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A Closer Look at the Gold Miners ETF – GDX

Last week we noted the following data point regarding the commodity futures market: Bianco Research estimates the total value of present open interest in domestic commodity futures is about $425 billion.

We commented how the $425 billion estimate wasn't even as big at the market cap of a single company; Exxon Mobil. That got us thinking. I asked the following: What is the market cap of the biggest publicly traded stocks in the gold mining sector - Barrick Gold, Goldcorp, and Newmont Mining? The answer: $42 billion, $29 billion, and $22 billion respectively. What might that tell us?

I took it one step further. Let's analyze our favorite gold and silver mining ETF – the Market Vectors Gold Miners ETF, symbol GDX. It is comprised of a diversified group of companies involved in the mining of gold and silver. It is a broad mix of small-, medium-, and large-cap names. It has global exposure, led by Canada, United States, and S. Africa.

The requirements to be eligible for the fund are a market cap exceeding $100 million, average daily trading volume of at least 50,000 shares, and listed on the NYSE or Amex, or quoted on the NASDAQ.

There are 34 companies represented in this ETF. The TOTAL MARKET CAP of all companies combined is $190 billion. The top 11 companies in this ETF make up $163 billion of the total, or 86% of the entire cap. The weight of these top 11 stocks as a percentage of the ETF is approximately 73%.

For comparison purposes, there are six individual companies alone in the S&P 500 with larger capitalizations than all of the stocks combined in the ETF. They are in descending order:

Exxon Mobil 441.9B
General Electric 317.2
Microsoft 260.3
AT&T 208.8
Proctor & Gamble 202.5
Wal-Mart 196.6

In getting my arms around the market cap of the mining sector, I came to the following conclusions. Any significant interest or institutional buying could propel these shares much higher, as there isn't a whole lot of stock around in the first place. For example, a Berkshire Hathaway with $47 billion in cash, or a Microsoft with $19 billion in cash (before a Yahoo acquisition), could take down big chunks of the ENTIRE sector combined!

What if the California Public Employees Retirement System (Calpers) decided to over-weight the mining sector? This is a fund with over $250 billion in assets, or if a Texas Teacher Retirement System Fund (TRS) – a $100+ Billion fund, wanted a bigger stake in gold or silver companies? The cap of all these stocks combined is tiny compared to the large pools of money that exist out there!! You could buy 23 of the 34 smallest stocks in the Gold Miners ETF (GDX) for a grand total of $27 billion at today's prices!

Think of it this way, IBM recently announced a $15 billion share buy back. They will issue debt at today's rock bottom rates available to A+ type companies, and buy back the shares using debt, a common practice. Perhaps they could issue more debt, and buy some gold shares? What about an Intel, holding $15 billion in cash alone, they could go on a shopping spree, maybe they might want to diversify away from semiconductors? And yes, Google could spend some of their $14 billion cash hoard on a few gold & silver companies; maybe a better investment than Sergey Brin buying and modifying a 747 jet aircraft for his personal use.

The small market cap in the gold and silver sector is one to drool over, isn't it?

A One Stop Shop for Silver & Gold

Looking for an alternative to GLD or SLV? Then look no further than the PowerShares DB Precious Metals Fund (DBP). DBP is a simple way to play both gold and silver at the same time. The shares move according to the “The Deutsche Bank Liquid Commodity Index – Optimum Yield Precious Metals” index. This index is composed of futures contracts on gold and silver, with the index weights presently at 78.53% gold and 21.47% silver. If you desire a one stop holding, this is the one for you. Note, average daily volume is around 40,000 shares and the annual expenses of this ETF are approximately 0.79%.

Pumping the Commodities!

CBSMarketwatch picked up some Schloegel comments regarding the hottest sectors on the move right now. Click here to read the article. The real question is; are the commodity type names going parabolic and setting up for a monster correction? That is the question of the day, week, and month. Good luck and happy trading!

Multiple Threats

Ben Bernanke testified twice on Capitol Hill this week. "We are facing a situation where we have simultaneously a slowdown in the economy, stresses in financial markets and inflation pressure coming from commodity prices abroad," he said. "Each of these things represents a challenge."

A challenge indeed. One day in the future, Gentle Ben will be considered a hero, or a goat. He does not have an easy job.

