Wednesday, January 2, 2008

Speculation is Bad Unless It Is Good

Instead of snow over the next two days, Northern Massachusetts will be blessed with bone chilling arctic winds with wind chills into the negative single digits. At least it is not snow, but it is time to break out the scarf and the hand sized heat packs! Did I ever tell anyone that I hate the winter? No? I just did then.

Gold and Silver - Making It Hard to Stick to My Plan!
Gold and silver were rocket ships today! Stocks that I own are GG (up 8%), KGC (up 9.5%), and PAAS (up 6.5%). Those percentages are just today's gains! Sick I tell you. Due to the quick run, I am faced with the investor dilemma. I truly believe in a strong macro picture for gold and silver, but that kind of price run up is tough to leave on the table, especially when your entry point is on average up 70%. My own rule is to cash out when up over 50%. Tough spot to be in I know. So what am I going to do? I will do the dumb thing and watch almost all of today's gains go away over the next week and feel bad. Like I said, this site is a no no for specific investment advice! The market certainly makes you humble. What are the readers here doing with their positions? Post a comment and let us all know.

Speculation is Bad Unless It Is Good
Understand that I do not want to debate things like "peak oil" and global demand for crude. I instead want to use the price of oil as an example of hypocrisy in the markets. As you may have heard oil hit a record $100 a barrel today. Crazy stuff. From Yahoo Finance today:
AP
Oil Futures Rise to $100 a Barrel
Wednesday January 2, 5:11 pm ET
By John Wilen, AP Business Writer
Crude Futures Hit Record $100 a Barrel on Supply Concerns After Violence Breaks Out in Nigeria
NEW YORK (AP) -- Crude oil prices briefly soared to $100 a barrel Wednesday for the first time, reaching that milestone amid an unshakeable view that global demand for oil and petroleum products will outstrip supplies.
Surging economies in China and India fed by oil and gasoline have sent prices soaring over the past year, while tensions in oil producing nations like Nigeria and Iran have increasingly made investors nervous and invited speculators to drive prices even higher.
Violence in Nigeria helped give crude the final push to $100. Bands of armed men invaded Port Harcourt, the center of Nigeria's oil industry Tuesday, attacking two police stations and raiding the lobby of a major hotel. Word that several Mexican oil export ports were closed due to rough weather added to the gains, as did a report that OPEC may not be able to meet its share of global oil demand by 2024.

Crude prices, which have flirted with $100 for months, have risen in recent days on supply concerns exacerbated by Turkish attacks on Kurdish rebels in northern Iraq and falling domestic inventories. However, post-holiday trading volumes were about 50 percent of normal Wednesday, meaning the price move was likely exaggerated by speculative buying.
"I would imagine the speculators are the biggest drivers today," said Phil Flynn, an analyst at Alaron Trading Corp., in Chicago.
It's hard to say whether prices would have risen as quickly on a normal trading day, Flynn said. While oil has soared on mounting supply concerns in recent months, speculators have often been cited as a reason for the swiftness of oil's climb.
Moreover, many of the concerns about supply disruptions have yet to materialize, but that hasn't stopped buyers from driving prices higher.

The Nigeria news does seem to be important here. Mideast tensions always play some role. Supply questions are real. I would say that oil has a realistic fundamental reason to climb higher going forward. With that said, let us compare and contrast how speculative buying in the oil markets fares next to, say, speculative buying in the stock market or housing markets.

Whenever I watch or read Larry Kudlow, he rails against the "speculative manipulation" of the oil prices by traders. CNBC loves to trot out commentators that bemoan the speculators pushing oil higher while they reiterate that oil will fall back to $50 a barrel any day now. Speculation is bad because it ignores fundamentals and causes an unrealistic market place for a product or service. On that I agree totally. Oil speculation, again just for argument, is bad because if the price of oil is artificially high, it hurts all of us.

Now, speculation in housing? That is all sugar baby. No problem there. Ignore all income to mortgage payment ratios? Check. Ignore any rental price comparison? Check. Force feed excess capital into the hands of folks that have no chance of ever repaying? Check. Speculation in housing is not only wonderful, but actively encouraged. Think of all the plans right now determined to reignite home price appreciation. Here speculation is great because it supposedly helps people. You can apply the same kinds of fundamental tests to Google or Amazon for a stock analogy.

