Marc Faber November 2011 Market Commentary

Marc Faber has just released his November 2011 market commentary on his gloomboomdoom.com website.

This month report is entitled "The Strongest Principle of Economic Development Lies in Human Choices".

There are 2 attachments to the monthly market commentary (MMC) :

• The Missing Chapter - A Personal View of Russia - Twenty Years After by Eric Kraus, Managing Director of Anyatta Capital
• The Inflation Pulse Returns and Implications on the Fall Melt-Up of 2011 by Michael A. Gayed, Chief Investment Strategist at Pension Partners, LLC

The first attachment can be accessed at "The Missing Chapter - A Personal View of Russia - Twenty Years After" and you can download the PDF at the end of the linked article. In this chapter, Kraus discusses about Russia before the 1997 collapse and the corruption that took place at the time and how it has now improved and that Moscow feels the freest place in Europe.

The second attachment refers to "Inflation, Deflation And The Fall Melt-Up of 2011" article on Seeking Alpha where Mr. Gayed explains how to navigate the markets which consistently changing market sentiments from deflation to inflation fear and vice-versa. He uses the price ratio of the Treasury Inflation Protected Bond ETF (TIP) relative to nominal 7-10 Year Treasuries (IEF) to anticipate sentiment.

I'll try to post highlights of the Gloom Boom Doom market commentary a bit later.

Market Predictions for 2012 based on Trends

Last week, I reported Bloomberg Consensus of Predictions for Year-End 2012 in Where are Markets Headed for 2012 ?

That was their average forecast:

1. S&P 500: 1,428 vs Current: 1,229
2. 10-year Treasury yield: 2.86% vs Current: 2.14%
3. Inflation rate: 2.05% vs Current: 3.9%
4. Unemployment rate: 8.7% vs Current: 9.1%
5. GDP growth in fourth quarter: 2.5% vs Second quarter, 2011: 1.3%
6. Gold price per ounce on Sept. 30, 2012: $1,835 vs Current: $1,704
7. Value of euro: $1.40 vs Current: $1.39
8. S&P/Case-Shiller 20-City Composite Home Price Index: 136.6 vs Current: 142.8
9. Barrel of oil: $95 vs Current: $92.58

Today, I'm going to do forecast for the same metrics in a "dumb" way by simply checking the trends on charts and give an estimate for each items and we'll see how it fares end of December 2012:

1. S&P 500: 1000
2. 10-Year Treasury yields: 2.5%
3. Inflation Rate: 2.5%
4. Unemployment Rate: 8.8%
5. GDP Growth Rate: 1%
6. Gold Price: 1850 USD
   
7. Euro: 1.37 US dollar
8. S&P Case-Shiller 20-City Composite Home Price Index: 135
9. Barrel of Oil (WTI): 125 US dollar

Sometimes I took the long term trend (e.g. 10 year on gold) and other times shorter trends (e.g end of 2008 to now for oil).

Eric Sprott: Oil Price Must be over 75 USD for Production to Occur

Sprott Asset Management published their monthly newsletter Market at Glance (October 2011) entitled "Oil or Not, Here They Come".

First, they explain that oil has been mostly absent from recent financial headlines, but availability and price of crude oil remains a key factor in world growth:

While the recent clamor over EU solvency and weak global growth has temporarily displaced its media attention, oil’s crucial importance to the world economy has not dwindled in the slightest. Oil remains the world’s greatest single energy source today
...
By historical standards, the world has been coping with constrained oil production and high oil prices for most of the past six years. This tightness in oil supply has been a significant factor limiting global growth, and it would appear that no matter what financial solutions are eventually engineered by our politicians, global growth will remain significantly restricted by the real economy’s ability to produce oil. Limited global supply growth means that the Western world now faces significant competition for oil from emerging markets whose citizenry are willing to work much harder for far less. This will continue to result in a narrowing gap of per capita consumption between emerging and developed economies as the emerging economies continue to gain relative economic strength, wage growth, currency appreciation and purchasing power. We believe strategic investments in oil producers and service companies will offer an effective way to profit from this trend.

