The Equedia Weekly Letter

Pimco's El-Erian Talks Equities & Rate Cuts
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An Expert's View of the Market         


With the Europeon debt crisis and China's recent rate cut weighing on investors' minds, what's next for the market?

Watch the video as PIMCO's Mohamed El-Erian, CEO & co-CIO of the world's largest bond fund, offers his view on equity market volatility, China's interest rate cut, and Ben Bernanke's recent remarks.

 


June 10, 2012
Dear Readers,

 

Investors have once again been duped.

Gold fell last week, while stocks rose.

The S&P 500 ended its best week in 2012. The strong gains came after the benchmark index fell more than 6 percent in May and dropped just below its 200-day moving average.

But why in the world is the stock market rising?

Was it the possible thought of QE?

Nope. Bernanke denied us of any immediate spending - yet the market continued to climb.

Was it the encouraging report that U.S. wholesale stockpiles grew twice as fast as they grew in March, signalling that businesses are ordering enough goods to lead to increased factory production and sales?

Nope. Stockpile growth largely depends on the spending habits of U.S. consumers and businesses. With little to no job creation and payrolls rising slower than the rate of inflation, where is the spending coming from?

(I suspect that it's coming from savings and further loose credit. That means it's all an unsustainable one-time increase. Yes, oil and gas prices have dropped but still remain high. Spending is not coming from income.  That's what is really scary behind the GDP numbers. More QE? Coming right up...)

Was it China's central bank announcing a surprise interest rate cut?

Nope. Because that means China's economy is slowing down. It was China's first rate cut since the 2008 crisis which means the world's economic engine may be preparing to announce some very weak data. Analysts are already forecasting China would deliver its weakest quarter of growth in three years in the second quarter at 7.9pc - the sixth straight quarter of slowing growth. They expected 2012 full-year expansion of 8.2pc, the weakest outcome for China since 1999.

So why in the heck is the market rising?

Uh Oh, Look Out

In March, I explained that stocks have been rising on historically low volumes:

"The one biggest concern scaring investors is the volume in trades that has been pushing the market higher. Trading at the New York Stock Exchange declined to the lowest level since 1999 last month, with the average volume over the 50 days ending Jan. 25 slowing to 838.4 million shares. The value of stocks changing hands dropped to $24.9 billion, a 50-day average not seen since at least 2005."  

When stocks rise on low volume, its fall could be disastrous.

While stocks had one of its best weeks, it also had one of its lowest volume weeks of the year. If that signals to you that the markets are moving back up on a new bull leg, you need to think twice.

It may sound shocking to you, but the rise in stocks and the downfall in gold was yet another clear shot of market manipulation by the powers running America. There are no buyers right now. So forget all the talk about a new bull leg.
There isn't one.

It's only a matter of time before everyone realises the market can only be propped up for so long. Stimulus can, and will, only ease the minds of investors for a brief period before it becomes mundane. And after one more round of QE, people will finally come to the realisation that their dollars and their currencies are losing value at an astonishing pace. That's why the Fed will wait until last minute to unleash its paper force.

A Giant Credit Bubble

The world is in one giant credit bubble sustained only by more credit.

Just ask your friends, your neighbours, your families, and your coworkers. I bet they all owe a lot of money - and not just money for their overpriced Canadian homes they were able to buy because of historically low interest rates, despite record high prices.

Most of these debts will never be repaid and yet  more debt and credit will flow. But don't stress yourself thinking you're the only one. The governments of the world are loaded with even more debt that will NEVER be repaid. It used to be millions. Then it turned into billions. And now sovereign debt is figured in the trillions.

How are these debts being repaid? With more debt...

What Does That Mean?

There's nothing we can do to fix the world's financial crisis. It will get a lot worse before it gets better.

There are only two likely simplified scenarios:
  1. We continue to print more money and inflate the heck out of all fiat currencies.
  2. We move to some sort of a gold standard.
The likelihood of scenario two is highly unlikely given that the world is still, and will continue to be, controlled by politicians and bankers.

