Monday, March 21, 2011

Oil, Gold, Silver are still the best bet against uncertainity---By Shan Saeed

Commodities are still the best bet against financial market chaos.

I am cautiously bullish on commodities. Last year, I predicted that the market would move higher on Fed liquidity and remain “cautiously bullish” on stocks. But I recommended that gold and silver will do well going forward and is especially positive on oil [ will stay over $100/barrel in 2011].

It’s not clear that the Federal Reserve can continue to keep interest rates low and QE2 and now QE3 is ready. Add to that the burden of new regulations on healthcare and labor from the White House, and the path forward for equities is less clear than a year ago.

Stocks have doubled off the March 2009 low but seem to have hit a wall on Middle East unrest and fears of a double-dip in the U.S. economy as oil shot higher. Gasoline prices now average $3.54 a gallon nationwide.

I think liquidity is slowing down a little bit. The market is having a harder time moving higher. It might even move lower here. Confidence is getting lower which is the main driver of the economy. How long can the Fed maintain these low interest rates? Are they going to another quantitative easing to stimulate the economy? While I remain cautiously bullish, I do think there are a lot of dangers there.

Nevertheless, I should advice my investors. Investors shouldn't fight the Fed by presuming that liquidity will end soon. There’s no indication that interest rates will rise, nor that the Fed’s bond-buying strategy has run its course. I think investors should take long position in oil, gold and silver. Agriculture is one aread where I feel that remained depressed for the last 27 years and would rish as weather patterns and population go up. I fully recommend my clients and investors to go into real assets and hold significant portfolio in gold and silver to get insurance of their wealth.

Regarding Oil, ExxonMobil recently announced that it would expand its production operations. Considering the continuing turmoil in the Middle East and the Obama administration’s unwillingness to expand drilling at home, investors would do well to focus on crude. Uncertainity would remain high and FEAR PREMIUM would average $30/barrel in 2011. I’m quite bullish on oil, gold is a great investment right now but oil is a better play.

As for inflation, while current inflation is around 5% and there are clear signs of inflation to keep rising as prices of precious metals go out of the roof. Inflation is still not that relevant. The fact that gold and silver are moving to new highs is a great indicator of future inflation. Current inflation is very strong which US government is ignoring. FED cannot fix the economy by printing money. US dollar will remain weak against major currencies by 9-10% in 2011.

Businesses are sitting on record amounts of cash but they are likely to continue to grow mostly by keeping costs in line with demand and taking advantage of rising productivity. There will be an eventual uptick in hiring, but expect plenty of mergers and acquisition activity this year. I do think employment is going to get better, but it’s going to be slow process. Unemployment in February fell to 8.9 percent from 9 percent, the lowest point since April 2009. In November, just three months ago, the jobless rate had been 9.8 percent. The Federal Reserve projects unemployment to stay at about its current level for the rest of 2011 and then fall to between 7.5 percent and 8 percent in 2012. But I think unemployment rate to stay over 10% as projected by Gallup.

Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making an strategic investment or strategy implemmentation.

Friday, March 18, 2011

QE-3 is getting ready to enter the market--By Shan Saeed

QE2 was a disaster and so would be QE3. Its a balance sheet recession.
By Shan Saeed

The unwind of the carry trade has been in full swing for a couple of days now. It’s probably been accompanied by repatriation of capital by Japanese investment trusts and the like – time will tell. Without the aid of intervention – it’s likely that the peak of this flow has passed. Still, the withdrawal of the world’s best savers from the global capital markets can be expected to put upward pressure on interest rates from here on in. There would be lot of headwinds in the global financial markets as Decision makers try to navigate through turbulent times strategically.

Next phase of the crisis, as it will be played out in capital markets at least, will unfold over a couple of weeks as the impact on individual actors become clearer. Given the enormity of the events, it is unlikely that we will see a return to the optimism of a week ago – bounces in risk assets will be sold into. Stocks and equity market would take correction of 10-15% globally. Commodities will continue to upsurge as US dollar would stay weak.

The response from global governments, if they stick to the same script, will be to once again turn to the stimulus levers. Given that these have been overused of recent times, fiscal policy options are now somewhat constrained. As a result, it’s likely that ‘unconventional monetary policy’ will remain a feature of the landscape. In the US, the liklihood of QE3 being pre-announced ahead of the closure of QE2 has just risen dramatically. Inflation is aroung 5-7% in US and living standards have gone down by 20% courtesy Quantitative Easing. Japanese government will print money as well. QE is going global and getting global recognition.

So while we can argue cause and effect, fears of further price rises in real goods may be amplified by the crisis in Japan. It’s a balance sheet recession. Whenever you have a giant bubble collapse, and the whole economy goes under, then you enter into unusual territory. If millions of homeowners are underwater on their
mortgage notes, are they going to take out loans? No, they want to pay
down their loans if they can, and that is what is happening. Deleveraging would cost $5-6 trillion to the American consumers. This would create sub-par GDP growth going forward. BUT,since most of the money supply comes from credit money i.e. money
borrowed at the bank, then the money supply COLLAPSES when people don’t borrow.

The QE maneuvers are an asset SWAP. The FED trades out cash for bonds
held at the big banks. It is equivalent to the average person taking
money out of his savings account and transfering it to his checking
account. The bank is no longer earning interest, and cash is available
to lend. The FED also buys bonds from the Treasury, so the treasury can deficit
spend up to their authorization level.