Then then mainly focus on the lack of oil production growth:

Global oil production has grown very little (since 2005), appreciating by a mere 2% in total production. This production plateau generated the 2008 oil price spike to nearly $150 per barrel. Subsequently, despite the economic stagnation experienced by developed economies, the price of Brent Crude Oil has averaged over $78 per barrel, four times higher than the ~$18 average that Brent traded at in the 1990s.

and that the International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA) have had to consistently reduce their production forecasts over the years as you can see in the chart below with forecast for 2015 and 2020:

They also shows other charts with price forecast made in 2002 with price ranging between 15 to 30 USD (high price scenario) between 2002 and 2025, in 2009 they revised this with a price range of 50 to 200 USD. (2008 USD).

In the next section, they look at the causes of high oil price namely supply constraints, high production cost, middle east export are riskier and costlier and increased demand from emerging countries:

Supply Constraints.

First, and most importantly, global supply is struggling to grow because we are not finding and bringing into production any new "super giant" oilfields. This reality was well documented by the EIA in a study it published in 2008.³

The EIA study revealed that the largest 1% of oilfields (798 total fields) in the world account for over 50% of global production.

What has been discovered and brought into production in the past few decades are smaller fields, which normally have higher decline rates. As these new smaller fields replace production from larger fields, and older larger fields age, we can expect the global observed decline rate to increase from the current estimated rate of 6.7% (or 4.7 million barrels per day annually).　

High Production Costs.

Oil prices are also high due to rising production costs, and it’s worth noting that new production sources, such as offshore, tar sands and other unconventional sources are amongst the highest cost producers today... As a result, it is becoming clear to many industry analysts that current oil production cannot be sustained under $75 a barrel and the price required to sustain production seems destined to continually rise.

Middle East Exports are Increasing in Cost and Risk.

The so-called "Arab Spring" uprisings in countries such as Egypt and Libya are forcing these and other major oil producing nations to spend more of their oil revenue on social assistance programs. For example, as a result of newly announced social spending in Saudi Arabia, it is forecasted by The Institute of International Finance, Inc. that the budget balancing price of Saudi oil will jump from $68 per barrel in 2010 to $85 per barrel in 2011 and then continue to rise, but at a slower pace, to $110 per barrel by 2015.

Increased Demand from Emerging Markets.

As globalization continues, we can expect job growth to be higher in countries where the citizenry are willing to work harder for less. This roughly characterizes the emerging market countries which for the most part are also large exporters of goods and services, run significant trade surpluses and have strengthening currencies. These factors enable them to continue to increase their per capita and total oil consumption. Conversely, higher wage Western nations are fighting rising unemployment, trade deficits, weakening currencies and, consequently, are being forced to reduce their oil consumption.

They also spend a large part of the letter comparing the US and China in terms of economic growth and oil consumption.

To conclude, they recommend that western investors hedge themselves against declining purchasing power and oil consumption by buying oil producer and service companies:

For North American workers and investors, one way to hedge against a decline in living standards is to use your current relative advantage in oil purchasing power to accumulate oil reserves that will be developed in the future. This purchasing power advantage, currently evident in the time a worker in the West must work to earn a barrel of oil, will eventually dissipate, as world labour markets recalibrate and shift wealth from West to East....

The recent market decline and ongoing volatility is affording investors with an opportunity to invest in oil producers and service companies, in particular junior and mid-cap companies, at attractive valuations. Equities are pricing in much lower oil prices over the long-term. Our view is that while there may be additional volatility in the crude oil price in the short-term, long-term pricing will remain high and equity prices will rise to correct this disconnect.

You can subscribe to Sprott Asset management's Market at Glance newsletter free of charge or download the PDF version.

My take is that you although you can invest in oil producer such as Exxon, BP and the like, you could also invest in Oil Producing countries via Market Vectors Gulf States Index ETF (MES) for example. However, since supply will go down overtime, that means reserve of oil companies will also go down so this is a negative for such companies although crude oil price is likely to increase. Another way would be to invest in Crude Oil directly either buy buying commodities futures or ETF, but be careful which one you choose (e.g. avoid USO at all cost).

Where are Markets Headed for 2012 ?

Bloomberg Consensus of Predictions for Year-End 2012 (unless otherwise noted):

1. UP Standard & Poor’s 500-stock index: 1,428 Current: 1,229

2. UP 10-year Treasury yield: 2.86% Current: 2.14%

3. DOWN Inflation rate: 2.05% Current: 3.9%

4. DOWN Unemployment rate: 8.7% Current: 9.1%

5. UP GDP growth in fourth quarter: 2.5% Second quarter, 2011: 1.3%

6. UP Gold price per ounce on Sept. 30, 2012: $1,835 Current: $1,704

7. UP Value of euro: $1.40 Current: $1.39

8. DOWN S&P/Case-Shiller 20-City Composite Home Price Index: 136.6 Current: 142.8

9. UP Barrel of oil: $95 Current: $92.58

Analysts are rather optimistic, except for the Case-Shiller index.

