The Inflation Trade

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Gold had another record close yesterday, the third one in four days. The near term futures contract closed at $1018.90 and was as high as $1023.30 intraday. The breakout level is $1004 and above. Gold still needs to take out its all-time intraday high of $1033. Silver closed at $17.33 and traded as high as $17.50. The New York Investing meetup mentioned gold was a good buy at $740 and silver in the the $9 to $10 range. We have also discussed in our meeting the ETF's DGP and AGQ that are 100% leveraged and move twice as much up and down as gold and silver do. These highly volatile ETFs are not appropriate for risk-adverse investors. For those who want to broaden their investments to include gold and silver miners , we proposed the ETF GDX. Our favorite gold stock is NovaGold (NG) which was first mentioned in this blog when it was just above $3.

The precious metals are going up for the same reason as global stock markets. Governments throughout the world are pumping massive amounts of liquidity into the financial system. This shows up in stock prices first and in consumer inflation later (it can take many years before the full impact is felt). The statistics indicating economic 'recovery' are usually not adjusted for inflation and what is being touted as economic growth by the mainstream media has a significant component of rising prices to it. This is only the beginning however. In a few years inflation is going to get incredibly ugly. When it becomes apparent that there is no 'real' growth, the stock market rally will fizzle - and the government will print even more money to stimulate the economy. The stock market is currently historically overbought based on some criteria. Over 90% of stocks on the NYSE are trading above their 200 day moving averages. A number in the 70% range is usually enough for a top.

Gold and silver are the ultimate protections against inflation and anyone concerned about inflation should make them the cornerstone of their investing strategy. I will hold as much as 50% of my portfolio in these metals and their miners during their bullish periods. The other two major inflation hedges are energy and agricultural commodities. Oil is seasonally weak in the fall and usually best bought early in the year and sold in the summer (as the New York Investing meetup did with DXO). Its seasonal pattern is almost the exact opposite of gold and silver's. Natural gas is the energy commodity of choice at the moment since it is seasonally strong in the fall. Agricultural commodities are dependent on weather as well as inflation. Good weather during the U.S. summer has driven many of their prices to very low levels. It might be worth taking a look at RJA or DBA (RJA is more diversified) and start putting a little of them away for a non-rainy day.

The other inflation trades include industrial metals and shorting long-term U.S. bonds. The New York Investing meetup mentioned FCX in the winter and Alcoa (AA), UYM and XME in the spring (as well as Harry Winston - HWD). These stocks have already had major rallies. They are partially dependent on inflation and partially dependent on the economy doing well going forward, so they are not the major bargains they once were. The short bond trade did well between December and June (bond prices went down and interest rates went up), but there has been some give back during the summer. TBT is a leveraged ETF that allows the average investor to short long-term bonds. When the economy heats up, interest rates go up. During bouts of inflation interest rates go through the roof. TBT works if either or both take place and it is currently at a reasonable price.

NEXT: Quadruple Witching Today; Market Update

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Silver, Oil, Gold - Market Screams Inflation is Coming

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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Silver is having its best month in 22 years. It was up to 15.49 in overnight trading, getting close to important resistance around 16.00. Gold traded as high as 974 before the U.S. markets opened, inching closer and closer to that key 1000 level. Light sweet crude was trading at 66.18 at 8:00 AM New York time. It's next resistance is in the 67 area and then 70 after that. Resource stocks were up significantly in Asian trading last night. Expect gaps up in SLV, GLD, DXO, and ERX when the U.S. market opens. Keep in mind that at some point those gaps will have to be filled.

Markets tend to be bullish at the beginning of a month, so early next week is a favorable period. While it may not happen today, silver, oil and gold will become too extended from their 10-day moving averages and will have to come back down to that line. Traders with a shorter term horizon need to take this into account. If you have a longer term perspective, you can wait until key resistance is reached. Oil is heading toward the 75-78 price level. While it may not finally peak this summer until it gets to around 100, profits should be taken in the mid-70s and oil should be swing traded shorter term at that point. You don't have to worry about gold until 1200 and silver until it reaches 21. They haven't even begun their rallies yet.

Marc Faber, a very well-known market investing advisor and market commentator that appears in Barron's annual roundtable has come out with a report stating hyperinflation in the U.S. is inevitable. While, I would certainly agree that lots of inflation here is inevitable, I don't yet think the 50% a month inflation rate needed for hyperinflation is a done deal. It is certainly a possibility though. To get to that point will take incredibly inept government policy and oblivious monetary authorities. You would practically have to have a central banker throw money out of a helicopter! By the way, the Fed is still currently worried about deflation, while printing money Zimbabwe style.

