Investment:Time To Short The Shorts By Gareth Milliams

Let me be clear. This market cannot be trusted to provide even medium term gains in equities. However, with under an hour to go before market open in New York, it seems highly possible that the next few days could be positive. 

Chairman of the Federal Reserve, Ben Bernanke in testimony to a Senate Panel yesterday calmed market fears by ruling out nationalisation and stating that he believed that 2010 could be a "year of recovery". This led to a strong market rally, which I believe could continue for a while longer.

Later in the evening President Obama made an upbeat speech to Congress 

"We will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times. And when we learn that a major bank has serious problems, we will hold accountable those responsible, force the necessary adjustments, provide the support to clean up their balance sheets, and assure the continuity of a strong, viable institution that can serve our people and our economy.

Washington is looking to calm the markets and I believe will succeed in doing so, at least until the Treasury's 'stress tests' begin.

The recent downward trend was fear based and partly driven by the financials. Fear based markets are always looking for hope and it is in the nature of the market that it looks to go ever upward. 

Therefore I have sold all Ultrashort holdings in order to protect the integrity of the portfolios.

I may be wrong. But I'd rather be wrong and sell early than buy at a bad time.

Investment: Gold Mining Stocks Are Massively Oversold - A Casey Chart

February 24, 2009

Positive investor sentiment towards the shiny metal has returned with a vengeance over the last year, evident in the global shortages of gold bullion and the 22% increase in holdings at the SPDR Gold Trust GLD. However, the companies that actually find and produce the metal have been caught up in the general equities sell-off that began last October.

Gold stocks have certainly bounced back from their October lows, but are still nowhere near their levels of last March. With oil, one of the major input costs for mining companies, trading at a third of its March 2008 levels and gold poised to surpass $1,000 an ounce, profit margins for gold miners are ready to go through the roof.

Investment: Selling Tickets For The Titanic

It drives me crazy and makes me very angry. There are people in Tokyo still being sold monthly and quarterly traded funds.

Why? Why in this market, in this, the first great depression of the 21st century, are there still people that trust the markets to the point of spurning liquidity.

Why are there people who will invest hard earned into assets where they have no possibility of getting out of their investments when they choose to do so?

Forget monthly traded funds. I hate weekly traded funds!

L-I-Q-U-I-D-I-T-Y!

I'm not saying don't invest. Quite the opposite. I'm saying look carefully at the structure of your holdings. Give yourself the option to get out of the asset when you choose, not when your broker or your fund manager decides that it is convenient.

There are great opportunities out there. We have proved that constantly since 2008. We bought assets designed to cope with the worst case scenario, such as gold and Ultrashorts. We were long yen before it was fashionable and will be anti-dollar for a long time yet. The longer that the dollar stays strong against the worlds currencies (ex-yen), the greater the impact of its fall in value. The dollar is in a massive bubble from which the air must be let out slowly or it will burst and collapse.

So we'll stay strong with gold (NYSE:GLD) and maintain our holdings in shorts.

But what we'll never do, is buy weekly, monthly or quarterly traded funds. That'll be like owning a ticket on the Titanic.

Investment: And Then There Are The Good Days...

"Gold is looking very attractive at present levels. Presently trading at $729 per ounce with the GLD ETF priced at $72.18, now is a great time to buy, even if gold drops further".

Constant Broker 10th November 2008

To read the full article, click the link. http://theconstantbroker.blogspot.com/2008/11/in-20-years-as-financial-adviser-this.html

My job is never easy but can be very rewarding. The last year has been an amazing experience. So I'd like to take this opportunity thank all of my clients for their fantastic support during these trying times.

Investment: February Model Portfolio By Gareth Milliams

When we weight our portfolios we split the assets into the four following classes:

Group 1. Overweight. These are our top choices. Long term holds that we believe will provide secure profits within the present investment environment. Prices are good and general sentiment is positive.

Group 2. Underweight. This is where we see a trend occurring and the sector is oversold. Underweight accumulation only and a long term hold.

