Bulls To Bears: Wall Street is stuck in a highly volatile range

Wall Street is stuck in a highly volatile range as investors hoping for a rally into the end of the year are browbeaten by Europe's unfolding crisis. For months, investors have been enthusing about valuations, earnings and, more recently, signs of an improving economy. Those may be good reasons why stocks should rally, but even the most ardent are starting to sound a bit glum. The political intrigue in southern Europe has flummoxed investors stateside. Papademos has replaced Papandreou. Berlusconi is, well, gone -- leaving the presidential palace on Saturday secretly through a side door after his resignation as prime minister while crowds shouted "clown, clown" among other insults and threw coins at his limousine. When word of his departure spread, people danced in the streets and drank Champagne. The headlines and the subsequent volatility seem relentless. Early last week, there were worries about a potential Italian default, and now we've seen government and regime change in two of the periphery nations. Italy's Senate approved a new budget law, clearing the way for approval of the package in the lower house on Saturday and the formation of an emergency government to replace that of Silvio Berlusconi. Papademos was sworn in as Greek prime minister, replacing predecessor Papandreou after days of political wrangling. He is tasked with meeting the terms of a bailout plan to avert bankruptcy. But with worries that the crisis could spread to other countries, investors are looking for either the European Central Bank or EU governments to commit more capital in order to backstop sovereign bond markets. For the markets to continue to rally, we would need to see market confidence that Italian, Spanish and French bonds are money good, There is likely to be more volatility around the sovereign debt crisis until we get more capital committed to the solution.


 

Bulls To Bears: The burst of the gold bubble coming soon?

It seems like just yesterday gold burst through $1,000 an ounce. It actually wasn’t quite yesterday, but it was only a year and a half ago. As you likely know the price now has shot through $1,800 an ounce. An 80% increase in roughly 18 months. Not bad. But that doesn’t tell half the story. Ten years ago a person could have bought that same ounce of gold for under $300. A decade later such an investor would have made 6 times their money by holding gold. That is almost a 20% compounded rate of return. The power of compounding never fails to amaze. I got nothing out of this huge gold price increase and I’m not likely interested in buying gold directly today either. Why ? I simply don’t like it as an investment. The price of gold is determined too much simply by the emotions of investors and not enough by its usefulness or earnings power. I simply can’t value it. I understand the desire to own a hard asset, but I’d much rather own oil or farmland where the world’s growing population and limited supply also are making for a fundamental reason for price increases. I guess I share the view on gold that Warren Buffett does. Consider this exchange from an interview with Ben Stein (Stein):

Stein:“My first question, as I sit there on the couch in his office, is: "What about gold? Is this a classic bubble or what?"

Buffett: "Look," he says, with his usual confident laugh. "You could take all the gold that's ever been mined, and it would fill a cube 67 feet in each direction. For what that's worth at current gold prices, you could buy all -- not some -- all of the farmland in the United States. Plus, you could buy 10 Exxon Mobils (XOM), plus have $1 trillion of walking-around money. Or you could have a big cube of metal. Which would you take? Which is going to produce more value?"

It is all well and good that I share Buffett’s lack of interest in gold. The unfortunate truth for Buffett, Berkshire Hathaway (BRK.A)(BRK.B) shareholders and yours truly is that not being invested in gold has cost the whole group of us a LOT of money over the past decade.

I have no excuses for missing the run in gold. I followed David Einhorn as he repeatedly spoke on the time being right to invest in gold. His New York Times article from over a year ago nailed the current mess that is boosting gold prices (Times):

“The question we need to ask is this: If we don’t change direction, how long can we travel down this path without having a crisis? The answer lies in two critical issues. First, how long will the capital markets continue to finance government borrowings that may be refinanced but never repaid on reasonable terms? And second, to what extent can obligations that are not financed through traditional fiscal means be satisfied through central bank monetization of debts — that is, by the printing of money?”

But I can only invest based on what I believe to be true. I need conviction or I can be shaken out should an investment temporarily move against me. I’m certainly open to changing my opinion when facts merit a change, but when it comes to gold I don’t think the facts have changed. It still has very little functional value and little earnings power and I’m not going to invest in something whose value is derived only from how worried investors are about certain macro items. At some point prospects are going to improve and then what for gold prices ?

What I have noticed, though, in relation to gold that has my attention, is how significantly gold producers have underperformed the commodity that they sell. As a group, it seems that the stock market is not pricing their assets or production using anything near the current commodity price. If gold prices stay where they are, these companies are going to produce too much cash flow to continue to be priced the way they are.

I think one of three things likely have to happen.

