That Was The Week That Was-2nd Week May

 There was a popular mutual fund family back when I started in the business ( It was eventually bought out by another fund family and then that fund family was sold to another and that to another and now I have no idea who owns it). –They had  a gold fund that invested client’s money in gold mining shares and other precious metal associated companies. It did not invest directly in gold as we can today in the Gold ETF -GLD. There were lots of funds like that then, as there are now.  The wholesaler rep of the fund family told me that investing in gold was merely having money keep pace with inflation. Gold, he explained, tracks the price of a good suit. When gold was $35 an ounce a person could buy a very nice man’s suit for $35. Then gold popped to $200 and, again, you could buy a nice suit for $200. Now gold is trading in the $1600 range  and folks can still buy a very nice Mitt Romney-like-suit for that price but the average cost of a man’s suit is around $400-$600, not the triple digits we see on the chart below. Is the price of gold out of whack with the real world? Probably, but selling and buying anything that doesn’t have a real value tied to it- it’s whatever folks will pay.

A recent Gallup survey had middle income earners thinking that gold was the safest investment they could own, followed closely by real estate.

There are planners and less than thoughtful scribblers that suggest the average person hold some percentage of the metal in their portfolios. For the most part gold doesn’t do anything except look pretty. ( It’s a lot like a few ladies I dated.) It doesn’t work, earn a dividend, buy back shares or do anything except glitter. For all it’s prettiness gold is called a portfolio ‘staple’. On average it gets more expensive as it ages. It also has a nasty habit of self-destructing at the oddest times. Unlike most equity or bond investments gold can decide to do absolutely nothing for the longest periods of time and then it will do ‘something’ quickly and without warning. To me that’s not a staple. Today gold moves almost in correlation with the stock market. What gold should be used as is a fear or inflation investment, as people worry about the loss of their paper money’s purchasing power. In the last several years it hasn’t worked out that way. (In a ‘matter of speaking’ it has followed ‘Fed Policy’ and has pulled back because the Fed has not signaled it would accommodate lower rates). Its for those reasons that I look at gold as a ‘trade’, and should be bought only when economic conditions merit and not held to ‘clutter’ up portfolios for long periods of time.

For the week Gold has broken support levels and according to ETF Trends has seen a 4% loss. Gold has declined more than at any other time since 2008.  It threatens to go negative in 2012.

A Rich Person Says Something Outrageous and They Are Thought of As Being Insightful or Wise or Both. I Say The Same Thing & I’m A Crack-Pot. Uber-Rich Warren Buffett said at the annual Berkshire Hathaway meeting, …’The market is a psychotic drunk, and sometimes Mr. Market does some very strange things. The stock market is the most obliging, money-making place in the world.’

CNBC Technician Said Stocks Could  Sell-Off but Not Swoon! Oppsy-Daisy! Maybe the poor fellow meant ‘further selling or tumble’. But swoon is what was said and reported.  Carter Worth from Oppenheimer said on CNBC that Monday the markets were more ‘buying the news’.  Rich Ross said, ‘I still think we’re pretty vulnerable here. I think technically speaking we’re setting up for that type of ‘sell in May’ situation to unfold again.’ The defensive utility sector is on a steady uptrend.

So What’s With Oil & Energy? Technical expert Michael Kahn expects that the price of oil (Monday’s price $96.42) is near its bottom but many stocks in the sector have more to give up. Encouraging signs are being seen in the United States Natural Gas Fund (UNG- ETF). Prices may go slightly lower but the charts show the Bears have lost their grip.  Investors well could follow UNG for a reversal.

Whispers …Greece has no stomach for further austerity measures. Word from Behind The Money CNBC is that Greece may be allowed to leave the EU. Germany would offer a helping hand, help them pack their bags, hold the door open and slip a few bucks into the coffer. ‘Long-term,’ Mark Goldberg at ClientFirst Strategy, said, ‘a Greek exit from the EU would be bullish for everyone.’ In the short term it would create a mess. Portugal may decide to go,  as well could a few more southern neighbors. The euro would be in jeopardy. Still, out of the mess several European stock- multi-nationals, would be beaten up and offer significant value, said Hillary Kramer. She offered up a list that included Vodafone, GlaxoSmithKline and Total.

Dump! The first six hours of the trading day Tuesday was spent bailing and tossing anything and everything overboard. Consumer staples, gold, energy, banks and small caps were all tossed until the final hours when things looked a bit calmer and markets settled down. At one point I saw the Dow down 160 points. It closed down 76. Gold was down $30 an ounce, the biggest drop in a long time. It finally closed at $1591. Oil closed at $96.50. The pain at the pump should be eased somewhat in the coming weeks if the price holds. The Saudis promised to fill any gap and experts say plenty of oil held by them in reserve. Mark Hulbert, writing for MarketWatch, said that a major correction is unlikely.  Investors should be aware that more up-down-sideways action could continue for a month or two.

