Putting the pieces together...

Notes on Gold

Recently there have been some interesting remarks on gold by several prominent hedge fund managers.  I may add to these this weekend. These are not from people who are gold bugs of the nutcase variety. They are value seekers in all markets at all times. They are seeing what I see.

 

http://dealbook.blogs.nytimes.com/2009/10/20/einhorn-goes-for-gold-slamming-us-policies/

 

""Last week when Federal Reserve Chairman Ben Bernanke, Mr. Geithner and White House economic adviser Larry Summers spoke in interviews and on panel discussions, Mr. Einhorn said, "My instinct was to want to short the dollar but then I looked at other major currencies - euro, yen and British pound - and they might be worse."

 

Mr. Einhorn added, "Picking these currencies is like choosing my favorite dental procedure. And I decided holding gold is better than holding cash, especially now that both offer no yield."""

 

http://dealbook.blogs.nytimes.com/2009/10/28/seeing-next-boom-tudor-goes-for-the-gold/#more-135679

 

""Winning the race, Mr. Jones posits, will be gold, emerging-market equities denominated in local currencies and commodity-related stocks. “I have never been a gold bug,” he says in the letter. “It is just an asset that, like everything else in life, has its time and place. And that time is now.”""

 

 

Update After Top Confirmation

The fact that 2cs never really got into the 70's for more than a half hour on October 16, and not ever on end of day, means this is a weak market for a while....probably at least a month. But there was also exuberance on October 16 in the volume indicator I use.

 

I was already into gradual cutting and pruning as detailed here, and I continued that last week. Finally I bought some SDS (double short SPX) last Friday.

 

The point of this is that I don't sell and reverse at a specific minute in time when everything lines up with a light in the sky. It's a gradual process of increasing probabilities for a change in trend. At tops some things get sold ahead of the inflexion point and some afterwards. In that way I am never too far wrong if the market fails to reverse. There is far less anxiety when all you have done is take some profits from the previous move going ito the top window and are waiting for confirmation to go short or just stay flat.

 

A lot of what I have left are the various hedged funds I have discussed here at various times: LSC, HSGFX, FPACX, TFSMX, OAKBX, HSTRX, PAUIX, etc. plus very long term hedges in gold and believable  (proven) "all season" funds like PTTRX and VFIJX and some SDS for proper "flavoring". Cash is nearly 20% after being under 5%, so I have ammo for small game when they appear out of the bushes. Since cash truly is trash from an income basis (thanks to the FED) I'll have no hesitation in spending it on good causes.

 

It's not exotic or heroic trading. It's very pedestrian and boring, but it works for this retired investor to maintain a very good existence and to defeat the evil forces of inflation and taxes. OK, I'll admit it. There is a wee bit of drama in it.....;)
 

One-Stop Shopping

The events of the past two years got me well off topic from my previous goal of optimal retirement portfolio construction. My greatest wish had been to construct a set-and-forget portolio that would withstand any kind of market and provide decent returns both for accumulation before retirement and during retirement. A second desirable consideration was that it be simple and require very little work. I have frequent requests to revisit this important issue.

 

Last year we learned, or re-learned, that in systemic crisis markets everything becomes corellated, and almost all asset classes move as one, and that is because a lot of leveraged and/or panicked  players simply have to sell everything in a hurry. 

 

But that was then. I don't know, or know of, anyone who always understands what's going to happen in the markets or the economy in the future. But here is an interesting fact. Vanguard's Wellington Fund (VWELX) started in 1929 (oooops!), and Wellington has an annualized total return (all dividends re-invested and no taxes paid) of 8.11% since 1929. Imagine what that return must be from the 1932 low. Through many wars and social upheavals, depressions and manias, and bear and bull markets, 8.11% annualized.

 

Wellington has about 65% stocks (~10% foreign) and 35% bonds and sister fund Wellesley Income (VWINX) about 35% stocks and 65% bonds. VWINX has returned 10.14% annualized  since mid 1970. A very good case can be made for one or the other of these two funds as one-stop-shopping choices for long term tax-deferred retirement accounts: up to age 45-50 going with Wellington and then  switching to Wellesley. Uncomplicated.

