Research Watch

PORTFOLIO POINT: This is a sampling of the week's best research notes. In a world of too much information, we hope our selection helps you spot the market's key signals.

This week Research Watch casts an eye over precious metals. We present a case for silver and look at George Soros’s big bet on gold, despite high prices and his own warnings about a bullion bubble. And if you like gold stocks, there’s also evidence that the best purchases might be found outside the traditional big producing countries. In equities, company insiders are showing signs of being less bearish, while Morgan Stanley says you should sell into the rally in preparation for a long and painful period ahead. We examine the long-term merits of currency trade, which might dominate markets this decade, and present a contrarian view on why now is a good time to buy a Toyota. Sharona Alperin, the real-life inspiration for the hit song My Sharona, discusses her knack for selling US real estate and, on video, 30 Rock takes on CNBC.

A silver supply squeeze might be on its way '¦ “If you missed the great run up in silver last year that saw prices run up 95%, you are being offered a second bite at the apple. The latest round of risk reduction by global hedge fund has bashed the white metal, knocking $5 off of the $19.50 high seen in the heady days of November. Geologically, silver is 17 times more common than the yellow metal '¦ but most of the silver mined has been consumed in various industrial processes, and is sitting at the bottom of toxic waste dumps '¦ Rising standards of living in emerging countries are increasing the demand for silver, especially in areas where there is a strong cultural preference for the jewellery, as in Latin America. That means we are setting up for a classic supply demand squeeze. I think we could run to the old high of $US50 an ounce in the next economic cycle, if another monetary crisis doesn't get us there first. Since silver can trade with double the volatility of gold, this forecast could prove conservative.” (The Mad Hedge Fund Trader in Business Insider, February 17)

And Soros sends mixed signals on gold '¦ “George Soros's Soros Fund Management charged into gold during the fourth quarter, doubling its stake in the world's largest gold ETF. Note that he did this despite the fact that gold prices had already run up substantially. It's also despite the fact that in Davos he recently said that gold was the 'ultimate asset bubble' and that there was 'no alternative to the dollar'. These are the actions of a true trend trader, it seems: 'The $US25 billion New York-based firm became the fourth-largest holder in the SPDR Gold Trust, adding 3.728 million shares valued at $421 million, according to a filing with the US Securities and Exchange Commission yesterday. Its investment was worth about $663 million, the fund’s largest single investment.’” (Clusterstock, February 17)

If you want to follow him into the market, here’s where to look '¦

“The picture gets even sharper when you see the regions where production is increasing, vs. areas where it’s declining '¦ Several countries where gold has been traditionally mined, such as South Africa, Australia, and the US, are suffering production declines, while other areas, like China and South America, are just now starting to rev up.

“In other words, not only is more gold being dug up outside our borders, more is being found there, too. This has obvious implications for the gold stock investor who recognises that the momentum is clearly behind the emerging countries.” (The Money Game, February 17)

Corporate insiders are becoming less bearish '¦ “One of the most bearish omens on Wall Street is for corporate insiders, in the face of a market decline, to accelerate the selling of their companies' shares '¦ Fortunately for the bulls, they did not sell more stock into that decline. On the contrary, recently released data show that insiders have not only cut back on their selling, but also increased the pace of their buying '¦ Each week, Vickers Weekly Insider Report calculates a ratio of the number of shares that insiders have sold over the previous week to the number that they have purchased. For the week ending January 15 '¦ which was the week in which the stockmarket hit its high, this sell-to-buy ratio was 5.15:1, which meant that insiders that week were selling more than five shares for every one that they were purchasing. For the week ending February 12 '¦ the ratio was less than half as high, at 2.42:1. Because of this marked improvement in the sell-to-buy ratio, David Coleman, Vickers editor, views 'the recent downturn as likely being only a near-term correction. We remain cautious, but are increasingly optimistic about the future performance of the overall markets.’ (Mark Hulbert in MarketWatch, February 17)

But Morgan Stanley says sell the rally '¦ “We recommend selling risky assets into strength over the near term. The road to repair will be a long, painful journey buffeted by tremendous uncertainty '¦ While the [Greek] announcement details will garner the headlines, the real issue for the markets is not whether troubled sovereigns get the needed aid/liquidity, but rather whether the aid and the accompanying necessary fiscal retrenchment leads to an unexpectedly soft mid-cycle economic slowdown – or, worse, a double dip – for the developed world '¦ What the markets are missing [is that] CDS spreads on Greek sovereign debt, yield-curve steepness, and earnings expectations implicit in equities are all too sanguine given the severity of the crisis '¦ And because of the close interrelationships between the European banking system and sovereign credit, the contagion effects are much greater than the market perceives '¦ Morgan Stanley continues to avoid the high risk trade '¦ views the Euro as a sell, developed markets as more risky than emerging markets, and prefers high-quality stocks over Treasuries as the problem of debt weighs on the markets.” (Morgan Stanley via Pragmatic Capitalist, February 17)

