Sprott Asks Whether the Fed Is Just a Ponzi Scheme
December 30th, 2009 | Posted by goldHedge fund firm Sprott Asset Management sent out its December market commentary a while back and we wanted to make sure everyone has seen it because it’s quite a strong piece. It’s entitled, “Is It All Just a Ponzi Scheme?” in reference to the Fed. This piece comes after we learned that Sprott would be launching a physical gold trust for investors that will compete with the popular exchange traded fund, GLD. Sprott’s December commentary is also somewhat of an add-on from its October piece entitled, “Dead Government Walking.”The hedge fund’s viewpoints on the government and its actions have become quite clear.
You can also download the .pdf here.
We’ve been posting up other great market commentary from hedge funds such as Woodbine Capital with its piece Gold: The Anti-Goldilocks. Sprott is more bullish on precious metals as evidenced by its research, Gold: The Ultimate Triple-A Asset so as you can see it’s always interesting to check out the varying viewpoints amongst money managers. Sprott has clearly outlined its point of view and has positioned its portfolio accordingly, taking a defensive posture.
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Gold, Silver, U.S. Dollar: All Hovering Below Resistance Areas
December 30th, 2009 | Posted by goldLast week, and coming into this week we said the story in gold/silver vs. the US dollar would be a key marker. Thus far we have no resolution and with so little energy and volume in the markets – one should not expect any more clarity until the new year.
Let’s check in on the updated charts. First the US dollar (again, this chart is delayed by 1 day but the Dollar Index is currently just over $78, so a bit higher than Tuesday’s close). Recall we sold our UUP (dollar ETF) options (bought just before Thanksgiving) on that first run into the 200 day moving average to lock in just under 30% gains; which in retrospect was the perfect play. As we said then, we are more than happy to re-buy our long dollar exposure but this time around we want to see the dollar index clear resistance – in this case the 200 day moving average (i.e. over $78.50) – this looks like it could happen.
Next gold*, and silver* which we said last week were “dead cat bouncing” (apparently a term the gold bugs on Seeking Alpha took great exception to!). But as you can clearly see, after the first big sell-off, the cursory oversold bounce took place – right into resistance (20, 50 day moving averages) – and then a new sell-off has begun.
Until proven otherwise, the precious metal charts strike me as not bullish, and I could see more downside developing from here. Silver is actually back to recent lows so it is either about to form a “double bottom” from which it will begin a new run back up, or break to new intermediate lows – my guess would be the latter. I will stick with my comments from last week until the charts prove me wrong:.
I’d expect dead cat bounces in both metals perhaps next week (inversely, the dollar is due for a rest/consolidation at some point), but both have broken their 50 day moving averages, so until proven otherwise I’d expect them to pull back over the intermediate term, rebuild a new base, and then when the dollar weakens again, start a new move up. But that won’t be a 2009 event. For now, time is money and the tide has turned. If you believe in the absolute correlation between the dollar and precious metals, this type of break down in the metals should bode well for the dollar in the near term as well
*For graphical purposes I am using the Gold (GLD) and Silver (SLV) ETFs rather than the actual metal pricing as they are good mirrors, and are updated with 20 minute delay on the charts.
Disclosure: Long [very small amounts] of Ultra Silver, Powershares DB Gold Double Long in fund; no personal position
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Stocks on the Move: CareFusion, ICx, OSI Systems
December 30th, 2009 | Posted by stockDec. 30 (Bloomberg) — Shares of the following companies are having unusual moves in U.S. trading. Stock symbols are in parentheses and prices are as of 10 a.m. in New York.
Makers of security devices and biometric technologies gained after the Netherlands said it will start using full-body scanners for all U.S.-bound flights following a foiled bombing attempt on a Northwest Airlines plane to Detroit. ICx Technologies Inc. (ICXT) surged 13% to 7.14. OSI Systems Inc. (OSIS) advanced 9.7% to 27.50.
CareFusion Corp. (CFN) fell the most in the Standard & Poor’s 500 Index, sliding 2.5% to 25.24. The provider of health-care products and services said parent company Cardinal Health Inc. (CAH) may sell as many as 35.9 million shares in the unit.
China BAK Battery Inc. (CBAK) dropped 14% to 3.12 for the biggest retreat in Russell 2000 Index. Chief Financial Officer Tony Shen said in an interview that the unprofitable Chinese company hasn’t won any orders from Google Inc. (GOOG), denying speculation that drove the stock up 63% yesterday.
