Pundits focusing on the individual investor and the independent voter proclaim the pains of uncertainty. They explain the lack of attention to the shortage of retirement funding throughout the world. Compared with their appetite for stocks over the last generation, individual investors’ purchases of equity mutual funds beyond their tax-sheltered retirement plans is pathetic. Capital growth is not their answer to recognized long-term needs. Capital preservation through the ownership of bonds is where their smaller-than-normal excess investment dollars are going. The low apparent inflation rate is not a concern for them.
Upbeat notes
In contrast, the non-committee focused professional investor is becoming increasingly attracted to equities and equities with coupons known High Current Yield bonds, or if you will junk bonds. Their purchases are providing the upward momentum we have seen since the dog days of August. They are being reinforced by strategic and financial acquirers’ announcements or rumors.
One of our advantages in helping sizeable institutional and substantial net worth investors in mutual funds is that we talk with lots of very smart and aware portfolio managers and analysts. Without exception they expect better revenues and earnings to be generated by their investments than past comparisons. (To be fair, some are moderating their estimates for 2011, but still see them higher than their 2010 estimates.) Occasionally we supplement this research by interviewing operating corporate executives who report that business is better than in the recent past and that their order books are getting fatter. As many members of this blog community know, my wife Ruth and I regularly check-out one particularly glitzy mall and other stores. There is a discernable “buzz” in the air as we see more shopping bags leaving the mall on the arms of many different types of consumers.
Three upcoming events
“Beauty is in the eye of the beholder” is an old expression that the viewer sees what he or she wants to see. There are three opportunities that will give consumers/investors an opportunity to use their dollars to express whether these events are viewed as good or bad for them.
The US elections
The first will be the results of the mid-term US elections, which may lead to significant changes in the critical unelected, but extremely powerful staffs on the various Congressional committees and to some extent the so-called independent agencies. One might suggest that the stock market rise since Labor Day is discounting the favorable change. The second and third events are somewhat interrelated.
Attempts to manipulate Balance of Payments
The second item is the government's attempted manipulation of balance of payments among the countries of the world. If this practice was done in the private sector it would be illegal. The US government wants to create an artificial ceiling to the size of balance of payments surpluses (read: limit the size of the US balance of trade deficit). We know the reality of international trade, that constraints do not work. In the historic example of the Smoot–Hawley Tariff of 1930, enacted by a panicked US Congress, the world was plunged into a depression from a severe recession. The futility of limiting trade is evidenced by the fact that during almost every war in recorded history, the opposing sides traded with each other through third parties.
Gold vs. paper currencies
The third event or events is the pattern of learned experts predicting that the price of gold will rise to $1500, $2200, and $10,000. This is the wrong way to look at the price of gold according to a very smart friend of mine who has headed two major research departments. His contention, along with others, is that the price of gold is a contrary indicator which measures the decline of the value of paper currencies, led by the dollar.
The link between the government attempts to manipulate trade flows and the decline in the value of paper currencies is the governments’ induced inflation. When people trade using currency (as distinct from barter), on one side of an international trade, both the amount and the value of the currency play a role in setting price. The US along with many European governments is trying to answer unemployment problems by the injection of taxpayer funds to support the economy through the expansion of debt.
In November we will learn about the election, the ill-advised quantitative easing by the Fed (discussed in my blog last week), the meeting of the G-20 leaders, and the likelihood of further legislative actions in the “rump’ session of the US Congress. Whatever actually happens, the key to the near-term outlook for the stock market is what beauty will investors, particularly individual investors behold in the post-November world?
What to do?
What should intelligent long-term investors do in the face of the November issues? I would suggest that you ignore all of the headlines and focus on building a portfolio that is appropriate to your needs for at least the next ten years. Over that period we will get one or more major winds to fill our sails. This wind will give us ample opportunities to jettison any poor investments that we have made and to rebuild our reserves for future storms. Sail on...
