Stocks are catching the bid again, trading higher. The S&P 500 has
topped 1500, a level not seen since 2007. The Dow has also recovered from its
lows to pre-meltdown levels, above 14,000. Stock traders shrugged off fiscal
cliff fears, to extend the rally into the new year. Small investors are now
joining the professional buyers, who have viewed stocks as undervalued assets
for over a year. They are cashing in their bonds and emptying the mattresses
to put money into stocks. What has propelled US equity markets? The answer
may surprise you.
Well we know the
presidential election has not pushed the stock market higher. To the
contrary, stocks tumbled when the president was re-elected. Stocks had
rallied with pre-election hopes of a new, pro-growth occupant in the Oval
Office. But alas, that hope vanished when the final votes were tallied. The
president could have won over traders by announcing a change in his economic
policy to start his second term, but he didnt,
and his plan has consequences. More on that later.
So if the presidents
economic policy did not stimulate the current rally, what did? The answer
lies in a fundamental principle of free-market economics (and everyday life),
namely, substitution. In his 1978 text Microeconomic Theory, Nicholson
defines substitute goods as those goods which, as a result of
changed conditions, may replace each other in use (or consumption).
Investors treat risk-free yield as a desirable economic good. The world gold
standard risk-free instrument has been the US Treasury bond, or note. Buyers
of AAA-rated 10-year Treasury notes would typically collect 4% annual
interest with virtually no risk of default. In contrast, equities as an asset
class typically return 7%, commensurate with higher risk.
Companies could go bankrupt, products could fall out of favor, or
stock prices could fall for any number of reasons. Throughout history,
investors searching for yield have committed capital both to stocks and
bonds, overweighting their portfolios in one or the other asset class
according to their risk profile and investment objective.
But that time-tested strategy not longer holds. Thats because the Federal Reserve has changed the game.
In his reverent adherence to Keynesian stimuli, Chairman Bernanke has taken
away risk free yield (or pushed it out to 30 year maturities),
by instituting his Zero Interest Rate Policy (ZIRP). This massive credit
intervention flattens the yield curve and drives real returns on medium term
Treasury instruments (and CDs)
into negative territory. Investors naturally seek other instruments. They
look for substitute goods. Many select high-yield dividend stocks, not for
their equity value, but for their dividend income. When the buyers come in,
stock prices rise.
Many investors have been holding cash since the great financial
meltdown. They have lost capital while they held because the Dollar has lost
purchasing power since then (and will continue to lose value). This too, is a
result of the Federal Reserves
massive credit intervention. Big Ben loves to print money. But we know that
Greshams Law still
holds. The Fed debases and devalues the currency each month by printing more
money out of thin air in its $1 Trillion/ year Quantitative Easing program.
Thats not all QE is
doing. QE is pumping up stocks with hot air. The Feds ultra-easy money regime keeps margin rates low,
which spurs stocks, and also keeps borrowing rates low for corporate capital
investment. Because of investor substitution, incoming stock buyers benefit
from low margin rates. But companies are not rushing to but capital equipment
at low interest rates. Instead, companies are sitting on roughly $2 Trillion
in cash here, and keeping another $2 Trillion offshore and out of reach of
Federal taxes. Some companies can think of nothing better to do with their
cash than buy back shares. Stock buybacks tend to push stock prices higher
(less stock outstanding, higher P/E for the same earnings), but they are a
tremendous waste of capital. Excess corporate cash should rightly go to
shareholder dividends or expansion.
In general, US companies are not expanding. They certainly are not
hiring. No amount of Federal Reserve QE will force them to do either. Simply
put, the Fed cannot create aggregate demand. This is heresy, of course, to
the Chairman and the presidents
economic team. But the reason that the presidents
entire economic team has deserted him is because their Keynesian policies
have utterly failed. TARP was a failure. The GM bailout was illegal. The $800
Billion Stimulus Package failed. Cash of Clunkers failed. Mortgage
modification failed. The Payroll tax holiday failed. GDP is hovering at low
levels, and dipped into negative territory last quarter. Unemployment has not
declined since 2009, despite the administrations
spin. It remains stubbornly at 14% (U-6 measure), a level not seen since the
1930s. We simply cannot print money, tax, spend and
regulate our way to prosperity.
