The First Leg of a (Hopefully) Long Drop

I have been waiting for this insane rally to peak, and I may finally get a nice Christmas present:

U.S. stocks declined moderately on Monday as weak data on holiday retail sales prompted questions about the consumer's ability to spend.

American consumers may finally be waking up to their new penury.

This rally has been spurred by overly optimistic investors (easily led along by Wall Street hype) and Fed liquidity pumping. Here's hoping that the Fed's desire to drain liquidity is more than just lip service. Goading investors into risky assets has been deliberate policy up for most of this year.

The Haiku of Finance for 11/29/09

Chinese gold records
Diversify from dollars
Middle Kingdom shines

China's Gold Isn't for You

China is now tops in gold:

China, the world’s largest gold producer, may have record demand and output this year as jewelry consumption soars and miners expand production after prices
reached all-time highs, according to the China Gold Association.

This supports the argument I made in my post on Nov. 27 that China's internal production is sufficient to soak up all of its internal demand. The spot price of gold on the world market is rising for many reasons. The unavailability for export of China's enormous gold production is certainly not the least of those reasons.

In my effort to avoid confirmation bias, note that the figures in the article are from an internal Chinese organization and thus subject to manipulation for reasons of the middle Kingdom's national pride.

Nota bene: Anthony J. Alfidi is long FXI, GDX, and ANV.

China's Net Effect on Gold‏

Here are some more of my thoughts on China and gold.

There's a lot to be said about how the average Chinese investor's rush into risky assets helps prop up a potential bubble in precious metals and other asset classes. Many Chinese are buying stocks, real estate, and gold with borrowed money. This may set China up for hard times in the short run if one of those asset markets has a downturn and your average Chinese investor has to sell other holdings to meet margin calls or loan payments.

China is now the world's top gold producer, so they are able to encourage gold investment domestically simply by restricting the export of bullion. This has little to no net effect on the world spot price of gold so long as all domestic Chinese demand for gold can be directed into the supply they withhold from the world market.

Diversifying away from the U.S. dollar is China's long-term goal and buying gold (in both individual and national accounts) is but one leg under that strategy. Every once in a while gold permabulls make a case for gold prices going into the stratosphere. Gold has appeal in uncertain times but I wouldn’t overdo it. It's just another asset class to me. Too many gold bugs make the classic mistake of falling in love with an investment rather than putting it into the context of a larger portfolio.

Nota bene: Anthony J. Alfidi is long FXI, GDX, and ANV at the time of publication.

The Haiku of Finance for 11/25/09

Turkey day coming
Cost of dinner declining
Eat the deflation

Not So Strong After All

Some time ago, I believe I predicted a downward revision:

The economy grew at a 2.8 percent rate last quarter -- less than originally estimated. And forecasts for the current quarter are for similarly slight growth before a drop-off next year.

That drop-off is coming sooner and harder than expected:

Major indexes were slightly lower Tuesday after the Conference Board said its Consumer Confidence Index rose to 49.5 in November from a revised reading of 48.7 in October. While better than expected, the report shows that consumers remain gloomy heading into the holiday season.

The markets are reacting sensibly, for once.

Alpha-D Portfolio Updates for Nov. '09‏

It's that time of the month again. Here's what I've done lately to try to make some money.

My shares of IAU finally went through the strike price of my covered calls. Wow! I've decided to walk away with several years' worth of capital gains and leave gold mining stocks as the sole "gold hedge" in my portfolio. I like bullion ETFs but I needed to free up some cash for potential equity purchases in the next few months.

Speaking of GDX, I did sell some off but I continue to write covered calls on the remainder.

I sold off some FXI and wrote calls on the remainder. I also sold cash-covered puts under FXI because I don't mind buying back what I sold at a lower price. I'm still bullish long-term on China but there may be a cause for concern behind recent talk of bubbles in Chinese stocks and property.

I've decided that I like the possibility of going long a couple of transportation-related stocks. I think Kirby (KEX) and Tidewater (TDW) have good long-term potential, but I'm not ready to buy them just now as I expect the broader markets to correct in the near future. I wrote cash-covered puts under both KEX and TDW so that when Mr. Market does decide to disappoint most everyone else, I'll end up buying two stocks I like at a discount to today's prices. My holdings of KEX and TDW will be an application of my focused value approach. I did my homework on both of them.

