The Profits of Doom

March 28, 2007 | By | 3 Replies More

Can any follower of world stock markets not now be aware that the confidence in an ongoing bull market is showing signs of slipping?

We have suffered a major correction in late February followed by a return to the high ground punctuated by the odd flat day and reversal. This activity and a look at the fundamentals that drive markets are making many of the old hands have doubts. Followers of the theory that past market movements can foretell the future are also becoming concerned that the party is coming to an end.

Ask any Elliot Wave technician what conclusions they are drawing from their reading of the runes! It has been a given that wherever Wall Street goes so European markets will follow. Before briefly talking about the problems facing the U.S. it is worth taking a close look at this premise to see whether it is likely to hold true in today’s global environment.

A fundamental belief at Precious Metal Investment is to check and double check wherever possible all the information that flows across our desk from whatever source. It would also be remiss of us if we accepted without question that past experience will hold true today and in the future.

U.S and European financial centers still remain the most powerful and influential drivers of stock markets world wide, and although there are signs that their significance is becoming eroded, we do not think that the effect will change attitudes for a decade or more.

In the meantime what happens in the US will continue to have a serious knock on effect on all Western stock markets, as in the past, and to a lesser extent on the markets of the emerging economies?

As an aside we also see Russia standing aloof from much of this downside as their realization of the extent of their untapped resources, both industrial and in commodities, will enable them to flex their financial muscle with increasing effect.

One Encouraging Aspect Of The US Economy

As we still believe that the strength and weaknesses of the U.S. economy will continue to direct the major markets, it is necessary to take a hard and calculating look at America today. It is difficult to see one encouraging aspect of the U.S. economy to hang a note of optimism on.

Although we may be clutching at straws we still believe that there are many individual entrepreneurs still alive and kicking in the States, and that American technology and ´get up and go´ will continue to lead the world for the time being so there is some hope that the U.S. will maintain its superior position of influence in the financial world for some time to come.

That is if the politicians can keep their noses out!!

The major problem as we see it is that the Chinese hold so much American paper that they are effectively holding a knife to the throat of the U.S. economy and if at any time they care to exercise it, the result will be a catastrophic fallout.

Sadly the present administration

  • can only think of printing more money
  • is unable to find the political strength to admit to and address the growing problem of inflation
  • as yet cannot find a face saving way of getting out the increasing cost of ill advised military ventures in the middle east
  • and never far from the headlines, the growing problem and consequences of the housing market collapse brought about by taking the politically easy way out with artificially low interest rates and to hang with the future.

Political Vacuum Between The Republicans And The Democrats

The dollar continues to lose value, there is in effect a political vacuum between the republicans and democrats that will not be resolved until the next presidential election and if Hilary gets in!!!

Out of the frying pan into the fire comes to mind.

And please do not think that we have overlooked the oil and energy problems, the growing and out of control national debt, a looming crises with Iran, the catalogue of potential disasters goes on and on. We can find no encouragement that there is a back up, fail-safe plan that could go into effect to avert or alleviate a painful market sustained downturn.

Before looking at ways to profit or at least to minimize the losses from a forthcoming long term bear market we have to reflect upon the timing. Lets be clear on this, if anybody were capable of accurately forecasting the timing of movements in any market they would quickly become as rich as Croeses. Furthermore the markets have a nasty and frequent habit of surprise, taking the most sophisticated of investors to the cleaners from time to time.

Despite the plethora of economic indicators now available the market will often contradict logic.

So where are the Profits of Doom?”

In the circumstances it is wise not to try to outguess market timing but to take a long-term defensive view to protect a portfolio. The answer can be to buy long term put options on the stocks in your portfolio and to look at selling covered calls when you believe the market is entering a reversal for a shorter-term profit on stocks you wish to retain.

We like to think that those companies that are long established and provide essential domestically sourced goods or services and have a history of paying a decent dividend should be retained and are candidates for covered calls. If you have other favorites in your portfolio you want to retain then think seriously about the advantages of puts.

It may be time to evaluate the advantages and disadvantages of holding on to the more speculative stocks and perhaps cashing profits or cutting losses and finding a safer and less volatile investment

You may be reluctant to hold cash if you see your own currency whether it is the $, Euro or GBP losing value and inflation taking hold. If so then commodities may hold out a solution for you.

We are enamored with Uranium and think that despite a general market fall out occurring, the environmental pressures are such that the benefits of nuclear power cannot be ignored.

Projects in the pipeline, tax breaks and government assistance all hold out promise that good returns can be made from investing in uranium producers, nuclear power contractors etc., despite economic difficulties in other sectors.

Gold Has Been Shadowing The Price Of Oil

Despite our misgivings that the price of gold has been shadowing the price of oil, this is a scenario we now accept as a given. If you believe that oil can only get more expensive and as some pundits have forecasted US$100.00 a barrel in the not too distant future then gold may be your answer.

There are also other fundamental reasons for favoring gold but this market does have some question marks hanging over it. Have a look at our articles on the yellow metal for some more opinions. As the emerging nations become wealthier so their appetite for the finer things in life grows greater, led by better food.

Take a look at soft commodities such as cattle or wheat, and the easiest ways to play this market is index led or Exchange Traded Commodities (ETCs). Whatever you do keep a close eye on the leading market movers, the news, and if you can get your head around it, technical analysis of charts can give some surprisingly accurate forecasts of future trends.

If you need more information or help on options, covered calls, ETCs etc. feel free to contact us

“A reasonable probability is the only certainty”  E.W.Howe

Check, double check and check again and may the luck be with you.

