Putting the pieces together...

Bingo!

Sentiment Indicators:

The 2CS made its low of 89 on September 20 and has remained in the low 90's. But the QSM5, which I haven't mentioned in several years, is screaming sell this week, as it was in April and May. Keep in mind that this is a stock market only indicator, but since so many asset classes are now trading together, there could be some spillover if the stocks break down.

Note: I will continue to publish longer analytical articles, but I decided to post short versions of some of my market thoughts and reads as we go along.

Paulson is buying:

http://blogs.forbes.com/robertlenzner/2010/09/27/john-paulson-sell-bonds-buy-stocks-double-digit-inflation-coming/

A Must Read:

http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2010/09/27/all-qe2-all-the-time.aspx

I'm not an economist, but I have a brain and two eyes, and I came to the same conclusions that Ed Yardeni expresses so much better. It's time to get on with it and let the rotten chips fall where they may.

Gold Stock Funds

I have held a constant amount (in Troy ounces) of gold for the past 11 years. From the late 90's until 2005-06 I held some of the larger gold miners and BGEIX (American Century Gold) and VGPMX (Vanguard Precious Metals and Mining). With the increase in general market volatility in 2007 I consciously reduced my gold stock exposure to a smaller holding and traded a bit on intermediate term (months) swings. I've done that also with some of the "paper" bullion ETF's and closed ends: CEF, PHYS, GTU.

Since the gold fund highs of early 2008, most funds have gone "nowhere but in an interesting manner" as John Hussman often describes volatile sideways market action. That has begun to change this year, and I think gold stocks are finally starting a catch-up move and will break out to new highs. 

We know that gold bullion has quintupled in price since 1999 while stock indices have gone nowhere. A recent study has shown that gold has outperformed stocks since the US stopped redeeming dollars for gold in 1971. A real shocker, however, was Mark Lundeen's email this weekend. With some assistance by an Australian reader, Lundeen was able to extend the Barron's gold stock index back to 1920 with complete data for Homestake Mining. Since 1920 Lundeen's indexed Homestake/Dow Jones list has increased from 1 to 135, while the Dow Jones Industrial Average has increased from 1 to 96 in the same 90 years! Lundeen's work is generally published at Gold-Eagle with a delay of a few days. Check back there later to see his chart from 1920. http://www.gold-eagle.com/gold_digest.html

The major factors driving gold are: 1. nearly continuous devaluation of the major sovereign currencies which has been on-going since World War I (and the FED) began. 2. an 11 year bear market in stocks which are normally a competitor of gold for inflation/devaluation protection. 3. a recent (2006 to present) bear market in investment real estate, and 4. rapidly maturing long bull market in bonds (bear market in interest rates). It has become extremely difficult for professionals and individual investors to make any money in the big three of stock equities, real estate, and bonds. Nor are there any obvious stand-out currencies above the crowd for long term investment.

Thus gold is becoming almost the only game left with a strong trend in motion, and gold is really quite a small market, even including gold mining shares. This is why investment demand for gold has picked up in the past two years. So far it is only a trickle as so few investors at any level of size have any significant gold position. On supply/demand grounds alone gold's price could increase in a major way.

I began buying ASA Ltd (ASA) http://www.asaltd.com/about/company.asp, an "ancient" closed-end gold fund, in June. Originally, in the 1950's, ASA held only legacy South African mines which paid very large dividends. It was always listed in the US. With th passage of time and due to international politics and gradual depletion of the South African gold deposits, these huge holdings were diversified internationally. The fund re-incorporated from South Africa to Bermuda and moved its operating headquarters to the US. As of May it has only 22% left in South African miners while 40% is in Canada.

Funds are my preference rather than individual  equities. It's hard enough to try to get the market and its potential right without trying to beat full time professionals at stock picking. Out of a universe of about 25 funds with at ;east a decade of operating history, I picked six with stable management and decent annualized returns. Since Tocqueville Gold (TGLDX) has been a winner but only started up in 1998, I measured the six from the date of TGLDX's start-up. July 7, 1998 is a good date since it was almost at the end of the long bear market.

