Making Money Alert
Eyeing the Golden Canary
09/22/2010
In last week’s Alert, we told you about the golden canary in the coal mine when it comes to assessing the mood of this market. At the time, we noted that gold was hitting a new, all-time high, and that investments like the SPDR Gold Trust (GLD) continue to deliver cautious investors solid upside in the face of global economic uncertainty.
Well, this week we’ve seen an even bigger rise in gold prices. In Wednesday morning’s trading, gold once again has surged to yet another record high. Former Fed Chairman Alan Greenspan recently said that rising gold prices actually are a sign that investors are getting very nervous about the global economy.
Greenspan warned that a jump in gold prices could be “the canary in the coal mine to keep an eye on.” Well, if gold is in fact the canary in the coal mine, then that canary clearly is signaling that all is not right with the financial markets.
The reason why the shiny metal’s rising price means that all is not right with the markets has much to do with gold’s status as a safety-valve investment during tough economic times. Actually, it comes as no surprise to me that traders moved into both gold and long-term Treasury bonds just one day after the Federal Reserve announced that it was ready to take more action to boost the economy.
Basically, the market is interpreting the central bank’s statement as a signal that it will ramp up its bond-purchasing program. So, if the Fed plans to buy more bonds, then bond prices are going to rise -- i.e., bond yields are going to fall the way they did in Wednesday’s trading.
If we see the Fed start to purchase bonds in any significant quantity, it will lift demand for Treasury bonds while also hurting the value of the U.S. dollar vs. rival foreign currencies. The lower dollar will keep sending investors into hard currencies such as gold, as the value of the yellow metal tends to rise whenever there’s pressure on the greenback.
Now you know why it comes as no surprise to me that bond prices rose (i.e., bond yields fell) and gold prices are making new, all-time highs.
The golden canary has spoken, indeed.
Presidential Town Hall Thoughts
Like many Americans, I watched President Obama’s Town Hall meeting about the economy on Monday that was hosted by CNBC. And judging from the response I’ve read about how unimpressed Americans generally feel about what the president had to say, I must say that I agree. To me, the language was essentially politics as usual. The president blamed much of the nation’s economic woes on what he inherited, and that line really just rings hollow at this point.
Although the president was a bit more pro-business than I’ve seen him be in the past (I guess this is no surprise given the event was hosted by CNBC), he still suffers from what I call the fatal flaw of collectivist thinking. That flaw was expressed time and time again via the president’s use of the term “afford” when it comes to tax cuts for the wealthy.
You see, the term “afford” implies that an individual’s money is first and foremost the property of government, and if government deems it can “afford” to give you your own money, then it will let you keep it. If the government thinks it cannot “afford” to give you your own money, then it will keep it.
Now, observe the flaw in this mindset. It’s the truly pernicious notion that your earnings are first and foremost the province of government, and only if it can “afford” to let you keep it will it do so. I think this notion goes against the very essence of property rights, and from both a philosophical and practical standpoint, this idea is über-bad for the nation.
I think that unless we see some drastic change soon (not a likely scenario), this mindset is going to continue causing very real economic problems for both the United States and the global economy. Is the world coming to economic Armageddon soon? No. Are we on a very dangerous path that could lead to some very dark places? I think the answer is yes.
ETF Talk: Exploring Emerging Market Opportunities
Every once in a while, I like to highlight a recommendation that I am making in one of my paid services to showcase a broad market trend that is worth bringing to your attention. While the U.S. stock market has been picking up recently, the emerging markets really have been climbing.
To take advantage of the fast-growing emerging markets, I recommended to subscribers of my Successful Investing advisory service that they buy the iShares MSCI Emerging Markets Index (EEM). I am pleased to report that the position is up nicely over the past six weeks since we recommended it.
One word of caution is that emerging markets generally rise faster than traditional markets, but they also tend to drop quicker. This kind of volatility can be unnerving, so only invest money that you are comfortable putting at risk. However, the potential reward is that emerging markets have been shown to produce bigger gains over an extended period of time than the markets of developed countries.
Another risk is that the market’s recent climb, coupled with fast-rising bullishness in the latest American Association of Individual Investors Sentiment Survey, suggests to me that a bit of a pullback could be triggered soon if unexpected bad news hurts growing investor confidence. If you are risk averse, you may want to watch for a market retreat before considering investing in EEM.
