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By MoneyMorning.com.au

The story of the moment is the Dow Jones breaking out to a new all-time high. It certainly makes a nice headline, but does it really mean anything?

The first point to understand is that the Dow Jones is a price weighted index. Rather than relying on the changing market cap of a company to calculate the movements, the index uses the changing price instead.

This means that a higher priced stock (eg. 3M Co.: share price USD$104, market cap USD$72 billion) will have more influence over movements in the index than a smaller priced stock (eg. Microsoft: share price $28, market cap USD$237 billion).

This obviously doesn’t make much sense because there is no relation between the price of a stock and its market cap.

Also there are only 30 stocks in the index, so it’s not a broad reflection of the overall health of the market. For example if Apple [NASDAQ: AAPL] was in the index there is no way that the Dow Jones would be hitting all-time highs, because Apple is currently down 38% from its all-time highs set last year.

But having said that there is no doubt the money printing is currently working wonders on the US equity markets. The S&P 500 is also only a skip and a jump from its all-time high.

I’m sure I’m not the only one who thought it would be impossible for the market to retest all-time highs so soon after the market crash.

US Federal Reserve chairman Ben Bernanke always said he wanted to get stock prices up so that the wealth effect would kick in and help heal the US economy. He has certainly succeeded in stoking prices higher, but has he succeeded in getting consumers to open their wallets? Not really, and here’s why…

The last US GDP figures were actually negative in the US and unemployment remains stubbornly high.

A Bleak Picture Behind the Headlines

The Wall Street Journal even noted yesterday that 50,000 people slept each night in New York City’s homeless shelters, which is a record. In the article Mary Brosnahan, president of the coalition for the homeless said that, ‘New York is facing a homeless crisis worse than any time since the Great Depression.’

So it looks like Bernanke’s printed dollars aren’t filtering down to the masses as he told us they would. What a surprise.

Legendary hedge fund trader Stanley Druckenmiller said on CNBC the other day that the party in stocks may continue for a while longer and he doesn’t know when it will end but ‘my guess is it’s going to end very badly’.

A great comparison recently on ZeroHedge.com between now and the Dow’s previous all-time high in 2007 paints a very bleak picture:

• Dow Jones Industrial Average: Then 14164.5; Now 14164.5
• Regular Gas Price: Then $2.75; Now $3.73
• GDP Growth: Then +2.5%; Now +1.6%
• Americans Unemployed (in Labor Force): Then 6.7 million; Now 13.2 million
• Americans On Food Stamps: Then 26.9 million; Now 47.69 million
• Size of Fed’s Balance Sheet: Then $0.89 trillion; Now $3.01 trillion
• US Debt as a Percentage of GDP: Then ~38%; Now 74.2%
• US Deficit (LTM): Then $97 billion; Now $975.6 billion
• Total US Debt Oustanding: Then $9.008 trillion; Now $16.43 trillion
• US Household Debt: Then $13.5 trillion; Now 12.87 trillion
• Labor Force Participation Rate: Then 65.8%; Now 63.6%
• Consumer Confidence: Then 99.5; Now 69.6
• S&P Rating of the US: Then AAA; Now AA+
• VIX: Then 17.5%; Now 14%
• 10 Year Treasury Yield: Then 4.64%; Now 1.89%
• USDJPY: Then 117; Now 93
• EURUSD: Then 1.4145; Now 1.3050
• Gold: Then $748; Now $1583
• NYSE Average LTM Volume (per day): Then 1.3 billion shares; Now 545 million shares

There’s not much about the comparison above that fills me with confidence that this breakout to new highs is sustainable.

When the upside momentum is as strong as it is currently it can be nearly impossible to imagine the stock market selling off at all. People who have missed out on the rally will be chasing the market higher and higher, adding fuel to the fire.

Most of the bears will have given up trying to short the market long ago. And so, breaking out to new highs can inspire a new set of investors to make the leap into the market hoping for even higher prices.

The Risk Lies This Way

I’ll keep hammering home the view that the highest likelihood from here is that we see a false break of the highs and a sharp correction in prices.

The topping process can take weeks and even months to play out while the market whips traders out of positions. But I feel very confident that the risk is heavily to the downside over the next month or so.

