Personal Finance

Larry Edelson on Gold, Stocks & Art Prices

The recent volatility in the markets is prompting a lot of questions from readers. So instead of writing my usual type of column today, I’m going to answer a handful of the most important questions and thoughts on your mind.

Let’s get started …

Q: Stocks really took a nosedive over the past couple of weeks. Is this the start of a big bear market again, another crash?

A: It is not the start of another crash. Nor is it the beginning of a new long-term bear market.

It is merely a much overdue correction within a new longer-term bull market.

Keep in mind that for any market to ever head higher, it needs to occasionally pullback … wipe out unsuspecting investors … and thereby gather the fuel it needs to continue higher.

According to my trading models, the worst-case scenario for the Dow is the 13,400 to 13,937 levels, where there is very strong long-term weekly and monthly support. However, I wouldn’t be surprised if the pullback ended once key long-term daily support is hit at the 14,000 to 14,373 level.

For the S&P 500, the worst-case level is monthly support at 1,524.50.

So worst case, you are looking at about a 20 percent decline. That’s big enough to scare the heck out of the majority of investors and analysts, which is what we need to see happen for the markets to regroup and then head higher again — to Dow 31,000-plus within the next few years.

Per my warnings, you should already be out of stocks. I would not hold one single stock right now. I would look to aggressively reenter the long side of equities near the end of the correction, which I hope to identify for you. In the meantime, for speculative funds, play the short side with futures or inverse ETFs.

Q: What do you think of the situation in the Ukraine? It fits in perfectly with your war forecast.

A: It sure does. The situation in the Ukraine is very bad indeed. All-out civil war is possible, and a split between Russia and Europe and the United States is in the cards.

Russia wants to take over the Ukraine. Keep in mind Kiev was a former capital of the USSR and half the population there speaks Russian and wants to become part of Russia again, while the other half wants to become part of the euro area.

Meanwhile, the U.S. has already moved tanks back into Germany, after pulling out just a year ago. Why? Because the situation is reaching critical mass and there is a very high chance that Putin will attempt to occupy the Ukraine, probably during or right after the Sochi Olympics.

Remember, Putin is an authoritarian, to put it lightly, plus he is still very much angered by what happened to big Russian money last year when it was confiscated in Cyprus. He could care less about what Europe thinks or what we think.

This is very serious stuff, and yet, we are only about one year into the war cycles, which rise all the way into 2020.

Q: You have forecast a rise in the dollar, and it is indeed creeping up. But not much. Why?

A: You are referring to the Dollar Index, which is a mixed basket and doesn’t reflect what the dollar is doing against individual currencies. The dollar has risen substantially against emerging market currencies, but is sideways to neutral against the euro, bullish against the pound.

The emerging market currencies are weakening out of an unfounded concern about another emerging market crisis now that the Fed is tapering its easy money policy.

Meanwhile, the ongoing strength in the euro is not a sign of strength in the euro. It’s merely the impact of deflation in Europe, which is causing many investors to go to cash, just like the Japanese yen surges every time Japanese investors go into a risk-off mentality.

The euro is doomed; it is just a matter of time.

The dollar is in a temporary bull market, but within the confines of a long-term bear market.

Q: Almost everyone I know and read says gold has bottomed. You disagree. Why?

A: It’s simple. Three reasons: First, gold has not yet perfected a test of time and price, meaning that it has not yet tested major long-term support at the right cyclical time period.

Second, its recent rally has not elected one single buy signal on my systems, and instead, gold remains well below the confirming signals needed to indicate a new bull market has arrived.

Third, silver has not even confirmed the recent rally in gold, let alone a new bull market of its own. Silver is acting terribly, unable so far to even get above resistance at the $20.50 level.

As to mining shares, I do not believe they have bottomed yet either.

Q: I have two questions for you. Last week you said the U.S. stock market could slide all the way into August/September. Won’t that destroy the bull market? And second, will Europe’s markets also fall into the same time period?