Well, I suppose we here at AllStarInvestor.com don't have an easy job either. We are judged on a daily, if not minute by minute basis. How come? The stock market is nearly a 24-7 occupation.

The scoreboard changes moment by moment. It's a unique system, where you know exactly where you stand, good or bad, each waking moment of the day. There is no where to hide. That is why we love this business! We are held accountable. Every action and reaction is scrutinized.

We strive to make a difference each day. Think about it: The capital markets offer the wonderful ability to make a big impact on the lives of others. Of course, you have to wonder how the folks at mortgage related firms, banks, and other financial institutions view their role in the recession we have and how accountable they feel to their constituents.

Ben Bernanke shoulders a heavy burden and will have a say in how our economy does over the next 5 to 10 years. High inflation, slow growth, the U.S. dollar declining, a credit crisis, financial institutions going bankrupt....it's a mess out there, and Bernanke must guide the super tanker that is the U.S of A through the turmoil. We wish him luck. In the meantime, we'll attempt to point our portfolios in the right direction.

The three securities we featured the other day are solid long term ideas. You don't have to sweat the day to day noise of the stock market, and you can seek to achieve the equity return over time. Sometimes that is the best course of action. Why get caught up in the 24x7 zigging and zagging of the global capital markets?

Good Luck.

A Triple Play

The good folks at Forbes.com today asked us for some ideas for long term investing. We are always happy to oblige. This exercise allows us to step back and to take a view of the "big picture." As growth minded individuals, we took the opportunity to package a three security portfolio that would give us a terrific odds at a successful outcome on a global basis. Our consideration moved us to recommend a growth fund, a value fund, and an international fund. We wanted exposure to broad asset classes, low correlation, go anywhere type managers, experienced operators, and low fees. We are extremely pleased with the outcome. I've included the text of exactly what was forwarded to Forbes today. I hope you enjoy.

MXXIX – Marsico 21st Century Fund: MXXIX is an aggressive growth no-load mutual fund. It’s a go anywhere type fund, and typically holds between 35 and 50 securities. It has a top quartile ranking from Lipper in 1, 3, and 5 year time periods, with a 21.3% annual rate of return for the five years ended January 31, 2008. This compares favorably to the S&P 500 annual return of 12.0% in the same time period.

YACKX – Yacktman Fund: Lead managers, Don and Stephen Yacktman, are classic value-type investors. They like to wait for the market to come to them and typically don’t chase stocks. This fund is an ideal candidate for the value component of your portfolio. The benefit with YACKX is bear market and downside protection. For example, this fund was up 11.4% in 2002 when the S&P 500 was down –22.1% that year. In the past six months through Jan 31, 2008, this fund was in the top 5% of all funds in its category. That’s the type of performance you want in difficult environments!

DIM – WisdomTree International MidCap Dividend Fund: DIM is one of a smorgasbord of offerings from the fairly new WisdomTree family of ETFs. There are two key benefits of DIM. Number 1: Its unique focus on international dividend paying stocks, ideally positioned between large and small stocks. Number 2: DIM is screened by a fundamental overlay that focuses on earnings and dividends. It’s not a pure market cap schematic. This fund has a low expense ratio of 0.58%, and has a cumulative return of 27.9% since inception (06/16/06), versus the MSCI EAFE benchmark of 21.6% in the same time period thru Jan 31, 2008.

A Narrow Range

Stocks have been moving sideways in a narrow range over the past three weeks. The January 22 lows have held for now.

From the "for what it's worth" category: TrimTabs estimates that individual investors have pulled $60 billion from stock funds this year. If you define this group as dumb money, then I'd wager you are a bull.

Next we have insider buying and selling data. The daily dollar-based ratio of insider sales to buys has been in the bullish zone all year. Apparently insider selling is down 90% from a year ago. If you consider insiders having the pulse of the economy and of their own shares, you'd again be considered a bull.

Helicopter Ben Bernanke delivers two Capitol Hill speeches this week. Wednesday he delivers a semi-annual testimony before the House Financial Services Committee. Thursday he continues in front of the Senate Banking panel. Based on what I read in the Fed minutes released last week, the Federal Reserve is increasingly alarmed as to the weakness in the economy and the on-going credit crunch. Despite persistent and high readings on inflation, it sounds like the Fed plans to continue its easing policy, esp in light of the bearish commentary contained in the minutes. Therefore, Wall Street will be closely monitoring Bernanke's remarks later this week.