 Facebook ends its Dog & Pony in front of prospective investors and shares come to the public May 18th. The company will trade under the symbol FB. Arvind Bhatia, analyst at Sterne Agree, starting covering Facebook early and last Monday issued a Buy rating with a price tag of $45.00!

Green Mountain Founder  Caught in Margin Call. He was forced to sell 5 million shares under a margin sellout. When investors buy shares on margin they must put up a certain percentage of the price to borrow from a broker. If the share price falls a margin call may be made for additional liquidity. Starbucks had announced in March it would enter the single serve coffee brew market causing Green Mountain Coffee Roasters to fall 16% that day. Additional bad news and perma-bears have hounded the company. The board forced founder Robert Stiller to resign from his post as chairman after he sold 5 million shares to satisfy his margin, the NY Times reported. Related were shares of Krispy Kreme Donuts that fell 9% on fear that Stiller would sell his positions to cover his Green Mountain losses.

Wynn Resorts Fell 5.4% Tuesday. Analysts said that even though the gaming company reported a disappointing first quarter investors should not give up on the stock. The company is a major player in Vegas and in Macau.

Ford Announced it would expand U.S. Output. It will reduce its normal 2 week shutdown at 13 plants in the U.S. to one week. Strong domestic sales have contributed to the decision. Higher taxes and losses in Europe have caused earnings to fall in half compared to last year. Ford shares traded around $10.75 Wednesday with a P/E of 2.9 (that’s not a misprint- Toyota has a P/E of 107.75). Hillary Kramer wrote that of all the car companies she likes Ford Best of All.

Wednesday was Groundhog Day…! Repeating what happened Monday and Tuesday markets opened lower again on Wednesday and recovered ground in the afternoon to close off their lows. Gold finished $1591 and oil was off its feed to $96.45.  (It was the 7th straight day for oil to fall, the longest streak since 2009). The WSJ called the early morning trading as ‘Amateur Hour’. Funds and institutions seem to be piling in late in the day, cherry picking stocks that were battered beyond reason. Leading the turnaround late in the day were Apple and Caterpillar. The Dow lost 97 points, S&P was off  9 and the Nasdaq fell 12 points.

Cisco & Priceline offered up poor guidance going forward, after the close of markets on Wednesday. The two diverse companies were sour on futures with Priceline saying the bookings would be at a slower pace. Cisco offered that customers told them they would be spending more on IT if Europe doesn’t get worse and government policy doesn’t impede growth.  That guidance sank the tech side of the market on Thursday! The Dow ended up +20 but the Nasdaq was off a point and Gold ended down $11.

Still markets ended a week long skid…Cisco closed under $17 a share and Morningstar allows fair value for the stock at $24.

After-Hours Bombshell… JPM Chase takes $2 billion trading loss…! The trading mistake was said to be made in a long bet on the economic recovery using derivatives (Yes, dear reader, the same type of investments that started the entire global mess!) The CEO, Jamie ‘Golden Boy’ Dimon, in a hastily arranged conference call said that the bank remains profitable despite the trading loss. He said the bank earned, more or less, $4 billion after-tax this past quarter. The banking unit responsible for the losses had under management, according to the WSJ, some $100 billion in derivative positions. Dimon is said to have known about this since the end of April.

Too Big To Fail…and using OPM ( Other People’s Money)! The Bank traded on increasing yield or the was it hedging its European holdings? The bank says it was hedging risk but we won’t know until regulators finish an investigation. What we do know is that banks lie and its been business as usual at JP Morgan Chase, and probably the other major financial institutions as well. It’s time to regulate them closely since they cannot be trusted. The fact that Dimon has said that financial regulations are too harsh and restrain the bank’s ability to do business is just smoke blown up our collective passbook savings. If regulators can’t get these people on a short-leash then maybe its time to start breaking up the majors into smaller more manageable banking units. Elizabeth Warren, over the weekend, called for Dimon to resign. She also called for tougher financial handcuffs for the banks.

Dow has worst week in five months… The bright spot was telecomm with Verizon and AT&T both up and Credit Suisse analysts recommending buying shares.

Why? Do we have a problem breaking up banks that threaten to destroy our civilized way of life in order for them to prosper using methods most business people would be tossed into the pokey for? The Sherman Anti-Trust Act was instituted in 1890 to protect the public from ‘arrangements designed to advance the cost of goods to the consumer.’ The United States had no problem breaking up railroad and oil companies when they threatened our way of life. With the latest news from JP Morgan Chase it’s time that banks were broken into many different units with a whole set of new rules.Our elected officials understand where the problem is –only lack the backbone to do what’s right.

Questions call Paul @ 877 783 7080 or write him at pstanley@westminsterfinancial.com. Share this blog with someone who cares about their money.