Kforce Inc. (KFRC) rose the most in Russell 2000 Index, adding 15% to 13.13. The recruitment firm said it was cleared to start working with the U.S. government again following a suspension.
Tessera Technologies Inc. (TSRA declined 10% to 21.41 for the biggest intraday loss since Oct. 30. The company lost a U.S. trade ruling in its efforts to get new licensing revenue from makers of computer-memory chips including Acer Inc. and Nanya Technology Corp.
Trico Marine Services Inc. (TRMA) sank 15% to 4.51 after dropping as much as 20%, the most intraday since May 11. The oilfield service provider said fourth-quarter earnings were hurt by weaker demand in the North Sea and low utilization of vessels.
To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net
Stock Picks: Apple, MGM Mirage
December 30th, 2009 | Posted by stock12-30-2009
Kaufman Bros. reiterates buy; raises estimates, price target
Kaufman Bros. analyst Shaw Wu said on Dec. 30 that he anticipates Apple Inc. will have a “blowout” December quarter despite “strong macroeconomic headwinds and ever-rising expectations” for the maker of the iPhone.
Wu said in a note that his checks indicate strength in all of the company’s three major product lines, but particularly in its iPhone business. He believes Apple could ship 9.5 million iPhones (vs. the consensus view of 8.8 million), a new quarterly record, beating its previous record of 7.4 million iPhones set last quarter. Wu also sees strong momentum in its Mac business driven by new widescreen iMacs and MacBooks, but is concerned that supply constraints on LED screens could limit upside; he kept his sales forecast at 2.9 million Macs (vs. the consensus view of 2.85 million). For iPods, Wu remains “comfortable with our aggressive forecast of 22 million units (consensus at 20 million).”
The analyst raised his estimates for December-quarter revenue and earnings per share (EPS) to $12.4 billion and $2.15, respectively, from $11.7 billion and $1.99. For fiscal 2010, Wu raised his forecasts to $44.4 billion in revenue and $7.40 in EPS, from $41.7 billion and $6.80. He also raised his 12-month price target to $253 from $235.
Oppenheimer maintains perform
A “reasonably successful” CityCenter phased opening in Las Vegas and a potential Macau initial public offering are good news for MGM Mirage, but the need for more capital weighs on the casino operator, analyst David Katz of Oppenheimer said on Dec. 30. In a client note, Katz said that MGM Mirage’s management anticipates CityCenter will report 2010 margins in the low 20 percent range, compared with his previous 12 percent estimate. Katz said the company’s margin forecast could be optimistic, but he raised his estimate for CityCenter’s earnings before interest, taxes, depreciation and amortization to $196 million from $136 million and increased the casino operator’s price target to $9 from $8.
While management is upbeat on CityCenter’s prospects, Katz feels the stock price already reflects this potential.
Katz said executives indicated MGM Mirage is looking into a possible Macau IPO. Peers Las Vegas Sands Corp. (LVS) and Wynn Resorts Ltd. (WYNN) both recently launched their own Macau IPOs.
SanDisk Corp. (SNDK)
Standard & Poor’s Equity Research reiterates hold; raises estimate, price target
S&P equity analyst Angelo Zino said in a Dec. 30 note that following comments last week from one of SanDisk’s peers, Micron (MU), he believes demand for NAND flash memory chips remains healthy. Zino said he thinks sales are being driven by higher demand for new smartphones as well as inventory replenishment.
“While we believe supply will remain at reasonable levels, we note that flash memory prices have fallen recently,” he wrote.
Zino kept his 2009 EPS estimate at $1.15, increased his 2010 view by 16 cents to $1.36, and initiated a 2011 forecast at $1.63. He also raised his 12-month price target price by $2 to $29.
Buckeye Partners, L.P. (BPL)
Stifel Nicolaus downgrades to hold from buy
Stifel Nicolaus analysts Selman Akyol and Justin Kinney lowered their recommendation on limited partnership units of Buckeye Partners on Dec. 30, saying that the units had exceeded their price objective. The analysts noted that the units are now trading at approximately $55.00, above their previous price target of $52.00. “[W]hile we continue to like the partnership’s assets, which predominantly generate fee and fee like income from refined products logistics, we believe the value is currently reflected in the units,” they wrote in a note.
“All said, while we see a solid base of cash flow to continue paying, and growing, the distribution we see limited catalysts for BPL units to outperform its peers,” they wrote.