Group 3. Speculative/Watch list. Suspects rather than prospects we follow the sector to see if a positive pattern is taking shape. A little bit like chasing tornado's, we consider the environment around the sector to be more important than the asset at this stage. No purchase will be made as yet, but this group is followed very carefully.

Group 4. Bucket List. These assets have been relegated from a higher group and are being either sold or a sale is being considered.

Presently, the groups are composed of the following assets:

Group 1. Gold Bullion ETF (GLD) Double Gold ETF (DGP) or more interestingly HBU.TO. HBU is leveraged (so be careful) but is also denominated in Canadian dollars which I believe are a good buy. The great inflation is coming and as it does, the dollar will drop in value and gold will benefit.

The case for gold has now strengthened. This is what I believe could happen:

Gold will trade in a range over $1,000 per oz, and then break out beyond $1500 per oz before the end of the Summer with a possibility of $2000 within one year.

This is why it is our number 1 asset.

Group 2. Silver ETF (SLV) and Silver Wheaton (SLW). Despite gold's stellar performance, silver has returned growth of 25% YTD reducing the gold/silver ratio to less than 70. Whilst I feel positive about silver as a precious metal, I still have reservations about it as an industrial metal with worldwide demand continuing to slow.

Silver Wheaton is a company which buys silver from mines that have it as a byproduct. They pay for the mining company to dig it out and then buy it from them at a maximum price of $3.90 per ounce. Its a great business plan and in a rising market SLW will outperform SLV.

NUCL, Cameco. The nuclear industry has been devastated over the last year. Uranium (UX308) hit a peak of $138 per pound in a speculative bubble and has now fallen to $47. But at this price the right uranium assets are good value. The industry has a secure and expanding future as demand for cheaper, cleaner power grows globally. Like the oil price, the cost of uranium is inevitably heading north. NUCL offers diverse access to the sector with miners, services and power companies.

Cameco is the worlds largest uranium mining company nicknamed the "Saudi Arabia of uranium". From a previous high above $55, this massive corporation has seen its stock drop to just over $14. It is Barrick Gold and Freeport McMoran rolled into one.

Remember, Group 2 is about underweight holdings for accumulation.

It is also more speculative. We have recently bought UltraShort ETF's. These are for the Russell 2000 Index (TWM) and Basic Materials (SMN). Basic materials includes chemical companies, miners and metals corporations such as Alcoa. The Russell 2000 Ultrashort targets the midcap index.

SMN has gained more than 59% and TWM just under 27% over a one year period. They are both 2xleveraged.

We expect both of these equity market indices to continue to fall over the medium term, providing our clients with excellent returns.

Group3. KOL. The coal sector has been ravaged during the slump. But it is America's primary source of power for its electricity and steel furnaces. America will begin generating more power in the next few years and 'King Coal' will be back in demand. At these prices with a longer term view, coal offers a real opportunity. However, the global slump is continuing and inventory is high.

USO/OIL. The two primary oil ETF's are futures based and can thus benefit from the present oil contango. However, this is a bubble that we think may burst with a possible fall into the
mid-twenties. There could be more severe cuts made by OPEC but we think that the oil speculators best friend (as ever) will be the weaker dollar.

These are great opportunities but not for now. Circumstances will provide me with greater context to purchase in the not too distant future.

Group 4. Nothing here at the moment. Maybe JPY could be a candidate, because it is extraordinarily strong versus dollar compared to AUD and CAD. These two currencies have a strong commodity component and have been given a good kicking by the USD over the last 5 months. These will be a buy and probably at the expense of JPY.

Markets: The Worlds Most Respected Companies By the Bespoke Investment Group

Interesting article from the Bespoke Investment Group.


B.I.G. Tips - Barron's Most Respected Companies

Publish at Scribd or explore others: marketing tips

The Crisis: America Looks Within

It is all too human to look within ones own borders for protection when things turn for the worse. But America became wealthy not from its domestic market but from demand for its goods internationally.