A: No, such a decline will not destroy the bull market. It will, however, destroy bullish sentiment, which ironically, is what is needed to fuel the next stage up.

Europe’s markets will also slide into the same time period. Asian markets, however, have likely already bottomed, and should move largely sideways during the next several months, with some upside progress. But then, once the U.S. markets bottom, we should also see renewed bull markets in Asian equities.

Q: You were right about the collectibles markets. They are red hot, with some new records just being set for art, with Edvard Munch’s 1893 painting “The Scream” recently selling for a record $120 million. Is this a sign of the times?


image1This will indeed continue as the bankrupt Western governments of the United States and Europe become more and more authoritarian and hunt down every penny of one’s wealth. This trend is only beginning.
A: You bet it is. The collectibles market is red hot because the savvy money wants alternative assets for wealth preservation and to get off the grid, so to speak, and to the highest extent possible.

Notably, I find “The Scream” to be a very accurate portrayal of what is going on in the world and how much uncertainty and anxiety is enveloping the masses.

Best wishes,

Larry

– See more at: http://www.swingtradingdaily.com/2014/02/10/qa-with-larry-edelson-on-gold-stocks-and-art-prices/#sthash.C2vDHd0O.dpuf

Fixed Mortgage Vs. Variable Mortgage – Pre-Payment Penalties

Dustan Woodhouse

Mortgage Terms – Fixed Vs. Variable – Consider penalty implications.

This would be a simpler topic if we were unemotional beings.  Spock would select variable rate every time.

Personally I have found that my life is Variable, therefore so is my mortgage product.

Definitions;

Fixed rate mortgage – just like it sounds; your interest rate is fixed for the length of the term chosen.  This is perceived as ‘safe’.

Variable rate mortgage – also much like it sounds; the interest rate is predicated on the Bank of Canada’s Prime lending rate and has the potential to go three directions at any one of the eight BoC meetings per year; either up, down, or remaining constant.  The component of a variable rate mortgage that is guaranteed is the premium or discount from Prime that is established at the outset of the mortgage term.

Let’s confirm a few facts about the variable rate product before we go any further;

  • The interest rate cannot ‘spike randomly’.  In fact there are eight pre-scheduled  Bank of Canada meetings at which the decision is made whether to move the Prime lending rate or not.
  • The interest rate will not ‘double overnight’.  In fact the interest rate is unlikely to move by more than .25% following any given meeting.  The Bank of Canada has not moved prime since September of 2010 as of this printing.
  • The payment will not ‘double overnight’.  Certain lenders offer a ‘fixed payment’ option – whereby no matter where Prime moves your payment remains constant for the 60 month term.  (this can be an especially effective product for an investment property, or in the case of the client holding a second property which they’re trying to sell.)

Statistically, for the past 40 yrs of history (see 20yrs here) the variable rate mortgage has been the correct choice for reduced interest expense.  At any point when one locked into  a 5yr fixed mortgage rate they effectively entered into a losing proposition.

Over the past few years many clients walked into my office adamant that they wanted a 5 yr fixed rate mortgage and nothing else.  I understand this mind-set, after all I did the same thing with my first mortgage.  I made the mistake of listening to my Parents, who had made the mistake of listening the bank, without understanding the banks motives were shareholder profit driven, not looking out for my Mom & Dad’s kid driven.

 Prepayment Penalties.

Easily overlooked in the heat and excitement of a first time purchase is the question of prepayment penalties.

6 out of 10 Canadians will break their current mortgage at an average of 38 months.

In the case of a 5yr fixed rate product a prepayment penalty equivalent to ~3% of the mortgage balance will be triggered.  ~$3,000.00 per $100,000.00 of mortgage money.

It would be incorrect to suggest that any of these mortgages are broken due to the availability of lower rates as lenders structure prepayment penalties to negate any savings from a simple refinance to a new lower rate. Rather, mortgages are broken for a number of other reasons including marriage, divorce, employment or health issues or the desire to leverage capital from the property.

variable rate mortgage, with its guaranteed prepayment penalty of three months interest (only), is a wiser choice for many.  Currently this equates to ~.70% of the mortgage balance, or a prepayment penalty of ~$700.00 per $100,000 of mortgage balance.

