Friday, October 30, 2009

Happy Halloween! Welcome Great Pumpkin

Earlier in the week I noticed we were suddenly getting a batch of Google image search traffic into our October 2007 post archive. When I looked at the link, I was quickly reminded why: "It's the Great Pumpkin, Charlie Brown!".

Since watching the Peanuts Halloween special is a Finance Trends tradition going back to 2006, I had to update the post's video link and, of course, watch it again for myself!

Let's all watch it together and find out if the Great Pumpkin appears this year. Enjoy the show!

Thursday, October 29, 2009

Jeremy Grantham GMO 3Q letter

GMO chief investment strategist, Jeremy Grantham is out with the firm's latest missive to investors; the GMO quarterly letter for 3Q 2009 is available at the GMO website and at Zero Hedge.

For a quick preview, here are some excerpts from Business Insider:

"
The idea behind my forecast six months ago was that regardless of the fundamentals, there would be a sharp rally [to S&P 1000-1100]. After a very large decline and a period of somewhat blind panic, it is simply the nature of the beast. Exhibit 1 shows my favorite example of a last hurrah after the first leg of the 1929 crash…

Today there has been so much more varied encouragement for a rally than existed in 1930. The higher prices preceding this crash (that were far above both trend and fair value) had lasted for many years; from 1996 through 2001 and from 2003 through mid-2008.

This time, we also saw history’s greatest stimulus program, desperate bailouts, and clear promises of years of low rates. As mentioned six months ago, in the third year of the Presidential Cycle, a tiny fraction of the current level of moral hazard and easy money has done its typically great job of driving equity markets and speculation higher.

In total, therefore, it should be no surprise to historians that this rally has handsomely beaten 46%, and would probably have done so whether the actual economic recovery was deemed a pleasant surprise or not.

Looking at previous “last hurrahs,” it should also have been expected that any rally this time would be tilted toward risk-taking and, the more stimulus and moral hazard, the bigger the tilt. I must say, though, that I never expected such an extreme tilt to risk-taking: it’s practically a cliff! Never mess with the Fed, I guess…
"

Catch the full report at the links above. Should be an insightful read, as always.

Related articles and posts:

1. Jeremy Grantham: first TV interview - Finance Trends.

2. Seasoned investors search for value - Finance Trends.

3. Grantham profiles in Barron's, Financial Times - Finance Trends.

Wednesday, October 28, 2009

Links: history, present, and future

Sharing some of the more interesting links and stories that I've come across (or revisited) this week.

We've got Paolo Pellegrini on US debt, an honest and brief overview of the global energy picture, a comparative look at China and the US, and much more. Enjoy the links.

1. Paolo Pellegrini says shorting US debt "attractive bet" - Bloomberg.

2. Capitalism,
Socialism, or Fascism? - Washington's blog.

3. Leonard Kleinrock: Mr. Internet (interview) - LA Times.

4. The Truth about Energy - Puru Saxena.

5. The "democratization of credit" is over - John Rubino.

6. Why the Dreyfus Affair Matters: Louis Begley interview with Bloomberg.

7. Niall Ferguson: US on collision course with China.

8. Gore Vidal thinks the US is headed for dictatorship.

9. Milton Friedman makes the case for limited government (PBS).

Monday, October 26, 2009

Jeff Saut on "Permanent Investments"

Checking out this article from Raymond James strategist, Jeff Saut, on the "Intrigue of Permanent Investments" (hat tip: Derek Hernquist).

There are some very interesting comments here on gold, farmland, and the "intriguing concept" of a permanent investment portfolio - if such a thing can ever really exist.

Rather than spoil the surprise (or front-run the excellent Bernard Baruch story), we'll let you read it for yourself. Enjoy the article!

Related articles and posts:

1. Tangible Investments - Financial Sense Online.

2. Unloved, Undervalued, & Underowned - Jim Puplava at FSO.

Friday, October 23, 2009

Warnings on Euro hedge fund regulation

Highlighted this Financial Times article on Twitter yesterday; certainly wanted to mention it here as well.

This story on proposed European regulations of the hedge fund and private equity industries and its likely effects may also reverberate here in the US. Here is an excerpt from, "ECB warns Brussels on hedge fund rules":

"Europe’s controversial
plans to regulate hedge and private equity funds were dealt a fresh blow on Thursday when the European Central Bank warned the proposals would put the industry at a significant competitive disadvantage.