I point this out to show that the mainstream media cannot even be intellectually consistent in their thinking. Rampant speculation is bad and tends to end badly. There is no such thing as "good" speculation. I wonder why they can find 20 guys that point out all the fundamental reasons why oil is overpriced, but they can only find maybe ONE guy that says housing is overpriced. I know this observation is clearly obvious, but I include it tonight because it annoys me.

ISM Index and the FED Minutes Sink Stocks?
The weaker than expected ISM number (fell to 47.7 percent for December from 50.8 percent in November) was widely credited with the falling market. While any reading under 50 implies economic contraction, the number bounces below 50 plenty of times. The FED minutes showed them to be the usual clueless bunch. They even had the term for the economic outlook going forward as "unusually uncertain". I mean, who can take that kind of stuff seriously? The FED is certain about one thing and that is interest rate cuts! In this unusually amorphous economic enigma, the FED will be ready to provide the usual one trick they think can help. The market move down today should be taken more as a warning from Wall Street to the FED to drop rates or else. No reasonable observer truly believes that the FED is in a box here with regards to fighting inflation. Anyone that says so is full of it.

Have a good night.

5 comments:

Anonymous said...

"Did I ever tell anyone that I hate the winter? No? I just did then."

Me too, we are 15 degrees -3 wind chill where I'm at but we are suppose to get back in the 40's by Friday. We haven't seen the 40's since before Thanksgiving.

"Speculation is bad because it ignores fundamentals and causes an unrealistic market place for a product or service"

Even long term investors are speculators, NO ONE invests with the expectation they are going to lose money.

Gold and Oil look like they are going higher, part of this I think is China allowing the Yuan to rise in order to slow inflation and control prices before the Olympics. 125 oil and 1000 gold might be a possible but I don't think it will hold as deflation takes over the course of the year. The Japanese will be repatriating Yen in February as companies close their books for the year in March. I'm watching for the dollar to form a double bottom around 74.5 around that time frame. I'm setting on my gold and silver bullion I bought in 03 and letting the Mo-Mo guy's drive prices higher but currently not adding as I have no need to chase it.

Kevin

Anonymous said...

I started investing in gold stocks from 2003 and onwards. Wars are inflationary and the US is involved in two. Three if you count the War on Terror. Along with irresponsible fiscal policy, a repeat of the 1970’s Guns and Butter.

All along, corrections and setbacks have occurred, but the stocks still power on. I’d advise not to trade this bull market in gold, or as happened in the 70’s, one day the price will just keep rising, damn the technicals.

Over this period of time, I’ve heard the same arguments at $350, $400, $450, $500, $550, $600, $650, $700, $750, $800, and now. Look at any gold chart for the past seven years and it starts at the bottom left hand corner and rises to the top right hand corner. Is it over? It’s any one’s guess, but for me, I just ignore the noise and continue to hold.

Nevertheless, may I offer two decent strategies, using a basic gold chart. When the RSI is over 70, technically gold is overbought. A downward cross over in MACD will show technical weakness. When the price rises proportionately too high from its 200 day moving average, a correction is possible. Of course this is more art than science, so when you think any of these conditions will affect short time price movement:
1. Sell from one third to one half of your position. Be prepared to buy back higher if the aforementioned scenario of continued upside grabs hold. If you are patient, and the price corrects, you might be able to buy back lower, or depending on circumstances, break even.
2. Sell a slightly out of the money call. 80% of the time, 80% of all options expire worthless. You get to keep the premium and this will give you some downside protection in the event the stock price drops. If your stock is called away, you have effectively sold it at a higher price than you would have made at today’s price. Either way you earn a little more than if you just flat out sell.

Yes, winter sucks.

Speculators are the grease that lubricates the market wheels. Speculators provide liquidity. They risk loss when they are wrong, and give a bid to those that want to sell. They puts their money down, and they takes their chances.

"Good" speculation is not speculation at all. The housing market was rank with fraud, and the current, at all costs, insane politics of free market ideologs, means NO regulation. Also, during the bubble stock mania, despite jawbonning "irrational exuberence", all the FED had to do was raise margin rates to slow things down. This is the price we get when politics trumps common sense.

