Gulf Islamic Banks Eye Conversion of Conventional Peers

May 3, 2010 by · Leave a Comment 

By Frederik Richter and Shaheen Pasha

MANAMA/DUBAI (Reuters) – More banks in the Gulf Arab region may convert to Islamic finance in a bid to tap rising demand for sharia-compliant products and to avoid the heavy investment required to launch new banks.

A source told Reuters this month that Qatari investors are planning to buy a 25 percent stake in Ahli United Bank <AUBB.BH> <AUBK.KW> from Kuwaiti investors and have plans to convert Bahrain’s largest retail bank, which itself plans to take its Kuwaiti unit Islamic.

“Converting to Islamic is compelling in the region. In Kuwait Islamic banks have rapidly won market share from conventional ones,” said Sayd Farook, senior consultant at Dar Al Istithmar.

Converting conventional banks would help the industry expand its retail footprint — for instance in countries where no new licenses are given out but conversions are allowed –, which experts say the industry needs to develop a more sustainable business model.

The Islamic banking industry in the Gulf Arab region has mostly relied on channeling the region’s oil wealth into real estate and private equity, and was badly hit by a regional property correction late in 2008.

“I would say between 70 to 80 pct of the Muslim market (in the region) would bank with an Islamic bank….if you are an Islamic bank you get to capture that market,” said Sameer Abdi, head of Islamic finance at Ernst & Young.

Scholars have said they do not oppose converting conventional banks as long as their investments and debt levels are brought in line with sharia, which bans investments in certain sectors such as alcohol, over a grace period.

“There is usually a two-year conversion gap from the moment you convert….during which you need to give away to charity any income from conventional instruments,” said Farook.

Experts say that converting a bank comes cheaper than launching a green-field retail bank, but costs associated with revamping the bank’s work-flow, accounting and core banking IT systems are still high.

“Depending on the scale of the bank and the market in which it operates, it could take two or three years before the investment pays off,” said Hatim El Tahir, a Bahrain-based director at Deloitte & Touche.

Abdi said he estimated that up to 15 percent of existing customers could leave a converted bank, not necessarily because they disapprove of the switch to sharia, but because the bank might struggle to maintain its service level during a difficult transition period.

Bahrain’s Al Salam Bank <SALAM.BH> is converting Bahraini Saudi Bank <BSBB.BH>, which it bought last year, as is Egypt’s National Bank for Development <DEVE.CA> after Abu Dhabi Islamic Bank <ADIB.AD> partially bought the lender in 2007.

But the Gulf Arab region is rarely seeing mergers and acquisitions due to cultural sensitivities and opaque ownership structures, which could be the biggest obstacle to the conversion of conventional assets.

Bahrain’s Ithmaar Bank <ITHMR.BH> this month concluded the transformation from an investment house to an Islamic retail bank to improve its funding base, but could do so because it fully owned Islamic retail bank Shamil.

But Kuwaiti banks and merchant families have been badly hit by the financial crisis and are trying to sell down their international assets, which could be a way in.

Their ownership in many banks in the off-shore banking center Bahrain, both Islamic and conventional, could migrate to Qatari investors and banks that are awash with cash, bankers and analysts say.

“Qatar is a small economy…the bigger banks are looking at other markets,” said Janany Vamadeva, banking analyst at HC Brokerage, adding that Qatari companies would also be best positioned to raise money in current capital markets.

(Reporting by Frederik Richter and Shaheen Pasha; Editing by Dinesh Nair and Louise Heavens)

12-18

High Frequency Trading High-tech Highway Robbery

April 22, 2010 by · Leave a Comment 

By Mike Whitney

April 18, 2010  — The Securities and Exchange Commission (SEC) knows that High-Frequency Trading (HFT) manipulates the market and bilks investors out of tens of billions of dollars every year. But SEC chairman Mary Schapiro refuses to step in and take action. Instead, she’s concocted an elaborate “information gathering” scheme, that does nothing to address the main problem. Schapiro’s plan–to track large blocks of trades by large institutional investors– is an attempt to placate congress while the big Wall Street HFT traders continue to rake in obscene profits. It achieves nothing, except provide the cover Schapiro needs to avoid doing her job.

High-frequency trading (HFT) is algorithmic-computer trading that finds “statistical patterns and pricing anomalies” by scanning the various stock exchanges. It’s high-speed robo-trading that oftentimes executes orders without human intervention. But don’t be confused by all the glitzy “state-of-the-art” hype. HFT is not a way of “allocating capital more efficiently”, but of ripping people off in broad daylight.

It all boils down to this: HFT allows one group of investors to see the data on other people’s orders ahead of time and use their supercomputers to buy in front of them. It’s called front-loading, and it goes on every day right under Schapiros nose.

In an interview on CNBC, HFT-expert Joe Saluzzi was asked if the big HFT players were able to see other investors orders (and execute trades) before them. Saluzzi said, “Yes. The answer is absolutely yes. The exchanges supply you with the data, giving you the flash order, and if your fixed connection goes into their lines first, you are disadvantaging the retail and institutional investor.”

The brash way that this scam is carried off is beyond belief. The deep-pocket bank/brokerages actually pay the NYSE and the NASDAQ to “colocate” their behemoth computers ON THE FLOOR OF THE EXCHANGES so they can shave off critical milliseconds after they’ve gotten a first-peak at incoming trades. It’s like parking the company forklift in front of the local bank vault to ease the transfer of purloined cash. Due to the impressive research of bloggers like Zero Hedge’s, Tyler Durden and Market Ticker’s, Karl Denniger, many people have a fairly good grasp of HFT and understand that the SEC needs to act. But Schapiro has continued to drag her feet while issuing endless proclamations about pursuing the wrongdoers. Baloney. She needs to stop yammering and shut these operations down.

In a recent posting, Market Ticker explained some of the finer-points of high-frequency trading, such as, how the banks/brokerages probe the exchanges with small orders in order to find out how much other investors are willing to pay for a particular stock. Here’s a clip:

“Let’s say that there is a buyer willing to buy 100,000 shares of Broadcom with a limit price of $26.40. That is, the buyer will accept any price up to $26.40. But the market at this particular moment in time is at $26.10, or thirty cents lower.

So the computers, having detected via their “flash orders” that there is a desire for Broadcom shares, start to issue tiny “immediate or cancel” orders – IOCs – to sell at $26.20. If that order is “eaten” the computer then issues an order at $26.25, then $26.30, then $26.35, then $26.40. When it tries $26.45 it gets no bite and the order is immediately canceled.

Now the flush of supply comes at $26.39, and the claim is made that the market has become “more efficient.”

Nonsense; there was no “real seller” at any of these prices! This pattern of offering was intended to do one and only one thing – manipulate the market by discovering what is supposed to be a hidden piece of information – the other side’s limit price!

With normal order queues and flows the person with the limit order would see the offer at $26.20 and might drop his limit. But the computers are so fast that unless you own one of the same speed you have no chance to do this – your order is immediately “raped” at the full limit price!

The presence of these programs will guarantee huge profits to the banks running them and they also guarantee both that the retail buyers will get screwed as the market will move MUCH faster to the upside than it otherwise would.

