Opportunity in Overvaluation

The world changes fast. Fifteen years ago the energy future of U.S. was bleak as it appeared the world was going to be short of energy: Stateside conventional natural gas production was in trouble along with peak oil. But markets work: Horizontal drilling combined with hydraulic fracking, while creating a glut devastating to the producers, has been remarkably outstanding for the rest of society. “The United States is about to begin a new era as a net energy exporter…The change will occur in 2020, according to the U.S. Energy Information Administration’s (EIA) Annual Energy Outlook 2019 (AEO2019), released in January 2019. The country will maintain that status through 2050, AEO2019 says.” SME

At some point we’ll want to revisit the energy sector as investors, and owning the lowest cost producer(s) in the lowest cost basin(s) would provide the best risk adjusted returns. AAPG. However, be aware “Analysts believe that 2018 will go down as the best year for internal combustion vehicle sales ever, predicting a downturn in demand for the mode of propulsion starting in 2019.” The Drive

Meanwhile, it’s the credit bubble which will tell the tale. Everything you could possible want to know and more about the U.S. federal deficit in chart form from The Manhattan Institute.  Alasdair Macleod asks if you got gold?

“…MMT’s central tenets will become increasingly influential among the coming generation of voters and investors.” Popular Delusions

Grant’s: “Mattel creditors are lending to a company already loaded with leverage, as net debt of $3.2 billion stands at 7.7 times consensus 2019 adjusted Ebitda. Operating income of $125 million in the 12 months ended Sept. 30 failed to cover the $190 million in interest expense incurred over that period.” How does this end well?

Generally speaking, asset prices are outrageous: The Corporate Share Count, Valuations, and Trend by Steve Blumenthal.

Today’s narrow market favors growth over value to an extreme, yet, “By steadily rebalancing against the market’s most extravagant bets, RAFI strategies are positioned to recoup accumulated shortfall at the cycle’s turn, delivering meaningful long-term value-add.” Research Affiliates

‘Stock pickers are now feeling like an endangered species. Just one-tenth of the US equity market’s trading volumes now comes from fundamental stock investors, with most of the rest coming from index derivatives and passive funds.’ FT

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Institutional Investor: “Passive investors may unwittingly be taking a huge active bet on the most overvalued sector of the market, according to new research.” At this time Active Managers Just Can’t Win the Loser’s Game by John Authors. Meanwhile, “(F)unds are dumping stock so they can qualify as ESG compliant for 2020. It’s a bloodbath out there.” Kruppy nails the opportunity.

“When I first entered the securities industry in 1979 (yikes!), paper assets were very cheap, and about to get cheaper, while hard assets were quite pricy and poised to get even pricier. It was a great time to be gradually shifting out of oil, gold, silver, copper, farmland, et al, and be moving into stocks and bonds. Of course, almost no one wanted to do so. Today, the exact opposite is true—buying and holding a passive balanced portfolio of US stocks and bonds—heavily tilted toward stocks these days—is assumed to be all an investor needs to do to generate superior returns. Based on the way the economy and politics are trending in the US these days, that’s likely to be just as return-crushing as bailing on stocks and bonds was forty years ago.” Evergreen Gavekal

Evergreen Gavekal has commentary on the MLP’s for investors searching for yield.

“An important ratio of commodity versus equity valuations just reached a fresh 50-year low resembling two prior significant cyclical US stock market peaks in 1972 and 2000.” Crescat Capital

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In spite of the poor stock market returns expected over the next decade, many are the opportunities.

Is it really December? The Independent Stock Analysis portfolio begins 1-1-2020.

Navigating the Inflation-Deflation Paradigm Is Exasperating

“Markets breaking out to new highs. But is the breakout a fake out?” Northman Trader

Internally the market lacks uptrends with a sector participation problem. Sentiment Trader

A valuation update and perspective from Jill Mislinski. Meanwhile, “The link between starting valuations and subsequent returns is powerful” though “Valuations levels are not useful for timing market tops and bottoms.” Research Affiliates

“The S&P has become totally detached from profits…” Marketwatch

“The US gross national debt – the sum of all Treasury securities outstanding – passed another illustrious milestone, $23.01 trillion…when recession hits…The federal debt will jump by $2.5 trillion or more in a 12-month period.” Wolf Street

