Watch Out for Gold and Silver... Rising Up!

http://musingsonwallstreet.blogspot.sg/2012/06/gold-equities-is-making-reverse.html

On 6 June 2012, I wrote that gold equities could be moving up again. NUGT or 3x Direxion Gold Equities ETF was at around USD13 then. It dipped drastically and is now hovering at 12. This 3x ETF is very volatile and not for the faint hearted!

Gold is rising again. The trend has reversed since 30 July 2012. On that date, XAUUSD was USD1620 oz. It is now USD1637 oz.

XAGUSD is also making a come back. Silver's intermediate (i.e. trend that lasts several months) buy signal occurred on 6 Aug 2012 at USD27.93 oz. It is now 29.35 oz.

The fundamental reason is that if ECB were to buy bonds and the US start QE 3, EURUSD will fall and so will USDSGD. Gold and Silver will rise because it is the only currencies that cannot be printed.

As the stock market is struggling to break higher, gold and silver are breaking new highs. Hence not every risk asset is perfectly correlated.

If you wonder whether it's better to buy the gold ETF (UGL or GLD) or gold stock ETF (NUGT or GDX), read both articles:

http://seekingalpha.com/article/793961-gold-vs-gold-stocks-part-i

http://seekingalpha.com/article/810681-gold-vs-gold-stocks-part-ii

I do not agree that gold stocks will continue to underperform gold futures. Gold miners can produce cashflow and pay dividends because the gold that they mine and sell can turn into profits, whereas if you buy gold bullion, you will never receive dividends. However, if your exposure to equities in your portfolio is already > 50%, it may be better to hold gold bullion for diversification rather than gold equities. I agree with the author that in 2008, the indiscriminate sell-off of equities resulted in gold miners being blasted downwards by 70% while gold bullion fell by half the amount (35%). So I prefer gold bullion to gold equities personally, purely from a diversification angle.

Entitlement Society in Europe and the US

Looks like I'm not the only person who disdains the social welfare model in Europe and the US. Marc Faber is ripping at this.

http://marcfaberblog.blogspot.sg/2012/08/entitlement-societies-growth.html

Singapore is the Richest Country in the World! Time to Hedge Your Portfolio!

A Minor Pull Back May Occur

I think stocks may rally another 7 - 10% from current levels before facing another significant correction. 

Look at Table 1. I expect a pull back anytime soon of around 3 - 4%, from 22.13 to 21.23. From 

there it will move up to 23.75 before we see a correction of between 10 - 25%! The price target 

of 23.75 could be reached by September or October 2012.

Table 1: MSCI World ETF IQQW

Table 2: Vix Index

Why do I think there will be a pull back? VIX is at around 13.7 - 14.5. Every time it reaches this
level there will be a pull back. It is a good time to hedge your long equities / leverage equities
portfolio. You can do that by shorting a CFD on "triple long" ETF like the 3x Direxion US Small
Cap Bull ETF (TNA US Equity). This mimics the Russell 2000 small cap index. Therefore if you
short it, you can achieve a leverage of 3x in the opposite direction of the stock markets. Therefore
if you have 1m of long positions in equities, you can hedge it fully by shorting 333k worth
of the TNA US Equity.

Another way of doing this is by investing in the Amundi Volatility World, leverage it 2.3x. It
is a less effective hedge than shorting a CFD on TNA because the Volatility Fund traditionally
rises by half the amount that equities fall. For example, in 2008, when most indices fell by
50%, the Amundi Volatility World rose by 25%. Therefore if you have 1m worth of long equities
positions, you need around 858k worth of Amundi Volatility World, leveraged 2.33x to
fully hedge your portfolio.

Seriously, if you're a longer term investor, you should just hold on to your long positions or just
take the profit off the table.

Singapore is the Richest Economy in the World. Why I am Not Surprised!

Singapore is now number 1 in the world in purchasing power parity (PPP) income! Number 2
 is Norway, one of those rare European welfare states that happens to be at the top because
of their wealth from oil. The US is 3rd and Hong Kong 4th. The key reason Singapore
surpassed Hong Kong and the US is the strength of the SGD. 

A flaw in the study is that Singapore is a city state, just like Hong Kong. But Norway and
US are countries, not cities. If we compare Singapore against major cities like New York,
London, Paris etc. Singapore may come up around 10th to 15th. I know for a fact that
we are around 10% lesser paid than Londoners. But this is gross income, before tax. I
believe that net of tax, Singapore should come in around 5th - 10th!

Singapore's miraculous economic development came from hard work, heavy investments
in education, investments in infrastructure, low income and corporate taxes and having
minimal social benefits. This goes directly against the grain of the European economic
model which has high personal and corporate taxes, high social welfare, and much less
working hours. The European model is causing the rich to relocate to lower tax regimes
like Singapore, Hong Kong, certain parts of Europe like Monaco. With the wealthy
emigrating, Europe will have fewer entrepreneurs, fewer corporate investments,
fewer employment opportunities. Their economic woes will never end.