So should investors join the buying spree in stocks?Well, the
speculator and the aggressive investor may find some gains in equities now.
We have been realizing good profits each week in our Model Aggressive
Portfolio (MAP), where we focus on near term trade (weekly) setups in stocks,
options and futures. In MAP, we have been focused on stocks since November
2011 and our recommendations have made money each week. But the market holds
risks for more conservative investors that enter at these levels. Thats because earnings, the mothers milk of stocks, are beginning to top out for many
large cap companies. We are seeing companies meet or beat 4th
quarter earnings expectations and miss revenue expectations. Revenue growth
is essential to earnings growth. Many companies are guiding analysts lower
going forward. These companies are reflecting lower global demand and the
realities of continued recession in Europe, a slowdown in China and slowing
demand in the US.
Slowing, low demand in the US wont be reversed by raising taxes. But raising taxes yet again
is exactly what the president intends to do. What is puzzling about the
presidents tax obsession
is history shows cutting taxes stimulates the economy. The economy jumps when
consumers have more discretionary income to spend. Whats more, the Federal government gets more revenue
when marginal tax rates are reduced. This happened as a result of the Kennedy
tax cuts, the Reagan tax cuts, the Clinton tax cuts and the Bush tax cuts.
Reducing federal regulation also stimulates the economy, as we saw most
prominently in the Reagan years, the longest period of prosperity and
economic growth in our time.
The technical indicators are signaling stocks are reaching major
resistance. For the S&P 500 index (SPX), a good measure of the broad
equity market, prices has climbed to just over 1500, a key resistance level.
Price action of the SPX has formed a bullish inverted head-and-shoulders
pattern on the daily charts with a neckline at 1458. The measured move on a
bullish breakout above the neckline is 105, which brings a target level of
1563. The SPX made its breakout of the bullish pattern on January 10th,
and has been climbing steadily since. Yesterday, the SPX closed
This move up can also be seen in the Fibonacci extensions of the
previous run up (June -Sept 2012) and pullback (Sept-Election swoon of
November 2012). Since the November lows, price action has powered up to the
50% Fib (1448) at circle #1 on the chart below, then fell back to just above
the 23.6% Fibo (1398 at circle #2), and quickly jumped past the 38.2% Fibo
and surged right up to the 61.8 Fibo at 1472 (circle #3).After five days of
consolidation at the 61.8 Fib, the SPX climbed steadily to the 78.6% Fibo at
1507 (circle #4) and appears to be headed higher still.
It is gratifying to see separate technical analyses in such lockstep
The speculator or aggressive investor that followed our Model
Aggressive Portfolio (MAP) Recommendations has done very well with selected
stocks, stock options and futures contracts over the last several months.
Weekly returns have ranged from 30% to 77%. What choices are available to the
conservative investor in todays
The answer certainly is not bonds, especially Treasurys. Treasury
bonds yield negative real interest returns. Investment grade corporate bonds
dont offer much
more for the added risk.
Conservative and prudent investors choose gold.
The case for choosing gold today is as strong as it has ever been. It
can be made efficiently in the form of a parliamentary inquiry, so often used
in my own sovereign state of New Hampshires
If you know, as I know, that stocks are full of Fed hot air, and the
Fed has fenced off reasonable yields in fixed income instruments by
intervening in the credit markets, and,
If you know, as I know, that corporate bonds offer yields only at a
significant risk of default, and,
If you know, as I know, that the Federal Reserve is continuing to
print money under its Quantitative Easing program, and has stated it will not
stop until the unemployment rate is lower than 6.5%, and
If you know, as I know, that unlimited QE has no effect on the
unemployment rate, and that
QE debases the currency and its purchasing power, and
If you know, as I know, that gold increases in value as the Dollar
decreases in value, and that gold is recognized as the ultimate global
Would you not agree with me that owning gold today will protect your
wealth against the ravishing of fiat currency and tyrannical federal
Thats right. The
answer for conservative investors is gold. In fact, aggressive investors
should also own some gold to diversify their portfolios. Heres why any investor should own gold now.
