Marc Faber's September Outlook: The Calm Before the Storm

Marc Faber is out with the latest issue of his famous Gloom, Boom, and Doom Report which is always a must read for serious investors. Unlike most of the other talking heads, Faber has an excellent track record. He correctly predicted the top in the equity markets in Nov 2007 and caught the bottom in March 2009, making his subscribers a lot of money. Here is a summary of his September 2011 report:

1. Stocks---Faber says stocks face two potential outcomes: a brief rally to between 1250-1300 on the SP 500 before another leg down (and breaching the 1101 low) or a prolonged trading range with 1100 being the low and 1300 as resistance. Faber thinks the first outcome is more likely, but this could change depending on Fed policy (aka: money printing). Another reason for Faber's bearish posture is the unfavorable seasonality of September (worst month for stocks historically). Investors who have exposure to stocks should use any bounce to sell. If you feel compelled to own stocks, Faber recommends blue-chip stocks like Pepsi and Johnson and Johnson.

2. Gold--Extremely overbought at this level. Could fall to $1500-1600 range during the correction. Faber noted the bizarre relationship between US treasuries and gold. Concludes that the people buying gold were not worried about inflation but a collapse of the entire financial system. Gold should be viewed as more of an insurance policy rather than an inflation hedge. Long-term gold is going significantly higher. Gold stocks may be the better bet than the physical metal in the short-term as they play catch up.

3. US Treasuries--After a huge, fear-inspired rally, US treasuries are extremely vulnerable to a correction. Faber notes that the Daily Sentiment Index is around 98%, indicating a possible top. Furthermore, the "dumb money," a.k.a. the retail crowd, is very bullish judging by their positioning in the Rydex inverse government bond fund. If you own Treasuries, now is time to take profits.  

4. Indian Equities (Sensex)--While generally bearish on equities, Faber would advise the gradual accumulation of Indian shares, noting that they are relatively cheap and represent good value. Over a longer time frame (10 years), Faber thinks Indian stocks could appreciate 7%, which is pretty good compared to other investment options.

5. Macro--"This system has become completely corrupted and is being run for the benefit of the billionaires and banking CEO's who have control of the politicians." Faber has harsh words for Warren Buffett, noting that the investment guru profits not because of his genius, but at the expense of the American taxpayer. Buffett represents the very worst when it comes to crony capitalism. His BAC investment will likely prove very profitable, courtesy of the taxpaying middle-class and Buffett's straw man President whom he controls.

Happy trading!

Black Swan Insights



Nasdaq Sentiment Index Hits All-Time Low---A Contrary Buy Signal?

The last time this indicator fell by so much was back on June 13 2011 when the NASDAQ sentiment index hit -194. We mentioned (see Negative Sentiment Suggests A Near-Term Bottom) that from a contrary perspective, this was a short term buy signal with the markets likely to rally. SPY was at 127 on June 13th. By July 7, SPY had risen all the way to 135.

Well it is that time again. The NSI has hit a new all time low of -342, showing just how much fear is currently priced into the market. This is a bullish signal for contrary investors who buy fear and sell euphoria as Jim Rogers would say.

I expect the market to trade sideways for a while before the new leg higher. Similar to what happened in late June of 2011. It would be hard to imagine a significant fall from these levels barring some kind of European Lehman event.

click chart for larger image.


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Investment Ideas from the Barron's Roundtable

Find out what the word's top investors are doing with their money during these tumultuous times.

Bill Gross of PIMCO-- "Our best idea therefore is a 10-year Australian or Canadian bond. A 10-year Canadian government bond yields 2.5%. A10-year Aussie bond yields 4.5%. "

Marc Faber--In the near term the stock market is oversold, and a bounce to between 1240 and 1280 on the S&P 500 is possible. New highs above the May 2 high at 1370 are most unlikely for next six to 12 months.

I'm not buying anything right now. But if stocks dropped another 10% to 20%, I might add to the positions I mentioned in the Midyear Roundtable. I also maintain my recommendation to short [CRM]

Gold is likely to correct, possibly by $100 or $150, but I continue to recommend gradual accumulation.

Archie MacAllaster-- I like some of the insurance companies more than the banks. Hartford Financial Services [HIG] has a book value of $43 a share, and the stock trades around 19. It yields more than 2%. Hartford raised its dividend this year to 40 cents a share from 20 cents, although it was a lot higher before the financial crisis in 2008. Hartford could earn $3 a share this year, so on a price/earnings basis it is very cheap.