Simply put, if you're young, brilliant, ambitious, hardworking, well educated, so definitely
very talented, where would you live and work? In a country that takes away up to 50%
of your gross income or a country that taxes you up to 21%? 

• 
  
• 
  
• Singapore topped the list for GDP per capita in 2010, and is expected to continue leading in 2050, 
• according to the Wealth Report 2012 published by Knight Frank and Citi Private Bank. 
• (Screengrab of Wealth Report 2012)  less 

Singapore topped the charts for highest GDP per capita in 2010 at close to SGD $70,000 (USD $56,532), according to a study.

In the Wealth Report 2012 published by Knight Frank and Citi Private Bank, Singapore is also expected to continue to be the global leader in 2050.

Trailing closely behind Singapore is Norway at about SGD $63,000 (USD $51,226), then the U.S. at about SGD $56,200 (USD $45,511), followed by Hong Kong at almost SGD $56,000 (USD $45,301).

Gráinne Gilmore, head of UK residential research at Knight Frank LLP who is also the author of the economic and wealth trends article said, "Other countries may have bigger GDP growth 2010 – 2050, but in most cases, they are starting from a much lower base on economic terms. Singapore is a developed economy, and is expected to achieve a rate of growth which enables it to remain one of the wealthiest countries in the world."

"Some of the factors contributing to Singapore’s forecast performance are its ‘human capital’ – a skilled and educated labour force (which is likely to lead to better long-term prospects for a country’s economic growth), the dynamic business environment (with legislation to match), openness to trade, capital mobility and foreign direct investment. Also, it is worth noting that there is a global eastwards shift in economic activity – Singapore is perfectly positioned to take advantage of this," Gilmore added.

Risk Assets to Rally Until Oct to Nov...

http://musingsonwallstreet.blogspot.sg/2012/06/stock-markets-worldwide-are-stabilising.html

http://musingsonwallstreet.blogspot.sg/2012/07/major-economies-are-heading-south-but.html

I mentioned in my earlier posts in June and July 2012 that stock markets are turning around. I think the rally will last till Oct / Nov 2012. We shall see...

Alternative Funds Like Amundi Volatility and Winton Still Deliver Positive Returns

Around early 2011, I started preaching the importance of having Alternative Funds in our portfolios. I strongly recommended Amundi Volatility World and DB Systematic Alpha (a tracker for CTA Winton Futures). Around early 2012, I started to pitch AllianceBernstein Global High Yield with great success. From May 2012, I started to pitch AllianceBernstein American Income Portfolio, which uses a barbell strategy. But my recommendation of alternative funds has not always been met by hot reception. Shortly after recommending alternatives, Amundi Volatility World rose strongly from Aug 2011 to Feb 2012 due to the massive correction in the 2H2011 of equities. Amundi Volatility World ended up 5% between early July 2011to 3 Aug 2012, slightly over a year (green line). The only funds that beat Amundi Volatility World were the AllianceBernstein Global High Yield and AllianceBernstein American Income Portfolio (orange line).

DB Systematic Alpha ended up slightly positive at around 2.5% (reddish brown line). CTAs had a torrid time because equity trends were very short. It didn't help that just when it made positive returns by shorting equity futures between Aug to Oct 2011, most indices began to climb rapidly from then on. Also, CTAs were heavily long on gold futures, which peaked in Sep 2011 at around USD1930 oz and fell to USD1520 oz. CTAs remained long on gold since then although their exposure rapidly reduced because the trend was deteriorating. Right now CTAs are beginning to short gold. But CTAs have made a strong return because they finally got their trend correct: They are heavily long US 10 year Treasuries, which continues to fall in yield and rise in price. They are also heavily short EURUSD, which plunged from 1.3 to 1.2.

I was vilified by some RMs and clients because they were expecting alternatives to give immediate returns and the stock markets performed a miraculous recovery after Oct 2011. Furthermore, good bond funds that give high dividend yields, like AllianceBernstein American Income Portfolio gave 4.8% per year of dividends and the Global High Yield gave 6.5% per year, became investors' favourites.

But my rationale remains the same: alternatives are for diversification and long term holdings. If you are investing in funds while waiting for opportunities in the properties, it doesn't make sense to even buy high yield bond funds. The AllianceBernstein American Income Portfolio can drop by 10 - 20% in a market correction. If you were to leverage 2x, the drawdown can be 30 - even 60%! It will certainly mean huge losses for the investors if they were liquidate the funds at the worst possible moment to make other large ticket investments. For the Global High Yield, it can fall 20 - 30% in a recession so again, it doesn't make sense to use that as a "getting paid while you wait" strategy. I proposed the Amundi Volatility World and DB Systematic Alpha because both have long track records and are proven to give double digit returns in a bear market!