Washington Post: Unemployment is climbing in key swing states, including Michigan and Wisconsin. “If the American consumer is Atlas — holding up “the greatest economy ever” — his legs are weakening under the strain.” 13D Research

“The New York Fed Staff Nowcast stand at…0.9% for 2019:Q4.” Woo nellie. New York Fed

“All bets are off if and when the unemployment rate begins to increase.” Evergreen Gavekal

We are repeatedly asked, what is the weak link that will bring the U.S. economy down? “Although there are many possibilities, our vote right now is corporate debt.” 13D Research

“America’s largest public companies (EPS) will decline year-over-year during the three-month period…they’re managing to cut costs without cutting employment.” Marketwatch

The short Gold Chartbook is still 70 pages.

“An awful lot of money is in stocks that probably doesn’t really want to be there, that was manipulated into that risk position because the Federal Reserve’s adherence to ultra-low rate policies has forced interest rates down to levels on which even people with substantial savings can’t live.” Horizon Kinetics

Chris Martenson: “Through history, the balance has swung recklessly — almost chaotically — between inflation and deflation. Another such phase transition approaches.  These moments are billed as periods of wealth destruction, but they actually aren’t.  Instead, they are periods of wealth transfers. Independent Stock Analysis will attempt to be ready.

Navigating the coming inflation-deflation paradigm has been and will be the difficult part. A crack up boom may well occur in equities. The New Bull Market by Callum Thomas

“It may be time to replace bonds with gold.” Goldhub

Larry Benedict: “(S)tep one towards having trading discipline is finding someone successful to emulate, step two is finding the specific thing you’re good at, and becoming an expert at it…When people tell you they have a portfolio of 40-odd stocks, that’s dangerous to me… How could someone look at 40 stocks every day or week and have a broad range of exceptional knowledge of each and every one? Impossible…I’d say it’s wise to become an expert on just a handful of stocks…around 5-10.”

When picking stocks, run, don’t walk, away from stock based compensation. Ben Hunt

The Independent Stock Analysis portfolio will be a focus portfolio of 10 stocks. We begin January 1, 2020.

The Environment and the ISA Portfolio

Your dear editor would prefer to spend his time evaluating the common stock of wonderful businesses which contain moats (Vaneck). Instead, the outrageous imbalances and the inevitable implosion seem to see most of our attention. The timing part is hard.

Stateside the Main Street economy continues to plow forward as evidenced by the strong and tight labor market. Garbage men until recently had a $3500 signing bonus in my area, and these are jobs which support a family. Recent headlines indicate the U.S. consumer is the last man propping up the world economy..

But globally: “Global manufacturing and construction sectors have already entered a downturn; the service sector is all that now stands between the economy and a full-blown recession.” Reuters

Closer to home, it’s the Worst Weakness Since Last Recession. Also, What Just Happened Also Occurred Before The Last 7 U.S. Recessions. Reason To Worry? Is recession coming: “Yes, but not just yet.” say John Mauldin.

The New York Fed “model puts the odds of a recession in the next 12 months at 34.8%, which, as Colas notes, is close to where the same model sat in September 2007, when it was at 34.6%. Still, it’s an improvement from August, when the model read 37.9%, he noted.” Barons

“Given the incremental debt accumulation that has occurred as compared to the accumulation before those five prior episodes, financial conditions have more than likely already tightened enough to induce a recession.” Michael Lebowitz

“The riskiest of junk bonds are seeing some selling pressure.” Jason Goepfert. More junk bond commentary by Mike “Mish” Shedlock. A junk bond market warning from Sentiment Trader. Jim Grant walks us thought the farce of a 100 year bond yielding 0.72% as only he can.

The demographic bulge, wealth inequality and information access will shape the world going forward. Morgan Housel

At this point in time, the precious metal complex is the favorite of Independent Stock Analysis. Gold in the Age of Eroding Trust is 340 pages of research. Take a day and read it. The PM’s are coming out of a bear market, yet remarkably “the average annual performance of spot gold measured in the world’s nine leading fiat currencies has been positive in 17 of the past 19 years (Figure 1).” Sprott

BANG: Why The Gold Miners Have Only Just Begun To Shine says Jesse Felder

What does the debt end game look like: “I believe we find a way to monetize the debt. We are headed for a “debt jubilee” of some form.” says Steve Blumenthal.

