See It Here Early
We believe our continuous research and our ever-refreshing analy-sis of global economics helps us to see trends earlier than many
other economists and money managers — and that’s what we strive for at Guild Investment. We want to give you a leg up in the business of money management by highlighting what we see on the road ahead through our Global Market Commentary. Helping you is our focus and goal. As we become aware of coming social, political and economic events, we relate them to the markets, always with the objective of increasing profits for our clients — as a Gold Subscriber, you can get this expert perspective. Here are a few of the past and present trends we’ve spotted ahead of the curve: See our archive for many others at www.guildinvestment.com/commentary-archive.
In the past we…
Predicted the dangers of the derivatives meltdown beginning in 2006, over two years before they crashed the system in 2008.
Since November 2011, we have repeatedly predicted that officials would rescue the European banking system from a meltdown, helping world markets. We now have nine specific investment recommenda-tions in the Guild Premium Global Market Commentary.
Much of what we see will not be found in the world press, TV and radio.
What This Means For You
We continue to be bullish on all of the open recommendations that we have made (i.e. those purchase recommendations that we have not recommended be sold), and we see no reason to alter our recent recom-mendations. If you have not yet ordered your Gold Subscription, do so right away as Gold Subscribers receive our newest analysis and recom-mendations.
Just Announced —
The Fed Intends to Keep Interest Rates Low Until Late 2014!
What This Means For You
This action reinforces our view that all of our open investments recommendations in the past have a strong tailwind. Lower interest rates means higher inflationary pressures: eventually lower rates lead to higher inflation and a lower U.S. dollar. In our opinion, lower interest rates reinforces the bullish backdrop for gold,
commodities, U.S. stocks, emerging market stocks, Indian stocks and specific non-U.S. currencies.
The House of Saud Needs $100 Oil — Saudi Arabia’s 2012 Budget
The kingdom needs triple digits
Saudi Arabia recently released their fiscal budget for this year, and we notice their domestic social expenditures–which began to balloon in 2011 as a result of growing unrest in the Arab world — are still rising. In light of what happened in Tunisia, Egypt, Libya, Yemen, and other Saudi neighbors, this increased public spending is wise, if not necessary. At first, it looked like the big increase in con-struction of housing, hospitals, and educational facilities, and big salary increases of government employees were tempo-rary: Now it looks like increased social spending will be-come a more permanent policy.
Fortunately, Saudi Arabia’s GDP growth in 2011 was a healthy 6.8 percent, helped by higher oil revenues and growth in government as well as the private sector. In 2012 they will need even more growth — and higher oil prices. Although Saudi Arabia projects a balanced budget with oil production of 9.3 million barrels per day and an average oil price of below $69 per barrel, a deeper analysis presents a different picture.
The Magic of Off-Balance Sheet Accounting
Despite their official projections for a surplus, we expect a Saudi budget deficit in 2012. Economists at Merrill Lynch also expect a deficit, forecasting Saudi Arabia’s actual expenditures to exceed government projections by about 9 percent, which is within historical norms for Saudi Arabia. If the Saudi cash budget is 9 percent higher than planned, the Saudis actually would need about $78.50 per barrel to break even on a cash basis.
What happens when we look deeper into their 2012 budget, at the items that are ‘off-balance sheet?’ We see that there is need for an additional 250 billion riyals — about 67 billion dollars for a special program to build 500,000 residential units. After considering the special spending programs, neither the official $69 per barrel breakeven, nor the Merrill Lynch estimate of $78.50 per barrel breakeven are sufficient. Add these 250 billion riyals of extra expenditures to the ledger, and Saudi Arabia now needs an additional $27 per barrel to breakeven on a cash basis–assuming 2012 oil production of 9.3 million barrels per day. Knowing that their new cash breakeven is between $95 and $105 per barrel, we were not surprised when Saudi oil minister, Ali Naimi made his recent statement.
The Saudi Oil Minister Speaks
Without discussing the Saudi budget, Naimi recently made the following comment on CNN: “Our wish and hope is we can stabilize this oil price and keep it at a level of about $100.” Gone is the old ‘consumer friendly’ tone of Saudi officials. He did not say that they would try to consider the needs of oil consumers. His comment was meant for a restive Arab audience and it marks an end to the pro-consumer posture that the Saudis have historically put forth.