The short version is that clients currently in five-year fixed rate mortgages with 30-24 months left in their term are being hit with a prepayment penalty five times higher than clients in variable rate mortgages.  This after paying a higher interest rate all the way along as well.

Moving forward if interest rates remain constant, as many (including myself) expect them to, these penalty figures will also remain constant.

A few reasons mortgages are broken;

  • Marriage (keeping both properties is not always an option)
  • Divorce (in many cases  neither spouse is able to carry the property on their own)
  • The appearance of more children than expected in your household (congrats – triplets)
  • Employment issues, both positive and negative – i.e. transfers, promotions or  layoffs.
  • Health issues
  • A variety of social issues
  • The desire to leverage capital from the property – again for a variety of reasons;
    • To start a business
    • To fund an existing business
    • To pay out high-interest consumer debt
    • To cover the failure of the business – without being forced to sell the home
    • To raise capital to help a family member purchase real estate or otherwise
    • **an important note for workers who have the potential to be transferred to different parts of the province or country, be sure your mortgage is placed with a National lender.  Otherwise you may be forced to pay a stiff penalty to a local lender if you are transferred out of province.  RCMP in particular have to be concerned about lenders that are willing to write mortgages in rural Canada.

As you can imagine this list goes on.  All of these things and more are what we call ‘Life’ and at some point some of this touches all of us, both the good and the bad.

For many of my clients at least one of these items may have been on the horizon at the time we were discussing their mortgage, and so either a shorter term fixed rate product – or even a variable rate product ( due to its guaranteed lower penalty ) has made better sense than a five-year fixed.

At this point I will reiterate a thought that I put out there regularly;

Ask your banker or your broker what they have done with their own personal mortgage(s) and why.

In the interests of full disclosure it should be pointed out that brokers and bankers alike are compensated more generously for clients who lock in for longer terms at higher rates.

If I were to make an argument in favor of my client locking into the 10 year fixed rather than a two year fixed my paycheck triples.  However I cannot make that argument as I personally do not believe in it at this time.  Instead I prefer to take the time to run the calculations and demonstrate to clients the tremendous advantage of making 10yr sized payments on a variable or even a 2yr fixed term mortgage (1 and 2 yr fixed are like ‘slow motion’ variables).  The extra dollars flow directly to the principal, lowering their mortgage balance faster.

Most people’s lives change a fair bit every three years, I know that mine has… since birth.

dustan@ourmortgageexpert.com

 

Thursday’s Analytical Charts for Gold, Silver, Platinum & Palladium

Due to popular demand, we have added Palladium to the list of Analytical Charts that Metals Analyst Jim Wyckoff features.

 

By Jim Wyckoff, contributing to Kitco News; jwyckoff@kitco.com

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

Vancouver Speech – Observations of a Trader

QUESTION: Mr. Armstrong; Your lecture at Vancouver was simply amazing. Inside of 15 minutes you tore the entire world economy apart and exposed the fallacy that we are taught and I am an economics major. Everyone was talking about what you had to say going out the door. You previously said that rising unemployment can take place with expanding domestic economic conditions. This seems to be taking place. Can you elaborate a bit more on this keen observation?

Thank you so much for being the beacon of light in an economic storm.

ER

ANSWER: Thank you very much. In all reality, these are the observations of a trader – not an academic. I never cared about theory, just figuring out what made the markets tick. I appreciate that those who change any established field always come from the outside in. I suppose I just have to get use to this impact of simply observing how to trade.

longbranchnj-depressionscrip

We are in a convergence of two creative-destructive events. The first is the shift fromPUBLIC to PRIVATE. Municipal governments are collapsing everywhere – including Europe. I have noted that during the Great Depression they even were forced to issue their own money. Therefore, we will continually see the rise in unemployment from the collapse in the public sector. These people have kept expanding their little empires ignoring the fact that their funding means taking more and more disposable income from the citizen. They then promised themselves exceptional benefits. Teachers in New Jersey were given 100% lifetime health benefits upon retirement. Nobody ever bothered to ask where is the money coming from?  This is creative-destruction – the readjustment of reality. The municipal governments are collapsing everywhere and they CANNOT print money, so this isDEFLATIONARY and not HYPERINFLATION nonsense. Therefore, we are creating a new readjusted would from the old – creative-destruction.

