Fortune Watch

With gold prices topping $1000.00 plus per oz., one has to question, is now the time to buy gold or has the buying opportunity already passed? Should you invest in the actual commodity of gold itself or is there an alternative that could prove to be more profitable?

The rise in gold prices from $250 per ounce in 2001 to over $900 today has drawn investors and speculators into the precious metals market. However, buying gold per se should not be considered an “investment”. After all, gold earns no interest and its quality never changes. It’s static, and does not grow as sound investments should.

“It’s more accurate to say that one might invest in a gold or silver mining company, where management, labor costs, and the nature of new discoveries all play a vital role in determining the quality of the investment and the profits made.”, stated Congressman Ron Paul (TX-R) in his address before the U.S. House of Representatives.

Both gold and dollars are considered money, and holding money does not qualify as an investment. However, there is one big difference between the two. By holding paper money one loses purchasing power. The purchasing power of commodity money, e.g., gold, however, goes up if the government devalues the underlying currency.

Many believe the United States is the cause of the global financial crisis we are currently experiencing and consequently, they are looking to the US to provide leadership in escaping this crisis. The US Dollar is currently experiencing strength over other currencies because it is presumed that since we are leading the pack with recovery initiatives, it stands to reason that our economy will recover before those who are following our lead.
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Risk is the probability of loss. It is best to estimate it and to adjust your purchase and sell strategies to it in order to control loss before the purchase is made. Correct timing of purchases, buying near support, limiting loss potential, and stopping the decline by using volatility stop losses are all ingredients of a good risk control system. Let’s look at a few of these loss control discipline components.

One method of controlling risk is by timing purchases so that they occur at or near support. That way, your stop loss can be a very small distance away from your purchase price. If you buy when the stock is 5% above its trendline, for example, it will mean little if the stock declines 5% to reach its trendline. Since stocks often return to support, why would you sell? You would sell only if it broke to the downside through its rising trendline. Therefore, your loss would be calculated by adding the distance the sell point is below the trendline to the distance the purchase price was above the trendline. Buying at the trendline instead of above it would eliminate that unnecessary 5% loss.

However, stocks often make a small temporary penetration through a support line and then resume their climb. When, precisely do you sell? Let us use the suggestions offered in Technical Analysis of Stock Trends by Edwards and Magee as an example. If you are using stops that are based on closing prices, they suggest a trendline penetration of 3% would warrant selling. If your stop loss is placed with a broker, they recommend that the stop be placed 6% below the trendline because of the possibility of inconsequential intra-day spikes. Therefore, if you buy when the stock is 8% above its rising trendline and place the stop loss 3% below the trendline, you will lose 11% before your stop is triggered. On the other hand, if you wait for the stock to return to its trendline before buying, you will lose only 3% if your stop is triggered. It is important to buy right so that you can sell right.
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The year 2008 has entered the record books for all of the wrong reasons; the Dow Jones had its worst year ever! So what about 2009, how will stock markets from around the world perform and which are the stocks to follow?

Well in reality you need a crystal ball to be able to answer these questions. 2009 may well be another tough year.

I am a person who enjoys investing on the stock markets and I have to say that I am a bit of a gambler; I am quite prepared to take a risk with my disposable income in the hope that I can increase it etc. Just a quick note however, I am a financial adviser and anything that I write or suggest in this article should not be seen as advice.

I personally believe in investing an amount of money (an amount that I can afford) on a monthly basis instead of investing lump sums. This way I am able to take advantage of what is commonly referred to as Dollar cost averaging in the United States. This is where when prices are high your monthly contribution may buy fewer shares or fund units but that when prices are low your investment buys more shares or fund units.

During these volatile times this method of investing may prove to be the most prudent. Even though stock markets had a very poor 2008 and is therefore quite low there may well be significant falls ahead.
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Some people consult astrologers and some don’t. Out of the ones that don’t, some believe that there aren’t any good astrologers around nowadays while others believe that it isn’t possible to foretell the future.

Out of the ones who believe that foretelling the future is impossible, some believe that the future can’t be foretold because there is no future yet. Meaning, the future is not preordained so there’s nothing to foretell. It happens when it happens.