Tomorrow's economic news will be January PPI and February Consumer Confidence, followed Thursday with the initial GDP reading for Q4, 2007. Stay tuned....

A Plan for Social Security

Read a terrific interview in Barron’s yesterday with Joe Rosenberg, Chief Investment Strategist at Loews, a New York conglomerate controlled by the Tisch family. The point blank question was for his views on the government bond market. Response: “I see no value whatsoever. With the two-year Treasury yielding under 2%, you might as well keep your money in cash or go out and enjoy it, because you are not getting a return on an after-tax basis.”

Ok, that was a lay up, but the fact is, I’ve seen NBA players miss lay ups. The response to the next question was even better.

Ques: You have some ideas on social security?

Answer: “If the government thinks it can fund Social Security with 4% government bonds, it’s dreaming. It’s a great time to start funding Social Security with stocks. The government ought to take advantage of the low yield on Treasuries be selling debt at 3% or 4% and buying the S&P 500, which has an earnings yield of 7%. Large corporations and states fund their pensions with equity. Why shouldn’t the federal government?”

Now you have to appreciate a guy who has a strong opinion. I couldn’t agree with him more, especially since I am a 40 year old working stiff who thinks the likelihood of the social security trust fund solvent in 25 years is a thousand to one long shot at best.

Plus, we have a smart guy talking about the earnings yield of the stock market! We’ve opined in these pages in the past about the attractiveness of stocks over bonds when comparing the earnings yield. Joe talks about a 2% treasury on the short end of the curve, but we’ve discussed a 3.65% 10-year Treasury as having little value, especially relative to the S&P 500.

Joe makes a strong argument for long term equity investing, and reinforces the notion that now is not a time to panic out, but to stay committed to your long term wealth accumulation plan. In fact, he argues that the present environment is one of opportunity versus risk, and the winning trade will be in equities, and not fixed income.

Speaking off opportunity, the cover story of this week’s Barron’s issue (titled: Giddyup) was a spotlight on Wells Fargo Bank and why Warren Buffett had purchased additional shares recently and how his stake had grown to 9+%. Here again, we have a large institutional type investor buying shares of a financial stock, when almost universally, we read about the terminal condition of banks and consumer oriented companies. Why would smart money man Warren Buffett invest in a so-called near death bank stock? Incidentally, one of Joe Rosenberg’s “picks” discussed in his article was about a bullish bet on Target (TGT), a stock in another massively out of favor sector. So we have two credible individuals buying shares in unappealing sectors at the moment, are you willing to bet against them?

Re-Testing the Low - Is it Necessary?

There is chatter about a re-test of the January 22, 2008 lows. Mark Hulbert writes a nice article about the re-test theory and how many practitioners believe it. His analysis found that many newsletter writers are unwilling to declare the lows are in for the year, and how that is good! Hulbert is taking a contrary view here, in the sense that since his research points to many don't believe a low is in and a re-test is necessary - which translates into these very same newsletters are then, by definition, bearish to slightly bearish, and invested accordingly. If you are expecting lower prices, then you are either short, in cash, or hedged to a certain degree. Therefore, your opinion can change two ways, one from bearish to bullish, or from bearish to depressionary.

My take, we are in a global boom, and the odds of depression are very low. Therefore, the direction of those bearish is more likely to change to bullish, or at least a move to neutrality. Therefore, the next trades for those particular investors presently expecting lower prices are to either buy back their short positions, or to invest their cash in long positions. In some sense, this creates a sort of backstop for the market, since other evidence supports other broad groups of investors presently in bearish modes as well.

A Busted Deal or an Opportunity?

Penn National Gaming (PENN) offers a unique investment opportunity at current prices. They have a private equity buy-out on the table for $67.00 per share at something called a "fully financed" transaction led by Fortress Investment Group (FIG) and Deutsche Bank AG (DB). The terms of the deal are such that Penn shareholders will receive $67.00 in cash for each share of Company common stock they own. If the merger is not consummated by June 15, 2008, the per share merger consideration will be increased by $0.0149 per day. There is also a provision that pays Penn $200mm if the deal falls through.