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Showing posts with label Gold prices. Show all posts
Showing posts with label Gold prices. Show all posts
Sunday, October 24, 2010
Sunday, November 8, 2009
Winning Calls
Life rarely presents us with celebratory events sponsored by others for us. Thus, occasionally we need to create our own in the fashion of Lewis Carroll’s wonderful invention of the “Unbirthday.” With this as a premise, I am indulgently going to celebrate the recent successful calls in our blog. If I don’t, who will?
The first correct call was the recognition that the month of October, 2009, had specific characteristics; which this year resulted in a negative bias to equity performance for the month. I also pointed out that mutual funds end their tax reporting year in October. While most funds have accumulated large realized losses created in ’08 and ’09, it would be possible (and perhaps prudent) to recognize some gains. The gains would not trigger a tax payment because the gains would offset the losses. Since there are no “wash sales” rules on gains, the smart thing to do is sell some of this year’s winners and either repurchase the same stocks, or perhaps to use Sir John Templeton’s phrase, search for “better bargains.” As the SEC no longer requires funds to disclose transactions on a quarterly basis, we no longer see a list of transactions made by the funds, thus I do not know what happened.* However, during the last three weeks of October, a significant number of the best performing stocks for the year were met with selling. On an overall basis, the month of October was down. My supposition is, that with the removal of the incremental mutual fund selling, the short term performance (at least in early November) would be up. This actually happened. I call it a win.
The second call was on the relative value of the dollar, which I felt was bottoming. This appears to be happening. Please note that I phrased my comment in relative terms. I agree with many of the views of the dollar’s detractors, that the buck should be worth less due to the present deficit, the almost certainty of a larger deficit, and the strong odds of a pick-up in inflation, probably induced. Why then should the dollar stop falling? World trade currencies are priced relative to other currencies. From a managed trade point of view, the decline in the US dollar is an increase in the value of the counter currencies. In many countries exporters are politically important. They see a rising price of their own money as an inhibitor to their export sales. Thus, I believe that other countries will buy some dollars to prevent their own money from being priced out of the world market. I have great respect for George Soros and his investment accomplishments over the years, even though I rarely am in agreement with his political views and actions. When he was recently asked about the worth of the US dollar, he replied that it was over-valued, except in comparison with other currencies. Today, I do not see a better value in other paper currencies, even though personally I own some other currencies to support my foreign equity investments.
From the standpoint of those who are focused on the absolute value of the dollar, that is to spend rather than trade, the price of gold (and to a lesser extent prices of some other commodities) is instructive. The nominal price of gold is at record levels, about $1100 a troy ounce. However when translated into today’s dollars, the old record price of over $800** an ounce in 1980 would be at least a thousand dollars higher. One reason for the recent strength in the gold price is that several central banks have made it known that they will not be carrying out their previous plans to sell gold. In addition, both India and China are buyers. I will claim this call as a winner in light that the other side is not winning.
On a tactical side, my recent calls for long term investing for growth, and particularly technology-driven innovation, appears to be winning relative to bets on value, and to some degree on industrials. I will claim these as short term winners, even though they were meant for long term investment.
Emotionally, the final two words in last week’s blog, “Go Yankees,” (written by the ‘born in Manhattan boy’ in me) proved to be the week’s biggest win. Please remember that there are legions of New York haters who resent the swagger generated by this culture of winning. Thus while I am very pleased, after eight long years of lack of fulfillment, my guard is up to defend against those who wish to punish New York. New York is a state of mind and not just a place. The biggest threat we face is a repeat event as severe to our economy and the financial markets as we experienced last year. We will retain our “license” to be central to the progress of the world only if we have learned something and we change our thinking.
I believe that we must change our thinking, thus next week’s blog will be devoted to my attempts to become more aware of the shape of future problems before they overwhelm us.
Any contributions from readers will be appreciated.
---------------
* Years ago, the SEC required mutual funds to report their transactions quarterly, allowing a deeper dimension to the analysis of funds than is now available. The SEC caved-in to the funds in abolishing this report, reasoning that the SEC and its staff could get the specific information anytime they needed it. Fund owners and their analysts no longer have access to that insight.
