One Less Sure Thing

Dave Gonigam – December 27, 2011

  • Amid a quiet week, some disquieting news: A “sure thing” investment that isn’t, and another sign the “robust” retail season is just as illusory…
  • Santa Claus rally as the Dow hits a post-summer high: Jonas Elmerraji on why this looks more like a “Krampus rally.” Plus, short-term trading guidance going into the new year
  • Dividends becoming sexy again? Jim Nelson on the dividend-payers’ outperformance in 2011, and why it’s set to grow in 2012
  • The most credible reason gold dropped from $1,750… and evidence buyers are swooping in at $1,600
  • Readers chime in on the Keystone XL pipeline… “environmentalists”… and (uh-oh) “those videos”

   Welcome to a week’s respite.

After a year in which U.S. stocks have gone nowhere, but with staggering volatility… in which eurozone leaders played endless rounds of kick the can… in which the mighty engine of China began unmistakably sputtering… here’s a chance to take a breath.

It’s that wonderful week between Christmas and New Year’s in which the markets and the world at large pause before launching a whole new year of turmoil. As Vancouver veteran James Howard Kunstler wrote yesterday, “Enjoy this nebulous week of suspended animation while it lasts.”

   Which we would… except for a piece of disquieting news that broke just as everyone was hitting the road for the holidays Friday: General-obligation municipal bonds might not be the sure thing they’ve been made out to be.

Jefferson County, Ala. — where corrupt officials in cahoots with J.P. Morgan Chase turned a $250 million sewer project into a $5 billion boondoggle and drove the county into bankruptcy court — has stopped paying its “GO” bonds.

“Conventional wisdom has it,” explains The New York Times, “that if a government defaults on a general obligation [as opposed to a bond issued for a specific project], its creditors can take it to court, where the judge will order it to raise taxes — as much as it takes, no matter how painful.”

But in Alabama, counties don’t have the legal authority to raise taxes — only the state.

“We all want to know, ‘What’s the truth here?’” Richard Ciccarone of McDonnell Investment Management told the Times.

The truth? The truth is that timeless verities — things investors take for granted — are starting to fall apart with increasing speed. General obligation bonds are the next-safest thing to Treasuries? Not for holders of Jefferson County debt. Investors in futures never lose money as a result of brokerage defaulting? Not for customers of MF Global.

   Whoops, here’s some more bad news that couldn’t wait for the new year: Sears is shutting down up to 120 Sears and Kmart stores. Same-store sales in the current quarter are down 5.2% year over year.

An isolated case of a down-and-out legacy chain? Or a portent of a retail season that’s not as “robust” as the CNBC pundits were telling us?

We’ll know soon enough, but as of two weeks ago, 40% of Americans responding to a poll said they were already done with holiday shopping. And Best Buy’s numbers, including Black Friday, took a hit from massive discounting.

   Here comes another number pointing to a resumption in slumping home prices: The latest Case-Shiller home price index is down 3.4% year over year for the three months ended in October.

From its peak in 2006, the index is now down 32.1%.

Among the 20 metro areas tracked in the survey, Atlanta is down the worst over the last year — 11.7%. Also down big are Los Angeles, Chicago and the Twin Cities… along with bubble-tastic Las Vegas and Miami.

   Consumer confidence as measured by the Conference Board jumped to its highest level in eight months during December.

At 64.5, the number has risen a staggering amount in only two months. In fact, the last time it made this sharp an upslope was coming out of the stock market bottom in March 2009.

Even the folks who put out these numbers are trying not to read too much into them. “It’s too soon to tell if this is a rebound from earlier declines or a sustainable shift in attitudes,” says the Conference Board’s Lynn Franco.

   The handful of traders punching the clock this week — along with the high-frequency trading robots — have digested the aforementioned developments and moved up the major U.S. stock indexes fractionally.

With Friday’s close, the Dow achieved a new high since the market’s big slide in early August. At 1,267, the S&P still has some huffing and puffing to do the same.

   “Historically,” says our resident technician Jonas Elmerraji, “stocks perform strongly in mid to late December, a phenomenon Wall Street likes to call the ‘Santa Claus Rally.’”

“This year, though, we’re seeing more of a ‘Krampus Rally’. Krampus, in case you’re not familiar, is the mythical monster from German folklore who follows Santa around on Christmas, snatching the naughty children and eating them. Let’s face it: We’re still in an environment where plenty of investors are getting snatched up and eaten by Mr. Market.”

Yeah, that sounds about right

“Although stocks still look fairly mixed,” Jonas goes on, turning to his charts, “there’s a more appealing image starting to form in the S&P 500:”

“Right now, the S&P 500 is approaching a clustering of resistance around the 1,260 level. A breakout above that level would be one of the most bullish signals that we’ve seen since late October.”

Also bullish from where Jonas sits is momentum as measured by the 14-day relative strength index — at the top of the above chart. “Momentum is a leading indicator of price — so the fact that RSI remains in an uptrend is a very positive signal for the S&P 500. Ultimately, though, we’ll need to see the S&P push above that resistance level before we can justify a bullish outlook on stocks, however short term it may be.”

   “Investors started buying up the more-established dividend-paying stocks in the second half of the year,” says our income specialist Jim Nelson.

For evidence, he presents a chart of the S&P 500 along with the S&P Dividend Aristocrats — stocks with a reliable history of raising their dividends year after year.

“The larger index,” Jim says, “looks to be ending the year relatively flat after a very rocky second half. Dividend payers jumped from down 5% in August to up 7.7% today. Clearly, we’re seeing a lot more investor interest right now.”

