Friday, September 19, 2014

Geopolitics v. Markets

Global Economics Monthly: September 2014 report published by the prestigious Council on Foreign Relations (CFR) provides an interesting analysis on the connection between geopolitical conditions and financial markets.

Generally, market watchers scan the political landscape and look for developments that might affect the world of finance. In turn, the harvested data is used to develop market predictions and determine the current volatility levels.

However, this connection is not always so clear-cut. The crises in Ukraine and current turmoil in the Middle East are striking testimonies to this reality. The spillover effects are different for each country. For instance, China has economic buffers that protect it from many existential shocks.

The report goes on to say that market investors might overestimate the impact of political developments on the financial markets. The cause and effect factors are not always clear and the implications of political changes mostly depend on the country’s connectedness to the global markets.

So, what are some of the metrics we can look at?

The central bank policy plays a major in shaping the economic realities. For instance, the low interest rate stimulates economic growth and provides incentives to open new businesses and take risks. The author mentions that the federal interest rates are expected to go up in mid-2015.

One of the trusted metrics that is used to measure market volatility is the VIX index. Current figures show that market volatility has risen, but continues to remain at historically low levels. This news provides some confidence for market traders.

On the political landscape, one can look at the Eurozone, which is plagued with systemic problems. The lack of economic resilience has made it vulnerable to external crises and shocks. Furthermore, due to Europe’s connectivity with the rest of the world, European problems are world’s problems.

Therefore, market players should look to Europe and check the VIX index to tailor their moves in the game. 

Thursday, September 18, 2014

Positivity In The Purported Market Bust

Is the US stock market in the downward curve in the proverbial business cycle of boom and bust?

For entire summer, the proliferation of bad news has been evident from every headline and talking point. Countries consider cessation from their parent nations, the Euro zone is facing a serious financial conundrum and economic sanctions continue to escalate against Russia’s aggression. In addition, the gold and silver continue to trade sideways and the future of stock market is clouded in mystery.  
Operating in uncertain financial environment is becoming a key feature of every analyst and practitioner.

We are told that the capital managers are increasing their short positions. The stock market has been bearish, will this continue and manifest into a crash akin to 2008? It has been over five years since the last one. Are we entering into the bust phase of the financial cycle?

In the investment circles it is well known to follow the moves of “financial alchemists”, who tend to over perform during downturns and market crashes. The portfolio of major venture capitalists is often the indicator of where the market is going. The hedging moves signify that the financial markets will go through some systemic changes in the future.

In an exclusive interview with Money Morning, CIA financial analyst Jim Rickards, warns of the imminent stock market crash that would result in the widespread market meltdown.
Although I would not ascribe to the doom and gloom scenario, there are a number of signs that investors need to look at.

If we are entering into the time of financial uncertainty, how can we save and multiple little that we have? 

The stock portfolios can be converted into cash or other liquid assets. Another option is to reallocate them into less volatile stocks that are less susceptible to market changes. The recommendation is to purchase low volatility stocks with a healthy dividend yielding history.

We can use a variety of metrics to determine the volatility of a given stock. In simple terms, volatility is the responsiveness of a given stock to the market changes.

Beta, which is provided by many trading platforms, is one of these metrics. The beta of less than 1 indicates that the stock will not fluctuate as much in response to the changes in the market. Beta of more than 1 indicates a highly volatile stock. This does not mean that the stock will crash or quadruple each time there is a change, but the fluctuations become more frequent and at a shorter period.

When good stocks plummet or fall in price, the crowd tends to sell their positions at whatever prices they can get. The prevalent philosophy among affluent investors is to hold strong to their positions and, yes, buy more when the prices are still low. Whatever came down will eventually come back up. That's their game plan and they follow it judiciously.

Of course, it's easy to say but hard to do.

However, consider this as a practice period to test your positions and charter new territories. Be positive, because the time of change is also the best opportunity to look for greater and better things.

Good luck...because you'll need it.

