The Market Direction…

It was reported in Mumbai that India may be ready to buy the remaining portion of IMF gold that is up for sale and bring the tally of its recent gold purchases up to 401 tons. If so, India’s purchase of gold at historically high levels speaks volumes about its perception of the Fed’s credibility to support the dollar.

In this current environment, emerging market central banks find themselves swimming in dollars and other fiat currencies to maintain their reserves.  Unlike some developed nations which have higher percentages of their reserves backed by gold, this is not the case for these fast growing countries and nor is it necessarily as convenient for them to do so.

The expansion of the monetary supply base easily outstrips the amount of new gold that is being mined on an annual basis. Mathematically, there is simply not enough of the shiny yellow stuff to go around for everyone if everyone simultaneously decides to add to their central bank reserves.

News events like this make me wonder how other countries such as Russia or China will react. Actually, we already know how China is responding. It is simply purchasing the gold that is being mined within the borders of its country.

As a side note, for all the criticism about U.S. monetary policy, it has the largest percentage as well as proportionate percentage of its reserves in gold.As far as I am concerned about the U.S.: we may be dumb, but ain’t stupid.

Here’s an excerpt from the story on India’s gold purchases which can be linked to at Commodity Online for the complete article:

 

India is still bullish on gold. This was evident when reports said India’s Reserve bank is still in talks with the International Monetary Fund (IMF) to buy another 200 tonne gold which the international body is ready to dispose of to fund its projects.

Earlier in November India had bought 200 tonnes of gold from the IMF for over $6.7 billion after which the global bullion market witnessed a bull run which lifted the yellow metal prices above $1150 per ounce.

The fresh attempt by the Indian central bank has added to the soaring prices of gold and the metal set a new record on Tuesday.
 
At the time of the purchase of the first lot of 200 tonnes, RBI had said it was part of its foreign exchange reserves management operations.

According to IMF, it has no fixed timetable for completing the sale.

RBI is on a spree to enrich its reserves and it wishes to change it to gold rather than dollar. That was evident when India first bought the 200 tonne gold. In just three weeks after it bought the gold, India benefited by $800 million on the investment of $6.7 billion it made in buying 200 tonnes from IMF.

Related securities: GLD, PTM, and SLV

*Disclosures: Hillbent does not provide individualized market advice. The information we publish regards companies in which we believe our readers may be interested and our reports reflect our sincere opinions. Nevertheless, they are not intended to be personalized recommendations to buy, hold, or sell securities. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. Each individual investor should determine their respective appropriate level of risk. It is recommended that you seek personal advice from your professional investment advisor and conduct further independent due diligence research before acting on information published in any of our reports. Most of our information is derived directly from information published by the companies on which we report and/or from other sources we deem to be reliable, without our independent verification.

Therefore, we cannot assure the completeness or accuracy of information contained within these reports and we do not in any way warrant or guarantee the success of any action which you take in reliance on our statements.

Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

In an interview with Bloomberg television, Gordon Johnson of Hapoalim Securities discusses and analyzes the current environment for solar stocks and the impact of the U.S. government’s timeline to provide funding to the industry.

The video is @ 8 1/2 minutes long and offers some practical investment insights.

Source: Sling.com

Related Securities: FSLR, TAN

*Disclosures: Hillbent does not provide individualized market advice. The information we publish regards companies in which we believe our readers may be interested and our reports reflect our sincere opinions. Nevertheless, they are not intended to be personalized recommendations to buy, hold, or sell securities. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. Each individual investor should determine their respective appropriate level of risk. It is recommended that you seek personal advice from your professional investment advisor and conduct further independent due diligence research before acting on information published in any of our reports. Most of our information is derived directly from information published by the companies on which we report and/or from other sources we deem to be reliable, without our independent verification.

Therefore, we cannot assure the completeness or accuracy of information contained within these reports and we do not in any way warrant or guarantee the success of any action which you take in reliance on our statements.

Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

>>>Market Analysis>>> Anyone still arguing in favor of deflationary forces resulting from the financial crisis should think again. Here’s why…

A report submitted to Treasury Secretary Geithner (by the Treasury Borrowing Advisory Committee of the Securities Industry and Financial Markets Association) acknowledges that the steepening yield curve may be a direct by-product of the extraordinary funding requirements in 2009-2010.

