Posted on Tuesday, July 20, 2010 - by Henry Walter
Gold and Precious Metals
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.


INTRODUCTION
In this article we are not recommending the purchase of any gold or gold-related products. The intent of the article is to provide background material to help investors understand the market for precious metals. If you are interesting in investing in precious metals, you should talk to you financial advisor or investment professional before taking any action.

Our first chart illustrates why there is so much interest in gold. At the start of 2000 gold was around $300 an ounce. Recently the spot price hit an all-time high of $1261.90. Gold is currently at the $1200 level. Gold was one of the few asset classes to post positive returns in 2008.



Silver pretty much follows the same pattern. Note in the chart below silver was priced at about $4.30 ounce in 2000 and is currently around $18 an ounce.




WHY INVESTORS BUY GOLD AND RELATED PRODUCTS
According to Christopher Barker, writing for The Motley Fool on May 26 and June 2, 2009, here are the top 10 reasons to hold gold. The writer of this article has added his comments in parenthesis.

1. The United States is awash in a sea of trillions. ($136 Trillion and counting.)
2. Derivatives are falling from a massively frothy peak.
3. As spending skyrockets, government revenue is set to contract sharply.
4. Quantitative easing is a very slippery slope. (QE is a polite term for printing money.)
5. The U.S. dollar is set for a sustained decline.
6. Inflation looms. (It has taken longer than many predicted but it will arrive one of these days.)
7. A question of confidence. (In the government’s ability to basically govern.)
8. Gold remains cheap. (Obviously there is a difference of opinion on this point.)
9. Gold is relatively scarce. (This is true. The gold market is very small in relation to other markets.)
10. The ultimate safe haven. (Gold bugs talk about gold being a storehouse of value and the only real currency, compared to fiat money.)

1. Gold is a barbarous relic. (Referring to British economist John Maynard Keynes comments in 1924.)
2. It has no intrinsic value. (Some question this since gold has held its value for 4,000 or 5,000 years and has applications in dentistry, jewelry and electronics.)
3. Costs money to store.
4. Has no return. (But larger mining stocks often pay dividends.)
5. Very volatile. (Investors remember the price collapse in 1980, see chart below.)
   
6. That any of the 10 ten reasons to hold gold listed above are wrong.
7. Many feel that gold is over-hyped and in a bubble, and highly dependent on investor sentiment which could change at any time.
8. The government could confiscate gold as they did in 1933. (Holders were compensated at $20.67/oz., the official price at the time. In 1934, the price of gold was raised to $35 /oz., and then in 1971 Nixon demonetized gold freeing it to trade at whatever price the market set.)
9. Scams and frauds. (Gold attracts its fair share of fraudulent activity.)

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Posted on Monday, July 12, 2010 - by Henry Walter
July 2010 Round-up
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.


1. CHARTS THAT TELL A STORY
Our first chart shows the performance of the S&P 500 Index during the first half of 2010. As you can see, since the high in late April, the index fell about 15% by the end of June, so the second quarter was a washout, but thus far the decline is a correction not a bear market. The third quarter started off with a bang. In the first week of July the S&P 500 gained more than 5%, its strongest performance in nearly a year, enough to swing investors’ mood from glum to cautiously optimistic.




2. CHARTS THAT TELL A STORY
Next is a longer term chart of the S&P 500 Index plotted on a monthly basis. Superimposed on the price bars is a 10-month simple moving average. We discussed this in detail in the June issue so suffice to say based on history, the fact that the index is below the moving average line is not encouraging. Investors are starting to consider the possibility that the market is sliding into a double dip, and wondering whether we are in a deflationary or inflationary environment, and what new taxes will be imposed in 2011 and beyond. In spite of all the issues, or perhaps because of them, the market appears reasonably priced. According to Jaqueline Doherty writing The Trader this week in Barron’s, the S&P 500 is priced at about 12 times expected earnings versus a long-term average of 14. The key word is “expected”. (Barron’s, July 12, 2010, page M3).




3. CHARTS THAT TELL A STORY
Most shorter-term interest rates are based on the Federal Funds rate shown below, which is currently 0 to 0.25%. The fact that U.S. rates remain at historic lows indicates that the economy remains extremely fragile and that the Fed is worried about the recovery. The low rates also play havoc with the plans of retirees and others who depend on such vehicles as Treasuries, money market funds and CDs for income.

Historical Graph - Below is a graph of the Federal Funds Rate from 1955 to 2010.




4. CHARTS THAT TELL A STORY
This next chart is one we should all be worried about. It shows people employed in manufacturing, mining, logging and construction versus jobs for federal, state and local government including teachers. This trend isn’t good.