Gold equities will rise so that their assets and production are valued using current gold prices

Gold drops and these equities don’t drop as much because they were never priced as though current gold prices were sustainable

Gold keeps rising and the gold equities rise even faster because they don’t even reflect current prices and because of the leverage their earnings have to the commodity price (fixed elements to their costs).

Given that line of thinking I think it might make sense to go short gold and long the gold stocks. If gold keeps going up, the equities should eventually go up faster because they have some catching up to do just to reflect current prices. If gold stays where it is, the equities should increase as the market begins to believe that their earnings power will be based on current gold prices. And if gold drops, the equities should not drop as much because they are not priced for current gold prices.

I’m just feeling my way through this idea and some of the equities with large gold exposure that I’m looking at are:

Barrick Gold (ABX)

Goldcorp (GG)

Kinross Gold (KGC)

Yamana Gold (AUY)

NovaGold (NG)

I think this idea definitely has some merit as I’ve read enough to be pretty much convinced that gold stocks are significantly undervalued if you believe in current gold prices. A short gold, long gold equities trade might be the best way to both take advantage of the potential for sustained high or rising gold prices and protect you (or even profit) should gold prices reverse.

The key thing to remember is that the valuation gap between gold and the gold equities can widen even more from here, so a lot of patience could be required as you wait for this gap to close.

Bulls To Bears: Europe making progress with bailout but a crisis still looms

In Europe, there was more progress toward strengthening a financial rescue fund aimed at shoring up the region's banks. Slovakia's parliament approved a measure that would release large amounts of money to European banks and governments before a full-blown crisis sets in. Slovakia had blocked the bill Tuesday, becoming the only one of the 17 countries that use the euro to do so. Wall Street has been fearful for months that one of Europe's shakier economies could collapse. If countries like Greece, Spain and Italy can't repay their debts, global banks that own those countries' debt would be at risk. That could make banks even more leery of lending to each other and to businesses. If that escalates enough, it could cause another international financial crisis similar to what happened in late 2008. Markets rallied over the last week as officials in Europe seemed like they were making progress toward shoring up European banks. In addition to the stronger bailout package, European Commission leaders had said they would require banks to hold more capital to protect them against losses. But without specifics on how those reforms will be accomplished, traders are getting concerned that the plans will deteriorate.

Bulls To Bears: U.S. markets tanked now what?

U.S. markets tanked this week even though the Federal Reserve offered a bigger dose of economic stimulus than investors had expected: The Fed plans to reshuffle $400 billion of its investments in hopes of pushing down interest rates on mortgages and other long-term loans. Lower rates are supposed to coax consumers and businesses into borrowing and spending. The Fed also plans to invest proceeds from maturing U.S. Treasury debt into mortgage bonds in an effort to support the housing market. But economists say the Fed's effort -- dubbed Operation Twist after a similar Fed program conducted during the Chubby Checker dance craze of the early 1960s -- probably won't make much difference.

Rates on mortgages and other loans are already the lowest in decades. Frightened Americans would rather cut their debts than borrow, and businesses aren't seeing enough sales to justify hiring and expanding despite rock-bottom borrowing costs. The Fed's announcement underscored the fear that the American central bank had run out of tools to stimulate the economy. That leaves fiscal policy -- government spending programs and tax cuts -- as the only other way to juice growth. But political bickering is preventing Washington from doing much of anything. Congressional Republicans are focused on cutting government deficits, not widening them in the name of helping the economy. They are resisting President Barack Obama's $447 billion plan to generate jobs with payroll-tax cuts and more spending for roads, bridges, schools and other infrastructure projects. Economist Eswar Prasad of Cornell University says the U.S. government should tolerate higher deficits now to spur economic growth -- as long as it delivers a credible plan to bring its budget under control in the future.

Bulls To Bears: The central bank is under pressure to revive an economy.

The plan the Fed is considered most likely to unveil Wednesday has been dubbed "Operation Twist" and dates to the early 1960s. The Fed used a similar program then to "twist" long-term rates lower relative to short-term rates. Fed Chairman Ben Bernanke is expected to advocate the move despite criticism from within the Fed and from Republican lawmakers and presidential candidates. The Federal Reserve is running out of options to try to boost a slumping economy and lower unemployment. So policymakers are expected to reach 50 years back into their playbook for their next move. Bernanke has also faced criticism from congressional Republicans and GOP presidential candidates. Some have argued that the Fed's $600 billion bond-buying program, which ended in June, weakened the value of the dollar against other currencies and contributed to a spike in oil and commodity prices. Texas Gov. Rick Perry, who is seeking the GOP nomination for president, went so far as to say Bernanke would be "almost treasonous" to launch more bond buying. Fed Chairman Ben Bernanke is expected to advocate the move despite criticism from within the Fed and from Republican lawmakers and presidential candidates.

