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By Robert Fitzwilson of The Portola Group

August 7 (King World News) - “Tinker Taper Soldier Spy”


Some may recognize the title above as resembling the title of the novel by John le Carre published in 1974.  We modified the title a bit, but our version seems to describe what we have seen in the financial and geopolitical world in recent weeks.


The central bankers continue to tinker with the global financial system by a cat and mouse game of suggesting that tapering is in the offing, but then suggesting that there will be no tapering of purchases by the Fed in the foreseeable future....


Continue reading the Robert Fitzwilson piece below...  




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There have been comments that it will be “data-dependent”, but we do not expect the data to improve to an extent that would trigger a change in policy.


In our view, other than QE1, quantitative easing has been about funding the Federal deficit and controlling interest rates.  The latter has been crucial not only to keep the carrying cost of the debt low, but also to float another real estate boom.  The deficit has been declining and the real estate market has recovered, but both are in danger of reversing.  We see no option for any substantial tapering.  Cosmetic changes, perhaps, but nothing of the kind that would cause the Fed’s balance sheet to decline in any meaningful fashion.


All eyes are on the 10-Year U.S. Treasury rate.  We have seen the rate rise to a point where markets were visibly uneasy.  Whether this was a deliberate stress test or a temporary loss of control is not known, but rates cannot go too much higher or the fragile housing recovery will unravel across the country.


The soldier reference above comes from the fact that tensions are rising all over the globe.  The Middle-East continues to be a toxic cauldron which could boil over into further instability and wider armed conflict.  An oil shock, on top of an interest rate shock, would probably send an already weak global economy decisively back into a severe recession, and quite possibly a depression.


The jobs report on Friday in the U.S. was a great disappointment.  Not only are the number of jobs being created wholly insufficient to indicate a recovering economy, but 75% were part-time jobs.  This cannot bode well for savings, consumption, or new home buying, just to name a few.  Not only in the U.S., but for young people around the globe, continued high unemployment and a preponderance of permanent part-time jobs will result in a “lost generation.”


The SPY reference above is for the original exchange-traded fund, the Spider and it’s ticker symbol.  We continue to see headlines about the index making new highs.  Each day that markets are open, there seems to be miraculous recoveries from negative territory by the close of trading, making the “new high” headline a possibility.  The one index that has been extremely strong has been the NASDAQ.  No stick saves have been required.


But right now in the traditional equity space, we are seeing tremendous value in the energy sector.  The recent strength in the price of oil has been reflecting not only tensions in the Middle-East, but we are also discovering that supplies of oil are very tight and inventories have been drawn down by unusually large amounts.  When you couple those factors with a troubling long-term supply/demand situation, as well as the renaissance of oil production in the United States, you have a very favorable environment for companies involved in the sector.


While investor focus is targeting whether or not stocks are fairly valued or over-priced, there are many companies in the energy sector which are generating tremendous cash flows and solid dividends.  In an era where the loss of income is being bemoaned, several of the established companies in this sector not only offer income, but tremendous upside potential as the long-term upward trend in the price of oil reasserts itself, as it must.  There are also a number of newer exploration and production companies as well as suppliers that are experiencing a boom involved in the Bakken and Eagle Ford trends in the United States.


Positions in the metals and selected miners should be maintained, but investors should not overlook value in other areas such as those outlined above.  The SPY and the HUI have been battling during the quarter, but a downward bias in the HUI emerges every time an attempt is made to stay about critical technical support levels.  The SPY seems to benefit from the “invisible hand” every time it looks to breach technical support levels to the downside.  Such is life in the Truman Show.


Given the dismal economic announcements, it is very possible that we will be presented with a new form of QE which is greater in magnitude than what we have seen so far.  If so, we could seen a period similar to 2009-2010 when just about every economically sensitive sector will benefit.  We believe real assets, instead of cash and fixed income, remain relatively safe allocations and this includes physical gold and silver.


© 2013 by King World News®. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed.  However, linking directly to the blog page is permitted and encouraged.


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Eric King

KingWorldNews.com

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