Silver And Gold: Another Rally Before Lower Lows?

So, by now, I had expected that new lows would have been seen in both silver and gold. Don't get me wrong, I am still of the opinion that lower lows will most likely be seen. However, the action over the last week has made me question whether another rally will be seen before the final "flush" down is seen in the metals.

At this time, I have to be honest in that I am struggling to present you with a fundamental argument for buying or selling silver and gold. Many others have pointed to Chinese demand, or the HUI chart, or many other reasons as to why the metals will either tumble further or will rally strongly.

But, this is nothing new to those of you who have been terribly whipsawed over the last two years. All of you know one thing: the metals are not an easy trade, and fundamental "reasons" have not aided in providing insight into the next move in the metals.

Furthermore, there are many that attempt to day trade the metals, and I have always discouraged this practice. The metals are among the most volatile of all investment vehicles, so trying to trade the smallest moves in them is extraordinarily difficult and something I try to discourage for most people. However, the swing trade set ups in the metals are some of the best trades to be had, as long as you have an appropriate pattern with which to work.

For example, back towards the end of the summer of 2011, I was looking for a top in silver in the 43/44 region, with the potential to decline to the 26/27 region. I personally loaded up on out of the money puts for that trade, and using approximately 2% of my aggressive trading account, I was able to double that entire account within a month's time. However, those type of trades do not present themselves exceptionally often, so one must take advantage of them when they do. But, at the time I was suggesting such a move, most of the readership here at Seeking Alpha was viewing me as a complete crackpot, especially since I had only started writing for Seeking Alpha a few months before that.

Yet, right now, I will be completely honest and tell you that this market can go either way. At the time of this writing, I have no serious clarity as to what the next 10+% move in the metals will be. In fact, it is something I will have to monitor very closely over the upcoming week to be able to make that determination.

But, since I did suggest to readers that I will provide an update this weekend, I am simply following through on my promise, and will tell you what I will be making my determination over the next week. And, any decision I make will likely be on the fly, and will not be able to provide you with forewarning here at Seeking Alpha, so I will have to suggest extreme caution to those who are trying to catch the 5-10% moves in the metals, rather than the much larger moves in the metals. Those that are trying to catch the much larger moves in the metals know well enough that any further declines seen over the next week or two is likely another opportunity to add to long term positions, and I am completely on board with that perspective. Furthermore, I see no reason to cash in my longer term puts unless I see a strong move over the GLD 123 region (for a 15 point profit from our shorting point of 138GLD).

At present, even though 117GLD has held as support so far, we can now see a break down below the 117 region, which may no longer suggest a waterfall decline. Unfortunately, it will now take a strong break down below 115 to get me to target the 98 region. And, any move through the 123 region will have me targeting the 131.50 region at a minimum, with the potential to still head back to the 140 region.

It was for this reason that I strongly suggested in our Trading Room this past week to all those that were still in put options with expirations of earlier than February of 2014 to consider taking their profits from our initial short trade from 138. And, if you want to maintain a short position, my suggestion would be to use options that go further out into 2014 in order to play it safe.

As for silver, it still can drop back into the 18.30-18.95 region without confirming that a long lasting bottom is in place, and it then may see a rally back to the 26 region before being its final phase to lower lows, if it is unable to break down below 18.30.

But, please do not believe that I am of the position that we will be clearly making a final low in the metals if we see a bit lower in the metals. While it is certainly possible, I still maintain that we will see the 100 region in GLD and 16.50-17.75 region in silver before we can consider that a bottom has been made in the metals. However, for those that are playing for the longer term trend, I am hoping that you are seriously considering buying VERY long term positions on the long side in the metals on any further drops, as we will likely be closing in on major lows in the metals within the next 3-6 months.

Source: Silver And Gold: Another Rally Before Lower Lows?

Disclosure: I am long SLV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: I also have intermediate term GLD put positions.

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VMware: Inconclusive Valuation And Overblown Competitive Pressure

I wrote about VMware (VMW) before the company reported third quarter earnings; the share price is pretty much flat relative to where it was the last time I published a report about the firm. But the share price did pop to the $90 per share level where it met stiff resistance. This suggests the market is not ready to accept valuations that high. I think the third quarter was solid.

VMW data by YCharts

VMware reported double digit revenue growth with solid profitability and excellent usage of cash. Besides that, there are discussions about the firm's competitive environment. Some analysts are saying that offerings from Amazon (AMZN) pose a threat to VMware longer term. I think those fears are overblown. I view VMware as having a solid competitive position in the medium term. My problem with the firm is valuations.

Simply said, I will not pay 40 times earnings and 7 times sales for shares of this company.

Fundamental Analysis

Amazon provides infrastructure as a service. Amazon's EC2 does provide an alternative to VMware's vCloud Suite, but the solutions provide answers to different questions at times. Specifically, VMware provides solutions for hybrid and private cloud while Amazon provides public-cloud solutions.

Amazon has also a cloud-based PC virtualization platform called WorkSpaces. To the best of my understanding, WorkSpaces poses the most risk to Citrix (CTXS) and its desktop and application virtualization products revenues. I view VMware as primarily a server virtualization company. Consequently, I view WorkSpaces as having a limited long-term impact on VMware's results of operations.

I think the biggest challenger to VMware's core operations is Microsoft through its System Center, Hyper-V and Windows Server 2012 R2 offerings. Medium term, I think Microsoft (MSFT) will have a limited impact on VMware. So, I think VMware should be able to maintain its profitability for the foreseeable future.

VMW Revenue (TTM) data by YCharts

In terms of the third quarter revenue growth rate, the rate is in line with the high end of my 2015 forecast. Management is not focused on improving operating profitability; they are focused on maintaining or improving VMware's competitive position. So, instead of seeing the operating margin expand into the 30 percent to 40 percent range, it seems as though management is guiding more towards maintaining the 20 percent operating margin.

Additionally, with about $6 billion of cash and limited debt, VMware remains in a solid competitive position.

Overall, the cash usage, financial position and performance are excellent. I think the fundamentals of the business are bullish for the valuations.

Valuations

VMware is engaging in share repurchases. As of September 30, 2013, the company had $775 million remaining for share repurchases. These repurchases will adversely impact the company's price/book value ratio and positively impact the price/earnings ratio. Consequently, the multiplier model valuations should account for this impact.

The investment in Pivotal could have a significant net positive impact on the valuations of VMware, should Pivotal generate the ROI.

Relative to its 5-year averages, VMware is undervalued. But I think the slowing growth rate and above average risk suggest the valuation should be lower. On the other hand, VMware's profitability suggests the valuation is justified. In conclusion, the multiplier models are inconclusive. I won't pay 7 times sales, 5.3 times book, and 40 times earnings for shares of VMware.

VMW Price to Book Value data by YCharts

Apply a free cash flow to equity model, I get an intrinsic value of $59B, which is 70% more than the current valuation.

Overall, the valuation models are inconclusive; I prefer to wait until a clearer investment picture presents itself.

Source: VMware: Inconclusive Valuation And Overblown Competitive Pressure

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Intel Has No Real Answer For Taiwan Semiconductor

On November 21, 2013, Brian Krzanich hosted his first annual investor meeting as the CEO of Intel (INTC). In retrospect, this event may prove to be the Best of Times and the Worst of Times at Intel. Certainly, technology geeks and investors are well familiar with Moore's Law, which specifies that the number of working transistors that may fit upon one integrated circuit will double every other year. Over time, computing devices will become increasingly powerful, yet smaller and more energy efficient. Ironically, Moore's Law may continue to wreak havoc on the Intel business model, as the balance of power shifts away from personal computers and towards mobile device sales.