You probably know the old saying of, ‘Sell in May and go away’, but the fact is the selling has arrived in April over the last few years.

The chart below shows the S+P 500 over the last three years…

S&P 500 Daily Chart

Click here to enlarge

I’ve placed vertical lines in the chart around mid-April of each year. It’s quite clear there has been a multi-month sell-off after April in each year.

I wouldn’t be surprised at all if many market players try to pre-empt the April sell-off this year by selling in March instead. The momentum is still definitely up but in my view the risk of buying now is extremely high.

Murray Dawes
Editor, Slipstream Trader

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By MoneyMorning.com.au

After a two-month rise, the oil price has pulled back.

On 12 November last year, the International Energy Agency (IEA) declared that, thanks to ‘fracking’ – blasting dense underground rocks apart to release fossil fuels within – the US would overtake Saudi Arabia to become the world’s biggest oil producer by 2017.

You might have thought this would be extremely bearish for the price of light crude oil. Greater supply leads to falling prices, after all.

Yet as it so often seems to, the reverse happened. Oil headed higher almost non-stop for more than two months after the announcement was made.

But now it seems to have hit a hurdle. Given that this is one of the most important commodities in the world, I want to take a look at where the oil price is likely to go next in today’s Money Morning…

A Potential Trade on a Rallying Oil Price

That IEA announcement pretty much marked the low. Over the next two and a half months, the price of light crude oil (as measured by the West Texas Intermediate – WTI – benchmark) duly rose nearly 20% from $84 a barrel to $98 by the end of January.

That phrase ‘buy the rumour, sell the news’ is ringing my ears once again. We should all have it taped to our computer screens, or some other conspicuous place. It’s a great warning flag for when a particular market gets gripped by excessive expectation.

However, the oil price has now turned down, falling about 10% in the last two weeks. It saw a double top at $98, and has now fallen to about $90 – just as the Dow Jones Industrial Average broke out to new highs.

I have illustrated the recent action in the chart below.

The question we must now ask is, ‘Where will the current fall end?’

Light crude oil staged a mini-rally, but I’m not holding my breath. One possible line of support is on that dotted black trend line I have drawn. If that doesn’t hold – and I’m not betting it will – then I suspect we will give back all of the recent gains and head back into the $84-85 zone.

I have drawn some areas where I see support on the three-year chart below. One in the $85 area; two around $75; three just below $70; and finally, with the dotted blue line, at $65.

I would be very surprised to see us back at $65 any time this year. Anything can happen, of course. But buying at $84-85, with a stop just below that red band, at say $81-82, seems a decent gamble to me.

If this doesn’t work you might try the same trick at the second red band in the $75 area.

The pattern of many markets over the last three years has been for them to trade in increasingly narrowing ranges. I have written about this in both gold and sterling in recent weeks. We can see the same thing happening in light crude.

Here is a chart of it since its historic low in 1999. I have drawn a red trend line off the 1999 and 2009 lows. In dotted red lines I have shown how that range is narrowing. On this log chart – which measures the percentage gain on the Y-axis, rather than price gain – that narrowing range is even more distinct.

If you follow chart patterns, you might also see a ‘bullish pennant’ forming. Such a pennant – or a flag formation – is seen as a continuation pattern, representing a pause in an on-going bull market. The market makes a big move (1999 to 2008), pauses and consolidates at these higher levels, then heads on up in its merry way.

What Technical Analysis is Useful For

This sounds banal, but my experience with such formations is that they work when they work, and they don’t when they don’t. The reason I like them and find them useful (and this probably goes for all technical analysis methods), is because they help manage risk and identify points at which to place entry and exit points, stop-losses and so on.

That long-term chart of light crude oil, for example, furthers my belief that a bet on oil at $84-85, with a stop just below the dotted line (perhaps at $81-82) might prove a good one.

Fairly soon that pennant formation is going to be broken. The way that oil breaks out of it – above or below – should be a good indication of its long-term direction.

But given the chart patterns, not to mention the inflationary practices of central bankers and the simple fact that oil is getting harder and harder to find, and, finally, the current indifference towards oil among speculators and investors (it’s all about the stock market, folks), I suggest that long-term direction is going to be up and very much so.

