forest and trees may 2011

8/6/2019 Forest and Trees May 2011

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Forest & TreesMay 2011

Welcome to the first issue of Forest & Trees. On a monthly basis I will put together my thoughts on theeconomy, markets and more. As the title indicates my goal is to pay mind not only to the forest but alsothe trees.

Many times investing dynamics will look like other aspects of life. I am certainly not the first person touse analogies in reference to the markets. As a matter of fact one of the most notable names regardinginvesting, none other than Charles Dow himself, often used analogies to explain investing. One of hismost famous analogies used the ocean as his reference. Dow likened the market trends to the waves ofthe ocean. He said the primary trend is like the tide of the ocean. It moves in and out in a large cycle. The

mid-term trend is like the waves of the ocean. They sometimes move with the tide and sometimes opposite,but they form part of the overall movement of the ocean. Finally, he likened the ripples on the waves to theminor or short-term trends.

Understanding the trends and the natural cycles of the markets used to offer advantages. I say used tobecause the market, at this point, is unnatural. But, this unnatural environment we are in has trends or atthe very least has tendencies. I will expand more on the unnatural market environment below. Trying tounderstand the current environment and the relationships within could certainly help with investmentdecisions.

THE FOREST

Where are we now?

Since the US Federal Reserve launched QE2 (quantitative easing round 2) in the fall of 2010 stocks haveheaded strongly to the upside. The massive injection of money into the system as well as the low interestrates has accomplished two things. The low interest rates have pushed investors into stocks and otherhigher risk investments. At the same time the money printing (inflation) has pushed up prices incommodities resulting in price inflation. At the same time, we have seen the precious metals move upsignificantly as the money printing is debasing the US dollar. Investors looking to hedge their bets on alower dollar and possible sovereign defaults have moved to the metals.

The problem the markets and investors face here in the spring of 2011 is the claim by the Fed that theywill not continue QE2 with a QE3. This knowledge begs the question if the economy and markets can

handle the Fed stepping off the gas peddle? In reality the Fed will be doing QE3 as they will rollover thebond purchases they have already made as they come due. This will keep the money supply at all timeshighs. In addition, the US Government has to raise the debt ceiling to keep the government out ofdefault. Raising the debt ceiling is a no win situation. If the debt ceiling is raised it obviously digs adeeper debt hole if not increased the nation risks defaulting on its obligations.

Along with achieving its goal of supporting stock prices through low interest rates and lots of liquidity,the Fed has also achieved some unintended consequences. It is these unintended consequences that have

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helped the market to turn unnatural. There are now strange relationships between different types ofinvestments that did not exist (as much) prior to all the government intervention.

Creating a monster

Something happened along the way to bailing out the banks. The Fed has painted itself into a veryuncomfortable corner. In a recent weekly market commentary to clients I penned:

Global markets were rocked this week with large sell offs in oil and silver which also spilled over into many othercommodities, equities and currencies. This past week is what you see when a government like the US gets mud on

their face. What do I mean? We all know that the money printing in the US has devalued the US dollar to pocket

lint status and is resulting in price inflation. Where better to look for evidence than oil prices and precious metals.

So the best thing you can do is try to destroy the evidence. Governments hate precious metals because they reflect

their wrong headed policies and makes their currencies look very bad. The only problem is by trying to knock thecommodities it drives up the dollar. When the dollar rises the stock market gets whacked. When the stock market

gets whacked that runs counter to the Fed's "wealth affect." The wealth affect is making us all feel richer by

increasing our 401k's. It is little wonder why the assault on the commodities was very quick and sharp. In the end

it buys some time for the Fed. But it does not change the facts.

I apologize if you already read the above but I cannot come up with a better way of saying the samething. The issue now is navigating this market. We are coming into the summer months which typicallyhas gas prices go up. You can be sure from all the saber rattling from the White House about oil companysubsidies, speculators and investigations that if prices of oil get too high we will see intervention to bringdown oil prices. As I write this a group of senators are begging for futures trading limits on oil. Fallingoil prices typically, pushes the dollar up or vic a versa. Now keep in mind the dollar is tickling scary lows(rightfully so) but it is not ready to die yet since there is no other currency that could step into its role asglobal reserve currency. The problem with either gas or the US dollar rising is the potential to derail theeconomy. If oil goes up it diverts consumer spending and if the dollar goes up it makes exports moreexpensive and limits what foreign countries will buy from us. Either way is bad. The question is what is

less bad? The answer is rising dollar because its impact is slower to affect US citizens.

Over Medicated

The dynamics outlined above is why the market is so overly medicated. If you know anyone that takesvolumes of medicine you know that nine times in ten many of the drugs are used to counteract the sideaffects or unintended consequences of other medicines. There are only a few drugs, in most cases, thatreally address problems. The markets are suffering from the same with interest rate intervention, moneyprinting, margin increases and dollar weakness. In my observations most folks that are over medicatedtypically are sickly folks and makes one wonder if they would be much better off with a reduction inmedications. We all know that natural, healthy solutions like eating right and exercising promotes healthbetter than any medication. The problem for the market now is that the medications have been so strongthat to get things back to some semblance of normalcy there is going to be withdrawal. Anyone that hasbeen witness to drug withdrawal knows it is painful.

The short-term with an eye on the long-term?