Ok, the background on Penn Natl Gaming: PENN is the 4th largest casino operator in the U.S. They have annual revenues of approximately $2.5billion. They have a focus on slot machine entertainment. The Company operates nineteen facilities in fifteen jurisdictions, including Colorado, Florida, Illinois, Indiana, Iowa, Louisiana, Maine, Mississippi, Missouri, New Jersey, New Mexico, Ohio, Pennsylvania, West Virginia, and Ontario. In aggregate, Penn National’s operated facilities feature over 23,000 slot machines, approximately 400 table games, over 1,731 hotel rooms and approximately 805,000 square feet of gaming floor space. In the past week, they opened a brand new facility called Hollywood Casino in Harrisburg, Pennsylvania to rave reviews.

The ques: Why is the stock trading for $49 when there is a deal that is set to be consummated in June at $67? One word...debt, well maybe two words, credit crisis. Fortress, Deutsche Bank, and another private equity firm in on this leveraged buyout, Centerbridge Partners, must have the capability to obtain financing, and the ability to off-load some of the debt to third party investors. This is the nature of the LBO - the tool is to finance a takeover by raising large amounts of debt at competitive prices. If pricing is unfavorable, then it becomes harder to justify the Return on Investment (ROI). The market is placing a legitimate amount of skepticism on the deal getting done.

However, here are some things to consider:

This past weekend, Peter Carlino, Chairman and CEO of PENN, was interviewed on site at the opening of the Hollywood Casino in Harrisburg. He was asked point blank to comment on the progression of the transaction. Answer: "To my knowledge, very well....This is a fully financed transaction, like Harrahs. We had locked-in financing from the outset. Financing with virtually no escape from the banks."

Note, Carlino mentions the Harrahs deal, which was recently completed in January. That was a $17billion purchase (significantly larger than the Penn offer) by Apollo Group and Texas Pacific Group (TPG) and banks in on the deal were Bank of America and Deutsche Bank.

Note, Deutsche Bank announced earnings a week ago, and lo and behold, they did not report any write-downs related to sub-prime or other mortgages. Last October, they did report $2.2 billion in write-downs, but the latest report mentions strong risk management exercised during the overall credit crisis. CEO Josef Ackermann was quoted, "Unlike many of our competitors, we are in very good shape and at times like these, when financial markets are more risk-averse, we are set to gain from a flight to quality." The banks ability to dodge the subprime crisis also allowed it to raise their dividend 13%, which is unusual relative to some other banking institutions doing the exact opposite.

Here's a re-cap: Fortress (and others) offer $67.00 per share for Penn (a premium of 37% over today's price). The bond market swoons on sub prime and other related problems. In the meantime, the board agrees to sell, and PENN shareholders approve the deal. Fortress agrees to pay $200mm if they back out. Harrahs Entertainment, the largest casino operator in the US, gets taken out in a private deal for $17billion in January 2008. One of the banks assisting the Harrahs package is Deutsche Bank. They had trouble selling some of the junk bonds, but the deal got done. Fast forward to June 2008, will the debt market get better? Will the "locked-in fully financed" deal get done? Is this a speculative risk worth taking? Would I be comfortable holding PENN if the deal does not take place? You be the judge.

Good Luck.

What Do We Know?

AIG (American Intl Group) is in the news today, off -11% or so as its auditors have called into question the value of some Credit Default Swaps (CDS's) listed on their Dec 31st balance sheet. The iShares Financial Sector ETF (IYF) is down -1.8% today, but still up +9% from its lows three weeks ago! One might ask: How is that possible? If there is blood in the streets, and another large financial firm is on the tape with more credit crunch news, why are financials up 9% from their lows? AIG is approx 4.6% of this particular ETF, by the way. Retailers and financials, some of the hardest hit sectors in the economy, are exhibiting short-term strength. We will continue to watch closely, as they could be signaling a change in market leadership.

Note: The biggest holding of IYF is none other than Bank of America (BAC), which will be added to the Dow Jones Industrial Average next week!

AP Poll Says We are in a Recession

61% of the public believes the economy is in recession. Click here for the story. So, if the public knows, what does the stock market know? Isn't the stock market well ahead of broad public sentiment? A market strategist at Bear Stearns says, "Stocks don't do well because the economy or earnings are strong; they do well because the environment turns out better than expected." So, if the stock market and the general public know we are in recession, the challenge will be to figure out what's really anticipated, and therefore priced. This also means understanding the odds and resulting outcomes when things are better or worse than expected. Sounds like a challenging and dizzying game that gets repeated on a daily basis. Is there a Cray Supercomputer big and fast enough to help in our worthy cause?