The great bull market for gold is continuing. The fundamentals are in
force to push gold prices higher, and the technical analysis supports higher
gold prices from here.
First, the fundamental case. It all boils down to central bank policy.
The Fed, the ECB and BOJ are all maintaining accommodative monetary policies.
That is, they will keep interest rates artificially low and continue to add
liquidity by various forms of Quantitative Easing. QE itself debases the
currency and drives commodity prices higher.Loss of confidence in the Dollar,
the worlds reserve
currency, is also reflected in the price of gold. Political instability in
sensitive regions of the world affects the price of gold (and oil). We are
seeing the war premium boosting oil prices as tensions rise over nuclear
weapons development in Iran and North Korea. Even central banks are buying
gold. Thats because
unlike fiat currency, gold has intrinsic value. Gold is recognized as the
ultimate global currency and store of value.
Second, the technical case.QE is weakening the Dollar. As the Dollar
weakens the price of gold increases. The traditional inverse relationship
between the Dollar and gold is present in todays
market. Global QE and US economic policy is keeping the Dollar weak. The weak
Dollar supports higher commodity prices in general and higher gold prices in
We can see this dynamic play out in the chart of gold vs Dollar below.
Technical indicators on the daily and weekly basis charts are bearish for the
Dollar. On the weekly basis charts, resistance is now 80.74 with support at
77.44. The Dollar is headed lower form here. A move down to the 78 level
would command a gold price of 1800, a key resistance level.
What would cause the gold price to drop significantly?Well, if the
Federal Reserve were to cease buying bonds (QE), the price of gold would
drop. But Chairman Ben has reiterated his commitment to buying bonds at the
rate of $85 Billion per month until unemployment is reduced to 6.5%. The
January 2013 unemployment rate is 14.4% and the current regime has no
pro-growth economic plan. The price of gold would drop if peace broke out in
the Middle East and Iran, North Korea and China dismantled their nuclear
weapons. Recent events in these tinderbox areas demonstrate theres not much chance of that happening, particularly
when the US is reducing its military strength to the point it can no longer
fight in two theaters of operationat once. Gold would fall if real estate
became a safe investment asset again. But it will take 10 years to work
through the housing overhang of 5 million foreclosed properties that is
weighing down home prices. And gold would fall, as it did in the Reagan
years, if pro-growth tax reform, and a plan to balance the budget within ten
years, which would include entitlement reform, were adopted now. As we saw in
yesterdays State of the
Union address, the president is campaigning for higher taxes, more spending
and more Federal regulation. No pro-growth agenda there.
So now is a good time to buy and hold gold. Buy gold to protect your
wealth against the corrosive effect of ultra-easy monetary policy. Buy gold
to maintain a store of value that is recognized universally. Buy gold to
diversify your investment portfolio. Buy gold for peace of mind in uncertain
times. Buy gold to secure yourself and your family.
Responsible citizens and prudent investors protect themselves and
their wealth against the ambitions of over-reaching government authority and
debasement of the currency by owning gold. Gold is honest money. Investors
from around the world benefit from timely market analysis on gold and silver
and portfolio recommendations contained in The Gold Speculator investment
newsletter, which is based on the principles of free markets, private
property, sound money and Austrian School economics.
The question for you to consider is how are you going to protect
yourself from the vagaries of the fiat money and economic uncertainty?We
publish The Gold Speculator to help people make better decisions about
their money. Our Model Conservative Portfolio has outperformed the DJIA and
the S&P 500 by more than 3:1 over the last several years.Follow @TheGoldSpec
Subscribe at our web site www.thegoldspeculatorllc.comwith credit card or PayPal ($300/yr) or by sending your check for $290
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