Not just astrology, I find the equivalent of all these views among investment analysts. In investments, there are times when the one can forecast with some degree of confidence because the current trends can be expected to continue unchanged. There are often long periods when trends just extend themselves in a linear fashion.

There are other times, when there’s a break in the trend and the past stops being a good guide to the future. When trends are smooth, then these expectations are true and the forecasts are also true. However, when there’s a break then the future is not predictable. Which is exactly what is happening now.

Currently, there is no shortage of experts trying to predict when the economic crisis will end and growth will resume. I’ve seen predictions ranging from immediate (as in, the crisis has ended we just haven’t noticed yet) to one estimate that said it will ‘take a generation for things to be normal again’. Between the two extremes lie more frequent estimates like late 2009 or 2010 or early 2011. These ‘reasonable’ estimates occur with a greater frequency so they’ve started sounding reasonable.
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The scandal around the so called investment guru Madoff is the second big case in this year as masses of people have lost their fortune. The first case was the bankruptcy of Lehman Brothers. Many people are lured to invest their money in financial market instruments that promise attractive yields. These instruments are, however, as opaque as black boxes.

Hedge funds as black holes

Hedge funds bet with complex structures of derivatives. Most of them lack the transparency. The common investors do not understand how they work. Institutional investors usually invest in funds of hedge funds. Their managers claim to be capable of picking the promising funds. Funds of funds absorb a cascade of fees that have to be subtracted from the yield.

There is a wide variety of investment styles among the hedge funds. It seems that the general lack of transparency of the hedge funds industry has made it possible that the Madoff Ponzi could remain undetected for such a long time. The Madoff scandal demonstrates also a failure of the SEC as well as of the involved audit firms.

Hedge funds should correlate with other asset classes, e.g. stocks or bonds, according to the theory. The fact is: Hedge funds have badly performed during the actual financial crisis. The global hedge-fund industry lost $64 billion of assets in November 2008 says Bloomberg.

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But in the end, ketchup is just ketchup, isn’t it?

Not really. For Americans, ketchup always contains tomatoes and vinegar and some kind of sweetener, along with spices, and a brand named Heinz.

H.J. Heinz Co. (HNZ) reported a 22% rise in its fiscal second-quarter profit and indicated that it may take fewer price increases on its products amid weakening consumer spending and falling commodity prices.

The company is still going ahead with some selected price hikes, but indicated that price cuts were unlikely.

Food companies have raised prices steadily over the last year amid soaring commodity prices. Investors and analysts have been watching closely to see how these companies now will handle the subject of price increases as commodities have pulled back and global economies have weakened. Price increases play a big role in offsetting costs, but in a weak economy companies run the risk of pushing away penny-pinching consumers. There has been some speculation that retailers may also be resisting efforts by manufacturers to raise prices.

The company took a fair amount of price hikes in the second quarter and that discussions with retailers on pricing are a “little more difficult.”

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The near-term outlook for global stock markets is for continued volatility, with little chance of sustained progress until we see an end to corporate earnings downgrades and an improvement in economic leading indicators.

In this note we comment on the problems facing emerging markets, and some broad thoughts on why capitalism remains a reasonable starting point for economic systems.

What is our market outlook?

The threat of a global financial meltdown has diminished thanks to massive central bank and government intervention, which has addressed the liquidity and solvency issues of many US and European banks. However, corporate earnings estimates for 2009 still look too optimistic in light of the poor economic leading indicators that we are seeing, such as consumer and business confidence levels. Therefore, sandwiched between the possibilityof an immediate short-term relief rally and a positive long-term view that equities are currently cheap, we have a near-term view that markets will remain volatile and are likely to trade sideways while the US, Europe and Japan endure a recession.

Emerging markets: the real threat would be a rise in global protectionism.

