Marc Faber's Latest View

1 . Earlier this year it was easy to call for a strong rebound in asset markets. Markets were extremely over-sold and sentiment was extremely negative. This is no longer the case.

2. Bullish sentiment is higher than at the 2007 peak.

3. Worrisome is that corporate insiders have been selling at an extremely high pace. The last time there were more US corporate executives reducing their stock holdings than increasing them was in June 2007 shortly before the stock market topped out. According to Bloomberg,
“executives at 252 companies in the S&P 500 unloaded shares since March 10, with total net sales reaching $1.2 billion, according to data compiled by Princeton, New Jersey-based InsiderScore, which tracks stocks. Companies with net sellers outnumbered those with buyers by almost 9-to-1 last week, versus a ratio of about 1-to-1 in the first week of the rally.”

4. Another negative for the stock market is that the demand supply situation has deteriorated. According to TrimTabs Investment Research, prior to May 2009 the highest level of share issuance in a given month was $38 billion. May brought about a new all time record with monthly sales totaling $64 billion! As can be seen from Figure 13, the bull market of 2003 to 2007 was partly driven by a reduction of shares outstanding through buy-backs and M&A activity (leveraging). Now, however, deleveraging is the order of the day and share issuance is running at a record.

5. Share issuance is also running at a record level in many foreign markets and is diluting existing shareholders. In Singapore, equity funds raised as a percentage of total market capitalization is at an all time high.

6. I have to confess that I do not have a very strong conviction at this time. For the S&P 500 there is strong support around 880 and resistance around 950. I could envision a scenario where we break out briefly on the upside before a more meaningful correction unfolds. But as mentioned above, renewed weakness is likely to provide a buying opportunity.

7. Personally, I would not be surprised to see for a while renewed deflationary fears
developing with bonds rallying (as mentioned in last month’s report), the US dollar rebounding and commodities and equities coming under renewed pressure.

8. I have had many professional gamblers as friends and as clients (two of them made over $500 million – starting with nothing at all - by using computers to calculate the odds of bets on horses - I have seen the money, so it is no exaggeration). Most of the time the odds were not particularly favorable and they only took small positions. But once in a while, the odds were very favorable to take a large bet and that’s when they made the big money.

Right now, I do not see anything that offers a particularly favorable risk reward opportunity and, therefore, I would take it easy. My doctor advised me “to cut back on predictions, “because as Mark Twain observed: “prophecy is a good line of business, but it’s full of risks.”

「先天」非理性經濟行為

信報研究部

金 融海嘯爆發即將一年，各地股市雖然已累積一定升幅，但全球經濟尚未見到確定復蘇迹象，各國政府仍忙於收拾信貸危機殘局，這場看似突如其來的世紀金融風暴的 起因，神經科經濟學家（neuroeconomist）與行為經濟學家（behavioral economist）分析指出，原來與人類的思想和投資心理息息相關；專家更認為，引發金融海嘯的房貸泡沫以至後來泡沫爆破，也是人類的非理性經濟行為造 成。

遠 在百萬年前的洪荒世界，人獸雜居，弱肉強食，人類一旦與猛獸狹路相逢，除了拚個你我活，另一選擇就是轉身逃命，即科學家Michael Shermer說的fight or flight，而或打或逃必須在人獸相遇的剎那之間決定，片刻猶豫不決便要賠上性命。長期活在適者生存的環境令人類養成了本能反應，往往未經深思熟慮便作 出決定，Shermer指出，在遠古時代只需判斷敵我強弱憑本能反應便足以保命。但未經深思憑一時間感覺（gut feeling）決定投資的非理性經濟行為，耶魯教授Robert Shiller以凱恩斯最先引用的獸性（animal spirit）來形容，投資者事前不做任何資料搜集工作，只是忽然會認為一間房屋或某隻冷門股票值得買入便付諸行動，在市道興旺時，房屋股票幾乎即買即 升，投資者更加相信自己可以霎時作出正確的決定，自信心膨脹以致拒絕聽取不同意見的訊息，形成行為經濟學上的確認偏見（confirmation bias）。

現代人表現在投資市場的獸性或者非理性經濟行為不排除出自遺傳基因，亦即Michael Shermer所講的fight，人類先祖不知經過多少年代都是憑瞬間決定與野獸搏鬥，日積月累已變成人類的本能反應。

過度自信成因

心 理學發現人們固有過份自信。自欺論（self deception theory，Odean，1998）指出，人們偏向高估自以為可能發生的事件而低估他們認為發生可能性較低的事件，亦即是人們傾向排除考慮或然率低的事 件，但確定或然率高的事件必將發生，甚至自欺地令自己的行為合理化。

自我邀功的偏見（biased self attribution）可能是導致過度自信的原因，他們會把好成績當作是自己的功勞，失敗的時候則歸咎於運氣差（Langer, et. al., 1975）。過度自信的行為與心理學的確認偏見「相輔相成」，人們全不理會指出自己錯處的證據，因此，並不是沒有客觀的反面證據，只是人們心理偏見對之視 若無睹而已。

導致過份自信的還有沉沒成本效應（sunk cost effect, Arkes, et.al,1985）和事後孔明偏見（hindsight bias），沉沒成本效應例如有人耗費大量工夫然後找到一隻他認為大有前景的股票，即使有其他負面訊息擺在眼前，他仍會堅持自己的分析正確。至於事後孔明 偏見則是在知道事情的結果之後，誤以為自己老早就預測到事情會怎麼發生。例如1990年代末科網泡沫爆破之後，他們堆砌種種理由解釋科網泡沫必然破裂，而 且早在科網泡沫形成時已是他們意料之內。不過，我們只知道在1990年代末科網股稱為「新經濟」。