“You see, advocates of MMT insist that because fiat currency is ultimately a creation of the state, governments can and should print as much of it as needed to fund massive public works, guarantee government jobs for the unemployed and much more. And since a government can never run out of money, the theory says, it can never default on its debts. Deficits are meaningless. Anyone who’s studied macroeconomics knows that unfettered money printing on this scale is a recipe for runaway hyperinflation.” Frank Holmes

Meanwhile, the stock market just had The Best Ten Years Ever. Well, yea: “The Crestmont P/E of 32.1 is 124% above its average (arithmetic mean) and at the 99th percentile of this fourteen-plus-decade series. We’ve recently highlighted a couple more level-driven periods in this chart: the current rally, which started in early 2014, and the two months in 1929 with P/E above the 25 level. Note the current period is within the same neighborhood as both the tech bubble and the 1929 periods, all with P/E above 25 and is certainly in the zone of “irrational exuberance”. Jill Mislinski

“…as the debt bubble unwinds and the market cycle flips, gold and other hard assets might be the best protective options for investors.” Well done by Evergreen Gavekal.

“Only when debt and derivatives have imploded…you can swap your gold for real assets like land, income producing property or sound businesses at bargain prices, this would be a serious opportunity. History is full of examples of people who used their gold to pick up absolute bargains in periods of economic distress and hyperinflation.” Egon von Greyerz “When the time is right, investors with bigger gold holdings will be able to buy valuable assets with their gold for a fraction of what they cost before the crisis. Price reductions of 90-95% are not uncommon in these periods…”

“Corporate Profits are Overstated and What It Means for Investors” by another early 20th century pen name, Jesse Livermore.

Our cornerstone precious metal investment did what they do this summer, purchasing mineral title counter cyclically from a distressed seller in a world class mineral deposit at the top of the capital structure.

Navigating the deflation, then inflation will be the key when things fall apart.

The company’s which move good by sea are interesting as Shipping Is All About Upside Leverage says Kruppy. He also likes Altisource is a default mortgage servicer as way to invest in difficult times.

I have a keen eye on the beaten down, low cost Marcellus natural gas producers. The survivors will be home runs. I’ll watch as their quarterly results are reported over next several weeks. Not yet, still preparing. Note this commentary from Sailing Stone. Thoughts on Cabot at Insider Monkey.

The Goehring & Rozencwajg Q2 Natural Resource Market Commentary.

The significant and provoking reading provided must suffice readers until Thanksgiving. What is the maximum precious metal exposure and still be prudent? How much cash can an investor handle? Is it okay to have a significant watch list and own zero of the shares of any of them? Would you tell my mother if I argued for put option exposure? The ISA portfolio begins January 1, 2020.

Positioning

“The average person living in the U.S. has never had it so good, by any number of measures” say Scott Grannis.

How the Stealth Deregulation Boom is Driving this Economy. Cabot Wealth

The problem remains the foundation of sand: Fiscal recklessness including pensions and student loans et all.

“The May Flash Markit PMI reading was terrible as it is consistent with just 1.2% GDP growth…The Markit PMI flash reading implies rising risks of a recession occurring as early as this year.” UPFINA

“The investment implications of a protracted trade war are still playing out” and they aren’t good. Scott Minerd

Many are the reasons Why a 60-65% Market Loss Would Be Run-Of-The-Mill.

“”Instead, they decided to spend a fortune buying back stock at much higher prices than where it’s currently trading,” the “Mad Money” host said. “In retrospect, they might as well have set that money on fire.” Bed Bath & Beyond embarked on an aggressive buyback program in recent years, but the stock is down nearly 80% from February 2015.” Indeed, Bed Bath & Beyond spent twice it’s current market cap on buybacks. Look for many more of those stories in the years ahead.

“Bond performance since 1981 is anything but normal. Bonds provided zero inflation-adjusted returns from 1926 to 1981. The performance streak since 1981 has created two unrealistic expectations…” Bonds are no place to hide, via Movement Capital. Further, U.S. Recession Would Spur ‘Massive’ Corporate Bond Losses at Bloomberg.

“Hedging is typically expensive and shouldn’t be treated as a free lunch to capture stock market upside with less downside.” Movement Capital

Policy response outcomes from Ray Dalio.