Three reasons to take up currency trading '¦ “Forget hedge funds, walk away from private equity and tell the derivatives boys they can dump their baffling mathematical formulas in the dustbin under the desk. Instead, become a currency trader. They are set to become the new kings of the financial markets '¦ First '¦ there are doubts about whether nations can service their [debt] obligations. The only way the markets can discipline governments, or pass a verdict on their performance is via the currency markets. However the crisis eventually works out, it is the foreign-exchange markets that will be in the driver’s seat. Second '¦ the dollar’s special status is coming to an end. That may be a good thing after some intense volatility as the world adjusts. Again, it is currency traders who will be in control of that transition. Third '¦ with the dollar on the way down, the world will need something as a reliable store of value '¦ Ultimately it will be foreign-exchange traders who decide what works and what doesn’t '¦ That’s why if you work in the markets, figuring out clever ways of swapping euros into yen, and dollars into pounds would be the best thing you could do. It will be the fastest way to make your fortune.” (Matthew Lynn in Bloomberg, February 16)

A contrarian look at why you should invest in a Toyota '¦ “If you're thinking about buying a Toyota '¦ the time to act is now. Or as soon as sales are back in full swing. Prices for new and used Toyotas have taken a hit, but Kiplinger believes that once the fixes are in place and the media attention dies down, long-term resale values will rebound. At the same time, it would be short-sighted to trade in a Toyota while used-car values are depressed '¦ Buyers in the market for new wheels have started to shun the brand, as well as sister nameplates Scion and Lexus. Kelley Blue Book predicts that new and used vehicle values will continue to soften as cars sit on dealers' lots. That means lower prices for buyers, plus a lot more room to haggle. Kelley says that 2010 Prius models are selling for close to invoice price – a $US1000–1500 drop from sticker price. And even Prius models unaffected by recalls have seen a 1.5% drop in value. You could also get a sweet deal on a used Toyota. Kelley is reporting that used cars now on dealers' lots have sunk in value by as much as 4.5%.” (Kiplinger's Personal Finance Magazine, February 12)

Rosenberg thinks that beating expectations is a trick, but is it? “As of February 16 just under 80% of the S&P 500 has reported earnings and 72% have outpaced analysts’ expectations '¦ Many market pundits and analysts remain sceptical of the data due to the underlying weakness '¦ David Rosenberg has gone so far as to say the earnings beats are a fraud: ''¦ a just-published study covering nearly 500,000 corporate results over 27 years found how companies “round up” their numbers to beat their estimates fractionally, knowing that the fast-money momentum players will trade the stock price higher. On average, it only takes $31,000 in quarterly net income to beat estimates by a penny, which can be handled easily by a tweak to inventory valuation. The report also showed that companies that find ways to 'round up’ are also the ones with the highest propensity for re-statements in the future.’ '¦ While this might be true historically, it is not necessarily applicable here. Companies are beating by a 6% margin vs the historical norm of 3%. In most cases this is not just 'one penny’, but several pennies – a big difference in the world of earnings outperformance. If Mr Rosenberg is upset with the high level of beats he would be wise to tell his fellow analysts to increase their estimates, as they remain very low.” (Pragmatic Capitalist, February 17)

In real-estate it’s important to have an edge '¦ “It was a No. 1 hit for the Knack -- and a career-maker for Sharona Alperin. The hormonally charged single My Sharona struck it big for the Los Angeles band more than three decades ago. The Knack is long gone and lead singer Doug Fieger died on Sunday, but Alperin is still working her connection to the infectiously raunchy rock anthem as she sells high-end West LA real estate to Hollywood types. To say that the song has marked Alperin's life is an understatement '¦ but in the world of luxury real estate, the cachet of having a hit song written for her has served as a unique marketing edge in a city filled with thousands of agents. 'You need to have a niche and anything like that, that will help people remember you is certainly an asset; she actually has that intro music on her website (www.mysharona.com),’ said Marc Giroux, a realtor who has worked with Alperin. Alperin said she first found an inclination for real estate while searching for a home with Fieger. After splitting with him, she took her real estate licence exam and began selling. Alperin dated a professional in the entertainment industry and soon began building a Hollywood clientele '¦ selling real estate has been her way to keep that early celebrity life alive.’” (LA Times, February 18)

Video of the week: 30 Rock’s Jack Donaghy in the 'Hot Box’ '¦ Alec Baldwin’s big business alter-ego talks current affairs in this CNBC spoof.