Gold Correction

Gold is one of the few assets in the world which is in a primary bull market, meaning that the asset is rising overall, despite periods of downward movement. We're in one such period now, which is going to act as a brake on all gold-related assets, including mining stocks like Seabridge Gold SA which I've recommended.

I still think the stock is a long term win, but I must say that it's likely it will go into correction mode (in fact, it already has fallen $6 or so from its recent peak, a 20% decline). Those with a short-term frame may think about selling, even at a loss, in order to get back at a lower price.

Since I expect the overall market to begin another period of decline, I like a stock that will move inversely to the market, like DXD. (Remember, DXD is for short-term trading only; it has mathematical characteristics that make it a poor long-term investment.)

I suppose I now have to break my 10 grand bit into two groups: long term and short term. Long term, stay with Seabridge, even though you're down right now. It'll come back. Short term, take the loss and move into DXD while you wait for SA to bottom out.

Stocks Fall

The Dow has, as of this moment, taken a big hit. It feels like the rally is over.

I expect that there may be an upward movement tomorrow, but I think the rally is basically out of steam.

Seabridge took a big hit today, falling to $25. I expect it will go up to $29, but then follow the market down. I think gold may have a big day tomorrow, as a new wave of fear washes investors out of stocks and into the safety of gold.

I'm going to try to sell SA at or around $29, and get into DXD at or around $45.

10 Grand: Sell DDM, Buy SA

The time has come to sell DDM (for now). I recommend Seabridge Gold (SA). Seabridge is a "resource hoarding" company, and their resource of interest is gold. They do no mining, but rather they buy the best gold mining land they can.

If you sold your 370 shares of DDM now, (for $29.45) you'd have $10,912.42 (assuming your trades cost $9.99; that is what I pay over at Ameritrade.) If you buy SA at $28, you can afford 389 shares (assuming you don't use margin, a wise move in these difficult times). You are now up 9.1%.

Only invest what you can stand to lose.

Microsoft Issues Bonds, Contemplates Drinking Own Urine

Microsoft has completed a new bond issue, its first ever, for $3.75 billion. The company says they have no real plans for the money, though the move has sparked speculation about possible acquisitions. They say they're just taking advantage of favorable market conditions.

Apparently some analysts think that the most likely use of the money would be a stock buyback, where the company buys its own stock, attempting to push prices up. Microsoft stock has been hit by the falling market, along with everything else. The stock was at $30 early in 2008, and it fell below $15 by March 2009.

The stock buyback is a corporate strategy that is emblematic of the first decade of the 21st century. Stock buybacks exploded during that time, as they did during the end of the 1990s. Of course, most buybacks are done with borrowed money. The tactic is considered an acceptable way of paying out profits to shareholders.

A company buying its own stock with borrowed money is doing something as sensible as drinking your own urine. At best, it keeps you alive in the desert. But it sure won't make you thrive. Borrowing money imposes an economic logic: you must pay back more than you borrowed. So if you're borrowing to invest, you'd better make sure that what you invest in has a higher return than the interest rate, plus some for inflation, and a normal rate of profit. How does a share buyback accomplish any growth whatsoever? If all goes well, and the stock price remains high, (far from certain in this volatile market) how exactly does that insure the future growth of Microsoft?

The real motivation for the skyrocketing use of buybacks is so that management can give themselves fat bonuses covertly, in the name of shareholder value. Now that the credit teat has been taken away, my guess is that we'll see far fewer share buybacks by corporations. It was a strategy of the bubble years, one that is doomed to extinction.

Stocks Continue to Rise

The Dow had a good day today, rising 101 points to break the 8500 mark.

If you bought 370 shares of DDM at $26.93 when I recommended it, you'd now have $10,807, an 8.3% return after trading fees (assuming $9.99 per trade).

It feels like the conventional wisdom is that the market has bottomed, and a new bull market has begun. A substantial minority opinion holds that the Dow is in a bear market (or "sucker's") rally. But the big money seems bullish, judging by a recent Barron's survey finding that 59% of money managers are either "bullish" or "very bullish". Since big money drives the market, it is wise to heed what the big money managers are thinking and feeling. As the rally continues, their doubts will fade, and bullish sentiment will increasingly dominate.

The strategy I'm proposing is a risky one, requiring some vigilance to carry out. I believe that the primary trend of the market is bearish, so this strategy looks to the secondary trend, which is even less predictable than the primary trend. Use caution, only invest as much as you're willing to lose.

At some point, when the market rally is nearing its end, we'll want to switch to DXD, which moves inversely to the Dow.

New Forecast for the Dow, New Feature for the Blog

In a previous post, I gave a prediction for the Dow to rise to 8300. Given what has now happened, I'd like to revise that. The Dow has just broken through its most recent high mark (of Apr 17th), and I now see the rally taking the Dow back above 10,000.

Which brings me to the new feature of the blog. I give my calls, and we'll see how a hypothetical $10,000 invested as I say will do over time, assuming a trading fee of $9.99.

Since I see the market rally continuing, I'm taking a position in DDM, which is a leveraged ETF (exchange-traded fund) that returns twice the daily performance of the Dow. I'm going to start the clock now, even though I bought DDM a few days ago. I'm going to say you can pick up DDM at its current price of $26.93, you can get 370 shares. (More if you're on margin, but let's keep it straight.)

I don't believe the bear market is over. I think the Dow will still fall to the 1000 range or below. (In a previous post, I called for 400). The reality is that the stock market has been on an outrageous tear for 27 years. That kind of growth is not corrected by an 18-month bear market, even one of this severity.