The Decade’s Worst Mutual Funds
December 30th, 2009 | Posted by stock12-30-2009 (Bloomberg) — U.S. stock mutual funds with the biggest losses in the past 10 years, a list topped by Fidelity Growth Strategies and Vanguard U.S. Growth, were crushed by the market sell-off at the start of the decade and never recovered.
The Fidelity (FDEGX) fund fell 67 percent and Vanguard’s lost 50 percent, according to data from Morningstar Inc. (MORN) The 10 worst-performing diversified funds that still manage at least $1 billion tumbled an average of 43 percent in the decade through Dec. 28, about five times the decline of the Standard & Poor’s 500 Index, a benchmark for the biggest U.S. stocks.
The group’s performance underscores the lasting damage from the March 2000 to October 2002 bear market that followed the collapse of Internet stocks. Fidelity Growth Strategies, which oversees $1.93 billion, hadn’t recouped the 86 percent loss incurred during the technology bust when stocks started falling again in October 2007 amid the onset of the housing crisis.
“A lot of funds and fund companies suffered mightily and haven’t come back,” Geoff Bobroff, a mutual-fund consultant in East Greenwich, Rhode Island, said in a telephone interview.
The 10 worst funds all focused on shares of growth companies, so designated because their sales or earnings are rising faster than their industry’s or the overall market. The group fell 71 percent on average after the technology bubble deflated. That compared with the 47 percent decline by the S&P 500 index from March 24, 2000, to Oct. 9, 2002.
A bear market is typically defined as a decline of at least 20 percent from peak to trough.
The Internet debacle didn’t dampen investor enthusiasm for stocks. Equity mutual funds attracted $166 billion in 2003, roughly four times the cash that flowed into bond funds, data from Chicago-based Morningstar show.
Investors shunned stocks in favor of bonds following the second bear market of the decade, when the S&P 500 index fell 55 percent from Oct. 9, 2007, to March 9, 2009. The 10 worst funds dropped 51 percent in that period, according to data compiled by Bloomberg.
Bond funds attracted $329 billion in the first 11 months of 2009, compared with $3 billion for stocks funds, Morningstar found.
“The enormity of the disaster in 2008 turned people off to equities,” said Burton Greenwald, an independent fund consultant based in Philadelphia.
Mutual-fund companies, including Fidelity, Los Angeles-based Capital Group Cos. and Boston-based Putnam Investments, eliminated jobs as assets under management shrank in 2008 and early 2009.
The slump also triggered consolidation among money managers. Invesco Ltd., based in Atlanta, agreed to buy Morgan Stanley’s investment-management business in October. Minneapolis-based Ameriprise Financial Inc. said in September it would acquire the Columbia stock and bond funds from Charlotte, North Carolina-based Bank of America Corp. In June, New York-based BlackRock Inc. agreed to buy Barclays Global Investors from Barclays Plc in London.
Fidelity Growth Strategies had a portfolio “clustered in some of the most exciting parts of 1999′s technology driven market,” Morningstar wrote in an analyst’s note in December 1999.
The fund, originally called Fidelity Aggressive Growth, more than doubled in value in 1999, Morningstar data show. The manager who produced those results, Erin Sullivan, left Boston-based Fidelity Investments in February 2000 to run a hedge fund.
As technology shares fell during the next two and a half years, Robert Bertelson managed the fund.
“It was a classic case of a manager not changing his stripes,” said Jim Lowell, editor of Fidelityinvestor.com, a newsletter, in a telephone interview.
Bertelson, who currently manages the $4.03 billion Fidelity Independence Fund, faced “tremendous challenges” early in the decade, Sophie Launay, a Fidelity spokeswoman, said in an e-mail, because he took over the fund in 2000 at the peak of the market for aggressive growth stocks. Launay said Bertelson had a “solid long-term track record.”
The fund underperformed about three-fourths of its peers in the most recent five years, Morningstar data show. Fidelity Growth Strategies has been managed since 2005 by Steven Calhoun. It gained 41 percent in 2009, better than 73 percent of similar funds, Bloomberg data show.
Launay said Fidelity funds outperformed about two-thirds of their peers in the past 10 years.
Vanguard U.S. Growth underperformed rivals in 1999 because it owned less technology than its peers, Morningstar wrote in an August 2000 analyst’s note. Between August 1999 and August 2000, the fund boosted its technology holdings to 56 percent of the portfolio from 35 percent, according to the note.
