MARKET WARNING- & a strong case for Precious Metals exposure

What really is happening in the Stock Market - MARKET WARNING & the strong case for Precious Metals exposure
-Richard Hoblyn FSI

Since 9th March the FTSE100 (S&P and DJIA have similarly rallied) has rallied almost 50%. Why? Well, in essence there has been a strong media drive (spun no doubt by Mendelsohn) that 'green shoots' and recessionary recovery is well on it's way. Recently commentators have suggested that the recovery and speed of it has been remarkable and even efficient. The predictions that the TARP program and Quantitative Easing may cause horrific economic problems in the future has been brushed aside. The old market adage "sell in May...don't come back till St.Leger Day" has been quashed as markets have been rising almost untested. The truth is that volumes have not been that high whilst institutions have sat on the fence. Day traders and active investors have had a field day as SHORTS have been squeezed mercilessly. Hedge funds have gone out of business only to be replaced by new funds, ably supported and funded by the very architects of the credit crunch. Regulation has failed yet again to curb excesses despite political and electoral anger. Guaranteed bonuses and just ordinary bonuses have been spun to death as shareholders get fleeced by the very managers that they effectively control. Balance sheets remain overstretched despite numerous fund-raisings and reorganisations but banks are still not playing the game. Funds raised through QE have not found their way into SME's and the private sector in the UK has been abandoned. The scale of debt amongst banks and large cap stocks is still breathtaking and no-one seems to be getting to grips with the destructive forces surrounding derivatives that many in financial services just don't understand. Many companies with questionable balance sheets should be ignored by sensible investors but sadly many are getting sucked into this rally. The old "Rockefeller shoe-shine boy" effect is back as new investors (just like 1930) clamber aboard the runaway train.


What is going to stop this train from getting to its destination? A major derailment is on the cards as the US$, £stg & Euro come under more pressure as the Chinese Yuen screams for attention. The recent rise in the gold price has got most short-term bulls of precious metals excited. Long-term gold/silver bulls such as myself remain relaxed as daily activity and volatility in precious metals still remains relatively low compared to the early '80s when bullion offices had queues of investors selling scrap or buying krugerrands. Just this week there was confirmation (& this is significant although Bloomberg hasn't yet caught up to speed on this) that the Chinese Goverment have accumulated over 1,000 tonnes of gold in preparation for a pseudo-gold standard attack on the US$. Of course China doesn't want to rock the boat just yet as it needs to accumulate a great deal more tonnage to combat the effect of it's $2+ trillion exposure in US Treasuries. The story goes that once China feels it has enough enabling stabilisation of its own currency it will pull the plug on its Treasury Bills, probably making substantial losses along the way, but of course the $ would spin out of control and gold would rocket to $2,000+++ thus compensating them. The effect would be a swift replacement of the reserve world currency to the YUEN. Let's not forget that the chinese invented the capital markets ideology well ahead of the British in 18th/19th centuries. Another alarming factor in the markets today (again a case for further chinese buying of gold) is the growth rate there of circa 7-8% (well below the 11% but above the recent 5-6% end 2008) that is fuelling chinese property prices (on cheap credit!) and the stock market which is a vast bubble. The chinese authorities are trying to educate their army of investors but like 1929, 1974, 1987 & 2008 it may just be too late. My own take on this is that global investors are expecting a capitulation in the USA (the Obama healthcare program is one step too far and Detroit thinking is dreamy) whereas the likelihood of a major slowdown in China after a burning correction there may put the skids on further western recovery. Emerging markets (ignoring China for a moment) are still growing and there is no doubt the demand will continue regardless so some exposure with Mobius' Templeton Emerging & JP Morgan Emerging seems sound.

The FTSE100 by my calculation will hit resistance around 5133 and I urge everyone to review exposure in property portfolios and equities. The virtual 0% interest rate policies adopted by the west could suddenly change direction (the Economist Intelligence Unit has suggested this) catching everyone out and sending equities and property prices further south. The bulls, however, argue that Kraft's bid for Cadbury's is the beginning of new M&A activity. I don't buy this argument as accounting issues and a lack of genuine investment for new businesses is at an almost standstill. Furthermore the recent GM Opel scenario does not bode well for EU relations as unions smell the flavour of the stale coffee down the road; this could be a repeat of the '70s as UK industrialists ignite ill feeling towards UK (mis)governance.

Throughout the remainder of 2009 I expect oil activity to continue (this is the one sector where some genuine M&A consolidation is likely), would be wary of the base metals story and continue to recommend exposure in precious metals despite further deflationary pressures. The world global markets are like a pressure pot just now. It's just a case of where it will blow next but some alarming f/x rate moves are on the cards very soon.