Take retailers, for example. They are up more than 10% from their lows a few weeks ago. Is the consumer recession already priced, and a continued accommodative Fed will avert a real drawn out recession, and therefore, the worst is over for the retailers. Or, what if the drastic rate cuts in January caused short sellers to cover, only if momentarily, and the 10+% pop off the lows is temporary, as the economy nosedives into a severe recession, and it lasts longer than most expect? Things aren't so crystal clear now, are they?

All in all, the fact that sentiment surveys (including the one above from the AP) are so despondent is a good sign for the bulls. The one unique notion of this market is that you can't have universal agreement that the market is going to decline and it comes to fruition because when everyone is on one side of the ledger, the other outcome usually comes in. (Think New York Giants as heavy underdog, and the New England Patriots as huge favorites). The question is, what is unexpected? Think of the litany of reasons as to why we are in big trouble: economy is in recession, the sub prime mess is bad, the credit crunch will take time to mend, the dollar is weak and going to get weaker, the election will be a pitched battle, earnings will disappoint, budget deficits are going to get worse, etc etc...these stories have had more black ink spilt on them than necessary...so the astute investor knows they should spend their time seeking clues as to the surprise, the unexpected outcome, and its ramifications. That's what we'll be doing. Good luck and have a pleasant week.

Adverse Feedback Loop

Janet Yellen and other Federal Reserve officials made some interesting statements this week. I copied and pasted a paragraph from her speech below. The key point is her comment about a negative feedback loop. I do think there is something to be said about the psychology of the markets, as one does wonder about the constant drum beat about "how bad things are," and whether or not investors act on that information. If you are told on a daily basis that things are bad, whether the facts may show something completely different, you may begin to believe "the noise," as I like to call it. However, the cascade effect impacts us all - as folks talk themselves into thinking the economy is in recession - they react by unwinding their portfolios; this selling begets selling. I can see where the feedback loop gets stuck in reverse and the market, economy, and life in general can get mired in the negativity.


Speech to the Chartered Financial Analysts of Hawaii
Honolulu, Hawaii By Janet L. Yellen, President and CEO, Federal Reserve Bank of San Francisco
February 7, 2008, 7:25 PM Hawaii Standard Time, 12:25 AM Eastern February 8

To sum it up, for the next few quarters, I see economic activity as weighed down by the housing slump and the negative factors now impacting consumer spending. It remains particularly vulnerable to the continuing turmoil in financial markets. My comments haven’t even touched on possible slowdowns in business investment in equipment and software and buildings. I see the growth risks as skewed to the downside for the near term. In circumstances like these, we can’t rule out the possibility of getting into an adverse feedback loop—that is, the slowing economy weakens financial markets, which induces greater caution by lenders, households, and firms, and which feeds back to even more weakness in economic activity and more caution. Indeed, an important objective of Fed policy is to mitigate the possibility that such a negative feedback loop could develop and take hold.

Silver Compliments Gold Nicely

Why Gold?

Weak U.S. dollar

A commodity play

A budget deficit play

Inflation play

Supply/demand imbalances

A hedge to your proto-typical equity allocation

A traditionally non-correlated asset

Credit crunch, derivative mess, mortgage meltdown

Govt stimulus package

Fed easings, etc etc

Substitute the word SILVER for GOLD. Why put all of your eggs in one basket? The way to diversify into silver is through SLV - the streetTRACKS Silver Trust. The shares are consolidating recent gains, and pulling back off of new highs, so a decent entry point is at hand. Good Luck.

Q4 2007 Earnings Down -20.7%; Think Again!

Corporate profits for Q4, 2007 are shaping up to appear downright UGLY. Compared to the year ago period, Thompson Financial says S&P 500 earnings will be off more than 20%. You have to look under the hood to get more details. If you strip out financials, and their massive write-downs, the result is a robust +11% gain.

In the third quarter of 2007, overall profits were +4.5%, excluding financials, they were +3%. The technology sector was extremely strong in Q4, showing the best pop among major sectors, +26% versus the year ago period. After tech's big gains, we have Energy coming in with +19%, Healthcare +17%, and Utilities +13%.