The fund fell 70 percent during the market sell-off that ended in October 2002, Bloomberg data show. It now oversees $4 billion.
“The fund has suffered from lousy stock-picking; there’s no other answer,” said Daniel Wiener, editor of Independent Adviser for Vanguard Investors (FDEGX), a newsletter, in a telephone interview.
John Woerth, a spokesman for Vanguard Group Inc., said in an e-mail that the fund’s technology holdings early in the decade continues to “weigh on its long-term record.” The fund beat 56 percent of its peers over the past three years, Morningstar data show.
The fund has been managed for Vanguard since 2001 by AllianceBernstein Holding LP, a New York investment firm, Woerth said. William Blair & Co. of Chicago has run a portion of the fund since 2004.
John Meyers, a spokesman for AllianceBernstein, declined to comment. John Jostrand, who works on the fund for William Blair, and Tony Zimmer, a spokesman for the company, did not respond to e-mails and phone calls seeking comment.
Vanguard, based in Valley Forge, Pennsylvania, is the largest U.S. manager of stock and bond funds, with $1 trillion in assets, excluding money-market funds, Morningstar data show. Boston-based Fidelity manages $721 billion.
The following is a list of the 10 worst-performing U.S. diversified stock funds based on returns from Jan. 1, 2000 to Dec. 28, 2009:
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To contact the reporter on this story: Charles Stein in Boston at cstein4@bloomberg.net.
Options Trading Reaches Another Record
December 30th, 2009 | Posted by stock12-30-2009 (Bloomberg) — Investors locking in gains from the biggest stocks rally in seven decades pushed options trading in the U.S. to a seventh straight annual record.
The number of options on stocks, indexes and exchange-traded funds that changed hands in 2009 reached 3.59 billion contracts, topping the previous high of 3.58 billion set in 2008, Chicago-based Options Clearing Corp. said yesterday. OCC settles all transactions involving exchange-listed contracts.
Investors bought and sold more equity derivatives to protect their assets and bet on price swings as the Standard & Poor’s 500 Index posted the biggest rally since the 1930s, surging 66 percent since sinking to a 12-year low in March.
“We’ve seen a lot of people getting involved with options who weren’t before,” said Eugene Choe, head of Advanced Execution Services options sales at Credit Suisse Group AG in New York. “A lot of fund managers started hiring options traders, mostly the hedge funds.”
Options give the right though not the obligation to buy or sell a security at a set price and date.
The market expanded after the benchmark for U.S. equity derivatives prices posted a record annual decline. The VIX, as the Chicago Board Options Exchange Volatility Index is known, has tumbled 75 percent to 20.01 since soaring to an all-time high of 80.86 in November 2008. It measures the cost of using options as insurance against declines in the S&P 500.
While the number of options trades climbed to a record, the rate of annual growth slowed to less than 1 percent following the worst financial crisis since the Great Depression. After options volume peaked in 1987, the market took a decade to surpass that level again after derivatives were blamed in part for the stock market crash on Oct. 19, 1987, that drove the S&P 500 down 20 percent.
“Options were the scapegoat for the ’87 crash,” said Kevin Murphy, head of U.S. option electronic execution at Citigroup Inc. in New York. “Now, not only are options not to blame, they were held up as something that, if you used them properly, you could have spared some of your loss.”
The S&P 500 lost 38 percent last year, the most since 1937.
Options began trading in the U.S. on an exchange when the CBOE started on April 26, 1973, when 911 calls were listed on 16 stocks, according to the exchange’s Web site. There were 1.1 million contracts traded that year. Put trading was introduced in 1977. Annual options volume first exceeded 100 million contracts in 1981. Since 1997, volume has increased by at least 7.5 percent a year except 2002, when it fell 0.1 percent. Trading topped 1 billion in 2004 and 2 billion in 2006.
“The level of acceptance of options as a legitimate, non-speculative vehicle to generate income and hedge has really ramped up,” said Randy Frederick, Austin, Texas-based director of trading and derivatives at Charles Schwab & Co., the largest independent U.S. brokerage by client assets. “What I hear most from customers is, ‘How can I stay in the market when it gets rocky and reduce my risk without closing my positions?’ And there are a lot of options strategies you can use to do that.”
To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.
Renewed Terrorism Threat Rattles Airlines
December 30th, 2009 | Posted by stock
12-30-2009 After one of the worst years in their history, U.S. airlines were actually looking forward to 2010. At least until a Christmas Day attempt to blow up a jet.