They also don't see huge swings in the markets (they never do).

How to Short the CAC 40 (French Stock Market)

After an initial sell-off around the world, the market have slightly recovered. However the crisis is far from over. Let's see how we can short the CAC 40 (French Index) and try to time the short.

There are several ETF and funds to short the CAC 40 including:

• Lyxor Etf Short Cac 40INSHC:PAR (in the US)
  
• ELAN FRANCE INDICE BEAR (FR0000400434) (in France)

Let's see how both products fared against the CAC 40.

Lyxor ETF only started its quotation in March 2010. Between that time and today, the CAC 40 lost 17.62% while the ETF gained 1.93% (Source: Google Finance). Not really what we should expect. Bear in mind that this ETF is denominated in US dollar, so the exchange rate should also be taken into account.

ELAN FRANCE INDICE BEAR is older having started in 2002. After 9 years, the CAC 40 gained 3.19% where the mutual fund lost 44.49% (Source: Boursorama). Again not such a good performance, but decay over time is expected for such products. This is even worse if we take dividends into account.


So we should only use those products for relatively short period of time (a few months to 1-2 years) and timing is very critical.

Let's assume a 50% retracement (Fibonacci) of the recent fall.

The top was reached around 4160 (18 February 2011) and the bottom around 2780 (22 September 2011), so a 50% retracement would be around 3470. If we reach this level within1 or 2 months, the RSI-14 could also indicate the CAC 40 is overbought and could be a good starting point to start to short the French stock market.

Shorting (even through via ETF) is quite dangerous in the current environment since politicians always seem to find reasons to stimulate. So I may or may not start a position once the target level is reached.

Overpopulation and Lack of Morality are Major Economic Issues

Jeffrey Sachs is an American (mainstream) economist and Director of The Earth Institute at Columbia University. I was pleased (but shocked) that he addressed two "hot" issues (Overpopulation and Lack of Morality) and their effects on the economy.

In the first video "7 Billion People Equals (At Least) One Major Problem" he explains that the current population growth is not sustainable and that we must find ways to control this growth. His solution is to decrease the fertility rates, by actually decreasing the child mortality rate, as in developed countries couple make many babies to make sure they will be taken care of during the old age as there is no social security over there and traditional kids have to take care of parents. I don't think this would cut it, but this is a starter.

In the second video "U.S. Can Come Back by Rediscovering Virtue", he explains that if Americans can rediscover virtue and morality (a la Marc Faber), the US economy will improve. He started by saying "First I would like a return to legality. So much of the financial crisis was not only about poor judgment, but breaking the law... We need a moral economy -- if everybody thinks they can push every limit we're not going to have a functioning society."

He continues by saying we need a more collective actions and at the individual level he calls for each of us to strive to be virtuous, both in our personal behavior (regarding saving, thrift, and control of our self-destructive cravings) and in our social behavior as citizens and members of powerful organization, whether universities or businesses.

Anonymous Looking to Investigate International Banks

Anonymous Analytics (@AnonAnalytics) has just tweeted the following:
Anonymous Analytics is seeking an analyst with significant experience analyzing international banks: anonanalytics [at] hushmail [dot] com

So after investigating Chaoda Modern Agriculture (0682.HK)and releasing a damning report leading to its suspension on the Hong Kong stock market, it seems they are now in the progress of checking out some international banks.

Chaoda Modern report took about 20 days to be ready. So we may receive a new report about an international bank within 30 days, if they manage to find a volunteer.

GEAB 58: H1 2012: Decimation of Western Banks

Here are the highlights of GEAB 58 (October 2011) entitled "Global systemic crisis - First semester 2012: Decimation of Western banks":

• Global systemic crisis – First half of 2012: Decimation of the Western banks

It’s this very unhealthy financial environment that will cause the "decimation of Western banks" in the first half of 2012: with their profitability in freefall, balance sheets in disarray, with the disappearance of trillions of USD assets, with States increasingly pushing for strict regulation of their activities, even placing them under public supervision and increasingly hostile public opinion, now the scaffold has been erected and at least 10% of Western banks will have to pass that way in the coming quarters... Read public announcement