 

On the chart from my data base start date of September 1, 1988, I also show Bill Gross's PIMCO Total Return Bond Fund (PTTRX) along with the others. If you had equal amounts of PTTRX and Wellington Fund, your return would have been almost the same as Wellesley VWINX for the same period. So Wellesley is the laziest and least complicated way to go. Both bond and stock markets have been in bull markets for much of the last 21 years (bonds for sure), and we can't know whether this will work for the next 21 years. But we never do know in advance. Things seem dreadful now but no one really knows how it will turn out over time.

 

 

Another factor is inflation. There was inflation from the late 1960's through 1981 and again from 1999 to 2008, and stock returns were still quite respectable. VWELX and VWINX are good stock pickers and they included inflation stocks, and foreign stocks, and do so now. But one might want to consider an additional inflation hedge. Energy stocks have been a far better hedge than precious metals stocks. So if you buy VWELX or VWINX, depending on age, you might want to add 5% in VGENX. So you could have only two mutual funds and relax and forget it all.

 

It depends upon your personal investment skills which may or may not be able to improve on this, the amount of time you have or want to have to manage your investments, and your ability to ignore events if you have a one-stop-shopping portfolio. So think about who and what you really are and what you really want  to do. There is only one right way, and that is a way you can live with and actually perform being who and what you are. Some self knowledge and honesty is required here. And consider whether you really want to be day trading when you're 70 or 90 years old.

 

If you had put $10,000 into Wellington in 1929(!), re-invested all the dividends, and paid no taxes--not possible of course except for a long term trust--you would have $6,430,189.84 today. That's the purpose of long term investing, and it gives new and deeper meaning to the phrase that "time is money".

 

I am a Vanguard client but have no other connection of any kind to them. You could do this with other long existent mutual fund companies. These are my ideas and not recommendations.

 

 

More Market Guesses for the Rest of the Year

Several weeks ago I guessed there was a possibility that US stock markets could top out early last week. The guess was based on market volume studies and market participant behavior and not on the stars or even the tides. And it required the market to do certain things to get to a sell. Clearly that was a bad guess from a short term trader's point of view. The market stalled a bit and the volume and behavior signals were pushed out in time at least to this past Friday.

 

S&P500 24 hour December futures made a high of 1095.50 last Friday, October 16, and by tonight they have been down as low as 1076.25 so far. That is just two ticks under the high of last Monday, October 12. Market irony, no?

 

In the meantime my favorite and very simple 2CS didn't quite get to the 70's, but it did drop to 81.90 on Friday from  129 on October 2, the Friday before my Sunday guess. Also my favorite volume study rose greatly from October 2 to October 16 at least into an exuberance range although toward the low end of that exuberance range.

 

As you know if you've been reading me a while, I tend to phase in and out gradually, so I did get out of some of the more volatile energy and gold holdings last week. But there is still more to sell. The only question is how "urgently" to do it. Again this involves a semi-educated guess. Friday's one day 2CS number was slightly under the average for the week even though Friday was a down day for S&P500. So there was definite exuberance during a pullback. It's normal to get increased exuberance in a pullback after extended advances, and this is the first one I've seen since March. It's a sign of the first admission of defeat by the bears. Often the bulls will take this as a way to force the bears into the market by rallying some more.

 

Personally I am taking this as reinforcement of my plan of gradual exit of equity and commodity related investments. I am going to have to sell down somewhat more in sub-investment grade bond vehicles and in some stock/bond funds whose bonds are mainly investment grade.

 

I don't think the bull move from March 2009 is over, but we may get a bigger  correction  than we have had to date. Naturally I am well aware that I may be wrong and too early. Declining now goes against the stocks seasonal but not the October decline history of recent decades, so this may just go a few weeks to a month if it happens at all. Plus, the seasonal has been wrong all year since March.

Howard Hill's Mind on Money

Howard Hill was there in the early 1980's when  the earliest bondlike securitizations of mortgages, and later the securitizations of nearly all large cash flow debt vehicles, were created. Hill was one of the creators. I knew him from a distance at the late, great Long Wave site under the auspices of University of Colorado in the last half of the 1990's and a bit beyond. More recently, last year and this, I had the pleasure of reading some of his book draft and some of his current opinions now that he is in a position to share them.

 

Nearly everyone now knows the alphabet soup of CMO's and too many others and the dramatic and drastic end results of their misuse which Hill feared ten years ago could happen.

 

This week Howard Hill has started his own blog Mind on Money which promises to be a real insider's view  of the good, the bad, and the ugly of the debt securitization era.