Intel foreshadowed that company revenue would flat line through 2014, in comparison to this year. Investors promptly dumped Intel stock to $23.87, for a 5.4% loss on the November 21 trading session. Wall Street then rationalized the flat revenue projection as an admission that billions of dollars in mobile investments have failed to pay off for Intel. In response, Intel has pledged to open up its foundries to outside semiconductor businesses. Taiwan Semiconductor (TSM), of course, is the 800-pound alpha gorilla sitting in this room, where Apple (AAPL) looms large as the main prize. Ironically, Intel as a foundry may be yet another Catch-22 proposal that shall be interpreted as a concession of defeat.

Intel PC Bread and Butter

For the sake of making comparisons, please be advised that fiscal years at Intel and Taiwan Semiconductor both largely coincide with calendar time. In recent years, Intel has classified its businesses according to PC Client, Data Center, Software and Services, and Other Intel Architecture operating segments. The Other Intel Architecture was designated as an umbrella classification largely above mobile chip sales. Through the first nine months of 2013, the Intel PC Client Group generated $8.4 billion in operating profits off $25.5 billion in segment revenue. In all, Intel posted $8.7 in operating income upon $38.9 billion in total net sales through this same time frame. Intel has been historically revered for its fat gross margins of 60%, or more.

High margins at Intel, of course, are largely attributable to the vertical integration of powerful chip design, assembly, and distribution to PC and server companies. The PC Client Group alone often generates roughly two-thirds of all sales activity at Intel. For the sake of comparison, the Other Intel Architecture division racked up $1.8 billion in operating losses upon a mere $3.0 billion in revenue between Q1 2013 and Q3 2013. Meanwhile, Taiwan Semiconductor posted a respective $7.3 billion in gross profits upon $15.2 billion in net revenue through the same time frame. Gross margins at the world's largest independent foundry have generally ranged between 45% and 50%. Again, factory work, if you can get it, is a bit less profitable than selling off popular and vertically integrated chip technology. Intel bulls should not assume that an American company would match the low costs and profitability of the Taiwan-based outfit.

In 1999, near the peak of the personal computer revolution, Intel spent a mere $3.1 billion on research and development, out of $29.4 billion in net revenue. During prior years, Intel was to allocate less than 10 percent of total net sales to research and development. By 2012, Intel was directing roughly 20% of net revenue towards research and development. In terms of cash flow, Intel has already used up $7.8 billion in cash for additions to property, plant, and equipment, through the first nine months of this year (Intel generated $14.7 billion in Q1 2013 to Q3 2013 operational cash flow). To date, Intel has literally attempted to buy its way into the mobile market, through aggressive capital spending. All recent reports out of research firms Gardner and IDC have confirmed a secular shift out of personal computers and into mobile devices. IDC has projected annual mobile unit shipment growth rates above 70% through year 2017.

Apple is The Big Fish

In addition to Moore's Law, prospective Intel investors must also acknowledge the Law of Large numbers. In terms of market capitalization, Intel is a $118.9 billion operation. Again, the company sinks billions of dollars into capital spending, each year. Expensive foundries must therefore be running at full capacity, in order for Intel to profitably leverage its fixed costs and generate real shareholder returns. Leading mobile chipmaker and rival Qualcomm (QCOM) is not likely to hand its business over to Intel. To no avail, Intel has nearly wasted two years of time in an attempt to outflank the ARM-based (ARMH) Qualcomm Snapdragon as the go-to engine that drove premium Android, and even Windows, handsets and tablets. For all intensive purposes, Intel must win Apple chip manufacturing contracts, in order to economically justify Santa Clara's foray into the foundry business. In 2013, ARM-based A-Series chips helped move more than 150 million and 70 million Apple iPhone and iPad shipments, respectively.

To date, the highly secretive Apple has contracted out the bulk of its chip manufacturing orders to rival Samsung (GM:SSNLF). The working relationship between these two unlikely bedfellows, of course, has been frayed by a seemingly endless parade of patent infringement lawsuits and billion-dollar judgments. The dysfunctional Apple-Samsung relationship has all the markings of codependency, as Apple has relied upon Samsung's manufacturing prowess to solidify its own iPhone and iPad supply chains. According to Mark Newman, Sanford Bernstein analyst, Samsung has filled roughly $10 billion worth of Apple component orders, over the course of the past year. Samsung, of course, will reinvest this money back into the company to roll out its own smartphones and tablets that compete directly against Apple.

Enter Taiwan Semiconductor. For years, the rumor mill has been abuzz with speculation that Apple was making moves to dump Samsung as a manufacturer, in favor of striking deals with either Taiwan Semiconductor, or Intel. On July 1, 2013, The Wall Street Journal confirmed rumors that Taiwan Semiconductor had inked a deal to share the load with Samsung, and produce 20nm Apple A8 chips, beginning in 2014. Ironically, Intel and its spearhead 14nm manufacturing capabilities, will be the odd man out as a foundry throughout the course of the next eighteen months. A recent deal to manufacture ARM-based chips for Altera will barely budge the bottom line needle at Intel.

The Bottom Line

Intel bulls, notorious for doggedly harping upon technical specifications, should also acknowledge that a long-term alliance with Taiwan Semiconductor grants ever more authority for control freak Apple to throw its weight around. Apple closed out its latest 2013 fiscal year ended September 28, 2013, with $146.8 billion in cash and securities on the books. Going forward, Cupertino could be laying the groundwork for a direct investment into the $90 billion Taiwan Semiconductor, in order to build out a wing of this company specifically designated to crank out Apple parts. Taiwan Semiconductor Founder and CEO Morris Chang, 82, may be open to closing out a megadeal for his company, before riding off into the sunset.

On November 27, 2013, Intel stock closed out the trading session at $23.90 per share. Again, this performance calculated out to $118.9 billion worth of market capitalization. Intel may close out this 2013 fiscal year with $10 billion in net income, at best. At this rate, Intel would trade for an estimated 12 times current earnings. This valuation is somewhat of an expensive price to pay for a deteriorating business model. Intel brass has already foreshadowed flat revenue figures through 2014. James Covello, Senior Analyst, Goldman Sachs, recently went on to dismiss even these flat revenue projections as 'aggressive.' Covello has also described his feelings towards Intel as an investment as the 'exact opposite' of bullish. Earlier this month, on November 22, 2013, investment bank Goldman Sachs reiterated its sell rating and $16 price target for Intel shares.

Financial engineers may argue that Intel can simply slash capital spending and direct these savings to buy back additional shares of outstanding stock, in order to immediately improve earnings per share. Intel managers, of course, have proven unwilling to kowtow to the financiers. Short-term financial engineering may effectively gut long-term prospects at Intel. At this junction in time, Intel must take a gamble on mobile, in order to avoid even further fallout from what appears to be the inevitable decline of the personal computer industry. As such, prospective investors should recognize that the fortunes of Intel are caught between a rock and a hard place, and walk away. Intel stock ownership is a losing proposition.