The flaw is that banks are not revenue limited to issue loans. If you
have a good credit rating, the bank will lend to you despite what they
have in reserves. The bank can borrow money anytime to back up a new
loan. So, the quantitative easing forces some banks to speculate in
order to keep their profits up. Think of it like the banker in the
game monopoly getting to play AND be the banker. But again, people are
not taking out loans, and the banks are sitting on piles of cash. You
cannot push on a string.

What the government should do and they aren’t, is direct spending into
main street. Simply issue cash to build bridges, infrastructure, and
so on. That will put people to work, thus improving wealth. It will
also put money in peoples hands so they can pay down their upside down
loan debts to the bankers.

The bottom line is the money needs to be issued vertically when you
have a balance sheet recession. How it is spent is very important, and
there are no good laws or sensibility issuing forth from Washington. I
blame it on predatory financial capitalism that has captured
Washington. Its like a revolving door of Goldman Sachs type people at
the levers of power, and they have pulled the wool over idiot lawyers
eyes in Washington.

A sovereign people should not have to borrow their own credit. I
think the banking class as important, but they really
aren’t. All a banker should do is match up creditors with debtors.
They should intermediate between credit and debt, and earn a fee for
their services. That’s it. As soon as US politicians and public
figure out that the money power rightly belongs under legal control,
then it can move on to a bright future. A federal political system is
ideal for controlling the money power through proper poltical
representation. In case of US, the money power is held in private hands,
and has usurped political power. Big difference.

During the great depression, FDR borrowed money to build things like
the Hoover dam. This money put people to work, and left behind
tangible wealth. The country was better off for putting people to work
and creating real wealth. At first the banks wouldn’t make any loans,
until they were threatened with the Thomas ammendment, which would
have allowed debt free greenbacks thus bypassing the banking system.

When WW2 came around the bankers opened their wallets to the max. They
agreed to 3/8 of 1% (memory, but it is close). In other words, the
bankers issued plenty of credit at low interest rates, when they knew
our tanks and planes would be blown up, but the debt would remain.

Imagine how much can get done in a balance sheet recession if US government spent
money to build infrastructure, low cost housing, strucural reforms and fiscal discipline, etc. There is plenty that needs to be done. Instead, since US does not have good laws, and doesn’t understand money, the deficit spend so people can sit on their rears in unemployment. Pumped money into the banking system, usually to create / gather dust, or be speculatively spent to create bubble in the financial markets.

Disclaimer: This is just a research piece and not an investment advice. Investors are encouraged to execute their own due diligence before making any stategic investment or implementation.

Saturday, March 5, 2011

Why dollar will stay low in 2011------by Shan Saeed

Why a Dollar Rally Will Never Last Long? By Shan Saeed

The bull market in the U.S. dollar is like an Invisible Man. Its quite funny when people talk about currencies without executing or performing their preparation on the subject.
An important aspect of any bull market is psychology. Bull markets climb a wall of worry, or so they say. This means that the market will continue to climb despite all of the worries surrounding the bull market.

Let analyze history and find some facts. For example, from 1982 to 2000, when the Dow Jones Industrial Average soared from 777 to above 11,000, there were all sorts of worries. Inflation pressures, the collapsed of the Eastern Bloc, the S&L crisis, the Mexican peso crisis, the Long Term Capital collapse in 1998.

Throughout all of these crises and collapses, equity prices kept climbing. If you read the book "The Great Super Cycle by David Skarica'....I analyzed why its true. One of the reasons is that markets take on a life of their own. These major cycles run 15 years to 20 years and they go on despite wars, recessions, drought, etc.

The same goes for downward cycles. Despite all of the reasons to buy the dollar in recent years — such as the financial crisis of 2008 which caused a flight to the dollar and the euro crisis of 2010 — the dollar has continued on its long-term downward trend.

However, I'm hearing more calls for a dollar rally. People are talking about reasons the dollar will rally, such as the Middle East crisis will cause another flight to safety in the dollar.

I hear that the U.S. economy will grow faster [ GDP 3%] in the short term due to the tax cuts of late 2010. Some say that the euro crisis will show its ugly head again. However, with so many calls for a dollar rally, I think this means the dollar will continue on its downward trend. Dollar will lose 9-10% against major basket of currencies. There are just too many people looking for a dollar rally.

In addition, we must remember three points about the dollar at the moment:

1• The U.S. is running a near-10 percent of GDP deficit, which is higher than every other Western government in fiscal 2011. Higher than Great Britain. Higher than Spain. Higher than Portugal. Yes, even higher than Greece, if its austerity measures pay off. These deficits are putting the U.S. in danger of losing its reserve-dollar status.

2• As George Soros pointed out recently, the euro crisis is all but over with the recent austerity and bailout measures being passed. The crisis this year is in local municipalities and states in the United States. It requires $127 billion to rescue the failed states in USA. They are acting like Greece....California, Illinois, Michigan, Wisconsin are all in red & in bad shape....This will put further pressure on the U.S. dollar in 2011.

3• If the Middle East crisis spreads[ Saudi Arabia is a bombshell], oil prices will continue to spike [ might touch $137/barrel this year]. My prediction of $$117/barrel already hit the market. The U.S. is much more reliant on the automobile and low oil prices than other Western nations. European nations have much better public transportation and train systems. Therefore, higher oil prices will pressure the U.S. more than Europe.

Therefore, other than small rallies upward, I expect that the dollar is going to continue its bear market [9-10% down in 2011] and continue to move lower against other major world currencies.

Disclaimer...This is just a research piece and not an investment advice. Investors are strongly encouraged to execute their own due diligence before making any investment decision or strategy execution.