That’s a very simple statement, but it’s backed by three powerful points:

• Commodities tend to do well when more popular investments (with retail investors) are doing poorly, and when economic conditions are less than ideal.

• When the typical economic underpinnings are at play, a “Secular Bull Market” for commodities tends to last for about 17 years. And right now, the underpinnings are far from typical – and may even be exemplary, meaning this bull-market run could last a lot longer than the norm.

• And last, but not least, we’re only about nine years into this commodities bull market, meaning that there’s probably a lot more room to run – maybe eight years, and very like even more.

Amazingly, this powerful notion of the “Secular Market Cycle” – despite its tremendous profit potential – is largely unknown to the investment masses, and is rarely discussed by the mainstream business news media. Indeed, it’s so taken for granted that it’s almost a market secret…

If you’re a long-term investor, however, you’ll ultimately realize it’s one of the most lucrative strategies you have in your investing arsenal. And most amazing of all is that it’s easy to understand, easy to deploy and easy to profit from.

Let me explain.

Investing in Commodities & The Secret of the Secular Market Cycle

Why is this commodity investing strategy so special? Well, with a finite time to invest for your retirement, it’s crucial to recognize and understand what we like to refer to as the “Secular Market Cycle,” or “Secular Cycle,” for short.

As the chart shows, a Secular Cycle, from peak to trough, typically lasts about 17 to 20 years on average (the period depicted by the chart ends in 2004, but still perfectly illustrates our concept).

And there are essentially two types of cycles:

• The “Secular Bull Cycle,” during which regular stocks increase in value, and have their Price/Earnings (P/E) ratios (earnings multiples) expand. That means that stocks get more expensive.

• And the “Secular Bear Cycle,” during which stocks tend to experience a decline in both price and valuation, with P/Es that contract. At best, stock prices move sideways over an extended period, but still see their P/E multiples shrink, since corporate earnings are growing at a time when stock prices are stagnant.

For investors, one key problem is that an overall “Secular Cycle,” from trough to peak and back to trough, can take 35 years. That’s a big chunk of a person’s wage-earning years, meaning there’s little room for missteps.

Now, there’s no point in fighting a secular market trend – not if you want your investments to grow.

So it’s essential to determine where we are in the cycle, because that will dictate expected returns over the following decade or two. And since most people only spend about 40 years of their lives investing for retirement, not knowing about the “Secular Cycle” – much less where we are right now in the cycle – leads to guesswork, mistakes and losses, instead of the clear planning that will generate the best investment decisions and, ultimately, the biggest profits.

The last commodity cycle ended around 1980. Essentially, a prolonged period of high commodity prices encouraged producers to over-develop their resources. Demand never fell off. Instead, there was a massive oversupply, and the commodities party eventually ended. Prices got pushed off a cliff, so the entire sector became lean in a hurry as profit margins imploded.

We now know how long a typical Secular Bull or Bear market will last years. We also know that the last Secular Commodity Bull was launched roughly around 2000. That allows us to conclude that we’ve easily got between eight and 11 years to go before supply catches up with the burgeoning global demand that we’re seeing right now.

Investing in Commodities – Profit Plays to Consider Now

With class over, it’s time to put your newfound insights to work, searching out ways to earn the outsized profits that will be available from the Secular Bull Market for investing in commodities.

If you prefer individual stocks, you have to get to know BHP Billiton Ltd. ADR (NYSE:BHP). This $140 billion resources behemoth is the largest diversified mining company on earth. With an enviable balance sheet and cash flow, this producer of base metals, precious metals, diamonds and energy is way ahead of the pack. With a current P/E of 11.66, the stock isn’t bargain-basement cheap, but it still represents a good value. Besides, this is a stock that you’ll want to hold all the way to the very end of the Secular Cycle.

Exchange-traded funds (ETFs) and exchange-traded notes (ETNs), on the other hand, provide investors with more direct exposure to commodity prices, as opposed to exposure to the stocks of the commodity-producing companies.

Finally, you’d be wise to get some gold exposure, too – gold miners can also be an excellent hedge against inflationary pressures.

In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographical diversification, while including substantial leverage to the price of gold. GDX is based on the AMEX Gold BUGS Index (HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

In the next couple of years, as U.S. and overseas economies recover, commodities producers will pay the price for recent major cuts in production, development and exploration – discovering it will be very tough to boost output even as global demand soars.

