Vass - Politics, Current events and more from an African American view

Predicting the U.S. economy for 2nd half 2008 and 2009

Well how much fun are you having today? If you hold investments, it may not be a fun day at all.

Back in the 4th quarter of 2007 I said I believed the Dow Jones Industrial Index would hit 11,000. I thought this would be a move in the late 1st to 2nd quarter. I was wrong… on the timeframe. But this is not a pat yourself on the back kind of moment.

With Indy Mac having failed and fears rampant over whether Freddie Mac and/or Fannie Mae will follow there should be no doubt that the Dow will cross into the 10,800 area on Monday. Add crude oil prices that are continuing to rise on fears from Iran and you get a bad situation. But perhaps the real culprit for this current situation is the Fed (Federal Reserve).

The Fed has been providing banks extra money to ensure their solvency, but not requiring that loan reserves be increased. It’s kind of like stopping a leak in your tub by adding more water. The problem is not getting fixed and may get far worse. And all the panic about the mortgage industry seems to have done nothing but whip up polispeak from political candidates and political parties, each looking to sway voters.

Loan reserves must be raised at all financial institutions. That especially means Fannie Mae and Freddie Mac. And several institutions need to fail. That of course means that some people will lose their homes. Nothing can, or should be done about that.

When I some will lose their homes I don’t just mean the roughly 4% of homeowners that are in default. I include in that group those that will fail this winter due to the cost of heating oil increases. I expect that in total some 7% of homes are in danger of foreclosure this year. While it’s not a nice thing to say, they need to lose their homes for the economy to survive.

This is not unlike the enormous wash-out that occurred when the internet bubble broke in the stock market. Money was lost, as it should have been, and opportunities were created. Those that made bad financial decisions, whether corporate or individuals, lost and others benefited from that loss. It’s a standard cycle in the markets.

Of course what is likely to happen is that Congress (with it’s 9% approval rating – sure to go lower) will take taxpayer money and bailout homeowners and financial institutions alike. Thus more water will fill the leaky tub. Undoubtedly the current Administration will be blamed (even more than they should) and the war in Iraq (and possibly Afghanistan) will be identified as the cause of all these ills. Which is false.

The outcome will probably be a surge for Senator Obama, who prefers a bailout. This may lead to him being elected and higher taxes to pay for that bailout. And if anyone thinks a bailout of this size will be limited to just the top 1% of the nation they are insane.

I believe, looking at current factors several things are highly probable:

While each of these items may or may not happen they are all interrelated. I expect each item to happen, at least to the degree I stated, generally in the timeframe given.

As money tightens, gold will be a hedge and prices for all precious metals will soar again. Credit will get severely crunched, and credit card rates will fly. The debt load on the average American will increase from the current $6,000 to $8,500. Most of this increased debt will be from higher energy costs. Thousands of small businesses will shutdown.

As a result of all these things I expect that the Dow Jones will drop to 10,200 by December. If I am correct about Congress and Senator Obama – for the reasons stated – then I further expect a drop to 9,300 during 2009. A significant bear market indeed.

The main problem is that the solutions being looked at now raised taxes and increased liquidity, fail to resolve the actual problem. And the combination will weaken the dollar, to a point where holding U.S. bonds is unattractive. I won’t even mention the increase in retirees and Social Security.

But there is opportunity. I see the housing markets as a great buy, for those willing to hold for 5 years. Buys in the secondary city markets will probably do best having a lower purchase cost and holding value better.

Several financial stocks will be excellent buys. Some have far better balance sheets than others, but will be blasted by the same investor fears as those in bad shape. Companies like Citigroup are trouble spots as they reinsure their own loans and thus hide them better on the balance sheets. Financials will lead the markets down, but they also will signal the start back.

Coal will likely start to regain interest in the quest for alternative energy sources. I expect nuclear energy will also get a push, with at least 1 new nuclear plant being authorized to be built in 2009. I expect a call to switch to ethanol produced by grass and sugar to go initially unheeded until mid-2010. Further harming the ethanol push is the fact that there will be a glut of ethanol by mid-2009 through 2011.

Bond rates will be more attractive in 2009 than today with the likely increases in interest rates. Of course inflation rises will remove that benefit.

There may be other sources of opportunity but they will be guided by factors including but not limited to:

That is the outlook that I have based on what is currently ongoing in the world today. Some of this is just my on interpretation, some my deduction. But I believe that if only ½ of my expectations occur, the general outcomes as stated are accurate.

But look around and determine your own answers. Better to be prepared than taken by surprise.

Labels: Congress, Crude oil prices, Dow Jones Index, election 2008, ethanol, Federal Reserve, Freddie Mac, gold stocks, heating oil, real estate, Senator Barack Obama, stock market

Can South Africa gold miners push futures prices over $1000?

Mid-day February 11, 2008 gold futures prices have risen to $927. Gold continues to move forward, taking many of the gold stocks along with it. In fact speculation in the most precious yellow metal has grown dramatically on a global level. In China, Beijing Caishikou Department Store sold out of two tones of gold bars in less than 2 hours.