The opposition voiced by the Frankfurt-based ECB, which feared a go-it-alone approach in Europe would backfire, is likely to be seized upon by the alternative investment fund sector – and influence the extensive re-writing of the proposals that is already under way.

Hedge funds have warned that business could be driven out of Europe as a result of the plans to regulate the sector for the first time on a pan-continent basis."

As we read on, the article seems to convey the notion that the problem lies not with this new layer of burdensome industry regulation, but the possibility that other regions may not move quickly enough to join Europe in adopting similar rules and restrictions.

You can see where this is going: the now commonly-cited fear of "regulatory arbitrage" rears its head once again. In other words, Europe doesn't want to be the only one to pass potentially restrictive industry legislation; they want to make sure the USA and other nations will institute similar rules ("harmonize") so that affected hedge funds and LBO firms have fewer places to relocate.

"In a legal opinion published on its website, the ECB warned that funds could simply shop around to find a country where the policing of the sector was less stringent. “An internationally co-ordinated response is necessary given the highly international nature of the industry and the consequent risks of regulatory arbitrage and evasion,” it said."

We also see this trend towards incremental global regulation unfolding in a number of areas outside of finance, but our focus today is the current and future regulatory environment for hedge funds and private equity.

What is likely to happen in this area in the year ahead? Your thoughts and insights on this issue are certainly welcome here, readers.

Wednesday, October 21, 2009

Julian Robertson interview at FT.com

Tiger Management founder and hedge fund legend, Julian Robertson sits down for an interview with FT.com's "View from the Top".

On tap for this discussion: Robertson's views on US debt and our reliance on foreign creditors (especially China), lessons from the tech bubble, risk control and avoiding "the big loss", the future of the hedge fund industry, and even his outlook on gold and gold mining shares.

Speaking of the precious metal and its allure to savers and investors, Julian says, "I don't believe in gold". Despite being bullish on the outlook for gold mining shares, Robertson dismisses gold as a worthwhile inflation hedge.

Interestingly, he comments that gold is a "psychological store of value" and that a psychiatrist would be better suited to understanding its appeal. I say interesting, because this is exactly the topic Dr. Phil Pearlman (trader and psychologist) took on in a recent episode of "Market Shrinkology" on Stocktwits.tv. This is a very worthwhile discussion in itself, and it provides an excellent contrast to some of Julian Robertson's views on gold.

Enjoy the interview, and be sure to check out the related links below for more on Robertson's views and investment strategies.

Related articles and posts:

1.
Julian Robertson: CNBC interview - Finance Trends.

2.
Replicating Julian Robertson's CMS trade - Marketfolly..

Monday, October 19, 2009

Gold's inflation adjusted high: $2,000+

Here's an article on gold from Bloomberg that we highlighted on Twitter this morning. It notes that gold's recent nominal high of $1,072 an ounce still puts it well under the 1980 inflation-adjusted peak.

For gold to surpass that peak in real (inflation-adjusted) terms, it would have to climb north of the $2,000 an ounce mark. More on that from Bloomberg:

"Gold’s rally to a record means prices are still 53 percent below the 1980
inflation-adjusted peak.

While gold rose 19 percent this year to $1,072 an ounce on Oct. 14, consumer prices almost tripled in the past three decades, eroding the metal’s value. Bullion hasn’t kept pace with the cost of bread, fuel or medical care. In 1980, gold hit a then-record $873 an ounce. In today’s dollars, that would be $2,287, according to the U.S. Labor Department’s inflation calculator..."

However, I take exception to the statement that "consumer prices tripled...eroding the metal's value". If anything has been eroded over time, it is the purchasing power of the dollar (and other fiat currencies like it). Those who study gold know that over long periods of time, the precious metal does remarkably well as a store of value and preserver of purchasing power.

The basket of goods or services that you can buy with an ounce of gold today, versus what you could buy with an ounce of gold in 1980, or in 1880, for that matter, remains relatively constant. There are changing tides in valuation, of course, when an ounce of gold will buy so many more (or less) barrels of oil, or so many shares in the Dow (figuratively speaking).

Unlike an inflated fiat currency, whose value is continually eroding over time, gold will retain its role as a store of value and maintain its purchasing power when the prices of a given asset or quality good come back in line with their historical mean. You can look to the Dow/Gold ratio chart for an example of this property illustrated over time.