Shrewd investors will reap the benefit of those decisions: Those shortages will persist, providing quite a tailwind for soaring prices.

Just make sure that your sails are fully deployed.

The bottom line: As you go about rebalancing your portfolio – or continue rebuilding it as a result of the financial-crisis carnage – make sure to include room for a solid natural resources allocation.

Source: Investing in Commodities: How to Buy Gold During Secular Market Cycles

There’s never been a better time to invest in commodities. That’s a very simple statement, but it’s backed by three powerful points:

• Commodities tend to do well when more-popular investments (with retail investors) are doing poorly, and when economic conditions are less than ideal.
• When the typical economic underpinnings are at play, a “Secular Bull Market” for commodities tends to last for about 17 years. And right now, the underpinnings are far from typical – and may even be exemplary, meaning this bull-market run could last a lot longer than the norm.
• And last, but not least, we’re only about nine years into this commodities bull market, meaning there’s probably a lot more room to run – probably eight years, and very like even more.

Amazingly, this powerful notion of the “Secular Market Cycle” – despite its tremendous profit potential – is largely unknown to the investment masses, and is rarely discussed by the mainstream business news media. Indeed, it’s so taken for granted that it almost a market secret.

If you’re a long-term investor, however, you’ll ultimately realize it’s one of the most lucrative strategies you have in your investing arsenal. And most amazing of all is that it’s easy to understand, easy to deploy, and easy to profit from.

Let me explain.

The Secret of the Secular Market Cycle

Why is it so special?  Well, with a finite time to invest for your retirement, it’s crucial to recognize and understand what we like to refer to as the “Secular Market Cycle,” or “Secular Cycle,” for short.

As the chart shows, a Secular Cycle, from peak to trough, typically lasts about 17-20 years on average (the period depicted by the chart ends in 2004, but still perfectly illustrates our concept). And there are essentially two types of cycles:

• The “Secular Bull Cycle,” during which regular stocks increase in value, and have their Price/Earnings (P/E) ratios (earnings multiples) expand. That means that stocks get more expensive.
• And the “Secular Bear Cycle,” during which stocks tend to experience a decline in both price and valuation, with P/Es that contract. At best, stock prices move sideways over an extended period, but still see their P/E multiples shrink, since corporate earnings are growing at a time when stock prices are stagnant.

For investors, one key problem is that an overall “Secular Cycle,” from trough to peak, and back to trough, can take 35 years. That’s a big chunk of a person’s wage-earning years, meaning there’s little room for missteps.

Now, there’s no point in fighting a secular market trend – not if you want your investments to grow.

So it’s essential to determine where we are in the cycle, because that will dictate expected returns over the following decade or two.  And since most people only spend about 40 years of their lives investing for retirement, not knowing about the “Secular Cycle” – much less where we are right now in the cycle – leads to guesswork, mistakes and losses, instead of the clear planning that will generate the best investment decisions and, ultimately, the biggest profits.

But in order to see where we are, we need to figure out where we’ve been.  To do that, let’s take a look at a very-long-term chart of the stock market in order to study the historic market trends. Then we’ll look at some other key factors – such as the value of the U.S dollar – to confirm our analysis. This is a process few investors take the time to work through.

Where are we right now?  Well, since about 2000, we’ve clearly entered a Secular Bear Market for general stocks.

All too often, investors read such a statement and conclude that its “game over” for portfolio profits. And that’s just not the case.

There’s an old market adage that says “there’s always a bull market somewhere.” That’s true even today, in the midst of the worst financial crisis since the Great Depression. Even if there’s a Secular Bear Market for stocks, it’s very likely that you’ll find a Secular Bull Market forcommodities. So all you really need to do is to focus your investing efforts on the hard-asset sectors.

The Makings of a Secular Commodity Cycle

The last commodity cycle ended around 1980.  Essentially, a prolonged period of high commodity prices encouraged producers to over-develop their resources.  Demand never fell off.  Instead, there was a massive oversupply, and the commodities party eventually ended.  Prices got pushed off a cliff, so the entire sector became lean in a hurry as profit margins imploded.

As you’ve probably guessed, exploration soon ground to a halt.  And little or no money was invested to expand production.  Over the next two decades, investors rejected hard assets.

