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US MARKETS After a couple of speed bumps in late spring and mid-summer, the major indices, DOW; COMP and S&P 500, caught a breeze at their backs. Fueled by lower commodity prices, particularly the pullback in crude oil from the $80 level, lower yields in 10-Year Treasuries, as well as further injections of liquidity, the markets rode off into the sunset producing double-digit returns, their best, at least in nominal terms, since 2003. However, while the US financial and mainstream media were toasting and boasting and Wall St. securing their $36 Billion in bonuses, it was foreign markets worldwide such as Asia and Latin America that were ripping the cover off of the ball, producing spectacular gains across the board. BONDS Much like the equities markets, 10-Year Treasuries also caught a breeze at their backs in July (coincidental?), whereby yields plunged from 5.3% to the December low at the 4.4% level. For the year, the note traded within a 100-point basis, where the yield curve remains in its inverted position (foreshadowing of recession ahead?). GOLD After reaching multi-year highs in May ($732), the “yellow metal” spent the remainder of the year digesting/consolidating the powerful thrust from the Fall of ’05, more than likely ending Phase I of the secular bull trend. Nevertheless, despite the “pause”, gold recorded another excellent year for investors, returning 23% (real money), while much of the “hot” money has been shaken-out of their positions. The secular bull trend remains in tact. And while the Fed and US Treasury continue their shameful and reckless debasing of the US currency (INFLATION), we’ve been more than happy in adding to our core positions, both physical and shares (Jr. Producers and Exploration) on pullbacks. SILVER Much like gold, after peaking in May, silver has found itself digesting/consolidating its impressive run into northern territory and perhaps signaling the end of Phase I of its secular bull trend. Nonetheless, it was another exceptional year for investors of the “silver bullet”, which produced a “whopping” 46% return. Again, while the “hot” money has been shaken from their positions, we continue to add on pullbacks in both bullion and shares (Jr. Producers and Exploration). On a further note, we’ve mentioned in past commentaries that the Gold/Silver ratio, which has been hovering in the 50 range, should contract to its historic norm somewhere in the vicinity of 20 in the years ahead. And IF such scenario unfolds, we expect that to occur at much, much, much higher levels. OIL West Texas Crude (WTIC) peaked in July just south of $80/bbl after a spectacular multi-year run from the $30 level in ’03. Such peak just so happens to coincide with the turn of both the US equities markets, 10-Year Treasury Note, the Fed’s “pause” in its monetary policy, heightened debate about “peak oil” and a couple of months after both Gold and Silver peaks ahead of the forthcoming November mid-term elections. Call us cynical, conspiracy theorists, or just outright “whacko’s” (not the first and surely won’t be the last time we’ve heard such) if you please. However dear readers, are you beginning to follow the pattern here? It’s all right in front of us. Could it be that upon announcing the new Treasury Secretary, Hank “Conflict of Interest” Paulson, that the former Chairman of Goldman Sachs acted in the manner of “Bruce Wayne” (aka Batman), and picked-up that fire engine red phone directing his former traders to cut its energy weighting from 7%+ down to 2% and change in the Goldman Sachs Commodity Index (GSCI) that triggered the slippery slope? While no one knows for sure, the events and timelines certainly suggest that something was most definitely amiss in “Denmark”. In any event, with geo-political events subsiding from a military perspective early in the year and now focused on potential “economic” warfare, oil finished the year flat-line for the most part, where the jury remains in deliberations on its future direction. FED/INFLATION The reason we titled this portion of the piece FED/INFLATION is, we believe that both are synonymous with each other. In fact, we’d go so far as to say that, “The Fed IS Inflation”. After seventeen (17) consecutive rate hikes beginning in June of ’04, the FOMC decided to “pause” in its rate hike campaign in ’06. While jawboning oil and precious metal prices lower, and understating both the PPI and CPI (we believe that inflation is running somewhere in the vicinity of 7-8% and perhaps