Fred Hickey---  I stay with my secular bull-market play in gold. I own bullion and gold exchange-traded funds. The better opportunity right now is in gold-mining stocks. They have underperformed for a while. They are going to get a huge boost on price alone. I like Agnico-Eagle Mines [AEM], Newmont Mining [NEM] and Yamana Gold [AUY] for the second half of the year.

We were short since May a dozen semiconductor stocks, but I have covered them. I wouldn't be short anything now, because I don't know when the Fed is going to pull the trigger on QE.

Felix Zulauf ---I predicted in the Midyear Roundtable ("Buy Low, Stay Nimble," June 13) that
the stock market would go to a low in the fall. The next few weeks will be extremely volatile. I expect the market to go below the latest lows in September.

The central bank will come in to provide liquidity, but timidly at first because the Fed was bashed for QE2. After the fall low, equities will recover part of what they lost into the turn of the year and then fall again. Economies around the world most likely will be in recession next year.
Confidence in our currencies, policy makers and central banks is going down the drain. That will be reflected in a rising gold price. I have long said this isn't an environment for investing in stocks. Hold cash in the form of short- to medium-term Treasuries. Own a lot of gold, and don't have debt.

Mario Gabelli --The volatility we saw in the markets in May 2010 --  hedge funds trying to protect themselves using ETFs [exchange-traded funds] --  has returned, with the result that good and bad stocks are getting crushed. It is hard to figure out where to allocate and reallocate capital. On the other hand, we are getting pretty decent cash flows in certain products such as utilities, where we have taken advantage of the decline in stocks like NextEra Energy [NEE]. One position to which we have added is National Fuel Gas [NFG]. Shares of the company, which is partly a utility and partly a shale-gas play, fell to 55 from

I have failed to include Abbey Joesph Cohen's view because she is a certifiable lunatic who only gets paid to pump stocks to retail investors. As such, her opinion is worth less than rat excrement and would only serve to harm readers. 

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Did We See the Plunge Protection Team Last Night?

Last night was a strange trading session. The Asian markets followed the US down. The Nikkei was off 4.5%, Kospi down 8%, and the ASX 200 was down 5%. As a result SP 500 futures plummeted another 28.50 points to around 1080. Then the unexpected happened--within a 20 minute period some massive buyer came in and starting lifting all bids in the market. The SP 500 futures almost immediately gained 14 points and went on to recoup all overnight losses. Then futures turned 1% higher. This is a stunning move considering the market was in free fall at the time.

I don't have any proof, but we may have just seen the plunge protection team in action. Just when everything in the world is going to hell, there always seems to be a mystery buyer come in to save the market. The huge move in the SP futures was not in response to any news, which makes the situation very suspicious. I doubt the SEC will ever investigate this considering how busy they are watching tranny porn (see ABC news article).

Oh well, back to your regularly scheduled market manipulation courtesy of the Fed.

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Charting the Stock Market Crash of 2011

Amazing charts show the massive carnage.

Here is a chart of the % of S&P 500 stocks above their 50 day moving average. We are at the same crash levels back in October of 2008.

S&P 500 stocks above 200 day average--its low, but has been lower.

The CBOE Equity put/call ratio--generally a contrarian indicator. We are near the highs reached back in 2008. Everybody wants to buy puts near the bottom.

The VIX--otherwise known as the fear index shows the real fear in this market. We either get a Lehman event or we are near capitulation.

SP 500 Bullish sentiment--not near the lows seen during October 2008 or March 2009, but getting very close.

Baltic Dry Index--used to be a good leading indicator. It is hovering just above 2008 lows.

Based purely on technicals, the market has only been this oversold twice:  5/21/40 & 10/19/87.  The SPX was +9.4% and +8.1% a month later according to

While the AAII investor sentiment will be released on Thursday--we can imagine that it is somewhere around 5% bullish and 95% bearish.

Comment: Don't listen to the fools on CNBC saying it is time to be defensive--the time for that was 2 weeks ago before the crash. Now is the time to buy safe stocks for a tradable bounce in the markets. I like tobacco stocks and MLPs (with no commodity risk). 

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Economy on the Brink--The Fed's Next Move

With the Fed meeting tomorrow, everyone wants to know what the Fed's next move after this dramatic crash. This is a re post of a previous article which explains the Fed's options during a liquidity trap.