If you’re wondering how Goldman Sachs and other “big banks and hedge funds” made all their money this last quarter, now you know.” (“High-Frequency Trading is a Scam”, Market Ticker)

The HFT uber-computers are able to find out the highest price that traders will pay in a millisecond and then extort that full amount millions of times to maximize profits. Clearly, this has nothing to do with efficiency or innovation. It’s high-tech highway robbery; institutional bid-rigging on a grand scale, tacitly sanctioned by industry lackeys operating from within the administration. Schapiro was picked by Team Obama for this very reason; because she was known as a regulator with a “light touch” when she headed Finra the financial industry’s self policing agency. As Finra’s chief, Schapiro managed to keep her head in the sand during the Madoff scandal and the auction-rate securities flap. She also issued far fewer fines and penalties than her predecessor. Here’s an excerpt from the Wall Street Journal which sums up Schapiro’s regulatory doctrine:

“The Financial Services Institute, a trade group, was meeting, and Ms. Schapiro addressed the crowd about Finra’s efforts to fight frauds aimed at senior citizens. Frank Congemi, a financial adviser, asked what Finra was doing to regulate “packaged products” such as complex mortgage securities. Mr. Congemi says that Ms. Schapiro replied: “We have rating agencies that rate them.” The credit-rating agencies, by this time, were being heavily criticized for having given triple-A ratings to mortgage bonds that became unsalable as foreclosures rose.” (Wall Street Journal)

If the financial crisis has taught us anything, it’s that the system is NOT self-correcting. And it takes more than just rules. It takes regulators who are willing to regulate.

12-17

Sukuk Market Starved of Benchmark Sovereign

March 25, 2010 by · Leave a Comment 

By Carolyn Cohn and Shaheen Pasha

LONDON/DUBAI, March 23 (Reuters) – Sovereign borrowing still eludes the Islamic bond, or sukuk, market, leaving investors hungry for a benchmark issue to reinvigorate trading after the credit crunch and the Dubai World crisis.

Where issuance from euro zone and emerging market borrowers in 2010 has been fast and furious, with emerging market borrowers alone issuing over $50 billion, there have been no sovereign sukuk issues at all.

Only one international sukuk has been issued so far this year, a $450 million Islamic bond for Saudi property developer Dar al-Arkan.

A resolution of debt woes at state-owned Dubai World, the mounting of domestic regulatory hurdles for issuers and improved liquidity could bring sovereigns to the sukuk market from around the third quarter.

But for now borrowers have been deterred by thin trading, the extra premium which borrowers have to pay to attract investors into this relatively small and specialist market, question marks over sovereign guarantees and regulatory conundrums.

“There is genuine need for issuance,” said Muneer Khan, partner and head of Islamic finance at law firm Simmons & Simmons in Dubai.

“Government-related issuances and good credit corporate issuances can often open the gates for further corporates.”

A sukuk is similar to a bond but complies with Islamic law, which prohibits the charging or payment of interest.

The typical path for any debt market is that the initial borrowers are sovereigns, seen as relatively risk-free, followed by state-owned entities, and then by corporate borrowers who will offer a higher yield.

“If sovereigns get deals away at a certain level, corporates should trade 30-40-50 basis points above,” said a London-based Islamic finance specialist.

But without sovereign deals, it is hard for corporates to follow.

The Philippines last week shelved plans for a debut sukuk issue, citing legal hurdles.

Indonesia, which has previously issued in the sukuk market, has no plans to issue again before September.

Gulf borrowers such as Bahrain and Dubai have also previously issued sukuk. But trading is weak after the shock payment standstill on Dubai World debt, which includes Islamic debt, and other defaults in a market once boasting a zero default rate.

In addition, the lack of a government guarantee for some state-owned Dubai World debt came as a shock to many investors.

Sukuk prices are generally trading below par and the market is highly illiquid, market participants say, even as benchmark emerging sovereign debt spreads are trading at their tightest over U.S. Treasuries in nearly two years.

Global sukuk issuance is likely to range between $15-17 billion in 2010, down from $19 billion last year, a recent Reuters poll shows. Currently even those forecasts look ambitious — in 2009, nearly all sukuk issues were made by states and quasi-sovereign entities.

“The sukuk market has been doubly affected by the downturn and the situation in the Middle East, so people are not pushing ahead — it’s not an easy market for a first-time borrower,” said Farmida Bi, partner at law firm Norton Rose in London.

European sovereigns have failed to issue any sukuk at all.

The UK was at the forefront of plans for sukuk issuance, and has the legal framework in place. But its original plans coincided with the outbreak of the global financial crisis, and the country has since saddled itself with huge amounts of debt.

“The reality is that the UK government has to fund a 178 billion pound ($266 billion) deficit,” said the Islamic finance specialist.

“To come to the market with a $500 million to $1.0 billion sukuk is not the highest on their priority list.”

France was also hoping to issue a sukuk but has become bogged down in legal changes, and market participants say sukuk issuance in countries such as Turkey remains some way off.

However, there are a few signs of light.

Investors are awaiting a restructuring any day of $26 billion in Dubai World debt, which will draw a line under the four-month old problem.

“The more positive news that comes for resolutions, the better,” said Khan. “It can’t hinder further issuances, but it could help.”

Sovereigns such as Jordan and Kazakhstan have said they want to issue sukuk for the first time, although there is no set timing.

And as markets around the world recover, led by emerging debt which is seeing strong demand, sukuk could yet attract investors.

According to a Gulf regional banker at a major investment bank: “The sukuk market is a natural follower of the debt capital markets and we’re starting to see more activity there. There is liquidity in the bond market.”

12-13

Gold’s Bull Market Turns 9 Years Old

March 18, 2010 by · Leave a Comment 

By Mary Anne & Pamela Aden

Gold, silver and the metals group are coming down from their January highs, on the eve of gold’s nine year bull market run. Considering the gold price has had nine consistent yearly gains, and it’s still above $1000 is a feat in itself. Gold’s bull market is solid, a new phase has begun and it’s currently declining in a sharp, yet normal downward correction.

Corrections tend to cause fear. And considering the volatility we’ve seen in recent years, the fear level rises fast. The word bubble is the buzz word, and it’s understandable since we’ve had so many over the last decade. The tech bubble was followed by the housing bubble, the credit bubble, and the debt bubble that continues to grow.

The debt bubble is an ongoing reality; it’s international in scope and it’s the biggest ever. This is hanging over our heads and over the markets, and it isn’t going away, it’s just getting bigger.

GOLD RISES WITH UNCERTAINTY

Debt monsters of the past have tended to end in deflationary depressions, but it’s important to understand that gold can rise in this kind of environment. Remember, gold rises during economic uncertainty. In the early 1930s, for example, during the Great Depression, President Roosevelt raised the price of gold almost 70% from $20.65 to $35 an ounce in a struggle to bring back inflation.

Gold is money. It’s the currency of last resort when monetary times are difficult. So when gold rises in all currencies, as it’s been doing for several years, you know the rise is enduring and superior (see Chart 1). So even though gold has no yield or earnings to measure like the other markets do, it has true value.

The central banks are flooding the markets with their own currencies, and competitive devaluations will continue to grow. Many countries depend on exports for economic survival. This means the best price in the current deflationary environment wins, which is what a cheaper currency does.

This situation originally started with globalization and it’s bullish for gold. The U.S. is still in a delicate situation. It needs a weaker dollar to compete and stimulus measures must continue, which are both ultimately bullish for gold.

This is one important reason why we do not think gold or commodities are in a bubble. We believe they are rising within a mega trend that could last several more years, perhaps a decade. Some say that China is in a bubble and if they are, the demand for commodities will fall. China may be overheated but we don’t think it’s in a bubble. Their growth, even if it’s only a part of what they claim, is solid.

Commodities are in demand and this continues growing with each passing month. China is the engine for demand. It’s the biggest consumer of many raw materials, like aluminum, copper and iron ore. In fact, just last month the number of iron ore and coal ships hired to carry cargo to China jumped 38%.

Rio Tinto, the second largest resource company in the world, forecasts that China’s consumption will be more than double by 2020. That’s only 10 years away.

China and other countries are also buying gold. It currently only makes up about 2% of the reserves in emerging markets. With the average being 10%, there is interest and a need to continue adding gold to their reserves.

Aside from central banks, mutual funds are adding gold to their portfolios as well. This month, the second biggest U.S. public pension, the California State Teachers retirement system, is considering investments in commodities in order to boost returns and provide a hedge against inflation.