Funding needs are based upon expectations of weaker economic growth and Congress and the Administration’s stimulative policy actions. Increased TARP expenditures, potential FDIC guarantees, and additional fiscal "stimulants" could push government funding needs to @ $2 trillion.

Under such a scenario, Americans are looking at Treasury funding requirements being the largest percentage of GDP since the post-war era.

Intermediate-term technical analysis of long-term treasury yields (see charts below) supports the probability of rates rising above 4% before encountering any significant resistance. Meanwhile, the U.S. Dollar’s days of basking in the "flight-to-safety" trade appear to be over as (see charts below) the Dollar is no match for long-term rising rising rates on a relative basis.

The bottom line: If this situation persists, expect the Gold Trust ETF (GLD) and the UltraShort 20+ Year Treasury Bond ETF (TBT) to continue their superior market performance. Another security that stands to benefit under these same market conditions is the U.S. Dollar Bearish Fund ETF (UDN). If the dollar breaks down, the UDN should appreciate due to its negative correlation to the U.S. Dollar index.

*Disclosure Note: Author is long GLD and UDN.

*Disclosures: Hillbent does not provide individualized market advice. The information we publish regards companies in which we believe our readers may be interested and our reports reflect our sincere opinions. Nevertheless, they are not intended to be personalized recommendations to buy, hold, or sell securities. Investments in the securities markets, and especially in options, are speculative and involve substantial risk. Each individual investor should determine their respective appropriate level of risk. It is recommended that you seek personal advice from your professional investment advisor and conduct further independent due diligence research before acting on information published in any of our reports. Most of our information is derived directly from information published by the companies on which we report and/or from other sources we deem to be reliable, without our independent verification.

Therefore, we cannot assure the completeness or accuracy of information contained within these reports and we do not in any way warrant or guarantee the success of any action which you take in reliance on our statements.

Hillbent.com, Inc. or its affiliates may own positions in the equities mentioned in our reports. We do not receive any compensation from any of the companies covered in our reports.

>>>Market Themes>>> Today’s market themes analysis is from Money Morning’s Louis Basenese. With historically low valuations, many investors peep from their foxholes asking: "is it safe yet?". This is a legitimate question and today’s article offers some practical guidelines for separating the wheat from the chaff…

By Louis Basenese, Contributing Writer
Money Morning

Beware The Value Trap

Consider this your warning…

With thousands of stocks down 50% (or more), investors are salivating over the bargains. But for every true deal, there are at least three “value traps” - stocks destined to languish at depressed levels indefinitely. Or worse, get cheaper still.

Think Kmart Corp. here. In late 2001, it became the poster child for value investors. They argued it was dirt cheap based on countless metrics like book value and sales. And it was destined for a historic turnaround.

Sure enough, the stock went from the bargain bin to the trash heap, as the company filed bankruptcy in early 2002.

So, before you go bargain hunting in this market, arm yourself with this list. It could be your only chance to avoid getting snared by the countless “Kmarts” begging for your investment…

10 Questions You Should Be Asking

In theory, a value stock is a beaten-down company that’s 1) cheap compared to its earnings, its competitors and/or some other relevant benchmark and 2) poised for a turnaround.

In contrast, a value-trap is simply a beaten-down company that’s cheap compared to its earnings, its competitors and/or some other relevant benchmark, but never quite turns it around.

Unfortunately, no formula exists to calculate when, or if, a turnaround will ever occur. But, these 10 questions should help. And ultimately, keep you out of most value traps…

1) Is there a near-term catalyst?
First things first, if there’s nothing on the horizon - like a new product launch, key marketing arrangement, a shake-up of the executives, the conversion of a massive order backlog, etc. - we shouldn’t bother. Companies and stocks need catalysts in order to advance. If none exist in the next 12 to 18 months, chances are the stock will be stuck in neutral, or worse, reverse.

2) What are insiders doing?
Nobody knows the company - and its future prospects - better than the insiders. If they’re not salivating over the “cheap” prices and backing up the truck, we shouldn’t either.

3) Is the company addicted to debt?
Too much debt magnifies the impact of tough times. As sales decrease, interest payments take up more and more of the company’s earnings. Not to mention, unwinding leverage is a time-consuming process. So, even if the company boasts new, fiscally responsible management, beware. Or as Warren Buffett observes, “When a management with a reputation for brilliance takes on a business with a reputation for bad economics, it’s the reputation of the business that remains intact.”