Get set for a tepid first half of 2008, but the Fed rate cuts and a recovery in the financials should support huge gains in S&P 500 earnings in the back half of the year.

ISM Whopper Sends Yields Lower!

Today's ISM Survey sent bond yields back into a recession tailspin. Here's the report:

The Institute for Supply Management reported that its index of service sector business activity declined to 44.6 in January from a revised reading of 54.4 in December. Economists surveyed by Thomson Financial/IFR had expected a slight slowdown but had still expected growth, with a median estimate for the index of 53.

It was the first time the service sector reading has contracted since March 2003. A reading above 50 indicates expansion, while below 50 indicates contraction. Price increases have slowed while costs are up, said Nieves, who is also senior vice president for supply management at Hilton Hotels Corp. Survey respondents cited recession fears taking hold and high energy prices dragging down profitability. ISM said only three service industries reported growth, while 14 showed contraction.

The 10 Year is approaching 40-year lows again. Mortgage rates are tied to the 10 Year, as well as Libor rate, and this will surely grease the wheels of the refinance engine again. Folks forget that Fed rate cuts have a lag effect, and kick into gear about 6-9 months after the fact. The first cut was back in August, so we are only on the bleeding edge of the impact kicking in. What is worth noting is the violent move off the lows all financial related shares have made over the past two weeks. The jury is still in deliberation - trying to determine if the worst is over and if financial related firms might be the next bull market leaders. We'll be watching closely.

The G Men

Ok, time to roll forward with the Super Bowl Indicator, as the heavily favored New England Patriots LOST to the New York Giants. My data tells me the super bowl indicator is "right" approx 80% of the time, so with a Giants win, that means we can expect the market to recover and finish positive by year end. YOWSA!

And last and not least, i dug up some "January Barometer" facts..and the fifty years between 1950 and 2000, the Jauary Baometer had an accuracy rating of 92.5%; therefore, as goes January, so goes the year...and the lousy January points us towards a difficult year! Take that Mr. Super Bowl Indicator!!

On tap this week: Super Tuesday is tomorrow. Big states CA, NY, and IL join 20+ other states in primary voting. We'll have a ton of earnings annoucements, markets in Asia closed later in the week for Lunar New Year (Year of the Rat?), the European Central Bank will be on the tape with interest rate news on Thursday, as will the Bank of England. The U.S. economic calendar is very light this week, so it will be a a time for backing, filling and building a base. All in all - make it a super week. Good Luck.

So Many Analogies

Every time the U.S. employment rate has risen by at least 0.3% in a month, as it did in December, a recession has occurred.

Prior to the onset of a recession, there's typically at least a 25% one-year rise in weekly unemployment claims. The increase in claims in December was less than 7%.

The average decline in the S&P 500 from a pre-recession peak to a trough since 1945 has been 25%, just a few percent more than the index has lost from the 2007 peak to its intraday low last Wednesday. So maybe the market has already discounted a recession?

Every one of the 23 times since 1987 that the weekly AAII poll has shown bears over bulls by a 2 to 1 ratio, the market was up 12 months later, by an average of 21%.

So, where does that leave us? We have conflicting signals. The positive is that since the one day reversal last week and the 600 point swing on the Dow, we have been moving higher. Most pundits talk of the recovery as short covering, a bear market bounce, nothing to get excited about. This is classic wall of worry stuff. Even capitalist-minded IBD (Investors Business Daily) can't even come out and say that they are watching for a follow through rally, and that today would have been Day #5 of a rally attempt. If IBD is skeptical, that tells us something.

Good Luck.

Fed Model: The Market is 51% undervalued!

Ok folks, with today's plunging 10 Year Treasury Bond down to the 3.31% level, I again worked the levers on the Fed Model. With the S&P at 1300, for its earnings yield to approach the same yield of the 10 Year Treasury, the S&P 500 price would have to be 2530. This is also based on today's estimated operating earnings of the S&P 500 over the next four quarters of $83.70. A 2530 level would also mean a 95% gain from current levels. Put that in your pipe and think about it. Good luck.

Stock Market Swoons Lead To....