Optimism Surrounding Iraqi Oil Production is Not Supported by Facts
Iraqi oil production is not going to meet its goals. Optimists have been saying that Iraq can produce as much as they did before the Iraq war, and an additional one to two million barrels a day above that level. We are highly skeptical. The Kurds, Shiites, and Sunnis in the country are angry with one another, and the world press is catching on. This week’s front page of Bloomberg Business Week reads “Iraq: Under Worse Management”. The subtitle is “Just a month after the U.S. withdrawal, hopes for turning the country into an economic beacon
are already in shambles.” Apparently, even the mainstream media is starting to catch on.
Central government control is diminishing. Kurdistan is the prime example of this, since it is an autonomous region in northern Iraq which has its own security system and officials, including its own president. Kurdistan is going it alone. Its government recently signed a contract with ExxonMobil without any involvement by the so-called central government in Baghdad. We believe that the probability is high that Baghdad will soon lose control of the oil-rich Shiite provinces in the south of the country. The government is generally alienating all Sunnis by arresting Sunni officials. In effect, the Prime Minister, Nouri Al-Maliki, is creating a Shiite state. He may be planning to become the next dictator. During this transition period, the massive corruption that has plagued Iraq for years will continue unabated. Recently, the former head of Iraq’s Electricity Ministry and his staff signed $1.7 billion in contracts with fictitious companies to build power plants. Multiply this by about thirty, and you will get an idea of the magnitude of the graft in Iraq. We see a good possibility of war breaking out within the country, and if civil war develops we expect oil and gold prices to move rapidly higher.
Problems in Iraq, Pakistan, and Afghanistan, and general political unrest throughout the Middle East do not lead us to expect rapid growth in oil output from the region. Libyan oil is gradually coming back into production, but is still below expected levels. Syria is a relatively small producer, but its production will continue to be curtailed.
What This Means For You
All of this suggests to us that oil prices are not going to fall a great deal and that prices could stay high for months — unless military problems develop with Iran or elsewhere; should that happen, prices would take an-other step upward.
Gold — What the U.S. Media is Missing
Europe Wants its Gold Returned
In 2011, Venezuelan president Hugo Chavez repatriated Venezuela’s gold held abroad. As an enemy of the U.S., it was clearly unwise of him to keep
any of Venezuela’s gold in New York. Now the European citizenry is won-dering, ‘Why not bring our gold back home to Europe?’ Our sharp-minded friend, Jim Sinclair, points out that European newspapers are wondering about the gold that their governments have stored at the NY Federal Reserve Bank. And legitimately so. If countries demand the return of their gold, will it be delivered rapidly? Or will bankers and bureaucrats try to slow down the process to protect their position and importance? Has the gold been loaned to collect interest? Will it take some time to get it back? Should any delays were to develop, we see the price of gold soaring.
Gold’s Seasonality – Taking A Break From Tradition
Over the decades, we have monitored gold prices closely. In the 1970’s, 1980’s, and 1990’s, Europeans domi-nated the gold market. Beginning at the turn of the century, Asia became a bigger player as Asian nations began adding gold to their national reserves and Asian consumers began to acquire gold with their new wealth. We have noticed that in August, especially at the end of August, when the Europeans have returned home from their holidays, that gold would turn higher.
The autumn seasonal pattern of rising gold prices continues. A boost in gold demand comes from India’s fall wedding season, and new purchases by central banks usually follows each pull back in the gold price. In 2011, this pattern was not in evidence. Gold ran up from June to August due to the panic to get out of the Euro. Then, in late August, we saw panic among some gold holders who worried about the strong U.S. dollar and deflation caused by the European sovereign debt crisis. The gold rally that often began in September was delayed a few months and after hitting an intraday low of $1,523 on December 29th, of 2011, a rally is in full swing. We still expect strong demand for gold in coming weeks.
What This Means For You
The European crisis has been gradually coming under some kind of control — even if it is only temporary — and analysts are asking themselves if the U.S. dollar rally has run its course. If the dollar rally is over, the rally in alternative currencies, including the Canadian dollar, Singapore dollar, and others is just beginning…and the gold rally will last longer than expected.
After MF Global’s 1.2 Billion dollar ‘Oops’, How Safe is Your Money?