“In my view, global risk is now at an extreme which clearly means that wealth protection should also be extreme.” says Egon von Greyerz. “The 2007-9 crisis was only a rehearsal for what we are to see next” from MOVES IN GOLD & SILVER WILL BE 1970s ON STILTS

Copper Well Positioned to Lead the Next Resource Cycle

The offshore drilling company’s are in depression, and most of the industry looks to go bankrupt. Bassoe Offshore. I’ve become interested in the industry. I think I’ve chosen my horse. But it’s still too early. Stay tuned.

“In just 20 years, the number of people going through their “S-Curve” period of intense commodity demand growth has jumped from 700 million to over four billion. Never in history have so many people all gone through their “S-Curve Tipping Point” simultaneously. The result is that global demand for raw materials such as oil, natural gas, copper, and proteins will continue to surprise to the upside”. Goehring & Rozencwajg

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This holiday weekend I read, among other things, The Greatest Trade Ever by the WSJ’s Gregory Zuckerman chronicalling John Paulson’s coup.

How does 1/3rd PM exposure, 1/3 the favorite stocks, 1/3 cash sound? Our next post will be around the July 4 holiday. The ISA portfolio begins 1-1-2020.

Roadmap to recession, or You Own Too Much Common Stock

A 460 point decline in the DJIA still gives me sticker shock, for back in the day that was a big move. Yesterday the S&P 500 fell 1.9%. Such ought not be a big deal. When you checked your portfolio…did you get a sick in your stomach feeling? If so, you own way too much common stock.

At Independent Stock Analysis we operate under theory that the financial system was going to implode during the financial crisis and Great Recession from a decade ago. The imbalances were monstrous and a cleansing needed to occur. The crises would have been a painful depression had the government and FED not acted decisively. Had the depression been allowed to run it’s course, the event would now be long in the rear view mirror and with only scars preventing it from being a forgotten depression.

Instead, the world doubled down on the wrong prescription and is moving toward Modern Monetary Madness. In fact, when the next recession occurs, the world may well go down that rabbit hole, which would be more painful than the proverbial depression passed over a decade ago. Mainstream Business Week gives an explanation.

Ten years into an economic expansion ought to see government revenue surplus. Instead the U.S. Posts Largest Ever Monthly Budget (Bloomberg): “The budget deficit as a share of gross domestic product is expected to widen to 5.1 percent this year, up from 3.8 percent a year ago, according to projections from the White House Office of Management and Budget. The shortfall is expected to be 4.9 percent of GDP in 2020, and further narrow every year through 2024, according to the estimates.” There will be no tiny narrowing to the outrageousness, but instead an explosion.

Hearken back to the last crisis: Do you remember wishing you were positioned differently as the disaster unfolded? That the available opportunities were spectacular…

…the idea is the same, though the playbook this time is different. A decade ago the question was ‘shall economic deflation or inflation occur?’ Today’s playbook is to be in a combination of cash and gold, and in the years ahead the first the cash converting into shares of your favorite company’s at distressed prices, then the gold. A kind of dollar cost averaging. Over the medium term, this time we know it’ll be inflation as money is printed 10 trillion at a time.

The timing has everything to do with recession: “Recession fears have increased but first quarter growth weakness could be short-lived, as has often been the case with first quarters. We don’t see a recession in the near term, but believe trade policy remains a key factor in the span between now and the next recession.” Schwab

The Roadmap to recession makes a remarkably clear case. Nordea

In the chatter yesterday: An Old Recession Boogeyman—the Inverted Yield Curve—Returns, and It’s Spooking Some Investors. Fortune

Meanwhile, The Retirement Crisis Is Worse Than You Think.

“Global equity markets peaked in January 2018 while US markets peaked in September 2018…We are confident that was only the beginning of a downturn in asset prices from record global leverage and central-bank-driven asset bubbles for this cycle. US asset bubbles only just began to burst at the end of last year as one can see in the chart below.” Crescat CapitalA

A Different Way to Look At Market Cycles by Lance Roberts.

Valuation Determines Return says John Mauldin and here is part 2.

To desperately seek income, as Jeff Saut suggests, will end badly. This recommended strategy is the equivalent to writing naked puts. At the wrong time. Nevermind that in a bull market the covered call strategy sees the investors best stocks called away.