Big gains. My friends at the Market Analysis, Research and Education Group (MARE), a unit of Fidelity Management & Research Co, sent me a report that compared the five worst Januaries since 1926. The average total return for these five Januaries was -6.8% as measured by the S&P 500. However, subsequent to the five worst January returns since 1926, the stock market generally recovered to post positive returns 12 months later.

The average one year return in the subsequent twelve months was 12.3%, while the two year total return was 26.0%. There was one two year return with a -8.1% result, which happened during the WWII years in 1939 and 1940. Recall, Germany invaded Poland in September of 1939, and not surprisingly, the market was already discounting global dislocations earlier that year! Funny how the market works, huh?!!

Bottom line, your goals and objectives should not have changed at any point in the last few days due to market fluctuations. If you think they have, it is only because you are reacting to fear and greed.

VIX Reaching Panic Levels

As noted last week, we've been watching for signs of capitulation; margin calls, bear market headlines, special one hour television programs dedicated to bear markets, magazine headlines, the whole shebang, and we are getting it and then some.

If you are a long term investor, seeking to grow your wealth, hoping to beat inflation and taxes, the way to success is through equities. Unique buying opportunities come around every now and then, and today is one of them. It's funny and perverse in the investment business, folks think about selling stocks after they have declined 20%, but when searching for bargains in the "real world," they wait for the after Christmas sales and other so-called big mark down events, but when it comes to the stock market, they buy when it's high and sell low. Perverse, huh?!?!

The time is now to get involved, if you have cash, you deploy it, thinking in 3, 5, or 10 years, that your stocks will perform better than bonds and cash. Don't forget, the market sometimes likes to re-visit past lows and put in a double bottom, so watch closely to see how the market trades and we don't want it to get ahead of itself. History of market bottoms tells us that they usually re-test lows, and then expand from there. So this mornings lows might be re-visited. Don't forget, you can't pick the exact bottom, so you wade in, add systematically, and as we put in a bottom over the next few months, you will look magnificent over the next few years. Good luck.

Guns are a Blazin

We finally had some capitulation today. The market rolled over, all ten S&P sectors were down greater than 1% today. The VIX, our trusty measure of volatility, approached the 30% level. This is what we have been waiting for. If you get a big down open tomorrow, and then a monster rally, you need to buy it. This strategy has worked in the past and should work again. Please review the chart above. The VIX is finally approaching 30, we're not there yet, but certainly today's trade scared a lot of people. That's what creates a bottom. Good Luck.

If You Sell Stocks, What Do You Do With The Money?

Ok, so the big question is: if you sell your equities, where do you go with the money? Think again in the big picture: stocks, bonds, or cash?? I think sooner or later, folks will realize the stock market offers the best long term value for your money. If your goal is to beat taxes and inflation, by default, stocks win.

Ok, so the asset allocation decision regarding where to go if you sell your stocks, has me pondering the Fed Valuation Model. Click here for what it is.

I also went to the McGraw Hill S&P site to determine the next four quarters earnings expectations. As reported S&P earnings forecasted for the next 12 months = $83.70. Therefore, with the S&P 500 currently trading at 1371, the market PE ratio = 16.37. The Fed Model, however, reverses the PE, and it becomes an earnings yield calculation, a E/P if you will. The calc is as follows: 83.7 / 1371 = 6.1%

It's straight forward from here, you compare the earnings yield of the S&P 500 to the 10 Year Treasury Yield, which stands today at 3.66%. Therefore, stocks are vastly undervalued compared to bonds. You can buy the 10 Year Treasury and lock in 3.66% today, or you can step out on the risk curve, and embrace the volatility of the stock market, in the hope you achieve something closer to 6% or better returns from equities. My suspicion is that over the next ten years, an investor will do better in stocks versus bonds. The key, you don't blink when things get tough, as they are right now, and consider investing a marathon and not a sprint. Good luck.

You Can Run, & Where to Hide?

The S&P 500 is off -5.4% YTD, and the Nasdaq Comp is -8.8% YTD. The healthcare and biotech sectors are holding up well. IHF (Healthcare Providers) is flat ytd, as is PBE (Biotech). What does this mean? It means investors who must hold equities have been rotating into defensive sectors. However, bear markets have a nasty way of crunching most, if not all stocks and sectors. The chart of IHF is OK for now, but worth watching extremely closely.