TexasRadio said...

Positions: April calls on Barrick and Yamana, Jan '09 calls on Gold Fields. March (avg.) puts on banks and retail.

It is tempting to cash out the gold options. However, I always look at it from the standpoint, what else would I buy in their place? With an April window, there is plenty of time to let them run. As recently noted on Minyanville, the inflation adjusted high in gold was $2,250. The same article expressed a concern that the gold price could decline because cash-strapped holders would sell. Who they are, I have no idea.

How many people do you know that own gold or mining shares? At some point, we are going to get a genuine speculative frenzy. It hasn't happened yet. Plus, as more people become aware that gold preserves individual wealth in a deflationary asset spiral, the skeptics will turn upside-down and reach for their wallets.

In an aside, Kevin should note that weapons as an investment would likely decline in a deflation; they are a mere manufactured good. After the first radar contact with an inbound ICBM, they will then outperform. However, it should be noted, not many will be thinking of their investments at that point.

Inflation? Of course the fed can fight inflation: all they have to do is raise interest rates. Deflation, that's a different story. FDR tried like hell and it still took a global war featuring the limited use of nuclear weapons before it came to an end.

Anonymous said...

In an aside, Kevin should note that weapons as an investment would likely decline in a deflation; they are a mere manufactured good.

I didn't say I would buy them for an investment the question as I recall was what else would you buy. I have a large amount of gold and silver bullion, I want to keep it. I also have a couple of large dogs they are companions and protectors just like the guns. I live in a rural area away from any major population center. It is filled with lots of game that I could hunt for food if push came to shove and I also live about a 1/2 mile from a trout stream. I own farmland with water rights, I grown my own. I have no debt. Electricity where I live comes from wind, nuclear and coal fired power plants and cost 29% less then the national average.

Guns are a must own in my view in being prepared, the government will not take care of you and may in fact endanger you, one must be prepared to take care of ones self.

I don't know if this trend will continue or not but I have been going to a lot of auction and the people buying the guns at these things are well capitalized profesionals and not the local bumpkins like it was last year. They know what they want and they are wiling to pay the price.

Kevin

Sean said...

I started investing in gold stocks from 2003 and onwards. Wars are inflationary and the US is involved in two. Three if you count the War on Terror. Along with irresponsible fiscal policy, a repeat of the 1970’s Guns and Butter. All along, corrections and setbacks have occurred, but the stocks still power on. I’d advise not to trade this bull market in gold, or as happened in the 70’s, one day the price will just keep rising, damn the technicals. Over this period of time, I’ve heard the same arguments at $350, $400, $450, $500, $550, $600, $650, $700, $750, $800, and now. Look at any gold chart for the past seven years and it starts at the bottom left hand corner and rises to the top right hand corner. Is it over? It’s any one’s guess, but for me, I just ignore the noise and continue to hold. Nevertheless, may I offer two decent strategies, using a basic gold chart. When the RSI is over 70, technically gold is overbought. A downward cross over in MACD will show technical weakness. When the price rises proportionately too high from its 200 day moving average, a correction is possible. Of course this is more art than science, so when you think any of these conditions will affect short time price movement: 1. Sell from one third to one half of your position. Be prepared to buy back higher if the aforementioned scenario of continued upside grabs hold. If you are patient, and the price corrects, you might be able to buy back lower, or depending on circumstances, break even. 2. Sell a slightly out of the money call. 80% of the time, 80% of all options expire worthless. You get to keep the premium and this will give you some downside protection in the event the stock price drops. If your stock is called away, you have effectively sold it at a higher price than you would have made at today’s price. Either way you earn a little more than if you just flat out sell. Yes, winter sucks. Speculators are the grease that lubricates the market wheels. Speculators provide liquidity. They risk loss when they are wrong, and give a bid to those that want to sell. They puts their money down, and they takes their chances. "Good" speculation is not speculation at all. The housing market was rank with fraud, and the current, at all costs, insane politics of free market ideologs, means NO regulation. Also, during the bubble stock mania, despite jawbonning "irrational exuberence", all the FED had to do was raise margin rates to slow things down. This is the price we get when politics trumps common sense.