Intermediate-term set-up for a gold rally?

Traders have been bearish on gold and gold stocks since late October, the longest stretch in recent years. All such previous instances were followed by significant multi-week rallies. Here’s a daily chart, showing some divergence in RSI.

Here is GDX, the gold miner ETF, which looks good technically, as well as being cheap vs. the metal itself:


A caveat here is exemplified by the coffee futures market (see recent posts), which has steadily declined since a manic high 18 months ago. Gold and silver experienced a mania around the same time, which perhaps capped their 11+ year bull run. If that is the case, a situation like the present could actually resolve not in a rally, but in a crash, as crashes may develop from oversold and bearish conditions that would otherwise be bullish. For this reason, as well as the value discussion below, I would be careful about any longs and use a stop-loss.

I still maintain that gold is overvalued relative to a meaningful basket of other assets and metrics. Today, a kilo of gold buys (or rents) you more real estate, commodities, labor, automobile, etc. than at any time in modern history, save bottoms in those respective markets and tops in the metal.

This doesn’t mean that gold can’t rally for a few weeks or months or even make a new high – it just means that doing so would make it even more historically overvalued. The time of gold being a great value has long passed. It has done a very nice job at protecting holders against the Federal Reserve’s war on savings, just like it did a good job at protecting against inflation in the late 1970s, but gold peaked prior to inflation, and today gold may peak prior to the end of Bernanke’s tenure.

I often make the point that gold is not the only hard asset. In an inflationary episode, there are many ways to play. The dollar lost 2/3 of its value from 1980 to 2000, but over that period gold lost 90% of its value when adjusted for inflation (70% nominally). As in equity investing, the price you pay determines your return. I would look for hard assets that are closer to historical lows, or at least mean values, rather than something near a high.  Distressed real estate comes to mind, or even Japanese equities.

Heck, if we get another cyclical equity bear market within the post-2000 secular bear, there will be plenty of hard, productive assets available for reasonable prices in the stock market. BTW, every episode of double-digit inflation in the US since 1900 has ocurred during the latter years of a secular bear market in equities (1919-1920, early 1940s, 1979-1982). Thanks in large part to Mish‘s explanations of the credit market, I have been a deflationist since late 2007, despite the shrill warnings of the hyperinflation crowd. There is no telling how long our own Japanese situation lasts, but we likely have at least a couple more years to go.

Are there any good buys emerging in Greece?

It may be interesting to look at some of the public companies in the hardest-hit European countries, since the stock indices here are lower than anytime in at least a decade. Here are the results of a search for Greek shares, with an eye towards companies in defensive industries that will not be hurt, or could even benefit from a weaker currency.

All of these businesses are likely to survive a very bad economy, even if they go bankrupt – the question is how the equity holders will fare.

Athex index chart (Athex is now 60% lower than at the 2009 bottom):

List of top 20 Greek companies by market cap as of May 2010:

Here are a few names – these first 2 look strongest to me (bottler and utility):

Coca Cola Hellenic Bottling Co:

Biggest foriegn Coke bottler

EUR 13.00, EPS 0.93 – not really cheap yet by earnings, 1.62x book. Keep an eye on this one.

Public Power Corp SA , ticker PPC

Biggest utility in Greece. To raise cash, the gov sold 17% of its until then 51% stake.

Plants are mostly coal-fired.

EUR 5.30, EPS 1.10 – very cheap by earnings, 15% dividend yield.

Hellenic Telecommunications Organization S.A., ticker HTO

3.6% div yield, 15 PE. 1.14x book – not cheap at all, though stock is way down

Boutaris J & Sons Holdings SA , ticker MPK (preferred shares also traded)

6 Greek wineries, one in France, most recognised Greek wine brand

Company website:

No earnings data available, but trading at 0.3x book and 0.27x sales.

Attica Group

Largest ferry operator

No earnings data, but 0.12x book



A look at the real value of gold on an historical basis.

I like making random gold ratio charts in since it lets you chart the ratio of anything: gold:oil, gold:copper, gold:SPX, etc:


If you do this kind of analysis on a longer-term basis, you see that gold is getting a bit expensive relative to other commodities, capital goods or labor (or you could say that each of those things is getting cheap when priced in gold). What is clear is that gold is no longer cheap by any measure. I don’t think this type of analysis has anything to do with where gold price goes in the near-term (technicals and sentiment drive that), but it’s helpful to think about where gold is on an historical basis.

  • The Gold:Oil and Gold:Copper ratios are moderately high, and would be off the charts if oil and copper were to crash.
  • Rent on a nicer 1BR apartment in Manhattan has fallen from 8 ounces in 2001 to 2 ounces today. This is about what it cost in the 1920s-60s.
  • 10 ounces in 2001 bought a 12-year-old Honda Civic, and now it gets you a brand new one with extras. A Model T Ford cost 15 ounces by the 1920s. The VW Beetle cost 30-50 ounces in the ’50s.
  • Median family income in was about 50 ounces in 1920, 90 ounces in 1955, over 100 in 1965, 70 in 1975, 75 in 1985, 95 in 1995 and way over 100 in 2000. Today, it’s about 30.

On a purchasing power basis, gold is adequately priced – it is certainly no longer cheap. Of course, markets don’t care about this on anything but the longest term – gold was overvalued at $500 in 1979, but it still spiked over $800 and then fell to a ridiculously low level in 2000. In the scenario where the dollar goes to zero, everything will soar in dollars, not just gold, so you’d still have to evaluate gold in terms of goods and services.