 

 

SPDR Gold Shares ETF: GLD

Even in good economic times I believe that gold is a good investment for perhaps 5-10% of assets as a diversifier and volatility moderator. In bad times I personally feel gold should be a higher per cent of a total portfolio.

 

Physical gold held in a US bank has been part of my portfolio for a long time, and I have also traded gold stocks and Central Fund of Canada, CEF.  During the past year I have looked in depth at a number of publicly-offered personal gold storage plans in the US and elsewhere. None really measured up in my view. Some were little more than secured financing of a dealer's inventory or unallocated portions of a common  gold holding.  Individual accounts at most major world gold storage vaults require creating a foreign trust and investing in 400 troy ounce bar increments.  One plan, Bullion Vault, has an option for storing US COMEX-approved 100 oz bars in the US, but the account itself is trusteed through a London bank, thus it seemed in my view to have most of the paper work, tax and legal issues of all off-shore trusts, and few of the possible advantages. 

 

Due to a constant stream of newsletter and internet chat claiming that gold and silver ETFs are defective in some way, I had not invested in them. But gold ETFs are rapidly spreading around the globe, so I recently decided to spend a good bit of time investigating them. To look at in depth I chose GLD, SPDR Gold Shares, the largest US gold ETF, now holding over 1100 metric tonnes (>35,000,000 troy ounces). The basics are that gold ETFs give all buyers, regardless of size, the opportunity of owning a share of actual specifically-allocated, numbered, safely-vaulted, and insured gold bars for 0.004% total expense per year. Some ETFs charge even marginally less. Check out the competition's prices for buying and storing gold for you if you can find them. In some cases annual costs can run several percent or more of total account value. Since the ETFs are now so large and dominate the market, every expense of a large ETF is incurred at very competitive low cost.

 

Still there has been a "conspiracy crowd" persistently damning gold ETFs as potentially dangerous frauds. They often say the gold isn't there where the legal prospectus requires it to be. Or they say the gold holding isn't audited, which it is GLD's case. Or that the gold isn't a specifically allocated quantity with uniquely numbered and named (by smelter/fabricator) gold bars which may NOT be borrowed or used by anyone else or mixed with anyone else's gold in the secure vaults in London in the case of GLD. The gold is there, and you can see the  list  compiled every Friday, after the market closes, of all the allocated numbered gold bars with the weight and number of each bar owned by GLD and the total weight of all bars combined.

 

Since gold is such a concentrated form of wealth--a 400 troy ounce bar (27.38 US pounds) is valued at $420,000 at $1050 per tr oz--world class gold storage has to be the most secure warehousing operation there is, apart, perhaps, from some military storages. It is a highly specialized type of warehousing with a very long history in London, Zurich, and New York and several Canadian locations. London and Zurich gold warehouses (vaults) have had for centuries the legal structure and legal precedent for specifically handling gold ownership safely and legally under all civil and political conditions.

 

In addition to SPDR Gold Shares' weekly list of all gold bars they have a  daily list page devoted to all the specifics that day of their gold holdings, the number of shares outstanding, and the closing price of gold in London. You can do the math yourself to prove that every ounce of gold is reflected in the share price with virtually never a premium or discount, as is quite common and disturbing for CEF. Then you can compare it with the numbers from the vault on the Friday list above. These facts are readily available to the public, and the legal prospectus for GLD is quiet clear on the structure and operation of the fund. The gold ETF critics are simply wrong in my opinion.

 

If you are considering investing in gold, you may not want it all in one basket. I have gold in a US bank vault, some in CEF shares, the Central Fund of Canada (not an ETF), and I finally bought an initial GLD position this week after long study of all the evidence and criticism including the prospectus and all SEC filings.  I have no personal connection to the gold industry except as a personal private investor, and this not a recommendation, just my own investigation and decision.

 

Besides GLD and CEF (not an ETF), there are also two other gold ETFs I know of available for sale on US exchanges: IAF and SGOL. I have not done the research on them that I have done on GLD, but they appear to be similar in structure and practice to GLD.

Small Cap Stocks

Much verbiage is expended on emerging market stocks, and rightly so. They are doing very well indeed. But if you think on it, an emerging market stock is likely to be a small capitalization stock. And if you look at well-chosen US small caps you see that they are doing as well this year as their look-alike emerging brothers. US equities have always been thought of in Europe in a sense as "emerging" market stocks. But now US small caps are doing as well as emerging market stocks "IN DOLLARS".