It is the country which more than any other has lectured the world on democratic values that included building the greatest economic empire the world has ever seen. Free trade and freedom were fraternal partners in our red, white and blue world.

How times have changed. It is feasible that the USA will no longer be the free market that it once was for foreign exporters. The US may be preparing to erect trade barriers and willingly man them. This is nationalism borne out of fear. If ever a time existed for neighbours to trust each other and not watch idly by whilst their friends houses burn down, it is now.

As a global economy, we need to act in concert. Congress legislating against free trade can only hurt America and breed further resentment.

Ultimately, should America look inward, there will be other actors willing to take its place. Whether that be the EU, China or a new alliance, who knows? Hopefully cooler heads will prevail and President Obama will exercise a red pen and delete this amendment forever.

Gareth Milliams

Below is a chart and commentary by Casey Research.

February 11, 2009

Plummeting global economies are taking world trade and industrial production along for the ride. No surprise, then, that the IMF projects total world trade to contract 2.8% in 2009. The surprise is the swift and spreading embrace of protectionist policies in reaction to this economic crisis.

Soon to join recent Russian, Indian and Vietnamese tariffs is the “Buy American” clause contained in the forthcoming U.S. stimulus bill. If a mere 2.8% decline in world trade, compared to the 66% drop from 1929 to 1934, can spark the erection of trade barriers, is a rerun of the trade war set off by the U.S. Smoot-Hawley Tariff Act in 1930 far behind?

The Crisis: Gold Purchases Hit A Record High

Fear of falling into an economic abyss and concern about the future of the US dollar is helping to stimulate buying of gold.

Below is an article from the FT yesterday highlighting what looks like becoming a new gold rush.

Bullion sales hit record in rush to safety

By Javier Blas in London

Published: February 9 2009 18:16 | Last updated: February 9 2009 18:16

Investors are buying record amounts of gold bars and coins, shunning risky assets for the relative safety of bullion amid renewed fears about the health of the global financial system.

The US Mint sold 92,000 ounces of its popular American Eagle coin last month, almost four times that which it sold a year ago and more than it shipped during the whole of the first half of 2007.

Other countries’ mints have also reported strong sales. “Large purchases of coins are perhaps the ultimate sign of safe-haven gold buying,” said John Reade, a precious metals strategist at UBS.

Inflows into gold-backed exchange traded funds surged in January, pushing their bullion holdings to an all-time high of 1,317 tonnes. Last month’s flows of 105 tonnes were above September’s previous record of 104 tonnes, and absorbed about half the world’s gold mine output for January, said Barclays Capital.

“We estimate that investment demand [into gold] could double in 2009 compared to 2007,” said Mr Reade. “Purchases of physical gold have jumped over the past six months as investors’ fears about the current financial crisis ... have intensified.”

The move into gold is being driven by the very rich, with bankers saying that some clients are hoarding gold in their vaults. UBS and Goldman Sachs said last week that investor hoarding would drive prices back above $1,000 an ounce. On Monday gold was trading at $892 an ounce.

Traders and analysts said jewellery demand, historically the backbone of gold consumption, had collapsed under the weight of the high prices. Sharp falls in demand in the key markets of India, Turkey and the Middle East have capped the potential of any price rally. But the lack of jewellery demand has not discouraged investors.

Jonathan Spall, director of commodities at Barclays Capital in London, said: “We have seen more new enquiries about investing in gold so far this year than during the whole 2008.”

Philip Klapwijk, chairman of GFMS, the precious metal consultancy, said that investors were buying gold because of fears about the global financial system rather than looking for a quick gain.

“This is a new round of safe haven buying,” Mr Klapwijk said.

GFMS estimated bullion coin demand last year reached its highest level in 21 years.

The Economy: Another Lost Decade: Japan vs US By Gareth Milliams

There is a fear making the rounds of economic pundits that the US could be facing its own 'lost decade' a la Japan of the 1990's. Niall Ferguson speaks eloquently on the subject below and broaches it in his book, "The Ascent of Money". Noriel Roubini, Paul Krugman and Doug Casey see marked similarities when comparing the symptoms of a massive housing bubble and a lack of confidence in the banking system. Even the responses from the US and the Japanese governments echo each other with a combination of stimulus and bail out.