Over time, known resource reserves were continuously plundered, and finally gave out about nine years ago. At about the same time, the Four Asian Tigers of Korea, Taiwan, Hong Kong and Singapore were already building a gargantuan appetite, and China’s big growth spurt was gaining momentum and growing in magnitude.

The situation has only gotten worse, with global commodities demand continuing to advance – even in the face of sapped inventories.

The Three Catalysts for Major Commodity Profits

We now know that a typical Secular Bull or Bear market will last 17-20 years.  We also now know that the last Secular Commodity Bull was launched roughly around 2000.  That allows us to conclude that we’ve easily got between eight and 11 years to go before supply catches up with the burgeoning global demand that we’re seeing right now.

Yet according to such renowned market experts as author and investing icon Jim Rogers, a number of “wild cards” are in place this time around, meaning this bull market in commodities may have a lot more room to run than its more-typical predecessors. Three factors in particular are extremely bullish for commodities investors:

• Global Infrastructure Spending: The Organization for Economic Cooperation and Development (OECD) last year estimated that worldwide investments in power-generation, water and transportation infrastructure projects would exceed $40 trillion by 2030 – and that was before countries around the world enactedhundreds of billions of dollars in stimulus-spending programs.

• Improving Worldwide Living Standards: About half the world’s 6.7 billion inhabitants are simultaneously pushing to improve their living standards, a fact that by itself stands to create a commodities demand shock never before seen – enough by itself, in fact, to extend the secular commodities bull by five additional years.

• Modernization Efforts in Major Markets: The modernization initiatives in China, India, Brazil, Eastern Europe and other portions of Asia are extremely bullish for commodities prices.

So if you’re looking for a place to stash your cash for the next 12-15 years, look no further: Commodities are the key profit play to make.

Two Arguments Against Low Current Prices

Unless you’re Rip Van Winkle, or had taken up residence in Biosphere 2, you know that the global financial markets suffered through a panic sell-off, and that we’re mired in one of the worst economic downturns in decades.

We also know that many investors sought refuge in U.S. Treasury securities. In order to buy Treasuries, investors throughout the world first bought U.S. dollars, driving up their value in relation to virtually every other major currency. That anomalous and unsustainable U.S. dollar spike hurt commodities, as they are all priced in terms of dollars.

The fear of a deep worldwide recession – or perhaps even a depression – served to temporarily frighten investors out of commodity plays, since the prevailing wisdom was that the global malaise would cause demand for natural resources to plunge. That, too, dampened commodity prices.

But investors who right now fear commodity plays are looking at this from the wrong vantage point: Instead of representing a dangerous point, the situation now at hand is nothing less than an extraordinary opportunity to either make their first foray into commodities, or to add to existing positions during periods of exceptional weakness.

What investors need to understand is that – in the last seven months or so – they have been witness to an impressively quick and coordinated adjustment on the part of commodity producers.  No time was wasted to pull the plug on unprofitable production, suspend near-term new production, or slash capital spending or investments in all forms of exploration.

Right now, most commodities producers are operating with little or no spare capacity. The fat’s been trimmed, and prices are down a third from this time last year.

It’s a situation that just can’t last – for two very simple reasons:

• First, world demand can’t be reversed on a dime. At least half the world continues to move forward with modernization initiatives. Massive infrastructure efforts continue unabated. And governments from both developed and developing nations are ensuring that this infrastructure-modernization train doesn’t get derailed.

• Second, central governments have recently put on a show of unprecedented fiscal cooperation, unveiling colossal bailout and spending plans. The United States ($787 billion) and China ($586 billion) alone have unveiled stimulus packages worth a combined $1.37 trillion. The addition of all that newly printed money means there are even more dollars chasing a still-fixed quantity of goods. And that can lead to only one outcome: A big increase in commodities prices.

We’ve become used to seeing prices increase. Price increases are merely a fact of life.  That’s why we see pay raises each year; we’re trying to compensate for the prices that are rising all around us.

But the magnitude of recent money-supply increases dwarfs the benign, garden-variety annual price increases of 3% to 6% that we’ve grown used to seeing. In the last year alone, the U.S. Federal Reserve has actually doubled the U.S. monetary base. That can only lead to serious inflation, perhaps even hyperinflation.  This will cause the value of the U.S. dollar – which has been eroding since 2001 – to decline at an even-more-frenetic pace. Over time, in turn, this erosion in the value of the dollar will lead to a big increase in the prices of many goods, particularly commodities imported from abroad.