但神經系統如何形成人們過度自信還未完全 研究明白，例如恐懼也是不經深思的自然感覺。當我們遭遇可怕的環境，或打或逃都是下意識的反應，事後才可證明當時的決定是否正確。不過，人類有自然傾向為 每件事的起因和影響都提出一套理論，大市上升因為聯儲局減息諸如此類；而大部分人普遍不接受「我不知道」的說法。因此，人們事後解釋他當事時的決定，他們 會強調經過深思熟慮；這亦符合人類固有的過份自信本色。

金錢幻覺

Scientific American一篇文章則指出，神經科專家發現，前額葉腦皮層中心（ventromedial prefrontal cortex，VMPFC）主導了人類的決定和行為，VMPFC會令人產生經濟學稱為金錢幻覺（money illusion）。在幻覺的影響下，為了購入一項資產，人們忽視明顯對該項資產未來價值的負面因素而確信這是遠超所值的投資。行為經濟學家亦認為，因為 VMPFC主宰人的貪念（greed），由此產生的幻覺會使人對處理金錢方面有錯誤的概念。

耶魯經濟學教授Robert Shiller也同意金錢幻覺造成房貸泡沫。他指出，有些人只記得多年前買入房屋時用了多少錢，但忘記當時的物價，因而有一個錯誤的印象房價比其他物品的升幅大得多，而錯誤的印象則誇大了房產的投資潛力。

Michael Shermer提及的flight也可以解釋投資者另一非理性經濟行為。人類由單打獨鬥慢慢發展到群居生活，漫長的進化過程使人類有追隨群體行動的傾向， 羊群效應隱藏在思維深處。次按危機爆發之前，私人投資者、銀行、信貸機構爭相參與房地產市場，直至減息周期結束，利率掉頭上升，金融機構因為信貸額度超越 資產負債表界線而推出五花八門後來成為「毒債」的次按投資工具，但金錢幻覺令投資者對各種不利房市的訊息全無警覺；及至泡沫破裂，只要有人帶頭「止蝕」， 非理性經濟行為這時表現在恐慌性拋售潮迅速蔓延，羊群效應令資產價格由一個極端走向另一個極端。

去年的信貸泡沫由形成到爆破可算是非理性經 濟行為的典型範例。針對投資者加深與經濟周期密不可分的通脹教育，Robert Shiller建議採用類似unidad de fomento（UF）的方法量度通脹。UF由智利政府在1967率先採用，並得到多個拉丁美洲國家支持。智利政府的UF設計由房價、按揭、租金、贍養費 以至行政人員花紅等等多個經濟項目組成，Shiller教授認為，UF有效防範金錢幻覺的影響，因為UF可以更清晰反映通脹指標。

UF與張五常教授多次在本報撰文倡議中國政府將人民幣與一籃子物品掛鈎的想法大同小異，中外學者「英雄所見略同」。

美國剩餘儲備高企啟示通脹未至

信報研究部

金 融海嘯發生後，美國政府為挽救金融市場及經濟，除了把息率調低至接近零水平外，更推出「量化寬鬆」（Quantitative Easing）政策，在金融體系內注入萬億美元計的資金，嘗試力挽狂瀾。聯儲局最終能否成功拯救經濟，以及令金融市場回復秩序，還有待觀察。然而，聯儲局 的救市行動，已令不少投資者擔憂超級通脹（Hyperinflation）的來臨，畢竟聯儲局（甚至連同歐羅區和英國）的救市行動形同大規模印鈔票。不 過，事實是迄今美國經濟不但沒有嚴重的通脹壓力，反而出現溫和通縮的情況。箇中原因何在？此外，聯儲局「量化寬鬆」政策仍在，惡性通脹的危機不能抹煞，但 作為投資者如何利用有效的指標監察惡性通脹的來臨呢？研究部今次與讀者探討這方面的議題。

在解構美國「量化寬鬆」政策對經濟帶來潛伏的通脹危機前，讓我們先了解一下目前美國的「量化寬鬆」政策如何運作。

剩餘儲備飆升400多倍

在 過去近年半以來，你是否知道升幅最快且最急的是什麼？股市、黃金或商品，全都錯！是美國金融機構存放在聯儲局的剩餘儲備水平（US Aggregate Reserves Depository Institutions Excess Reserves，即美國金融機構扣除法律規定所需儲備要求外，存放在聯儲局的剩餘儲備金額；下稱「剩餘儲備」）。

事實上，在金融海嘯湧到之前，美國金融機構存放在聯儲局過剩的儲備不足約20億美元，但截至今年5月中，已飆升至逾8700億美元，上升幅度四百多倍【圖一】！

由 於美國貨幣基礎（monetary base）是由兩個主要成分所組成，分別是美國金融機構存放在聯儲局的儲備（這包括所須及剩餘儲備兩部分），以及整體貨幣流通量，而「剩餘儲備」過去一年 多時間內大幅攀升，直接令美國貨幣基礎出現暴升情況【圖二】。美國貨幣基礎由2007年年底約8200多億美元急速膨脹，至今年5月最高曾見1.8萬億美 元，升幅近一點二倍。而美國金融機構存放在聯儲局的儲備水平，則由佔貨幣基礎不足0.3%，大幅攀升至佔50%以上的水平，升幅達一百七十倍！