Once this rally has tapped out, I'll call for taking the opposite side, with an ETF called DXD, which moves double the inverse of the Dow.

Outrage Over AIG Bonuses

It's been interesting to watch the back-and-forth over the $165 mil in bonuses to the AIG execs and financial wunderkinds in the division that wrecked the company.

On the one side, AIG is like, well, we're still in business, so it's business as usual. The "performance" part of the bonuses was based on a Panglossian assessment of the profitability of the credit default swaps. (Jack Adamo of Forbes has a nice article on this.)

It sure makes the government look bad to be completely behind the curve on this. Congress knew about the bonuses for months, but only acts once the public gets upset.

Is AIG stock a candidate for a short sell? I'd say so. The stock more than tripled in price recently, going from a low of $0.35 to a high of $1.28 today. The short interest is currently 5.9%.

A former student sent me a note asking about AIG - is it a good idea to invest in it, since it seems like the government is behind it, so it can't fail, right? I said it was extremely speculative, since AIG is sitting on God-knows-how-much in liabilities, but in the short term, I expect the stock to rally to $1, making it a good play if you have the stomach for the risk.

At this point, I expect the rally to take the Dow to 8300 before resuming its downward course, and I expect AIG will be punished by the market soon.

And yes, I try to only list my good calls...

A Prediction for the Dow

In the spring of 2006, my father and I predicted a financial crisis would hit the US. (We assumed that this crisis would be driven by dollar depreciation, which has not yet occurred). We continue to feel strongly that the dimensions of the coming crisis are still not grasped by most Americans. In January 2008, I predicted the Dow would fall to 7000. Given what has now occurred, our concerns were mild. Yes, an estimated $60 tril of paper wealth has been destroyed globally, but there is much more to come.
Over the next five or ten years, the US will sink into a deep recession. Unemployment will rise dramatically as the restructuring of the American economy proceeds. We see the Dow falling to 400. Yes, four hundred.
Given the endless parade of bad news and bearish forecasts for the economy, it may seem that the worst has already happened, and there is nowhere to go but up. Indeed, some analysts (for example here and here) have called a market bottom. The US consumer is not spending, unemployment is rising, the highest officeholders in the land call it the worst situation since the Great Depression... you might say, how many other shoes are there waiting to drop (or be thrown)?
What has not yet occurred is a serious threat to the dollar's status as the world's reserve currency. That threat will come, for the world cannot continue to finance American profligacy. When the eventual flight from the dollar occurs, it will cause much worse damage even than the unbelievable carnage in asset prices (click here for a chart of the Dow over the last year) we've already seen.

Stewart vs. Cramer: Short Selling Backlash

[Written for the Borsen-Kurier]
Judging from the cable news cycle, the most important story of the last week in the US was a face-off between Jon Stewart, comedian and host of The Daily Show (you can watch the show here), Comedy Central’s fake news network, and Jim Cramer, a former hedge fund trader and host of CNBC’s Mad Money. How did it happen that arguably the most serious journalist in the US, virtually the only interviewer who is willing to ask truly tough questions, is a comic specializing in, as he puts it, “fart jokes”?
Stewart played a clip from the end of 2006, which showed Cramer being interviewed and revealing some of his secrets of short selling: “You want to spread rumors about the company,” he said, “it’s against the rules, but the SEC won’t find out.” After the clip, Stewart says: “I want the Jim Cramer on CNBC to protect me from that Jim Cramer.” Cramer squirmed and capitulated, trying to make it seem that he’s doing everything he can to prevent the kind of abuses he’s just been shown to be adept at, and promising to do a better job as a financial reporter. “That would be great,” said Stewart, pressing on, “but this is about more than you.” It’s about the network, the show, the whole focus on short-term gain at the expense of the little guy, about gaming the system, about the average investor “capitalizing your adventure”.
He’s right, of course, in that financial markets can function like a poker game. As Warren Buffett put it, if you’ve been playing poker for half an hour and you don’t know who the sucker is, it’s you. Shows like Mad Money are designed to draw in more suckers, who then make amateurish blunders, which the pros exploit.
What should be done?
It doesn’t seem to make much sense to try to ban rumor-mongering. But should we ban or try to restrict short-selling? Has short-selling caused the financial meltdown? Short-selling is the practice of borrowing shares, selling them, then waiting for a lower price, which allows the investor to buy back the shares, and return them to the lender, pocketing the difference. The practice of short-selling is having its 400th anniversary this year, and it remains controversial, because it puts the investor in the position of hoping for a decline, and for the last 400 years, short sellers have been blamed for causing markets to fall.
But such a position is untenable. Though it is true that every short sale begins with selling, and each act of selling exerts downward pressure on a stock, the number of short sellers in a market tends to be small, and short sellers tend to be professional (or at least experienced) traders.
Because markets tend to price in available information, rumors cannot bring prices down for long. If a stock is undervalued by the market, its price will eventually rise, just as overvalued stocks will fall. Short sellers do a valuable service by putting pressure on overvalued stocks. Either the shorts are correct, and the stock falls back to a lower value, or the shorts are wrong, in which case they lose money. There is no more effective discipline for traders than losing money. Blaming short-sellers for falling stock prices is like blaming a vulture for the death of a zebra. A vulture is incapable of killing a zebra, but the vulture obviously benefits from the zebra’s death; the rest of the ecosystem benefits from the vulture stripping the carcass.
Short selling did not cause the US stock market to fall. The stock market fell because it had reached a monumentally overvalued condition. To restrict short selling not only locks the barn after the horse is gone, it discourages traders from taking positions which correct overvalued prices.