Lastly, anyone really know where the saying, "You can run, but you can't hide" came from?

AAII Survey

The news is coming fast and furious these days, and as I type, we are experiencing a 10-1 day, meaning we have 10 declining stocks for every one advancing issue on the market today. The down volume on Nasdaq is at 93% versus up volume of 7% as I type! I can't seem to find any "news" regarding the negative PPI report today (positive for inflation), as the market is completely obsessed with weak retail sales and other "bearish" news items.

What is getting discounted is the "bad economic news." The evidence? The weekly American Association of Individual Investors (AAII) Bulls/Bears Survey. As of Jan 11, 2008, the percentage of "Bears" = 58.9% and the percentage of "Bulls" = 19.6%. The typical extreme pessimism zone starts when the bulls only number approx 49%, and we are awfully far away from that number. This is a contrary indicator, meaning we are far out-numbered by the bears, and therefore, the market has discounted a recession, or other negative events. Perversely, since most are now bearish, this presumes most investors have already sold their equity positions, and by definition, they are now bearish, and consequently have sold equities, are holding cash, or have gone short. The contrarian idea means that the next logical move is for bears to slowly become bullish again, and by definition, will have to buy back, or cover their shorts, and the market will turn and begin to climb again.

Ned Davis Research did a study on this data set, and concluded anytime bullish reading are below 49%, the average annual gain of the S&P 500 is 17.2% twelve months later.

In addition, the levels of bullishness/bearishness indicated in this survey were most similar 17 years ago. They show us that investors haven't been this bearish since the 1990/1991 recession and Gulf War period.

20 Tips for a Positive New Year

Jon Gordon, publisher of a terrific book called "The Energy Bus" - sends a weekly email that I typically share with my colleagues. It is packed with good ideas, but doesn't drone on and on about feel good/positive thinking stories. It is on point and a quick read. Click here for his 20 tips for a positive year. This guy makes sense, and he has solid ideas for both your work AND home environment. I hope you like his Tips for 2008!

Buy the Dips on the QQQQ

The chart above says it all. In our nearly five year bull market, every time the Nasdaq 100 tested the 50 week average, or dipped temporarily below it, it was a terrific buying opportunity. The question today: Is this time different? As we roll into the new year, there is plenty of fear and skepticism building, as evidenced by the put/call ratio, vix level, newsletter sentiment, etc etc....and history has shown that it usually rewards investors who buy when others are running for the exits. Let's see if history repeats itself. Note, the spring 2006 decline was scary, but by the time you acted, it was probably too late to sell. We could yet have a sudden 5 or 10% more downside, but we could easily reverse quickly and sprint higher once again. So, how are you going to play it? Good luck.

The Demand for Gold

Sean Brodrick writes today in Money and Markets about why he thinks the price of gold will trade higher this year. Thankfully, he doesn't address the common notions of inflation and a weak dollar as justification for gold trading higher. I think the media is sometimes wrong when attempting to describe the precious metal sector in this fashion. What Sean does well here, is to simply assess the supply and demand attributes to the gold bullion market. The key point to focus on, and refreshing not to belabor the intrinsic demand from India, China, and other emerging markets (again, we get tired of hearing that), is the demand generated by "investment" products per se, and not individuals searching for jewelry or coins. Here's the quote:

"Force #2: New Demand From Gold Investment Vehicles. Worldwide demand for gold as an investment rose to 138 metric tonnes in the third quarter, up a stunning 618% from the 19.2 tonnes in the year-earlier period!

Exchange-traded funds that hold physical gold — GLD and IAU in the U.S., GOLD in Australia, GLD in Johannesburg, GBS in France and Britain — held approximately 741 metric tonnes of gold at the end of November — up from just 39.4 tonnes in 2003.

The huge rush of gold buying by the ETFs is helping drive the market — the easier it is for investors to buy gold, the more they buy, and the higher the price goes."

The relative change of demand for gold by investors during the period 2003 to 2007 is stunning! We're talking a change from 39 metric tonnes to the tune if 741. WOW! Now that's a trend that could easily continue for some time, especially as demand for ETFs continues to explode. In addition, in a world of flattening capital market yields, investors will continue to seek alternative investment ideas as opposed to traditional allocations to stocks, bonds, and cash. This will be fun to witness as the year unfolds. Stay tuned.