I do not believe that it is enough for a government to buy bad bad assets and build more infrastructure. Even getting the banks to lend will take time. These stimuli must be combined with a strong series of tax cuts in order to encourage consumer spending. Domestic spending is the thinner that unclogs the arteries and allows the US economy to pump cash through its system revitalising that which was previously calcifying.

From Noriel Roubini,Is the U.S. a Japan 2? The Return of Japan’s “Free Fallin” Stag-Deflation and the Risks of a U.S. L-shaped near depression.

"Thus, even if the US were to do everything right and fast enough (on the monetary, fiscal, bank cleanup and household debt reduction) we would still have a severe two year U-shaped recession until early 2010 with a weak recovery of growth (1% or so that feels like a recession even if you are technically out of it) in 2010-2011. But if the US does not do it right this severe U-shaped US and global recession may turn into a nasty multi-year L-shaped near depression like the one experienced by Japan. We don’t have to go back to the Great Depression (when output fell over 20% and unemployment peaked over 25%); even a stag-deflation and Near-Depression like the Japanese one would be most severe for the US and the global economy. And while six months ago I was putting the odds of this L-shaped near-depression at 10% or so such odds have now risen to one third. So time is of the essence and the clock is working against US and global policy makers. The time to stop dithering is well past; and the time to implement a program of forceful, coherent, credible, globally-coordinated monetary, fiscal, financial clean-up and debt-resolution is now. The US and global economy are truly risking a near-depression if the policy reaction is not bold, aggressive, sustainable and credible".

From Doug Casey "Anatomy of Japan's "Lost Decade"

"The similarities between the U.S. now and Japan then derive from the big run-up in debt prior to the onset of economic crisis. Likewise, the reactions of the Bank of Japan and the Federal Reserve in cutting interest rates to zero and using unconventional methods to buy assets to expand their balance sheets are much the same. Further, the central governments both went into deficit to support the economy. Fed up with low growth from the early 1990s, Japan experimented with quantitative easing between 2001 and 2006, adding $250 billion to its excess reserves. The U.S. has adopted the concept of quantitative easing with even more vigor and promises much more intervention than even Japan. Japan has taken almost two decades to do what the U.S. is planning to do in two years. What can we learn from these results? 1. Very little happened in Japan. From beginning to end, the Japanese government spent trillions in its various stimulus programs, including currency interventions, but the economy did not return to robust growth. The GDP after 1990 has stayed level, so the best that can be said is that their actions may have helped the country avoid a worse downturn. Other than temporarily, their interventions certainly didn’t help the Japanese stock market, which dropped from 38,000 in 1990 to 8,000, doubled from that level during the easing, then sank back to 8,000. One might, therefore, be tempted to conclude that the U.S., like Japan, could be in for a slow economy for a long time".

From Paul Krugman, New York Times, "On The Edge"February 5th 2009

"And deflationary traps can go on for a long time. Japan experienced a “lost decade” of deflation and stagnation in the 1990s — and the only thing that let Japan escape from its trap was a global boom that boosted the nation’s exports. Who will rescue America from a similar trap now that the whole world is slumping at the same time"?

Investment: When Aspirations Meet Reality By Gareth Milliams

As a financial planner, my job is to turn an aspiration into reality. Unfortunately, aspirations can be very expensive.

This posting looks at the cold truth of pension funding and what is required to fund that income.

People will naturally delay contributing as long as possible by assuming that their incomes will continue to grow as their careers progress. Unfortunately, their commitments grow even faster as they accumulate spouses, children, property and general debt. Planning for retirement gets delayed and the cost of achieving what was relatively easy five years previously becomes prohibitive.

My clients are amongst the highest paid employees in the world. Many have incomes well in excess of $500,000pa by their late twenties.