“This should continue into 2012, and possibly even pick up more speed.” Why? Well, you’ve no doubt heard about the record amount of cash companies are sitting on. “But what you don’t often hear is that many companies — 40 in the S&P 500, to be specific — have been sending shareholders more and more cash through dividends and buying back stock.”

Indeed, a report from JPMorgan anticipates 28% growth in distributions going into next year. “That’s an enormous amount of money going to dividend investors like us. If that’s the case, 2012 will be a tremendous year for our portfolio.”

Caution: You have to be choosy with dividend payers. “It takes a smart, watchful eye to separate the potential winners from the losers.” Readers who put Jim’s eyes and ears to work this year saw his closed positions in Lifetime Income Report average 45% gains. Not one of Jim’s readers yet? Check this out.

   Gold is losing a bit of its luster in dollar terms this week. It’s back below $1,600, currently $1,596. Silver is demonstrating a bit more resilience at $29.05.

And this comes despite a hint of dollar weakness today: The dollar index has slipped to 79.8.

   “It seems,” says our Dan Amoss, reflecting on gold’s recent drop from $1,750, “there were some holders of gold futures that had to raise cash quickly.”

“Some believe (with good reason) that European banks had to sell whatever they could to raise cash. The gold futures market is noise; the gradual remonetization of gold in the international currency system is the signal that you want to keep monitoring.”

“It looks like that bout of selling is over, and stronger hands (mostly central banks from emerging markets) will step in to accumulate gold ounces at lower prices.”

   Sure enough, Turkey boosted its gold reserves 30% last month. That’s the highlight in a monthly report from the International Monetary Fund.

Before the move, Turkey was the world’s 30th largest gold holder, according to the World Gold Council. Now it’s likely No. 22.

Russia also built up its gold stash again last month; it’s grown 11% year to date.

[Ed. Note: We’ll give Dan a bit more space later this week to delve into the situation in Europe and what it portends for you in 2012.

We’ll also take this opportunity to remind you that membership in the Agora Financial Reserve is now open. General-obligation muni bonds may no longer be a sure thing, and trust might be evaporating from the futures market, but Reserve members can count on our entire team being there for them throughout 2012 and beyond.

The Reserve gives you carte-blanche access, for life, to nearly everything we publish — whether it’s Dan’s granular (and actionable) analysis of Europe, Jonas’ technical trading guidance or Jim’s income investing research (including his new premium advisory), along with Michael Pento’s macro view, Chris Mayer’s unparalleled fundamental analysis and Byron King’s resource investing prowess.

Your invitation is here. Bookmark the link and take this week to consider whether the Reserve is for you. The invitation remains open through Jan. 4, so there’s no rush.]

   “I think these whack-jobs calling themselves environmentalists have it all wrong,” writes a reader carrying on our discussion of the Keystone XL pipeline.

“Do you suppose they have ever been to Alberta to see the oil sands firsthand? I have, and trust me, this sticky goo is all over the place…it gets stuck to your tires, it cakes itself up under your vehicle until you cannot move under the weight.”

“In summer, you can see it oozing out of sun-heated river banks and floating off on the surface of fresh water streams and rivers.”

“When you get right down to it, the Canadian oil sands are likely one of the world’s largest natural disasters….and the companies currently operating there are participating in the largest cleanup ever attempted.”

“A true environmentalist would applaud the efforts currently under way….in a few hundred years, these lands will be productive farmland and pasture, and the groundwater and river water will hopefully have been restored to freshwater status, instead of the oil slick we presently have.”

   “Your Canadian reader” who said environmentalists detest free enterprise “should get off the couch and actually go and talk to an environmentalist.”

“Almost all environmentalists care deeply about the environment. Yes, some of them may also hate free enterprise, but that is another matter. Your readers may substitute predigested opinion about the environmental movement for actual thought, but I would expect that as editors of a newsletter, you would not publish such obvious misinformation and perpetuate these inaccuracies — at least not without a smiley face (;-).”

   “I consider myself a practical person with a good knowledge of biology, botany, geology, history and economics. If, in fact, any decision about the Keystone XL pipeline was going to be made by an objective decision about the environment, it would be on the way through the United States right now.”

“From an actual impact on the environment viewpoint, there is no question it should not go through a pristine rain forest in British Columbia; it could easily be put in an already man-altered prairie in the USA.”

“Any idea that by not allowing the pipeline it would reduce dependence on hydrocarbons by Americans or anyone else is stupid on so many levels it is hard to know where to start. First, trying to regulate supply to reduce demand has a great history of failure — i.e., Prohibition, war on drugs, etc. Second, sending petroleum products to Asian countries with fewer environmental standards will not reduce carbon burning or its effects, but it will increase them.”

“I enjoy reading The 5; thank you for insightful reporting.”

   “With respect to your reader deploring the video form of reports, I too have a problem with that,” a reader chimes in after Friday’s issue.

“My problem is that my DSL service is slightly faster than dial-up and is expensive. It may take between 30-60 minutes for a video to load.”

   “My machine is too old to do a streaming run,” writes another, “so I get a sentence, then a load, then another sentence, etc, etc.”

“I haven’t seen a complete video since you started to incorporate them in your letters.”

   “You really ought to tell your readers,” writes a third, “that if they simply close their browser, they will be given the option to ‘stay on [this] page,’ which will let them read the transcript of the video.”

The 5: Now you’ve done it! You’ve given away one of our secrets!

Seriously, if you’re one of those people who swears up and down you’ll “never” watch one of our presentations, the aforementioned technique will get you the text version most of the time. We look forward to your patronage.


Dave Gonigam
The 5 Min. Forecast

P.S. Did you know that membership to the Agora Financial Re-serve also gives you free admission to our annual conference in Vancouver?

Membership confers far more privileges and benefits than I can convey here. A complete listing is at this link.


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