I maintained my long position in ANV and my cash-covered puts under it. They've turned a corner and I still think they have tremendous upside potential.

I also decided to hedge two bubbles that I think have formed in defense spending and real estate. I bought puts against LMT and IYR in the expectation the markets for both advanced defense goods and commercial real estate will sink between now and 2011.

That's all for this month.

The Haiku of Finance for 11/21/09

Dollar carry trade
Pushing up markets worldwide
Prepping a big crash

Dr. Doom, Gold, Housing, and Unemployment

Gold used to be regarded exclusively as an inflation hedge. This made sense when the U.S. had a gold standard but made less sense after the gold confiscation of 1933. It made almost no sense as a philosophy after the closing of the gold window in 1973. Gold today is useful as just another asset class that's not closely correlated to equities; nothing less, nothing more. It helps diversify a portfolio when uncertainty plays havoc with other asset classes.

Meanwhile, Dr. Doom thinks gold is getting too big for its britches (through no fault of its own):

Nouriel Roubini said investors are “chasing commodities” and there is a risk of new asset bubbles emerging as stock markets and commodity prices surge amid record-low lending rates.

Okay. Who wants to be overweight an asset class that is getting frothy? Not me. My gold has done well but I'll probably begin pulling some money out of it soon even if it's still far from topping out. Why raise cash? Well, it pays to have some laying around in case I find something cheap to buy, like a foreclosed property:

The outlook for the home market dimmed this week as residential construction and mortgage applications fell and loan delinquencies reached a record.

“I don’t think the housing crisis is over,” Mark Zandi, chief economist with Moody’s Economy.com, said in a telephone interview. “I think we’re going to see another leg down.”

Okay. I'm also betting that worries over rising unemployment will keep home prices depressed for a while. This is good for patient investors like yours truly.

Full disclosure: Long IAU and GDX (with covered calls).

Fed Set to Pull Props From Mortgages

So what's been driving up stock prices? Insane buying activity like this:

The $5 trillion market for bonds backed by the housing finance companies Fannie Mae, Freddie Mac and Ginnie Mae is in for a shock when the Fed stops buying at the end of the 2010 first quarter.

The end of the Fed's mortgage buying means prices of mortgage-backed bonds will fall to a new market-clearing equilibrium. That means yields on new mortgages will have to rise to make them attractive to lenders. The resurgent mini-bubble in home prices - and stocks - thus has until April 2010 to run. Long-term investors may consider trimming their stock holdings before this hits. Me? I'll be looking to buy equities next spring, or even sooner if holiday sales crater.

The Haiku of Finance for 11/14/09

Burlington Northern
Buffett's century long play
But not a bargain

China Approaching Bubble Territory

China may be one of my favorite long-term bets, but articles like this make me think it's about to overheat in the short term:

China is doing what it can to expand domestic demand and rebalance its economy, President Hu Jintao said Friday, calling for renewed efforts to improve international financial oversight to prevent future crises.

There's other evidence that retail loan growth is getting to the point where the average Chinese consumer thinks they absolutely must max out their credit to avoid being left behind. That's the same mentality that inflated the U.S.'s housing bubble all the way until it burst in 2005-6.

I've been long FXI for a while, but soon I may start to take some money off the table.

3Com: A Special Situation

HP announced a buyout of 3Com (ticker COMS) for $7.90 cash per share. I see the appeal, as HP's brand strength can help it sell 3com's product line in markets where 3Com has failed to penetrate.

This was too tasty for me to ignore. I bought some COMS and I'll hold it until the deal closes. It's that simple. No options plays this time. The annualized gain will probably amount to only around 4%, but that's better than any bond of comparable duration.

The Limerick of Finance 11/08/09

China knows Africa has it rough
And offers to help them build stuff
There's resources galore
A lot left to explore
With new wealth they'll all soon have enough

The Haiku of Finance for 11/06/09

Job losses no joke
"Create or save" didn't work
Misspent stimulus