As we have established the Fed has stated that they will not continue new bond purchases after June 30,2011. Essentially, they are running a test to see if the markets can stand on their own. Keep in mind theFed is the largest buyer and largest holder of government debt. The Fed has bought as much as 70% ofgovernment issues and is the largest holder of government debt. So, the question is when the Fed stopswho will step in? Not only that but if someone does step in they likely will demand higher rates than


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what the Fed was accepting. Higher rates on bonds will be bad for bond prices but good for the dollar.A rising dollar will slow exports, decrease commodity prices and decrease stock prices.

The likely outcome of the end of quantitative easing is a test through the summer where we may see the

dollar rise putting downward pressure on stocks and commodities. If the Fed feels the pressure fromweak stocks, rising interest rate pressure and weak demand for treasuries they will have no option otherthan to step back into the markets. A return of Fed support in whatever form it comes will send thedollar on another slide which will push up commodities in particular the metals and stocks.

In summary, we are more than likely to see a summer of weak stocks and commodities. By fall thepicture will likely be very different and especially positive for the precious metals. Keep in mind that themetals markets are going to be very volatile through the summer months. The source of the volatility will be the big banks like JP Morgan and HSBC as they will likely try to unwind their decades longmanipulation of silver in particular.

THE TREES

Revisiting the precious metals outlook?

Below you will find a chart from sharelynx.com. Pictures are often the easiest way to presentinformation. What we have in the below graphic is five images involving silver. Here is a thumbnailpresentation of each image starting from top to bottom

1. The first image is the price performance of silver. No surprise there was an accelerated rise in silverfrom late 2010 (the introduction of QE2) until now.

2. The second (green image) is open interest which is the number of open futures contracts on silver both long (long being people looking for increasing prices) and short (looking for lower prices).Notice the spike in 2008 and subsequent decline as silver prices backed down. Keep in mind this is aperiod where silver should have gone up as a safe haven. Why was short interest increasing?

3. The third image (red US banks/blue non-US banks) shows the number of banks in each category thathave open interest. Note the US banks are small in number. Note the CFTC (Commodities andFutures Trading Commission) withheld data in the crisis period.

4. The fourth image (red US banks/blue non-US banks) this is in numbers of contracts. It shows thatthe overwhelming majority of the short positions (the dropping red bars) are in the small number ofUS banks. This is called concentration and lends to manipulation.

5. The last image says it all. Look only at the US banks blue long positions and red short positions in

numbers of contracts. Why on earth would banks want silver to go down? What axe do they have togrind against silver?


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So here are some questions to ponder in regard to silver (and to a smaller extent gold). Why has silvernot bested its 1980 high price? There are few commodities that are now, 30 years later, below their 1980high. The answer is market suppression. The story is out and the market suppressors are being forced totake their heavy hand off. But, before they are done they may do their best to drive silver down so theycan get out at the lowest cost. In the not to distant future we will see silvers real move higher. In themeantime anyone holding the silver ETF ticker SLV should watch out. None of my clients hold this veryrisky ETF.

For those of you that still think banks dont cheat their clients and America read Rolling Stone magazinesMatt Taibbis expose on Goldman Sachs The People vs Goldman Sachs.


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Planning

Over the last two years I have taken a conservative approach to the markets as the risks have been (andstill are) plentiful. We are now at a point where the outcomes (in the short-term) are more than likelygoing to be the reverse of what we have seen. The Fed hit the gas peddle in the fall of 2010 and we have

seen the market skeptically rise. Now the Fed is going to ease off the gas. At the same time we are seeingthe absolute need to keep oil prices down. Keeping oil down is a dollar up environment. A dollar upenvironment is a stocks (particularly commodity stocks) down environment.

In a commodity unfriendly environment other stocks are looking more attractive. I have increasedpositions defensive areas such as consumer staples, large dividend paying companies and big USindustrials. I have target prices that I will sell commodity based equity positions if the assault oncommodities continues. These targets are based on my moving averages strategy and set to maintaingains (or limit losses depending on holding period). I am also looking at adding some precious metalsmining positions over the next few months. Lastly, whether I agree with it or not the US dollar is stillwhere investors are scrambling to in volatility. So, I may consider a US dollar investment to hedge on thedownside while the Fed runs its test of removing life support from the market.

Precious metals will remain in portfolios as they are the ultimate long-term play and the price movementsare going to be volatile but still trend up. The reality is any purchase of gold and silver in the last 12months or the coming few months will be handsomely rewarded long-term. The difference betweenstocks and the metals is the next upside leg in metals is going to be fast and furious and not having aposition when they move will be remiss. So, in the short-term it may be painful but the global debt loadand central bank missteps will push the metals much further.

Disclaimers

Investing involves substantial risk. Becker Advisory Services (BAS) makes no guarantee or other promise as to anyresults that may be obtained from their views.

No reader should make any investment decision without first consulting his or her own personal financial advisorand conducting his or her own research and due diligence, including carefully reviewing the prospectus and otherpublic filings of the issuer.

To the maximum extent permitted by law, BAS disclaims any and all liability in the event any information,commentary, analysis, opinions, advice and/or recommendations in the update prove to be inaccurate, incomplete or

unreliable, or result in any investment or other losses.

The information provided in the update is obtained from sources which BAS believes to be reliable. However, BAShas not independently verified or otherwise investigated all such information. BAS does not guarantees the accuracyor completeness of any such information. The commentary, analysis, opinions, advice and recommendationsrepresent the personal and subjective views of the BAS, and are subject to change at any time without notice.

The update is not a solicitation or offer to buy or sell any securities.


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forest and trees may 2011

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