 

Stock Top At Hand?

Christopher Carolan and Terry Laundry, both highly respected by me and many, many others, are calling for a major stock market high within the next day or so.  Carolan's is based on his Spiral Calendar F11 (279 days) from the January 6, 2009 high which comes out tomorrow as I measure it. Laundry's is based on his T Theory forecast from the March 18, 2009 NYSE volume oscillator high which he calculates as coming out October 12-13. You can click through to both of these fine analysts via the "Blogs I Like" list in the left hand edge of this page. (Carolan's site is part subscription but you can get the flavor of his work in the free part. I heartily recommend his classic book, "The Spiral Calendar" which you can buy from him or perhaps through Amazon.)

 

While a decline can always start at any time and may well do so tomorrow, my sentiment and volume studies do not support an intermediate term decline at this time. The 2CS is at 90.33 as of Friday October 9 and really should be under 80 for an intermediate term high that is going to decline more than 5-8%. The volume studies are also not at normal extremes for a top.

 

Laundry is  expecting a decline of perhaps as much as 16% by mid to late November. He has several audios and pdf file at this time today explaining it all, and if you have the time his free reports are always worth the time and effort. To be sure, Laundry does have a longer term T which doesn't expire until the summer of 2010.

 

I certainly can't, and it would be absurd to, claim to know their work better than they do, but they have both been so open and kind over the years in making their ideas

available to the investing public, that I have used their work in my own way for over 30 years in Laundry's case to nearly 15 years for Carolan's. I believe that Laundry's T could extend to October 30 which would give the market time to become truly overbought.

 

Carolan says that in his experience with major Spiral Calendar highs, other usually reliable indicators often fail to warn of impending doom. That's a humbling idea for me. By the way, I do believe that the current decline in T bond futures was predicted by the Carolan F11 (279 days) from the December 30, 2008 bond high.

 

 

Guesses for the Rest of the Year

Since I stopped trading with much leverage (mainly stopped trading futures), I have been rather lazy about  attempting to pinpoint tops and bottoms. I have gone by feel and tended to start getting out ahead of time and over a period of time including afterwards. The same is true of bottoms.

 

For me, predicting is generally a sucker's game, and my guesses are often wrong, but I'm going to try one for the next few weeks. I've put this together with my own indicators and judgment, but I have also leaned on some favorite personal gurus, Terry Laundry and Christopher Carolan, whom you should not blame for any of this. Keep in mind this is just a semi-educated guess.

 

Based on the 2CS and other non-disclosed sentiment and volume measures and on tide analysis, I suspect the SPX and other stock indices will bottom on Tuesday, October 6 and the market will jump up to 1060-1070 by Tuesday, October 13, although it could go to the end of that week. There is  gap in the CME SP futures 2 month perpetual forward daily chart at 1057-60.

 

I don't think 2cs will make a new low or that SPX make a new high.  This implies that this is not a "final" high. After this turn on the 13th-17th the markets will decline down to fill a gap in the perpetual futures at about 906-910 over a two to three week time. The seasonal low is for October 26th, but I don't want to be too rigid on that.

 

From that low the bull market will continue up well into 2010. I don't own generic index stocks at all. Some of the "hedged" stock funds I do own (HSGFX, TFSMX, FPACX, OAKBX) frown upon in-and-out trading, and I want to  stay in them, so I will buy some Rydex or other short market ETF to hedge some more. I will lighten up on but keep a base position in LSBDX (largely corporate bonds) since they have had such a spendid run. I won't be trying to make a lot of money on this as I don't want to lose a lot if I'm wrong. I won't touch the other managed bond funds from Vanguard, Hussman, and PIMCO as I have confidence in them.

 

Gold and dollar/forex crosses are an enigma to me in this setting, so I will make no changes going into this time period unless something gives me greater clarity.

 

 

 

 

The Long Bond Rate

The 30 year T bond interest rate is at a crucial point from which it plunged into the abyss last November and December. Technically there is a lot of support here as I've indicated. This the 123 area on the T Bond December futures price (inverted to rate) that I have talked about for years. What happens next will be extremely important for the intermediate term for markets and economy.