As a result of the MF Global debacle, we are often asked about safe places to keep money. Having your stocks in certificate form, in your name, at your residence is one very safe method, but not practical un-
less your investments are for the very long term. It is also not practical because many brokers or banks make it difficult to get physical delivery of shares under personal names. Many firms have given up physical delivery of shares, thus it is rare that the companies you own have transfer agents who will transfer the stock into your name and then deliver it to you.
The Guild Guide: Suggestions You May Find Useful
We believe it is a good idea to have your own attorneys review the account opening documents of your cus-todian. If you want your assets to stay at a brokerage house, you can make sure that you are under the SIPC insurance limits of $400,000 for stocks and $100,000 for cash. If the broker supplies additional excess SIPC insurance, check on the amounts per account and the total amount of insurance available. Clearly, $10 million or more per account is good insurance if your account is under $10 million, but you should check the total insur-ance for the firm. If it stops at $100 million and the broker has many billions in accounts, this could be insuf-ficient in the case of a major crisis or bankruptcy.
We also suggest only placing a limited amount of assets in margin accounts — those that you actually intend to trade on margin—but in general do not have all your assets in margin accounts. The broker’s margin account clauses (which may be customary clauses in many broker agreements) typically allow the broker to borrow and loan or hypothecate your securities without your knowledge. If the broker borrows your securities you become merely a general creditor of the broker to the extent that your assets were borrowed. That is a risky situation that you do not want in the event of a broker failure. You want the broker to be acting merely as the custodian of your assets, not as a borrower from you. Holding assets in a private bank is an option if it is done correctly. Many of our clients have opted for a fully custodial account at a private bank where their assets are segregated from the assets of any other customer and the assets of the institution itself, and where the assets are audited by outside auditors to make sure the intended separation was consistently applied.
Remember the acronyms of the 2008 and 2009 bailout programs — TARP, TALF, and PPIP? Forgotten are the trillions of dollars in central banks and government-sponsored deposit guarantees and money market guarantees. These programs protected many customers’ assets from failing United States financial institutions. The problem is, they were not permanent — just ask the MF Global depositors who are still missing their $1.2 billion.
Investor asset protection has been taken for granted by too many people, but we are not among them. In March 2008, shortly after the Fed’s shotgun marriage of JP Morgan and Bear Stearns, who was pregnant at the time with huge losses, we wrote the following commentary. Click here to view it.
Then in an October 2008 commentary, we reminded our readers to call us to discuss the safety of asset provi-sions they should look for in a custodian. Click here to view it.
In August 2009, we wrote about how the brokerage industry’s self-insurance proved to be woefully inadequate, in the segment called “Uh-Oh CAPCO”.
Our clients have had this discussion with us and we have made suggestions for their assets. We are now offer-ing such a discussion with any Gold Subscriber with an account that exceeds the SIPC insurance limits. If you are an interested Gold Subscriber, send us an email (firstname.lastname@example.org) with your current account information and the location of your assets and we will be happy to share what our legal counsel has concluded about your particular custodian.
More of What the World Press Isn’t Discussing…
Latin America — An Uneven Scorecard
Why did the booming demand for commodities in Asia create wealth for the citizens of only a few Latin American countries? It is clear that the boom helped Brazil immensely, and Chile, Peru, and Colombia
have also benefitted. Meanwhile, the economies of Venezuela, Argentina, and Bolivia continue to lag. Why?
Populist Policies Can’t Match Free Trade Policies For Improving the Standard of Living
Latin America has been a beneficiary of Asia’s immense demand for raw materials over the last twenty years. Certain countries, among them Brazil, Chile, and a few others, have been wise enough to take advantage of the opportunity. Others have fallen prey to the promises of despots and political opportunists who tear up contracts, nationalize industries, subsidize the unproductive, and implement other destructive long-term economic policies in the name of re-election. We see this occurring in the oil-rich country of Venezuela, with Hugo Chavez — in mineral-rich Bolivia, with Evo Morales — and in verdant Argentina, with the late Néstor Kirchner and now his wife, Cristina Fernández Kirchner. All three countries have seen a series of edicts that erode their standard of living coming from their presidential palaces. It is leaders like these that lead countries to bankruptcy time and again. Despots and dictators were once a staple of Latin America and then things improved. Now it looks like some countries are reverting to the types of leaders they had decades ago. Unfortunately, this is an old Latin American story that is still playing out.
