Goldilocks Ends and ‘Currency Wars’ Begin

Goldilocks Ends & ‘Currency Wars’ Begin

Amid continuing inflationary policy, the US Dollar is at a critical juncture by both daily and weekly charts. Euro targets 142+ and the Yen approaches our target. Currency war kicks off; gold just sits there biding time.

From last week’s eLetter:

“A Goldilocks atmosphere was expertly created in large part due to the fact that Operation Twist (yes, we are still dealing with its effects) by its very definition held long-term interest rates down (buying long-term T bonds) while sopping up any money supply implications and inflationary signals by sanitizing the process with the sales of equal amounts of short-term bonds.”

Policy makers have not found a new way to indefinitely manage the economy. Traditional laws of economics have not been repealed. The Federal Reserve used the equivalent of a macro parlor trick to dampen inflation signals and help produce today’s Goldilocks atmosphere, which features stocks rising now that the public and its mainstream money managers feel the worst is over with respect to the Fiscal Cliff non-event and the Debt Ceiling noise.

But in economics and macro finance, there is is always a price to be paid for unnatural (read: man-made) distortions. The Fed ran out of short-term bonds to sell and now something has to give, as its ongoing inflationary operation is now unsanitized.

A bearish Head & Shoulders pattern has formed on the currency for which the Fed is supposedly a steward. If the neckline breaks, the measured target is 76.50.

The weekly chart of USD targets 74 off of an even more significant H&S, with the baby H&S of the first chart merely representing the right shoulder of the big daddy H&S.

A breakdown in the US dollar would confirm that the recent tick higher in Adjusted Monetary Base is the beginning of a new trend up in inflationary policy.

Unsurprisingly, USD’s chief rival, the Euro is in an inverted and bullish H&S. We have been targeting 142 in NFTRH since the break above the neckline. The Euro appears to be attracting a ‘long Euro/short Yen and gold’ momentum (read: hedge funds) crowd playing the opposite game to that from mid 2011 when Yen and Gold rose strongly in reaction to the Euro crisis.

Yen has been played to the hilt by the hedgies. We have had 106 as the downside target since the neckline to the massive H&S broke down. Yen could be a heck of a contrarian play for a counter trend rally, as the short-covering should be massive.

Meanwhile, the currency that resides outside the system bides its time. Gold is unofficial money and with all the hype about currency war people who are not patient may have expected a rocket launch in the precious metals.

Here we bring it back to the Euro and realize that too many unhealthy would-be gold bugs came aboard during the acute phase of the Euro crisis in 2011. That is being worked off now in gold’s ongoing consolidation.

Bottom Line

US dollar looks bearish. Euro looks to complete its rally to 142+ where it will by the way, encounter a bigger picture DOWN trend line. Yen is bearish but due for a whale of a short-covering bounce soon.

In the near-term some currencies are bullish and some are bearish. But the US Fed, Europe’s ECB and the BOJ are not going to engineer their way out of their respective ‘inflate-or-die’ predicaments. Gold may have a few more months of correction/consolidation but that is a drop in the bucket when viewing its entire history as a monetary anchor to value.

Big Investor Mistake: Trying to Catch a Falling Knife

Big Investor Mistake this article is from site http://www.investmentcontrarians.com

One of the common investor mistakes that occur quite often is trying to catch the bottom in a stock…or trying to catch a falling knife, as some might say. Many companies go through periods of being up and down financially, with the market sentimentcausing stocks to rise and fall. Investor mistakes occur when people believe a rebound might occur when there are significant hurdles for the companies to overcome. A great example of trying to predict a change to the market sentiment before the time is right and of investor mistakes along the way involves two cell phone makers, Research In Motion Limited (NASDAQ/RIMM) and Nokia Corporation (NYSE/NOK).

Nokia recently announced layoffs of approximately 10,000 people in an effort to try to change the market sentiment of the company. Nokia used to be the largest cell phone maker in the world, but has seen a massive fall from grace and is now incurring losses. With the cash pile being burned on an increasing basis, it appears that if things don’t change, the company could run out of cash by the end of 2013. Many have made common investor mistakes like buying Nokia earlier in the year purely based on the dividend yield. However, they would have lost a lot of money, as we’ve seen a continued fall in the stock. In fact, it’s now trading at just over $2.50, down from a 52 week high of $7.38. Back in 2007, the stock was trading over $41.00.

Research In Motion (RIM) has gone through a period in which it had over 40% market share of the smart phone market. The latest numbers by IDC have the “BlackBerry” maker at just over six percent of the smartphone market. As this dramatic fall has continued over the last few years, many people have made several common investor mistakes, such as believing that each time the stock has stopped going down it was a buying opportunity. I personally know people who have bought RIM all the way down from $80.00 a share. The current price is just over $10.00 share.

What is common amongst these investor mistakes? Even though the market sentiment is poor, investors believe they could predict the future. That is one of several investor mistakes that are part of human nature. People think they’re smarter than other investors and step in before all of the information is known. If we look at both situations, we see the same scenario in which market share is declining, profitability is declining, gross margins are declining and the products are not cutting-edge but rather behind the curve. I can go on with numerous investor mistakes, but I’ll just say they all have in common the idea that the person believes they’re smarter than the market. Investors start to “hope” for an outcome, rather than look at the evidence in an objective light.