That’s yet another reason why investors must consider resources of all kinds.

Profit Plays to Consider Now

With class now over, it’s time to put your newfound insights to work, searching out ways to earn the outsized profits that will be available from the Secular Bull Market in commodities.

If you want an automatically diversified approach, check out the various resource sector mutual funds available to you.  That can be a great starting point.  Make sure to look at each fund’s individual holdings, which will give you a feel for that fund’s focus, and that will also help you get more familiar with the individual companies and what they do.

If you prefer individual stocks, you have to get to know BHP Billiton Ltd. (NYSE ADR: BHP).  This $140 billion resources behemoth is the largest diversified mining company on earth.  With an enviable balance sheet and cash flow, this producer of base metals, precious metals, diamonds and energy is way ahead of the pack.  With a current P/E of 11.66, the stock isn’t bargain basement cheap, but it still represents a good value. Besides, this is a stock that you’ll want to hold all the way to the very end of the
Secular Cycle.

Exchange-traded funds (ETFs) and exchange-traded notes (ETNs), on the other hand, provide investors with a more-direct exposure to commodity prices, as opposed to exposure to the stocks of the commodity-producing companies.

The broadest exposure you can get is probably through the ELEMENTS Rogers International Commodity Index Total Return ETN (NYSE: RJI).  RJI, based on the index built by the investing-guru Rogers, himself, is comprised of 34.9% agriculture, 21.1% metals, and 44% energy.  Another viable option is the PowerShares DB Commodity Index Fund (NYSE: DBC).  While less diversified – with 22.5% agriculture, 22.5% metals, and 55% energy – it boasts large trading volume.

You can also get exposure through some of the ETFs that focus individually on agriculture, coal, nuclear power, and steel-related companies.  Van Eck’s Market Vectors’ suite of ETFs – such as its Market Vectors Agribusiness ETF (NYSE: MOO) – is a great place to start.

Finally, you’d be wise to get some gold exposure too.  Gold miners could be an excellent hedge against the enormous inflationary pressures thatMoney Morning has repeatedly warned investors to expect. In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographical diversification, while including substantial leverage to the price of gold.  GDX is based on the AMEX Gold BUGS Index (HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

The bottom line: As you go about rebalancing your portfolio – or continue rebuilding it as a result of the financial-crisis carnage – make sure to include room for a solid natural resources allocation.

In the next couple of years, as U.S. and overseas economies recover, commodities producers will pay the price for recent major cuts in production, development and exploration – discovering it will be very tough to boost output even as global demand soars.

Shrewd investors will reap the benefit of those decisions: Those shortages will persist, providing quite a tailwind for soaring prices.

Just make sure that your sails are fully deployed.

Source: The “Secret” Investing Strategy That’s Your Best Bet For Commodity Profits

Editor’s Note: If you’re new to the commodities-investing arena, and are uncertain about the landscape – or even if you’re an “old hand” at natural-resource stocks, but want some insights into the new profit plays and new players – consider hiring a guide: Money Morning Contributing Editor Peter Krauth , a recognized expert in metals, mining and energy stocks, is also the editor of the Global Resource Alert trading service, which ferrets out companies poised to profit from the so-called “Secular Bull Market” in commodities. A former portfolio advisor, Krauth continues to work out of resource-rich Canada, which keeps him close to most of the companies he researches. Against the growing global financial malaise, Krauth says that commodities are among the most-profitable and least-risky investments available, and notes that this may well be the most powerful bull market for commodities we’ll see in our lifetimes. He makes a strong case. To read more about his strategies, and the sector plays he likes the most, please click here. ]]> http://www.contrarianprofits.com/articles/the-%e2%80%9csecret%e2%80%9d-investing-strategy-that%e2%80%99s-your-best-bet-for-commodity-profits/18915/feed 0 http://www.contrarianprofits.com/articles/gold-recovers-some-ground-as-dollar-falters-vs-euro/18707 http://www.contrarianprofits.com/articles/gold-recovers-some-ground-as-dollar-falters-vs-euro/18707#comments Fri, 03 Jul 2009 14:00:09 +0000 Contrarian Profits http://www.contrarianprofits.com/?p=18707 Gold rose today, Friday, steadying above $931 per ounce as the dollar lost ground versus the euro, with deeper concerns over the U.S. economic outlook also underpinning the metal.