Yes, gold is slowly making its way into mainstream investing, in large part thanks to the Exchange Traded Funds, ETFs. They have made it easy to invest in gold and commodities.

BAD NEWS COINCIDES WITH DECLINING MARKET

Debt and how it’s handled will be the driving force in the markets looking out to the years ahead. And interest on the debt, compounded, will be the biggest problem.

This is why there are so many doubts that the economic recovery will be sustained. The commodities, metals and energy fell sharply in recent weeks on concern that rising job losses in the U.S., and mounting debt in Europe, will slow economic growth and, therefore, curb demand.

Interestingly, this type of news becomes more common when the markets are due for a downward correction anyway. The great rises in the metals and crude oil were overextended and they’ve been poised for a downward correction.

With copper being the global economic barometer, the fact that it fell sharply for the first time since the rise began a year ago, provided a good example of bad news hitting an overextended market. A bull market decline is now underway.

Gold is a good example too. Its seven month rise that peaked in November, which we call the C rise, was a bullish one that had reached maturity. By gaining 40% and meeting our original target level, we knew the bulk of the rise was over, for the time being.

GOLD: “D” decline underway

A D decline is now underway. These declines tend to be the sharpest intermediate declines in a bull market, and so far this one is following the pattern. Chart 2 shows that gold’s leading indicator (B) declined clearly below its uptrend and it could now fall to the low area while the gold price itself stays under downward pressure.

The $1000 level is a key support area, which is near the prior C peak in 2008. The 65 week moving average, now at $975 is rising and it’s set to reach the $1000 level in a few months, which will further reinforce the support at $1000. For now, $975 to $1000 is the strong support level for gold.

Interestingly, gold at $975 would be a 20% decline from the November $1218 peak. The worst D decline so far in the current bull market was in 2008 during the financial meltdown. Gold fell almost 30% from March to November. This was an extreme case in an extreme situation. A decline to the $950 level would be similar to the 2006 D decline, which was the second worst decline since 2001.

In other words, the extent of the decline is about half over. As for timing… since 2004, the D declines have been lasting about twice as long compared to the first years of the bull. This means we could see the decline end any time from here on out, if it’s on the shorter end, but more likely it could last until April.

Pressure is likely to stay on gold and the metals in the weeks ahead, which means it’s time to take advantage of weakness by adding or buying new positions. Gold’s major trend remains up, indicating it’s headed higher. But for now, it will temporarily remain under downward pressure by staying below $1110.

12-12

At What Cost?

February 28, 2010 by · Leave a Comment 

By Steve Betts, www.thestockmarketbarometer.com

Whenever you embark on a significant activity, and it doesn’t matter whether its business or personal, you have to ask yourself two important questions: why and at what cost. In 1913 the United States adopted a central bank system and an income tax, both of which were and remain unconstitutional. At the time the United States was the richest creditor nation in the world and already had the best central banker in the world, gold! The US settled all transactions in gold and in order to spend more, it would need to have more gold. Gold could not be printed or created in some computer hard drive; it had to be dug out of the ground at great personal and financial sacrifice. Even more than this, gold represented real wealth and that’s why a 1913 dollar bought the same thing as an 1841 dollar, and that’s what a store of wealth is supposed to do. This begs the question why you change something that seemed to work almost to perfection. For the answer to that question, you need to go back a little further, to 1907 to be exact.

In 1907 the markets suffered the worst financial crisis in their history, but this crisis devastated Wall Street while leaving Main Street mostly intact. A lot of big name brokers and bankers went down the tubes as a result of the 1907 panic and that inspired the survivors to get together and create a plan that would prevent another such crisis. The group included Morgan, Vanderbilt, DuPont, and Rothschild, and they all ended up as shareholders in the new and private Federal Reserve System. The problem with gold during a crisis is that you can´t increase the supply overnight, so “bailouts” are not possible. Too big to fail banks and brokerages must therefore fail, and that was an unacceptable and intolerable situation for Wall Street. So they created the Federal Reserve and paper money “to facilitate business and the economy”, which would be backed by gold. In an emergency, you could always print paper and then drain liquidity once the crisis had passed. Additionally, they created the IRS with the mission to tax personal income, so the government would have funds to handle any emergency.

Now we get down to the meat of the issue, at what cost? Everything we do in life has a cost, but usually it’s so miniscule that it is seldom noticed. Going back before 1913 the United States had experienced an industrial revolution that led to the development of a strong middle class in America, and that middle class had as a group, accumulated wealth. That wealth served to make the US the richest creditor nation in the world, and it was decided that wealth would be better served if it were transferred to Wall Street for “safekeeping”. After all, they were in the money business. The private Federal Reserve was created with no assets, allowed to print money backed by gold the middle class had earned, and then charged interest and fees to distribute that money. In 1932 Roosevelt confiscated all the gold held by Americans and in 1973 Nixon eliminated the gold standard altogether. Any attempts to interfere with Fed business was dealt with harshly. 

So the idea was to transfer as much of the wealth as possible from Main Street to Wall Street and it would do so through taxation and the creation of a fiat currency, that would eat away at the purchasing power of the middle class. And that is the true cost of the Federal Reserve. The average American has gone from a saver to a debtor, while the US went from the largest creditor nation to the largest debtor nation ever seen. The transition took a century and is now in the final phases and the massive bailouts that we’ve seen are nothing more than an attempt to drain the last cent from the last American before the whole thing goes under. For more than ten years the Federal Reserve has done everything possible to change the primary trend of the markets from bearish to bullish. Although I note the bull market as having topped in October 2007, the real top was back in 1999, but the Greenspan Fed delayed that with massive amounts of liquidity. Now the Bernanke Fed is trying to do the same thing. In modern history no one has every succeeded in changing the primary trend of a major market.

The result of this misguided policy is to postpone the inevitable, but at a cost. The cost is a series of unintended consequences that only now are beginning to float to the surface. Like icebergs, we see only a small portion of the problem until it’s too late. I contend that it is now too late. The ship of the economy is now run up against the iceberg, huge holes are being gashed into the hull, water is pouring in, and all the passengers are passed out in the bar. Any effort to put more punch into the bowl will prove to be futile and the resulting hangover will be debilitating to say the least. The morning after survivors will swear that famous oath of “never again”, form committees, assign blame, and then start the whole process all over again. For the few that will have any money left, and the courage required, stocks will become cheap and there will be a great buying opportunity. For the large majority there will only be misery.

Of course governments are obliged to throw the public a bone every once in a while, no meat, just a bone. Obama ran on the promise of change and then came in and bailed out Wall Street at the cost of US $2 trillion. He distracted the public’s attention with his proposed health care package that in the end no one wanted. Now he has a new mantra, job creation. He recently put forward the idea of a US $40 billion fund for job promotion and now he recommended the commencement of several nuclear plants that will mean more jobs. Unfortunately the President failed to say that most of the jobs for nuclear plants are high paying technical positions and there aren’t that many required. If you really want to create jobs it’s the small business owner that does it, and he has his back against the wall and it gets worse every month, as you can see in the chart posted above. The number of businesses with cash flow problems is on the rise, meaning they’ll reduce their labor costs instead of hiring new workers.

The question now is what can you do about it? I believe the only solution comes in the form of one ounce coins that contain gold. All markets are barometers of future activity and no market is more sensitive to the qualms and traumas of everyday life than gold. Also, I think it’s fair to say that it has never been this difficult to understand the gold market. The IMF comes out and announces the sale of 191 tons of gold, in an effort to manipulate the price lower, and gold falls, for about an hour. Then the Fed authors a surprise rate hike and gold falls for a couple of hours. One gold guru says the yellow metal is going to US $5,000 while Elliot Wave says it’s going to US $400.00. In one minute gold is up 15.00 and an hour later gold is down 20.00. What do you do and who do you believe? Years ago I took a simple, albeit difficult path, and decided that I would only follow the primary trend. The primary trend in gold turned up in 2001 and has been heading higher ever since. I took my initial position in 2002 and I’ve done my best to add on after significant dips. Sometimes I’ve timed it right and sometimes I haven’t, but the one thing I’ve never done is sell!