In the latest chapter of the Argentine story, things turn almost comically desperate as the government employs drug-sniffing dogs that smell the ink on banknotes to keep people from sending U.S. dollars and other currency out of the country. Sadly, this is due to Argentine currency hav-ing been so damaged, and the growing fear of devaluation becoming so rampant by the effects of Kirchner policies. It is estimated that Argentines — in hopes of protecting their capital from a rapacious government — have taken about $30 billion USD out of the country in the last 13 months. This flight has taken place while the Argentine peso has been collapsing.
Rather than go into the details, suffice it to say that the populations of Venezuela, Bolivia, and Argentina have a standard of living headwind coming from their own statehouses, and it does not have to be that way. A better chance at prosperity may be just across the border.
China — Bulls or Bears?
We Think it’s More Good News
For years we have been optimists on the Chinese economy — not always on Chinese stocks, but on the Chi-nese economy — and we retain that view. We foresee China’s current growth slowdown should be ending by April 2012. We expect a change from strong growth to very strong growth, and our view is supported by a
raft of good news.
We acknowledge that pessimists have been bearish on the Chinese economy a great deal of the time for the past eight years. We have been consistently bullish and the record shows that China’s economy has boomed during that period. Now a new wave of pessimism is being promulgated by some Western brokerage houses. We dis-agree, and we believe the economic facts support and will continue to support our view. We do not believe the banking system will fail anytime soon, as some are predicting, and we note that the excesses of the real estate boom are starting to moderate.
This is not to say that China is without problems. In our opinion, China’s biggest problems are not the ones that pessimists think will be China’s undoing. We believe they are dead wrong. For the last few years, China’s GDP has been strong and Chinese economy has led the world econo-my. China has been the growth engine of the world and its imports have supported the flagging West and Japan.
Some further reasons for our optimism about China:
- Q4 2011 Chinese GDP strong at 8.9 percent — Bullish
- China is adding liquidity to the banking system for the Chinese New Year, which is a form of QE —
- Bank loans–the most important indicator of economic expansion in China — will be up 5 percent in 2012, from a strong level last year — Bullish
- Food prices are beginning to come down — Bullish
- Interest rates and bank reserve ratios will come down and liquidity will be highly available in 2012 —
- Money supply as measured by M2 could grow at a rate above 14 percent. This is QE, and is Bullish
- Retail sales remain strong — Bullish
- Industrial production as measured by power, cement and steel production continues strong — Bullish
The bottom line is that despite its challenges, the picture is an altogether positive one for China.
What This Means For You
China’s continued growth is a major part of why we recommended investors buy emerging markets on January 17, 2012.
China Starts to Close Unprofitable Domestic Mines
China will wisely import raw materials at cheaper prices. Some big beneficiaries of this trend are iron ore exporters in Brazil, Australia and India, and copper exporters in Australia, Chile, Peru, the U.S., Spain, Kazakh-stan, and Zambia. Cheaper raw materials are also bullish for China’s economy.
Recommendation Summary and View
What This Means For You
We remain bullish. Europe’s sovereign debt problems are still in focus, but the European banking system remains protected. We expect a continued positive environment for stocks that will exist for at least the
next few weeks or months. Interest rates are falling in developing world and we think that many stocks are cheap, the rally will also take Europe along for the ride up. More back stops are being introduced to the Euro-pean banks and sovereign nations as more funds arrive to add support to the European Central Bank (ECB), the IMF and European debt management institutions. We are making no new recommendations this week and we stand by all of our past recommendations.
The publisher of this newsletter is Guild Investment Management, Inc. (GIM or Guild), an investment advisor registered with the Securities and Exchange Commission. GIM manages the accounts of high net worth individuals, investment partnerships, trusts and estates, pension and profit sharing plans, and corporations, among other clients.
Your receipt of this newsletter does not create a personal investment advisory relationship with GIM although some recipients may also be advisory clients of GIM. GIM has written investment advisory agreements with all its personal advisory clients, which sets forth the nature of that relationship.
The newsletter makes general observations about markets and business and financial trends and may provide advice about specific companies and specific investments. It does not give personal investment advice tailored to the needs, objectives, and circumstances of individual readers. Whether investment ideas and recommendations are suitable for individual readers depends substantially on the personal and financial situation of that reader, which GIM, as the publisher of the newsletter, makes no effort to investigate.
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Please note that investing in stocks, other securities, and commodities is inherently risky, and you should rely on your personal finan-cial advisors and conduct your own due diligence in connection with any investment decision.