Spot gold stood at $931.70 by 1510 GMT, up from $928.65 late in New York. Earlier it rose to $933.90.

After a week of tracking a volatile dollar, gold is on course for a 0.6 percent fall on the week — retreating further from a four-month high near $990 hit in early June.

The precious metal found support above $931 after falling on Thursday, when weaker-than-expected U.S. non-farm payroll data sent investors piling into the relative safety of the dollar.

The U.S. currency  lost some ground against a basket of six currencies but remained broadly positive…

Grantham sounded the alarm on the credit crisis all the way back in 2006. And in a 2007 article in Fortune magazine, he warned: “In five years, I expect that at least one major bank (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private equity firms in existence today will have simply ceased to exist.”

What caught our eye in Grantham’s recent letter were his comments on what he terms the “Presidential Cycle.” Loyal readers will know that here at Notes we believe Washington is now the prime mover in the US economy and financial markets. Grantham offers interesting proof of our theory (emphasis added):

This Presidential Cycle effect is dismissed as an artifact by the great majority of financial academics, but they have a stalwart record of dismissing any data that implies even modest market inefficiency, and this effect implies great dollops of inefficiency. Simply summarized: since 1932, in the third year of the Presidential Cycle, the average S&P 500 return (from October 1 to October 1) is 22 percentage points ahead of the average of years one and two! And this is statistical noise? Year three is the time when, driven by politics, financial stimulus and moral hazard are applied so that the economy – particularly increases in employment – can be a little stronger in the run-up to the election in year four. In years one and two, in contrast, the system is tightened in order to leave some room for re-stimulus in the next year three (except during Greenspan’s era, when he basically could never stop stimulating and so periodically upset the applecart). It is all pretty understandable. All we have to believe is that politicians like to be re-elected and that completely independent Fed chairmen like to play ball with politicians. (Volcker of course, unlike the others, was never a ball player.) There have been no serious bear markets in year three, and many in years one and two.

Grantham, a well-known bear, says his familiarity with the Presidential Cycle has caused him to “part company” with many of his bearish allies for a while. That’s because the Presidential Cycle teaches us that fiscal stimulus and moral hazard have the power to “move the stock market many multiples of their modest effects on the real economy.”

Grantham’s central argument is that investors should never underestimate the power the Fed wields over the market through its ability to 1) boost liquidity 2) bailout speculators. This is borne out by empirical evidence. Britain has shown a bigger year-three jump on the US Presidential cycle since 1932 than the US itself. Europe and Japan have also historically shown sympathy with the cycle.

The implications of Grantham’s argument on the current market rally are huge. If relatively small liquidity injections and bailouts have had such a large effect on previous market cycles, then the unprecedented interventions by the Fed in the current case are likely to have unprecedented effects.

If the stock market is many times more sensitive to financial stimulus in the short term than the economy is, then we could easily get a prodigious response to the greatest monetary and fiscal stimulus by far in U.S. history. Second, if you don’t think there is a special, one-off, super colossal dose of moral hazard out there today, you are sadly uninformed. The moral hazard in play today is of a massively larger order than any we have ever seen.

This heady cocktail of two fingers of moral hazard plus more than a dash of liquidity could send the S&P 500 to the 1,000 – 1,100 level before the end of the year, says Grantham. But this hasn’t changed his overall bearish stance.

In a rally to 1000 or so, the normal commercial bullish bias of the market will of course reassert itself, and everyone and his dog will be claiming it as the next major multi-year bull market. But such an event – a true lasting bull market – is most unlikely. A large rally here is far more likely to prove a last hurrah … a codicil on the great bullishness we have had since the early 90s or, even in some respects, since the early 80s. The rally, if it occurs, will set us up for a long, drawn-out disappointment not only in the economy, but also in the stock markets of the developed world.

A weaker oil price reflecting poor economic demand ahead shut off a rally in world stocks on Friday while government bond yields sank.

Wall Street looked set for a poor start and the dollar recovered from early losses.

Oil fell below $54 a barrel, on course to end the month down more than 20 percent, as OPEC ministers prepared to meet in Cairo to discuss potential further supply cuts to combat a global fall in demand .