The second creative destruction trend is the INTERNET. This is the same as the invention of the combustion engine that eliminated the bulk of jobs in agriculture, capped the expansion of the railroad era, and enabled the growth of the suburbs. The INTERNET has been displacing jobs from small stores to publishing. Book publishers are becoming obsolete for their biggest strength use to be distribution. Today, their biggest customer is Amazon.  Newspapers are also dying and as the older generation dies out, so will newspapers. Magazines and newspapers will be replaced online. This is reducing jobs on a grand scale. The invention of the railroad wiped out local business and brought in competition. They created the mail-order business and the world was changed. The automobile did the same to the railroads. Now the INTERNET is wiping out local business bringing in competition.  This is simply the cycle of how the economy expands.

Our own business began sending reports by telex. The cost would rise to $50 each and thus the communications costs for our services would be $250,000 annually in early 1980s. Then FAX came and reduced that cost t $3. Now the INTERNET and emails reduced that delivery cost to ZERO and the vast majority of people can read this when only the largest institutions could afford it in the early 1980s. This is the advancement of technology through creative-destruction.

The skill set changes. Students had better learn how to program today for that is how to read and write in the future. This is the force of creative-destruction that the economy seems to go through every 51.6 years to varying degrees, It is why you can have rising unemployment, yet expanding domestic economic activity and it gets very confusing if you are married to the old linear way of thinking.

So unemployment rose as ALWAYS after Xmas because retailers do about 40% of their business during the last quarter and hire help for that reason temporarily. What should we be so stunned at this trend? The other trend nobody is talking about is the avoiding of benefits. Obamacare will limit the growth of business and the Democrats are too stupid or ignorant to even understand the concept. For Obama is doing the very same thing himself. The Post Office is hiring part-time people because they do not get the benefits and pensions. Government itself is contributing to these numbers as people are shifting from full-time to part-time.

….read Martin’s: Ukraine – Becoming the Real Focal Point

The Most Important Investing Lesson I Ever Learned

We’re in Washington Dulles airport, on our way to India. As we write, the Dow is down some 300 points… and still falling. 

As Chris has written about in his Market Insight columns, it’s still way too early to know if the bull market trend of the last five years has run its course. Mr. Market may be exhausted from all this running uphill. Or he may be just toying with us. We will wait to see. 

What goes around comes around. What’s been going around lately has been fear and loathing of emerging markets and gold. Because these are among our favorite investments – and are investments we have recommended to members of Bonner & Partners Family Office, our little family wealth advisory – we are forced to think about what is going on. 

When prices go in your direction, you’re asking for trouble. No need to think; you know it all already. No need to worry either; just sit back and let the money come to you. Until it doesn’t. 

You are much better off when the financial news goes against you. Then you have to wonder about your premises, your emotions – and your sanity.

Blessed by Misfortune

Hardly a day goes by that we don’t thank our lucky stars. We were blessed, you see, by misfortune. 

As a child, we had no money. We couldn’t lose the family fortune; we didn’t have one to lose! Which turned out to be a good thing. For if we had had any money, we would have lost it in the Great Bear Market in Gold of 1980 to 1998. 

President Nixon finally severed the dollar’s connection to gold on August 15, 1971. We’d read enough history to know what that meant. Soon, we would be pushing wheelbarrows full of $100 bills to the liquor store to buy a six-pack. 

How to protect yourself from the inevitable hyperinflation? 

Simple: Buy gold. 

That is how we became a “gold bug.” 