higher), we must admit that “Big Ben & Co.” did a masterful job, as well as their global counterparts, whereby numerous Fed Heads scurried about the landscape proclaiming its intentions to fight and ward-off the Beast (Inflation). Yet credit creation continued/s to flow. Despite the baby rate hikes and the elimination of reporting M3, the broadest measure of money supply, it’s quite apparent that the world remains awash in liquidity, evidenced by the staggering rates of monetization ranging from single digits to the mid-teens, depending on which region of the world one chooses to extrapolate the data, which has produced wild speculation across all asset classes. While we can certainly single out the FRB and their machinations, this phenomenon has spread like a “brushfire” encompassing central banks throughout the globe. As a direct result, although the $USD has taken the brunt of such actions, global currencies find themselves in the debasement camp as well. And lest not forget, since the inception of the Federal Reserve in 1913, the purchasing power of the $USD has evaporated by roughly 97%. Thus, rendering its present .03cts value. Furthermore, throughout former Chairman Greenspan’s (The “Maestro”), who we ultimately believe will go down in the history books as the “Master of Disaster” eighteen (18) year tenor at the Fed, we’ve witnessed a 50% decline in the purchasing power of the $USD. And finally, during the past 4-6 years, the 2001 $USD now fetches you .70cts worth of today’s goods, a loss of 30% in just the past five (5) years alone. Astonishing and quite sad we may add. $USD Now that we’ve covered the Fed/US Treasury, it’s no surprise that the $USD is taking it on the chin. After bouncing from its late ’04 early ’05 lows at the 80 zone, the $USD once again finds itself flirting with potential disaster and in the process, potentially losing its status as the worlds reserve currency sometime in the future. Although US policy makers have reiterated their intent for a strong $USD policy, their actions or lack thereof, suggest otherwise. However, while Wall St. and a placated citizenry may not hear the alarm bells ringing, the rest of the world is taking notice and in such, several countries have recently openly discussed the possibilities of diversifying their reserves. In any event, the 80 level remains crucial support and we’ll have to see how it all plays out WHEN and IF such scenario occurs. Stay tuned. US/WORLDWIDE HOUSING We’re not going to spend much time on this issue as it’s quite apparent that the US housing market is experiencing difficulties to say the least. The air is whistling right beside our ears. Foreclosures across the nation are running at record levels, as the “Grande Daddy” bubble, $10 Trillion in US mortgage’s, finds itself on the down stroke. With $1 Trillion in ARM’s (Adjustable Rate Mortgage’s) about to reset in ’07, we can only surmise that the pain forthcoming will be enormous, although we’re sure that “Big Ben & Co.”, will certainly attempt to pull out all stops and usher the safety net beneath the fallen. With that said, it’s not just the US that finds itself in such a predicament. Recently we’ve read that former Fed Chairman Greenspan attributed the global housing bubble to the “fall of the Berlin Wall”. With that said, we’ll end it on that note, for we think that such statement speaks volumes. So, that’s a wrap for 2006. What will the financial markets do in ’07? Where will they go (higher/lower)? We don’t know and we’ll leave such questions for others to debate. Having said that, should the Fed and central banks worldwide continue with their current practices of excessive credit creation, the rising tide may float all boats and ducks. That is, unless of course, someone decides to pull the plug on the bath water, or we experience the unforeseen, unknown accident awaiting in the winds, such as a potential currency or derivatives debacle. In the meantime, we’ll enter the ’07 campaign much like we have these past three (3) years, with our core positions in Gold and Silver, both physical and shares, as well as high paying dividend oil/energy issues, which has served us quite well during the recent past, as well as a hoard of cash, where we’ll continue to rent (trade) selective issues that posses favorable technical risk/reward set-ups. Wishing all of you a Happy, Healthy and Prosperous New Year!!
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INFORMATION The opinions of FSU contributors do not necessarily reflect those of Financial Sense. |