那麼「貨幣基礎」或「剩餘儲備」如何及為何會出現暴漲？更重要的是，這將引發什麼潛在的問題呢？

「貨 幣基礎」或「剩餘儲備」出現暴漲，正正顯示聯儲局運用「量化寬鬆」政策的踪影。具體而言，聯儲局於去年10月開始，給予美國金融機構存放在聯儲局的儲備 （這包括所須及剩餘儲備兩部份）利息，利率雖然自去年12月16日開始向下修訂為0.25%的水平，息率不算十分吸引，但已較三個月或以下日期的國庫債券 息率高（目前三個月國庫票據息率約0.15%）；再者，在目前經濟乏善足陳，壞賬風險高企的環境下；再加上銀行正積極去槓桿化，修補及強化資產負債表，故 不少金融機構寧願把資金存放在聯儲局內，這也解釋「剩餘儲備」或「貨幣基礎」近月出現顯著上升背後的因由。

聯儲局資產負債表質素轉壞

值 得補充的是，美國金融機構雖有龐大的資金存放在聯儲局內，但仍有不少銀行存在資不抵債情況，只是當資產不在按市價計算價值後（mark-to- market），情況「看似」有所改善。以花旗集團為例，它的資產約為2.1萬億美元，但當它進行壓力測試（stress test）時，當局處理其加權風險資產值，只計算資產值的一半而已，可見美國金融機構的資產值仍存在甚高水分。因此，美國金融機構也欠缺向市場拆出資金的 意欲，令大量的剩餘儲備資金只存放在聯儲局內收取利息。

那麼聯儲局從金融機構吸納了數以千億計的存款做什麼呢？答案是成為部分資金來源，向 美國金融機構購買國債，甚至按揭毒債（即MBS），從而向市場注入資金，逐步改善金融機構資產質素。根據聯儲局資產負債表顯示，在金融海嘯爆發前，聯儲局 並未持有任何按揭毒債，但截至今年7月止，持有這類債務便高達4600多億美元。

此外，值得補充的是，金融機構從聯儲局獲得沽出毒債的資金後，再反過來把資金存放在聯儲局收取利息，產生循環乘數效應，令貨幣基礎進一步膨脹（即聯儲局不斷在金融體系注入資金）！

站 在美國金融機構角度，其毒債賣給聯儲局的同時，還有儲備資金存放在聯儲局（收取利息），顯然美國金融機構資產負債表的質素將可得到改善（這也難怪近月來金 融類股份有顯著的反彈）。然而，站在聯儲局的角度，它用了金融機構的存款，買入它們的毒債同時【圖三】，還要為金融機構的剩餘儲備支付利息，它的資產負債 表質素卻在轉壞中。

貨幣流速仍低

那 麼為何聯儲局實行「量化寬鬆」政策多時，卻未令美國經濟出現高通脹呢？關鍵在於貨幣流速（Velocity of money；有興趣讀者可參閱5月22日「全球聯手救市 美三項中、長期經濟隱憂」）。以下的程式可反映出，貨幣基礎與經濟的關係：MV = PQ（M是貨幣供應；V為貨幣流速；P為物價；Q是實質產出）。

目前的情況是，雖然聯儲局不斷增加M供應，但金融機構迄今向市場拆出資金的 意欲不大（見前文分析；這點可從「剩餘儲備」保持高企體現出來）。反而正積極減債改善資產負債表甚為明顯；加上美國家庭也同樣步入減債及增加儲蓄的階段 （美國5月份儲蓄率攀升至6.9％，創下六十五個月以來的新高）【圖四】，消費層面出現萎縮，直接地令貨幣流速（V）下跌至近二十二年以來的新低【圖 五】，使物價（P）至今不但未曾出現大幅攀升的情況，反而正在下跌。

那麼惡性通脹最終會否出現？機會是存在的。從以上的討論可見，截至目前為止，聯儲局看似暫未出現放任濫印鈔票的情況，因為聯儲局在吸納毒債的資金，相信有不少的比重源自金融機構的剩餘儲備（當然也有部分來自救市資金）。

事 實上，美國M2貨幣供應增長，至今按年只上升10%左右（增長速度明顯較剩餘儲備的為低）。不過，問題是聯儲局向美國金融機構借入巨額資金（剩餘儲備）買 入毒債，倘若美國金融機構對放貸的意欲回復時，聯儲局如何支付資金予金融機構呢？顯然大量印鈔票是其中的不二法門，尤其當各國央行對購買美債的意欲每下愈 況，屆時通脹急速惡化是可以預期，甚至是無法避免的。

四指標監察惡性通脹

最後，惡性通脹的出現，很大程度上是聯儲局未能在經濟增長及拆借需求回復後，把之前在金融市場注入的巨額資金抽離金融體系。那麼除通脹及經濟增長指標外，還有那些另類指標可有效地監察惡性通脹的來臨呢？相信以下數個指標可作參考：

一、貨幣流速的變化：不難想像，聯儲局在金融市場注入如此龐大的資金（即M增大），若然貨幣流速加快（即V上升），通脹必然無可避免地急速上升；

二、美國金融機構在聯儲局剩餘儲備的水平：若然剩餘儲備水平出現回落，某程度反映美國金融機構借貸意欲正逐步上升，一方面會令貨幣流速增大；另一方面，勢將迫使聯儲局增大印鈔票的步伐，應付資金的提取；

