Global Economics Blog

After 11 years of roller coaster rides in the stock market which have only intensified in recent months investors are happy to use their money for Christmas shopping and debt reduction instead of investing. If you look at what people are typing into Google last month you will see that 12,100 people looked for How To Get Out Of Debt while only 9900 searched for How To Invest In Stocks.
While this may not be the most sophisticated method of analysis but it’s more accurate than you think. If you read reports put out recently by Lipper Analytical and Trim Tabs you will see they confirm the notion that investors are fleeing the stock market and choosing to pay down debt with their cash instead.

The same thing happened in the 1970′s and didn’t bottom out until late in 1982. By the time the market turned up in the second half of 1982 no one cared. When the market broke out in 1983 no one believed it. They had been tortured in stocks since the high was reached in 1966 so no one wanted to be in stocks any longer, they were much more apt to hold gold or silver. That was the point where stocks took off in an 18 year bull market and commodities spent 2 full decades in a bear market. We have not reached that point yet, but we are well on our way. In fact, looking at the chart below which can be found at StockCharts.com it appears that we are roughly in December of 1977 right now so we have a good 5 or 6 years left to go before another bull market appears in stocks.

This does not mean that the stock market can’t make marginal new highs in the next couple years, but a major bull run is still off in the future if we are to believe the past. That’s what causes people to abandon the stock market in droves, each time things start to feel good they take another spill to the downside. When the pain gets to great they bail out once again with losses. It’s a long torturous process that leads to an entire generation abandoning the stock market. I am in that generation. I caught the tail end of the stock market rally in the late 90′s but by the time I had any significant money to risk the ride was over. After getting pounded in the stock market I made back my money in Gold and Silver but have never made much in stocks. It’s been a tough environment to win in stocks because when the indexes turn down, everything plunges regardless of how good the company.

As a trader I know this cycle will persist a few more years and then stocks will once again be king. So when the market is taking hits I’m going to be buying the Nasdaq ETF (QQQ) as that tends to significantly outperform the S&P 500 ETF in bull markets. The small cap Russell 2000 also tends to outperform at the beginning of the cycle but the big winner overall is usually the Nasdaq 100. So QQQ is the best place to be for the long haul.

Gold (GLD) has been the star performer this year in the precious metals arena as it’s up about 27% on the year and appears poised to move higher. the silver etf (SLV) was briefly the star last spring before flaming out after reaching the 1980 high of roughly $50. Gold had a similar parabolic run in mid-summer but after a couple hundred dollar correction is once again moving higher. If the trend continues those holding gold ETFs or the physical should do well. However, it’s often a good strategy to invest in a related asset that has under-performed instead of going with the obvious.

In this case the two that I would be looking at are the Gold Stocks (especially Junior Gold Stocks) and platinum in the metals arena. If you take a look at the performance of the Gold ETF (GLD) versus the Gold Stock ETF (GDX) you can see that since the beginning of 2011 GDX has under-performed by more than 20%.

If you move a little further out on the risk curve you will see that the under-performance of the Junior Gold Stock ETF (GDXJ) has even been more extreme losing nearly 20% of it’s value at a time when gold has risen 27%. This is something that only occurs in a the strange situation of gold rising on a fear trade while stocks dropping due to the “Risk Off” trade.

If you look back at how GDXJ has traded since inception you will see that it has basically tracked the Double Gold ETF (DGP) over the past several years until the last 9 months. This severe divergence normally plays out as a sharp drop in gold prices or a rise in the price of gold stocks.

Gold stocks have begun to outperform gold in the past few days and this could be the beginning of a recovery. Since the juniors have been so beaten down I have decided to go with GDXJ instead of GDX. If the “risk off” mentality continues it could delay a recovery in junior gold miners but if gold remains strong their day will definitely come!

Health savings accounts or HSAs have been around since 2004 but are rapidly becoming more popular since the economic downturn in 2008. According to the Health Savings Account Rules an HSA is designed to be paired with a High Deductible Health Plan (HDHP) that has a deductible of at least $1200 for an individual or $2400 for a family. The benefit of the HDHP is that they often have monthly premiums that are significantly lower than other health insurance plans that have lower deductibles. In fact, it’s not uncommon to find savings of 30-50% on the monthly premiums.