Dominic Frisby
Contributing Editor,

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Publisher’s Note: This article originally appeared in MoneyWeek

From the Archives…

Gold’s Dark Hour Before Dawn
1-03-2013 – Dr. Alex Cowie

The Primary Colours of Investing
28-02-2013 – Kris Sayce

Revealed: Inside a Share Trader’s Den
27-02-2013 – Murray Dawes

Where to Find Value in this Rising Stock Market
26-02-2013 – Kris Sayce

China Bull Versus China Bear – There Can Only Be One Winner
25-02-2013 – Dr. Alex Cowie

By MoneyMorning.com.au

How to get past money illusion now that it’s day-break in America once again…

Forget about the Apple effect. Not including AAPL in its 30 constituents is just one of the Dow Jones Industrial Average’s many quirks.

So too is its ever-changing Dow divisor, a number seemingly picked at random to smooth out the math in the DJIA. But neither of these oddities changes the fact that this oddest of equity averages is hitting new all-time highs right now.

Signalling, if you ever doubted it, that the United States’ economy is being re-forged as well.

But wait! If you think there’s any link between the rise of the stock market and the health of the economy, then you might want to double-check the Dow’s value in real inflation-adjusted dollars.

Or better still, now that it’s morning in America once again, adjust the Dow by the cost of eating your breakfast…

Alternatively, you could judge the Dow in terms of the stock market’s dark, benighted opposite – a lump of gold bullion. Many people do, in fact. The Dow/Gold Ratio as it’s known plots the value of the 30 Dow stocks in ounces of gold.

As you can see, the recent drop in gold bullion prices, plus the Dow’s re-found vitality, have dented the stark trend of the last 13 years. During that time gold cut the cost of the United States’ biggest listed businesses (well, a random selection of them) by some 85% top to bottom. Some die-hard gold bugs pointed time and again (ahem) to the historical low at 1 ounce for 1 unit of the DJIA.

Stocks have rallied however by 43% since the two-decade low of 6.3 ounces in the Dow/Gold Ratio hit in late-summer 2011. And turning to the broader, more respected (and AAPL-laden) index the S&P500, it was overtaken by gold – in nominal terms – back in April 2010. That was odd, as we noted at the time. Because gold in dollar terms hadn’t traded above the S&P in almost two decades.

Each of these 3 charts looks backwards, of course. None can say much about where the cost of breakfast goods, gold or productive business assets might go from here. But even with the Apple issue aside, it’s worth putting the Dow’s new record highs into context.

Against the backdrop of zero rates and quantitative easing, at least the Dow/Gold ratio, like our new Dow/Breakfast measure above, doesn’t fall for money illusion.

Adrian Ash
Contributing Writer, Money Morning

Publisher’s Note: Adrian Ash is head of research at BullionVault.

Join Money Morning on Google+
From the Archives…

Gold’s Dark Hour Before Dawn
1-03-2013 – Dr. Alex Cowie

The Primary Colours of Investing
28-02-2013 – Kris Sayce

Revealed: Inside a Share Trader’s Den
27-02-2013 – Murray Dawes

Where to Find Value in this Rising Stock Market
26-02-2013 – Kris Sayce

China Bull Versus China Bear – There Can Only Be One Winner
25-02-2013 – Dr. Alex Cowie

By Jim Nelson – insideinvestingdaily.com

For income investors, it has always been tough to find a way to invest in gold.

Gold bullion doesn’t pay you any income. And gold mining stocks have never been great dividend-paying companies.

Big names in the gold mining sector such Barrick Gold Corp. (NYSE:ABX) and Goldcorp Inc. (NYSE:GG)
have averaged dividend yields of just 1% — about a quarter of what the
dividend-friendly utilities sector has yielded. And many others haven’t
even paid that much.

But that’s changing. In fact, as I’ll show you today, we could be
entering a new era of “golden income checks” from some of the world’s
biggest gold mining stocks.

And that’s a BIG opportunity if you are an income investor and also long-term bullish on gold, like me.