三、 美國聯儲局調升儲備利率或儲備要求（reserve requirement），甚至開始調升聯邦基金利率：目前聯儲局給予金融機構剩餘儲備25個基點的利息。若然聯儲局開始調升這方面的利率或調升儲備要 求，某程度顯示聯儲局已呈現剩餘儲備流出的壓力，即反映金融機構借貸意欲開始回升，通脹惡化的風險也將隨之上升；

四、各國央行對美債的需求轉弱：不難想像，美國聯儲局救市的資金，除印鈔票和源自金融體系的剩餘儲備外，便是透過向外發債。若然投資者，尤其各國央行對美債需求持續下跌，反映美國政府將更依賴印鈔票來籌集救市資金，屆時惡性通脹的壓力必定增大。

無 論如何，從目前各項的經濟數據表現，以至目前聯儲局實行「量化寬鬆」政策的方向，看似暫未觸發通脹大幅上升的危機。然而，經濟增長及金融機構回復正常借貸 的日子來臨時，聯儲局屆時能否及時在金融市場上抽走多餘的救市資金呢？若然讀者對此沒有信心，現在還是逐步做好預防通脹惡化的準備較佳。

Marc Faber: Inflation will come, but you still want to be in stocks

Faber also discusses his investment strategy, prospects for economic recovery and concerns about inflation. Here are my notes for the video:

1. Marc Faber Correctly called the 1987 market crash and stated back in March , 2009, stock market would rally and industrial metal. Lately said loose monetary policy will lead to hyperinflation

2. Stock market has seen its lows as if the market drops, more government stimulus package will come

3. Economic recovery will be disappointing since only Government is creating job but private sector is not. US Federal Budget Deficit will go up

4. For the next 12 months, investors do not want to be in cash. That is lot cash on sideline that may be moved to other asset class, but not into bond. Money could flow into precious metal.

5. But money also can flow into equity. Equity has value in inflationary environment as the replacement cost is inflation hedged

6. Neat term (4-6 weeks), gold may sideline, dollar may strengthen, industrial commodity could come down. but longer term, USD will depreciate, Asian equity will do better than US/Europe equity market.

7. Repeated his assessment for high inflation down the road. there is no political will to reduce the budget deficit. Inflation will go up.

The 50% Principle

Richard Russell had some interesting commentary in his latest letter. He covers the 50% principle:

One area that has always fascinated me is the concept that George Schaefer called “Dow’s 50% Principle.” The 50% Principle can only be applied to extended movements in the Dow (Schaefer only applied the Principle to the D-J Industrial Average). Schaefer was my mentor, a pioneering Dow Theory analyst, and a man who had a better “feel” or instinct for the primary trend of the market than anyone I have ever known or read about. The following is what Schaefer actually wrote about the 50% Principle.

“The 50% Principle is one that has never been fully explained to the public. The writer has never found a treatise on it in any book, magazine or newspaper article on Dow’s Theory. However, the editorials of both Dow and Hamilton strongly suggest that these men gave due consideration to what the Averages did at the halfway point of preceding major swings.”

Russell Comment: I have always kept the 50% Principle in mind during major swings of the Dow. The material below is taken from George Schaefer’s June 9, 1950 Special Report..

The following is a diagram and description from George Schaefers’ actual report, written on November 4, 1950. To my knowledge, this has never been shown before by me or anyone else. You might print it for reference or for historic value.

“After several years of research, I (Schaefer) have found a way to visualize the 50% Principle, which I will now pass on to you.

“Imagine a beam which has been balanced perfectly from a point at the center (see diagram). It will finally come to rest in an equally balanced horizontal position, which is the 50% level. Now suppose that different weights are applied at the ends A and B. These weights may be likened to economic forces in the market. One could be the sum total of all bullish forces, while the other could be the sum total of all bearish forces. The beam will now swing back and forth according to the influence of these weights.

“In seeking its new level, the beam is reflecting an appraisal of the weight at each end. If B, for example, swings above the 50% level and stays above it, the chances are that it will stay above it and have times when it will swing much higher. If, on the other hand, it swings below the 50% level in a convincing manner, the way is then clear for it to swing down much farther later on”.
……………………………………………..

This is Russell again — The great advance in the Dow began on October 9, 2002 at 7286. The Dow headed higher and by October 9, 2007, the Dow recorded its historic high of 14164.

This represented a rise of 6878 points. The halfway or 50% level of this rise was 10725. The question — would the Dow, on a decline, be able to hold above the 50% level of its advance?

The Dow declined, and on September 17, 2008, the Dow broke below the 10725 or halfway level of the great advance from 2002 to 2007. After breaking below the 10725 or 50% level of the advance from 2002 to 2007, the Dow then fluctuated back and forth above and below 10725 for several weeks — and then dropped decisively below 10725. Since then, the Dow has never been able to close above 10725. Thus, the 50% Principle turned bearish on September 17, 2008, and it remains bearish to this day.

My conclusion is that when the Dow broke below 10725, the “spine” of any remaining bullish forces was broken. After that, the long-term trend of the stock market and the economy are seen to be headed irresistibly down.

When will the decline end? This bear market will end the way all great bear markets have ended — at the level when blue chip stocks become “great values.” By great values I mean the Dow selling at less than 10 times earnings and with the dividend yield on the Dow in the 5-6% zone.

Great thoughts from an investing legend. You can check out the Dow Theory Letters and more from Ruseel at www.dowtheoryletters.com

Why Now Could Be the Right Time for Gold Stocks

From The Daily Reckoning by Frank Holmes

Conditions have improved for gold equities, and economic policy decisions being made in Washington could further increase the investment appeal of these mining stocks.

The charts below clearly illustrate the relationship between gold-mining stocks and the federal budget.