One other quick point to mention. During the run of this current gold bull market, I've often heard comparisons made regarding gold's current price in relation to its inflation-adjusted 1980 high. What often seems to be missing from the discussion is the fact that the 1980 high was just that: a peak price high that came at the end of a parabolic spike in gold (as measured in US dollars).

Right now we are in the middle of a bull move in gold prices. We don't know when this current move will end, but for now it may be more instructive to use middle to latter portions of past gold bull markets (for example, 1975-1978 vs. 2006-2009), rather than past peaks, when comparing current nominal gold prices and inflation-adjusted prices.

At some point, gold may run up quickly to "catch up" with monetary inflation, but it's difficult to foretell such a move. In fact, noted gold watcher, Paul van Eeden points out that there may actually be too much of an "inflation fear" premium built into the current $1,000+ gold price.

I'm a little rusty and need to brush up on some of these points, so further study is needed here. If our readers have any insights to share on gold's purchasing power in relation to past highs or previous decades, I'd definitely appreciate their sharing them with us.

Friday, October 16, 2009

Marc Faber on investment strategy (Bloomberg)

Famed investor and market commentator, Marc Faber joins Blooomberg TV to talk investment strategy.

There is an interesting and lengthy discussion of the inherent worth of the US dollar and other fiat currencies, and why paper currencies are losing their purchasing power against most asset prices, especially gold.

You'll also find an update on Marc's view of Intel shares and technology, along with his views on natural resource shares and why you should try to focus on buying assets and shares when prices are depressed.

Related articles and posts:

1. Marc Faber on Lateline Business - Finance Trends.

2. Marc Faber: Another Case for Inflation - Financial Sense Newshour.

Thursday, October 15, 2009

Dow 10,000, we meet again

Being plugged into the market chatter on Twitter and Stocktwits, it was hard to avoid yesterday's talk (often dismissive) of a return to Dow 10,000.

So now we're back to the vaunted high number mark that serves to remind us of the glory days of the dot.com era & the possibility for an even higher 5 digit readout in the not-too-distant future. But what does Dow 10,000 really mean, if anything at all?

Noting the fact that inflation over the past decade has reduced our purchasing power by at least 20-30 percent, we should remind ourselves that a trip back to a nominal high in a widely followed market average does not automatically translate to money in our pockets.

Reflecting on these thoughts yesterday, I went off to dig up my old copy of the Wall Street Journal from March 30, 1999, the first time the Dow Jones Industrial Average crossed 10,000. I could not find that old paper, but I did find this interesting article instead.

Excerpt from, "Dow 10,000 and the Lost Decade":

"
I have made it a habit to save the print edition of the Wall Street Journal on certain key dates including March 30, 1999, the day after the Dow Jones Industrial Average (DJIA) first crossed 10,000.

Although the DJIA is a
flawed benchmark, no other index has captured the imagination of the public to the same degree. As we again approach the 10,000 level, there appears to be no shortage of commentators ready to discuss what this means for the overall market. It comes as no surprise that value investors attach no particular significant to round numbers for individual stock quotations or for market indices.

However, it is hard to avoid recognizing the obvious fact that the past decade has seen very disappointing returns for index investors given that stocks started the ten year period at very high valuations. This is true of many individual DJIA components as well...
"

Read on for a very interesting look at the market's performance over the past decade, along with some worthwhile notes on the changes we've seen in media, business, and the debt and commodity markets over that time frame.

Related articles and posts:

1. The great "bear market rally" post - Finance Trends.

2. The Invisible Crash: book review - Financial Sense.

Wednesday, October 14, 2009

FSN inflation vs. deflation debate updates

We recently called your attention to the inflation vs. deflation debates aired on the Financial Sense Newshour.

Some of the interview guests in the debate included Mike "Mish" Shedlock, Daniel Amerman, and Marc Faber. Earlier broadcasts included inflation vs. deflation arguments from Bob Prechter at Elliot Wave and Peter Schiff.

FSN host Jim Puplava recently concluded the debate series by replaying segments of these broadcast interviews, and offering his own views on the likelihood of a future US inflationary or deflationary environment. I won't hesitate to add that, in spite of Puplava's partiality to the inflation side of the debate, you'll be hard pressed to find a fairer or clearer treatment of these arguments.

If you caught any of the earlier broadcasts, or would just like an overview of this broadcast debate, check out this excellent macro overview (part one, part two) on the great inflation vs. deflation debate.