Source: Intel Has No Real Answer For Taiwan Semiconductor

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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This Will Be The Last Console Generation

Microsoft (MSFT) pulled off fairly phenomenal sales for its first day launch. Props to Microsoft for being classy enough to congratulate Sony (SNE) on its success! Sony returned the sentiment to Microsoft as well.

Microsoft sold out the Xbox One on the day of launch. The lineup of games, paired with the multimedia features gave Xbox enthusiasts plenty to be happy with. In the last generation, a $100 price differential had a more significant impact. But this time around it seems that it hasn't.

Microsoft announced how thrilled it was with its launch, selling over a million units on the first day. That's a lot of inventory to move around, so running short on supply should be no surprise. But hopefully, the supply chain managers at both companies get it right in the next console generation if there is indeed one.

With consumer discretionary spending up, and demand for electronics roaring back to the forefront. I knew that the two companies may have underestimated demand. It is a little early in the console generation. But, defending the living room has remained a priority for both Microsoft and Sony. This is because the living room may be contested by Apple in the foreseeable future.

Will Microsoft spin off the Xbox segment?

(click to enlarge)

Source: Statista

It has been 7 to 8 years since Microsoft and Sony have released a console system. The fact is, Microsoft and Sony could have charged significantly more for the hardware but chose not to. Both businesses want to earn profits from software rather than hardware. Because of this, many have criticized the business, and some within Microsoft want to spinoff the Xbox division.

To be specific, Stephen Elop, a contender to be the CEO of Microsoft, is rumored to believe that selling the Xbox and Bing division of Microsoft could help to keep the company on track. However, that same Forbes article points out that there's plenty of logic that would run counter to Stephen Elop selling the Xbox and Bing division.

Stephen Elop has a terrible track record as CEO of Nokia. To be more specific, over his three year tenure at Nokia, Nokia's revenue fell by 40%, profits fell by 95%, and smartphone market share fell from 34% to 3.4%. Let's assume, the Verge was right about Stephen Elop's plans of selling the Xbox and Bing unit. That alone should give the board ample reason NOT to hire Stephen Elop. Stephen Elop has a terrible track record of winning in the ONE product category he had control over - mobile. I can't imagine how he's going to succeed at running the disparate parts of Microsoft's vast empire.

The probability of Microsoft selling Bing and Xbox is not only small - it's infinitesimally small. There aren't that many businesses in the world that operate at similar scale to Xbox and Bing. The Bing and Xbox segments alone could be separately listed on the S&P 500. Microsoft needs these two segments to effectively complement its One Microsoft strategy. Building a huge product ecosystem helps to insulate Microsoft from both Apple and Google. To be more exact, both Apple and Google are bigger threats to Microsoft than Sony will ever be.

That being the case, we have to think that if Bing and Xbox were sold off, it would not only hurt the brand, but it would also diminish Microsoft's ability to effectively transition users from Windows 7 to Windows 8. While the Windows 8 functions very effectively and doesn't have that many software issues. Users prefer the old Windows layout over the new one. However, by standardizing the experience across all form factors, (mobile, television, desktop, laptop, and tablet) the core Windows experience may continue to survive. Plus, if Microsoft can continue to maintain its respectable position in tower and laptop PCs, and gain share in mobile and tablet, the company may become a more formidable force.

Sure, Bing may never have the same amount of market share as Google. But it's still growing at a pretty steady clip. Plus it doesn't hurt that Bing has been gaining market share in the United States against Google. This is all thanks to Microsoft's mobile operating system using Bing. By 2020, 75 billion different devices will be connected to the internet, according to Morgan Stanley. Of those 75 billion devices, Microsoft needs to capture as many as possible. To do this will require synergy across all of its business segments, which is why Microsoft should be building a larger moat around its ecosystem rather than selling different pieces of the castle it has worked so hard to build.

Will there be a next generation console?

Yes, and no. I think this question is really difficult to answer. Generally speaking, making long-term predictions can be difficult. But the fact is computing is becoming more invisible. Going forward, the key differentiator would have to be the software that comes with hardware. This puts greater emphasis on the three emerging ecosystems: Windows, iOS, and Android.

I don't consider Sony to be a complete ecosystem, and quite frankly it's starting to acknowledge its own weakness in the technology space. The fact that it can't transition any of value from some of its business segments to other business segments is a problem. I don't get why Sony has both a bank and a consumer electronic division under a single umbrella. Some have pointed out that it should spin off its entertainment division (music and movies). But in reality, the banking part of the business should be the part that should go. This is because banks and technology companies are managed extremely differently. Sure, it may be Sony's only profitable segment, but it doesn't change the fact that banks are heavily regulated. How could added regulation make things any easier for Sony's management team?

If anything, Sony is the ultimate OEM (other equipment manufacturer). But being a great OEM without great software is terrible. The more an ecosystem can scale the better. As Larry Page from Google has said, technology spending doesn't scale that easily! Instantly creating products would be nice, but it's simply not feasible. Hence the fat cash piles on Google's balance sheet. Sure you can start by shoveling money, but if you just throw money at product development without a very well thought out business strategy, what's the point?

It sounds almost silly, but Sony will sell computers rather than televisions. To be more specific a Sony Bravia television may not be a simple cable and movie viewing experience. Sony may have to partner with Google, and develop a Sony Bravia television that runs Android. And with 75 billion devices connecting to the internet by 2020, we have to assume that the average person will own 7 to 8 devices that can access the internet. The TV will become one of those devices.

However, to do this effectively, Sony will have to put an end to its PlayStation gaming division. Perhaps, sell games, but sell them to a much larger ecosystem - the Android ecosystem. In this transition, Sony will earn vastly more profit from blockbuster video game titles, plus sell a television that is an all-in-one computer, and gaming device.

However, some have speculated that the standard ecosystem of gaming will come under attack because of the cloud. After all, if you can access hardware via the internet, problem solved, right? Not quite, this is because the data that's being transferred from your web connected device is limited by the bandwidth of the internet connection. However, some may add that you can simply increase bandwidth to solve the issue right?

No, not exactly, the PlayStation 4 can handle 176 GB/s of data transfer on its RAM (random access memory). Short-term memory is the bridge between the processor and the hard drive. Currently, 4G LTE networks can transfer data at around 100 MB/s, which is a far cry from the 176 GB/s of data transfer capability on a Sony PlayStation 4. This further implies that streaming a video game's graphics from a mainframe PC is a very remote possibility. There could be technological workarounds, but I doubt Microsoft and Sony will cloud stream and abandon a lucrative hardware business.

If anything combining a console system with a television is most likely. And plus, it's vastly more profitable. By the time 2018 to 2020 rolls around, I can only imagine the limitation of bandwidth to be further crippling. This is because the data transfer between processor, graphics, and storage will become substantially faster. Bandwidth and memory transfer on a board will advance at a far greater rate than with network technologies (Fiber optics, 5G LTE). Therefore, it's improbable to think that games will simply stream from the cloud.

Conclusion

Both Microsoft and Sony were able to successfully launch their consoles. However, Microsoft seems to have come slightly ahead by selling the same number of consoles at a full $100 more than Sony. It's unlikely that Microsoft will sell its Bing and Xbox One division. This is because Microsoft is trying to build its own ecosystem across all form factors. To sell any of the businesses would run counter to the one Microsoft strategy.