The top chart below compares the total-return performance of the S&P 500 (blue line) with that of the Toronto Gold & Precious Minerals Index* (gold line) going back to 1971, when President Nixon ended dollar convertibility into gold and deregulated the price of gold.

At that time, the United States was in the thick of the Vietnam War and was pumping billions of dollars into the financial system to pay for it. The dollar’s value dropped compared to other currencies, and the demand for gold and its price shot up. At the same time, the U.S. stock market was languishing, taxes were high and new regulatory entities like the EPA were being created. It was also a period of socialism, unionism and protectionism in Europe.

The bottom chart shows the federal budget, and the trend is readily noticeable – when the federal government is spending more than it takes in, gold stocks tend to outperform the broader market.

One hundred dollars invested in the S&P 500 at the start of 1971 underperformed the gold-stock index essentially for a quarter-century. In each of these years, the federal government engaged in deficit spending. The S&P 500 surpassed the gold-stocks in 1997, in the midst of the tech boom and budget surpluses under President Clinton.

When those surpluses reverted to widening deficits after the Sept. 11 attacks, you can see the spread between the broad market and gold equities narrowing. At the same time, another important event occurred – China began to deregulate its precious metals markets. During that period, the S&P 500 dropped before largely leveling off, while gold stocks charged forward.

Gold stocks have delivered a 9.9 percent average annual return since 1971, while the S&P 500’s annualized return has been 9.6 percent. That $100 invested in gold stocks in 1971 would have grown to nearly $3,800 at the end of May 2009, while the same amount in the S&P 500 Index would be worth about $3,400.

Gold stocks are among the most volatile asset classes, but old and new research shows that their judicious use can enhance investor returns without adding portfolio risk.

U.S. Global Investors has updated research on gold stock investing by Jeffrey Jaffe, a finance professor at the Wharton School, that was published in the Financial Analysts Journal in 1989. Prof. Jaffe’s study covered the period from September 1971, just after President Nixon ended convertibility between gold and the dollar, to June 1987.

The Jaffe study concluded that adding gold and gold stocks to a large portfolio increases both risk and return, but that the additional return from these non-correlative assets more than compensates for the additional risk.

During the study period, gold bullion saw an average monthly return of 1.56 percent, considerably better that the 1.06 percent average monthly return for common stocks represented by the S&P 500. Gold stocks shone even brighter, returning an average of 2.16 percent per month.

On the risk side, gold and gold stocks had greater volatility (measured by standard deviation) than the S&P 500. But Jaffe found that, due to their non-correlative qualities, adding gold-related assets to a diversified portfolio would likely reduce overall risk.

We picked up the Jaffe study’s result for gold stocks (measured by the Toronto Stock Exchange Gold and Precious Minerals Total Return Index, converted to U.S. dollars) and compared it to the S&P 500 Total Return Index from September 1971 through the end of May 2009.

Our research included creation of an efficient frontier series to establish an optimal portfolio allocation between gold stocks and the S&P 500, with annual rebalancing. As you can see on the chart above, a portfolio holding 85 percent S&P 500 and 15 percent gold equities has essentially the same volatility as the S&P 500 (horizontal axis) but delivered a higher return (vertical axis).

Between September 1971 and May 2009, the S&P 500 averaged a 9.34 percent annual return. A 15 percent allocation to gold equities, with annual rebalancing, would have yielded on average an additional 0.89 percent per year.

How much is 0.89 percent per year? Assuming the same average annual returns since 1971 and annual rebalancing over 25 years, a $10,000 investment in the portfolio with 15 percent gold stocks would be worth about $114,000, 22 percent more than the 100 percent S&P 500 portfolio, while adding virtually zero risk.

U.S. Global Investors consistently suggests up to 10 percent gold in a portfolio allocation, so we also looked at returns for investors at that level. A 10 percent allocation to gold equities, with annual rebalancing, would have yielded on average 0.63 percent more than an exclusive S&P 500 portfolio.

In dollar terms, the $10,000 investment in the 90-10 portfolio would grow to $107,611 over the ensuing 25 years (assuming, the same average annual returns since 1971 and annual rebalancing), compared to $93,210 for the portfolio solely invested in the S&P 500.

And when you look at the efficient frontier in the chart, the 10 percent weighting is two diamonds above the 100 percent S&P 500 allocation. You can see that adding gold stocks also increased return with no increase in the portfolio’s volatility.

More than two decades and many ups and downs have passed since Prof. Jaffe published his study, but our follow-on research shows that the relationship between gold, investor returns and volatility has remained pretty much the same.

Another bullish indicator for gold and gold stocks is that, for the first time in my 20 years at U.S. Global Investors, pension fund consultants and other gatekeepers for large institutional investors are advocating an exposure to gold.

These gatekeepers have influence over managers of many hundreds of billions of dollars in retirement funds, and they are advising a 5 percent to 8 percent allocation to gold, which is similar to the long-term exposure suggested by U.S. Global.

Another thing that held gold stocks down was the number of gold equity financings. In early 2009 there were roughly 50 deals and more than $5 billion raised, and that put a short term cap on many of the established gold producers that that said that they were going to start buying the junior exploration companies.

The emergence of a new merger-and-acquisition cycle has been a key driver for the small exploration stocks, which have significantly outperformed the actual producers in 2009. The miners that can replenish their reserves while also controlling their costs to enhance profitability will see this reflected in their stock price.

Regards,

Frank Holmes
for The Daily Reckoning

This article originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets. Follow the Daily Reckoning on Twitter.