Monday, October 12, 2009

FT Alphaville: debt and dollar's demise

Over in London, at the FT Alphaville blog, they're talking about the US' federal debt (now $11.9 trillion or $38,000 per citizen) and the fact that we are fast approaching the point at which the government will once again have to raise its "debt ceiling" past the current $12.1 trillion mark.

More from Alphaville on the implications for the US dollar:

"...Fine, but what would an increased debt limit actually mean for the US
exactly?

Well, for a start it effectively `kicks the can’ of the debt problem to the next generation.
But it could also have more near-term implications — namely a massive effect on the US dollar — a currency already under pressure from the Federal Reserve’s unconventional monetary policies and journalists from The Independent...."
Will we see a dollar devaluation in the not-too-distant future? Read on if you're up for a rather dour view on the US' ability to deal with its "gigantic and excessive levels of debt".

Related articles and posts:

1. Reasons to raise the debt ceiling - James Altucher at WSJ.com

2. Killing the goose - John Mauldin at Goldseek.

Friday, October 09, 2009

Features of the Week

It's been a while since we last updated our regular linkfest, but have no fear: "Features of the Week" is here. Enjoy the market-fueled goodness.

1. Jim Rogers chats with Pimm Fox about commodities, inflation, and the outlook for global equity markets - Bloomberg.

2.
Hedge fund managers are cautious on market rally while real economy is shrinking; see liquidity driven market - FinAlternatives.

3. David Rosenburg fumes over the bear market rally - FT Alphaville.

4. The rise and fall and rise of US cities (interactive graphic) - Infectious Greed.

5. In depth interviews with Jim Chanos - Marketfolly.

6. Are gold and US Treasuries in conflict? - Gregor.us.

7. Don't miss MacroTwits discussion hour with GregorMacdonald, Sundays at 9 pm EST - Stocktwits TV.

8. Has anyone noticed that silver is up 56% year to date? - Reuters.

9. Be sure to check in with Upsidetrader and Abnormal Returns for more excellent weekend linkfests.

Thanks for reading Finance Trends Matter. You can also keep with us via RSS and on Twitter. Have a great weekend!

Thursday, October 08, 2009

Bill Fleckenstein: wary of dollar, long gold

William Fleckenstein has some very interesting things to say about the US dollar, gold (with quotes from John Paulson), and an impending turn in inflationary psychology in this new Minyanville article.


Bill is also seen here in this Bloomberg TV interview, explaining why he is currently long gold stocks and looking for future short opportunities in the market.

He also makes a few choice points about the Fed's culpability in bringing about this financial crisis, and why we can't "print our way to prosperity". Check it out.

Related articles and posts:

1. Bill Fleckenstein on PPIP, inflation - Finance Trends.

2. FSN interview w/ Bill Fleckenstein - Finance Trends.

Wednesday, October 07, 2009

Gold rises to new record price

Certainly one of the biggest stories of yesterday's market action is carrying over to today; gold's breakout to new record highs.

We spoke quite a bit about gold in yesterday's Twitter stream, noting that gold's latest upsurge has come amidst a global tide of inflationary worry and growing anti-fiat money sentiment. This is quite remarkable, as much of gold's rise this decade was, previously, widely perceived as a "weak dollar story".

Reuters shares this quote from gold watcher and newsletter writer, Dennis Gartman:


"
Gold's rise is not a dollar phenomenon but an "anti-currency" phenomenon as money is flowing away from almost any and all currencies.".

Interestingly enough, today's coverage from the Financial Times seems to take an opposing tack, quoting an analyst who noted the lagging performance of gold in euro terms:

Eugen Weinberg of Commerzbank said: “The fact that the rally of gold prices is mainly attributable to the weak US dollar at the moment is clear if we look at the price of gold in euro terms. At €710 a troy ounce, this is still 10 per cent lower than the all-time peak recorded in February 2009.”"

However, Bloomberg's article coverage of gold's new price highs yesterday cited inflation as a mounting global concern, alongside quotes from analysts and investors who noted the metal was acting as "a hedge against all currencies".

It's been a while since we covered the gold market in depth, but then a round of all-time highs usually seems to get everyone's attention. For more on the subject, please have a look at these previous gold commentaries in the related articles section below.