Going forward Microsoft and Sony will try their best to protect their turf in the living room. However, to accomplish this, Microsoft will have to partner with a television maker and learn to sell Windows on a 50" to 60" screen. To accomplish this, Microsoft has overhauled its operating system (Windows 8). By standardizing the operating system across all form factors, Microsoft may be able to release a next generation system that is integrated into a television. This new device will operate as a console, TV, and computer. This will be an all-in-one device.

Now, for Sony… since Sony doesn't have its own ecosystem. I imagine a scenario where it will have to partner with Android. Then build its next generation console into every Sony television that is sold. It will earn its profit from software, without having to incur financial losses from the hardware. Also, it can't hurt that Sony will have broader distribution to casual gamers and may even port over console titles to smartphone and tablet devices.

So in the end, this is the last console generation that comes in the form of a box for Microsoft and Sony.

Source: This Will Be The Last Console Generation

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Central GoldTrust Close To Historically High Discount

Looking at prices over the last five years, the Central GoldTrust (GTU) is selling at historically high discount presenting the opportunity for a pairs trade with GLD (or IAU).

GTU is a closed-end fund based in Canada that holds 98.50% of its assets in gold. 97.60% is in gold bullion, 0.90% in gold certificates and 1.50% is in cash. Because it is almost all gold, the net asset value of the fund will closely track the price of gold.

Looking at the last day of the month since November of 2008, according to data from CEFConnect.com, GTU has generally sold at a premium to its net asset value. However, with gold being so out of favor, GTU is now selling at a discount of about 7% as of 11/27. The 52 week high was 7.89% and that was hit on 11/26/13. Even at 7%, that discount is still greater than the month end price of every month since November of 2008. The discount was as low as 4.46% as recently as 11/6/13.

This historically high discount might present a good time to consider a pairs trade by going long GTU and going short GLD (or IAU). GLD should closely track the price of gold, so a trade like this would be bet on the GTU discount narrowing. Of course, the main risk would be that the GTU discount gets even wider, resulting in possible losses.

Using the closing prices from 11/27/13, here is how the transaction might work out if the trader had the good fortune of the discount narrowing to the 11/6/13 spread of 4.46%. This example assumes an investment of about $10,270 with a $7 commission and no other expenses such as a short borrowing fee or margin fee.

Go long 239 shares of GTU and short 86 shares of GLD. The net cash outflow is $5.49.

Assuming that the price of gold does not change, and assuming that GLD trades at the same spread to net asset value as when the transaction was originated, and assuming that the GTU spread narrows to 4.46%, this trade can be exited with a net cash inflow of $261.78. Combined, the overall profit would be $256.29.

Please note there can be considerable risk in a trade like this, so always consult a financial advisor and do lots of research.

(click to enlarge)

Source: Central GoldTrust Close To Historically High Discount

Disclosure: I am long GTU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: and short IAU

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Little Accuracy In Economic Predictions

I have yet to see a model of the economy which can project future dynamics including accurate projections of productivity, employment, inflation, earnings, peak anything, bubbles, social changes, wars, et al.

Economic models use existing trends and extrapolate to forecast. The surprise in the punch bowl is that economic dynamics are not fixed, and dynamics which align to make an economy flourish in one time period can combine with additional "evil" forces sometime in the future to work against the economy. Take the baby boomers for instance.

Economists saw the acceleration of the economic growth of the late 20th century - and projected this growth into the future. The Great Recession of 2007 might be considered the economic reset from a multi-decade period of high economic growth to a "new normal" of relatively bland economic growth. One of the main contributors to this reset was the baby boomers (a population distortion caused by the end of World War II). The economic argument is that young people starting out in life consume more as they start a family and then work their way to a peak in their career path.

As people age, they begin to see retirement - and as people near retirement, they start to squirrel away assets and money to have more spending power available in retirement. When one retires, less funds are available - so spending is less.

It follows then that increased economic growth can triggered by a slug of young entering the workforce (aka boomers beginning in the late 1960s). The 21st century boomers are not spending like they did at the beginning of their working lives - and the economy is reverting to mean that existed in the late 50s and early 60s after the economic distortions of rebuilding the world healed after World War II.

(click to enlarge)

The argument is not as simple as drawing lines on the chart above. I could dazzle with integrations and summations like the economists love to use in their studies. But the truth is that every economic axiom or position requires a set of economic dynamics to maintain defined relationships with each other. There are no definitive tipping points where the wheels could start flying of the economic cart - as the dynamics themselves dissociate or combine with other dynamics to create effects not foreseen in any model.

What I find interesting is the declining birth rate leading into the Great Depression of 1929.

(click to enlarge)

It might be argued that the great birthrate cascade from the beginning of the 20th century to the middle of the 1930s was interrupted by the baby boom and what we have seen in recent decades is simply a continuation to a new bottom in the birth rate. This new bottom has not seen "rescue" and "recovery" such as provided by the baby boom.

An aside: Even a dynamic as obvious as the baby boom with its obvious economic implications can be misinterpreted in a major way. An example of this is the published work of Harry Dent who correctly identified the economic trajectory of the boomers impact. But he ended up on the wrong side of history because the baby boom peak influence that he foresaw for the first decade of the 21st century was swamped by other economic factors that he did not include in his forecasts. His books from 1998-2006 were focused on the booming 2000s with economic problems for the 2010s when the last of the baby boom generation would be transferred into the above 55 age group. He didn't see the greater forces overwhelming his assumed dominance of demographics, namely the bursting dot.com bubble followed by the housing bubble and the Great Financial Crisis of 2008.

The population does have a lot to do with the economy. It is curious that although the USA birthrate is still declining - the overall population growth is relatively constant. This is influenced by immigration but longevity is also an important factor. People are living longer - and the life span increase produces a swelling of the population in a stage in life of lower consumption (except for health care expenses). Does it make anyone wonder about longer lifespans being one of the (major?) dynamics producing runaway per capita healthcare costs?

(click to enlarge)

But as share of GDP devoted to health care increases, doesn't that merely represent a shift in buying preferences? Doesn't that simply mean that the health care sector becomes a "winner" in the economy as other sectors become "losers"? Isn't that simply the result of the market forces at which alter we worship?

Of course, many will argue that the market forces involved in health care are not really effective and the efficiency of delivery of that product has been distorted by removal of the basic participants (doctors and patients) from the "marketplace", which has become dominated by government programs and corporate compensation programs. These have removed effective "control" of the market to insurance companies and government subsidy forces.

And when you become convinced that there is some correlation between population growth / demographics and the economy - you can stare at the below graph for Germany.

(click to enlarge)

Almost any opinion can be argued as true (or false) in economics. This clearly reflects the primitive level of understanding of the complex dynamics of macroeconomic interactions.

My usual weekend economic wrap is in my instablog.

Source: Little Accuracy In Economic Predictions

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Weekly Global Market Wrap - 2 Minute Drill

A week's market action summarized

The following is a partial summary of the conclusions from the fxempire.com weekly analysts' end of week meeting in which we share thoughts and conclusions about the common drivers of major global asset markets: global stocks and the leading stock indexes, forex, commodities, and bonds.

This article is a quick summary of last week's stock market action, a brief review of what moved Asia, Europe, and the US each day, and serves as a quick summary review of last week's global market movers. It's our starting point for our follow up articles on:

• Lessons For The Coming Week And Beyond


• Coming Week Top Market Movers


• EURUSD Outlook


• Related Special Features

The exact mix varies somewhat from week to week, depending on what's most important per prior and likely coming week market action, news, and events. You can find all of these here as they come out over the weekend. You can skim it in about 2 minutes, or take a bit more time to study it. A useful weekly summary of what's driving global asset markets.