The Golden Cross and DJT Confirmation

From MarketSci Blog by marketsci

A lot of chatter about the stock market’s upcoming golden cross has focused on whether the Dow Jones Transportation Index (DJT) is confirming a bullish trend.

Unfamiliar with the golden cross? Read our take on the cross, about its two flavors (SMA and EMA) and crosses in up vs downtrending markets.

As the theory goes, to qualify as bullish, the DJT (an index of U.S. companies that move stuff around like airlines, railroads, ocean freight, etc) must also confirm the market’s golden cross. I’m not a Dow Theory proponent, but if I remember correctly, this concept originated there.

In this post, we’ll look at how off-the-shelf golden crossovers, versus those confirmed by the DJT, have performed historically.

[logarithmically-scaled]

The chart above shows the results of two strategies trading the Dow Jones Industrial Average (DJIA) from 1931 (blue) to present. The first (red) is the straight version, going long at today’s close if the 50-day SMA crossed above the 200-day today. The second (green) is looking for DJT confirmation – it will only go long if both the first condition is met AND the 50-day SMA of the DJT index is trading above its 200-day.

Geek notes: these results are frictionless (i.e. do not account for transaction costs or slippage), and I’ve included a return on cash when not invested of half the nearest 13-week Treasury bill.

And for the number lovers…

Requiring DJT confirmation, improved performance over the life of the test, but only slightly. The strategy has gone through long periods where it hasn’t really helped or hurt.

What is more impressive to me is that the confirmation strategy maintained performance, while drastically reducing exposure (time invested in the market).

I’ve written about this before: accomplishing the same end goal with less exposure to the market is an inherently good thing because it reduces the risk of getting caught looking the wrong way on a massive unpredictable black-swan’ish day (a’la Oct. 1987 or Sep. 11, 2001).

Do I think DJT confirmation, as I’ve defined it here, is a huge step up in the strategy? No. Do I think it’s a nice little tweak that should at least be in the back of the mind for trend-following types? Sure.

Last comment: I’m not a fan of trading the DJ Industrial Average. I used it here because it was a nice match for the DJT, but my personal opinion is that it’s too driven by too few names (in other words, it’s not sufficiently diluted) to be easily traded.

I personally would much rather trade something like the S&P 500, so in a follow up post, I’ll rerun this same golden crossover test on the S&P 500, but still using the DJT for confirmation. More to follow.

Demographics is a bigger problem than health care costs

From KeithHennessey.com by kbh

The President and Budget Director Peter Orszag frequently say we need to “bend the health care cost curve downward” to address our long-term fiscal problems. This is correct but incomplete.

Here is Director Orszag, writing in last week’s Financial Times: (emphasis added)

As the healthcare debate picks up in the US, there has been much discussion about how to pay for it. Coinciding with this debate are vocal concerns about the country’s underlying fiscal position – which some have suggested as a reason to delay healthcare reform.

What this argument ignores is that healthcare is central to the long-term fiscal and economic prospects of the US. If costs per enrollee in Medicare and Medicaid grow at the same rate over the next four decades as they have over the past four, those two programmes will increase from 5 per cent of gross domestic product today to 20 per cent by 2050.

Healthcare cost growth dwarfs any of the other long-term fiscal challenges the US faces. Nothing else we do on the fiscal front will matter much if we fail to address rapidly rising healthcare costs.

Director Orszag is correct that rising per-capita health spending is a key driver of our long-term fiscal problems. But he overstates his case by ignoring the other driver of federal spending growth, demographics. We need to address both. We need health care reform that will slow the growth of per capita health spending. And we need to change the promises made under Social Security, Medicare, and Medicaid to adjust for a rapidly aging U.S. population.

Let’s look at a graph from the President’s Budget (page 191 of the Analytical Perspectives volume):

This chart shows the combined effects on the big three entitlement programs (Medicare, Medicaid, and Social Security) of two factors: demographics, and age-adjusted per capita health cost growth. The effect of demographics is larger than the effect of “excess growth in health care costs” up until some time in the 2040’s. This is why Director Orszag chooses 2050 to make his case.

Director Orszag’s own graph shows that the aging of the population is a bigger driver of spending increases in the federal budget for the next 30-40 years.

There are two forces driving the aging of the U.S. population. People are living longer. This is a good thing.

This means people are collecting benefits for more years. That’s good for people and expensive for the government.

Longer life expectancies are a permanent and positive feature of the U.S. demographic landscape. There is a second, transitory cause of the aging of the U.S. population: the Baby Boom. Fertility rates surged after World War II. Before and during the war, each woman had on average about 2.2 – 2.4 babies. That surged to 3.6 babies per woman in 1960, and is now down to 2.0, where it is predicted to stay.

The Baby Boom began in 1946. You can start collecting early retirement benefits under Social Security at age 62. This means the first cohort of Baby Boomers started collecting their checks in 2008. You can see how the number of new retirees each year is going to spike over the next ten years.

I think of longer lifespans as a permanently rising tide, and the Baby Boom as a huge wave that supplements that tide. Together, the two of them mean that America is rapidly aging. This is affecting federal and state budgets beginning now. Since Social Security and Medicare are pay-as-you-go systems, in which current workers pay for the benefits of current retirees, this means a larger tax burden is placed on each younger worker. (No, the government does not save your payroll taxes. It has spent and is spending them on other stuff.)

In 1950, there were 16 workers paying payroll taxes for each retiree collecting Social Security benefits. Today, there are 3.3 workers supporting the Social Security and Medicare benefits of each retiree. In the future there will be only 2 workers paying taxes to support the benefits of each retiree.

