD (ETF for Gold) – in at 158.28, (currently 154.82) – no stop, AND - SLV (ETF for Silver) – in at 28.3 (currently 28.00) – no stop. To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm. Please be safe out there! Disclaimer: Expressed thoughts proffered within the BARRONS REPORT, a Private and free weekly economic newsletter, are those of noted entrepreneur, professor and author, RF Culbertson, contributing sources and those he interviews. You can learn more and get your free subscription by visiting:
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