In Ground Rules of Existence John Hussman shares his compelling playbook.

“Fortunately, we believe there are things worth owning. First, we are excited about T-bills at this stage of the cycle. In addition to protecting capital, T-bills are very liquid, provide a competitive yield relative to equities, and allow investors to act decisively when future opportunities return. Second, as it relates to potential equity purchases, we are very attracted to businesses with strong balance sheets” Palm Valley. So, cash and a very small investment universe; we will be talking about this later in the year.

How to position? Cash. And Gold – Preparing for the next move by Alasdair Macleod.

Buy Gold, Sell Stocks Is the ‘Trade of Century’

There is a lot here to ponder. As I have only begun to get back in the saddle, a question to consider: How would you like to be positioned when outstanding opportunity arrives? I am bursting with things to say in the months ahead You know where I stand: You own way too much common stock. It will likely be late April before I post again. Subscribe by email to Independent Stock Analysis to avoid missing the next post.

Triumphant Return

No one has been more out of step with asset markets this decade than me.

As Warren Buffett recently said, “Prices are sky-high for businesses possessing decent long-term prospects.” (The Felder Report). Unfortunately that’s not a good environment for this fellow.

Been wrong for long, yet I’m still in the “There is no bull market without central bank intervention or jawboning” camp. (Northman Trader).

Absent recession, oil looks good. (Goehring & Rozencwajg) This decade U.S. oil & gas production boomed yet the sector has underperformed to near generational lows relative to the whole stock market. And the sector may still offer precious little value. We’ll discuss this in the future.

Copper looks better. (Goehring & Rozencwajg). We’ll discuss this in the future.

The move to 5G in wireless is a big deal. (Gavekal).

The next decade, the 2020’s, I expect to be filled with harrowing opportunity born in upheaval. (Lance Roberts). I’m watching carefully. (Northman Trader).

When the economy rolls over, the stock market is in huge trouble. The credit imbalances today compared to a decade ago are different, and worse than the Great Recession of a decade ago. Thus the positioning of oneself ought to be different.

Already profit margins are under pressure (Blackrock). Long time bear John Hussman eloquently writes like the market peak is definitely in the rear view mirror (Hussman Funds). Watch out below when the margin debt unwinds (Advisor Perspectives) simultaneous to the calm premium ending (Blackrock). The next recession will have to wring out monster excesses (Gundlach).

Getting this right is the opportunity. In today’s world I’m not sure the difference between protecting yourself and seizing the opportunity are a whole lot different. We’ll discuss this much in the future.

It’s been 3 and a half years since my last blog post. I’m back. Posting will be sporadic through April; by May I hope to be rolling on a regular basis.

Cash is King

I have been out of step with the market for several years.  The valuations and underlying fundamentals are pretty much outrageous.  Perhaps the proverbial bell rang this week.

Market internals have been horrible for quite some time, that’s why most market participates have been left behind despite the rising stock market of the last few years. The strength in the large momentum names is gone, there is no where left to hide.  The narrow market has reached exhaustion.  Already 74% of NYSE stocks are below their 200 DMA, a downtrend started early 2013.  Yesterday (8-21-2015) the NYSE had zero new highs and 627 new lows. The VIX has had the largest one week spike in history, from 12.83 to fear 28.03 in 5 days.  Yet YTD the S&P 500 index is down just 4.3% and the Nasdaq Comp is down only 0.63%.  The Biotech’s are still 10% higher in 2015 and 28.3% year over year; manias end badly for investors.  Initial public offerings as a froth indicator peaked last fall.  The Nasdaq 2000 and 2015 are a double top if I’ve ever seen one; perhaps she’ll punch through permanently in a decade.

This market cycle was dependent upon QE:Maybe it's spurious, but the market has shown an inability to push meaningfully higher in the absence of QE. $SPX

Don Coxe: Bond Bull Coming to an End and Bonds Now a Center of Risk is an excellent listen for those who haven’t run across Coxe’s commentary in a while.  The junk bond market has cracked with credit spreads at multi-year highs, something which began, ironically, with the energy issues.

When a stock market break occurs, the record margin debt will be a downside catalyst.  The familiar margin debt charts show margin debt 40% above previous peaks.  Further, margin debt as a percent of market value is high, with free cash being particularly frightening.  Just two days ago the DJIA and Nasdaq entered corrections (first since 2011!), and these newfound speculators will become forced sellers.