Friday, September 12, 2014

Dude, Where Is My Gold…And Silver?

Nowhere to be seen, because the prices have fallen dramatically over the past 3 years. In fact, the prices of precious metals have dropped so much that investors forgot that they are even an option. The gold has descended to the $1,232 mark and has been oscillating in that range for a while.  Some wonder if precious metals are still worth the investment. George Soros certainly thinks so. He is known to hedge his capital in gold and silver before the expected “financial shock”.

In the aftermath of the Great Crash of 2008, gold and silver prices continued to rise, thereby reinforcing many wild speculations that the price of gold will reach $2,500 and beyond. Of course, it never did. Precious metals like any other financial instruments require undivided attention and constant scanning of the environment. The economic, political and social forces shape the value trend of every commodity in the marketplace. However, a mere “hope” cannot be traded in open markets.

I believe that hope is what drove many people to buy gold and silver coins with an inflated expectation that they will reap great wealth in the near future.

It should be remembered, that gold and silver are good hedging financial vehicles and long term investment tools. Precious metals are fantastic to diversify your portfolio, but poor for short term trading. If you are looking for a high risk / high return instruments, stock market is your best choice.

Following the Great Recession of 2008, a number of radio talk show hosts and TV pundits were advising every freedom loving patriot to purchase gold and silver to protect their financial portfolios. Some commentators went as far as stating that everything will crash and the country will descent into chaos and destruction. The only protection they saw was canned food, bullets and real gold. As is usually the case, the doom and gloom scenarios never materialize.

Gold kiosks and exchange shops were sprawling across the country and folks from all walks of life were getting into precious metals. These actions have driven the prices up to unprecedented levels and reinforced the inflated expectations of rapid wealth creation. The lucky bunch had made money in the bullish trend, while others procrastinated and ended up with the cheaper commodities.

Wealth managers consider gold and silver as hedging mechanisms that they employ in the volatile economic times. However, precious metals have remained part of a relatively long-term investment strategy.

Furthermore, the current macroeconomic indicators show that the US economy is continuing to improve, thereby suppressing gold and silver prices. 

For almost three years, silver has been in the bears market and the price has fallen to a new low. Technical analysts predict that silver will continue to trade sideways due to the uncertain political climate. This trend will be partially determined on the outcome of the conflict between Russia and Ukraine. Geopolitics is a known factor of influence in the financial markets.

What is the lesson learned? Markets are volatile, dynamic and prone to change. The market place is susceptible to the gravitational forces that will bring the inflated expectations down to the grim reality of supply and demand.

For instance, currently the silver is trading at $18.69 per ounce and it is difficult to predict where it is heading next. It might reach a base level and shoot back up to the upper 20s or remain in the teens until the next crisis. The prediction that silver will reach $50 mark is unrealistic at best and deceiving at worst.  We are more likely to see silver to trade sideways and continue to stay in a $15-20 price range.

Therefore, my recommendation is to refrain from accumulating gold and silver. For silver, I would wait until the price drops to mid-teens (or gets close) and then make buying moves. For gold, the geopolitics will decide where our money will go.

Wednesday, September 10, 2014

Why Iran?

Have you wondered why Iran keeps making its way back to the headlines in America? The fear mongering abounds, the outcry does not seem to cease and a nuclear apocalypse is said to be imminent. The threat remains the same—Iran almost, almost…already…kind of got the bomb. No, wait…it got all the necessary components, nuclear fuel from Russia, etc. to make the bomb that it can use to leverage its position in the Middle East.

In the meantime, politically dysfunctional Pakistan and rogue North Korea have tons of weapons and missiles, but these facts make only an occasional appearance in the mass media outlets. In addition, the aforementioned countries do not receive the same level of demonization as Iran does.
Thus, the question arises: Why Iran? Why Iran and not North Korea, Pakistan or even Somalia (save for the occasional pirate stories).