Below I’ve posted a monthly chart with respect to the gold bull market and I have some interesting observations. You can see that the current price is right about in the middle of the two ascending bands that define the primary trend. Also, I’ve divided the current bull market into the first and second phases, and I’ve given you a short explanation for each of the first two phases. The question now is whether or not gold has entered a new third phase with the breakout above 1,000.00 and we really won’t know until gold makes the next move. Incidentally, the third phase is highlighted by buying from the general public and there are certainly no signs of that. On the monthly chart gold’s price actually appears to be consolidating for the next move higher. It will continue to consolidate as long as it holds above support at 1,048.90. On the other hand it will require a close above 1,136.70 to bring gold to an upside breakout, and that hasn’t happened yet. On Friday the spot gold closed out the week at 1,117.00 and that’s about a sixteen dollar gain for the five sessions, although it felt like a loss due to the volatility.
So the primary trend for gold is up, it is completely intact and in no danger of being violated, and it appears that we could be close to a break out to the upside. So why is everybody so negative? Part of it has to do with ignorance. The large majority of people view gold as a commodity when in fact it is a store of wealth. These same people view fiat currency as money when in fact it is debt; a “promise to pay” can only be interpreted as debt. Gold on the other hand is the only real money and it says so in the US Constitution. It seems that our founding fathers were a lot smarter than we are!

Over the short run the panorama appears to be improving. Gold recently staged a minor breakout above the upper band of a descending trend line in an effort to move higher. That is a minor victory. The real victory will come when gold closes above the 50% retracement from the December high to the February low and that resistance comes in at 1,136.70.  Until we see a close above that mark, it’s all just a guessing game. Gold had a volatile week with announcements by the IMF and Fed designed to push the price lower and yet it finished higher. The dollar rallied as well and yet gold finished higher, so it would appear that the yellow metal is gaining strength. I have maintained for weeks that the dollar, commodities, and gold are all linked to the Dow over the short run, and I still believe that. Therefore, I won’t get overly excited until I see how gold reacts when the Dow begins to fall in earnest.

In conclusion the dollar, stocks and bonds must head lower over time. The dollar and the bond are debt, while stocks represent value in some company. That value is grossly overvalued as the excess water must be squeezed out. The Fed wants to prevent that and has been doing everything possible for years to stop it. The primary trends in all three are headed down and the Fed wants to change that. If they succeed it will be the first time anyone has ever done that. I suspect they’ll fail. The cost of that failure will be incalculable in terms of both money and social harmony. The standard of living for the average American will drop substantially. Repercussions will follow. The only way to protect yourselves is to buy gold, and physical is preferable to paper. Store it someplace safe and just wait for the storm to pass. I know you are tired of hearing this, and God knows I am tired of saying it, but you’ll come face to face with this reality before the year ends.

Steve Betts
Stock Market Barometer SA
February 21, 2010

12-9

Exploring China’s Wild West

December 17, 2009 by · Leave a Comment 

The Jakarta Globe

silk road hotan There is a smell of goats, fresh bread and melons. A cacophony of bleating animals rises, mixed with conversations full of hard-edged Turkic gutturals. A small boy clambers deftly onto the back of an unbroken, barrel-bellied pony, and reining it back sharply he somehow stays in place as it gallops wildly over the stony ground. Horse-trading elders with beards and skull caps look on with approval and begin to count wads of tattered money. Above everything arches a vast Central Asian sky.

I am in China, but here, at the Sunday livestock bazaar on the outskirts of Kashgar, an ancient city in the southwest corner of Xinjiang, I have to keep reminding myself of that fact.

Xinjiang is China’s Wild West, a state of deserts and mountains peopled by Muslim Uighurs, and leaning more to Bokhara than Beijing. It has long had a troubled relationship with the rest of the country, slipping in and out of effective Chinese control as imperial power waxed and waned over the centuries. Today the tensions continue. In July, protests by Uighurs in Urumqi, the state capital, turned violent and a government crackdown followed. But unlike in neighboring Tibet, the government has kept Xinjiang open to tourists. When I arrive in Kashgar on a long-distance train, rolling though vineyards and pomegranate orchards, there has been a state-wide telecommunications shutdown for over four months and army trucks bearing antiseparatist slogans were rolling down the streets. But I am free to go wherever I like, and the first place I head is Kashgar’s famous Sunday Market.

Kashgar stands astride the ancient Silk Road, the much-mythologized trade route that once linked China with Europe. From here trails led east along the fringes of the desert, and west over mountain passes. For centuries, people, religions and ideas passed along the caravan routes. The Uighurs’ Turkic ancestors dropped out of the mountains in the sixth century. Before them, Buddhism, Manichaeism and Nestorian Christianity had traveled west. A few centuries later, Islam arrived.

Today a hint of this old romance survives — the borders of Pakistan, Afghanistan, Tajikistan and Kyrgyzstan lie within 150 kilometers of Kashgar, and trade goes on in weekly markets across the region. In the Kashgar Sunday Market I see carpets, fruits and embroidered cloth, mixed in with everyday metals and plastics. Women in sparkling headscarves jostle with old men in embroidered pillbox hats.

But the Chinese government is determinedly dragging Xinjiang into the mainstream. The market has now been corralled into a modern complex, and beyond it new high-rises tower over the remnants of the old mud-walled city. In recent years, swathes of the Uighur old town have been bulldozed, and immigration from other parts of China has been encouraged. These moves — and the dominance of immigrant Han Chinese in the job market — have only increased tensions. English-speaking Uighurs I meet on my journey whisper their disquiet in hushed, paranoid tones. A man at the Sunday Market explains the resentment at the destruction of old Kashgar.

“There is no privacy in a Chinese apartment,” he says. “Our traditional houses are built around a courtyard so we all live together, but with privacy. We don’t want to live in apartments.”

Looking for something a little more authentic, I head to the livestock bazaar. It is a glorious chaos of goats, donkeys, horses and sheep and haggling men in fabulous hats. I am hoping to see a camel or two — real evidence that I am on the Silk Road — but to my disappointment there are none. I console myself with a plate of greasy kebabs and plot my onward journey.

From Kashgar I head east. Human habitation in Xinjiang has long been squeezed into the narrow margin between the mountains and the desert. A string of oases runs along what was once the southern branch of the Silk Road. My first stop is Yarkand — a place once as fabled as Samarkand or Xanadu. During Xinjiang’s periods of independence from Chinese rule, Yarkand was usually the capital city. It was also the terminus of skeleton-strewn caravan trails over the mountains from India.

Today, it is a backwater. A Uighur old town of mud alleyways remains, and a dusty graveyard of royal tombs studded with the faded flags of mystic Sufi cults sprawls behind a medieval mosque with a vine-shaded courtyard. A modern Chinese town of arrow-straight boulevards dominates, but away to the south I can pick out the faint white line of the Kun Lun mountains, the back wall of the entire Himalayan range.

From the next oasis, Karghilik, I take a taxi into those hills along a road that leads, eventually, to Tibet. An army check-point by the chilly banks of the Tiznaf River is as far as I can go, but I scramble up a steep brown slope to take in the view. A mass of brown mountains, ribbed and scored with dark shadow, spreads east and west. Behind them, rising in a glittering white line, is the backbone of the Kun Lun. This was the barrier that Silk Road traders from India once had to cross en route to Kashgar, Yarkand, and my own final destination — Hotan.

