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Dr Doom: When surrounded by rubbish and danger, buy gold
Jan 03 13:10
by Gwen Robinson
[emphases added - jk]
“The credit bubble is just beginning to unwind, and while US borrowers are being blamed for the mess, they were really just a pawn in a global game.” So says Marc Faber, aka Dr Doom, quoting Satyajit Das, author of a 4,700 page reference book on credit derivatives.
In the New Year issue of his Gloomboomdoom.com monthly market commentary for subscribers, Faber muses darkly on the direction of the US economy, markets, bond insurers and Wall Street banks, and concludes - as he has increasingly in the past months - that gold, among other commodities, is a very good place to put your money.
In the US, the severity of the housing recession is evident from the record level of existing home inventories as a percentage of US households, he notes. “It should therefore, only be a matter of time until housing starts decline further and will also signal the onset of a recession.”
Of course, he adds, the slump in the housing market is old news - but before readers get bored, they should consider what is new is that the credit problems, which first manifested themselves in mortgage-backed securities, have now also infected the bond insurance companies such as Ambac and MBIA.
The problem is that MBIA — the world’s largest bond insurer — disclosed on December 21 that it had had guaranteed $8.1bn of the riskiest mortgage securities, which now imperil its entire net worth (which as of September 30 was $6.5bn). The company said it had guaranteed $30.6bn of complex mortgage securities in total. Morgan Stanley said that, “We are shocked that management withheld this information for as long as it did.”
Faber, for one, is not at all surprised.
First of all if we look at the stock performance of bond insurance companies such as MBIA and Ambac, we can see that these stocks really started to tumble in earnest in October 2007 and were so indicating some problems.
As I have emphasised so many times before, we need to look at the performance of shares, which reflect the market perception of the future value of companies and their earnings, and avoid listening solely to opinions of analysts and so-called “sophisticated” investors.
For example, consider, says Faber, how often you hear about what a great bargain banks such as Bank of America, JP Morgan Chase and Citigroup are.
I am not so sure about this view. Consider that in the case of MBIA the buyout firm Warburg Pincus was aware of the exposures to lower quality CDOs prior to making its investment in the company, when it announced on December 10, 2007 that it would initially invest $500m by purchasing MBIA shares at $31 each. This announcement initially helped restore some investor confidence and pushed MBIA shares as high as $37.50 the day the deal was announced.
But, now with the shares changing hands at $18 the deal does not look that great (and may not even be completed). Similarly, Citigroup shares jumped from $30 to $35 after November 27 on the announcement that the Abu Dhabi Investment Authority would make a $7.5bn investment in the company.
But it has since then given back the entire rebound and some more. Moreover, if we look at long term charts of Bank of America, JP Morgan Chase and Citigroup considerable downside risk still exists.
In fact, he notes, “each time a sovereign wealth fund makes an investment and stocks rebound, they seem to provide excellent exit opportunities”.
Blackstone Group has declined 24 per cent since its IPO in June after China Investment agreed to buy a $3bn stake in the firm. Bear Stearns has declined 26 per cent following its sale of a stake last October to Chinese government controlled Citic Securities.
Therefore, says Faber, he would consider “selling UBS stock here or on any rebound following the recent announcement that the state-owned Singapore Investment Company and a Middle Eastern investor made a SFR13bn investment in some convertible bonds”.
He sets out three key observations:
1) I have never experienced a bull market in equities without the participation of financial stocks. In addition, when financial stocks across the board collapse it is a very negative sign for the overall health of the stock market.
2) The fact that a stock has declined from the peak by 50 per cent or even 90 per cent does not make it necessarily inexpensive. In 1985, I recommended the purchase of a basket of Texas banks, which at the time had declined by 95 per cent from the peak, as a contrarian play. Subsequently, they all went bankrupt.
3) As I have explained before, the financial sector has become disproportionally large over the last 15 years or so. Therefore, I would also expect the reversion to the mean of the financial sector to take several years and not to be completed in just six months! In short, I would avoid purchasing financial stocks for now and would also defer new commitments to equities.
Emerging stock markets are definitely to be avoided, he adds, “following their significant out-performance over the last few years”.
In an environment of relative global tightening of liquidity I am afraid that emerging stock markets could be deserted by foreign investors as seems to have begun in the case of Asia.
So, where would Dr Doom put his money?
He likes sugar, cotton and he still recommends accumulating gold, which he expects to continue to out-perform equities for several years.
Central banks around the world have no other option but to print money and this will lead to a further depreciation in the value of paper money against precious metals.
Still, nothing goes up in a straight line, notes Faber, and, therefore, investors need to be aware that gold could still correct to around $750 or so.
But when we consider the upside potential of gold compared to its downside risk, the biggest mistake an investor could make is not to own any gold at all. Interestingly, we know a lot of gold bulls who have already sold their positions and pray for a significant correction in order to establish again long positions.