5. CHARTS THAT TELL A STORY
Our final chart is of the Shanghai Stock Exchange Composite Index courtesy of StockCharts.com through July 9, 2010. The index is down 25% from the July 2009 high and is therefore classified as being in a bear market. And it is off substantially more from its high in 2008. We are following this closely because we think China and Asia will be where the growth will be in the next decade, but before we add to our holdings we’d like to see some evidence of a turn. Currently the Chinese government is trying to cool down the economy and when they reverse course the market should rebound, unless we have a worldwide depression. There are over 100 large Chinese companies listed on the New York Stock Exchange, and there are a number of ETFs if you prefer that route. The most liquid ETF right now is FXI, ishares FTSE/XINHUE China 25 Index, which trades over 20 million shares a day.




6. PREPARING FOR THE NEXT BIG ONE
Stock market corrections and bear markets are inevitable. The table below shows the frequency of various types of declines. (The table does not include the 8 or 9% decline in early 2010 or the 15% decline currently underway.) For example, the average frequency of bear markets, defined as declines of 20% or more, is about once every 3 ½ years. Based on this data we like to hold some cash reserves so we can take advantage of opportunities that occur when markets decline. For some reason, many investors remain fully invested all the time and therefore have no funds available when their favorite stocks become priced at bargain levels.




7. IS A ROTH IRA SAFE FROM TAXES?
All taxpayers are now eligible to switch from a regular IRA to a Roth IRA (and pay the one time tax) because the income limit of $100,000 was permanently repealed. Many have already done so: Fidelity Investments says that as of May 31, the firm had handled 87,000 Roth conversions this year, about four times the number for the same period last year. But some investors are afraid of a congressional double-cross.

Laura Saunders, who writes the Tax Report for the Wall Street Journal, recently tackled this question (WSJ, June 19-20, 2010, page B9).

Ms. Saunders quotes Professor Michael Graetz of Columbia University, a former top tax official at the Treasury Department, who thinks it is unlikely that lawmakers would enact a wholesale levy on Roth assets. “That would be like taxing a salary twice,” he says. “Congress has never done this, and there is no reason to expect it will.”

The bottom line: Roth benefits can be real, while cutbacks might not come for years, if at all; meanwhile, tax rates are rising for those at the top. Wary taxpayers who stand to benefit from a conversion but don’t want to be vulnerable to changes might want to do a series of partial conversions instead of one large one.

Aware of the risks, Prof. Graetz himself feels comfortable making a partial Roth conversion this year, and he says many of his colleagues in the tax world are doing the same.

To read the full article Google Is a Roth IRA Safe From Taxes?

High Falls Advisors is planning a series of seminars on the Roth conversion. For details contact your advisor or HFA.


8. BOND FUNDS
If you are heavily into bond funds or thinking of moving money into bond funds, you may want to read the article in today’s Barron’s (July 12, 2010, page L4) with the title Beware Bond Funds – When interest rates finally rise, bond-fund holders will get slammed – far worse than owners of individual bonds.

For questions or additional information on this blog entry, please contact us.

Posted on Thursday, June 24, 2010 - by Henry Walter
Leading Economic Indicators
Please Note: The below information has been taken from trade and statistical sources which we deem reliable. We do not represent that it is accurate and it should not be relied upon as such. Any opinions expressed herein reflect our judgment at this date and are subject to change. The information provided is not specific financial advice or a recommendation to buy or sell. We must review your profile, needs and accounts specifically to determine what is right for you.


Leading economic indicators are indicators which change before the economy changes. Stock market returns are a leading indicator, as the stock market usually begins to decline before the economy declines and they improve before the economy begins to pull out of a recession. Leading economic indicators are the most important type for investors as they help predict what the economy will be like in the future.

Many of the economists forecasting the economy are hardly independent. They are paid to bring business to their firms and enhance the reputation of the firm and themselves. Sometimes they are right, but often wrong especially at inflection points.

One of the best leading indicators is the Weekly Leading Indicator (WLI) from the Economic Cycle Research Institute (ECRI) because it has a good, though not perfect, track record, and results are published weekly. The Conference Board’s Leading Economic Index (LEI) is published monthly and therefore is not as sensitive to change as the weekly index. ECRI is an independent institute dedicated to economic cycle research in the tradition of its founder, the late Geoffrey H. Moore.

The chart below shows the growth rate of the ECRI’s Weekly Leading Index through June 7, 2010.



Note that as early as mid-2007, the index predicted trouble ahead, and sure enough the S&P 500 collapsed in 2008. Then in late 2008 the index anticipated better times and on March 9, 2009, the market lifted off and staged a roughly 70% rally for the rest of the year and so far into April 2010. With that kind of record it is no wonder that investors are becoming concerned about the recent performance of the WLI and what it portends going forward.

As Randall W. Forsyth points out in Barron’s Up & Down Wall Street (Barron’s, June 21, 2010, page 6) the WLI is down sharply for the past six weeks, although ECRI director Lakshman Acuthan says the slide hasn’t been sustained long enough to signal “an imminent recession,” hardly a ringing vote of confidence.

It seems to us that it would be a good idea for all of us to keep an eye on this indicator until things settle down.

Sources:
The Sub-Zero Economy, Mike Burnick, Weiss Advice
Barron’s (see above)

For questions or additional information on this blog entry, please contact us.