See here for details on the lessons we learned for the coming week and beyond, and on how once again, the most potentially ominous stories were not market moving.

As demonstrated by the sample of US, European, and Asian weekly stock index charts below, overall the major global indexes drifted higher to new multi-year or all-time (US) highs on light volume and no major market moving news.

(click to enlarge)

Weekly Charts Of Large Cap Global Indexes With 10 Week/200 Day Ema: Left Column Top To Bottom: S&p 500, Dj 30, Ftse 100, Middle: Cac 40, Dj Eur 50, Dax 30, Right: Hang Seng, Msci Taiwan, Nikkei 225

Source: MetaQuotes Software Corp, thesensibleguidetoforex.com

01 NOV 30 20 07

As we'll discuss in our article on lessons for the coming week and beyond, in addition to a number of noteworthy lessons, there were in fact a number of significant news items, even though investors haven't responded much to them yet.

Anyway, here's a summary of how the daily action went.

Monday

Asia: Mixed mostly higher Japan +1.5% to 15619. Hong Kong -0.1% to 23684. China -0.5% to 2186. India +1.9% to 20605

Europe: Higher as Iran nukes deal raises risk appetite in general and prospects for EU firms with heavy Iran exposure, such as French carmakers.

US: Indexes mixed, slightly higher overall.

Despite the lack of decisive price action in global indexes overall, a few points worth noting. See here for our article about lessons for the coming week for details on all of them.

Tuesday

ASIA: Mixed mostly lower, the only major index up was Korea, + 0.33%, as they lacked an overall driver and individual indexes were left to move (or not) based on local conditions or technical positioning.

Europe: Closed mixed, mostly lower as corporate profit warnings and lower-than-expected U.S. consumer confidence data tempted profit takers and kept benchmark indexes within ranges set earlier this month. Volume was higher than usual, lending conviction to the modest to solid pullbacks.

US: Indexes were again only incrementally higher, essentially closing flat for the second straight day.

Wednesday: Good US data, German coalition deal send stocks higher on lower pre-holiday volume

Asia: Indexes mixed, with Japan down modestly on a profit taking at resistance from a 6 month high, but the other leading ones overall modestly higher as Hewlett-Packard's earnings beat was bullish for other electronics makers.

Europe: All indexes up solidly, around 0.6%, on a combination of strong U.S. data, a long-awaited coalition agreement in Germany, and upbeat comments from Italian insurer Generali. Volume on the pan-European FTSEurofirst 300, however, was 25% below its average for the past 90 days, suggesting there were relatively few investors behind the rise. Many traders were away ahead of Thanksgiving Day in the United States on Thursday.

· The US data included better than expected results from the Chicago PMI and also the final November UoM consumer sentiment survey. Adding to evidence that the US continues to recover, weekly new unemployment claims filings fill fell more than expected. The PMI report's showing both inventory buildup and hiring occurring together suggested that there was indeed rising demand. While durable goods orders missed expectations, the survey showed intentions to increase capital expenditures, raising hopes that the miss was an aberration that would soon correct and show increases in actual capex spending.

· The German coalition agreement was bullish for peripheral economies, as the SPD is seen as somewhat more pro-European than Merkel's Christian Democrats, though the two parties seem united in opposition to softening Germany's positions about more ECB easing, risk sharing, or the need to keep up the pace of economic reforms (austerity, mostly) in the weaker economies.

US: The S&P 500 and Dow were up modestly, 0.15% and 0.25% respectively, while the Nasdaq rose a solid 0.67%, bringing all to new all-time highs, albeit on already low pre-holiday volume.

Thursday

Asia, Europe both up on light volume with US closed, Europe boosted by some welcomed better than expected (i.e. higher) Spain and Saxony inflation data, and Italy's Senate expelling former prime minister Silvio Berlusconi, fuelling hopes of stability for the current government.

Friday

Asia: Profit taking and rising tensions with China caused most major Asian indexes to close flat or lower, although Hong Kong and India finished up 0.4% and 1.25% respectively.

Europe: Indexes closed mixed with only modest moves up or down on a day lacking both market moving news and trading volume as the US Thanksgiving holiday kept trading subdued.

US: The Dow and S&P 500 closed slightly lower but were still up for the eighth consecutive week. The Nasdaq closed modestly higher, rising 15 points to a new 13-year high, helped by Apple's 1.9% gain due to indications of strong iPad sales this holiday weekend. Early reports of strong Black Friday sales and traffic had some retailers such as eBay and Best Buy up on hopes for a robust holiday shopping weekend.

Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.

Source: Weekly Global Market Wrap - 2 Minute Drill

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)

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It's Always A Great Day To Buy Gold

Gold prices continue to flip flop around, as analysts seem to be randomly upgrading and downgrading the commodity based on when they want to buy more. The end of an unceremonious year for precious metals is finally at hand. Gold investors will likely be happy to put 2013 behind them, but, conversely still probably recognize the long-term value behind their investment strategy in precious metals.

Gold ETF's like GLD have been clipped to the tune of over 25% since the beginning of 2013, but I'll argue what we're witnessing is simply a short-term pullback in the middle of an enormous long term rise in gold prices.

(click to enlarge)

Additionally, gold is ending a tough year on one of its toughest months. Yesterday, Barron's reported:

Gold's price is close to its worst monthly loss since June - although on Friday, the last trading session of November, the most actively-traded futures contract is rising 1.1% to $1,250.90.

From investors' ETF outflows to a soaring stock market to traders' reassessment of the Federal Reserve, it's been a tough month and a tough year for investors in the metal.

Is this poor year going to be a sign of things to come in the long-term for gold? Likely not. Gold remains and will continue to be a safe long-term vehicle for investment due to the fact that its non-renewable, central banks continue to hold it in reserve, and it's likely to continue rising as central banks print more money.

There's a simple analysis to the gold situation - an analysis that just requires some long-term thinking, resolve, and willingness not to get caught up in the day-to-day headlines behind the precious metal. The important thing about gold is not to get scared out of the position by bad headlines and analyst downgrades. Regardless of the noise, you'd be hard pressed to find anyone with basic financial knowledge that would tell you they think gold is not a good bet for a long-term hold; 10 years plus.

Rather than sell off or doubt gold from the headlines, use it to your advantage to make a great contrarian buy at an attractive price.

Best of luck to all investors.

Source: It's Always A Great Day To Buy Gold

Disclosure: I am long GLD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: I hold physical gold.

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Lessons For The Coming Week: The 7 Things To Watch

A new threat to the rally beyond fears of a fed taper, high asset prices, or the EU

The following is a partial summary of conclusions from our weekly fxempire.com analysts' meeting in which we share thoughts and conclusions about the weekly outlook for global equities, currencies, and commodity markets.

Here are the lessons we learned last week that can be applied for the coming week. One of the obvious new developments is the emergence of multiple new geopolitical concerns. See our special report here for details.

1. Fed Taper Speculation Remains Dominant

There was no data in the US-holiday shortened week to move fed taper speculation, but it remains the leading consideration through which investors view data. As we noted in out 2013 Outlook Year End & Beyond, the taper's influence extends well beyond US borders, as it presents challenges for the EU, Japan, and emerging market economies, raising rates for them as well and counteracting their efforts to ease liquidity as US assets offer higher yields.