The rapid growth of per capita health spending in the U.S. is a critical policy problem that needs to be addressed. It is not, however, the primary driver of our federal budget problems over the next 30-40 years. The aging of the population is. Policy changes need to address both pressures to prevent an eventual fiscal meltdown. We must not ignore demographics.

Gold Doesn't Care If It's IN-flation or DE-flation

Jastram performed a study of gold’s performance over a 416-year period injavascript:void(0) England's history (from 1560 to 1976). He found that historically gold has acted like a storehouse of value throughout wars, plagues, and the like. However, what’s most striking is that gold actually INCREASED its purchasing power during periods of DE-flation.



[Link]

Dennis Gartman Sees Both Inflation & Deflation

Gartman explains that due to the weak US dollar complex, commodity prices are going up, indicating inflation in assets. He specifically cites the action in grains, crude oil, and copper. In fact, in the past, Gartman has even said he could see gold being the world's reserve currency. So, while those assets are signaling inflation, he cites deflation in employment and labor prices. Additionally, he points out that housing prices are in a deflationary spiral and he says that, "homes are not going to go up for a long time." Curiously enough, Gartman thinks that the impact on the consumer will be negligible. We're not exactly sure how his rationale behind that works out though.

Gartman likes to play pairs trades as we all know and he notes that it's a bit harder to play the deflation side of this trade. For the inflationary portion, he says he can simply buy copper futures or Freeport Mcmoran (FCX) or Southern Copper (PCU), etc. But, on the deflationary side of things, Gartman has trouble going long bonds to place that bet. In the past, we've laid out scenarios for investing in both inflation and deflation, a resource readers can use to place their own wagers. This debate will surely wage on for a few more quarters (or even years), as the United States' fate slowly begins to play out.

In terms of economic recovery and world strength, Gartman thinks that the United States and Europe are the only two that will still truly be in the house of pain. He sees economic recovery beginning to occur in the emerging market nations such as China and Brazil, while other countries are beginning to benefit such as Australia. However, he thinks the US and Europe will be up a creek for a while longer. You can put on this pairs trade by simply going long Australia, Brazil, Canada, or any other number of world markets, while simply shorting the US markets or those of Germany, France, and Japan. Simply put, Gartman likes being long the 'new world' commodity exporters and short the 'old world' commodity importers.

We've highlighted some of Gartman's major activity in the past here on the blog as well. Back in April, Gartman had said to watch base metals as a leading indicator. And, copper exploded to the upside for numerous reasons. This call was in addition to his tendency to use the transports and baltic dry index as other solid economic indicators. After all, the economy can't truly recover unless we see it 'going through the motions' and transporting the goods that make the world tick. The month prior in March, Gartman was long 'cheap' retail and short the malls.

He definitely is a swift trader and likes to cut his losses short and let his winners run. We track him because he runs a truly hedged book and often has cutting market insight. We'll continue to monitor him and post up his moves when we can find time to pry ourselves away from our hedge fund portfolio tracking series.

Nothing is more certain than uncertainty

Jerry Haworth, co-founder of hedge fund manager 36 South, pitched into the debate last week with the launch of a new product dubbed Excelsior. The fund pledges to protect investors against the ravages of possible inflation by giving them an exposure to out-of-the-money call options on a range of investments, including commodities.

If the deflationists triumph and global inflation fails to rise beyond 5% over five years, punters will lose their money but console themselves with the thought that their wealth has not been inflated away. If, however, the inflationists come out to play and price rises go beyond 5%, investors can expect to quintuple their money. It is quite possible that the mere fear of inflation, at one point or another, will be sufficient to help the options soar upwards.

Haworth adds that it is possible inflation will hit some asset classes, notably commodities, without making any impact on others, such as financial assets. This syndrome is supported by the stagflationists, who are not generally allowed out during the day because they scare people so much.

http://www.wealth-bulletin.com/rich-life/content/1054330752/

Hyper-Inflation: The Psychological Trigger

Hyper-Inflation: The Psychological Trigger

Publish at Scribd or explore others: Magazines & Newspape money articles

Stocks Will Fall 37% or Gold Will Rally 60%

A lot of commentators talk about how gold is near an all-time high and that stocks have fallen 50%, making them cheap again. However from a long-term perspective, gold and stocks are nowhere near their normal relationship.

According to Dr Marc Faber, editor of the Gloom Boom Doom Report, gold and stocks move in distinctive long-term trends. Over the last 110 years, these trends has staged six major phases:

* 1900-1929: stocks outperform gold
* 1929-1932: gold outperforms stocks
* 1932-1966: stocks outperform gold
* 1966-1980: gold outperforms stocks
* 1980-2000: stocks outperform gold
* 2000-???: gold outperforms stocks

Overall, the median stock to gold ratio for the last 106 years is 5.4. In other words, throughout the 20th century, on average 5.4 ounces of gold would buy one unit of the DJIA.

Today, gold trades at $980. The DJIA trades at 8,500. This puts the ratio of gold to stocks at 8.6. Thus, the DJIA needs to fall to 5,292 (a 37% drop from today’s level), gold needs to rally to $1,574 (a 60% rally from today’s level), or some combination of the two, in order for gold to be appropriately priced relative to stocks again.

During the last bull market in gold, the precious metal rose 2,329% from a low of $35 in 1970 to a high of $850 in 1980. However, during that time, there was a period of 18 months in which gold fell nearly 50%.