In both scenarios gold prices will move up, as it has done without question in the past century. Citizens will soon realise that wealth is not something you can print. As a result they'll begin to hoard their gold, land, and other real tangible assets.

Every fiat currency since the Romans first began the practice in the first century has not only ended in devaluation but eventually in collapse. Not only did currencies fail, but the economies that housed them failed as well.

Is our modern civilization on the same path?

If you compare the fall of previous fiat currencies, they all have a similar cycle and consequence. In almost every case, so much money was printed that they became useless and lost nearly all of their value as serious inflation took over.

The fall of civilizations, economies, and currencies don't happen overnight. Some of these currencies failed within years, some within decades, and some within a century. While the US implemented fiat currency since the late 1800's, its current currency issued by the Fed (and no longer by the US) is just over 40 years old. How much longer do you think it will last?

While it may seem farfetched today, this point of failing fiat currencies will eventually make sense.

We're already seeing this in gold's slow and steady rise over the last ten years, right alongside our monetary base.

Slowly, but surely, gold will continue to rise. There will be a point where gold will show its force and turn speculative. While gold has been shunned by the mainstream media, psychology will reverse and everyone will be rushing to own gold. It's the only form of money that has been rising steadily for the last few hundred years. Can you say the same about the dollars in your wallet? Will it take another 100 years before people realise that the only thing fiat currencies do is lose value over time? The only thing gold has done over time is gain more value...

No wonder China continued to buy more gold in April, importing another 100 tons of physical gold. In the first four months of 2012 Chinese purchases have already increased by an unprecedented 782% over 2011.

The Chinese are the only ones with real money to spend. With the highest savings rate in the world, they are spending their money on gold and silver. I wouldn't even call it spending; I would call it saving or preserving wealth.

The Chinese have the strongest purchasing power and a labour shortage while America is a country riddled with debt and unemployment. Which side would you prefer?

Walking on a Tightrope

While QE and additional world stimulus packages have alleviated pressures for the time being, the truth is quietly lurking behind the scenes. Take a look at this chart from BofA Meryll Lynch's Global Research:

BofA Chart Gauging Market Fragility 
In the last year or so market fragility has soared, signaling even higher systemic risks than in the peak pre-Lehman era in 2008. The credit markets are clearly telling us that there is serious risk on the table.

Even after spending trillions of dollars, systematic risks across the board are just as high as they have ever been. Spain still needs a bailout. Greece is finished. Europe remains a mess. And Americans aren't the economic powerhouse they need to be.  

If we adjust for inflation, the real economy is actually in a contractionary state. We're 3 years into a recovery and we're growing at an anemic 1.88% rate while the per-capita income continues to shrink.

I had mentioned last week that we may see a bounce from the week prior:

"The stock market could bounce from Friday's low, but that won't signal we're in the clear. The real short term bottom would only be found if indeed another round of QE is announced, or the Greek mess is resolved. And I stress that it would be a near term bottom."

My thoughts haven't changed. Politicians are only delaying the inevitable.

I don't see a pretty week ahead. Let's see what Spain does first.

 

 

Until next week,
 

Ivan Lo

Equedia Weekly  

 

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Disclosure: I am long gold and silver through ETF's and bullion, as well as long both major and junior gold and silver companies - which means I am biased towards the sector. You can do the math. It's your money to invest and we don't share in your profits or your losses, so please take responsibility for doing your own due diligence. Remember, past performance is not indicative of future performance. Just because many of the companies in our previous Equedia Reports have done well, doesn't mean they all will.  

Featured News:

Balmoral Receives "Best Discovery Record" Award - Click to Read

Casey Research   

Is the Table Set for a Mania in Precious Metals?       

 

By Jeff Clark  

 

It may feel like I'm out of touch with the precious metals markets to broach the subject of a mania today, but I think the table is being set now for a huge move into gold and silver.