In Faber’s opinion, “the gold bull market will come to an end when SWFs - sick and tired of their investments in financial stocks - will final purchase gold — probably at above $3,000 per ounce”.
http://ftalphaville.ft.com/blog/2008...nger-buy-gold/
Jan 03 13:10
by Gwen Robinson
[emphases added - jk]
“The credit bubble is just beginning to unwind, and while US borrowers are being blamed for the mess, they were really just a pawn in a global game.” So says Marc Faber, aka Dr Doom, quoting Satyajit Das, author of a 4,700 page reference book on credit derivatives.
In the New Year issue of his Gloomboomdoom.com monthly market commentary for subscribers, Faber muses darkly on the direction of the US economy, markets, bond insurers and Wall Street banks, and concludes - as he has increasingly in the past months - that gold, among other commodities, is a very good place to put your money.
In the US, the severity of the housing recession is evident from the record level of existing home inventories as a percentage of US households, he notes. “It should therefore, only be a matter of time until housing starts decline further and will also signal the onset of a recession.”
Of course, he adds, the slump in the housing market is old news - but before readers get bored, they should consider what is new is that the credit problems, which first manifested themselves in mortgage-backed securities, have now also infected the bond insurance companies such as Ambac and MBIA.
The problem is that MBIA — the world’s largest bond insurer — disclosed on December 21 that it had had guaranteed $8.1bn of the riskiest mortgage securities, which now imperil its entire net worth (which as of September 30 was $6.5bn). The company said it had guaranteed $30.6bn of complex mortgage securities in total. Morgan Stanley said that, “We are shocked that management withheld this information for as long as it did.”
Faber, for one, is not at all surprised.
First of all if we look at the stock performance of bond insurance companies such as MBIA and Ambac, we can see that these stocks really started to tumble in earnest in October 2007 and were so indicating some problems.
As I have emphasised so many times before, we need to look at the performance of shares, which reflect the market perception of the future value of companies and their earnings, and avoid listening solely to opinions of analysts and so-called “sophisticated” investors.
For example, consider, says Faber, how often you hear about what a great bargain banks such as Bank of America, JP Morgan Chase and Citigroup are.
I am not so sure about this view. Consider that in the case of MBIA the buyout firm Warburg Pincus was aware of the exposures to lower quality CDOs prior to making its investment in the company, when it announced on December 10, 2007 that it would initially invest $500m by purchasing MBIA shares at $31 each. This announcement initially helped restore some investor confidence and pushed MBIA shares as high as $37.50 the day the deal was announced.
But, now with the shares changing hands at $18 the deal does not look that great (and may not even be completed). Similarly, Citigroup shares jumped from $30 to $35 after November 27 on the announcement that the Abu Dhabi Investment Authority would make a $7.5bn investment in the company.
But it has since then given back the entire rebound and some more. Moreover, if we look at long term charts of Bank of America, JP Morgan Chase and Citigroup considerable downside risk still exists.
In fact, he notes, “each time a sovereign wealth fund makes an investment and stocks rebound, they seem to provide excellent exit opportunities”.
Blackstone Group has declined 24 per cent since its IPO in June after China Investment agreed to buy a $3bn stake in the firm. Bear Stearns has declined 26 per cent following its sale of a stake last October to Chinese government controlled Citic Securities.
Therefore, says Faber, he would consider “selling UBS stock here or on any rebound following the recent announcement that the state-owned Singapore Investment Company and a Middle Eastern investor made a SFR13bn investment in some convertible bonds”.
He sets out three key observations:
1) I have never experienced a bull market in equities without the participation of financial stocks. In addition, when financial stocks across the board collapse it is a very negative sign for the overall health of the stock market.
2) The fact that a stock has declined from the peak by 50 per cent or even 90 per cent does not make it necessarily inexpensive. In 1985, I recommended the purchase of a basket of Texas banks, which at the time had declined by 95 per cent from the peak, as a contrarian play. Subsequently, they all went bankrupt.
3) As I have explained before, the financial sector has become disproportionally large over the last 15 years or so. Therefore, I would also expect the reversion to the mean of the financial sector to take several years and not to be completed in just six months! In short, I would avoid purchasing financial stocks for now and would also defer new commitments to equities.
Emerging stock markets are definitely to be avoided, he adds, “following their significant out-performance over the last few years”.
In an environment of relative global tightening of liquidity I am afraid that emerging stock markets could be deserted by foreign investors as seems to have begun in the case of Asia.
So, where would Dr Doom put his money?
He likes sugar, cotton and he still recommends accumulating gold, which he expects to continue to out-perform equities for several years.
Central banks around the world have no other option but to print money and this will lead to a further depreciation in the value of paper money against precious metals.
Still, nothing goes up in a straight line, notes Faber, and, therefore, investors need to be aware that gold could still correct to around $750 or so.
But when we consider the upside potential of gold compared to its downside risk, the biggest mistake an investor could make is not to own any gold at all. Interestingly, we know a lot of gold bulls who have already sold their positions and pray for a significant correction in order to establish again long positions.
In Faber’s opinion, “the gold bull market will come to an end when SWFs - sick and tired of their investments in financial stocks - will final purchase gold — probably at above $3,000 per ounce”.
http://ftalphaville.ft.com/blog/2008...nger-buy-gold/
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