The value-weighted
S&P 500 index has dramatically shifted directions since August with over $3
trillion evaporating away. The financial services sector was hardest hit,
suffering a $1.1 trillion loss, causing its share of the index to drop from
21.2% to 16.3%. But that 4.9% had to go somewhere. Where did it end up?
Perhaps it just died and ended up in "Money Heaven".
Surprise,
surprise – the energy sector, which in just over a year has climbed from a 9.3%
index share to 14.2% today. Facing a worsening economic storm, the smart money
has started ignoring the technicals and following the fundamentals – right into
the energy industry that has arguably some of the most solid fundamentals of any
sector.
Of course, investing in energy companies is not quite as easy as
1-2-3, which is why the October issue of
Casey Energy Opportunities
reveals how best to place your punches for a knockout portfolio. If you are
interested in subscribing go to
www.CaseyResearch.com and tell them we
sent you.
The Birth of a
Monster Rally
Did you miss buying
copper, gold, aluminum, nickel, water, grains and other raw commodities and
mining stocks back in 2001? Now’s your next best chance to take positions in
these critical resources, and the companies that produce them. But time is of
the essence: An explosive rally could literally happen at any
moment.
As recently as this past
summer, prices looked like they were on their way to the moon. Now, thanks to
the global credit crunch, fearful investors are dumping super strong companies
en masse. That’s driven prices lower than they’ve been in several years for
first rate resource companies across the board, with selling intensifying as
prices have dropped.
But the time for a turn is
at hand. Commodities are down 37 percent since their highs in May. But on
October 8, the S&P500 materials index began taking off, rising 5% and
holding its gains despite a retreat by the S&P 500.
Clearly, this market is way
oversold, which means it’s gearing up for a monster rally. Because it could
begin at any time—tomorrow or next month—the time to position yourself is
now.
Moreover, the long term
case is air tight. We live in an age of increasing scarcity. Developing nations
like China are sucking down more and more resources critical for economic growth
every year. For example, China’s share of global copper consumption has more
than doubled since 2003 to 27 percent, while the US—where demand has still
grown—has seen its share halved.
That translates into a
giant, unprecedented call on global resources. At the same time, the old
reserves are running out. Producers are having to go to ever less hospitable
locations to secure supplies to meet demand, exposing themselves to ever-higher
expenses and resource nationalism, as governments look to expand their share of
the profits from what’s extracted within their borders.
That means supplies are
squeezed, even as demand growth is accelerating. Then there are the traders and
the manipulators. They are putting the squeeze on the nervous Nellies and
driving prices down so far that only the stout-hearted will stay the course.
Then, and this might have begun already, they take the hundreds of billions on
the sidelines and step into the market creating monster
rallies.
We have identified the
major beneficiaries of the coming rally. Agriculture is one of them and we have
the positions in for this massive buying opportunity. But the game has changed,
and only if you know what to buy—and why—are you in for a big
windfall.
THE FDIC AND THE GAME OF CASH
The FDIC the other morning announced yet another
new program under which it'll guarantee every penny of noninterest-bearing bank
deposits, as well as the newly issued senior unsecured debt of financial
institutions. This is said to decrease "systemic risk" and restore
confidence.
I don't know about restoring anything, but it's
certainly a confidence game. Now that it's taking on even more risk, the FDIC
has without doubt increased systemic risk by removing incentives to get
financial institutions to figure out how to achieve real solvency.
FDIC boss Sheila Bair said in a press release the FDIC has "faith in our
economy, our country, and our banking system," and that "the overwhelming
majority of banks are strong, safe, and sound." If that were really true, we
wouldn't need all this confidence boosting and reassuring and backstopping,
would we?
My prognosis remains the same as it's been since the spring: Hundreds of
banks will fail over the next two years as foreclosures soar and the burgeoning
option-ARM crisis makes the subprime crisis look tame by comparison.
Hedge-fund giants are going to cash. Steve Cohen,
who runs the $14 billion SAC Capital, recently moved about $7 billion into
money-market and other short-term securities. Cohen plans to sit on the
sidelines for the rest of the year. The rumor mill suggests Cohen is getting out
with his $3 billion and shutting down. According to one source, Cohen told his
traders, "You're all idiots. We're going to cash. I'll see you in January."
Israel Englander,
who runs the $14 billion Millennium Partners fund, put about $6 billion into
cash. John Paulson, of the $35 billion Paulson & Co. fund, has about 70% of
his fund in cash.
These guys
certainly have more experience and money than I do, but it sounds to me like
they've fallen victim to the recency bias – basing actions on recent events, not
probability. Recency bias is why investors sell at the bottom and buy at the
top. Bull markets make them feel safe; bear markets make them scared.
That's why
Warren Buffett is always quoted as saying you have to be greedy
when others are fearful and fearful when others are greedy. That much easier
said then done. Being fearful seems to be an overwhelming emotion right
now.
Value investors Ken Heebner and Marty
Whitman aren't scared. They're diving into beaten-down stocks. This is
the opportunity of a lifetime," Whitman said. "The most important securities are
being given away."
Heebner sees "a lot
of tremendous bargains out there." He pointed to Chesapeake Energy (NYSE:CHK), a
natural gas producer. Heebner also said long-term investors should consider
mirroring Buffett in his Goldman Sachs (NYSE:GS) and General Electric
investments (NYSE:GE). Didn't Buffett buy preferred shares though?
Ideas like Chesapeake make a lot more sense right now. Much of the risk has
been flattened out of risky industries like mining and oil and gas. Nobody wants
risk right now, even professional risk takers like Cohen, Englander, and
Paulson.
What's Happening with Gold and Silver Now?
Yesterday was a generally up day for the precious metals, as
equities retreated after Monday’s big runup, and oil sank along with the dollar.
Gold started today's move on the upside.
Gold’s lack of sharp movement is obviously, at least partially, the
result of it being pulled on hard from opposite directions. Those who want to
believe that the bailout will return things to ‘normal’ are discounting the
metal’s strength; while those who believe they’re witnessing big government’s
last big failure are stockpiling like mad.
Thus the disconnect between
the paper futures market, and those on the ground who are paying any price to
get their hands on actual gold.
“The unintended consequence of the
ongoing financial bailout will be a return of inflationary pressures to the
commodity markets,” was the curious commentary of analyst Francisco Blanch at
Merrill Lynch.
That the buck is deliberately being sacrificed for the
perceived lesser of two evils—recession prevention—could hardly make the return
of inflation ‘unintended.’
Peter Grant, senior analyst at USAGOLD,
seemed more on target when he said that, “I anticipate further debasement of all
currencies, including the dollar, which will ultimately drive gold prices
higher.”
Meanwhile, analysts at Merrill Lynch, figuring in the
inflationary effect of all the bank bailout measures now underway, predicted
gold will go to $1,500 an ounce and oil back to $150 a barrel, though they
posited no timeline.
MarketWatch.com went further, writing that
“with a U.S. administration that's overseen the biggest deficits in history
about to be replaced by the closest thing to a socialist government America's
ever had, ‘stimulus’ spending will likely remain high on Washington's agenda.
Given all that, $1,500 for gold looks more like a floor than a ceiling in the
years to come.”
Frankly I sense that a Monster Rally, and perhaps several of them, are to
be anticipated in the weeks ahead. Commodities, precious metals and selected
stocks will surprise everyone in the magnitude and velocity of their upside
moves.
Between now and November 5th though, volatility and a negative bias should
prevail. The big question remains, Will there be an October Surprise, and if so,
what direction? The farther down they drive the markets, the bigger the
ensuing Monster Rallies ahead.
