This Week in Barrons – 4-14-2013
Winds Of Digital Change are Blowing…
Sometimes it is hard to stay buried in economics and financial structure when so much is changing around you. Who wouldn't have wanted to be there when Polaroid debuted its new technology? Or when Johnson and Johnson (back in 1885) brought out the first "ready to use" bandages? The speed of innovation has not just doubled or tripled in the last hundred years, it has gone parabolic. My great grandmother (when she was alive) – went from living in a wood structure with a horse, buggy, and no plumbing – to seeing someone land on the moon. There is one particular technological innovation that we're living through that is going to affect all of our lives in a way that we don't fully understand – it is the complete transition to a cash-less society. Money has been around (in one form or another) for thousands of years. Money created it’s own ‘business boom’ because money (rather than barter) made it easier to buy things. Money is on slightly newer ground now – not being backed by a ‘gold standard’. But what happens when we become a completely digital, cash-less society – and every transaction becomes a card swipe, or a smart phone pass. Every transaction comes with a complete digital, unbroken trail. No more hiding from the IRS.
- Will sales increase because you can swipe faster than you can wait for change?
- Will jobs be created because you can no longer hire someone "under the table"?
- Drug dealers will potentially go out of business – as will any other companies that don’t comply with regulations. But what will that impact be?
After all, governments are broke and they're on a wild hunt for tax income – tracing money is their game, and digital currency makes it that much easier.
A huge thanks to Mitch F. and Morgan C. for contributing the following on a new global, digital, decentralized currency called Bitcoin. The value of a Bitcoin (the first global, digital currency) has gone from $15 to $260 to $90 in 3 months – so it is ‘investable’. But there are some differences between Bitcoins and today’s currencies. Often, global (country based) currencies are backed by a Central Bank – that produces ‘real money’ on an ‘as needed’ basis. Bitcoins are created at a constant rate by a process called ‘mining.’ Their creation is based upon a mathematical solution and has a hard limit of 21 million Bitcoins in existence. As the number of Bitcoins in existence (mined) approaches the 21 million limit, the creation algorithm is mathematically slowed in order to maintain the balance. Here is a video that explains this using pictures: http://vimeo.com/duncanelms/bitcoinexplained
To invest in Bitcoins – you need to use an online exchange. Of the three major exchanges: MtGox.com, BitStamp.net, and CampBX.com – MtGox.com is (by far) the largest exchange – and the one our experts recommend. In order to do a transaction, you will need to deposit funds into the exchange. MtGox provides instant deposits by using BitInstant.com. But, be aware, this costs you a 4% fee, and should only be used if you want funds in your account as soon as possible. Otherwise, bank transfers are available that take 1 to 3 days, and charge less than a 1% fee – or potentially no fee at all. In terms of sales and withdrawals – the transaction speed and percentages are the same.
Once you have some Bitcoins you will need a digital wallet to store them in. Why not just store your money in the exchange itself? The reason not to do that is because these exchanges are fairly young, and therefore targets for hackers. E-wallets such as Blockchain.info are strongly recommended. Your E-wallet will give you a Bitcoin address (or several) in order that your Bitcoins can be automatically transferred (as needed) in and out of your ‘more secure’ wallet. Because it’s digital – make sure you keep an automatic back-up of your digital wallet account. For a more thorough FAQ discussion – please refer to the wiki page: https://en.bitcoin.it/wiki/FAQ.
Like any new element, Bitcoin is not without it’s hurdles. Last week the main Bitcoin exchange was subject to several DOS (denial of service) attacks which caused the price to fluctuate wildly between $260 and $90 per coin in one day. Therefore, Bitcoins are not for the faint of heart investor – but rather a step into a completely global, digital currency that brings as many questions as it does promises. As for me, I’m going to try it, because I think it is the shape of things to come.
I have to start with gold, since it made headlines Friday. Gold, silver, copper and many other metals were attacked on Friday, but it was gold with the most dramatic result. Why did gold decline by $70 an ounce? After all, isn’t Gold supposed to go up during inflation, and at minimum "hold steady" during times of turmoil? There is significant inflation and tons of global turmoil, however; Gold is off 20% from its 2011 high. As a very smart gentleman once told me: “People sell – when they need the money.” Now as mundane as that sounds, what he meant was – most people don’t calculate the exact moment to sell – and then execute the trade. Most of the really big trades happen - when people (countries) really need money. And if you knew that a specific country really needed money, and their only asset was Gold – you would do everything you could to ‘reduce’ the price of that asset (in this case Gold) before the sale – in order to maximize your profit – yes? Now would the amount of Gold that a nation like Cyprus "could" sell on the open market actually correlate to a $70 drop? No. But if sovereigns wanted Cyprus’ gold at a real bargain, then pushing the paper market down ahead of any sale would be quite advantageous.
Also, with the consistent deterioration of the Japanese Yen and the Euro, the US dollar is still the defacto global currency. Due to that – there is still no love lost between any Central Banks, Wall Street and the precious metals. Nobody can package up ‘bogus tranches’ of gold to sell to investors and make large premiums. In fact when gold is falling, financial institutions are often quick to tell you that you should sell any and all of it and buy ‘their’ financial instruments.
Can Gold go lower? Sure. Is this a reason to bail out and run for the hills? For me, once it stops falling and finds its footing, I'm going to buy more. Personally, I would rather buy more at $1,400 than at $1,500, but let’s see where it settles.
Speaking of stocks, both J.P. Morgan and Wells Fargo made their earnings estimates on Friday, but they made it by moving loan loss reserve monies into the "general pool" thereby increasing earnings. Fair warning, that’s an accounting scheme that’s just wrong.
Another consumer sentiment report came out Friday, and it showed the single, largest "estimate miss" ever recorded. We were expecting a consumer confidence reading of 78.8, and instead received one of 72.3. After weak bank earnings and the lousy economic data, we still ended UP 2 DOW points on the day. Many analysts are calling this most recent stock market run-up a ‘bubble’ that could go on for months or could end Monday. I have seen the market ignore 11 separate economic report misses. But, the Fed isn't going to stop printing any time soon, so we could be looking at Japan 1989 – when their stock market made it to 40,000 before imploding to 9,000. In those days, Japan went from 5,000 to 38,870 in 5 years, fell back to 9,000, and today (24 years later) is around 13,400.
If you are "IN" the market, then things are good. If you’ve been in the market for over a month, then you have some cushion, and could sell and take profits right now. But getting in NOW is extremely dangerous. If the Fed is pushing the DOW to 17,000, then you want to be in. You just don’t want to be in days ahead of its first correction. Bubble markets are scary. We're in one, and each day brings new excitement. Small positions and taking profits quickly aren't the ideal plays, but it beats not being in at all, and it beats losing when a ferocious drop comes. Be careful out there.
Thursday COP hit 60.63 (up over $1 a share) – and on Friday we stopped out flat. The same was true for ORCL. I'm still watching SBUX and JNJ, but lets face it, this market desperately needs a rest. Even a manipulated market needs help now and then. So I'm okay going slow here.
My current short-term holds are performing nicely (with gold and silver still lagging):
- NUAN – in 19.10 (currently 21.64) – stop at 20.50,
- SPY – in at 154.45 (currently 158.67) – stop at 157.25
- SIL – in at 24.51 (currently 16.20) – no stop yet
- GLD (ETF for Gold) – in at 158.28, (currently 143.55) – no stop ($1,501.00 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 25.10) – no stop ($26.32 per physical ounce).
To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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