• Global systemic crisis: LEAP/E2020 anticipation of 40 countries’ risks 2012-2016 (USA, Euroland, BRICS, Japan, UK, Australia, Argentina, Sweden, Egypt, Switzerland, Philippines, Mexico, South Korea, Morocco, Libya, Syria, Iran, Israel, Poland, Thailand, Indonesia, Saudi Arabia, Tunisia, Chile, …) - Widespread collapse at the heart of the global geopolitical dislocation phase... with very different prospects for exiting the crisis depending on the country

In this issue, our team sets out the annual update of "countries’ risks" under the crisis from 2012 to 2016. The assessment of country risk for the next 5 years is meant to be a decision-making tool for political and economic players and investors (individuals, companies or institutions). In a world in turmoil, it offers a medium-term perspective based on the methodology of political anticipation which has proved itself over nearly six years in terms of anticipating the global crisis and its consequences. Based on an analysis incorporating twelve criteria this year, this decision-making tool has already demonstrated its relevance for many years, faithfully anticipating developments generated by the crisis....

• GEAB $ Index – October 2011: The US$ fall accelerates against the €, ¥, Ұ and R$ basket

As our team has explained in many GEAB issues, the traditional Dollar Index (used by the financial markets) isn’t a reliable indicator for calculating the Dollar’s progress. In fact, it is based on a basket of currencies which is no longer representative, neither of the major global monetary balances, nor United States’ trade. This currency basket is, in fact, a "tiny Western club" even more illegitimate today than the G8. …

• Strategic and operational recommendations
  
  • Banks: How to avoid being trapped in the decimation of Western banks?
  • Gold – Currencies: A new inflexion point coming up
  • Commercial real estate: The moment of truth comes closer
    

• The GlobalEurometre - Results & Analyses

We note a continuation of the major uncertainty over the exact state of Euroland governance progress. This month opinion is split (48%), still showing the clash between the laborious, but real, putting in place of this governance with the solid message showing the opposite…

The full GEAB 58 (PDF format) is available to subscribers for 200 Euros per year (10 + 6 issues).

Jim Chanos Says China Banks Deteriorating

Jim Chanos Interview on Bloomberg on the 11th of October 2011.

He's still bearish on Chinese banks even though the government has stepped up to buy Chinese banks shares.

He emphases that his company focuses on the property market in China and that this market has only started to decline.

In the second part of the interview, they discuss US politics: GOP debate, his support for Obama and income inequality in the US.

Finally, he talks about European banks and the need for recapitalization.

Marc Faber: Lack of Savings is the Problem of the US

Marc Faber was interviewed on CNBC on the 11th of October 2011.

He said he was bullish on the US dollar:

Despite the fact that the (European Central Bank) and the European government will flood the market with liquidity to bail themselves out, global liquidity is tightening," Faber said. "Whenever global liquidity is tightening it is bad for asset prices but good for the U.S. dollar, as was the case in 2008.

He also discussed the debt issues in the USA, Europe and Japan and explained there is no way to repay that debt without a major collapse:

We've had far too many interventions in the Western world where the share of total economy that goes to government and is government-sponsored has grown. That essentially makes it very difficult for the Western world to grow sustainably...I don't see how the Western world including the U.S., Japan and Western Europe can grow. They're going to stagnate.

Finally, he ranted against regulations in the US:

We have expansionary fiscal policies, we have expansionary monetary policies but we have restrictive regulatory policies and it curtails any initiative by the small businessman and the large businessman. He doesn't employ and invest capital in the U.S. He does that in China or somewhere else in the world where the regulatory environment is more favorable.

Jim Rogers: Bernanke Has Already Announced QE

Jim Rogers is interviewed on CNBC's Larry Kudlow on the 10th of October 2011.

He discussed about the current bailout of European banks and called for letting the market work and let bad banks fail.

He's still long commodities and expects the ECB and FED to print more money.

QE is already there as Bernanke said interest rates will be kept low for 2 more years.

GMO 7 Year Asset Class Forecast (Q3 2011)

GMO has just released its monthly 7-year Asset Class Forecasts and here are the expected annualized return (based on valuation and historical earning growth):

• US Large caps: 3.1% per year
• US Small caps: 1.5% per year
• US High Quality: 6.6% per year
• International Large caps: 7.2% per year
• International Small caps: 6.0% per year
• Emerging Markets: 7.2% per year

Different kinds of bonds are expected to return between -2.7% and 1.9% per year.
Managed Timber is expected to return 6% per year.
Those are real returns adjusted for inflation of 2.5% per year.