The road to Hotan blazes across the stony desert, the mountains floating to the south. The vast void that surrounds it makes arrival in Hotan a strange experience, for here, at the very limit of China’s vastness, is another large, modern town. As a Uighur heartland, the Chinese government has been particularly keen to integrate Hotan with the rest of the country. Roads from the north now plough straight across the Taklamakan Desert, and from next year a railway line will link it to Kashgar. A Uighur man I meet at a kebab stall hisses, “When the railway is ready we will be finished — Hotan will be all Chinese.”

But something remains here: a week has passed and it is time for Hotan’s own Sunday Market. Nothing has been regimented here; the bazaar sprawls over a vast area, filling all the lanes and alleys of the old quarter with a mass of color and commerce. There are sections given over to cloth and carpets, to the jade mined from the banks of nearby rivers, to animals and even tractors. Donkey carts clatter through the crowds, the drivers calling out “ Bosh! Bosh! ” (“Coming through!”). When I am tired of wandering I feast on laghman (Uighur noodles) and slices of fresh watermelon.

And as I leave the market I spot something — what I had hoped to see in Kashgar. A boy is leading a pair of shaggy, twin-humped Bactrian camels through the crowd. They are enormous beasts and they pass through the chaos unperturbed and disappear among the trucks. I stare after them as they go, now sure, despite the political tensions and the heavy-handed Chinese modernization, that I am in Central Asia, and on the Silk Road.

11-52

China House Hunting to Rev up Economy

August 27, 2009 by · Leave a Comment 

By Simon Rabinovitch

BEIJING, Aug 18 (Reuters) – The Chinese government is attempting to pass the baton of growth from state-funded infrastructure investment to the private housing sector, a risky but necessary move to sustain the economic recovery.

Construction cranes sprouting in big cities, busy furniture shops and soaring property sales all show that the transition is going smoothly so far, though officials are wary that house prices may rise too high, too quickly.

China’s biggest listed property developer, Vanke <000002.SZ>, lifted its housing starts target for this year by 45 percent, while its rival Poly Real Estate <600048.SS> said sales in January-July rose 143 percent from a year earlier.

On the ground, construction firms, big and small, are trying to meet the demand, last years’ downturn now a distant memory.

“It’s been a long time since we’ve had a day off. Several months, I think, though I can’t remember exactly,” said Zhang Minghui, owner of a small building company in Beijing.

“From late last year to early this year, we basically had nothing to do. Everybody was careful with their money because of the crisis and so projects got delayed.”
Zhang cut his staff to three in November but is now back up to a crew of 14.

The economic importance of the property sector in China is hard to overstate. Investment in residential housing accounted for about 10 percent of gross domestic product before a property boom turned to bust in 2008, roughly the same as the contribution from the country’s vaunted export factories.

The government’s first steps last year to revive the stalling Chinese economy were to offer tax cuts to encourage home purchases, followed by rules to ease access to mortgages.

These are bearing fruit.

With housing investment up an annual 11.6 percent in the first seven months, Chinese growth momentum is broadening out and the central government has been able to slow the pace of its stimulus spending on infrastructure.

But Beijing must strike a fine balance in its bid to kick-start the housing market.

On the one hand, it wants rising prices to persuade house hunters to stop putting off purchases and to get developers to invest in new projects. On the other hand, it is wary of prices rising too quickly, luring speculators into the market and turning it into an asset bubble, not an economic driver.

“Because it is closely linked to so many industries, volatility in the real estate market will inevitably lead to macroeconomic volatility,” the government-run China Economic Times warned on Monday.

The housing market rebound in Beijing, Shenzhen, Guangzhou and other big cities means that prices are already back to their 2007 peak, the report noted.

While prices are high, a surge in sales has depleted housing inventories and developers need to break ground to catch up, Ken Peng, an economist at Citigroup in Beijing, said.

That the Chinese property sector is at a turning point, just getting back on its feet, is seen in the differing fortunes of shops at the Shilihe hardware market in east Beijing.

Those selling goods for early stages of construction, such as tiles, say business is strong. Vendors of lights, among the final purchases for a new home, say it is only now perking up.

“We have done some sales to attract shoppers. But we have actually started scaling these back,” said Chen Yu, a saleswoman at Jushang Lights.

The government can take heart in how most of the real estate money has been spent to date.

Investment in property construction was up a fifth in western China — the part of the country with the biggest need for new housing — in June compared with a year earlier. Wealthier coastal areas in the east, which are already heavily built up, saw a 4.4 percent rise.

But officials are wary of another boom in housing prices paving the way for yet another bust. A handful of Chinese cities have made mortgage lending terms on second homes stiffer to try to keep speculators at bay.

Several real estate agents said the market seemed to have cooled over the past few weeks.

Shanghai Xinyi, a real estate agency in China’s financial centre, said transactions in August fell by half from July.

A salesman surnamed Luo at a Shenzhen branch of Centaline China confirmed that business has slowed down from its brisk pace in the first half.

“It was not rare for house sellers to cancel their original contracts and lift their asking price, even if it meant paying a penalty,” he said by phone. “But the momentum has weakened in August. We could feel the effect of the government’s tightening-up of loans for second homes.”

However, Dong Tao, an economist with Credit Suisse in Hong Kong, offered another explanation of the drop in transactions.

Soaring demand gobbled up whatever homes were on the market and so developers simply must build more, he said in a research note. But it takes time to buy land and obtain approvals.

“After many sites have passed the paperwork phase, we expect housing construction to rise significantly over the summer time.”

(Additional reporting by Ben Blanchard; Graphics by Catherine Trevethan; Editing by Tomasz Janowski)

11-36

Americans & America’s National Interests

July 2, 2009 by · Leave a Comment 

By Dr. Aslam Abdullah, TMO Editor in chief

For almost 40 years, we Americans are being led to believe that Israel is a Western outpost in the Middle East and it is the only democratic country in the region that looks West. We are being led to believe that only Israel can defend out interests in the Middle East.

What are our interests in the Middle East? What are our core values?

In one simple word, our interests are in oil and in capturing a market share that would sustain our jobs and economy.

What are our core values?

In one simple word, our core values are defined by free market and unbridled capitalism.

We have rarely stood for democracy and democratic values. We have supported dictators and we still support them. We have supported movements that destabilize democracies primarily to ensure that our market interests are shared. Out interests are not determined by our people who vote in every election. Rather they are determined by those who influence our representatives through money and intimidation.

Our power elite has a grudge against Islam and Muslims. It does not view Islam a credible force in the world. In its view, Islam is a regressive ideology that dictates its draconian laws through the instrument of state. Our power elite relies on the medieval understanding of Islam for this perspective. Regardless of its leanings towards liberal or conservative thoughts, it believes that a religion that cannot change according to the will of those who produce capital is not worthy of anything.

The power elite is supported at least in action by Muslim monarchs, dictators, and Muslim political entities who have yet to provide a blue print for a society where human beings can live with dignity and freedom. On the contrary, they have projected Islam as a faith that is intolerant towards all those who are not willing to listen to its call. The way religious opposition is dealt in Muslim majority countries is a living proof of that.

Regardless of what the power elite tries to dictate, we Muslims must make every possible attempt to connect people and identify with their interests. We must present our perspectives of national interests to them without being intimidated. Otherwise, we would remain a pawn in this ponzy politics that legitimizes double standards in every policy issue. We the people have a right to determine our national interests collectively. We must never allow any lobby to dictate its terms on us. We are a democracy that are led by lobbyists and not by people. We claim that we believe in a government of the people, by the people for the people. But we tend to promote a government of the people, by the lobbies and for the lobbyists.

11-28

Green Shoots?

June 18, 2009 by · Leave a Comment 

By Bob Wood, MMNS

If you’ve spent any time listening to the financial drones recite the rationale for buying stocks now, you might be just about as sick as I am of hearing about so-called “green shoots.” To me, this is just one more disingenuous way to sell you things you shouldn’t be buying.