Look at the First State Dividend Advantage (red line). It is up by around 2% and this is considered a fantastic performance because the MSCI World is still down by 10%!

If you're thinking of employing a "getting paid while I wait" strategy, I suggest a portfolio allocation of:

20% Amundi Volatility World SGD Hedged
10% DB Systematic Alpha SGD
40% bonds (either SGD/NZD perpetuals/bonds, or AB AIP/AB GHY)
10% Schroder Asian Income / First State Bridge
10% Schroder Gold & Precious Metals / Gold ETF
10% First State Dividend Advantage

When the intermediate trend turns bearish (it is still trending up despite all the naysayers talking about the Bundesbank blocking ECB's rescue effort), I would sell off the First State Dividend Advantage and half of Schroder Gold and the balance funds to bonds Amundi Volatility World and DB Systematic Alpha.

Will the Bundesbank Yield to Pressure??

Last week, at an investment conference in London, Mario Draghi, President of the ECB pledged to do "whatever it takes" to prevent the collapse of the eurozone. Right after the speech, the EURO rallied and Spain's 10-year bond yield retreated towards 6.5% while Italy's 10-year yield fell below 6%.

This week, Draghi secured the endorsements of Germany and Francce for a plan to reduce bond yields in Spain and Italy. Draghi's proposal to tackle the Euro crisis involves:

1. Providing long-term loans to European banks
2. Getting Europe's rescue fund, the European Financial Stability Facility (EFSF) to buy government bonds on the primary market.
3. Getting the ECB to buy government bonds on the secondary market.

However, the biggest hurdle to this proposal comes from the German Federal Bank (Bundesbank), which reiterated its opposition to the ECB's bond buying program, arguing that it blurs the line between monetary and fiscal policies. The good news is that while the Bundesbank is the central bank of the eurozone's biggest economy, it has only one vote on the ECB's 23-member governing council and could be overruled on the issue.

At the moment, the relief seems to come from the EFSF, which allows the funds to directly recapitalise banks and ultimately lowers government borrowing costs. But it is important to note that the EFSF is still a temporary fund, and investors are waiting for the establishment of the bloc's permanent rescue fund called the European Stability mechanism (ESM). The EUR500 billion ESM is on hold pending a decision by Germany's Federal Constitutional Court, set for 12th Sep 2012.

There are several implications for this:

1. The EUR currency will probably be the weakest major currency to borrow against. It has turned into a carry trade currency, a hot favourite for speculators to borrow against and change into other stronger currencies. The low interest rates in the Eurozone is another big contributing factor to the currency's weakness. Whatever the outcome, the EUR will be the big loser. A weak EUR benefits all the Eurozone members. It allows Germany to maintain its trade surplus without inflation shooting up as unemployment is still high in Germany. It allows other Eurozone members to devalue their debt without deflating. The entire circus in the welfare state of the EU will continue for years to come. If you borrow in EUR, be sure to convert to SGD and invest in bonds / equities / real estate.

2. The USD is also another weak currency that will fall further if QE3 is announced. The US is into too much debt to repay. It has to devalue its currency to remain solvent. With unemployment at 8.2%, devaluing the currency is a very attractive option. Again, it is very good to borrow in USD but be sure to swap to SGD and invest.

3. Eventually, Greece may leave the Eurozone. From my grapevine, the Greek government has not fulfilled any of the requirements to reform. When Greece eventually leaves, stock markets will shoot up.

4. Bonds are increasingly unattractive relative to stocks. The dividend yields of many stocks are increasingly higher than their bonds. Far too many investors are flocking to bonds / cash, chasing after the pitiful amount of yield. The bond market will eventually unravel once inflation sets in and interest rates start to rise. 2014 may be the D Day for bonds.

5. Emerging Markets, Asia ex Japan, Latin American and European equities may outperform US equities in the near future. The S&P500 Index is approaching the 2011 high. However, most other stock markets are still languishing. Sooner or later, investors will flock to value plays in non-US stocks. Always go for the laggard and try to avoid chasing winners.

6. More QE may not help the economies in the US and EU. UK has been doing its own QE for several years and yet it still plunged into a second recession in 3 years. It is not a silver bullet. It may push up hard asset and stock prices. But its effects will eventually wear out within 6 months.

7. QE actually delays the inevitable crash by a few more years. Already, rental yields in Singapore are at historical lows (around 2 - 3%). Properties around the world are still attractive investments despite their record low yields, because interest rates are at record low levels. Eventually when the music stops and interest rates start rising, property and bond prices could skid.