“The real value of gold is not that it provides a quick, speculative fix, but its capacity to provide a sure and steady means of protecting wealth and to enhance risk-adjusted returns,” said Hou Huimin, vice-chairman of China Gold Association.

With a weak dollar, spikes in oil prices - which are consistently above year ago levels, and an outlook of an unknown time period for an American recession gold hedges seem more attractive everywhere. And outside factors continue to add to this upward trend in prices.

Already the effect of Venezuelan President Hugo Chavez threatening to cut America off from that nations oil supply has added to the price of oil, while power shortages in South Africa have forced many mining companies to lower production, boosting in turn platinum and gold futures. This is having a net effect being seen in the Philadelphia Gold and Silver Index rising .73%, along with the CBOE Gold Index up .26% and the Amex Gold Bugs Index up .76%

Will the gold mining stocks of South Africa take a hit? Of course, and many other mining stocks will drop along with them. But that is hardly an indication of a bear market any more than the fact that once those mines are back online gold spot prices will drop. In a few weeks supply and demand factors will shift again with the aforementioned miners increasing supply. But the real factors moving gold in all the various investment markets is not the short-term actions that are the fodder of traders.

Protecting wealth and risk adjusted returns are the main concern right now as global markets look weaker by the day. With global instability and the other factors that are growing with no end in sight, I believe that gold will continue to increase in price. $1000 gold spot prices are not the top in my opinion but a stepping stone to a higher level. Whether shortages due to difficulty in mining or nature, increased demand in emerging markets like India and China, or economic weakness and general bear markets in stock markers globally I do not see a substantial retreat of gold or gold stocks in 2008.

Labels: Amex Gold Bugs, CBOE Gold Index, emerging markets, gold spot prices, gold stocks, hugo chavez, Philadelphia Gold and Silver Index, South Africa

Gold in the markets: which is better charts or fundementals?

It’s amazing the various views and means by which so many try to predict where the gold markets will go and for how long. There is the fundamentals view, which I tend to agree with, charts, moving averages, economic indicators, lucky shoes, and so on. Each one has there own merit, and detractions. And to give you an idea, here is one thought I’ve recently seen.

“When you take a look at gold stocks they also are badly lagging the metal. Even though they made new 52-week highs early in January they underperformed the metal when they did so. This is important, because usually the XAU/gold and HUI/gold ratios lead gold and gold stocks. It is bullish when gold stocks outperform gold and when they both go up and gold stocks lag that is a powerful negative divergence that usually spells some sort of top being made.

I do expect the broad market to continue to rally - and expect that rally to keep a bid under gold stocks and commodities. But once the broad market tops, and I expect this to happen in March, I think we will see a big 25-30% correction in commodities and gold stocks. The Chinese stock market is likely to fall 40-60%! If we get such a correction I look to see the XAU bottom in the 130-145 area.”

Sounds a bit ominous doesn’t it?

Then there are the views I hold. That we know supply will tighten due to the multiple mines that shut down because of the power outages. Those outages are expected to last another month or so. Demand in China and India has consistently been on the rise, but the recent winter storms in China have affected millions. Businesses have shut down and people have been stranded. Thus their demand should decrease for a short period, then spike and normalized.

The U.S. economic outlook is still bleak. Though the Federal Reserve has cut rates dramatically in January that won’t really hit the economy till the 3rd quarter at best. A recession in America is a fact to many people and industry sectors. Oil, though down from January highs remains above year ago levels. And the U.S. stock market is leading the world markets lower, with financials still not done with the mortgage crisis.

Based on my observations, gold continues to be a strong choice. Given that many of the gold miners have pulled back, either through regional difficulties or profit taking. Considering the moves they made in the positive compared to the losses in the broad market a pause is to be expected.

Gold and gold stocks are a hedge versus a weak dollar, bad economic forecasts and weak general stock market movements. For the various gold investments to correct 30%, you would expect several of those factors to improve. At this point there is no indication that it will happen. In fact, once the unpredictable conditions of weather and power are resolved, the obvious expectation is that gold should increase since the other factors look to take several months more to even begin to improve.

Thus the question is what will be correct. Will gold and gold stocks fall into a bear market of their own, pulled down because of chart and moving day averages? Or will the fundamentals of demand and weak economics continue to propel gains made in January.

I’ve heard many arguments for both. And each always has their days when they are proven correct. But considering gold is again at the $900 level, plus my own personal preference to fundamentals, I say the charts will be wrong.

As always time will tell. Keep an eye on when the power comes back on, and the storm recovery is done. I think a spike will hit the gold stocks and the spot prices, and growth will continue till May or a bit later. And I still expect to see $1000 gold spot prices, with a commensurate move in individual gold stocks, long before then.

Labels: bear market, Chinese stock market, economic forecasts, economic indicators, Federal Reserve, gold spot prices, gold stocks, HUI, moving averages, XAU

Will the Federal Reserve stop the move in gold markets

Gold has hit $921 and the U.S. House of Representatives has passed a $146 billion stimulus package. The Fed is set to cut rates another .50 basis points, or so the world hopes, and financials are rising in the stock market.