Most see their career in banking ending by the time they reach 45 or 50 years old. At that point they would like to retire and lead a life of independence in total financial security.

Ask people what they would like to live on in retirement and most would consider half salary as acceptable. Lets assume that the half salary is $250,000pa.

I would then need to calculate the required lump sum in order to achieve the income target.

Assuming that I could get 5% at a bank and inflation was 3%pa, then that would leave me with a net 2%. This would mean I would need to plan for a lump sum of $12.500.000 to provide that income of $250,000pa.

Let me break the figures down:

$12,500,000 lump sum x 5%pa interest = $625,000pa gross

The components that make up the 5% are:

$12,500,000 lump sum x 3% inflation = $375,000pa

12,500,000 lump sum x 2% net return = $250,000pa income

Even $100,000 pa requires a nest egg of $5,000,000. This $5,000,000 is the value in todays money. If you are 40 today and are looking to retire at 55, then that figure becomes $7,800,000.

It is alarming at how underprepared people are for retirement. This is why we always recommend a multistrategy approach combining lump sums with regular savings. The combination of absolute return and compound growth does work if monitored professionally. It takes serious planning and commitment to create financial security.

If you haven't begun a plan, then the financial crisis is your friend. Its combination of heavily discounted markets and high volatility will enable you to play catch up.

Do something. Make it a priority and do it now.

Investment: Will Oil Be The New Black? By Gareth Milliams

Click the chart to enlarge

Bloomberg - Davos - 30th January

Abdalla el-Badri, OPEC secretary- general, said $70 to $90 a barrel is a “reasonable” oil price to support investment in new production.

“It’s a reasonable price where we can invest and that’s the most important thing for the world,” el-Badri said in a television interview at the World Economic Forum in Davos today. “We control 75 to 80 percent of the world reserves, we need to develop that reserve so we can have more supply to the world.”

Al-Jazeera 1st February

"El-Badri said Opec members would have reached the group's pledge of a drop of 4.2 million barrels a day by the end of January.

After that "if we still have some downward problems, then Opec will not hesitate to take some quantity out of the market," he said".

Nobody is expecting a 73 style oil crisis but the crash in the oil price is hurting the oil producing nations. In Russia this weekend, there were violent protests over rising unemployment and food prices. It's not being discussed much at the moment, but even in the oil rich gulf, there are mass lay offs and retrenchment of skilled staff. Property prices are falling California style. The truth is, is that most of these nations require an oil price north of $50 per barrel just to maintain the status quo.

OPEC has already cut production twice to little effect. This has created a contango in the crude oil market. Oil purchased Friday for $41.68 a barrel could immediately be sold through a forward contract for September delivery at a price of $52.85 a barrel. That’s a gross profit of 25% or more than $11 per barrel before storage costs.

In all probability it is this contango that is helping to create a (thus far) solid floor for the oil price at $40 plus. Lack of demand may push the price lower but that would engender an immediate retalitory response from OPEC, keeping the price high.

There is also a glut of crude oil sailing slowly around the Shetlands or parked up in tankers off Louisiana. However with the cost of at sea storage being less than a dollar per barrel per month,
oil bought at todays price and immediately sold for September delivery will garner a profit of $4 per barrel.

So how to benefit from this? The leading ETF is the United States Oil fund (USO). It seeks to reflect the performance, less expenses, of the spot price of West Texas Intermediate (WTI) light, sweet crude oil. The fund will invest in futures contracts for WTI light, sweet crude oil, other types of crude oil, heating oil, gasoline, natural gas and other petroleum based-fuels that are traded on exchanges. It may also invest in other oil interests such as cash-settled options on oil futures contracts, forward contracts for oil, and OTC transactions that are based on the price of oil. The fund is nondiversified.

The price of oil today reflects a recession and a global slowdown. In two years the price will probably be much higher due to greater demand and much lower production. The cost of a barrel of oil may well continue to drop but an opportunity now exists for long term profits.

In this situation, the investors best friend may prove to be the suffering property developers of Dubai.