Indian stocks were higher as a siege in Mumbai between police and Islamist gunmen continued, but India’s 10 year bond yield fell to its lowest level in three years on expectations that the attacks will an impetus to rate cuts.

Globally, the MSCI all-country world index was flat, although it had gained around 11.6 percent, the first weekly gain in four weeks.

“On a range of measures, there is undoubted value to be found in many of the world’s equity markets,” said Sarah Arkle, chief investment officer with Threadneedle Asset Management.

But economic woes held back an earlier rally.

The pan-European FTSEurofirst 300 was down 0.3 percent, led lower by oil-related companies.

Earlier, Japan’s Nikkei average climbed 1.7 percent for its best week in a month. It gained 138.88 points to 8,512.27, while the broader Topix was up 0.7 percent to 834.82.

A monthly Reuters survey found that Japanese retail investors became slightly less pessimistic about domestic equities in November, fitting with other signs globally that recent market sell offs may be bottoming at least temporarily.

OPEC TO MEET

Oil fell below $53 a barrel for a while before recovering slightly. The Organization of the Petroleum Exporting Countries is to hold an informal meeting on Saturday in Cairo, as it struggles to slice output fast enough to keep pace with a recessionary reduction in fuel demand in the West that has sent crude prices down nearly two-thirds since July.

U.S. light crude for January delivery stood at $53.32 a barrel, down $1.12.

The dollar regained traction against major currencies after early losses.

It was 0.2 percent higher against a basket of six major currencies, while the euro lost 0.4 percent to $1.2838 . The dollar lost 0.1 percent to 95.22 yen .

Euro zone government bonds rose, reflecting concern about the economy and expectations of interest rate cuts. Two-year Schatz yields sank 10 basis points to 2.213 percent.

By Jeremy Gaunt, European Investment Correspondent
LONDON, Nov 28 (Reuters)

But let’s start with the financial news first. Macquarie Group (ASX:MQG) told investors yesterday that its profit fell by 43%, thanks to write downs in assets. It was the first time since going public twelve years ago the “Millionaire Factory” has reported an earnings decline. Still, the $604 million profit number was higher than what analysts were expecting ($594 million) and the stock finished up over 16.5% on the day.

In the revenue results and write downs you can see how the decline and fall of the investment banking model has hit Australian shores. MQG reported a 13% decline in fee and commission income (to a paltry $2.2 billion). Trading income fell by 14% to $722 million. The big one was the 43% decline in income from asset and equity investments.

There were some strange assets in the back rooms of the Factory. The company took over a billion dollars in write downs on its Italian mortgages and fund management assets. It did not, however, take any write downs on Macquarie Airports or Macquarie Infrastructure Group. Hmmn.

Picture the good ship Macquarie Group as something like a Noah’s Ark/Pirate Ship full of a menagerie of debt-financed assets. Under Captain Allan Moss as CEO, Australia’s version of Goldman Sachs sailed the high-seas of global finance, buying assets with borrowed money, bundling them into funds, and then charging retail investors fees to invest in the funds. It’s the sort of business those Somali pirates who hijack oil tankers should look into. Far more lucrative.

Twelve years of collective booty and swag gave the Factory quite a collection of eccentric and fee-generating assets. Some of those assets are not ageing so well. But you’ll note the company chose not to mark down the value of its infrastructure or airport funds, the two big ones.

It claims the current market value of those assets isn’t what they are really worth. The book value is more accurate. In the meantime, it is throwing other less attractive assets overboard. Deck chairs…Italian mortgages…extra chickens…everything must go!

There’s no doubt that asset values are likely to fall more next year and that revenues will continue to fall too. Still, the company says it will sell $15 billion in assets and then set sail, on the lookout for more acquisitions again. Garn!

It’s looking to sell its margin lending book. And new CEO Nick Moore said it will securitise its motor vehicle loan book, move it off the balance sheet, and sell it off. Thus the liquidation continues in the financial world. Loss-making assets are written down or thrown overboard at…er…fire sale prices.

What’s really happening, mixed metaphors aside, is that the Millionaire Factory model is giving way to deleveraging reality. In a world with falling asset values and tighter bank credit, it’s harder (and much less profitable) to build a cleverly constructed portfolio of assets and generate fee income from operating them.