** A very valued former associate of mine, the late Alling Woodruff, of Greenwich, CT, did sell his physical gold position above $800. He was an independent director of what was then the largest US gold fund and was going to South Africa to visit some mines, thus out of touch with the market for a couple of weeks.
The first correct call was the recognition that the month of October, 2009, had specific characteristics; which this year resulted in a negative bias to equity performance for the month. I also pointed out that mutual funds end their tax reporting year in October. While most funds have accumulated large realized losses created in ’08 and ’09, it would be possible (and perhaps prudent) to recognize some gains. The gains would not trigger a tax payment because the gains would offset the losses. Since there are no “wash sales” rules on gains, the smart thing to do is sell some of this year’s winners and either repurchase the same stocks, or perhaps to use Sir John Templeton’s phrase, search for “better bargains.” As the SEC no longer requires funds to disclose transactions on a quarterly basis, we no longer see a list of transactions made by the funds, thus I do not know what happened.* However, during the last three weeks of October, a significant number of the best performing stocks for the year were met with selling. On an overall basis, the month of October was down. My supposition is, that with the removal of the incremental mutual fund selling, the short term performance (at least in early November) would be up. This actually happened. I call it a win.
The second call was on the relative value of the dollar, which I felt was bottoming. This appears to be happening. Please note that I phrased my comment in relative terms. I agree with many of the views of the dollar’s detractors, that the buck should be worth less due to the present deficit, the almost certainty of a larger deficit, and the strong odds of a pick-up in inflation, probably induced. Why then should the dollar stop falling? World trade currencies are priced relative to other currencies. From a managed trade point of view, the decline in the US dollar is an increase in the value of the counter currencies. In many countries exporters are politically important. They see a rising price of their own money as an inhibitor to their export sales. Thus, I believe that other countries will buy some dollars to prevent their own money from being priced out of the world market. I have great respect for George Soros and his investment accomplishments over the years, even though I rarely am in agreement with his political views and actions. When he was recently asked about the worth of the US dollar, he replied that it was over-valued, except in comparison with other currencies. Today, I do not see a better value in other paper currencies, even though personally I own some other currencies to support my foreign equity investments.
From the standpoint of those who are focused on the absolute value of the dollar, that is to spend rather than trade, the price of gold (and to a lesser extent prices of some other commodities) is instructive. The nominal price of gold is at record levels, about $1100 a troy ounce. However when translated into today’s dollars, the old record price of over $800** an ounce in 1980 would be at least a thousand dollars higher. One reason for the recent strength in the gold price is that several central banks have made it known that they will not be carrying out their previous plans to sell gold. In addition, both India and China are buyers. I will claim this call as a winner in light that the other side is not winning.
On a tactical side, my recent calls for long term investing for growth, and particularly technology-driven innovation, appears to be winning relative to bets on value, and to some degree on industrials. I will claim these as short term winners, even though they were meant for long term investment.
Emotionally, the final two words in last week’s blog, “Go Yankees,” (written by the ‘born in Manhattan boy’ in me) proved to be the week’s biggest win. Please remember that there are legions of New York haters who resent the swagger generated by this culture of winning. Thus while I am very pleased, after eight long years of lack of fulfillment, my guard is up to defend against those who wish to punish New York. New York is a state of mind and not just a place. The biggest threat we face is a repeat event as severe to our economy and the financial markets as we experienced last year. We will retain our “license” to be central to the progress of the world only if we have learned something and we change our thinking.
I believe that we must change our thinking, thus next week’s blog will be devoted to my attempts to become more aware of the shape of future problems before they overwhelm us.
Any contributions from readers will be appreciated.
---------------
* Years ago, the SEC required mutual funds to report their transactions quarterly, allowing a deeper dimension to the analysis of funds than is now available. The SEC caved-in to the funds in abolishing this report, reasoning that the SEC and its staff could get the specific information anytime they needed it. Fund owners and their analysts no longer have access to that insight.
** A very valued former associate of mine, the late Alling Woodruff, of Greenwich, CT, did sell his physical gold position above $800. He was an independent director of what was then the largest US gold fund and was going to South Africa to visit some mines, thus out of touch with the market for a couple of weeks.
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