From mid-1971 to December 1974, gold rose 471%. It then fell 50%, from December ’74 to August ’76. After that, it began its next leg up, exploding 750% higher from August ’76 to January 1980.

Now, in its current bull market (2001 to March 2008), gold rose over 300% from $250 to a little over $1,000. And just like in the mid-70s, it began showing signs of weakness after its first big rally up to $1,014 in March ’08. At one point, it even fell to $700, a 30% retraction. Granted, it wasn’t a full 50% retraction like the one that occurred from 1974-76. But we are experiencing a financial crisis. And gold is the most common catastrophe insurance.

http://seekingalpha.com/article/140776-stocks-will-fall-37-or-gold-will-rally-60

Financial markets can channel liquidity directly into inflation

Most analysts argue against inflation on grounds that excess capacity due to slumping demand will keep inflation in check. Hence, they say, the liquidity boom won't be a problem until the global economy has fully recovered. Andy Xie thinks this is faulty logic. Financial markets can channel liquidity directly into inflation through commodity speculation.

Despite declining oil demand, for example, prices have nearly doubled from their lows this past spring. This mainly reflects rising financial demand; a rising amount of liquidity has flowed into oil futures, which is being powered by expectations of inflation. As in the 1970s, these expectations alone are capable of turning liquidity into inflation.

Rising labor activism is another source of inflation. Most think labor unions are no longer an important force because their influence has waned over the past three decades. I think labor union power is driven by demand rather than supply. During an economic boom, few are interested in supporting labor unions. But in hard times, workers are more supportive of unions.

Full article:
http://english.caijing.com.cn/2009-05-25/110170757.html

There is no such thing as VALUE

曹仁超: 趨勢投資十種有效工具

以下十種有效工具，有助初學趨勢投資法嘅讀者：

一、每次升市領袖股都唔同。例如1998至2000年科網股，2003至2007年係國企股。如抱住過氣領袖股不放，處境有如2009年5月嘅電盈（008）小股東。

二、創五十二周新高價嘅股份，通常可進一步睇好。

三、10天線同50天線係有用嘅trading工具。如10天線重返50天線之上，即短期內股價仍上升；反之如10天線跌穿50天線，都係小心D好。

四、二線股份出現連續強勢數星期但指數卻唔上升，小心調整市好快出現。

五、公布業績後股價如上升10％（或以上），代表跌市方向改變；如公布業績後股價急跌20％（或以上），亦代表上升方向已改變。

六、一隻股份大升後出現窄幅牛皮（例如喺10％內），代表另一次較大升幅將再出現。

七、拆細通常代表股價快見頂，合併代表股價快見底。拆細代表企業大股東欲出貨，合併代表企業大股東欲收集。

八、大企業股價喺惡劣環境下可迅速回落。最愚蠢嘅投資係喺惡劣環境下買大企業股份〔最近例子例如喺2008年買滙控（005）〕。

九、股價走在消息之前三到六個月。唔好聽消息去決定買賣，請追隨趨勢而非走勢。利用timing買賣投資項目，而非評估該股嘅「價值」係多少。

十、响牛市中每次跌穿250天移動平均線乃入貨訊號；喺熊市中每次升穿250天移動平均線係出貨訊號。

2008年係最多投資者由價值投資法過渡到趨勢投資法嘅一年（或叫Earnings Momentum Investing）。投資者再唔計較股票係咪「物有所值」，改為分析未來企業純利前景，而決定現存趨勢（trends）能否繼續落去。簡單D講：一、該股未來一年純利能否上升25％或以上？二、該公司有冇新產品或新服務，支持未來純利上升？三、該股股價係咪較最低價最少上升25％？四、喺行業中係帶頭者抑或落後者？五、後市點睇？因75％股價升降受大市升降影響。2008年你有冇由價值投資者轉為趨勢投資者？

Insurance against both inflation & deflation

Already surging by 30% in 2009 to a total valuation of $38 billion, Gold ETFs are clearly attracting significant new allocations from mainstream pension and mutual funds. Yet the metal remains "institutionally under-owned" according to James Montier, London strategist for Societe Generale. Pointing to conflicting signals about whether the global economy now faces inflation or deflation, Montier recommends gold as "insurance" against both outcomes. Because while "gold is the one currency that can't be debased" by inflationary policy, "a significant prolonged deflation would see what's left of our financial system likely to collapse. Holding a money substitute isn't such a bad idea against this cataclysmic outcome."

Paulson: 50% in Gold

Top 15 Holdings (by % of portfolio)

1. SPDR Gold Trust (GLD): 30.37% of portfolio
2. Wyeth (WYE): 13.96% of portfolio
3. Rohm & Haas (ROH): 13.44% of portfolio
4. Boston Scientific (BSX): 8.4% of portfolio
5. Gold Miners ETF (GDX): 6.81% of portfolio
6. Kinross Gold (KGC): 5.87% of portfolio
7. Philip Morris International (PM): 3.42% of portfolio
8. Petro-Canada (PCZ): 2.96% of portfolio
9. Schering Plough (SGP): 2.26% of portfolio
10. Mirant (MIR): 2.22% of portfolio
11. Gold Fields (GFI): 2.21% of portfolio
12. JPMorgan Chase (JPM): 1.65% of portfolio
13. Anglogold Ashanti (AU): 1.15% of portfolio
14. St Jude Medical (STJ): 0.91% of portfolio
15. Embarq (EQ): 0.81% of portfolio

Read more: "Paulson & Co (John Paulson) Buys Tons of Gold: 13F Filing 1st Quarter 2009 ~ market folly"