4) Does the dividend yield seem too good to be true?
Value investors love to tout they “get paid to wait” for a turnaround. Granted, many stocks do maintain their dividends through a downturn. But countless others don’t. They slash or cancel them altogether, just to stay in business. No matter how tempting, tread carefully when the dividend yield hits double-digit levels.

5) Is the company just as “cheap” based on the future?
At first glance Eastman Kodak Co. (EK) appears dirt cheap, trading at a price-to-earnings (P/E) ratio of 2.96. But don’t be fooled. Or get too easily excited. Remember, the P/E ratios cited on most financial websites are historical. And as investors, we don’t care what a company was worth… we care about what it will be worth. So before you buy, make sure the stocks forward P/E ratio is similarly attractive. (FYI - Eastman’s is not. It trades at 27 times forward earnings. Hardly cheap.)

6) Which direction is the company’s market share headed?
A general economic slowdown is one thing. But when a company’s losing market share, too, that’s an indication that a competitor has a better mousetrap. And while economic growth is cyclical, market share is not. Even if the economy or industry turns around, chances are the company’s market share won’t.

7) Does the company operate in a highly cyclical or moribund industry?
If you go hunting in a highly cyclical industry (like semiconductors) you’re asking for trouble. Same goes for industries destined for obsolescence (like print media). To win with these stocks, you need both the company’s misfortunes and the industry’s to reverse course.
           

8) How’s the free cash flow?
Earnings can be massaged, manipulated or completely fabricated. But cash cannot. So, make sure free cash flow is stable, or growing. If nothing less, it provides management with a little wiggle room, or margin of error when considering ways to speed up a turnaround.

9) Is the stock liquid enough?
Just like insiders provide support to share prices, so do institutions (mutual funds, pension plans, hedge funds, etc). Both groups can move stocks prices quickly and significantly. However, many institutions can’t or won’t buy stocks trading for less than $10, with a market cap below $1 billion and/or that don’t trade several million dollars worth of shares each day. Without the potential for institutional ownership, a quick rebound in prices becomes less likely.

10) Does the company have a sustainable competitive advantage?
For a stock to turnaround we need the company to thrive, not survive. That’s not possible without a sustainable competitive advantage. So stick to companies like Apple Inc. (AAPL) that are light-years ahead of the competition in terms of design, market share, new product offerings and/or technology.

In the end, don’t kid yourself. Detecting a value trap is no easy task. Even the best investors occasionally get snared. Think Bill Miller (with Countrywide and Freddie Mac (FRE)) and Carl Icahn (with Yahoo! Inc. (YHOO) and Advanced Micro Devices Inc. (AMD)).

But at the very least, these 10 questions will ensure you never buy blindly, or on price alone.

(Editor’s Note: Louis Basenese is the Associate Investment Director of The Oxford Club and regular contributor to Investment U. He is one of the top analysts and most sought after speakers on financial topics in the country.The following article first appeared in Investment U. But because of the quality, we wanted to share it with Money Morning readers)

*Disclosures: None

>>>Market Themes Analysis>>> To deal with the current financial crisis, Treasury Secretary Paulson emphasized the need for sufficient firepower, i.e. capital, to combat the problems beseiging the U.S. capital markets. His $700bn request was incredibly unprecedented in the annals of economic history. Politicians and the public both balked, but conceded to enable Paulson to slay the dragon of Greenspan’s legacy.

The latest news is that the government may take equity stakes in insurance companies. Doing so would allow them to remove bad assets from their books and create extra capital. Transferring these assets to the government does come with strings attached. The string is actually a chain and it is called "regulation".

Ironically, laissez-faire policies have driven companies full circle right back into the arms of "regulation" which they sought to avoid. Greenspan was not the only one who did not see this one coming. The model for free market capitalism is being deconstructed and Wall Street, the Fed, the Treasury, and their global counterparts are desperately seeking to build a better one. Until we get a clearer blueprint, market chaos will reign alongside volatiltiy.

Meanwhile, this movie is beginning to look like a scene from the depression era except that the soup lines are populated with entities such as banks, insurers, automakers, state governments and transit agencies instead of people. "Brother, can you spare a dime?"

*Disclosures: None