For those willing to assume the risks, EEM offers a way to tap the emerging markets with a single investment. At the end of August, the fund had a one-year return of 19.11%. Its volatile nature is reflected by annualized returns of negative 2.76% over the past three years, and a profit of 11.59% over the past five years. The performance shows that investors who weathered the market plunge during the fall of 2008 would have profited nicely if they had held the position for the past five years. Of course, my technical-trading approach of tracking the market’s moving averages to determine when to enter and exit is intended to move subscribers into non-equity investments when conditions warrant -- and more importantly, bring subscribers back into equities when the path to profitability opens up again.
Here’s a brief description of EEM to help you understand the fund’s holdings. The largest sector that it owned, as of Aug. 31, was financials, consisting of 25.1% of the portfolio, followed by materials, 13.72%; energy, 13.65%; information technology, 12.94%; telecommunication services, 8.57%; and industrials, 7.05%. The countries where EEM invests the bulk of its money were: China, 18.36%; Brazil, 15.91%; South Korea, 13.09%; and Taiwan, 10.46%. As of the same date, the largest company holdings were: Samsung Electric-GDR, 2.39%; China Mobile Ltd., 1.87%; OAO Gazprom-REG S ADS, 1.65%; Petroleo Brasileiro S.A.-ADR, 1.59%; and Banco Itau Holding Financeira SA-ADR, 1.54%.
If you want advice from me about which ETFs to buy and to sell, I encourage you to sign up for my ETF Trader service by clicking here. As always, I am pleased to answer any of your questions about ETFs, so please do not hesitate to contact me if you have one. To send your question to me, click here. You may see your question answered in a future ETF Talk.
The Next BIG Opportunity: High Yield --- Listen Now, FREE!
The negative news on the economy is everywhere, but I have a newsflash for you. The world is NOT coming to an end. America will not slip back into a recession anytime soon, and a big Congressional victory by conservatives in November could set us up for a fantastic buying opportunity -- if you know where to invest your money.
Throughout most of this year, I have been warning investors about the risks of owning mutual funds and about the mindless strategy of buy and hold that most stockbrokers and advisors constantly advocate. Throughout most of 2010, the best strategy has been a high cash position combined with a healthy dose of patience. Now, however, my research is pointing to opportunity.
Taking advantage of this opportunity is easy. In fact, all you have to do is listen to a replay of my recent teleseminar, “The Next Big Opportunity: High Yield.”
As the title suggests, we believe there is a HUGE opportunity coming for investors seeking high-yield investments. High-yield investing comes with its own set of risks and rewards, and we’ll be focusing on these risks and rewards in this teleseminar. If you’re an investor who wants to increase the income generated from your assets, then you’ll want to listen to this seminar.
During this one-hour teleseminar, we share our thoughts on:
• How to build a high-yield portfolio fit for these chaotic economic times
• Which high-yield securities are appropriate for your portfolio
• How you can plan for, and protect yourself from, the bubble now forming in bonds
• How stocks are likely to perform in a slow-growth economy
In addition, you’ll also receive our complete “High-Yield Watch List.”
The audio for this teleseminar is absolutely FREE. To listen to the replay now, all you have to do is click here.
NOTE: Fabian Wealth Strategies is a SEC registered investment adviser, and is not affiliated with Eagle Publishing.
Radio Show Update: Talking Buy Setups
Last week’s show was handled by the Fabian young guns, my sons David and Michael. I want to congratulate them on a fantastic hour of broadcasting in my absence. If you didn’t get the chance to hear last week’s show live, then don’t worry. As an Alert reader, you have FREE access to all of my past shows, and all you have to do is go to my Radio Show archive.
I’m back in the saddle again this week, and I’ll be talking about current conditions in the market and how you can position your money to take advantage of what I suspect are some nice buy setups taking shape right now. We’ll cover which sectors I think are going to be ripe for the picking soon, so be sure to tune in and catch all of the action.
To listen to the show live each Saturday from 10 a.m.-11 a.m. Pacific Time, just go to our website.
Pithy Rothbardian Wisdom
“There is one good thing about Marx: he was not a Keynesian.”
--Murray Rothbard
The great Austrian School economist makes crystal clear his disdain for Keynesian economic theory in this one pithy and rather humorous statement. Unfortunately, there’s nothing humorous about the fact that Keynesian economic theory dominates the thinking in Washington, D.C., and in our major universities. That, as they say, is no laughing matter.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you’d like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars or anything else. Click here to ask Doug.
P.S. My publisher, Eagle Financial Publications, is now on Facebook. Click here to see our page and be sure to become a fan when you get there.