Market Review: Thus Commences The Vicious Cycle
It’s the question of the year, says CBS MarketWatch’s, Tom Calandra (courtesy of Le Metropole Cafe): "When the investing public, already headed for the exits, runs screaming from the U.S. stock market, how will gold mining stocks, and gold, benefit?"
The answer seems obvious… to some. Since September, mining share indexes have even risen ahead of the spot gold price… no small feat, as bullion is up 28%. In the same stretch, the Philadelphia Gold & Silver Index (XAU) is up 49%… and the AMEX Gold Bugs Index has reached as high as 139%.
What’s more, "gold mining stocks," write Calandra, "thanks to the weak stock market, nuclear war threats, and reduced forward-selling by miners, are juiced well beyond the pricing models of professional analysts. The Wall Street and Toronto mining analysts almost all use operating cash flows, profit margins, and the level of proven bullion reserves a company has in the ground as their touchstones for value."
These valuations are, of course, a far cry from measuring ‘eye-balls,’ potential payoffs from productivity increases, off-the-book derivative schemes and share buyback programs we’ve come to know and love over the last several years.
With the tepid caution of a 17-year-old entering his first peep-show, investors again belied their wariness of Wall Street’s shenanigans this week and left the Dow panting uneasily 171 points lower. The Nasdaq and S&P fared slightly better… each losing about 30 for the week.
Even in London, from whence I scribble today, Mr. Market-Smith-Jones was left feeling a bit edgy. The ‘footsie’ shed about 300 points over the last two trading sessions… sliding down to 4630. Uneasiness with regard the US ‘recovery’ and widespread lack of interest by investors were widely cited as reasons for the drop.
In the humble opinion of your editors here at the Daily Reckoning, we have entered the initial phase of what promises to be a uniquely vicious cycle: Foreign investors pulling the plug on Wall Street… an increasing desire by the world’s central bankers to STOP using the US dollar as their reserve currency… further turmoil in the markets… driving investors to seek alternative investments outside of the world’s major markets… including those, like the FTSE, that generally hold up well during US market weakness.
In a nutshell: "If foreign investors fail to recycle funds generated by our trade deficit," writes the Prudent Bear’s David Tice "the dollar could continue to sink, further limiting interest in our stock and bond markets. After all, there are bull and bear markets in the dollar as in any other freely traded commodity. Prior to its bull run over the last seven years, the dollar lost half its value against the yen – from late ’84 through ’89 – and against the Swiss franc – from ’85-’87."
Should the dollar continue to drop, as we expect, the price of gold to go higher and higher still, as it is the safest investment for individuals – and governments – when markets tumble. "Gold," says the Financial Times this morning, "long shunned by professional investors, is back in fashion as a ‘safe haven’ investment. The Swiss National Bank, which has one of the biggest gold reserves of any central bank, says that private investment demand in Japan, Europe and the US is ‘booming’."
"The investment case for gold," writes Tocqueville Funds John Hathaway, "centers on the notion that the over valuation and excessive supply of the US currency has funded a decade’s worth of uneconomic investment and unsustainable consumption." And according to Professor Robert Mundell, also courtesy of Mr. Hathaway, "There will come a time when the pileup of international indebtedness makes reliance on the dollar as the world’s only main currency untenable. It is no longer necessary or even healthy for the U.S. or the rest of the world to rely solely upon the dollar."
For more on the sustained rally we’re expecting in gold – including an opportunity to further investigate five gold juniors we expect to benefit quickly from a rally this summer – please read the following Daily Reckoning Investor’s Alert, followed by John Hathaway’s groundbreaking report "The Investment Case For Gold: The Basics" (also available on Tocqeville’s excellent website):
And in the meantime, hope you’re having a good weekend.
It’s World Cup fever here in London today, as England takes on Denmark in the firs match of the sudden death round. The pubs opened at 7am this morning, and they’re packed…
The Daily Reckoning
June 15-16, 2002 — London, England
P.S. "Given their unpleasant experience [should international investors lose money in US markets]," Tice continues, "it would be no surprise if they thought twice about putting more money in U.S. stocks. And sure enough, foreign buying is losing steam. Net foreign purchases averaged just $5.3 billion a month during January and February. Other than last September, that’s the least interest foreign investors have shown in our stock market since April, 2000. February net buying at $2.1 billion was far below the $9.3 billion average over the ’97 – ’01 period." More below, in today’s Flotsam & Jetsam…
P.P.S. By the way, if you haven’t heard, Agora Financial Publishing will be hosting our Annual Agora Wealth Symposium in San Francisco this year.