 

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Comments (3)

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  1. Stephen Dreher says:

    I just read the Profits of Doom article as well as some of the guides to precious metal investment. You address some important issues for me as I adjust my investment portfolio to reflect a heavily defensive position.

    I was searching for a message board to list my questions and not bother you personally, buy since you offered….

    1) I’m definitely interested in the ETC’s. Commodities may be overbought somewhat now (according to Marc Faber), but I want to watch them. It is
    difficult to find pure farm/agriculture stocks, so the ETC’s sound great. CanI find these easily by searching the Morningstar site? Any particular ones you like? Any particular advice on doing additional research?

    2) Again, would like to further understand the put options you discussed. I can do a bit of research on my discount brokerage’s website, Scottrade, but their explanations are notoriously superficial. I’m thinking along the exact lines you describe on my individual equities, holding on to things like
    Walgreens, Wrigley, GE but wanting to protect myself as well. I’ve been eliminating speculative equities, especially ones that I have realized a profit
    on or approach break-even points. A percentage of that cash is already going into short term T bills.

    3) Uranium — totally agree there. I was going to invest in Uranium One (SXR) several months ago at US$7, didn’t pull the trigger and it’s sitting at $14
    today. I do plan on following this and other miners.

    4) Lastly, really need some further help on precious metal investment. I am ready to take a position on bullion and appreciate the connection to
    bullionvault.com. However, I also wanted to invest in silver and/or platinum/palladium. Problem is trying to decide on where to go
    (bullionvault.com only sells gold).

    I opened up an account at Fidelitrade, but as I further analyze the price structure, it seems a bit heavy. Costs at Kitco and Miles Franklin don’t seem
    all that different, so maybe that’s the nature of the beast.

    Specifically…take a purchase of a 100 oz. silver bar. Today’s price at Fidelitrade was a bid of 13.21 and an ask of 13.64. Spot price today was 13.22. So, assuming Fidelitrade will charge me the 13.64, I’m paying a 3.2% premium, then a 1% commision, and a 0.5% annual storage/admin fee. If I keep the bar for a year in their custody, the metal must grow by 5% in value before I break even.

    Seems high, but like I said, maybe that’s the beast.

    Any insight you can give would be GREATLY appreciated. If you haven’t the time, perhaps direct me to a good blog, message board or website where I can ask others.

  2. John Lloyd says:

    In the first place I would question the assumption that you say has been made by Marc Faber that commodities are overbought, this is far too great a
    generalisation.

    While it may be true of say Timber or Copper both extensively used in the construction industry it is not necessarily so for other hard and soft
    commodities, what can happen to Corn prices if Ethanol takes off? The answer here is to be selective and think globally, after all there is no indication
    that the construction boom in China has been affected by the bursting housing bubble in the U.S. And what about oil! A quite important commodity I think!

    I don’t use the Morningstar site so I will provide a list of ETCs. and referrals together with other associated investment vehicles within the next
    two days.

    The best place by far to get a comprehensive and unbiased guide on every aspect of options is the Chicago Board of Exchange web site – http://www.cboe.com

    As you probably know a put option gives the right to sell at a given price within a limited time frame.

    If you have concerns that the market is turning bearish but you have stocks in your portfolio that are fundamentally sound and are providing an
    acceptable yield based on your purchase price that you really are reluctant to sell then buying the right to sell a stock at a price that would more or
    less let you break even is a form of insurance against taking a heavy hit if even your best stocks bomb! With this in mind the time frame becomes a
    particularly important consideration, the longer the time frame the more the option will cost so a balance that you are happy with has to be struck. Make sure you look at ´leaps´ that can have up to a two-year time span.

    Do look at selling calls on stocks you hold, this action can provide a steady income stream if the options are not exercised, in other words the
    strike prices you sold the calls for are not met or, if they are, then at least you will walk away with a profit to invest elsewhere.

    I think that holding bullion in a vault is a very personal decision and I hesitate to give advice or pass an opinion. All I can say is if you go this
    route then Bullionvault seems as good as any. Although I do not think there is any danger that Western governments will put an embargo on personal gold holdings, as has happened in the past, it is something to keep in mind.

    It is possible to buy platinum and palladium bars and hold them in storage but again this is not for me personally. Also both can be considered
    strategic metals in the event of war as they are important metals in various types of ordinance so, however unlikely, your holdings could be confiscate in a crisis.

    I completely agree with you that storage costs are an important factor so unless you anticipate a sudden substantial spike in price that anyhow would
    be reflected in the other associated investment vehicles, why bother.
    Charges for dealing on line are so much cheaper than paying storage and bid/offer margins are much easier to contain.

    Although I live in Europe I have an account with Option Express in the US and which I can find no fault with and can recommend. Dealing costs are
    reasonable, the site is easy to navigate, and dealing in options, stocks  ETCs is a simple procedure, there is also a practise facility and good
    educational resources. Go to http://www.optionsexpress.com and have a look.

    Please let me know if I can of further assistance and that my answers have been helpful.

  3. Thanks for your perspective and useful info. I agree with you about commodities, really too complex to generalize. Oil and energy have done well for me. I do feel that the Chinese expansion is primarily dependent on US consumer liquidity and when that dries us, as it will be doing, the effect on China will be heavy. After all, they make all the crap we consume.

    One clarification….from your comments, I take it you are not particularly interested in purchasing precious metals as part of your portfolio. If that is the case, how do take your exposure to them, via mining stocks?

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