Commodity Weakness Persists.

In light of this decades financial advisor meme to charge 2% of assets for putting investors in index funds, this chart is particularly scary:Chart of the Day

The DJIA:Gold chart looks to finally reassert itself southward: Chart of the Day

Cash ought be the largest position of any investor.  Period.

Gold will be the asset of choice for the next recession (which is not imminent).  Central bank bond buying and ginormous fiscal stimulus (budget deficits) will drive the mania.  In the meantime, gold bulls will have to be content with a currency war.

Gold ought to be the second largest position of any investor.  Another bell was rung:  The 491 million ounces traded in two weeks is highest volume in history.

A little schedenfruede:  In mocking gold bugs he called the bottom!  Joe is right about the inguinity of humans, it’s the folly of the political class he missed:
That was fast!  Precious metals have already reached short term rebound targetsAdam Hamiliton provides a starting point for speculators in junior gold equities.  Student loans will be the next big political fight.
Little else is investable. Many speculative situations, however, do exist:
Silver is extremely interesting long term as a play on the remarkable booming solar build out worldwide.  Maybe the next silver bull market has already started.
Twice in this young century investors have made (and lost) fortunes in the energy complex.  Consider conservative Baytex Energy (BTE).  This heavy oil producer with low production costs has collapsed again.  Two days ago the income security cut the dividend to zero. In a stable $100 oil price environment Baytex provided shareholders with an annual C$2.88 dividend.  Yes, Virginia, that implies a return to robust oil prices means patient buyers of the stock could realistically see a 50% dividend yield on today’s shares.  It’s just not a bet I can recommend at this time.  Shares may be more likely to get cut in half before any sustained move higher and are a function of an unlikely oil price rebound.
House prices should remain stable (and homebuilding will be a tailwind for economic growth in the years ahead).  Higher interest rates are a financial pricing negative.  However, fundamental household formation supply-demand is strong.

 

The world outside of the United States is experiencing anemic economic growth.  But stateside conditions are better and job growth is not a bad as thought.  The difficult environment for asset prices can exist with decent economic growth.  The dynamic seems strange at first, but is the norm  in a rising interest rate environment.

“Overall, the U.S. “startup rate”—new firms as a portion of all firms—fell by nearly half between 1978 and 2011…” (WSJ).  Might be the right direction to head…

Investable…

“Warren Buffett’s favorite valuation model is screaming that stocks are overvalued.”  (Ed Yardeni ) “The most important observation an investor can make is that foreign equities (EU and EM) have not made any progress since October 2009, while majority of the gains in the All Country World Index (NYSE: ACWI) has come from the US equities outperformance.”  Short Side of Long

In the extremely low interest rate environment many investors chased yield, and have begun to learn “investing for high income can sometimes be extremely risky…”  Richard Bernstein.

In short, Asset prices are very rich.  Stocks and bonds.  This isn’t the year 2000 either, when Russell 2000 stocks were in the bargain bin.  Precious little is investable.

The economy continues to plod along:  Employment, Housing & Autos Point To Continually Improving Economy at Value Plays.  Jobless claims are at a 40 year low (WSJ) though inflation adjusted incomes stinks (Doug Short).  Pent-up demand for housing is real and underappreciated (WSJ).

The commody complex disaster has continued, and even accelerated this summer.  “The Bloomberg Commodity index fell 3.3 per cent on the week, to the lowest level since 2009.”  Financial Times

Fortunately in the real world, “The long run economic benefits of structurally lower energy prices and energy security are slowly feeding through to the wider economy.”  In the Long Run

Salman Partners economist calls bottom in copper (Mining).  Many a commodity bull has said the same the last four years and been wrong all the way down.  Base metals are a tough business, and interetingly:  “But since 2005, the world’s copper industry has consistently produced 7% less copper than planned.”  TCK sports a $7 handle.

In commodities meltdown, natural gas is a bright spot at the Finacial Post.  The delinking arguement is at least interesting.

The entilement program picture with color:  Social Security, Medicare Outlook: Better but Still Bleak at the WSJ.