The Health Savings Account component allows owners of an HDHP to set aside money (on a pretax basis) to be used to cover deductibles and other medical related expenses. Employers often contribute to the HSA of their employees as well as it reduces the overall cost of health care coverage for the company. In fact, large group employers with over 50 employees were the fastest growing market segment for HSAs the past year.

As health care costs continue to escalate industry experts expect the growth in these types of plans to continue. It seems the deductible levels continue to increase on the most popular health insurance plans so it only makes sense to combine it with an HSA. Another additional benefit of these accounts is that the balance can be rolled over from year to year so it can continue to accumulate. Then once you turn 65 and go on medicare you can withdraw any leftover money and use it for any purpose. So it’s really like having an additional Tax Advantaged source of money to use in your retirement. Saving you money now and providing a little extra in retirement certainly seems like a win/win situation.

As with all other forms of qualified plans there are a significant number of rules and regulations that you should check out prior to establishing your plan. So do your homework!

There are few markets that can be more psychotic than the precious metals as they can turn on a dime and crush the unsuspecting. After making a double top in the $1920 area just a couple weeks ago Gold hit $1535 over night and came close to reaching the 200 day moving average which is found at $1520.

If you look at a longer term daily chart you can see the last time that gold actually hit the 200 day moving average was back in July 2010 prior to QE2.

If you remain in the camp that believes the only way out of our current economic problems is through dollar devaluation then the 200 day moving average is a place where you find good value. If the 200 day moving average doesn’t hold, it could be a torturous market for the next year. Today we will see a significant amount of pressure on the largest Gold ETF (GLD) as small investors try to escape the extreme volatility.

Silver has been much weaker than gold since making it’s parabolic top back in April back when many people were investing chunks of their 401k in the largest silver etf (SLV). Unlike gold silver has already blown out the 200 day moving average and is now in no-mans land. Silver has more of an industrial component than gold so that partially explains why silver has been performing much more poorly than gold in recent months.

With oil, copper and other basic commodities weak and the dollar rallying it’s time to use caution. Precious metals should be a conservative part of your asset allocation in this volatile environment.

Both silver and gold have joined the risk asset plunge as the U.S. Dollar once again becomes the safe haven of choice. Gold which has been the safe haven most of the year is currently down over $80 after making a double top in the $1920 area. Deflation is back on the table as the fed remained conservative following it’s recent meeting focusing on readjusting the durations within their portfolio through Operation Twist. Without further fuel from the fed it’s difficult to keep the inflationary theme alive. With all the Baby Boomers moving into retirement it’s pretty hard to come up with an underlying inflationary scenario unless the printing presses go wild.

With the fed on hold, corporations hoarding cash, the government under pressure to cut the deficit and consumers lying dead on the side of the road….. it’s hard to see a light at the end of the tunnel. In the long run, the only way out is to keep printing but things may have to get much worse before that begins. In the meantime, I decided to dump my silver etf as well as most of my gold etf holdings. After a good correction however, I think it’s the right bet to get back in the metals in anticipation of monetary lead inflation being an ongoing theme.

The stocks I’m going to keep an eye on are the big dividend payers. Dividend paying stocks have held up the best in this decline as the industrial / materials / energy stocks have been pounded along with the financials. The destruction in these sectors is so intense that it makes me wonder if we aren’t headed into another 2008 style meltdown. Our financial system is more stable today but none of the underlying problems have been resolved and with Europe in free fall it’s hard to be bullish about our future. We have set ourselves up for long term failure with all the entitlements so we will see more monetary stimulus in the future.

I’m torn between owning precious metals or dividend growing solid companies in the future to protect against inflation. I’m thinking that some combination of the two will be the best way to position once the dust settles. There are a few growth companies that are still interesting as well but since none of them are doing stock splits it’s hard to do a proper allocation without a good ETF. Ideally I would like to have 1/3 dividend growers, 1/3 precious metals and 1/3 growth stocks. However, for today I’m simply sitting in cash and watching everything plunge.

9/23 update: Wow, silver futures are currently down over $6, major support comes into play at $28.30 which is the 20 month moving average. If that can’t hold we will most likely retrace the entire QE2 move all the way back to $20 or even the high teens. At that point I would re-establish all my longs…. load the boat!