1. Dramatically Change Price Expectations---Recent Fed announcements indicate that they want a 2-3% inflation rate compared to the current 1% rate. One idea is for the Fed to increase its inflation target upward to between 4-6%. To support this new policy the Fed could openly announce that they are monetizing debt rather than calling their money printing--credit easing. The Fed could also buy new kinds of assets such as stocks, corporate bonds, land, etc. This could have the effect of stimulating spending as consumers and businesses fear the loss of purchasing power. It would make it clear that the Fed is serious and will do everything in its power to create inflation.

2. Cap Treasury Rates (Aka. Operation Twist)--Under this policy option the Fed would agree to cap treasury rates at unreasonably low rates (e.g 10 year at 2.0% and 30 year at 3.5%). They would openly announce the target to the market and state that they will print as much money as necessary to achieve the goal. This would have the effect of lowering the real inflation adjusted yield of the 10 year to below zero. It would reduce the incentive for financial institutions to hold Treasuries and force them to do something with their money.

3. Taxing Currency---- Under this option the government would tax the currency, meaning that the dollar would automatically lose value over a period of time (say 3% every 6 months). This would create a cost to holding currency, giving people and institutions an incentive to spend it quickly, which would increase the velocity of money throughout the financial system. An extreme example of this policy would be the introduction of a new currency, which would lose a certain amount of value over a fixed period of time. The Japanese government considered this option in 1999, but never implemented it.

4. Negative Interest Rates--Like taxing currency, this option imposes a cost to hold money and theoretically forces people and corporations to spend money, which would increase aggregate demand. However, this is a hard policy to implement from a political perspective. It could lead to a flight of capital from the US as savers abandon the dollar for foreign assets. Under this policy option you may have to implement capital controls. What could work is for the Fed to impose negative interest rates on bank deposits held at the Federal Reserve. They could also prevent banks from passing along negative interest rates to consumers. Banks would be forced to do something with all of the money they are hoarding. This policy option would give banks an incentive to lend to the economy.

5. Reduce the Interest Paid on Excess Reserves---One reason QE failed was because banks simply held onto all of the excess reserves created by the Fed. All of this money is simply sitting around doing nothing for the economy. The Fed could reduce the rate it pays on these excess reserves, thereby creating an incentive for the banks to lend the money. While this appears to be a logical policy option, it is not practical because the major banks are largely insolvent. They need the capital to cushion themselves from future credit losses. Even if the Fed was to reduce the rate paid on reserves to 0%, it would not be enough to encourage the banks to lend out the money.

6.Extend Duration of Balance Sheet--Under this option, the Fed would start to move its bond holdings into longer dated Treasuries. The idea would be that the Fed would indicate to the market that it is going to maintain easy monetary policy forever. However, this action would be a de facto admission that QE 1, QE 2  was debt monetization. The last bit of confidence left in the dollar would collapse . The whole goal of QE was to con Americans and foreigners into believing QE was temporary and would be reversed at a later time (readers know better than that). If the Fed starts buying 30 year treasuries, it collapses the illusion forever.  

7. Helicopter Drop Money--The easiest way to stimulate aggregate demand is to print money and hand it out to the general population. Imagine everyone in the US getting a check for $25,000. This would automatically create inflation and increase spending. It would also increase inflation expectations, which the Fed considers important. The major drawback is that nobody knows how much inflation this would cause and it might lead to hyperinflation.

As you can see the Fed is not out of bullets. Zimbabwe Ben and his fellow counterfeiters will stop at nothing to create inflation and destroy the value of the dollar, all in the name of saving the economy.

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Buying Into a Stock Market Crash

No, I am not insane. The markets are in free-fall, crash mode, whatever term you want to use. Fear reigns supreme as everyone is talking about another recession, depression, etc. Hedge funds are collapsing as we speak. So what is the trade? It is quite simple: buy. That's right you want to be a buyer of top quality tobacco stocks and MLPs which do not have any commodity price risk. I have also decided to sell volatility (through a call spread) at around 40. Placing a trade like this makes me want to vomit, but historically this is a high probability trade.

During a market crash--which we are experiencing, everything falls regardless of fundamentals. This represents an opportunity for the few smart investors.

Stocks I am buying:

Nustar Energy--stable toll like revenue with a 7% plus yield. So if this is such a great stock, why is it falling so much? Because this is a favorite of hedge funds who like the postive carry. They borrow from their prime broker at 50 bps (if that) and buy Nustar and other MLPS which yield 6-8%. When there is a market crash, these hedge funds are forced to liquidate to meet margin calls.