A Special Comment for Guild’s Clients
If you are an investment advisory client of GIM who is receiving this newsletter, please note that the fact that a general recommen-dation is made of a particular security, commodity, or investment area to its newsletter subscribers does not mean that investment is suitable for you or should be purchased by you. For example, GIM may already have purchased such securities on your behalf or purchased securities in the same industry (and an increase in the position for you may represent too much concentration in one security or industry), or GIM may believe the investment is not suitable for you based on your risk tolerance or other factors. If you have questions about the recommendations in this newsletter in relation to your account at GIM, please contact Monty Guild or Tony Danaher.
Conflicts of Interest
As of the date of this newsletter, GIM’s investment advisory clients or GIM’s principals owned positions in areas that are the sub-ject of current recommendations, commentary, analysis, opinions, or advice, contained in this newsletter. GIM’s advisory clients or principals are currently long U.S. and foreign equities. Guild Investment Management (acting for its clients) and/or Guild’s princi-pals, purchased 84,050 shares of Potash Corp. of Saskatchewan (NYSE: POT) from January 3, 2012 to January 17, 2012, at prices between $43.11 and $45.53. Guild Investment Management (acting for its clients) and/or Guild’s principals, purchased 116,530 shares of Golar LNG (NYSE: GLNG) between December 2, 2011 and January 11, 2012 at prices between $43,5017 and $46.1674.
Guild also sold 15,000 shares of GLNG on January 11, 2012 at $44.1006. They also hold positions in U.S. and foreign market ETFs, emerging market ETFs, gold ETFs and gold mining ETFs, precious metal mining shares, and foreign currencies.
GIM and its principals have certain conflicts of interest in its relations with its investment advisory clients and its newsletter subscrib-ers resulting from GIM or its principals holding positions for its clients or themselves which are also recommended to its clients. GIM may change the positions of its clients or GIM’s principals may change their positions (increasing, decreasing, and eliminating them) based on GIM’s best judgment at any given time, including the time of publication of the newsletter. Factors that lead GIM to change or eliminate its positions may include general market developments, factors specific to the issuer, or the needs of GIM or its advisory clients. From time to time GIM’s investing goals on behalf of its investment advisory clients or the personal investing goals of GIM’s principals and their risk tolerance may be different from those discussed in the newsletter, and the investment decisions made by GIM for its advisory clients or the investment decisions of its principals may vary from (and may even be contrary to) the advice and recommendations in the newsletter.
In addition, GIM or its principals may reduce or eliminate their positions in an investment that is recommended in the newsletter prior to notifying the newsletter subscribers of such a reduction or elimination. The publication by GIM of a “target price” or “stop loss” for a particular security or other asset does not necessarily represent the price at which GIM intends to sell or will sell any such assets for its advisory clients or the price at which GIM’s principals intend to sell any such assets.
As a consequence of the conflict of interest, GIM’s clients or principals may benefit if newsletter subscribers purchase assets recom-mended by GIM since it could increase the value of the assets already held by GIM’s investment advisory clients or GIM’s principals. On the other hand, GIM’s principals and clients may suffer a detriment if they seek to acquire additional shares in securities that have been recommended and the price of the securities has increased as a result of purchases by newsletter subscribers.
To help mitigate these conflicts, GIM seeks to avoid recommending the securities of individual companies where GIM or its princi-pals have an ownership position and where the issuer is small or its securities are thinly traded−that way sales by GIM in advance of possible sales by newsletter subscribers would not be likely to cause any significant decrease in the sale price to newsletter subscrib-ers. GIM has a fiduciary relationship with its investment advisory clients and cannot agree on behalf of such clients to refrain from purchases or sales of a security mentioned in the newsletter for a period of time before or after recommendations for purchases or sales are made to its newsletter subscribers.
GIM encourages you to do independent research on the securities or other assets discussed or recommended in the newsletter prior to making any investment decisions and to be especially cautious of investments in small, thinly-traded companies, which are usually the most risky investments that you can make.
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GIM disclaims any liability for investment decisions based upon recommendations, information, or opinions in its newsletters. GIM is not soliciting you to execute any trade. Nothing contained in GIM’s newsletters is intended to be, nor shall it be construed as an offer to buy or sell securities or to give individual investment advice. The information in the newsletter is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation, or which would subject GIM to any registration requirement within such jurisdiction or country.
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