On Tuesday the Conference Board's consumer sentiment fell for the 3rd straight month to its lowest level since April.So the last minute deal in Washington to end the shutdown and avoid default failed to bolster consumer confidence. This report bolsters belief in a later taper, because the sharp rise in non-farm payrolls has not been confirmed by other reports. Even if there are more jobs, consumers need to be confident enough about their own future earnings in order to spend. Retailers are fear this holiday shopping season may be the weakest since 2009. If they're right, it will be very difficult for the Fed to justify tapering this year. We continue to believe that the central bank will wait until 2014 to reduce asset purchases

Next week's calendar has more top tier events that could alter taper expectations than any for the rest of the year.

• A Bernanke speech Monday


• ISM manufacturing (and its jobs component) report Monday


• New home sales Wednesday


• US Preliminary GDP Thursday


• US monthly jobs reports Friday, as well as related reports like the ADP NFP report Wednesday and the jobs components of the ISM manufacturing and services PMI reports Monday and Wednesday


• Preliminary UoM consumer sentiment

See our article on coming week market movers here for details.

2. Stock Market Bubble Babble: Focus On Need For Earnings To Support Valuations

As US markets hit new all-time highs, and many other global indexes approach their own multi-year or historical highs, the great debate over whether the rally still has legs continues. Many analysts continue to warn of rising risk of a pullback. Per Citi's Tobias Levkovich, "euphoria" has returned to the markets. , "Euphoria readings (Per Citi's proprietary stock market model) indicate the market may retreat with an 83% historical probability of losses in the next 12 months," said Levkovich. Nothing new here, as even the many who also see continued upside potential warn of shorter term pullbacks along the way.

Better Earnings Needed

In researching our 2013 Outlook Year End & Beyond, a repeated theme among both bulls and bears was that was that 12 month trailing PE of the S&P 500 was getting close to historically "bubble-ish" levels.

Even stock bulls believe that earnings need to keep improving in order to justify further gains and keep the S&P 500's trailing PE ratio from rising beyond its current 16.5 level. Anything higher is considered by many to suggest an overextended market due for a pullback. For example, in his bullish 2014 outlook, LPL Financial's Jeff Kleintop notedhere that

…the 17 - 18 PE (is) where every secular and cyclical bull market has ended since WWII (with the exception of the late 1990s that ended much higher) a better pace of growth must materialize; just more bond buying by the Fed is not enough to lift valuations from current levels to propel further gains.

EU Concerns

3. It's Official: Europe's Earnings Season Stank

Europe's earnings season's results have been disappointing. About half of companies missed profit forecasts and nearly two-thirds have missed revenue forecasts, per data from Thomson Reuters StarMine.

4. No Relief From Deflation Concerns

Societe Generale bank analysts issued a note warning that falling commodity prices are another symptom of a growing deflation threat. On Monday night ECB member Coeure was again in the media reminding us that the ECB is considering more exotic easing measures (negative deposit rates for banks, a new LTRO or a European version of QE-style bond buying to keep rates low) now that it has already lowered rates to 0.25%, exhausting most of the potential for further conventional rate cuts. The EURUSD rose despite these comments, demonstrating that as long as Germany remains opposed, the chance of such actions remains remote. The EURUSD remains firmly in its 16 month uptrend, with solid support around 1.3500.

As we discussed in our 2013 year end forecast, a coming fed taper, believed to start no later than March 2014, presents additional deflationary pressures and could force additional easing measures from the ECB and BoJ.

Indeed it's worth remembering that fed taper risks extend well beyond spiking US interest rates that could dent the American economy.

• There could be a domino/ knock-on effect on global bond rates, as international bonds must now compete with increasingly high yielding US bonds, thus counteracting ECB and BoJ efforts to keep rates low.


• Many emerging market nations' bonds would thus see their bond prices fall and interest rates rise as yield seeking capital is increasingly drawn to what are now higher yielding and safer US bonds


• They feed deflationary forces in Europe, the EU, and emerging markets, as rising rates hurt risk assets like commodities, which are a big part of many fragile emerging market nation exports.

The latest inflation data last week did nothing to ease these concerns.

• On Tuesday Spain and Saxony showed better (i.e. higher) than expected CPI readings, which helped ease deflation fears for the moment.


• On Friday EU and Italian CPI results Friday showed mixed results, with Italian CPI below expectations, and EU flash CPI a bit above forecasts.

The bottom line however is that EU inflation remains well below its target 2%, and deflation remains a concern likely to pressure the ECB into further easing measures at some point.

Markets Shrug Off Other Disappointing Eu Data, But For How Long?

Looking at the charts, the uptrend in most of the European stock indexes remains intact but from a fundamental perspective we can't ignore the downside surprises in European data Thursday and Friday. Not only did German retail sales drop 0.8% in October (versus an expected 0.5% rise) but also unemployment increased 10k last month. German consumers have now cut spending 4 out of the last 5 months. Consumer spending in France also fell for the third straight month, by 0.2%, and like Germany this represented the fourth monthly decline in five months. It is this weakness in demand that makes us skeptical of the rally in European stocks, and also in the EUR/USD, because if spending does not rebound in the fourth quarter, the ECB will be forced to seriously consider the need for negative rates.

5. German Coalition Deal: The Good ,Bad, And Worse News The Good News

German PM Angela Merkel's center-right party finally got a coalition agreement signed with the center-left Social Democrats (SPD) to form a broad based coalition. That's good news because it should be stable, and move Germany past months of political paralysis. As we noted here Germany has been without a coalition since the elections. That created unwanted uncertainty and political paralysis. Of particular concern, it rendered Germany incapable of approving any bank stabilization plan that will be needed before the ECB bank stress tests can begin. These are a key step to the ECB's assuming overall supervision of EU banking.

The Bad News

However, the deal now needs the approval of SPD's 474,000 members, and the vote isn't until December 14.

Both sides are opposed to any softening of Germany's stance against 'risk sharing' (funding countries pay for debtor nations' banks' mismanagement) via Eurobonds or other means, and want each nation responsible for their own banking recapitalizations. However the SPD is considered to be a bit more pro-EZ (i.e. more willing to volunteer taxpayer funds for the GIIPS).

The Worse News

EU finance ministers charged with forging an agreement for how the EU would deal with banks that fail the coming ECB stress tests were well aware of Germany's objections to any terms that could leave it paying for others' mismanagement or corruption. Thus the wording of the agreement was altered to allow Germany the chance to avoid that. So if that wording stays, we'll have an agreement, but not one that provides assurance that the EU can prevent contagion risks if the stress tests reveal too much bad news (which was kind of the whole point of the deal).

As we learned in 2011-12, bailout deals that lack details or funding increase doubts about the EU's ability to manage a crisis, rather than ease them, and so just inflame market fears rather than ease them.

6 & 7. Rising Geopolitical Threats From Iran, China

Stocks, risk currencies and other risk assets have so far managed to shrug off concerns about a coming Fed taper (and rising rates), the EU, and asset price levels as leading global indexes and risk currencies continue to rally.

Yet last week brought some worrisome geopolitical developments:

A transparent capitulation by the P5+1 group to Iran's nuclear ambitions

An escalation in China-Japan tensions over disputed islands

See our special post here for details.

Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.