Then the worst possible thing happened: Gold went up. From $41 an ounce in 1971, the yellow metal soared to over $800 an ounce by 1980. 

We were right! We were smart! We went “all in” on gold… and waited to be rich. 

Fortunately, our luck changed before we got far. Misfortune smiled on us… setting us at odds with an 18-year secular bear market in gold. 

Do you know what that is like, dear reader? 

Every day… every month… every year… losing money… mocked by the market gods… dissed by family and neighbors. 

Every day proved even more emphatically than the day before that we didn’t know what the hell we were doing. Every day, at the sound of the closing bell, Mr. Market pronounced his solemn judgment: We were idiots. 

It’s Easy to Be Wrong

For 18 years we endured this punishment. And thank God we did. Because now we know how easy it is to be wrong. 

You try to make out what is going on. But you see only shadows and hear only echoes. 

Like a ghost haunting an old house, you will feel a chill breeze brush your face…. you will see things appear in strange places and wonder how they got there. But you will never know how this spectral world works, not as long as you cling onto your mortal coil… 

As we clung to our losing positions in gold, the smart money went into stocks. Perhaps it understood that we were in a huge credit expansion that would take stocks up to 20 times their value in 1971. 

From 874 in 1971, to 15,400 yesterday. Wow! 

But wait. What if you had just stuck with gold? 

Let’s see… from $41 to $1,250 an ounce. Holy smokes. That’s 30 times your money! 

Maybe our “crackpot” insight was right all along. And maybe gold and emerging markets will turn out to be stellar investments after all. 

Regards,

Bill

Market Insight:
Don’t Do Something… 
Just Stand There! 

From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners

US stock markets BOMBED yesterday… (Ed Note: written Feb 4th)

The S&P 500 and the Dow ended the day with the steepest selloff since last June. 

So what should you do about it? 

First, let’s take a quick look at the technical picture. 

As I warned yesterday, doubts had already been creeping into the market. The S&P 500 had already broken below its 50-day moving average and was sitting in “no man’s land” between its 50-day and its 200-day moving average. 

It had also been trading sideways – a sign of no clear trend, either up or down. As I wrote: 

If this sideways action gives way… and the index breaks lower… the next big level of support is at the 200-day moving average. 

The bulls will be looking for the index to climb back above its 50-day moving average and resume its uptrend. 

Which way the index breaks from its sideways trading will determine the market’s next big move.

Well, guess what… 

Yesterday, the S&P 500 knifed lower, as you can see from the yellow shaded area on the six-month price chart below. That means the next level of support is at 1,707 – at the 200-day moving average (red line on the chart below).

DRE-02042014-ISSUE-B

Does this mean you should sell? 

That’s not the way we approach the business of investing at Bonner & Partners. 

As we like to say, money in the stock market is “made in the buying.” We recommend you buy stocks when they are cheap relative to underlying values… and sell when they become fairly valued or overvalued. 

Charts like the one above help you get a visual picture of how the market is trading. And they can help identify good entry points. (For instance, you don’t want to buy when prices are in free fall.) 

But the evidence is overwhelmingly against individual investors beating the market by trading in and out of stocks based on market timing indicators. 

Whatever “alpha” – or above-market returns – you may generate (and that’s an extremely difficult challenge in and of itself) will be gobbled up by the broker fees and spread costs you incur as you churn your portfolio. 

The S&P 500 hasn’t had a meaningful drop in a long time. A 10% – or more – correction is long overdue. But that doesn’t mean you should panic. 

As Vanguard founder Jack Bogle puts it: 

While the interests of [Wall Street] are served by the aphorism ‘Don’t just stand there. Do something!’ the interests of investors are served by an approach that is its diametrical opposite: ‘Don’t do something. Just stand there!'”

So, get used to the fact that stocks go down as well as up. And resist any knee-jerk reaction to price falls in positions you’ve “bought well.” 

P.S. I am taking some time off this week for my annual snowboarding trip in the Czech Republic. I’ll be back with more market insights on Monday.