It promises to be quite a shindig. We’ve arranged for you to stay in a five star hotel for about half what it usually costs…all while minling with with some of the sharpest ‘contrarian’ investment minds in the business today. Then again, I’ll be speaking, too…
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THIS WEEK in THE DAILY RECKONING
by Bill Bonner
06/14/02 ALMOST TOO GOOD TO BE TRUE
"…What sticks in our craw is the self-righteous carping and the "I told you so" subtext of the sudden stock market naysayers. We do not recall the newspapers complaining about Kozlowski’s compensation when his stock was rising. Nor do we remember anyone in the mass media who was troubled by the way in which Tyco and other boom-era whizzes didbusiness…"
06/13/02 THECURTAIN RISES
"…Nothing about this recession/recovery has followed the script. Every line has been flubbed. The leading man – Alan Greenspan – played the same character he always plays…Mr. Easy-Money-to-the-Rescue. But the audience neither booed nor cheered. No one seemed tocare…"
06/12/02 RISING NORTH STAR
Guest Essay by Andrew Kashdan
"…Canada is looking better and better as an investment destination for those fleeing the declining U.S. dollar. Economic growth is rebounding, interest rates are rising and both current account and budget surpluses are expected thisyear…"
06/11/02 QUACKS AND RISK PREMIA
"…As recessions go, the recent downturn was a total flop. It did none of the things recessions are supposed to do. Consumers did not slow their borrowing or spending. They bought new cars instead of making do with old ones. They bought new houses, and mortgaged more of existing ones…Stocks did not go down to reasonable levels. Businesses did not pay downdebt…"
06/10/02 TRADITIONAL VALUES
"…In large groups of people, complex and even elegant ideas get mushed down to a fermenting syrup of empty jingles, slogans, and campaign folderol. From time to time, now and again, but according to no published time- schedule, Mr. John Q. Public takes up the brew and quaffs it like a dipsomaniac with an empty stomach. In practically no time at all – it has gone to hishead…"
FLOTSAM AND JETSAM: Foreign Investors Hold The Key To Dow And Dollar Strength
Watch Out if Foreign Investors Turn Against U.S. Markets
– David Tice
The Prudent Bear
"…Throughout the ’90s, non-U.S. investors were increasingly aggressive buyers of U.S. securities, helping to drive U.S. stocks higher during the bubble, and keeping them from falling further since. This foreign money is nothing to sneeze at. In fact, the Securities Industry Association calculates that between 1997 and June 2000 foreign investors were the third largest purchasers of U.S. equities, behind only U.S. mutual funds and life insurance companies.
But how long will foreign investors keep buying our stocks? After all, the factors that piqued the interest of foreign investors are working in reverse. The NASDAQ has under performed the U.K.’s FTSE 100, Europe’s FTSE 300, and even the Japanese Nikkei over the one, two and three year periods ending in April. The S&P 500 has fared better against those averages, but it too has posted negative returns over each of the periods.
And now the dollar has begun to weaken. That makes bad returns worse when translated into local currencies. Year-to-date, the dollar has lost ground against the Euro, the Canadian dollar, the Swiss Franc and even the Japanese yen.
Given their unpleasant experience, it would be no surprise if international investors thought twice about putting more money in U.S. stocks. And sure enough, foreign buying is losing steam. Net foreign purchases averaged just $5.3 billion a month during January and February. Other than last September, that’s the least interest foreign investors have shown in our stock market since April, 2000. February net buying at $2.1 billion was far below the $9.3 billion average over the ’97 – ’01 period. Foreign investors bought more than stocks over the past decade. They were also happy to help soak up the supply of U.S. governments, agencies, and corporate bonds. By 1998, net foreign inflows into U.S. securities had reached $288 billion, on their way to a record $522 billion last year – a fivefold increase over eight years. Foreign investors now own some 40% of the country’s marketable Treasury securities, compared to 19% in ’92. And, foreigners bought a net $229 billion of U.S. corporate bonds (including structured products) in ’01. That’s triple the $76 billion net inflow into all U.S. open end bond funds – including government bond fund funds.
But foreigners have had less enthusiasm for U.S. fixed income instruments lately. While they were net sellers of Treasuries in ’99 and ’00, they were heavy net buyers of corporates and agencies. Last year foreigners were net buyers in all four categories of US securities tracked by the U.S. Treasury. But in January and February, foreigners were net sellers of Treasuries and only meager buyers of everything else. Other than last September, we have to go back to early ’99 to find less foreign interest in U.S. financial markets generally.
If foreign investors fail to recycle funds generated by our trade deficit, the dollar could continue to sink, further limiting interest in our stock and bond markets. After all, there are bull and bear markets in the dollar as in any other freely traded commodity. Prior to its bull run over the last seven years, the dollar lost half its value against the yen (from late ’84 through ’89), and against the Swiss franc (from ’85-’87).
Either a sharply falling dollar, or a grinding dollar bear market, would make foreign investors think twice about loading up on U.S. securities…"
David W. Tice is the founder and director of David W. Tice & Associates, a capital management firm in Dallas, Texas. Tice manages The Prudent Bear Fund and is an important component in Strategic Investment .
Tice’s work has gained national recognition through Barron’s articles he has authored and from his appearances on business television. He has appeared on the Nightly Business Report, Wall Street Week with Louis Rukeyser and CNBC, warning investors about the dangers of investing near the end of a bull market.