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.
The Market:
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.
Tips:
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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