On Your Mark . . Get Set . . . Dig!

"The Levi Strauss Strategy"

Caterpillar Inc. said it will buy mining giant Bucyrus International Inc. for about $7.6 billion as the heavy-equipment giant looks to bolster its mining-equipment production.

--"Caterpillar to Buy Bucyrus"; Wall Street Journal (11/15/2010)

What do corporations do when the price of metals -- both base and precious -- double and triple?

Start digging.

Or, in the case of Caterpillar, buy a company that makes digging equipment.

Call it the Levi Strauss strategy: there's as much (or more) money to be made selling supplies and equipment to the gold diggers, as there is in digging for gold.

Market Correction: "THERE it is"

Gold Down 3% . . Mosaic Down 5% . . . Apple Down 3% etc.

If you're a fan of "30 Rock," you'll recognize Liz Lemon's signature line ("There it is . . ") when she spots the inevitable flaw in her prospective new, too-good-to-be-true suitor.

So, for everyone waiting for a break in what's been an uninterrupted tear for such things as commodities and high-flying stocks . . . "[t]here it is."

Whether today's sell-off is due to profit taking, or Cisco's earnings miss, or tightening Chinese monetary policy -- remains to be seen.

Rogers: 'Agriculture Better Than Gold'

The Other "Black Gold"

I expect to make more money in agriculture than I do in gold.

-- Investor Jim Rogers

Jim Rogers might not be quite the household name that Warren Buffett or George Soros is, but long-time investors know Rogers as an astute, independent market analyst -- who's made gobs of money, for both himself and his clients, spanning several decades.

So, it's noteworthy that Rogers has been beating his investment drum even louder for agriculture the last several years than he has for gold.

His rationale?

Farmland ("black gold?") is the ultimate play on rising inflation and commodity prices.

Gold has skyrocketed the last few years; farmland, not so much (yet).

Farmland isn't my specialty, but if you're an investor who's interested in buying some . . . I'll help you find someone at Edina Realty who's an expert! (and I guaranty, there is one).

Flushing Savers From Their Foxholes

"Certificates of Confiscation" Once Again?

Certificate of Confiscation: 1970's term for bonds, certificates of deposit (CD's), etc. yielding less than (rising) inflation.

How do you get people (and corporations and banks) to stop hoarding cash, and put it to work, stimulating the economy?

Reduce interest rates to zero.

But what if that still doesn't do the trick?

Make holding cash not only unremunerative, but costly.

The best way to do that is to devalue the currency and/or create inflation, so that the value of cash steadily erodes, precipitating an inexorable stampede into . . . anything else.

Fleeing Cash

Which is basically what has been happening since late August, when The Federal Reserve signalled its intent to further stimulate the economy by printing more money (called "quantitative easing").

Since then, stocks have rallied about 10%, and commodities -- especially gold and oil -- are up anywhere from 15% to 40%.

Meanwhile, the dollar is down 8% against a basket of major currencies.

(Un)Intended Consequences

The problem with driving savers out of their negative-yielding foxholes is, what comes next?

The Fed hopes that all that liquidity will find its way into the stock market, driving up prices and creating a "wealth effect" that will spur spending and the broader economy.

But it's just as plausible that erstwhile savers will switch their affinity to something -- anything -- that promises immunity from central bank debasement.

That list includes: gold, silver, oil, wheat futures, Swiss francs, Australian dollars -- you name it.

As those things appreciate, they create inflation, which punishes consumers, which hurts the economy.

Can you say, "full circle?"

All Roads Lead to -- and from -- the U.S. Dollar

U.S. Dollar Down, Everything Else . . Up!

Perplexed by the action in stocks and commodities since last Spring? (I've addressed housing in many, many other posts.)

See the explanation (below), courtesy of David Rosenberg, chief economist and strategist at Toronto-based investment manager Gluskin Sheff.

It's a bit wonky -- note the references to the DXY, VIX, various credit spreads, etc. -- but very worthwhile.

The reader's digest version?

As the dollar declines . . . it's driving up everything else.

The U.S. dollar . . . has become a huge ‘carry trade’ vehicle for all risky assets. Historically, there is no correlation at all between the DXY index (the U.S. dollar index) and the S&P 500. In the past eight months, that correlation is 90%. Ditto for credit spreads — zero correlation from 1995 to 2008, but now it has surged to 90% since April. There was historically a 70% inverse correlation between the U.S. dollar and emerging markets, such as the Brazilian Bovespa, and that correlation has also increased to 90% since the spring. Even the VIX index, which historically has had no better than a 20% correlation with the U.S. dollar, has now sent that correlation surge to 90%. Amazing. The inverse correlations between the U.S. dollar and gold and the U.S. dollar and commodities were always strong, but these too have strengthened and now stand at over 90%.

--David Rosenberg, "Breakfast with Dave" (11/19/09)

I consider my financial vocabulary to be pretty extensive, but I've seen so many references to the DXY the last few weeks that I finally googled it to find out.

It turns out to be a basket of six, non-U.S. currencies that reflects the strength/weakness of the dollar.

If you read the above excerpt, you know which way it's been going.

'09 Stock Market Rally

Out of Treasuries, Into Stocks?

"Obama Warns Trillion-Dollar Deficit Potential"
--The New York Times (Jan. 7, 2009)

"Suddenly, a Markets Turnaround"
--The Wall Street Journal (Jan. 7, 2009)

The stock market is famously forward-looking, so it's certainly possible that the rally the last month or so -- up 10% to 20% from its lows, depending on the index -- reflects investors' optimism that the economy is due to start improving (or, as NYT columnist Floyd Norris puts it, that "things are getting worse at a slightly slower rate").

It's also true that tax-loss selling peaks near the end of the year, and that once it subsides stocks frequently rise (called the "January effect," which often as not now occurs in December).

However, it's at least a fair guess that some of the market's rise is due to investors taking President-elect Obama at his word, and exiting suddenly not-so-safe Treasuries. Where does that money go? Stocks, bonds, gold, commodities -- you name it, all these asset categories have rallied recently.

High Risk, No Reward?

For the uninitiated, literally trillions of dollars have flooded into U.S. government debt (T-bill's and bonds) seeking refuge from the stock and credit market crack-up's the last 18 months ago. The stampede has been so great that the yield on short-term debt has effectively been driven to zero -- less when you take account of fees.

Now, with the prospect of trillion dollar U.S. deficits as far as the eye can see, would-be Treasury buyers are faced with the double whammy of minuscule yield and debased currency (in truth, the latter has been a concern for some time, but the magnitude of the risk is clearly rising along with the deficit projections).

Such a combo recalls the Cal Tech football team's slogan: 'we may be small, but we're slow.' Not surprisingly, investors are taking the hint and deploying their money elsewhere.