MS is data from Morningstar's on-line total return charts and FT is from FastTrak's charts.  The two  companies roughly agree except for ASA, and I suspect Morningstar is more nearly correct. Annualized total returns depend on the date of reinvested dividends aa well as the amounts and on splits or reverse splits. I have a query in for both sources, but who knows when I will hear from them.

USAGX is USAA's Gold fund, VGPMX is Vanguard's Mining Fund, BGEIX is American Century's Gold Fund and CEF is the Canadian 50:50 gold:silver closed-end fund. I chose TGLDX. USAGX, VGPMX, and ASA for further review. I looked at the top 25 holdings of each of the four and tallied how many of the four held each mining company. The only stock held by all four funds was Newmont Mining. I was mainly interested in funds which had a lot of unique holdings. ASA has 3 unique holdings,  USAGX has 4, and TGLDX has 5. But VGPMX has 16 unique holdings, so it deserves to be bought and perhaps weighted more heavily than the others. VGPMX does hold a lot of multi--mineral and even even some non-gold miners. As I learned from the late Paul Sarnoff in the 80's and 90's it's important to hold some non golds even in a gold portfolio. 

I do have a small position in VGPMX from months back but will add to that and buy TGLDX. ASA habitually trades at 7-10% discount  to its own neat asset value. But they are buying back shares at 98% of  NAV each quarter under certain conditions, so that is always an out. Although I have very mixed feelings about the Canadian closed end bullion funds, I will probably buy some CEF for diversification. TGLDX and ASA do own some small percentages of gold and platinum bullion as well. 

Bullion is about 15% of total investment portfolio now, and I plan to get up 25-30% with the gold funds added. I could even go higher if conditions warrant it. I'll be selling more of the longer term bond funds to do this. The argument that gold pays no interest is now moot as cash and even two year bonds pay no interest either.

Following are the top 25 holdings for TGLDX, VGPMX, and ASA (only 22 stocks held) respectively as on the date of their last reports:

 
 
    Addendum 9/13/2010: Mark Lundeen has given permission to post his Barron's Gold Mining Index extension back from 1938 to 1920 using complete Homestake Mining price data. If you would like to receive Lundeen's weekly email (in .doc format and usually >20 pages) contact:

Mark J. Lundeen

[email protected]

 

Summer Vacation &The Long Wave

If at all possible, people who live in southern Arizona attempt to escape the heat of some part of late Spring and Summer. There are two major choices: mountains or seashore. At 6000+ feet above sea level in northern Arizona, New Mexico, and California days are warm and nights are cool, and there are many places reachable in a day's drive or a one hour air hop. Then there is the cool coastal California strip due to the prevailing north/south ocean current and off-shore winds. San Diego is closest since the "west coast" is actually oriented southeast to northwest. It's over twice as far to San Francisco, and the roads are not straight-line as they are to San Diego.

Southern California coastal summer weather is lovely, but unless you are a polar bear or wear a scuba diver's wet suit, the ocean is too cold for mere mortals who want to swim or surf. The readily available mountains are also delightful but, except for Santa Fe, there is not a whole lot to do, and Santa Fe is not a vacation spot for children.

When we lived in San Francisco and later in Santa Fe we took winter vacations to Hawaii. Winter is very pleasant in southern Arizona barring the chilly period around Christmas, so Hawaii in winter is not a priority. But Hawaii turns out to be a great place for summer vacations. Many, many coastal California families have summered in Hawaii for generations for good reasons: the ocean temperature is about 79 degrees F and the daily air temperature range is from the mid 70's to mid 80's at sea level. Plus the northwest trade winds at 10-20 knots keep occasional humidity from bothering. Typically one thinks of semi-tropical locations as very hot and humid in summer, and that's quite true of the Caribbean and Mexico's Yucatan and of course Florida.

