Sunday, July 30, 2006

HOW WILL GOLD STOCKS PERFORM IF THE STOCK MARKET CRASHES?

By Greg Silberman29 Jul 2006 at 11:58 AM EDT


ATLANTA - I have been receiving lots of e-mails from subscribers asking me what I thought would happen to gold stocks if the stock market (SM) crashes.
Before I answer that I would like to chime in and say I find it very interesting that the question is even being asked.

Inflation / Deflation Argument (Yet Again)
Many readers have told me I’m outright NUTS for considering a SM crash. Now I accept they may be right, I probably am nuts but certainly not for considering the possibility of a deflationary SM meltdown.

Inflationists tell me the Fed would step in to avert a crash the same way the did in 2000 to 2002 - MASSIVE monetary inflation! They tell me nominal prices just cannot go down in a material way when the Federal Reserve is ready, willing and able to buy up every asset with newly printed dollars.

Their arguments are very persuasive. I mean, who wouldn’t accept a check from the Fed for the original purchase price of your home even whilst its value is catering?

I think the inflationist view is flawed for one major reason.
Psychology!

Most of us have now felt the rising level of fear that accompanies War. We’ve seen it either in our stocks, in the worried faces on TV or merely talking with friends and family.

Confidence is a very fickle trait. When it’s with us we feel as if it will never depart. When it leaves it disappears so quickly we are convinced it can never return.

As we speak, the same dynamic is underway in the Stock Market. Confidence can and is being shattered in an instant and irrational behavior will take over in a heartbeat!

Yes, the Fed can turn on the monetary spigots, and yes they probably will. But based on debt levels and a World War, the speed and ferocity of this collapse will be BREATH TAKING.
The Fed may (believe it or not) find all out inflation to be too costly.

If the world is crashing around you and some Government official tells you that they will buy your assets, your home for example, for exactly the same amount of money you paid for it 1 year ago, do you honestly believe that original $500,000 would buy you the same goods and services today as it did then? Of course not, all prices would adjust accordingly. That’s inflation you say! Hear me out.

The U.S. borrows a ton of money from the rest of the world. In effect, the greatest asset the U.S. possesses is its capital markets and its reserve currency. What do you think foreign debt holders (who stand to lose the most from reckless inflation) would do if the Fed started swapping assets for paper as above? They would dump our debt and our dollar and destroy our biggest assets.

There is a cost to too much Inflation and that is the destruction of our reserve currency and our capital markets. Now unless you think Americans are willing to commit outright financial suicide (I don’t) then mark my words, the inflationary route may prove too high a cost and deflation may be allowed to have its day.

After Deflation

What happens after deflation is another story altogether. After enough debt has been cleansed (through bankruptcy) there is much less risk of monetary inflation destroying capital markets. Then it will be no holds barred and most likely hyperinflation.
You like roller coasters? I hope so because we’re on the big boy!

Gold Stocks

There is no denying that gold stocks have sold off with the stock market even though the price of gold has been rising.

The fact that gold stocks fell whilst physical gold rose does not surprise or worry me at all. It is quite common that during an advance gold stocks get ahead of physical. This can result in physical ‘catching up’ after gold stocks have topped out - and we see this divergent behavior.

However, the correlation with the stock market is the million dollar question. Yes, gold stocks are equities and yes, they will be influenced by the broader stock market. But fundamentally gold stocks are counter cyclical because the product they mine moves in an inverse relationship to paper assets.

Once irrationality sets in and the stock market really starts to fall I would say, based on recent experience, gold stocks would initially fall alongside.

However, at some point investors in gold stocks will focus on their business and not the fact that they are stocks. When will that happen? When the fed starts to panic and ‘attempts’ to restore confidence through the printing press.

Keep your eye on the BIG picture:


Gold stocks (red) vs. S&P500 (blue) vs. gold/HUI ratio (green)

Rest assured, the stock market and gold stocks will ultimately detach and gold stocks will perform their counter cyclical duty.

Chart 1 shows how gold stocks rallied whilst the stock market fell during late 2000 – 2002 (grey block). In fact, chart 1 shows gold stocks led gold bullion higher (green line HUI outperformed physical gold) during the panic moments of the SM crash.