So the best performing assets should be international large caps (Europe & Japan?) and emerging markets and the worst performing assets should be US and international bonds.

One way to act on this forecast via ETF would be to buy iShares MSCI Japan Index Fund(EWJ), iShares S&P Europe 350 Index Fund (IEV) and iShares MSCI BRIC Index (BKF) on the long side, and buy short ETF for bonds such as ProShares Short 20+ Year Treasuries (TBF). If you can short, you could do so with SPDR Barclays Capital International Treasury Bonds (BWX).

You can receive GMO's forecasts (monthly) and the quarterly newsletter for free by registering at http://www.gmo.com

Marc Faber October 2011 Market Commentary Highlights

As I blogged on the 1st of October, Marc Faber is out with the latest issue of his famous Gloom, Boom, and Doom market commentary entitled "They are Ill Investors that think there is no Treasure Island, When They can See Nothing but a Sea of Problems".

A summary has been released by Nathaniel Crawford on Seeking Alpha:

• Stocks: Yes, stocks are very oversold, but that does not mean they cannot go lower. The dreadful price action in both Copper and the Shanghai Composite points to new lows for the equity markets. After US stocks make a new low below 1100 on the S&P 500, there could be a year-end rally followed by a more meaningful decline into 2012. Investors should use any bounce in stocks as an opportunity to reduce their equity exposure. At this point, Faber advises no more than 25% of your portfolio be in stocks.

• Gold: At $1900 gold was extremely overbought, and a correction was necessary. However, Faber now believes that gold could undergo a significant correction similar to what happened between 1974-1976, when gold fell 40%. Faber notes that a large decline in gold is now a distinct possibility. The first support level for gold is at the 200 day moving average around $1500. Despite the potential for a pullback, Faber still likes gold and believes it will trade significantly higher.

• Dollar: It's true that the dollar has no intrinsic value and is being printed into infinity, but the US dollar will be your best friend for the next few months. As global liquidity contracts on EU debt concerns and a possible hard landing in China, Faber advises investors to be long the dollar. Note this is a short-term call; longer term the dollar is going to zero.

• Treasuries: Despite being bullish on the US dollar, Faber does not recommend treasuries, noting that they are overbought and susceptible to a large correction.

• China and Copper: If you think the market is falling because of incompetent EU bureaucrats you are behind the curve. According to Faber, the price of copper is signaling a very serious slowdown (if not complete collapse) in China. This is what is really behind the move down in all commodities. A hard landing in China would be devastating for the global economy. The Shanghai composite is making new lows along with copper, which is very bearish. Also stay away from the Australian and Canadian currencies. If China crashes, these markets will get massacred.

• Emerging Markets: Stay away from these at all costs. All emerging markets are falling and making new lows. Even though Faber likes these longer term, they could still fall another 20%-30% before they would be good buys. These markets could even fall to their 2009 lows. However, this will represent a good buying opportunity because these markets will be the first to bottom.

• Short Opportunities: There is no doubt about it; shorting in this kind of manipulated market is dangerous, but if you must, here are a few ideas: Apple (APPL), Amazon (AMZN), and Salesforce.com (CRM). Only short these with very tight stops.

Jim Rogers: Tarrifs would be a Disaster

Jim Rogers interview on Russia Today America on the 3rd of October 2011.

They discussed about the currency law debated in congress mainly related to the Chinese RMB currency manipulation. Jim Rogers aid if the US implemented tariffs, everybody would suffer, the dollar could plunge and interest rates go up.

He then explained that he owned the US dollar because everybody was negative about the the dollar and that many people perceived the US dollar as a safe haven.

Finally, they talked about the economic outlook for the US and the world.

Marc Faber October 2011 Market Commentary

Marc Faber has just released its October 2011 market commentary on his gloomboomdoom.com website.

This month report is entitled "They are Ill Investors that think there is no Treasure Island, When They can See Nothing but a Sea of Problems" probably referring to the current bearish sentiment of investors (e.g. AAII September 22 sentiment: 25.33% Bullish vs 48.00% Bearish).

There is no attachment to the monthly market commentary (MMC) this time.

I'll try to post highlights of the Gloom Boom Doom market commentary a bit later.

Update: The October market commentary highlights are now available at http://etf-investment-ideas.blogspot.com/2011/10/marc-faber-october-2011-market_05.html