The incident raised concerns among some people that terrorism fears could derail the airlines’ nascent recovery, as security procedures make international travel burdensome to the point that corporate fliers take a pass on some trips. Investors sold airline stocks, ending a recent upswing that had the industry outpacing the rest of the stock market. Since the Dec. 25 incident in Detroit, stocks for most of the majors have dropped: 5.7% for American’s parent; 5.3% for Delta (DAL), whose jumbo jet was targeted; 4.7% for United (UAUA); and 2.3% for Southwest (LUV).
But, despite legitimate security concerns, airline experts said worries about the incident’s effect on the airline industry may be overhyped. Of course, anything that discourages air travel is bad news for North American airlines, which are expected to lose nearly $3 billion in 2009, according to the International Air Transport Assn. That’s atop $55 billion in losses for U.S. carriers alone the previous seven years.
Airline executives had been sounding enthusiastic about the new year. “While we still have a long ways to go, our revenue results are improving as overall demand strengthens and, importantly, business travelers return,” United Airlines Chief Financial Officer Kathryn Mikells said Dec. 9 at an investor conference in New York. “We believe we will see improved conditions,” Delta President Edward Bastian told investors Dec. 15.
This optimism has prompted many analysts to predict U.S. airlines could return to profitability in 2010. In the past nine months, Delta shares had gained 90%, while stock in United parent UAL Corp. and American Airlines parent AMR Corp. (AMR) more than doubled. “We were actually getting to be more hopeful [that] we were going to see increases in business traffic,” says Jesup & Lamont transportation analyst Helane Becker, who considers the terror incident a potential problem for revenues.
Moreover, most airlines are burdened with heavy debt these days as they dealt with a sharp spike in fuel prices in 2008 and a severe recession. That debt load means that even a slight drop in 2010 air travel demand and revenue could wipe out a large chunk of airline profits. For example, Vaughn Cordle, chief analyst at research firm Airline Forecasts in Washington, D.C., estimates that the holiday terror attempt could dampen 2010 revenue by a mere 0.25% to 0.5% for the top 10 airlines. However, a sales decline even that small could translate into a 10% to 20% hit to those airlines’ net earnings, he estimates.
But airline experts and executives say it’s important not to exaggerate the effects of terrorism fears. In the past, “these incidents have not had significant impacts on domestic travel,” says David Cush, chief executive of Virgin America and a former executive at American Airlines, in an interview with Bloomberg BusinessWeek.
The key, Cush said, is whether new security procedures make traveling so difficult that consumers prefer to stay home. “We need to have very measured responses to this, so that we don’t make travel so arduous and burdensome that it [discourages] travel,” Cush said. So far, he says, the Transportation Security Administration has displayed a “measured” response. (Virgin America has no international flights, which are currently subject to tighter security requirements than domestic flights.)
Since 2001, travelers have gotten used to terrorism warnings and annoying security procedures, says Craig Hodges, portfolio manager of the Hodges Fund (HDPMX), which owns airline stocks. “Everyone has grown to accept it,” he says. After this last incident, “there may be a short-term blip,” Hodges says. But, assuming no further incidents occur, “everything will be back to normal in a few weeks.”
Other issues could have a far more significant effect on airline bottom lines. According to Cordle’s estimates, airlines squeezed about $19 billion in annual concessions from labor unions earlier this decade. Now many of those contracts are up for negotiation in 2010, including those at United, American Airlines, Continental Airlines (CAL), and US Airways (LCC). And many groups of workers are expected to demand large raises. Labor and fuel bills combined make up more than half of airlines’ annual costs. That means airlines also watch energy markets carefully. Last year’s spike in oil prices cost many airlines dearly.
Airlines should also worry about higher taxes or more onerous government regulations, says Morningstar (MORN) analyst Basili Alukos. By itself, a spike in fuel prices, labor costs, or taxes could dash an airline’s dreams of 2010 profitability.
Luckily, there are a few positive trends for this industry. Airlines have slashed the number of flights, ending cutthroat price competition on many routes. “The airlines have done such a good job reducing capacity,” Alukos says. “That’s kept pricing higher.” Airlines have also found new ways to wring revenue from customers, from baggage fees to charging for food, drinks, onboard movies, and in-flight Internet. “The airlines have added a tremendous amount of new revenue sources that weren’t there a few years ago,” Hodges says.