Will gold stocks violate long term trend lines? How low will gold stocks go before detaching from the SM? The answers to these questions are unknowable at this time.

So what do we do? When faced with a credible risk to your position it is prudent to purchase put option insurance.

Copyright © GoldandOilStocks.com 2006

Friday, July 28, 2006

STOCK MARKET REPORT
By John Gizzi, PFS Baseball Senior Writer

Now, more than ever, you must be quick with the hook, cutting loose any dead weight on your roster - to be more precise, cutting live weight like Esteban Loaiza and others before they ruin what could be a championship-winning season. A bad starting pitcher could literally cost you 12 points in the standings, and few teams have that kind of lead to work with. This provides with me with a segue into my next point. It's also the time of year where fantasy owners who are lagging somewhat in wins and strikeouts are tempted to use the spot-starter strategy. While this idea would work quite well if Johan Santana was on the waiver wire, in reality you'll be choosing between 1) raw rookies on bad teams; 2) bad veterans on bad teams; 3) bad veterans on any team, period. In other words, your options are "bad," "worse," and "Democrat or Republican." Here are this week's hot and cold players, where a big-name pitcher (think Mark Buehrle) is on the wrong end of the scale.

-- Rising --

SP Vicente Padilla, Texas
Starting pitchers in August in Texas do not usually merit attention, but Padilla could break that rule. Since his ERA reached a season-high 5.29 on June 3, Padilla has been quite solid in the nine starts after, as his ERA now sits at an even 4.00. How has he done this? By throwing strikes. In those nine starts, covering 62 innings, he's walked 14 while striking out 50. The Texas offense is struggling now, but Padilla's won 10 games, and if you need a starter in your mixed league, I'd take a look at Padilla.

2B Ray Durham, San Francisco
Yes, yes, yes, we mentioned him last week. If you didn't take my advice and pick up Durham in your mixed league, here's what you missed in the last week: a .346 average, four home runs, 11 RBI, and seven runs. That thud you heard was your window of opportunity to get Durham. Bummer.

RP Ambiorix Burgos, Kansas City
And so Burgos once again finds himself closing games for the Royals. It's not the cipherous job it appears to be, as Burgos does have 15 saves so far, with more than a half-dozen botched ones, so the opportunities have been there. He'll likely do the job, though he'll have his rough patches. Kudos if you kept Burgos around hoping (at minimum) he'd turn into an effective middle reliever. Keep an eye or two on Joe Nelson and Todd Wellemeyer, too; they could step in should Burgos fail.

1B Prince Fielder, Milwaukee
Not only does "Little" Cecil make an excellent player to target for 2007, but he could also push your team closer to a fantasy title this year. Fielder hit seven home runs in June, but hit only .208. In July he's hitting .316, but with only two homers and 10 RBI. The suspicion here is that he puts it all together in August and September, hitting 15 home runs, driving in 40 runs, and maintaining an average near .300. Get him now and reap the benefits; he won't cost you as much as, say, Mark Teixeira, but he'll out-hit him.

SP Carlos Zambrano, Chicago (NL)
Some time ago, Zambrano landed on the "Falling" list, mainly thanks to his control problems. Ever so slowly, though, Zambrano's control has improved. After issuing six free passes on June 6, in his last eight starts he's walked 22 in 54 innings, striking out 50 in the process. What's really helped Zambrano has been his stinginess with hits: opponents are hitting .197 against him. With 11 wins for a dreadful Cubs team, Zambrano is an anomaly. But he's a worthy anomaly, and if you need to trade for an ace down the stretch, consider Zambrano, who possibly won't cost as much as other aces.