What makes Iran so special to be the prime target of every newspaper commentator and TV pundit? Furthermore, what do we know about Iran, its history, culture, heritage and current situation to throw our weight behind all proposed sanctions, embargoes and other devastating actions.

Why Iran remains the target of the USA foreign policy? This is the intellectual challenge I am willing to undertake to understand the idiosyncrasies of this situation. Moreover, I hope my readers will assist me in furthering this understanding.

The relations between USA and Iran began to deteriorate after the Iranian popular revolution of 1979, which ousted the monarch and established the Islamic Republic of Iran. In the aftermath, America adopted a harder line toward the Middle East in order to preserve the regional status quo.

Regular readers of the Foreign Affairs magazine, published by the prestigious Council on Foreign Relations, might have read numerous policy articles on the Middle East region. The apparent fact is that this region is composed of diverging nation-states, some of which have aspirations for regional dominance. In order to preserve status quo, America is actively engaged in the region to prevent any one country from reaching the status of the regional hegemon and to continue to set its own policy. 
The Iraq was taken out of the picture during the American led invasion in 2003. The next aspiring actor in the region is Iran. Its strength and vitality must be extinguished in order to fulfill the policy of preventing any one power to control region’s development, thereby ensuring the preservation of American primacy in the region.  

It is quite apparent that United States’ policy toward Iran is twofold. First, all the war conflicts and military operations carried out by the Western governments appear to take place around Iran, which is in tune with the policy of encirclement and containment. Second, United States will use any means necessary to prevent the ascent of any one country into the hegemonic sit of power in the Middle East. The hegemon will ultimately dictate its policy to the region and might unite all Arab states under one common front, which will pose a threat to the U.S. interests in the region.

Even if Iran does go nuclear, should we become more fearful of it than of rogue North Korea and unpredictable Pakistan who currently have the capability to carry out a nuclear strike? In addition, Pakistan is politically unstable and vulnerable to terrorists and non-state actors who contemplate stealing a nuclear device. Furthermore, have you seen any real military response to the threats that North Korea has been issuing since it has acquired a nuclear weapon? So, why all this focus on Iran, who in addition to lacking nuclear weapons, does not have a delivery system for a successful launch?

Although, the Iranian government is known for their radical rhetoric and unwarranted threats, but they exercise reasonable caution when it comes to taking military actions outside their borders. Tehran is not as crazy as the leader of the North Korea and it is in their interest to preserve stability and uniformity in the Middle East. The fanatical speeches are mostly directed towards dissenting political bodies and other troublemakers who are considered a threat to the Iranian regime.
It is true that in the current international nuclear non-proliferation climate, the leading countries would like to see a nuclear de-escalation and a shift toward a safer world. However, countries who choose to live and act independently should not be muscled and intimidated by more powerful world actors.  

As was pointed out by Mohammad Java Zarif in the Foreign Affairs magazine, Iran is one of the few countries that “remained independent from outside powers and practiced genuine nonalignment, lending it a particular freedom of action within the existing global order.” Perhaps Iran’s independence is another reason why it has to pay the price to the new global order that is attempting to emerge. Iran wants to take its own road to happiness, whatever they conceive it to be, which apparently deviates from the Western plans.  

Well, I wonder what happened to the concept of Inclusive Diversity and why can’t the West leave Iran alone. 

Instead of taking a hard-nosed approach, U.S. government should focus on economic growth and development.

To sum up, I would like to leave you with the quote from Hillary Rodham Clinton, which appeared on the pages of the Foreign Affairs magazine. Her article in the November/December 2010 issue is titled “Leading Through Civilian Power” and focuses on the American diplomacy and development abroad. Perhaps an economic miracle that was achieved in the South Korea and Japan can be replicated elsewhere.

“Economic growth is the surest route out of poverty, and expanding and strengthening middle classes around the world will be key to creating the just and sustainable international order that lies at the heart of the United States’ national security strategy.”

For anyone interested in the works used for this blog post, please contact the author. I strongly encourage comments and suggestions.