Altria(MO)--this company sells an addictive product. People have to have their nicotine fix, regardless of economics. Even if you think we are entering a depression, this is still a good stock. They have complete pricing power and control 50% of the market. Current yield 6%.

Gold (GLD)--Over 50% of my portfolio remains in gold (see here). I will not be selling despite the huge move in gold.

Good luck.

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S&P 500 Priced in Gold---The Economic Recovery Illusion

Back in Jan of 2011 Black Swan Insights predicted that the S&P 500 when priced in gold would decline. So far in 2011 this has been the case. The following chart shows just how poorly the S&P 500 has performed this year when priced in real money. The result is shocking. We are now back to the March 2009 lows--and no fiat money printing from Zimbabwe Ben will change this situation.

click chart for larger image

With the ECB officially entering the monetization phase, you can expect gold to continue its upward trajectory.

This issue of money printing and the performance of equity markets is very important. The SP 500 may only be down 4.4% year to date in nominal terms, but in real (gold) terms it has fallen almost 20%. And when you consider the performance of the S&P 500 since March 2009 you can see that it does not exist in real terms. This whole fiat money rally from 2009-2011 has been an illusion to fool the masses into thinking they were wealthier, when in reality they are no better off then at the bottom of the Great Depression Recession.

Below is an embedded YouTube video about visual illusions. As humans we are sometimes not capable of seeing reality when it right in front of us. In my opinion the greatest illusion is between nominal values and real values. Enjoy.

It is a long video (17 mins). If you want to jump to the visual illusions go the 2 minute mark.

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Obama's Failure: S&P Downgrades US Debt Rating

Well it happened--after markets closed, S&P officially downgraded the credit rating of the US. This is a truly historic occurrence which will have far reaching impact on the economy and financial markets. The real question is: What will the stock market do? Will we swoon limit down or shrug off the news and dismiss S&P as a totally irrelevant entity?

A few facts to consider:

The US should have been downgraded years ago. Specifically, when the Federal Reserve decided to monetize US debt in late 2008-early 2009. This action should have been considered an unofficial default by all three major ratings agencies. Countries that print  money to pay their debts do not deserve an AAA rating.

The US has defaulted on its debt before. In 1933, war criminal and traitor Franklin Roosevelt took the US off the gold standard and devalued the dollar by over 60%. Why on earth the US was not downgraded for this goes to show just how worthless the ratings agencies are.

A debt downgrade is not the end of the world. Japan lost its coveted AAA rating in 2001. At first, pundits declared that bond yields would surge as investors flee. What happened? Take a look at the "fear and panic" in the JGB market. Oh--that's right nothing happened. People continued to buy JGBs and today Japan enjoys the lowest bond yields on the planet.

The real question is: What happens to the market? I believe this to be a very negative psychological event which comes at the worst possible time for an already fragile stock market. Numerous hedge funds have blown up this week leading to margin calls and liquidations. Investors are scared about the EU debt crisis, and we need a US debt downgrade like we need a bullet in the head. This downgrade could be the tipping point which leads to more selling.

Gold--If you are like me and own gold, you are in nirvana. The gold bugs have been proved correct. The dollar and US debt are no longer safe havens anymore. It is hard to say gold does not continue to surge as investors rush to the ultimate safe haven of gold.

The dollar and Treasuries may rally. I know it sounds absurd, even illogical to suggest the dollar and Treasuries could increase on news of the downgrade, but consider the following: The US is the world's reserve currency with the largest, most liquid debt market. There is simply no alternative for global investors to flee to. What, are they going to buy the euro when it is on the verge of collapse? I think not. As much as I like gold, there is not enough gold to handle trillions of dollar denominated assets. Furthermore, most Asian central banks (including China) will continue to buy US dollars and US debt to keep their currencies from appreciating against the dollar.

By the way, if you look at the chart below, you will see that quite a few bond investors knew in advance of the S&P downgrade (e.g. Bill Gross, etc). Someone wanted out of US bonds before the end of the day.