The short-term price movement for gold and gold mining stocks has
been miserable of late. The gold price has dropped 12% over the last
four months. And gold miners have been even worse hit. The Market Vectors Gold Miners ETF (NYSE:GDX) is down 33% over the same time.

This is a rare opportunity for income investors. That’s because gold
mining stocks’ prices are falling just as their dividend payments have
been rising.

And one company is leading the charge toward higher dividend payouts. In April 2011 gold producer Newmont Mining Corp. (NYSE:NEM) announced it would start paying its dividend based on the price of gold.

Newmont has since refined this policy. Last July, it announced it
would link its dividend payout to the average gold spot price for the
preceding quarter. This has led the company to hike its first quarter
dividend by 21% this year compared to the same quarter last year, based
on an average gold price for the fourth quarter of $1,718/oz.

This makes Newmont one of the highest yielding mining companies in the world. The
stock now yields 4.4% — or almost double the S&P 500 average of
2.5% and well over double the puny 1.8% yield on the 10-year Treasury
note.

Newmont has proven and probable reserves of 99 million ounces of gold
in the ground. So even with gold selling for $1,000/oz, Newmont would
still be netting over $300 per ounce, plenty to continue paying its
dividends going forward.

Of course, gold prices could continue to fall. And this would affect
Newmont’s dividend payments. But even if gold falls another $100 (not
likely, but certainly possible) Newmont’s dividend yield would still be
above 3% — triple the historical rate for gold miners.

As my colleague Chris Hunter has written about, despite recent price falls, the fundamentals are still supportive of gold.

Thirty-eight countries around the world are pursuing a zero or
negative real interest rate policy. And many of the world’s major
developed central banks — including the Fed, the European Central Bank,
the Bank of Japan and the Bank of England — are pursing a policy of
limitless money printing.

Gold hasn’t been responding to this inflation threat of late. But
over time, you can expect the world’s only “honest currency” to perform
well in a time of widespread currency debasement. And that means that
beaten-down gold mining stocks such as Newmont should benefit.

So not only is Newmont’s 4.4% dividend yield extremely attractive,
but also adding some exposure to gold in your portfolio is a prudent
protection against future inflationary cycles.

I recommend you take advantage of the correction in prices to buy
shares in Newmont Mining and lock in some “golden income checks.” This
opportunity won’t be around forever.

Sincerely,

Jim Nelson – insideinvestingdaily.com

By www.CentralBankNews.info     The Central Bank of West African States (BCEAO) cut its benchmark marginal lending rate by 25 basis points to 3.75 percent in light of moderate inflation and weak global demand.
    The central bank, which has held its rates steady since June 2012 when it cut by 25 basis points, said inflation expectations over the medium term are in line with the bank’s objective, with inflation forecast at 1.5 percent year-on-year in the fourth quarter of 2013.
    “Factors behind the moderation of the inflation include weak global demand that mitigates the risk of imported inflation and lower food prices in the perspective of a 2013/14 crop that is satisfactory,” the central bank said in a statement.
    Inflation in the eight states that comprise the West African Monetary Union has gradually declined since last October to 2.2 percent at the end of January.
    Economic growth in the eight nations confirms real Gross Domestic Product growth of 5.8 percent in 2012 and “for 2013, the revival of economic activity is expected to continue with a projected real growth rate of 6.5%,” the central bank said.
    “Analyzing the economic situation, the Committee noted the persistence of a gloomy international economic situation fraught with uncertainty,” the central bank said.
   
    www.CentralBankNews.info

By www.CentralBankNews.info     Poland’s central bank continued to cut interest rates earlier today, saying economic growth is expected to remain moderate, even if it picks up in coming quarters, and this will restrain inflation.
    The National Bank of Poland (NBP), which has cut rates by 150 basis points since embarking on an easing cycle in November 2012, said these rate cuts “will allow inflation to run close to target in the medium term and at the same time supports recovery of the Polish economy.”
    The bank cut its rate by a larger-than-expected 50 basis points earlier today in light of the risk that inflation may run below the bank’s target in the medium term. The NBP targets inflation of 2.5 percent target, plus/minus one percentage point.
     “In the opinion of the Council, incoming data confirm persistently low economic growth in Poland, no wage pressure and low inflationary pressure. Economic activity may gradually improve in the coming quarters. However, GDP growth will probably remain moderate, which will continue to contain inflationary pressure,” the bank said in a statement.
    The NBP said data point to low economic growth early this year with rising unemployment holding back wage growth and household and corporate lending subdued.