 

There are, however, very valid reasons to reasonably expect a mania in our sector. For one thing, manias have occurred many times before, but the main issue is that a mania in gold and gold stocks is the likely result of the absolute balloon in government debt, deficit spending, and money printing. Saying all that profligacy will go away without inflationary consequences seems na�ve or foolish. Inflation may not attract investors to gold and silver as much as force them to it.

 

Now, one could make the argument that any rush into gold and silver will be muted if no one has any savings, especially given that demographers say a quarter of the developed world will soon be retired. But even if individuals are wiped out, the world's money supply isn't getting any smaller, and all that cash has to go somewhere.

 

I wanted to look at cash levels among various investor groups to get a feel for what's out there, as well as how money supply compares to our industry. Data from some institutional investors are hard to come by, but below is a sliver of information about available cash levels. I compared the cash and short-term investments of S&P 500 corporations, along with M1, to gold and silver ETFs, coins, and equities. While the picture might be what you'd expect, the contrast is still rather striking.

Corporate Cash and M1 vs Gold and Silver
click to enlarge
Naturally, not all this money or even a big chunk of it will be used to buy GLD, Barrick, or American Eagles, but it's clear that if any significant fraction of the cash sloshing around the economy were to be used to buy gold, it would have a major impact on the price of gold - which would trigger the mania I fully expect. Let's take a quick look at what kind of impact our sector could experience if just a small amount of available funds were devoted to various forms of gold and silver...

 

 

More Casey Research Articles

 

> Is the Generational Divide in Technology Widening?

> Cashing In On Japan's Debt Conundrum?

> Myths and Realities of Returning to a Gold Standard 

> Video: Currency Wars - The Making of the Next Global Crisis

> Rick Rule: "Avoiding the Ugly in the Junior Resource Sector"  

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Balmoral Provides Northshore Property Update - Click to Read

Why I am Not Buying This Rally     

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The S&P 500 is 5% off its corrections lows this week, but Zacks' tatical trader Kevin Cook says he's not buying into this rally.

Watch the video to see why he believes the market is headed lower.

 

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More Zacks Videos:

> Growth and Income Stock Picks with Analyst Research on PPG Industries (PPG) and ViewPoint Financial Group (VPFG) Video - June 7, 2012 

> Aggressive Growth Stock Picks with Analyst Research on O'Reilly Automotive (ORLY) and Heartland Payment Systems (HPY) Video - June 6, 2012 

 > Value Stock Picks with analyst research on CNH Global (CNH) and Pioneer Drilling Company (PDC) - June 5, 2012 

> Roundtable Top Picks for the Week of June 4th, 2012 

> The Economy, Market and More 

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Except for the statements of historical fact, the information contained herein is of a forward-looking nature. Such forward-looking information involves known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievement of the Company to be materially different from any future results, performance or achievements expressed or implied by statements containing forward-looking information.

 

Although the Company has attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that statements containing forward looking information will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on statements containing forward looking information. Readers should review the risk factors set out in the Company's prospectus and the documents incorporated by reference.

 

Cautionary Note to U.S. Investors Concerning Estimates of Inferred Resources

 

This presentation uses the term "Inferred Resources". U.S. investors are advised that while this term is recognized and required by Canadian regulations, the Securities and Exchange Commission does not recognize it. "Inferred Resources" have a great amount of uncertainty as to their existence, and great uncertainty as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of "Inferred Resources" may not form the basis of feasibility or other economic studies. U.S. investors are also cautioned not to assume that all or any part of an "Inferred Mineral Resource" exists, or is economically or legally mineable.


In This Issue
Uh Oh, Look Out
Balmoral Receives "Best Discovery Record" Award
Is the Table Set for a Mania in Precious Metals?
Balmoral Provides Northshore Property Update
Why I am Not Buying This Rally
BNN Clip: The Secrets of ExxonMobil
Upload Your Own Videos
Wall Street Journal: Is Bernanke Testing Patience of Global Markets?
Equedia Tips- Markets Tab
Additional Features
Forward-Looking Statements
Get Featured in Equedia
This Week's Most Wanted
Equedia Watch: Companies Under Evalualtion

 

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Equedia 2012 Media Kit  

 


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