QE3 has landed.
This week, Federal Reserve chairman ‘Helicopter’ Ben Bernanke demonstrated his determination to push up the price of just about everything by announcing open-ended money-printing for the US.
That’s right. Unlike previous bouts, where the Fed created a certain amount of money to buy a fixed amount of bonds, QE3 will be ongoing. The Fed will buy $40bn of bonds a month until US unemployment improves “substantially”.
That sounds a lot to us like “the beatings shall continue until morale starts to improve.” But it’s certainly good news for one asset we like – gold.
The best way to make money from gold
But while we think you should have a chunk of the yellow metal in your portfolio as insurance, at this stage you might be even better checking out gold miners. Or at least, that’s what one of our newest investment writers, Simon Popple, certainly believes.
Simon runs his own capital-raising firm in the City, helping to secure finance for commodity projects. As a result he’s had a front row seat on the gold mining story for the last two decades. He is convinced that now is the time to buy in. He can explain his techniques better than I can, so take a look at his latest report- this has generated a lot of interest amongst our readers since he released it on Wednesday, so it’s well worth your time.
The truth about energy
In Thursday’s Money Morning Matthew Partridge took an in depth look at another side of the commodity market that’s also been boosted by QE3 – energy.
Energy experts tend to fall into two camps, says Matthew. On one side are those who think we’re about to enter an age of abundant cheap energy as the US and others exploit vast reserves of shale gas and oil.
On the other, you have ‘peak oil’ pundits claiming that, because conventional oil supplies have peaked, the days of cheap energy are over.
So who’s right?
“There’s some truth in both arguments,” says Matthew. But the truth is that “both trends have been over-exaggerated”.
That’s because “both the bull story on oil and the bear story on gas… assume that current trends will continue. This is a natural human tendency – you see it played out in markets across the globe, every day. We all think that today will be much the same as yesterday was, and then get shocked on the days when it isn’t.”
Peak oil theorists often assume that new discoveries won’t add much to known reserves. “However, history shows that reserve levels are anything but static. The oil industry has consistently managed to find new oil at a pace that keeps up with demand”, says Matthew. Also, people eventually stop using as much oil – cutting back on driving for example – if prices stay high for long enough.
The same tendency to extrapolate current trends may also undermine visions “of a shale gas utopia”. One reason why gas production has shot up is because of the nature of contracts many US producers have. They have to sell as much gas as possible very quickly, even if it’s not very profitable. That’s unlikely to continue, says Matthew.
In short, “oil is likely to get cheaper, and the price of gas is likely to go up”, says Matthew. He details some ways to take advantage of these trends here: The experts are wrong on energy – here’s how you can profit.
The UK’s employment riddle
Britain’s employment figures have had economists scratching their heads, blogs Merryn Somerset Webb.
There are two main questions: “How, they ask, can employment be going up so fast in a recession? (The number of people in work went up by 236,000 in the three months to July, leaving the number of people employed in the UK a mere 1,000 short of our all-time high.)
“And if employment is rising so fast, how come unemployment isn’t coming down faster? (The number of the unemployed fell by a mere 7,000 in the same period.)”
The second question is probably the simplest to answer – there are more people in the workforce. Tough economic conditions mean that huge numbers of students and retirees are looking for work and swelling overall numbers in the workforce, says Merryn. This means that even with higher employment, the percentage of people unemployed is slow to come down.
“And as for how so many people can find work in a recession, the first thing to note is that we might not be in a recession. The GDP numbers are endlessly revised, and very few of the other statistics out in the last few months back up the idea that the economy is actually contracting at the moment. It clearly isn’t booming (and isn’t going to for some time to come), but it probably isn’t shrinking either.”
Another factor could be to do with the type of jobs, says Merryn. Many of them are probably lower paid or less productive. This means you can have more people, working more hours, while the country’s overall economic output, the GDP, is stagnant.
The fact is, we are going through a deleveraging process “by which we give up the bubble growth of the pre-2007 years”, says Merryn.