    Under the bank’s latest forecasts, Poland’s Gross Domestic Product is expected to grow at an annual rate of between 0.6-2.0 percent in 2013, down from the November forecast of 0.5-2.5 percent, and between 1.4 and 3.7 percent in 2014, compared with 1.1-3.5 percent. In 2015, the forecast looks for growth of 1.9-4.4 percent.
    In the fourth quarter of last year, Poland’s Gross Domestic Product rose by 0.2 percent from the third quarter for annual growth of 1.1 percent, down from 1.8 percent. In 2012 economic growth was estimated to have declined to 2.0 percent from 4.3 percent in 2011.
   Inflation in January fell more than expected to 1.7 percent from 2.4 percent in December and core inflation also remained low, which the “confirms limited demand pressure in the economy,” the bank said, adding that inflationary expectations decreased further.    The bank said there is a 50 percent probability of inflation being 1.3-1.9 percent in 2013, down from the November forecast of 1.8-3.1 percent, and between 0.8-2.4 percent in 2014 and between 0.7 and 2.4 percent in 2015.

    www.CentralBankNews.info
     
    

By The Sizemore Letter

Life hasn’t gotten any easier for Big Tobacco.  Last week, Russia became the latest country to impose major new restrictions on smoking in public places.  Starting in June, Russians will no longer be able to smoke in restaurants, and cigarette advertising will be banned.

I have my doubts as to how strictly the ban will be enforced, but the fact remains that one of the friendliest countries towards public smoking just got a lot chillier.  According to the Wall Street Journal, 44 million Russians smoke, and they collectively account for 9% of Philip Morris International’s (NYSE:$PM) profits.  Japan Tobacco and British American Tobacco (NYSE:$BTI) get 11% and 8% of their profits from Russia, respectively.

Russians will not quit smoking overnight in response to the ban. That didn’t happen in the United States, and it won’t happen in Russia.  It may be years before it makes a serious dent in consumption.  But it does blow a major hole in one of the bullish arguments supporting Philip Morris International: emerging markets will not be growth markets for tobacco forever.  As countries reach higher levels of development, the costs to the health system prompts a crackdown.

We saw the same in China.  In 2011, China banned smoking in restaurants, bars, and in several other enclosed public spaces, though it is still legal to smoke in offices. But there are now plans to ban smoking in virtually all public place, New York City style, by 2015.

Again, we’ll see how strictly it is enforced.  Though China has no qualms with crushing freedoms of expression or religion, the right to light up a cigarette is one they seem to let slip.

Latin America?  Same.  Brazil, Argentina, Chile, and Peru all have bans in most indoor areas, and enforcement is starting to be taken seriously.

India?  You guessed it.  As of 2008, smoking was banned in most public places, though enforcement has been a little touch and go.

By now, you should be getting the picture.  Though enforcement varies from country to country, there is really no such thing as a “tobacco friendly” country anymore.  Everywhere you look, the noose is getting tighter.

Sizemore Insights readers know that I have been a Big Tobacco fan for a long time.  They tend to be dividend-paying powerhouses with consistent returns.  And like other “vice investments,” they tend to be priced as perpetual value stocks, which has made them an outstanding performer in recent decades.

But I don’t advocate buying tobacco stocks at any price.  Tobacco stocks have been a great investment precisely because they were cheap and no one wanted them.  But you can’t make that argument today.  In fact, if anything they have become trendy.

Last month, I wrote that At Current Prices Tobacco is a No-Go, and I want to repeat that sentiment today.  Domestic Big Tobacco stocks such as Altria (NYSE:$MO) and Lorillard (NYSE:$LO) trade at a slight premium to the S&P 500 earnings multiple.  That simply should not be.  These are companies in terminal, albeit gentle, decline.