The market for all commodities is bullish going forward, but that doesn't mean there aren't going to be tradeable pull backs. Which ones you pay attention to depends on how short term your trading perspective is. Other than too much extension above the 10-day moving average, you need to be aware of the 200-day moving average - HWD (Harry Winston) is caught there at the moment, but it has a textbook perfect bullish chart - and the 38% Fibonacci retracements. If you sell with a short term perspective, you must be willing to buy back with a short term perspective as well. If you can not do this, and most people can't, wait until major resistance is hit before pulling the trigger.

NEXT: How Susan Boyle Provides a Lesson for Stock Investing

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Oil Takes Gas, Silver's Shining Moment, GM Watch

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

The oil inventory report was delayed this week and it was bullish big time for the third week in a row. The natural gas report was just better than expectations, but even this minimal accomplishment proved a combustible mix that caused UNG (the natural gas ETF) to shoot upward. SLV (the silver ETF) traded over 15.00 this morning, removing all doubt that a breakout has taken place from strong resistance around 14.50. News reports are indicating that some progress is being made with GM bondholders in a last minute effort to avert the largest industrial bankruptcy in the history of the United States.

Analysts expected that U.S. oil inventories would rise 1.8 million barrels last week. Boy did they get a surprise! Inventories fell by 5.4 million barrels. Gasoline, the major use for oil during the summer months, had 600,000 less barrels in storage. Year over year U.S. gasoline demand is down only 1.2% despite the troubled economy, yet oil is still 47% off of last year's high. Despite dropping supply and the barely lower demand for gasoline compared to the much lower price of oil, you can still find bearish comments on oil in media coverage. Our favorite oil ETF, DXO, has continually told an opposite tale however - and when in doubt, the market is always right. DXO broke above 4.00 today and should be heading higher until light sweet crude reaches at least $75 a barrel. Triple leveraged energy company ETF, ERX, is having an even better day after consolidation around support between 29 and 30 level.

While oil may have only a month or so left of its rally (frequently when the most money is made), natural gas is still putting in its bottom and I have been accumulating UNG since it fell back to the low 14's. Unlike oil, the fundamentals of natural gas are indeed negative and have been for a long time. Moreover, the favorable seasonal for natural gas can begin as late as July as opposed to February for oil. The peak is most likely in late October, early November, while oil statistically peaks in early August. This week, analysts expected U.S. storage of natural gas to increase 111 bcfs (billion cubic feet), but the increase came in at only 106 bcfs. In a heavily shorted market, that was enough to generate a big move up.

In the precious metals, SLV trading above 15.00 today was quite impressive. At the moment silver is doing better than gold, but it has a lot of catch up to do. Gold is only 4% off its recent highs of 1000, while silver is about 30% lower than it previous high around 21. SLV has another point of resistance at 16. After that, SLV testing 21 is almost certain.

Some progress seems to have been made with GM bondholders this morning. It is still too early to tell if this will come to fruition. Whether or not GM declares bankruptcy (allowing this to happen will be one of the biggest economic mistakes that the U.S. government has ever made) is obviously going to go down to the wire. The stock has not fallen below a $1.00 today however and is actually up 10% at the moment. When the market thinks a company is going bankrupt, it pushes its price into the penny level. Watch to see if this happens. While a GM bankruptcy will weigh on the market, the avoidance of bankruptcy would cause a big rally next week.

NEXT: Silver, Oil , Gold - Market Screams Inflation

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Bull Markets Climb a Wall of Worry

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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An old market adage from the 1800s is that bull markets climb a wall of worry. At almost every step of the way (except at the end), there is substantial hand wringing about stocks being over priced, overbought, overextended and ahead of themselves. You will hear and read over and over again how current prices are not justified and the rally has gone way too far. Despite all the numerous reasons cited, most of which seem quite reasonable, stock prices continue to go up and up. Based on these criteria, we are currently in major bull market.

This type of opinion for stocks has been pervasive in the mainstream financial media from almost the beginning of the current rally (the oil market is even worse, with a constant barrage of negative headlines and news of impending price collapses that are supposedly going to take place any moment). It has however reached new heights in this rally with the CEO of NYSE Euronext giving a public interview stating the current rally is likely to run out of steam and stocks return to their previous lows. Considering the NYSE Euronext makes its money on the amount of trading that takes place, widely publicized comments from its CEO to talk down the market and discourage people from trading are a bit curious to say the least. There is definitely more to this story than meets the eye.