Every market cycle brings with it a new trend, a strategy devised by Wall Street in order to keep you invested when you should get out or convince you to buy when you should not. The “green shoots” concept is the latest strategy following the demise of the now discredited “Goldilocks” nonsense pounded into our heads by those encouraging us to remain invested as the Dow ascended to its all-time high in late 2007. Once Goldilocks’ obituary had been written, promoters needed to find another angle, another trend for investors to follow. Of course, Goldilocks had only served as a replacement strategy once “the only risk in tech stocks is not owning them” premise failed in the late 1990’s. So “green shoots” it is, at least for now.

Although perennial optimists may find reasons for hope, they should remember that some green shoots wither and die before blossoming into something beautiful. Some have even been known to sprout in barren wastelands. I am about as sure as I can be that these tiny signs of life will soon die out just as investors begin hoping for another meager inch or two of growth.

There are just too many obstacles in the way of an impending economic recovery. The notion that positive signs abound seems like wishful thinking, like placing a higher value on hope than fact in the push to keep investors interested in high-priced stocks that should be avoided.

I have been filling this space for the past 6 ½ years with my beliefs in secular trends, and the idea that domestic markets are squarely in the throes of a long-term bear market. Today, I think my point has been resoundingly made. I’ve explained how few investors ever make money in stocks, regardless of whether we’re in a secular bull or bear market. I think I’ve made my point there, too.

I’m convinced that many investors fail in the long run due not only to the nature of secular bear markets, but also the rampant corruption that appears to permeate even the highest levels of Wall Street and Washington, D.C.

From the ‘’dotcom boom’’ and the ensuing meltdown that wiped out many thousands of investors, to the housing boom that imploded and took many more to the cleaners, domestic markets have simply not rewarded traditional “buy and hold” investors. Many have seen their retirement dreams dashed, even if they truly tried to do all of the right things. Millions of them saved, invested, diversified, and perhaps even hired a professional or two to manage their savings.

And virtually all for naught, and isn’t that how it always seems to happen? This latest round of economic disappointment brings with it invaluable lessons on why the deck is stacked against investors in ways not likely to end any time soon.

In his financial blog, market strategist Barry Ritholtz (www.ritholtz.com/blog) included this excerpt from his new book, Bailout Nation, (http://bailoutnation.net/) about how we got to this point and what triggered catastrophic losses throughout our financial system:

“We’ve come a long way from the days when the man atop the organizational chart   made 40 times what the person on the lowest rung earned. Over the past few    decades, executive compensation has exploded, with some CEOs taking 200, 300, even 400 times the base pay at the company.

With so much of this compensation made via options-based incentives, the bosses     had every reason to swing for the fences. The upside was all theirs, and the downside was   the shareholders’—and taxpayers’.

But don’t for a moment think their terrible track record had a negative impact on their compensation. Despite their performance, these CEOs were paid as if they were enormous successes. The compensation figures that follow are enormous; that they were   paid for such abject failure is a national embarrassment.
It is also an indictment of three major corporate governance issues that have not been discussed widely enough. The first is the crony capitalism that was rife in boardrooms across the United States. The cronyism of major corporate boards, especially those in the finance area, has become legendary. Rubber-stamp directors who rarely buck the chairman or challenge the CEO are unfortunately all too common. These boards did not serve either their companies or their shareholders well.

Also enabling this festival of greed are the large institutions that held the companies’ stock, most especially the big mutual funds that have been AWOL when it comes to policing the senior management. They have the time, expertise, and incentives to do so; it is beyond the capability of individual shareholders. Besides, it makes no economic sense for someone who owns 100 or 1,000 shares of stock to act as overseer and scold to corporate boards. But it was squarely in   the interest of owners of 10 million shares and up to do so. Why the mutual fund complexes failed to protect their shareholders is hard to fathom. Perhaps when it comes to the finance sector, they feared missing out on syndicate deals and hot IPOs if they asked too many questions.

Then there are the so-called compensation consultants. They did a horrific disservice to the shareholders as well as the companies. The role of these primarily ethicless weasels was to give cover for these ridiculous compensation packages. I would love to see a review of the packages as written back then. If the compensation experts were members of an actual profession with standards and ethics, they would be drummed out of that profession. Instead, these people were merely tools used by the C-level execs to transfer vast sums of wealth from the shareholders to themselves.’’

I couldn’t have said it better myself, which has everything to do with why I chose to quote Mr. Ritholtz instead. Unfortunately, this type of scenario is nothing new in America’s business environment, nor has our government done much to prevent the type of shareholder abuse we’ve witnessed over the past two decades. Most regulations were either ignored or watered down so business (at least for the top echelon) could continue as usual, with business and government leaders getting what they wanted all along.

Talk of “green shoots” ignores the fact that very little has changed, and greed, corruption, and meaningful lack of oversight is just one more obstacle for investors to maneuver. How can investors possibly hope to gain from working with a financial system so completely rigged against them?

And why should they even bother trying? I feel great about being out of the domestic markets on both the long and short sides. If the game is rigged, I say why play in it? There are plenty of options to consider, and by now you may have grown tired of hearing about my devotion to investing in international and emerging markets.

But again, results matter, and again, those markets are strongly outperforming our domestic market. Many are higher today than they were at the dawn of this decade. And that’s a strong signal that they’re in the throes of secular bull markets.

I am often asked how I know that foreign markets are more honest and fair than our home markets. My response? “How can they be any less honest than what we’ve seen here, time and time again?”

I’ll take my chances there, but of course, given the structural challenges here and how a resumption of the bear market will affect all equity markets, I prefer to tread softly. I am heavier in cash than I have ever been before, with cash positions representing well over 50% of all capital managed here. Of course, rising commodity prices will slow growth all over the world, but even more so in the U.S.

And given the enormous debt loads to be managed here, a bankrupt government, and a complete failure of leadership, everywhere else still looks better.

Have a great week.

Bob

Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., invest@muslimobserver.com.

11-26

Time to Sell?