Related articles and posts:

1. John Paulson, hedge funds move into gold - Finance Trends.

2. Gold's place as a reserve currency - Gillian Tett via Gata.org.

3. Gold hits all-time highs (Jan. 2008 roundup) - Financial Sense.

4. The Invisible Crash: book review - Financial Sense.

Monday, October 05, 2009

Poker investing: Jeff Yass of Susquehanna

Here's a cool post from John, "The Masked Financier" on, "Beating the odds with (Texas Hold'em) poker investing - Jeff Yass and Susquehanna".

While I'm not much of a card player, I do appreciate the discussion of probability and rational decision making in trading and investing. We also get a glimpse inside the workings of one of America's more secretive trading firms, Susquehanna International Group.

Here's an excerpt from John's post:

"Jeff Yass (and his trading firm Susquehanna) is a prominent example of Texas Holdem Investing in action. Although Yass has been intensely secret about himself and his firm in recent years he first appeared in the popular investment media through an interview with Jack Schwager for “The New Market Wizards: Conversations with America’s Top Traders”.

However, just this week the Philadelphia Magazine has written a detailed background piece on Yass and Susquehanna – Beating the Odds – which demonstrates the extent of the close links between poker and trading / investing. Susquehanna already featured on this site where it was described how the firm had held a poker tournament earlier this year in Dublin to select trainee traders for its European operations.

The Philadelphia Magazine piece goes to greater lengths in explaining some of the inner workings of Susquehanna and the integral role that poker plays in the training and work ethic of the firm’s traders..." 

Be sure to also read the Philly mag piece, "Beating the Odds", in full. Interesting profile, to be sure. 

Related articles and posts: 

1. Dasan on poker and investing

2. Investing lessons from John Templeton.

Friday, October 02, 2009

Paolo Pellegrini interview on Bloomberg

Paolo Pellegrini, the man who helped John Paulson structure his short trades in the subprime mortgage bond market, is the subject of a new Bloomberg profile.

An excerpt from that piece:

"
Paolo Pellegrini has a nose for trouble. He saw it in rising housing prices in early 2006, when he cranked through decades of home price data and concluded the bubble was poised to burst. Pellegrini then helped engineer a massive bet against subprime mortgages that catapulted Paulson & Co. hedge funds to 2007 gains of as much as 590 percent -- and firmwide profits of more than $3.5 billion.

Pellegrini, 52, pocketed tens of millions of dollars, allowing him to buy a couple of what he laughingly calls “entry- level supercars”: a silver Ferrari F430 with a base price of $168,000 and a black $109,000 Audi R8.

By April 2008, the Rome native smelled danger again. Nearly six months before the collapse of Lehman Brothers Holdings Inc. and the bailout of American International Group Inc., he and his colleagues saw that the unfolding crisis would trigger U.S. government intervention: bank rescues, a stimulus plan and yawning deficits. That move would eventually undercut the dollar and U.S. stocks, unleashing market havoc, Pellegrini reasoned.

“The losses would be massive,” he says. “I knew the policy response would be commensurate...”"

Read on for more about Pellegrini's investment strategy at PSQR, his thoughts on the Fed, the US dollar, and more.

You can also catch Pellegrini in this Bloomberg TV interview, where he makes some interesting points about inflation and the relative health of household balance sheets between 2007 and today.

Thursday, October 01, 2009

Inflation adjusted home prices (US)

This chart of US inflation-adjusted home prices caught my eye as I leafed through Investment Postcard's recent, "Words from the wise", roundup.

As you'll note from looking at the chart above, we are currently in the midst of a sharp correction from the near-parabolic highs reached during this decade's "housing bubble". From the peak in 2004 to the most recent low (just below $170,000), we see a decline of around 50 percent in the median home price.

If this were a stock chart, we might note that the most recent low also violated a line of long-term support (drawn in red) at the $170,000 price level. This is the level from which home prices "broke out" in an advance above their previous highs beginning in the mid-1990s.

Assuming this type of chart inference is applicable to real estate prices, can we expect median home prices to return to their previous "trading range" of $145,000-$170,000 in inflation adjusted terms?

In any case, I felt the chart provided an excellent (and long-overdue) update to one of our original posts on home prices: Robert Shiller's study of US housing price data. Enjoy the look back (to the uncertain days of the bubble top) and the current data, with its implications for what may lie ahead.

Related articles and posts:

1. Single family home prices (inflation adjusted) - Big Picture.

2. Parsing the recent housing data - Finance Trends.