We tested our new summer vacation discovery for a short time in HOT, HOT June and loved it. Good bye San Diego, aloha Honolulu! Tourists and transiting travelers from all over the world have discovered the same facts. Hawaii's tourism statistics showed a five year high in tourist arrivals in June, a statistic few tourist destinations can claim. Some of this is thought to reflect the decision by many Americans to cancel Mexican trips, due to on-going civil violence there, and rescheduling vacations to Hawaii. Also wealthy Chinese citizens have begun the tourist jaunt to Hawaii as generations of Japanese, Koreans, Taiwanese and southeast Asians have done. I would say from listening at the beach and on walks that Australians far outnumber them. I heard a lot of German and Scandinavian and Slavic  languages as well and some French and Spanish being spoken, and many, many Japanese. One can more easily spot eastern Canadian English speakers than their mid-westerners and west coast citizens, but Canadians still seem to be fairly high on the national origins list. California remains the most visiting American state.

The Hawaiian economy seems to be strong. Obviously tourism is one reason, but there are a lot more prosperous small businesses including a boom in niche agriculture businesses which produce not only for tourists but for the locals and also for export.  Also a strong tradition in professional arts, crafts, and music now provides many jobs. Of US states that collect retail sales taxes, only Georgia and Colorado have a base rate lower than Hawaii's 4% (as of 2009). New Jersey and California charge ~8%.

Real estate was impacted negatively in Hawaii in the past few years but in a different way and not as severely as I would have expected. I haven't done a thorough survey, but high end residential property appears to have taken the biggest hit. This probably means it was a casualty of the stock market and other market crashes far more than of unemployment as in Arizona. Then too, at least four new high rise and high end condominium buildings in Honolulu and Waikiki (the beach section) came onto the market last year and this. These were planned and permitted in 2005 or so when they looked like a good idea. So there was a glut of very fine new units which had to be marked down substantially on the orders of lenders. Thus my family found a very nice condo for summer vacations while we a were on a summer vacation. They were being advertised at 25% off original listing prices, and we came in at close to 35% off and our "bid" was accepted. Quality in every way in a superb location.

Those who have followed my portfolio posts know that I've had a lot of essentially "dead money" for several years in very short term Vanguard municipal funds. (In 2007 much of it was in very short term Federal notes.) Some of this fund is being re-deployed into the condo. This may well not even be close to a final bottom in real estate, but it will pay almost immediate and very enjoyable "dividends". Giving up a 1.5% "opportunity cost" from the short term munis will not be missed, and paying cash for the condo  will keep operating costs very small. The operating monthly management fee includes all utilities except for electricity, and the dedicated in-building parking space can be rented or leased at a good rate if we choose not to buy a car, which is probable given the location and excellent local transportation and walking.

As David Knox Barker, a Kondratieff Wave analyst, put it in his latest update of "Jubilee on Wall Street", quality personal residential property is one of the few really worthwhile investments in the climax winter phase of the Long Wave. His view, and my own, is that 2012 is probably going to be the low before the economy bottoms and inflation re-starts.

Some of you will recall charts of Sergei Tarasov (http://timingsolution.com/) I showed here about 18 months ago. This one used only inputs of the Juglar's  and Kuznet's cycles: http://www.timingsolution.com/TS/Forecast/2009_long_term/

Here are other Tarasov charts using very long term data and what is essentially Fourier cycle analysis for cycle synthesis of the bond interest rate and the earnings/price ratio of US stocks. All three charts and some others have indicated a pprobable low in 2012. Tarasov has suggested 2013 on occasion but these charts are pretty clearly for 2012:

SPX Large Broadening Continuation Pattern

The sharp move down in US stock indices from late April to late May (to point 1 on the chart) took ~150 points or handles off the SPX. Since then a large broadening or  expanding eight point formation has developed  until ~August 9. Then a resumption of the primary trend downwards until last week. And lastly a retracement upwards. The rule for these retracements is that they will top out at or about the Andrew's median bisect of the last leg which in this case is about where the 200 day moving average is at this time.

If this works out, I would expect a fairly quick drop of 150 SPX handles which from 1115 would mean 950 on SPX in October.