If the worst is over regarding the US and European banking crisis, it certainly is not for some emerging markets. Hungary finds itselfwith a massively over borrowed consumer sector, with foreign currencyborrowings in Swiss francs and Japanese yen. As these safe havencurrencies appreciate, the risk of widespread default on mortgages and other bank loans increases. The Ukraine economy is coming down with a bump as foreign lenders are put off by 25% inflation. Other emerging markets are suffering from a mix of problems that can include an overvalued currency, excess consumer borrowing (in local and sometimes foreign currencies), falling prices for commodity exports, domestic politics and a drop in demand for exports as the G7 enters recession.
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Though investors have endured some pretty terrible Dow performances in recent weeks, including another 300-plus point on Friday, the downward spiral has not gone far enough to halt trading on Wall Street.

New York Stock Exchange rules currently call for circuit breakers to interrupt trading only in cases of extreme drops of more than 1,100 points. Such breaks, established after the Black Monday crash in 1987, are intended to help investors step back and assess what is happening.

The thresholds for market timeouts are set quarterly, using the Dow’s average closing price for the previous month, and activate in increments of 10, 20, and 30 percentage point drops.

For the current fourth quarter, if the Dow drops 1,100 points before 2 p.m., trading stops for an hour. If such a drop happens between 2 p.m. and 2:30 p.m., trading halts for a half hour. After 2:30 p.m., the 1,100-point threshold expires.

There is also a 2,200-point mark. If the Dow falls by that much before 1 p.m., trading stops for two hours. Between 1 p.m. and 2 p.m., a 2,200-drop causes an hour halt. After 2 p.m., trading ends.

If the Dow falls by 3,350 points, trading stops for the rest of the day.

The circuit breakers have been activated twice, both times in late afternoon trading on Oct. 27, 1997, when the Dow eventually closed off 554 points, or 7.2 percent. Trading that day was halted under previous triggers, which were later revised in 1998. The current triggers have never been hit.
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The torrent of earnings releases set to hit this week could only exacerbate volatility moves, analysts say. Volatility has knocked around stocks on Wall Street in record ways. Buckle up for the coming week.

News and concern over inter-bank lending, credit spreads and declining oil prices, the major averages managed to piece together a strong week that built on the lowest levels in five years.

So far in October, each day the Dow in ranges of no less than 250 points. In fact, the index saw the first 1,000-point swing in its history just over a week ago on Oct. 10. Most of this volatility has been blamed on the liquidation of assets of hedge funds and mutual funds. Rumors of poor performance at major players intensified the effect.

“No doubt the indiscriminate selling we’ve seen has been liquidation, no doubt. Everything is for sale,” says Art Hogan, chief market analyst with Jefferies. Hogan points out that all the indexes have fallen by roughly the same percentage, which indicates that funds are not selling stocks in one industry to invest in another.

The news about the deleveraging of the hedge fund industry is already behind the event, to a certain extent. A lot of hedge funds have a very high level of cash right now. As we come into next week, the question now is whether cash levels are high enough for everyone’s comfort and is the indiscriminate selling is behind us or not, and can we start focusing on fundamentals.
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Have you ever seen a road accident happen? You must have, since many generally drive like idiots and have a high accident rate. Whenever I see a road accident and later think about how it happened, I can’t help feeling that while most of us drive like idiots, most of the time accidents happen when two idiots do something idiotic at the same time and at the same place. One guy is happily speeding, while trying to read a text message and just then another one in front of him decides to turn right without revealing his intentions beforehand. Either one would have got away but the two in combination becomes an event.

The stock markets are just like that. While one company or one industry may be driven by some particular factor, a prolonged bull market or a bear market only happens when many different factors come together. Sometimes, some of these factors may be related but at other times, they may be unrelated. It could just be a coincidence that they are happening at the same time.

There has never been a correction that has not proven to be an investment opportunity. While everything is down in price, there is actually less to worry about than when prices are historically high. More money has been lost by people who bought into last year’s markets than by those who will buy into this one, at this stage of the correction. When the going gets tough, the tough go shopping.

Every correction is different, the result of various economic and/or political circumstances that create the need for adjustments in the financial markets. This correction is worse than most that I’ve experienced, but the doom and gloom scenarios many have been pushing are unlikely to come to fruition. Once the media elects a new president, they’ll just have to start reporting better news: 96% of all mortgages are current sounds a whole lot better than 20% of all sub-prime mortgages are in trouble.

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