The prospect of a better economic environment in 2010 and 2011 means airlines could reap significant financial benefits from higher ticket prices and new passenger fees. “When the economy [improves] I think the airlines are going to thrive,” says Hodges, whose funds own shares of Continental, Delta, and Southwest. Yet others warn that the U.S. airline business remains highly unpredictable, historically a graveyard for capital. Serious long-term challenges mean that airline stocks are popular trading vehicles, but rarely buy-and-hold investments. “They’re not fit for long-term investment,” says Cordle.
It’s difficult, if not impossible, to predict the direction of energy markets, the economy’s pace, future terror threats, or the outcome of labor negotiations. As a horrible year for the industry ends and hopes rise for 2010, airline executives must try to do all four at once.
Steverman is a reporter for BusinessWeek’s Investing channel.
December 30th, 2009 | Posted by innovVisitors touring Zappos.com’s suburban Las Vegas headquarters can see Chief Executive Anthony C. “Tony” Hsieh waving from his cubicle or get their photos taken in goofy, mullet-shaped wigs. On the tour, which the online shoe retailer offers 16 times a week, staffers blow horns and ring cowbells to greet the guests, who move among the aisles in groups of 20, trying to get a handle on the company’s unique culture. “The original idea was to add a little fun,” Hsieh explains. Then it all escalated “as the next aisle said, ‘We can do it better.’ ”
Zappos already knows how to sell shoes. Now it’s hoping to profit from people’s fascination with its friendly, antics-filled business model. Last summer, the company began holding two-day, $4,000 seminars on how to recreate the essence of its corporate culture. At the third such session, last October, the 25 attendees included an executive from the Girl Scouts, some competing e-tailers, and an entrepreneur from Scotland—a market Zappos doesn’t even serve. In coming weeks the company will also relaunch Zappos Insights, a Web site offering management videos and tips from staffers at a cost of $39.95 a month.
The goal behind these activities is to build more buzz around the Zappos brand and its extreme customer service. Hsieh, 36, is an avid consumer of management tomes. He has 1.6 million followers on Twitter—more than either CBS News or the NFL—and he regales these fans with inspirational quotes, riffs on the news, and whatever else is on his mind. In the October seminar, which will be repeated once every quarter, Hsieh, the chief financial officer, and two dozen other staffers shared tips on hiring, compensation, customer care, and creating the right work environment.
One big Zappos fan is Amazon.com (AMZN) founder Jeffrey P. Bezos. On Nov. 2, Amazon completed its purchase of Zappos for shares worth $1.2 billion.
There’s certainly much for students of management theory to try on at Zappos. For example, pay for call-center operators starts at a modest $11 an hour, and there are no bonuses or 401(k) matching contributions because Hsieh believes the most productive employees work for the psychic gratification in helping others. Customer service reps are given plenty of freedom. They may chat for hours with customers, write thank-you notes, send flowers, and even direct shoppers to rival Web sites if an item is out of stock. In a tough year for retail, sales are up by double digits.
Zappos rep Michelle Robles recently showed a reporter how the approach works. She offers coupons and free shipping to one unhappy customer while grabbing a returned pair of shearling boots for another. Robles knows her top priority is to establish an emotional connection. More than 95% of Zappos’ transactions take place over the Web, so each actual phone call is a special opportunity. “They may only call once in their life, but that is our chance to wow them,” Hsieh says.
A Zappos seminar last July impressed David Brautigan, who runs a family heating and air-conditioning repair business. It prompted him to fire 12 employees who were “just not being nice,” while rewarding those who remain with such perks as sky diving trips. “The nicer we are to people,” he says, “better things are happening.” Hsieh appears pleased to spread that message: “Sharing is how we build our brand.”
December 29th, 2009 | Posted by goldThe ad pages in my local newspaper have been outnumbering the story pages for weeks. Retailers who missed getting your holiday shopping dollars are now hoping that the Sunday ads will draw you in for Boxing-Day-Plus-Two savings on leftovers.
There’s a second chance being offered to would-be gold buyers, too. Some investors who watched gold race past $1,200 held off purchasing as they waited for a price dip. Now that gold’s heeled over, they’re wondering which price level’s going to be the turnaround point for another run-up.
We looked at this question from an open interest perspective in mid-December (“When Will The Gold Froth Dissipate?“).
COMEX/NYMEX Gold (Feb. ’10)
February gold is dawdling around the $1,100 mark now, seemingly ready to take a breather from its nearly monthlong swoon.