As we pointed out in the blog a few days ago, the big money in rallies like the current one is made by buying very low-priced stocks with good fundamentals. A case in point would be diamond company Harry Winston (HWD). While the media was telling you to stay out of the market, you could have almost doubled you money in this stock in less than two weeks. The stock is indeed now overextended, but should offer some opportunity for buying it on a drop later next week or even earlier the following week. While oil the commodity is moving sideways, a number of oil stocks are moving up. We mentioned in this blog drillers was the place to look, one the best deals seems to be Precision Drillers (PDS). A few shippers, also mentioned here as a place to look, have had explosive rallies in the last couple of days.

If you have a longer term perspective, media coverage can actually be very helpful. Just look for stocks that they are bashing. One of the best examples I have ever seen of this was in an article published in yesterday's IBD ("Bottom Fishing Can Land a Smelly Catch"). While every point made in this article applies to HWD (try to find an IBD stock that went up a 100% in the last two weeks - don't bother looking, there aren't any), the article is actually about MEMC Electronics (WFR). While most of the article bashes WFR as one of the worst stocks in the world, a careful reader would note that WFR had similar problems in 2001 to those that it has today and it was selling as low as $1.05 at that time. Within 6 years, WFR went up to $96.08. So you could have made 95 times (or 9500%) your investment by buying the stock when things looked worse. But don't worry, IBD is doing its best to make sure you don't fall into that trap again!

NEXT: Nasdaq Confirms Double Bottom - 200 MA Next

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Rallies Make You Rich, No Matter What the Type

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

Our Video Related to this Blog:

While the major indices were flat yesterday a lot was going on below the surface in the market. Oil went on another incredible roller coaster ride, opening way down, getting close to even and then closing with smaller losses. It's back above the breakout point again in European trading this morning. A lot of small cap stocks, including some oil and gas drillers and producers, had major rallies yesterday however. In fact, the beaten down inexpensive under $5 stocks - the ones that almost every financial advisor tells you categorically to avoid are the stars of this rally. This is nothing new, its always the case in short-covering, technically based rallies.

Oil is repeating the behavior pattern at $50 that took place when it traded around $40. It went above $40 and was driven back below it over and over again. The oil "experts" were repeatedly quoted in the media that a price over $40 couldn't be justified. Oil would then go below $40 and would shortly thereafter bounce right back above it. It then shot up to $45, which the "experts" said was too high. It then promptly went to $50. Yesterday was the 4th time light sweet crude was driven below the key $50.50 breakout point. This morning in European trading it shot back above it. The market has continually shown that the oil "experts" the mainstream media quotes are wrong. Nothing succeeds like failure in financial media coverage however (much like in Washington, D.C.). The media seems to seek out "experts" who have never made a correct prediction in their entire careers.

The "experts" will also tell you not to buy stocks under $5 and stocks that have had huge price drops because they are unsafe. Better to stick with 'sure things' like Enron and those Bernie Madoff funds instead. When the market has has a major drop, buying low-priced, beaten down stocks are the key to making the most money in the rally that follows. Just make sure the company is financially viable - a current ratio around 2.0 and positive operating cash flow are the signs the company is likely to continue its operations. Low or no debt is even better, but not necessary. Running out of cash and failure to make debt payments is what drives companies into bankruptcy. On a fundamental basis, you can find a number of low-priced stocks that have very low price earnings ratios, price to book values well below one and even with price cash flow ratios below one (the price is below the amount of cash generated for the most recent year). There are also stocks with real dividends above 20%. These stocks are major bargains by any criteria. Oil and gas, coal (even in its bright, shiny form), and shipping are the richest source of these stocks. There are a few bargains in technology as well.

Yet is the mainstream media telling you to buy, buy, buy? Not at all. It is filling you with fear and telling you this is a suckers rally. Every rally is actually a suckers rally however. In a bull market, the suckers are the people who buy and then hold. In a bear market, its the people who sit on the sidelines and don't buy at the bottom or close to the bottom or even after the market is off the bottom because the financial media is warning them about losing money. If you are doing this, just remember every major financial publication had nice things to say about Enron. How much money do you think you'll make if you follow the investment advice of those people?

NEXT: The Deflation Boogieman, Oil and Intel

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.