Mystery Trader

Many people seem to be concerned about the “evils” of short selling and how it can drive down the prices of a stock. Various means to limit it or ban it altogether have been proposed.

But what about analysts’ “expectations”? How many times have you heard that a stock went down because a company’s earnings were quite positive but not quite as good as analysts’ expectations? Or how many times have you seen a stock go up because a company lost a ton of money but not as much as expected? It’s a mystery how these expectations can have such an influence on the price of a stock.

And then how many times have you seen a stock fall when a company reports positive earnings but gives negative “guidance” on future expected earnings?

Maybe analysts’ expectations or guidance should come under more scrutiny because of the impact they have on a stock’s price.

As the value of the U.S. dollar has bounced off support at a previous low, prices of a number of commodities have tumbled, reinforcing the value of including intermarket analysis in any analytical approach.
At least we assume the reversal — or at least a pause — in the dollar downtrend has been a big contributor to price weakness elsewhere. Apparently the acknowledgment by the BRIC countries (Brazil, Russia, India and China) at their recent meeting that the dollar will remain the world’s reserve currency is giving the dollar a renewed boost.
For the dollar’s effect, look at coffee futures. It used to be a given that you didn’t want to be short coffee going into the Brazilian winter in June-July, just as you didn’t want to short orange juice futures going into the U.S. freeze season in December-January. But coffee has skidded from about $1.43 a pound to below $1.20 in June, a 14% decline.
While markets such as sugar, crude oil and soybeans have maintained higher price levels, bears have taken a big bite out of corn, wheat, cocoa, cotton, orange juice and metals. No inflation signs in these markets.
Bottom line: In any analysis of markets, keep the value of the U.S. dollar in mind.

As the prospects for higher inflation and higher prices increase with the billions of U.S. dollars created out of thin air being pushed into the financial system in various government bailout and stimulus programs, one might expect that a traditional inflation favorite like gold would benefit.

Indeed, gold prices have gone up – 5% or 10%, depending on the day – but gold has not been able to exceed 2009 price highs like oil or soybeans or even some stock indexes. We hear anecdotal evidence of strong demand as coins and other physical forms of gold/silver-related investments are back-ordered or carry high premiums.

But instead of putting money into physical gold or gold stocks, many inflation-wary investors have put astronomical amounts of money into gold and silver exchange-traded funds (ETFs). Suddenly, the “supply” of gold has gotten much larger. The World Gold Council estimates ETFs purchased 400 tons of gold in the first quarter, and the amount of gold held by the GLD ETF alone is said to be larger than the gold reserves of almost every nation on earth.

But here is my question: Is the gold really there or are we dealing with the possibility of another paper “investment” without substance? Pardon my skepticism, but after the mortgage-backed securities debacle, Madoff Ponzi scams, AIG insurance-type frauds, questionable rating services and assorted accounting schemes, you have to wonder about the viability of the paper gold-silver instruments.

Do we have a fractional reserve type system in paper gold like the banks have with dollars? If all of the paper gold is backed by actual gold, who is auditing what is actually in the vaults? And where is the gold coming from? Mining isn’t producing enough gold to keep up with annual demand, so that leaves central banks as about the only available source. Are they doling out supplies to control prices? And how long can they keep it up?

Lots of intrigue, lots of conspiracy ideas, lots of mystery in the gold market. I don’t have the answers. I just wonder . . . and look for clues on my charts.

Traders in the energy markets have had more than their share of ups and downs in the last year, and it appears they may be in for another ride higher. After slumping to almost $45 a barrel in conjunction with the stock market skid last Monday, crude oil futures have bounced back above $50. Lower prices have discouraged production, but economic issues also continue to discourage demand so it’s hardly time for bulls to get too excited — until crude oil gets close to the March high and above $55 a barrel.
A dampening effect on the whole energy sector is the price of natural gas, which dropped to $3.28 per mmBTU Friday, the lowest since 2002. Eventually, of course, all the bearish price action will have its effect on supply and demand. Some day, bulls will have their day again.

Brokerage statements showing results for the first quarter of 2009 for 401(k)s, IRAs, SEPs, etc. are reaching mailboxes this week and will look somewhat better for many investors than they would have a month earlier. But even though the Dow Jones Industrial Average gained 7.7% in March and added another 5.4% in just the first three days of April, I have this feeling about another shoe waiting to drop.

Yes, I know it’s spring and hope springs eternal. And some talking heads see early signs of economic recovery with some statistics to back them up. And I hear “the government is here to help.” And I want to be optimistic.

But where does the “big money” – the pension funds, the endowment funds, the retirement plans, the insurance companies – have its investments? Large shares of their investments are either in stocks/mutual funds or in commercial property.

With the Dow down more than 13% in the first quarter of 2009 and down 40% from March 31, 2008, and dividends being cut, I can’t imagine that stocks are shedding off the income that the big money anticipated. With the dismal stock market showing contributing to companies and retail stores closing, the outlook can’t be too bright for the owners of shopping centers or warehouses either, some of which are carrying huge loans.