Why would someone believe that something has changed even though all of the quantitative data suggest otherwise? RIM is a great example of this error, as management at the BlackBerry maker has, until recently, believed that the company was somehow better than any other cell phone maker. The company management team stopped innovating and started to put their feet up and enjoy their large market share. That type of arrogance and hubris always damages the long-run future of a company, especially in this world of technology where the landscape now changes on a daily and monthly basis. To avoid common investor mistakes, understand the industry, product, and corporate structure fully. This obviously is not an easy task, but then making money is never easy.

Gold: Getting Ready for the Coming Correction

By Michael Lombardi, MBA

I’ve learned many things about investing over a career that has spanned 30 years. One of the biggest lessons is that not a single investment goes either straight up or straight down.

When an investment is rising in price (bull market), there are usually dips and corrections on the way up. Just look at the long-term secular bull market in stocks that started in the early 1980s and ended in 2007—there were many times stocks “took it on the chin” during that 25-year bull market run.

On the other side of the equation, not a single investment goes straight down either during a bear market. Just look at the U.S. new-home-builder stocks.

As these stocks started collapsing in 2006 with the real estate market, there were many rallies in the prices of home-builder stocks, as the new long-term downtrend in these stocks entrenched itself. Investors lacking experience would have bought on these rallies thinking that the home-builder stocks were showing life again. Most investors fail to realize the strength of a long-term bull or bear market.

And that brings me to gold bullion.

Long-term readers know I’ve been a big believer in gold investments since late 2001, when gold traded at about $300.00 per ounce. Each time that gold prices pulled back (five percent to 10% corrections); I would suggest dollar cost averaging down—buying more gold investments on price weakness of the metal.

Over the past 12 months, gold bullion has risen an astonishing $611.00U.S.per ounce—up 49%. The rise from $1,700 to $1,800 to $1,900 an ounce has been too swift and quick for me.

I’m warning my readers to expect a correction in the price of gold bullion. That correction could bring the metal back to $1,600, even $1,500 an ounce. However, I would view a pullback in the price of gold bullion as an opportunity…an opportunity to buy more gold investments at lower prices. My investing in gold preference would be the stocks of junior and senior gold-producing companies.

I believe we are in a long-term bull market in gold that will eventually see the metal at $2,500, even $3,000 per ounce. I’ve had this opinion for years and I continue to view any price correction in the long-term bull market in gold as an opportunity.

Michael’s Personal Notes:

Should you follow Warren Buffett and make an investment in Bank of America Corporation (NYSE/BAC)?

Bank of America common stock has collapsed from $15.31 in January of this year to $7.91 today, a drop of 48%. The nation’s biggest bank was experiencing a vote of non-confidence from investors. In my opinion, it brought on Buffett as a big investor in the bank to show “a vote of confidence” in the stock and the bank.

But the average investor cannot get the deal Buffett received for his $5.0 billion. Buffett’s Berkshire Hathaway investment was in preferred stock of Bank of America. These preference shares will pay Berkshire Hathaway six percent per annum. An investor buying the common stock of Bank of America gets a dividend yield equal to less than one-tenth that.

As an inducement, Buffett can buy another 700 million common shares of  Bank of America at $7.14. The stock sits at $7.91 today. Buffett is already “in the money.” Regular investors will not be able to get this deal in the open market.

Finally, Bank of America can give Buffett back his $5.0 billion at any time…but they will have to pay a “goodbye fee” of $250 million to get rid of him.

Personally, I’m not a big fan of Bank of America stock. I believe the company has plenty of problems. It could take years to turn it around.

Buffett’s recent investment in Bank of America makes sense for him. The average investor can’t get the same deal Buffett did. And I notice Buffett didn’t buy any of the common shares.

Where the Market Stands; Where it’s Headed:

The stock market sits today at about the same place it started 2011. Investor and stock advisor sentiment is quite negative. Monetary stimulus continues to be expansive. The yields on stocks are attractive compared to government bond yields. These three factors alone provide a positive backdrop for stocks.

However, economic conditions are very fragile. Consumers, worried about the economy, are increasing their savings as opposed to spending. The depressed housing market continues to be a drag on the economy. Jobs are difficult to create in a country that has lost its manufacturing base.

The immediate-term market conditions remain favorable to stocks and that’s why I believe the bear market rally will bring stocks higher. However, the short-term to long-term outlook is quite negative, hence why I continue to believe that all we’ve really been experiencing since March 2009 is a rally within the confines of a general bear market.

What He Said:

“The proof the party is over in the U.S. housing market could not be clearer to me. The price action of the new-home-builder stocks is telling the true story—these stocks are falling in price daily (and the media is not picking it up). Those who will hurt the most when the air is finally let out of the housing market balloon will be those buyers that bought in late 2005. In fact, the latecomers to the U.S. housing market may end up looking like the latecomers to the tech-stock rally that ended so abruptly in 1999.” Michael Lombardi in PROFIT CONFIDENTIAL, March 1, 2006. Michael started warning about the crisis coming in the U.S. real estate market right at the peak of the boom, now widely believed to be 2005.