“Our employment numbers look fine; good, even. But if they reflect not full-time jobs in dynamic industries but hordes of desperate pensioners and women taking whatever work they can at falling real wage levels, they don’t necessarily tell us things are improving as we would like them too.”
Readers were quick to add their opinions on the topic. ‘Kawasakifreak’ wondered if “falling real wages in the UK is part of the correction process continuing throughout the world economy?”
While Alastair contributed a gloomy analogy, comparing the UK economy to a “buggy whip manufacturer who kept trying to make better whips to compete with horseless carriages. He improved efficiency and productivity by 100% but sales kept falling off. He couldn’t understand why he went out of business.”
It’s an interesting debate so read the piece and have your say: The truth about Britain’s employment figures.
How to sting short sellers
On Wednesday, Bengt Saelensminde explained in his The Right Side newsletter, how a ‘hated’ strategy can make investors money.
“A lot of investors hate the notion of short selling”, says Bengt. “Especially when someone’s shorting the hell out of one of their stocks! Of course nobody likes to see their shares trashed just so that someone else can make a ‘well-earned’ profit.”
But a short attack isn’t always bad news, says Bengt. Sometimes it can give “you a fantastic opportunity to buy a quality stock and make a good profit”.
The thing about shorters, says Bengt, is they’re highly exposed. “At some point they have to buy back in. And that leaves them at the mercy of a short squeeze. When that happens, it can lead to a rapid price rise as the shorters scramble to buy back shares to close their positions and stop losing money.”
A great example is clothing retailer Supergroup. “The short squeeze hammered Supergroup’s short-sellers yesterday. Supergroup rocketed back up over £5.80 as the shorts were slain.”
Bengt can understand why people shorted Supergroup. The high-flying fashion brand grew meteorically and the management soon showed themselves to be ill prepared. Indeed people who shorted the stock back in April made a killing after a series of management blunders.
But then more shorters joined the bandwagon. Indeed in June and July, Supergroup “earned the accolade of the most shorted stock in town”, says Bengt.
But there was one flaw in the shorters’ thinking, says Bengt. “This business has no debt. Personally, I wouldn’t short anything without a debt problem.” If a business has no debt, says Bengt, it can keep plodding on. And that means a short can come undone very quickly.
That’s exactly what happened this week. Supergroup released a decent set of results. Not amazing, but enough to show that there is life in the firm yet. Shorters began to realise their mistake and tried to run for the exit. That triggered an upward spiral.
“As short traders buy back stock, it creates even more demand – the price goes up – moving against anyone still short. Come late afternoon, the pips began to squeak. The shorts got clobbered, the squeeze was on as the price moved as high as £5.80 – 45p or 8% up on the day.”
Bengt’s original piece explains how the shorts unfolded with some good graphs, so read it in full here: How this ‘hated’ tactic can help you make big profits. Also, for those of you who don’t regularly read his newsletter, Bengt isn’t just being wise after the event. He backed Supergroup months ago after the stock tanked: Supergroup: I’ve got some explaining to do.
You can sign up to more free insight from Bengt here.
Does ‘alpha’ really exist…?
As most of you will know the finance industry is not short on jargon. One of its favourite buzz words is ‘alpha’. Fund management stick it on to all sorts of investment vehicles to drum up sales.
In this week’s video tutorial MoneyWeek deputy editor, Tim Bennett, asks: “What is alpha and does it really exist?” It’s essential viewing.
And before I go, most of you will have seen that events are hotting up in Asia. China and Japan have entered a bitter war of words about a disputed island chain and, as I write this, are sending patrol boats to the area.
Given Asia’s growing importance in the world economy, this dispute, and others in the region, will have a big impact on your investments. In this week’s MoneyWeek magazine cover story I examine how it will affect you: How to profit as China flexes its muscles.
If you’re not already a subscriber to MoneyWeek, you can subscribe to MoneyWeek magazine.
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Have a great weekend!
• MoneyWeek
• Merryn Somerset Webb
• John Stepek
• Tim Bennett
• James McKeigue
• Matthew Partridge
• David Stevenson
• This article is taken from the free investment email Money Morning. Sign up to Money Morning here .