I wonder if the actuarial wizards have calculated the effect of what these huge shortfalls in funds will have on the ability to meet all of commitments. We are really only eight months into the financial crisis, and I don’t think we’ve seen the full effect yet of what it will mean when endowment funds can’t provide expected funding for colleges or when pension funds run low or insurance companies can’t pay all of their claims. Maybe the government can bail them all out, but I don’t see how adding trillions of dollars of debt is the solution to get out of debt.

My retirement plan welcomes March’s stock market performance, but I’m still very nervous . . . and would be very cautious about investing in commercial property or insurance companies or any other area where debt and future obligations are greater than the current income stream can support.

Remember four or five years ago when the housing market was strong and new housing developments and McMansions were popping up everywhere? And people in them were buying SUVs and big-screen TVs and all kinds of expensive "toys"? How can they possibly afford to do that, you may have wondered. Where is that money coming from? It can't last. Then there came the first cracks in the market in July 2007 when reality started to settle in and people realized it wouldn't last, although the stock market did continue higher until October 2007. Defaults on sub-prime mortgages became a trigger that brought markets back to earth as the base of the credit market house of cards was already eroding away and social attitudes started to change. The extent of the financial crisis began to unfold in 2008, accelerating in September as deflation and even depression became D words that even economists and government officials could mention. Investors with vision to position themselves for a deflationary environment did well. Just as the 2007 trigger sparked a downward deflationary spiral, did we see another demarcation line last week with the announcements of the Fed's program to buy Treasury securities and the Treasury plan for the toxic assets held by banks? Is this the trigger that sparks the inflationary scenario that many expect as a result of the huge government funding programs around the world and the surge of money created out of thin air? The shift from deflation to inflation may not appear for a year or more, but that looks like the investment future for which investors should prepare.

One place where it seems wise not to invest money is Venezuela. President-for-life Hugo Chavez continues to expropriate anything and everything he chooses, and his comments about doing so make him sound like the ultimate thug. His latest decision this week is to take over the rice plant owned by Cargill Inc., which happens to be the largest U.S. agricultural company, and everyone is aware of Chavez' distaste for anything U.S. Seems like Cargill and another company were producing flavored rice, which was not subject to production and price controls, instead of white rice, which does have price controls. So Chavez sent in his army to take over the rice plants. It is not the first time Chavez has taken over industries, of course, and probably won't be the last as he takes a socialist path. When he seized some crude oil joint ventures a couple of years ago, some companies like Exxon Mobil and ConocoPhillips pulled out of the country. It is one reason I like those companies and will not gas up at Citgo, a Venezuela-owned company. All of these moves cannot do anything but end up badly for Venezuela and those who invest in Venezuela.

Is President Obama’s economic stimulus plan working or do investors think it will work? Based on the reaction of the iShares Financial exchange-traded fund (IYF), a good gauge of sentiment about the viability of the financial system, the answer is clearly and definitely NO.

It is said that refugees talk with their feet when they walk away from a bad situation into one that they hope will be better. Well, investors are walking away from the IYF, which includes large holdings in JPMorgan Chase, Bank of America, Citigroup and the usual major banking suspects. The IYF peaked above 120 in 2007 and was even above 90 as recently as last September. Today it fell below 27.

With Bank of America shares below 3 and Citi below 2, the former financial titans are quickly becoming penny stocks, and investors are showing little confidence that the billions of bailout dollars will improve the situation. Mark me up as one who thought the government would rescue my investment in one of these “too-big-to-fail” banks – in my case, BAC – and now has to figure out how to deal with the fact that these banks might be nationalized.

With the inauguration of Barack Obama as president at hand and all of the discussion about solutions to the U.S. economic mess, one of the best suggestions I have seen came from Vince Malanga of LaSalle Economics Inc. in a presentation several months ago. "Fiscal stimulus" seems to be the watchword of the day but things like tax rebates or getting those stimulus checks that many taxpayers got last May or extending unemployment benefits or other types of one-shot solutions may sound good but they have been tried again and again and have never stimulated economic activity, Malanga contends. All the talk about emphasizing infrastructure improvements to produce jobs and to provide grants to state and local governments won't have much impact in the near term and they invite fraud and abuse, Malanga points out, and this is the type of pork barrel spending that has been wasteful and widely criticized. "Smart fiscal stimulus is an across-the-board tax cut and, even more preferably, a reduction in the payroll tax," Malanga says. "This is immediate; it affects all wage earners in a progressive manner and it affects both business and individuals with one stroke of the pen." Malanga suggests the cut in the payroll tax would be for 2009, with the tax then phased back in over the next three years. Simple. Immediate. Less pork and fraud. Odds of approval for any kind of tax cut? About as slim as for the flat tax. If Obama wants change, his economic team ought to be looking at such measures instead of the type and hype of stimulus packages that have been tried and failed in the past.

Whenever a bitter cold snap reached the Midwest and Northeast U.S., you could count on a spike higher in markets like natural gas and orange juice in the past, no matter what the fundamentals looked like. But this winter, with those frigid conditions having blasted across the country, the market response? Virturally nothing, with natural gas falling below $5.00 per 10,000mm BTU to the lowest levels for a January since 2002 and orange juice at its lowest levels since 2004. This probably says about as much about economic conditions as anything.