Obama will go down in history as an unmitigated failure, just like George W Bush. Obama will be the first President to preside over a US downgrade. I don't blame him for his incompetence and lack of leadership. I blame the dumbed down piece of filth Americans who voted this supercilious jackass into the White House. Everyone one of you who voted for him should be stripped of your constitutional rights immediately. You voted for a low-life community organizer from Chicago with no experience into the highest and most powerful job in the world. I remember watching the cheering fools, celebrating Obama's victory. People were running around claiming that the US would be saved and that they would not have to worry about their mortgage or gas bill anymore thanks to Obama. LMAO! Well, now you are stuck with a mental midget in the White House whose only concern is playing basketball with the secret service and vacationing at Martha's Vineyard. He does not give a damn that Rome is burning; he is too busy holding fundraisers and selling out the country.

America you got what you deserved! I hope you can live with the fall-out. I bet you will re-elect Obama in 2012 just to prove how stupid you really are.

Don't blame me, I voted for Ron Paul in 2008 (and will again in 2012).

Black Swan Insights


Market Massacre--- What Happens Next?

That little EU debt crisis we have been warning about for over a year is finally hitting the fan. The market has fallen over 10% percent in the last 9 trading days, which is similar to a mini-crash. Today the Dow was down 512 points with European bourses performing much worse. Why the dramatic decline?

The realization that the EU is on the verge of collapse is finally starting to dawn on investors. About fucking time in my opinion. More importantly the EURO finally got smacked hard after ECB president Trichet finally acknowledged that future rate increases will not happen. Furthermore, the ECB started to buy Italian and Spanish bonds in a desperate action to restore confidence (did not work). This action caused massive panic in Europe and dumping of the EURO in favor of gold--which was bid all the way up to $1680. The Europeans see the writing on the wall. Either the ECB monetizes all PIIG debt (inflationary) or the EU collapses into oblivion. Natural response is to buy gold.

But, a funny thing happened in the middle of New York trading--gold was deliberately taken down from $1680 to $1650. The rumor on the trading desks was that COMEX was going to increase margin requirements (didn't happen). It is days like today where you really know gold is manipulated by the US government and central banks. Why would gold suddenly go into a flash crash in the middle of trading on no news? I could see if gold fell in Europe along with the market. This would make some sense, but today's move was unjustifiable and clear evidence of market manipulation. The gold cartel did not want to see gold surge to new all-time highs during a market meltdown. Good news is that gold held its own.

Why was gold relatively strong today? Because QE 3 is guaranteed! It may not be called QE 3, but Bernanke and Co. will almost certainly start to print more money or begin Operation Twist 2.0 (manipulating Treasury yields). The market will continue to fall until the Fed injects more liquidity.

That being said the market is getting pretty oversold and could get a token bounce tomorrow with the NFP. The number may not be as bad as expected and that will give a reason for a short-term move higher.

As for how to protect yourself from further market losses? There is little you can do at this point when the vix is over 31 up 50% over the last three days. The time to protect your portfolio is when the vix is below 18 not at panic highs above 30.

From a trading perspective the easiest trade is to short volatility if it jumps to around 35-36. This would likely constitute a short term market bottom. The way to play is through VXX which is mathematically guaranteed to decline over time because of the term structure of volatility. About they only way this instrument could rise longer-term is if volatility became an appreciable asset (impossible). In the intermediate time frame it should be noted that super-investor Marc Faber thinks the SP 500 could fall to around 1100 before a QE 3 bounce.

Today I picked up NS--Nustar Energy MLP an oil storage company with steady earnings and a stable 7% yield. A lot of hedge funds have been flushed out of the name and it looks like a good opportunity.

Have a good day.

Black Swan Insights  


Profit From the EU Debt Crisis--Short EUR/CAD

With Spain having crossed the thin red line into bankruptcy, with its 5 YR CDS surging above 400 bps and Italian 10 year yields rising over 6%, the next chapter in the EU debt crisis is rapidly playing out. I have been thinking of ways investors can profit from this almost certain EU calamity. While on the face of it, shorting EUR/USD looks like a no-brainer, but anyone who has put on this trade has been royally screwed over the last few months. The problem is that the US government along with the Fed is feverishly devaluing the dollar, which has led to a flat EUR/USD trading range between 1.40-1.45. Competitive devaluation at its finest.

I think the better trade is to short EUR/CAD at around 1.3630. The Canadian government is not actively devaluing its currency by printing money, which makes the Canadian loonie stand tall in a world of debased fiat currencies.

If you look at the chart below of EUR/CAD you can see the trend is definitely down (e.g Canadian strength). In addition to strong technicals, you have a favorable macro back drop as more and more market participants realize that the EU is doomed to collapse. I am looking for a EUR/CAD downside target of around 1.32-1.3250.

click chart for larger image

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