Buying GLD: A Golden Opportunity For Contrarian Investors

Back from hiatus. As frequent readers will remember, gold remains a core part of my portfolio (since the beginning of QE madness from the FED). However, from time to time I will take a trading position in the yellow metal when opportunities present themselves. Well, that time is now upon us. I am buying GLD.

Why?

Gold has been in a downtrend since reaching its high back in 2011 around $1913. Recent selling has been initiated on the (I believe) false assumption that QE 3 is off the table. Wrong! Another month of weak unemployment numbers will almost certainly force the Fed into more QE (maybe sterilized in some form) to force long term interest rates even more. QE=Money Printing=Dollar Debasement=Higher Nominal Asset Prices. No rocket science here. 

However, the market has failed to realize that QE is back on the table. This case is especially true in Europe where the ECB will be forced into doing more to stop the bleeding. The European public does not want more austerity (outside of Germany). They want more government spending financed by money printing. ECB will initiate more QE or expand its current refinancing operations. 

Sentiment on gold is extremely negative which from a contrarian perspective is positive. According to the Hulbert gold newsletter sentiment index (a collection of market timers) the crowd is now short gold-- Here is an excerpt, "Today, in contrast, it is at minus 14.8%, which means that the average gold timer is now allocating about a seventh of his gold-oriented portfolio to shorting the market."

As usual these professional market timers are almost always wrong. They are bullish at the top of the market and bearish at the bottom. So I will be happy to buy when they are shorting.

Obviously, gold could go lower, but the odds favor that we are approaching a major bottom in gold.

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Buying GLD: A Golden Opportunity For Contrarian Investors

Scared To Death: Investment Manager Sentiment Plummets to March 2009 Levels

Considering that the market has done nothing for the last few weeks, except bounce up and down in a very tight range, one would think that sentiment has cooled off from August's market crash. You would be wrong. The NAAIM sentiment survey released today shows that investment managers are practically on the ledge and ready to jump to their own deaths to escape this vicious market turmoil. Apparently, they just realized that their end of year bonus is not going to be filled with gold or jewels, but instead with a lump of coal thanks to their poor performance. NAAIM sentiment came in at 4.18, a level not seen since the March 2009 lows. This also means that investment managers are so depressed that they are almost completely net short (with leverage). It should be remembered that this is a contrary indicator. You generally make money by doing the exact opposite of these pigeons. Right now it is saying that we may be nearing an important low in the market. This is quite interesting because other sentiment indicators like the AAIII poll are not confirming excessive bearishness.

One thing to keep in mind when trying to use this indicator for market timing. Back in March 2009 when the market was bottoming, the NAAIM survey held below 10 for three weeks. So it is not a perfect timing indicator, but certainly one worth following.

3/4/2009      2.15
3/11/2009    4.23
3/18/2009    9.97

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Scared To Death: Investment Manager Sentiment Plummets to March 2009 Levels

Quick Update: Closing Sugar Short

All good trades must come to and end as they say. The time has come for my Sugar short. I caught a nice 14% downside move that was pretty much straight down. It would be piggish of me to press the short any further. When you trade on leverage, you cannot risk a large oversold bounce (you never know if it is the beginning of a large move higher or just a technical bounce).

So why did this trade work so well? Luck. When I shorted sugar the fundamentals were beginning to sour along with a negative technical backdrop. Furthermore, all soft commodities were weak during this period, which pressured sugar lower. In short, the general conditions favored lower sugar prices.

I might consider shorting sugar again on a possible bounce higher.

Related Articles

Shorting Sugar
Update on the Sugar Short


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Quick Update: Closing Sugar Short

Will the EU Bailout Save the Market? Be Careful What You Wish For

The endless and increasingly desperate rumors of an EU bailout was enough to juice the stock market higher today. The Dow closed up over 270 points. To me, this has ominous parallels to the October 2008 Tarp bailout of the banks. If you remember the market initially dropped when the US House of Criminals Representatives failed to surrender complete sovereignty to the major banks. A few days later, the big banks made the right payments to the right people to get the TARP bailout approved despite public opposition to the plan. Anyway, the key takeaway was that the stock market immediately began to crash after the passing of the TARP bill. Instead of restoring confidence, the bailout bill spooked the market. People started to freak out that the US financial system must be in deep trouble if it needed $700 billion in additional capital. After all, every Government official and Fed member had assured the market that "the fundamentals remain sound" and other lies.

Below is a chart of the S&P 500 between October 3, 2008 (when the TARP bill was approved) and October 17,2008. The market crashed 22% despite the bailout. The lesson from 2008 was that bailouts don't prevent markets from crashing. Are we repeating history?