Source: Lessons For The Coming Week: The 7 Things To Watch

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)

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The Latest Threat To The Risk Asset And Currency Rally

Iran, China, and Investor Implications

The following is a partial summary of thoughts and conclusions from our weekly fxempire.com analysts' end of week meeting, in which we share ideas about the outlook for global equities, currencies, and commodity markets for the coming week and beyond.

Risk assets and currencies continue to rally, as markets continue to shrug off concerns about a coming Fed Taper, the EU, and arguably overvalued markets. Here's a new cluster of developments to consider.

While last week had little market moving news, it had some major geopolitical developments with equally significant potential to move markets as we move into 2014.

Iran's Nuclear Win

On Tuesday representatives of the P5+1 nations signed an agreement with Iran. The term refers to the P5 or five permanent members of the UN Security Council, namely United States, Russia, China, United Kingdom, and France, plus Germany. P5+1 is often referred to as the E3+3 (or E3/EU+3) by European countries.

Per Western news sources, in exchange for Iran's cutting and diluting stockpiles of highly enriched uranium, and allowing serious international monitoring of enrichment facilities, the U.S. and E.U. agreed to lift certain sanctions that Washington claims have cost Iran $80 billion. London-traded Brent crude oil contracts fell, even though the sanctions that are being eased are related to the repatriation of overseas funds and not to restoring oil sales. However oil prices fell because as part of this deal, U.S. lawmakers have pledged not to impose new sanctions on oil over the next 6 months as long as Iran follows through on their pledge.

Oil dropped modestly on the news, and could see further pressure in the near term. Longer term however, the deal more likely means a return of tensions and higher prices, as it granted Iran concessions in exchange for what was arguably, less than nothing because the deal:

· Explicitly allows enrichment even though the prior U.N. Security Council resolutions called for Iran to halt all Uranium enrichment. Worse, Iran denies Western reports that uranium enrichment levels must be mutually defined and agreed upon by both sides in further negotiations. According to Iran's official IRNA news agency, Iran's foreign minister Javad Zarif said "Iran will decide the level of enrichment according to its needs for different purposes...Only details of the enrichment activities are negotiable." See here for details.

· Even though it requires Iran to turn its 20% enriched Uranium into oxide, this is a meaningless concession because the process is reversible. In sum, the due date for an Iranian atomic bomb hasn't even been deferred, much less stopped.

· Isn't even agreed upon to be the same deal by both sides. Within the same day of the signing (Tuesday) Iran was already publicly disputing details of the detail that Washington had published on Sunday.

In essence this was just another example of how crises are handled these days - "extend and pretend." Washington et al pretend they've addressed the problem while in fact another crisis is pushed off to the future.

There are many implications of this loss of US credibility as a deterrent against Iran, and of convincing the Israelis, Saudis, and other Sunni nations that they'll have to deal with the Iranian threat on their own. They include:

Escalating the Syrian conflict

· Raising the odds of a new Israel-Hezbollah conflict: Both sides have been intensively preparing for the next war. There are multiple reasons why an emboldened Iran could lead either side to start the next round.

· Raising the odds of new Sunni nuclear powers, and of an Israeli strike on Iran, conceivably with tacit Sunni help.

Those seeking further details can find an excellent piece here. A key point the author makes:

While it may sound improbable for hard-line Sunni states to work with Israel, it really isn't. For a Sunni fundamentalist, it's easy to make a theological case for working with "people of the book" against the Shi'a, who many consider to be apostates (which is much worse than being an infidel).

One of the brakes for an Israeli attack on Iranian nuclear facilities has been the risk of it spiraling into a broader "Islam vs. the West" conflict. That is one of the reasons Israel has sought U.S. approval for an attack thus far. With many of the Sunni Arab states supporting action against Iran, if only tacitly, that brake may now be gone. Does Israel really need U.S. approval for an action that other countries in the region support?

Trader/Investor Implications

For equities investors, energy stocks, particularly those without Persian Gulf exposure, just became a better long term investment, as future trouble in the Persian Gulf just became more likely. These include:

· The energy ETFs, like iPath Oil Total Return ETF (OIL), ProShares Ultra DJ-AIG Crude Oil (UCO), and PowerShares DB Oil Fund (DBO). Note that these ETFs may be subject to futures roll and leveraged ETF decay.

· Individual exploration and production or integrated energy stocks with minimal Mideast exposure.

· For those with more of an income orientation, upstream master limited partnerships like MEMP.

· For those seeking Canadian dollar denominated income, some of the Canadian energy stocks like ERF, PGH, etc.

Note however that in the short term oil prices are likely to see further pressure as markets price in Iran oil's return and/or increased Saudi production to keep economic pressure on Iran.

Forex Trader Implications

For currency traders or investors that consider currency trends in their investing and portfolio allocation decisions:

· In the short term this is bearish for energy related currencies and other risks asset, as the markets price in both Iran oil and increased Saudi production to keep economic pressure on Iran.

· In the longer term this is bullish for the currencies of energy producers beyond the Mideast, particularly the USD (also benefits from safe-haven flows), CAD, and NOK.

It's very possible that Washington's lack of resolve against Iran brought another geopolitical tremor.

China Escalates Dispute Over Islands

Could Washington's weakness in opposing Iran and abandoning its allies in the Mideast be behind China's latest moves against Japan and other neighbors?

Since 2008, China has been slowly escalating its disputed claim over possession of a few barren islands (really over the fishing and mineral rights their possession implies) that have been under Japan since the late 19th century.

Although Washington has no position on the sovereignty of the islands, it recognizes Tokyo's administrative control and says the U.S.-Japan security pact applies to them.

Nonetheless, China raised the heat on the simmering dispute when just over a week ago (as the details of the Iran deal came out), China announced that foreign aircraft passing through its new air defense identification zone (ADIZ) - including passenger planes - would have to identify themselves to Chinese authorities. The zone includes the skies over these islands.

The newly declared ADIZ overlaps with that of South Korea and Japan, as well as with Japan's territorial claims. Meanwhile:

· The Philippines is unhappy with Washington for what it sees as a US failure to give it sufficient support in its dispute with Beijing over a group of islands in the South China Sea.

· Vietnam has a separate quarrel with China over its maritime borders.

· India also has a simmering territorial dispute with China that has escalated recently.

Thus as FT.com's Philip Stephens wrote late last week, "Consciously or otherwise, Beijing has now turned control of the air space around the Senkaku into a litmus test of the US security commitment to east Asia. For Washington to accept the Chinese restrictions would be to send a signal to every other nation in the region that the US cannot be relied on to defend the status quo against Chinese expansionism...My guess is that Mr. Obama, accused of presiding over a collapse of US power in the Middle East, cannot afford to back down over the Senkaku (islands)."

Japan and the US have responded by sending warplanes into the area without informing China. China has countered by sending its own air patrols.

While no one wants an armed conflict, the dangers of one from some kind of miscalculation are rising.

Implications For Forex Traders

Given the complications of reducing tensions, the uncertainty will likely get worse before it gets better. With risk assets and currencies already high and vulnerable, rising tensions could provide here could become the catalyst for a shift into safe-haven assets and currencies.

The USDCNY and USDJPY start to see volatility from related events.

The USD and USD bonds should get a boost if this story drags on, given that:

· Recent data out of the EU continues to support the view that the ECB is likely to become more dovish relative to the Fed.

· The JPY is the only currency that ranks higher on the safe haven spectrum. However its vulnerability to rising tensions with China makes the USD a better bet.