-- Falling --

SP Mark Buehrle, Chicago (AL)
Buehrle and his teammates Javier Vazquez and Jon Garland appeared here last week, but this time Buehrle has the spotlight on his own. Including his start on Wednesday when he gave up 10 hits and seven runs in 5.1 innings, Buehrle in his last five starts, covering 26.2 innings, has given up 47 hits and 36 runs (34 earned), while walking five—his control has been good at least!—and striking out 15. For those of you keeping score at home, that's an 11.47 ERA and 1.95 WHIP. Ugh. It could be that Buehrle heavy workload over the last five years is catching up to him, but whatever the case, the time is now to drop him in your mixed league. You can't wait around for him to turn things around, because even in the best of times he's not a dominant starter.
SP Esteban Loaiza, Oakland
I'll throw away all pretense of objectivity and claim my dislike for Loaiza. Forget the alleged DUI he had earlier in the season. That speaks for itself. Come to think of it, so do Loaiza's putrid numbers this year: 6.75 ERA, 1.76 WHIP, 12 home runs allowed, and 37 strikeouts in 69 innings. What's remarkable is how much worse his statistics would be had his one inning/nine run outing against the Royals not been cancelled because of a rainout. He needs to be dumped in all formats, and now. Good thing the A's signed him to a three-year deal, eh?

RP Mike MacDougal, Kansas City
Needless to say, MacDougal collecting holds for the White Sox doesn't help your fantasy team as much as him collecting saves in Kansas City. Since I already wrote 20 words after "needless to say," I'll stop here. Well, not quite here. MacDougal can still help your team as an effective middle reliever, and knowing Ozzie Guillen's caprices he may just give MacDougal the closer's job if Bobby Jenks doesn't hit a batter or 15 in belated retaliations—retaliations his wimpy teammates failed to carry out, the quislings.

Thursday, July 27, 2006

T. Rowe beats the Street despite stock market swings
Baltimore Business Journal - 4:53 PM EDT Thursday
Continuing its recent pattern of record profits, T. Rowe Price Group Inc. beat Wall Street estimates for its second quarter despite a weak stock market.
The Baltimore-based money manager reported second-quarter earnings of $136 million, up nearly a third from the second quarter of 2005. T. Rowe (NASDAQ: TROW) earned 49 cents per share, beating the consensus estimate of analysts surveyed by Thomson Financial by 3 cents. The company split its stock in June, issuing one new share for every share outstanding.
T. Rowe's second-quarter net revenues hit a record $446 million, up 23 percent from a year ago. And assets under management hit an all-time high of $294 billion, an increase of just under $1 billion from the end of the first quarter.
The company prospered during a quarter that was tough for money managers. On Tuesday, T. Rowe's neighbor and competitor Legg Mason Inc. (NYSE: LM) reported that assets under management dropped slightly as Legg worked to integrate its huge acquisition of Citigroup's asset management business.
Investors poured $7.7 billion of new money into T. Rowe during the quarter. But that was nearly offset by a market-driven decline of $6.9 billion in the value of T. Rowe's assets. Similarly, $2.6 billion of new money flowed into T. Rowe's mutual funds in the second quarter, but that was more than offset by a $4.6 billion decline in the value of fund assets.
"Our strong second-quarter performance was achieved during a period of increasing stock market volatility in which global equity markets swung considerably and the decline in U.S. stocks erased a large portion of their gains from the first quarter of the year," said chairman George Roche in a news release.
T. Rowe has been selectively scooping up assets from companies looking to trim or unload their money management operations. That trend continued in the second quarter, as $615 million in assets poured into T. Rowe from its acquisition of Caterpillar Inc.'s Preferred Group Of Mutual Funds. T. Rowe also added $115 million of separate account assets from Caterpillar. Construction equipment maker Caterpillar (NYSE: CAT) had begun the investment offerings for employees' retirement plans, later opening them up to the public.
The new money coming in from Caterpillar helped boost T. Rowe's assets under management despite the market-value declines. T. Rowe pointed out that with no debt and more than $1 billion in cash and liquid investments, it can make other purchases as opportunities arise. T. Rowe also bought back 4 million shares of its stock in the second quarter to boost share price as investors shied away from money-management stocks. The company has continued buying back stock into July.
Compensation and related costs at T. Rowe rose by 27 percent from a year ago, as the company hired more people and their pay and benefit costs increased. T. Rowe spent 12 percent more on advertising in the second quarter than it did a year ago, but expects to trim ad spending from that level in the third quarter.
Roche said T. Rowe thinks the financial markets can make "moderate progress" in 2006, but "equity investing in the near term may be less rewarding than investors had become accustomed to in recent years."
T. Rowe shares jumped 6 percent on the earnings news Thursday morning to $39.15 and closed at $39.03.