Commentary regarding the credit fiasco leading to the financial crisis often led to ‘gold to the moon’ as the investment conclution.  Perhaps the goldbugs were just an economic cycle early.  Household balance sheets have not improved.  The governement’s balance sheet worsened significantly.  Business balance sheets were strong going into the financial crisis, but the siren song of cheap money has turned out to be too much temptation for corperations as Companies May Be Running Out of Time to Borrow From Bond Investors to Pay Shareholders (Bloomberg).  With a Kansas City Fed research paper finding changes in the economy and financial markets are blunting the effects of Fed policy, the money printing to arrive with the next recession will be larger than can be imagined (WSJ).  We just don’t think it’ll be anytime soon.

“It could take many months — or even years — for the precious metals to form a bottom” says Peter Brandt.

Chart of the Day

Upside Down

“The yield on 10-year U.S. Treasury securities averaged 1.8% during 2012, the lowest levels in 60 years. But that episode may now be behind us.” (Econbrowser).  Pimco’s Bill Gross Says the Bond Rally Is Over (Business Week).

The fundamentals of gold are remarkable.  Consider:  “Moody’s Investors Service, dissatisfied with the way states measure what they owe their retirees, released its own numbers on Thursday, showing that the 50 states have, in aggregate, just 48 cents for every dollar in pensions they have promised.” (Dealbook).  Additionally, the world’s third largest currency is in the Mother of All Painted-In Corners (Mauldin).

Meanwhile in the investment world, gold can not be owned.  Consider:  Gold is not yet as oversold as it was during the bottom in ’76 at The Short Side of Long.

“It’s been an incredible run… but gold’s 12-year streak of price gains will end in 2013.”

A Big Correction Means Gold Streak is Over

The Ups and Downs of the Gold Stock Market

U.S. Oil Boom Affecting Global Prices at the WSJ.

Is Oil is the Next Major Commodity to CrashEconmatter

Coal shares tumble as investors see no sign of turnaround at ReutersWhat Happens When You Buy Assets Down 80%? (Mebane Faber), though I’m not so sure asset prices always come back.

“There was no discussion of exports in Bernanke’s assessment of the economy during his press conference last Wednesday. They’ve stopped growing because global economic growth has been depressed by Europe’s recession.”  Ed Yardeni

Here We Go Again in Europe (Economic Policy Journal).  Also, “It’s likely that the days of the super-powered Chinese economy are over” says Michael Pettis.

In the U.S., “four powerful forces coming together over the next year are poised to support stronger growth and job creation.”  Stronger U.S. Growth Ahead at Economix.

On the one hand, “Since May 1, rising mortgage rates have reduced the purchasing power of U.S. home buyers by 18%” (Dollar Collapse), while at the same time the shortage of supply we’ve long discussed is manifesting:

Housing Returned 684% During the 1970s

Chart of the Day

“I would add that it does appear based on the last month of data that rail
traffic seems to be picking up.  This gives further evidence that we might see GDP increase at higher rates as we go through the second half of 2012.”  Value Plays  The Private Economy is Doing Just Fine says Davidson.

Yet U.S. stock valuations are uninspiring:

Chart of the Day

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Limited Opportunity

Paul, I’m not sure what the future holds.  The U.S. relative strength against Europe and China continues on the back of oil (Mark Perry) and natural gas production.  “Home construction is booming in the United States, but it remains severely depressed.” (Ritholtz)  Yes, housing has legs:

Chart of the Day

Weakness in China has the commodity trade looking bad and feeling worse:

Commodities Have Been Volatile, But Move Sideways

After all, The Oil and Gold Booms Are Over (Bloomberg).  Grim BRICs news pushes copper to 5-week lows (Mining).  Oversupply pushes thermal coal price to 2009 levels (Mining).

Yet, Commodities poised for revival says Cam HuiA Case for Owning Commodities When No One Else Is by Frank Holmes.

Meanwhile, the S&P 500 at new highs with modest valuation has the stock market uninteresting.  (Vitality katsenelson)

Chart of the Day

Avoiding interest rate risk seems prudent:

Chart of the Day

Additionally, being a gloom and doomer is so passe.  (Albert Edwards)

Perhaps the best opportunity is the shorting the Yen, using the break this week to attempt to initiate a position.  It’s The Mother of All Painted-In Corners (John Mauldin) with horrible demographics.