In the post-credit crunch world (or post-Deluvian, if you accept the nautical metaphor), you have to focus on cash, not debt. One example would be Cash Converters, a sort of Main Street Macquarie, without the debt, and substituting Italian loafers for Italian mortgages. Cash Converters buys low and sells high. It’s the perfect business for the first world depression.

Cash Converters helps people turn lazy assets (guitars, mobiles, stereos, old harmonicas) into cash. And what is that but the liquidation of the consumer spending boom? Of course, most stuff isn’t worth as much people think it is. When you own something, you tend to think it’s worth more than everyone else.

Then you try and auction it on eBay or take it to a pawn shop or Cash Converters. There, you find that it’s worth a lot less than you believed in your heart. Such is life, as Ben Cousins and Ned Kelly might say. Kris Sayce at the Australian Small Cap Investigator (whom we often call the Ned Kelly of the Old Hat Factory) has been looking at Cash Converters as an example of what he calls “Main Street Stocks.”

We’ll let you know what he’s up to…but we think it has something to do with companies that actually do more business in a recession and increase both revenues and earnings-without relying on debt. If you have your own suggestions for “Main Street Stocks,” let us know at dr@dailyreckoning.com.au

Dan Denning

Source: Macquarie Group (ASX:MQG) Profits Fall By 43%

It is an interesting time for gold investors. On one hand, gold prices should be soaring as investors flee to the precious metal for security. On the other, gold’s value should be dropping precipitously as deflationary concerns gain momentum.

It is no wonder gold prices remain horizontal and the gold hedge I recently created is paying profits. Last week we cashed in for gains of up to 50%.

Some interesting reports released today will help illustrate why gold prices are acting the way they are.

First, let’s look at the demand side of the equation. Global orders for gold increased by over 120% during the third quarter on a year-over-year basis. Retail investors moved 232 tons of the metal, compared to 105 tons this time last year.

Exchange-traded funds (ETFs) significantly boosted their physical possession of gold over the past three months. Third-quarter holdings increased by 150 tons. During the second quarter of the year, they only added 4 tons of gold.

These figures are proof that global demand is soaring. But why are prices staying flat and showing signs of a serious collapse?

They want it, but we don’t

There are two answers.  For the first, we have to look at the situation here in the States. During the previous quarter, Americans demanded 20% less gold than the same period a year ago. Thanks to a strengthening dollar, American investors are shying away from gold as it typically moves inversely to the greenback.

Remember, gold is a vehicle used to protect against inflation. Right now, the American economy is anything but inflationary. The headline reading of the latest producer price index, released yesterday, showed a record 2.8% decline in wholesale prices last month. Today’s consumer index confirms the deflationary environment with a negative reading of one percent.

Deflating prices will be a major drag on gold’s appreciation. Enough American investors will be dumping their gold holdings in exchange for stronger assets to nearly offset the significant increase in global demand.

If a deflating economy is not enough to drag gold valuations down, the fact that institutional investors are abandoning the metal certainly will. The world’s largest funds unloaded 300 tons of gold recently. As they are forced to meet margin calls or as their investors cash out, institutional investors are unloading their gold holdings as the metal is liquid and, compared to their other holdings, has held much of its value.

By reviewing this information, it is easy to see why gold prices have made relatively little moves over the past three months. When prices get pulled in both directions, they tend to stay put.

Something’s gotta give

Eventually one of the forces will give and gold valuations will make a significant move. If the break is caused by a slowdown in global demand thanks to signs of economic recovery, gold prices will plunge. If it institutional sellers stop unloading while global demand is at record levels, prices will soar.

History and basic economic principles point towards falling prices so I am naturally bearish on gold’s long-term valuation. But there are plenty of folks that tell me I am wrong. As the world economy tanks and the U.S. floods the market with its currency, they say, gold price will soar.

Never one to invest unprotected, I created a hedge play that will profit no matter which way valuations move over the next year. If I am right, the bearish leg of the hedge will win. (Last week we proved my theory by cashing in gains of over 50%). And if I am wrong, the bullish side will win. No matter what, the hedge is designed to pay out profits.

If you want to learn about this unique hedge, click here.

This is an interesting time for investors. Never before have so many unique, yet infinitely strong forces, tugged at the market.

As we slowly weigh and understand all of the variables, the economic future will become clear. But for now, it is prudent to take protection and seek shelter in the opportunities that have historically provided profitable recessionary havens.

Source: The gold dichotomy: Demand rises, prices fall