I’m still in the dollar bull camp for the foreseable future. Treasuries are pointing the way (record low 10-year yields, 3.5% on the 30-year, almost like Japan), and it looks like another bout of deflation is underway, if you define deflation as a contraction in money and credit (if credit is marked to market). Europe’s soveriegn debt implosion is deflationary. The same goes for the Australian real estate collapse and the pending RE collapses in China and Canada, and the US muni and junk market troubles.

I don’t see the dollar as any worse fundamentally than the euro or yen, and much better technically. Japan’s history since ’89 is proof that printing and spending and running up huge public debt doesn’t necessarily kill your currency. When there is too much private debt going bad but not being written off, it overwhelms the mismanagement of the currency and props it up. It doesn’t matter what you think of the fundamental value of the dollar if you’re in debt and can’t find enough dollars to make your payments. And until asset and labor prices and demand for goods and services can justify borrowing costs, there’s no credit expansion so no inflation.

Sentiment-wise, we’ve still got a great long-term case on the long-dollar trade. Fear of the dollar has been widespread since early 2008, but the DXY has just bounced around sideways – no crash. The crash happend from 2000-08, while nobody but old-school Austrians noticed.

My screen is still cluttered with overpriced stocks.

This bubble was so extreme by any standard but Tulip Mania, that even after a 40% fall, the exchanges are full of junk stocks priced to go down another 40-100%. Where are the earnings? Where are the dividends?

Here are some prime examples:

  • Home Depot. How on earth is this company supposed to make money in the future? It is still priced at 10X last year’s earnings, and we were just entering a recession then. What will they do in the depression?
  • Blue Nile. It’s a great business concept, but how many diamonds are going to sell at retail next year, and the year after that, and after that? How do you put a 38-handle on last year’s earnings when the business is toast and they don’t even pay a dividend? Also take a look at Zales and Tiffany while you’re at it.
  • REITs, poor REITs. Kind of hurts to have to service all that debt with tenants dropping like flies. Expect zero equity to bring zero bids on a few of these before 2009 is out. Many are still down less than 50% from the crazy prices of 2006.
  • FedEx. Still a trailing PE of 20 and dividend yield at 0.6%! That’s a long ways from value. The stock ought to be priced at 5X last year’s earnings, because they will be lucky to see any next year.

I could go on and on. Stocks are still ridiculously overpriced. If you have Buffett-esque skills, you might be able to find the needle in the haystack that will hold up from here, but why swim against the tide? Your cash goes up in value every day.

Brave New World

The world from 2008 forward will be completely different than the last 60 years. Enormous shifts are taking place that will disrupt every business model and interrupt earnings in a major way. That has only begun to be discounted. This is not 1929, which was just a setback in the growth of western civilization. The utter economic cluelessness of the elite and middle class alike is paving our road to serfdom. My advice to anyone who doesn’t want to live in a Huxley or Orwell novel is to make like Jim Rogers and head east.

It’s a beautiful day for shorting. My picks: Wal-Mart & Costco

I wouldn’t be surprised if the market ends down on the week (maybe even the day). This morning’s little bailout* blip just offers shorts another chance to set up some trades we may have missed in the bounce since July. (*For a dissection of the bailout, here’s Mish).

Why short leading discount big-box retailers? Although they sell stuff cheaply, they have come to rely on Americans buying lots of cheap stuff. American’s have a habit of viewing low prices as an opportunity** to buy more of something, not to buy the same amount and save the difference. The aisles of these stores are packed with discretionary goods: a myriad of toys, cosmetics, housewares, sporting equipment, and all kinds of footwear and clothing. People’s homes are overflowing with decades worth of junk: enough clothing for a couple of generations, and used toys, tools and appliances galore.

These stocks are priced for perfection, as if the consumer binge will continue in perpetuity and the companies will continue to open new stores in new exurbs. Unfortunately, many of those new developments will be ghost-towns before long, and the stores will be big, empty cleanup liabilities.

Let’s take a look at the numbers:

Wal-Mart: Price: $61; P/E: 18; Dividend yield: 1.6%; Earnings growth, 2005-2007: 6.5%

Costco: Price: $70; P/E: 24; Dividend yield: 0.9%; Earnings growth, 2005-2007: 0.94%

By any Graham and Dodd style evaluation, these two are massively overpriced, Costco more so than Wal-Mart. However, I like the short odds on Wal-Mart just as much because it is so overbought and near a 52-week high in a sort of nifty-fifty bubble (hence, I picked up some puts this morning — I’ve had long-term puts on COST for a while).

Yes, same store sales may be up, but that is largely on account of groceries and gas. The profits are in discretionary items. Over the next 12 months, watch for sales to go flat and margins to shrink, before sales drop outright.


**People don’t apply this logic to investment purchases, hence the securities and real estate markets are inefficient.

P/E’s are Nil on Dow and Russell 2000

Click image for sharper view. Source: Wall Street Journal Online

Earnings have gone negative. How’s that for value? Remember, most bear markets end with P/Es below 12, sometimes 7. Even the value play in the group, the S&P 500, will have to fall by more than half to get there, without any further contraction in earnings.

And what kind of fools see value in equity yields under 3%, when earnings have grown above trend for years? Stocks are all risk with no reward. You can get these yields on 1-5 year treasuries right now.