April 27, 2006 by · Leave a Comment 

Time to Sell?
So there you are, one of the lucky few who, a couple years ago, spotted the best places to invest and now see some fat gains in your portfolio holdings. Is it so great that you consider scattering your account statements on the floor and rolling around on them? Or is that just me? But then, it might also occur to you that those big gains could be temporary, while selling the big winners could lock in your well deserved gains. So, do you sell? Or do you ride the wave a while longer, hoping to increase your gains?
My first reaction to the question about ‘’taking profits’’ on big gains in emerging markets stocks or funds, or perhaps gold and energy funds, is always the same. ‘’Gee, I don’t know if that’s the smart thing to do.î Comforting, right? But let’s be realistic for a moment, even rational, as all investors think they are.
If I knew for sure when to sell raging winners or strong performers in the Indian or Brazilian markets, that would infer powers of prescience that only CNBC promoters claim to possess, though they know no more than you or I. Such a call would suggest skill at predicting the future, or at least those actions forthcoming from thousands (if not millions) of other investors with different methods and goals.
Let’s be realistic about investing! I’m guessing where to invest now. I always have — and always will. What are the best things to buy now? And the best things to sell? If anyone really knew with any certainty, then investing would be so easy, everyone would know investors who ìcrushî the market regularly. But those ìcrushersî don’t exist, do they? So no one knows for sure what to do. We’re all just making our best guesses.
After accepting that premise, we can consider our choices — with the proper amount of humility to gain favor in the eyes of the market gods, who never stay long with investors claiming great success in the markets. And just as important as humility is accepting, from the start, that making major portfolio changes may cause regret in the future.
You could sell your big winners now — only to watch them rise even higher. So will you be right or wrong? The wrong decision plus a potential ego dent can linger in your memory and affect future decision making, adding an emotional influence that makes investors even less rational. But a decision must be made, and standing pat is also a decision.
So letís look at some decision-making ideas. First, we must admit that the changes we consider are timing decisions. Yet we all know we can’t time the markets, right? Timing is another one of those widely accepted ìdead wrongî investing tenets with the same value as diversification or the concept of ‘’stocks for the long run.’’
But you can consider timing in making your decision, since you always have in the past. And so have I — and most everyone else! You donít believe me? An illustration might help. Perhaps a friend asks you what to do with new money going into his brokerage account. What should he buy? Maybe some shares of the S&P 500 index fund or a good international equity fund? Or some energy stocks balanced by a mellow bond fund?
So when would you tell your friend to buy? In a month? Next March? Or maybe you suggest buying right now, since other things, like technology or gold funds may have already run too far, too fast? Yes, any investing decision involves timing, as in what you buy from all available options.
Yes, gold stocks and funds have had a great run for the past five years! In that time, for example, Fidelityís Select Gold fund has powered about 200% higher than the S&P 500, which sits about where it started then, showing a minimal gain in nominal terms. So this point brings up two more problems. Do you avoid the big winner, the gold sector, since it has done so well and is selling at a high price? And will you re-balance your portfolio, as in selling some gold shares and adding the cash to your S&P fund?
Consider this as you decide whether to sell a high flyer like gold. In 1998, the Russian government was essentially broke and defaulted on bonds issued to foreign investors. The situation looked bleak as the stock market index sat at about 100. Only a fool or high risk taker would have ventured into something looking that bad — or so it seemed.
A couple years later, smart money saw value there and watched that index power higher, going past 300, 400 and then 500. A great time to sell and take profits, right? Surely, you wouldn’t buy into a market that had risen 300% or 400%, right? And just where is that market index now? In late April 2006, the Russian market sits just above the 1,600 level.
For another fine example, look at the Brazilian market. Pounded down in unison with the S&P 500 during the bear market of 2000-2002, it bottomed at about 8,400. But smart money saw value there and watched as that index rose about 20,000 in a little more than a year. Is it time to sell? Maybe not, even with that index hitting a new, all-time high this week, passing the 40,000 level.
Did you hear on CNBC last year that you should sell your energy stocks or funds since oil had more than doubled in price and would soon fall? With oil now costing above $75 a barrel, how smart was that? One thing I have learned the hard way is that trends tend to last longer than you think they will. Selling your best performers seems like a great idea — until you realize that the person buying your winners may hold them and make even more on them.
And re-balancing is a stupid idea for several reasons. The worst of them are that all asset classes will, at some point, have their day in the sun and that selling your winners at a high price and buying more of your losers at low prices will ensure success over the long term. For a useful illustration on how that could fail to work, consider the investor in Japan who diversified into the S&P 500 in the early 1990s.
As his home market tanked, with the Nikkei average falling from 39,000 to about 8,000 in 13 years, he would have re-balanced annually, selling some of his winning S&P shares and moving the cash into a market that continued to fall every year! Each year he added to his losers and reduced the impact of holdings in a winning category.
So how about a couple ideas that seem better to me? If you have big winners in your portfolio that are making you nervous, consider selling a portion of them over time. If the fear of losing your big gains outweighs the fear of selling too soon, go ahead and sell. But my compromise solution allows hedging your decision somewhat and reducing the chance of being glaringly wrong. You are only a little wrong, regardless of what happens.
Another idea is doing a fresh fundamental analysis on why your best performers are doing so well and whether they will continue. Recently, I overheard a conversation at a local office of a big mutual fund company catering to individual investors. The investor asked the nice lady about her interest in buying into the companyís Latin American sector fund, a recent big winner. The lady commented that recent performance was impressive, indeed, but wondered how long those big returns could continue. If you, like this lady, have no idea about your holdingsí recent performance, you need to do some fundamental research, rather than just walking away from what seems too good to be true.
Brazilian stocks, a major portion of any high-flying Latin America fund, still look as good as ever! In fact, they look better now than three years ago when that market began its current bull market. And the market is still quoted as selling at about 13 times earnings, on average, while the country enjoys a trade surplus and its government, a small budget surplus.
Adding to these factors is a recent development regarding energy. Brazilís domestic oil production now sufficiently satisfies domestic demand, lessened by a long-running project to produce substantial amounts of sugar-based ethanol. Sharply rising energy prices have little effect on the economy. And while concerns are warranted, based on past events, that the currency could lose value sharply, Brazil sits on billions of dollars, enough to intervene on behalf of the real.
Similar conditions now exist in Russia, though they did not when that market began its huge bull trend. Awash in foreign currency reserves, the country, as a major world supplier of ever more costly energy, now runs budget surpluses. When Russiaís bull market ensued, oil sales were barely profitable. Fundamentals have clearly improved, right along with rising stock prices, which are much higher now. And valuations have risen right along with them.
The best of all fundamentals may be found in gold. When gold began its huge move higher, our federal government was running deficits so small that co-mingling excess Social Security withholdings as part of general operating funds (during Clinton’s second term), appeared to be a small federal budget surplus. Since then, the Bush regime has splashed red ink everywhere, and America’s unfunded liabilities for retirement programs like Social Security and Medicare have shot higher, from about $20 trillion in 2000 to over $50 trillion, with some estimates even higher.
And since Americans are not saving, all government funds must be borrowed. Of course, all the money left in the world wonít buy that many bonds, since countries with money to spend, like China, Russia, etc., have domestic investment needs. Our leaders will, no doubt, print whatever money is needed, and that amount grows shockingly higher — much higher than anyone thought possible when the Bush team took charge five years ago. So rising inflation makes our bonds really bad deals and makes borrowing even harder. The dollar printing press will run for the foreseeable future, so the fundamental case for gold improves along with its valuation.
With energy, today’s supply-and-demand problem was not as evident in investor thinking four or five years ago. The Iraq war has decreased oil production there, something not factored into the thinking of pre-war energy investors. And didn’t we all assume that oil production would increase after the invasion?
And as the Bush administration continues to anger eight other oil suppliers, such as Iran, Saudi Arabia, Venezuela and Russia, the potential use of energy as an economic weapon is higher now than when Bush, early in his first term, looked into Vladimir’s eyes and felt his honest soul. So again, fundamentals rise along with prices.
The best reason to sell or, better, scale out of your biggest winners is when the holdings just become too large in your overall portfolio. If you intended to maintain a 10% allocation in gold shares or funds, (which one really doesn’t matter, since they’ll rise together) and your gold holdings have risen to 15% or 20% of your portfolio, reduce your exposure. The added volatility resulting from such a large asset class position only increases the chance of your making an irrational decision later.
Of course, keeping your shares in a rising market like gold increases your chance of winning big, too, so factor that in as well. And when you sell some of your big winners, you must find something else with solid fundamentals to buy. And how many opportunities like that are available now?
So don’t sell just because something has done well. And don’t re-balance annually either, by taking money from sectors or asset classes in the middle of wonderfully profitable secular bull markets and adding hard-earned gains into something like the S&P 500, clearly in the early stages of a secular bear market.
Have a great week.
Bob