Bulls To Bears: U.S. Stocks hit again today

U.S. stocks took a hammering again today as Greece struggled to convince international creditors that it can meet its debt obligations in return for more bailout cash to avoid running out of funds as soon as next month. Stocks are on track for the first down day in six, weighed by indications Greece was on the brink of default. The Dow Jones Industrial Average DJIA -1.81% tumbled 165 points, or 1.4%, to 11,440. The S&P 500 SPX -1.77% lost 17 points, or 1.4%, to 1,199. The Nasdaq Composite COMP -1.07% fell 24 points, or 1.6%, to 2,580. Over the weekend, the cabinet of Greek Prime Minister George Papandreou met to discuss concerns over the nation's ability to meet fiscal targets as international lenders withheld the next disbursement of aid until Greece comes up with a credible deficit-cutting plan. Treasurys and gold gained. A Greek default looks to be imminent and the markets seem to be bracing for the event.

Bulls To Bears: U.S. stocks are rising today, fixed mortgage rates fall

U.S. stocks are rising today after the European Central Bank, the Federal Reserve and three other major central banks agreed to make U.S. dollars more readily available in Europe's struggling financial system. Stocks have gained for the third straight day after German Chancellor Angela Merkel and French President Nicolas Sarkozy calmed jittery investors by insisting that Greece would remain a eurozone member and would achieve its fiscal targets. On another note, fixed mortgage rates fell to the lowest level in six decades for the second straight week. But few Americans can take advantage of the historically low rates. Still, cheap mortgage rates haven't helped home sales. Sales of new homes are on pace for the worst year on records dating back a half-century. The pace of re-sales is shaping up to be the worst in 14 years.

Many Americans are in no position to buy or refinance. High unemployment, scant wage gains and large debt loads have kept them away. Others can't qualify. Banks are insisting on higher credit scores and 20 percent down payments for first-time buyers. Some homeowners have too little equity invested in their homes to meet loan requirements.

Bulls To Bears: Geithner says Europe ready to do more to help euro

U.S. Treasury Secretary Timothy Geithner insisted Wednesday that European leaders are ready to do more to support the euro from the debt crisis that is crippling Greece and shaking global markets.Ahead of a teleconference between the leaders of Greece, France and Germany on Wednesday evening, Geithner sought to convince markets that European governments understood the severity of the crisis and that more would need to be done. Geithner, who is to join eurozone finance ministers this weekend in a meeting in Poland, stressed that European governments have to make it clear they "stand behind" the financial system so that it can fund and finance the economic recovery. Traders nevertheless hoped that some form of new support would emerge and pushed Greek shares higher. Some analysts saw it more as an exercise in damage control after the flurry of recent -- and often contradictory -- statements coming from Europe.

Bulls To Bears: Greece Default Risk Jumps to 98%

Worries over the deepening debt crisis fueled safehaven bidding at Monday's auctions of ultra short-dated U.S. government securities, driving their three-month rate close to zero. Investors essentially gave the United States a near interest-free loan for three months on fears about a Greek default and its repercussions on French banks and the rest of the euro zone banking system. Shares of top French banks tumbled by more than 10 percent on worries about an imminent downgrade by credit ratings agency Moody's, due largely to their exposure to Greek bonds. The stock market is sinking. Bank stocks are getting hammered. People are parking their money in bills.

Bulls To Bears: President Obama unveils a $447 billion package of tax cuts and new spending to try to stimulate job growth

While the bill's $253 billion in tax cuts could well draw support from Republicans, an additional $194 billion in new spending likely will prove a harder sell. The president asked for the money to fund highway and other construction projects, modernize schools, stabilize blighted neighborhoods and help states hire teachers and first responders. "The president's plan is nothing new," said Sen. Orrin Hatch of Utah, the senior Republican on the tax-writing Senate Finance Committee. With a nod to deficit hawks -- independent voters among them -- Obama also said he would outline legislation in coming days to offset the bill's $447 billion price tag so it wouldn't add to federal deficits. Politics shadowed every element of Obama's speech. He appealed to people watching on TV to lobby lawmakers to act. He did the same thing before his speech in an email to campaign supporters, bringing howls of hypocrisy from Republicans who wondered why Obama was telling them to put party above country.

Bulls To Bears: Crude oil supplies fell last week, while gasoline supplies grew, the government said Wednesday.

Crude supplies dropped by 4 million barrels, or 1.1 percent, to 353.1 million barrels, which is 1.9 percent below year-ago levels, the Energy Department's Energy Information Administration said in its weekly report.