So the run in gold and gold stocks is over? Not necessarily.

The fact is that little has changed. The mortgage crisis still has at least one more quarter to go. Oil may not be at the record levels set recently, but it is far above year ago levels. The cost of heating and gasoline are hitting the pockets hard, and the economy is slowing down causing fears of job loss. Demand is still high in China and India, and the political outlook in the world is no less volatile than it has been for years. And a recent power outage in South Africa looks like it will cause even more tightening of supplies.

In the most optimistic outlook, the rate cuts will not take a hold until late in the 3rd quarter at the earliest. Companies and individuals are now looking to pay off debt and not expand. The stimulus package will likely fail as many Americans will use the funds that will come in the late spring or summer to shore up debts and bills rather than going on a spending spree. And all this is just in America.

That also assumes that oil stays at current levels, no additional political instability, the mortgage crisis ends completely in this quarter, and the world economies have no surprises. It also assumes that new housing sales pick up from the 28 year low that was just broken, and a return to mid 1990’s or 2000 levels. How likely is that?

I expect that analysts are going to cut production rates across the board for the South African gold miners, and slash quarterly and year expectations. [Already gold miners like AngloGold Ashanti, Gold Fields and Harmony Gold have had thier share prices hit] Miners in other parts of the world should get a boost if new mines come on-line during the potential 6 weeks that South Africa is down, like Goldnev Resources Inc which just had positive results on recent core drilling tests.

So a glut in the gold market is not going to happen any time soon. Nor is political stability a reality. Oil is high, and the U.S. economy is lagging. And this says nothing of how the Dollar is valued versus the world currencies.

Given all this, do you think that calls for gold at $1000 just a week ago are inflated? Do you think that gold stocks have hit the wall of their appreciation?

All stock markets, all financial markets, move on emotion first. That’s given. And few things are more emotional that 1.25 basis point moves by the Fed in a week. But fundamental facts of the markets always come to fore and correct the emotion. To me, $1000 gold, and higher gold stocks across the world, is as fundamentally sound today as when I discussed it earlier this month and in December of 2007.

But then again I’m not a specialist. [You might want to look at what the one of the specialist – Goldman Sachs - had to say back in the ancient time of November 29, 2007 though] I suppose only time, demand, and investors will show what is the right view.

Labels: AngloGold Ashanti, Federal Reserve, Gold Fields, gold stocks, Goldnev Resources, Harmony Gold, housing sales, mortgage crisis, South Africa, stimulus package

Fed interest rate cut and a bear market nearby bring attention to gold

So where does gold, and gold stocks, go in this new market of overnight rate cuts? Yesterday the American stock market was closed for the Dr. Martin Luther King holiday, but the rest of the world markets dropped like rocks. Europe was down almost 7% in each nation, China dropped 5.5% and India fared no better.

So in the face of that news the U.S. markets opened with a drop of 450 points, and the Fed cut interest rates .75 basis points. It’s taken the rest of the day but the market seems to have recovered virtually all of the loss.

But what happens next?

Well the chance of the U.S. stock market dropping 18.5% was one factor driving the price of gold. While the interest rate move has been an impressive move not seen in decades, it also means that the real effects of the rate cute won’t be felt for 6 months at the very earliest. The losses from the mortgage crisis are still not over, and I still continue to see further hits to the various financial securities. Oil is still higher than it has been for decades. Consumer debt has reached more than 50% of the U.S. population.

Gold may have retreated a bit, but the environment hasn’t changed in my opinion. And I’m not alone.

“We suspect that the cuts won’t work. Sentiment has turned and people and companies are now focused on rebuilding their balance sheets. Looser lending conditions will be used to repay debt, not to borrow more. One way or the other, the US is heading for recession, and rate cuts now only risk making inflation a real threat.Of course, it’s all good news for gold. Gold has sold off recently, almost certainly in part due to various players rushing to liquidate easily sold assets to fund losing positions elsewhere. It looked set to fall further today, but the Fed’s announcement arrested the decline almost immediately. We suspect it will be back above $900 an ounce before too long. - John Stepek”

I agree that the current drop in gold has more to do with liquidation for cash in hand than any change in sentiment. Given 3 days for settlement of trades, and margin calls to come out, there may well be a change in direction back to the previous trend.

"This smacks of panic and desperation, but is obviously bullish for gold as interest rate cuts make gold more attractive," said Robin Bhar, UBS metals analyst in London.

So what have some of the gold stocks mentioned recently in this blog done on this turbulent day?

Now if you have been paying attention I mentioned there would be a drop to 11,000 on the Dow. That there would be a bear market. That gold would do well, and the financial markets would fare poorly. Given the rate cut today, and the other factors pressuring the market, I continue to believe this will happen.

With the added threat of inflation becoming rampant, I feel this is more true now than back on January 4th (Gold soars in early 2008, but will it stay lofty?) and prior(Will 2008 be a lump of coal or a nice present for investors?).

Labels: Agnico-Eagle Mines Ltd, Alamos Gold Inc, bear market, gold stocks, interest rate, John Stepek, Newmont Mining, recession, Robin Bhar, stock market