It’s Not Just Me

April 24, 2006 by · Leave a Comment 

It’s Not Just Me
By Bob Wood
Any Bear will tell you it’s tough making a living on the short side of the markets, risking your hard-earned capital on the idea that markets are heading lower. And it’s just as hard for the Bear writing weekly columns about the markets’ shaky footing. Since, in both cases, “wrong” can be costly, never assume that a Bear takes his position just to be contrarian or different.
You can be sure of one thing about the Bears whose work I follow. Neither are they pessimistic or negative by nature. But to me, it seems only the Bears are doing any real analytical work, though few people prefer listening to or believing Bears over Bulls, so strong cases must be made for their side.
Several better-known Bears tend to agree about the near- and long-term future of stock and bond markets and now add information relating to real estate. To me, their analyses are much more compelling than those offered by TV’s Bulls. And to assure you that not only the guy writing on page 6 of TMO is bearish, I’m sharing thoughts from other financial writers, whose thinking I respect and follow.
On the stock market, I can hit two birds with one rock by citing a quote from one guy whom I wouldn’t have known except for the other. In his most recent work, the Mogambo Guru quotes Robert Prechter from the “Elliot Wave.”
And in talking about Newtonian physics and “big moves,” Robert Prechter, of Elliott Wave fame, says that the recent huge (>40%) losses in Middle-Eastern stock markets is just prolog. “This year the U.S. stock market is shaping up to drop at least as fast. Generally when stocks levitate into a market cycle, they make up for it by crashing.
In 1929, stocks rose for 2.5 years into the 2.7-year cycle. Then they lost 50 percent of their value in 2 months. In 1987, stocks rose for 3.1 years into the 3.3-year cycle. Then they lost 40 percent of their value in 7 weeks.” If you think you got the guts to weather a 40% drop in your portfolio, maybe you ought to re-think that optimistic assessment when he goes on to say “But given that the bear market is of Grand Supercycle degree, the largest in nearly 300 years, the coming drop should dwarf both of those crashes.”
And not only these two voice their concerns about today’s stock market. Richard Russell also chimed in this past week.
“But with the massive amount of debt built into the US economy, I don’t see how the Fed could tolerate a path of contracting liquidity—it would be too dangerous. The more probable path would be the Fed raising rates too high and setting off trouble in the housing market— remember, the effects of rate changes don’t usually appear until six months to even a year after the last rate change.
In the meantime, stock market action is erratic and suspect. While the Dow holds and even creeps higher, the majority of stocks are failing to follow. How about this surprising statistic—only 50% of the stocks in the S&P 500 are now holding above their 50-day exponential moving average (statistics from the great DecisionPoint site). In other words, we’re seeing persistent internal deterioration in the stock market, despite the better performance of the Dow.
What are the markets waiting for or looking at? One thing they’re looking at is the oil situation, and they’re wondering if there’s any way that it can be resolved—Nigeria, Iraq, Venezuela, Iran? Has the US lost control of the world’s oil markets? Well, there’s always Canada.
In response to all the uncertainty, the stock market seems to have adopted a “what, me worry?” attitude. Here we have an “Iran problem,” an expensive mess in Iraq, huge negative trade balances, China taking away our manufacturing base, rising interest rates, record high oil prices—and lots, lots more. And does Wall Street worry? Not at all. The only thing the boys on Wall Street are worried about is the size of next year’s bonus.
Jim Stack of Investech Research now allocates 39% of his model portfolio to cash. While his reading of technical tools like charts leads him to think that bull market trends will continue, his concerns center on the real estate market. Of particular concern: more than $2 trillion in mortgages are the adjustable rate variety. And with rates now rising, those debts will see rates “that will be reset at much higher levels in 2006-07.’’
Since the middle class seems to save little, the pain could be most intense there. And speaking of real estate, Bill Fleckenstein noticed this Wall Street Journal item.
“It is indeed the financial institutions that are most at risk in the real-estate market (which is not to say that consumers and speculators won’t get hurt). They will bear the brunt of the pain, because in many cases, they loaned the entire purchase price. As I have said often, the housing bubble has been more a lending bubble. It will be the impairment of the financial institutions that will stop the flow of credit to the real-estate market.
In turn, that will accelerate the collapse in house prices somewhere along the way.
The story closes with a description of how slow the market has recently become in Florida, demonstrated by an email sent last week by real-estate broker Mike Morgan read as follows: “We went three days this week with not a single showing.
That’s incredible. I have 35 listings. We usually get 2-6 showings a day. . . . I received more desperate calls from sellers than ever. One lady broke down into tears. Her husband bought two investment properties, and they are now going to lose their ‘life savings’ if they sell the homes in today’s market.”
Ladies and gentlemen, that is going to happen to a lot of people around the country.
And, after they have lost their life savings, the financial institutions that were the engine behind this folly will take their own hit. Easy Al tried to bail out one bubble with another bubble. While it bought some time, it will end in far-worse pain.’’
But the overall economy looks pretty good, doesn’t it? How many times have you heard that the economy is ‘’strong and getting stronger’’ and unemployment and inflation rates are nearly at record lows? But here’s another problem: whom do you believe when smart arguments come from both sides of an economics issue? We’ve all seen glorious statistics issued by government agencies and touted by those making fiscal policy!
I tend to listen to people who work for me—those whom I pay for access to their work, including some cited in this article. I don’t see much conflict in their thinking. One such source, Kurt Richebacher, notes in his latest letter how government statistics have changed over the past 40 years.
“We have pursued these and other changes in the U.S. statistics for years with great misgivings. There has been an unusual, concerted drive to produce better looking statistics. Obviously, these contributions have been decisive in creating the perception of the U.S. economy’s superior performance. The particular importance of the inflation rate arises from the fact that it has a large effect on real GDP and productivity growth, two aggregates of highest economic and political assessment’’.
So, if you understate inflation enough, the economy looks like it’s growing smartly when it is actually in recession—the thinking of some right now. John Williams of “Shadowstats.com” shows how using methodology of the 1980s to calculate today’s rate of inflation produces a result of 6.6%, while using a method from the 1970s yields a 7.4% inflation rate. And that would take GDP growth to about a negative 4%.
Speaking of government accountability and the veracity of its reports, Williams offers more interesting items this week. It seems that some have misgivings about reporting our country’s financial position, such as material weaknesses and “problems with fundamental record keeping and financial reporting, incomplete documentation and weak internal control.’’
He adds that auditors will not apply their signatures to attest accuracy of the nation’s financial accounting, with three reasons cited: “serious financial management problems at the Dept. of Defense, the federal government’s inability to account for billions of dollars of transactions between federal government entities, and the federal government’s ineffective process for preparing the consolidated financial statements.’’
Comforting? Here’s more. Deeper in his report is the writer’s opinion of the National Debt, “only $7 trillion,’’ at the time, which does not account for the federal government’s true liability total. Left out are items for projected Social Security and Medicare benefits at about four times that amount. And “the new prescription drug benefit, which is one of the largest unfunded commitments ever undertaken by the federal government, will serve to increase this financial and fiscal challenge.”
It seems the President has pushed through his prescription drug plan with no apparent thought about how to pay for it. This information comes from David Walker, Comptroller General of the United States, who should know! And since we borrow to pay our deficits — and more every year to pay interest costs on that debt, rapid money printing as seen during the Greenspan era seems like the easiest thing for government leaders to do. And so they continue the printing.
Williams concludes that “risks of the current circumstance evolving into a hyperinflationary depression remain extraordinarily high. An unfolding inflationary recession is the worst of all worlds for financial markets. Particularly hard hit will be the U.S. dollar, with downside implications for both equity and bond prices.’’ But the story does get better. He adds that “when the system re-stabilizes, post-crisis, there will be exceptional investment opportunities for those who have been able to preserve their wealth, capital and liquidity.’’ And Russell agrees.
So what do we do about this now? If you’ve been reading this column regularly, you’ve heard it all before. In his latest “Gloom, Boom and Doom Report” (wish I’d thought of that!), Marc Faber says, “In my opinion, the dollar will depreciate mostly against gold. In the long run, what you will see is the standard of living in America decline very significantly compared to the standard of living in Asia.
And the stock market capitalization of the U.S., which is now 52% of the world’s stock market capitalization, which will decline to somewhere between 20 and 30% and the Asian stock market capitalization will rise to between 20% and 30%, possibly 50% of the world’’.
And you thought I was gloomy, eh? To me, these sources make perfect sense. Remember, it is hard being the Bear when investors would much rather be hopeful. But there is hope! In economics, we always find winners and losers, just as in the markets. The outlook for gold, energy and Asian markets offer hope for positive returns. And of course, hedging with bear market mutual funds makes any bear market a lot less worrisome.
Have a great week…I mean it!
Bob