And Philip Morris International, the “growth stock” of the bunch, trades at a significant premium.  Philip Morris trades for 18 times trailing earnings and yields 3.7%.  That is simply not a high enough dividend yield to make this stock worthwhile given the better alternatives out there.  “Boring” tech stocks like Intel (Nasdaq:$INTC) and Microsoft (Nasdaq:$MSFT) both offer higher dividend yields, as do most midstream master limited partnerships.

If Big Tobacco has a substantial price correction, then I might be interested again.  But for now, I consider these stocks as toxic as the cigarettes they sell.

Disclosures: Sizemore Capital is long MSFT and INTC.

SUBSCRIBE to Sizemore Insights via e-mail today.

The post The Russian Smoking Ban: Will It Snuff Out Big Tobacco Profits? appeared first on Sizemore Insights.

By www.CentralBankNews.info     Canada’s central bank left its target for the benchmark overnight rate steady at 1.0 percent, as expected, saying its current accommodative policy stance is appropriate for the time being given the slack in the economy, the muted outlook for inflation and a better balance in household finances.
    But the Bank of Canada (BOC) added its “considerable monetary policy stimulus” will still have to be withdrawn at some point to meet its 2.0 percent inflation target, maintaining a slight bias toward raising rates.
    The BOC started warning financial markets in April that it would have to raise rates but last month pushed back the expected timeframe for raising rates, saying a tightening was less imminent than previously anticipated due to a more muted outlook for inflation and the beginnings of a more balanced financial situation for households.
    The bank said in its statement that it expects the “growth in household credit to moderate further, with the debt-to-income ratio stabilizing near current levels.”
    Canada’s economy expanded by an annualized 0.6 percent in the fourth quarter, the bank said, with solid domestic growth offset by a sharp reduction in the pace of inventory investment.
    “The Bank expects growth in Canada to pick up through 2013, supported by modest growth in household spending combined with a recovery in exports and solid business investment,” the BOC said.

    Exports, however, are likely to remain below their pre-recession peak until the second half of 2014 due to restrained foreign demand and “ongoing competitiveness challenges, including the persistent strength of the Canadian dollar,” the bank said.
     The BOC said the global economic outlook was largely in line with its forecast from January and global financial conditions remain stimulative. Fiscal drag in the United States over the next two years is likely to be more front-loaded than expected due to the current sequestration budget cuts and the recession in Europe continues.
    Growth in China, however, has improved while economic activity in other major emerging countries is expected to benefit from policy stimulus, the bank said.
    Inflation in Canada has been more subdued than expected and headline and core inflation is expected to remain low in the near term before gradually rising towards 2.0 percent as the economy returns to full capacity.
    Canada’s headline inflation rate eased to 0.5 percent in January from 0.8 percent in December.
    Compared with the third quarter, Canada’s Gross Domestic Product rose by 0.2 percent in the fourth quarter for year-on-year growth of 1.1 percent.

   
    www.CentralBankNews.info

By www.CentralBankNews.info Here’s today’s Central Bank News link list, click through if you missed the previous link list. The list comprises news about central banks that is not covered by Central Bank News. The list is updated during the day with the latest developments so readers don’t miss any important news.

By www.CentralBankNews.info     Poland’s central bank cut its reference policy rate by a deeper-than-expected 50 basis points to 3.25 percent and said it would explain the reason for its third rate cut this year at a press conference later today.
    The National Bank of Poland (NBP), which has cut rates by 100 basis points this year following a reduction of 50 basis points in 2012, also cut its lombard rate to 4.75 percent, the deposit rate to 1.75 percent and the rediscount rate to 3.50 percent.
    The size of the cut was unexpected as last month only two members of the bank’s 10-member policy-making council had voted for a 50 basis point cut in rates. In February the central bank cut rates by 25 basis points and did not signal any future moves.
    In the fourth quarter of last year, Poland’s Gross Domestic Product rose by 0.2 percent from the third quarter for annual growth of 1.1 percent, down from 1.8 percent. In 2012 economic growth was estimated to have declined to 2.0 percent from 4.3 percent in 2011.
    Poland’s inflation rate fell to 1.7 percent in January from December’s 2.4 percent, in the lower range of the bank’s target of 2.5 percent, plus/minus one percentage point.