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Will the EU Bailout Save the Market? Be Careful What You Wish For

Update on the Sugar Short

A few days ago I mentioned that Sugar was a good short from both a fundamental and technical view. So far the trade has done well. The longs are currently in liquidation mode as market sentiment has changed dramatically. A few weeks ago the bulls were focusing on Brazil's weak crop estimates. Now, everyone is worried about the expected global sugar surplus of between 4-7 million tons for the 2011/2012 season. Furthermore, the risk on market sentiment has been turned off courtesy of Europe's financial implosion.

This situation represents trouble for the sugar bulls as the market is heavily long sugar. The sugar market is also at a key technical level. See chart below

March Sugar is currently trading at 25.84, which is just above the early August low of 25.38. If sugar fails to hold this level than it exposes 24 as the next downside target. If 24 is breached then we could see sugar fall to 22.

Volume, as you can see from the chart is starting to pick up as spec longs sell their losing positions. Adding to the bulls' woes, the CME's margin hike made it a little more expensive to hold sugar.

I remain short Sugar.

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Update on the Sugar Short

Shorting Sugar

With the market gyrating back and forth with no real conviction either way, I have been looking for uncorrelated trades, which can protect me from the non-stop risk on/risk off algo controlled market. Well I think I have found an interesting short opportunity: Sugar. 

Below is a chart of SGG, the ETF which tracks Sugar. 

You can see from the technical setup that Sugar is looking very heavy, with a possible double top pattern. Along with a weak technical picture, Sugar also faces poor fundamentals. The market is expected to be in surplus of at least 5 million tons for the 2011/2012 season. The only news that supports the market is a lower than expected harvest out of #1 exporter Brazil. However, this decline in output will be easily offset by record crops in Thailand, Europe, and India, along with strong harvests out of Russia and Ukraine. So we have a situation where the price of sugar has been bid higher on Brazilian crop concerns, but this should be short lived as market participants realize that the market will be well supplied. 

Another reason I like this trade is because sugar has a very low correlation with the stock market (around 0.1), which provides at least some diversification.

Finally, the sugar market is dominated by long speculators right now. Non-commercial traders are currently long 155,000 contracts, meaning that they will be quick to sell on any decline. Another bearish indicator is the fall in open interest, signaling a lack of conviction in this latest up move.

The trade is pretty simply. Short SGG with a stop at 105. 

UPDATE 9/16/2011---Well obviously I got really lucky on my timing on this trade. At the time of this writing 11:18 am pst, Sugar is down over 5% on a Canplan report, which suggests the Brazilian sugar crop will be stronger than expected. I am still short. There will much more long liquidation in the days to come.

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Disclosure: I am short SGG at 100.40

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Shorting Sugar

Merger Arbitrage Opportunities---Free Money....But

With the recent chaos in global markets, merger arbitrage spreads have widened considerably. This has made the risk/reward more favorable, allowing enterprising investors to take advantage. Below are some of the best opportunities in the merger arbitrage area:


From Dow Jones

Varian Semiconductor Equipment Associates Inc. (VSEA), Applied Materials Inc.(AMAT) 
 
Premium offered: $1.03 or 1.66% 
Acquirer: AMAT 
Target: VSEA 
Offer per share: $63.00 cash 
Value of outstanding common equity: $4,752,090,000 
Target share price: $61.97 
Acquirer share price: $11.05 
Expected closing: End Of 2011 9/25/2011 (might be October at the latest) 
Annualized gain: 37.92% 

Motorola Mobility Holdings, Inc. (MMI), Google Inc. (GOOG) 
 
Premium offered: $2.40 or 6.37% 
Acquirer: GOOG 
Target: MMI 
Offer per share: $40.00 cash 
Value of outstanding common equity: $11,772,000,000 
Target share price: $37.61 
Acquirer share price: $533.51 
Expected closing: End 2011-Early 2012 1/1/2012 
Annualized gain: 20.39% 

I don't normally like merger arbitrage because the risk is generally too high and the reward is too low. However, with these kind of annualized returns and ZIRP by Banana Ben and his merry traitors at the Fed, these look like good opportunities, without having to bet on the direction of the stock market. After all, anything is better than 0% at your bank. 

Warning: Merger Arbitrage often seems likes a sure thing...and it is until one of the deals falls through and you watch the stock drop 20-30%. The deals listed above are both all cash deals and have a very high likelihood of going through. But no guarantees. 

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Merger Arbitrage Opportunities---Free Money....But

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!

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

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

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 Salesforce.com [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
75.
-------------------

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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Investment Ideas from the Barron's Roundtable