Some bulls, however, are waiting for a full 50 percent retracement of the contract’s July-December rally as a buy-in point. That’s $1,068 for the February contract. A number of traders, too, are selling puts struck at $1,070 as a way to capture a sale price on gold futures.
Here’s the deal: Puts, as you may know, bestow the owner with the right, but not the obligation, to sell gold futures at the strike price. For this right, the put buyer pays cash to the option’s seller. The seller, in consideration of the cash premium received, undertakes the obligation to buy futures at the strike price if, and when, the put buyer exercises his or her option.
Now, it’s likely the put owner will only exercise the option if the underlying futures’ price dips below the strike price. The economic advantage for “putting” gold futures to the option seller is equal to the difference between the strike price and the current market price of futures.
Think about those $1,070-struck puts. Put owners would only want to exercise (sell futures) if February gold’s below $1,070. The farther below the strike February gold declines, the greater the economic gain upon exercise.
For the option grantor, it’s pain, not gain, that increases with a decline in gold’s price since he or she would be obliged to buy futures at the strike price.
But if you wanted to be a gold buyer on a dip to the 50 percent retracement level (near $1,070), that’s exactly the kind of risk you’d be taking. The only difference between placing a buy limit order under the market at $1,068 and selling puts struck at $1,070 is the premium you receive for selling the option.
As gold closed out pre-holiday trading, the $1,070-struck put’s premium was $14.30 an ounce. That means your effective gold futures purchase price would be $1,055.70 ($1,070 – $14.30) upon exercise.
Is that a good sale price for gold? It certainly is compared with $1,100.
What if February gold doesn’t dip below $1,070 after selling the put? What then? Well, the same that would happen with a resting buy limit order at $1,070. Nothing.
It’s not likely the put holder would want to exercise the option if February gold’s trading above the strike price. There’s only economic disadvantage in that since he or she would end up short futures.
The good news for the option grantor is that he/she gets to keep the premium. If February gold is at $1,100, for example, when the put expires, you can use the retained premium to lower the purchase price – or margin requirement – of the then-active gold futures by $1,430.
You can use this same approach with ETFs on gold bullion. The 50 percent retracement level for the SPDR Gold Trust Shares (NYSE Arca: GLD) is just above $104. With shares of the grantor trust trading around the $108 level now, the premium for a $104 put is about $2.06 a share.
The Market Vectors Gold Miners ETF (NYSE Arca: GDX), now trading with a $46 handle, has already rebounded from a test of its 50-retracement level around $44.80.
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‘We’re on the Path for Fireworks in 2010′
December 29th, 2009 | Posted by goldMany commentators have over the past few days churned out lists of 2010 predictions. Although never one to produce best and worst lists at the turn of the year, Richard Russell, 85-year-old doyen of newsletter writers and author of the Dow Theory Letters, did express a major concern, as quoted below:
I’m thinking that we’re on the path for fireworks in 2010. The reason I say that is because the federal deficits are running into the trillions of dollars. The roll-over of debt coming up in the next two years defies comprehension. For instance, in the next two years the U.S. must roll over $2.5 trillion. Worldwide, banks during the coming two years will have to roll over $7 trillion. On top of that commercial real estate in the U.S. has $750 billion to roll over.
Whether all this debt can be successfully rolled over is doubtful, but one thing is clear – interest rates will go up. This will have an immediate impact on housing. Nobody can negotiate a mortgage now – and worse, nobody has the money to buy a house for cash.
In the face of the deflationary events described above, the Fed will have to create a massive torrent of money. This should be highly inflationary – on top of the forces of deflation and semi-depression. Thus the base will be set for an inflationary depression, during which time the very viability of the dollar will come under suspicion.
Since the dollar makes up a part of almost every nation’s reserves, the worth of every fiat currency will come into question. There will be a frantic search for a currency that will preserve the purchasing power of one’s wealth and assets. The money that can do that is gold. Consequently we may see a total panic for physical gold. Secondary beneficiaries will be silver and platinum, which may be ‘reclassified’ as monetary metals.
Asia’s central banks seem have taken this message to heart and have started to diversify their foreign-exchange reserves by buying gold. In the video clip below, Wall Street Journal economics reporter Alex Frangos speaks to the Heard on the Street Asia editor Mohammed Hadi about the potential demand for the yellow metal.
Source: The Wall Street Journal, December 28, 2009.
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