Traders remain overall short the EURUSD per both latest COT reports, and the forexfactory.com EURUSD live positions chart below.

(click to enlarge)

Source: www.forexfactory.com (homepage, under Positions/Live Accounts heading)

02 DEC 010031

As we've pointed out before, although the sample of retail traders is small (438 as of this writing), the fact that it provides a real time reading makes it a useful tool in combination with the U.S. CFTC COT reports, which present far larger (and more statistically meaningful) but much less timely sample, particularly when the two are in rough agreement.

Disclosure/disclaimer: No positions. The above is for informational purposes only. All trade decisions are solely the responsibility of the reader.

Source: The Latest Threat To The Risk Asset And Currency Rally

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. (More...)

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Eve Of Inflection

Thanksgiving is that time of year when many sit back and think about all of their bounty and good fortune in the past year.

Sometimes the processes of reflection and introspection bring about inflection. Sometimes reviewing where you've been and where you appear to be heading are sufficient causes to consider a change in path or direction.

Nowhere is that more true than among many hedge fund managers now faced with the end of the year in sight and a stock market that has been out-performing their own trading and expertise. Many have already made the decision to increase risk taking behavior and eschew hedging in a last ditch effort to catch up to the averages and to secure their bonuses or save their jobs.

That may be more an example of desperation rather than introspection, but that kind of behavior may also herald an inflection point, not only in personal behavior but also in the very nature of the markets, especially if you take a contrarian view. When others change their behavior and begin to chase it may be time to take cover.

Sometimes that change in path is neither wanted nor welcome, but perhaps unavoidable. With the market hitting new highs on a nearly daily basis, what hasn't escaped notice is that the rate of increase is itself decreasing. Most will tell you that in the case of a momentum stock a sign that its heady days are about to become a memory is when the rate of growth begins decreasing. In this case, it seems that it is the market as a whole whose rate of increase has recently been on the decline.

Depending on your perspective, if you are eternally bullish that decline is just a chance to digest some gains and prepare for the next leg higher. For the bears that slowing is the approach to the point of inflection.

Every roller coaster has them. Every stock market has them. On roller coasters, even when your eyes are closed you know when a change in slope direction is about to occur. It's not quite as intuitive or simple in the stock market because human nature often believes that simple laws governing events can be suspended. No one thinks in a cautionary manner when the prevailing spirit is "laissez les bon temps rouler."

While the overall market would likely find that a point of inflection would take it lower, there may be opportunity in stocks whose points of inflection may have been reached and are now bound to go higher or are already on their way.

As usual, the week's potential stock selections are classified as being in Traditional, Double Dip Dividend, Momentum and "PEE" categories this week (see details).

Stanley Black and Decker (SWK) reported its earnings early in the most recent earnings season. It was the first to blame the government shutdown on its poorer than anticipated results and shares plummeted about 15%. Having recovered nearly half of that loss, with about another 6 weeks to go until the next earnings report, shares go ex-dividend this week. It has been a bit more than a year since the last time I owned shares, then too purchased in part because of its upcoming dividend. I think Stanley Black and Decker still has some room to move higher relative to the overall market and now offers good opportunity in advance of its next report.

To a degree Stanley Black and Decker and Fastenal (FAST) are related and dependent upon residential and commercial growth. This past week's durable goods orders report didn't necessarily send news of a robust economy, but Fastenal has been trading in a range of late which is always a reason to consider as part of a covered option strategy. I already own two lots of Fastenal, but continue to like it at its current price in anticipation that it will remain near that price.

The Gap (GPS) is one of those clothing retailers that still insists on releasing monthly comparison statistics. The past two monthly reports have sent shares moving in opposite directions as the report itself is the source of exceptionally high option premiums. With conflicting interpretations in two successive monthly reports there is little reason to believe that any volatility surrounding the monthly reports are indicative of systemic or irreparable issues at the retailer. Even with the prospect of another negative report this coming week, I don't believe that the market will react as rashly as had occurred in October and from which point shares have now fully recovered.

While both AIG (AIG) and Halliburton (HAL) do go ex-dividend this week, their dividends alone aren't appealing enough to focus attention on their purchase. Both, however, are sufficiently off from their recent high levels to warrant consideration. Both also represent stocks that appear to have set new baseline price levels as they have been slowly and methodically moved higher until very recently. Those are opportunities that get enhanced by the prospects of an inflection and their option premiums complemented by the possibility of also capturing dividends, albeit modest ones.

Dow Chemical (DOW) may also appear to be in the category of having fallen some from its recent high point and perhaps ready for a turnaround, with its current levels serving as that point of inflection taking the stock to a modestly higher level. While it may also be subject to some of the larger macro-economic issues such as those faced by Stanley Black and Decker and Fastenal, Dow Chemical's dividend offers some protection during a market decline and its option premiums help to provide a cushion during either bigger picture declines or stock specific missteps.

While the previously mentioned positions are all fairly sedate choices that may be expected to do better if there is an inflection in the market, there may also be room for consideration of some more volatile additions to the portfolio, particularly as part of short term trading strategies.

Freeport McMoRan (FCX) has reversed course from its nearly 15% climb in October, simply an example of successive points of inflection in a short period of time. I think that the selling is now overdone, not only in Freeport McMoRan, but in the metals complex and that shares of Freeport are once again getting ready for another period of inflection. While I have held some positions in Freeport McMoRan much longer than my typical holding, its dividend has made the holding period more tolerable. That dividend appears to be secure, even while there is some talk of gold miners being at risk of cutting dividends if ore prices continue to decline.

For the ones really enjoying roller coaster rides, Walter Energy (WLT) may be just the thing. Its recent drop for its near term high seems to be developing a new price floor that can serve as the point of inflection taking the price higher, although I would expect that based on its recent behavior such a move might be short lived. However, that rapid alternation in direction has made Walter Energy a very good recent covered call trade, although for some the sale of puts may be a more appropriate manner to take advantage of the share's volatility.

Finally, it's yet another week to consider eBay (EBAY). Despite a 2.5% gain on Friday, eBay is simply proving the analysts correct, in that it continues to be a moribund stock trading in a tight range. It was decried just two weeks ago for being unable to escape from that range while the rest of the market seemed to be thriving. In the meantime, those practicing a covered call strategy and owning shares of eBay, over and over again, have fared well. Responding to the analyst's cry, eBay did test that lower range and has now bounced back nicely to the point that it is once again in the middle of that range. That's an ideal position to consider opening a new position or adding to an existing position.

Traditional Stocks: Dow Chemical, eBay, Fastenal, The Gap

Momentum Stocks: Freeport McMoRan, Walter Energy

Double Dip Dividend : AIG (ex-div 12/3 ), Halliburton (ex-div 12/4), Stanley Black and Decker (ex-div 12/4)

Premiums Enhanced by Earnings : none

Remember, these are just guidelines for the coming week. The above selections may become actionable, most often coupling a share purchase with call option sales or the sale of covered put contracts, in adjustment to and consideration of market movements. The overriding objective is to create a healthy income stream for the week with reduction of trading risk.

Source: Eve Of Inflection

Disclosure: I am long DOW, EBAY, FAST, FCX, GPS, WLT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

Additional disclosure: I may buy, add shares or sell puts in AIG, DOW, EBAY, FAST, FCX, GOS, HAL, SWK and WLT

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