Market Up, Market Down
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by John Dalt

8/01/11

Congress and the President negotiated a tentative deal to raise the debt ceiling late Sunday.  The markets reacted with the predicted gap up at open this morning.  You could almost hear “Happy Days are here Again.”  The music stopped when the Manufacturing ISM numbers came out thirty minutes after the market opened.  Economists expected a reading of 54.8, which was slightly less than the 55.3 reading of June.  The Institute of Supply Management estimated manufacturing activity with a reading of 50.9 in July.  Any reading above 50 shows growth, below 50 is contraction.  This number was the worse number since July 2009.  August 2009 broke above 50 and we have shown good growth numbers since then…not anymore.

We took our own advice for the last few weeks.  We were selling into the strength of the rally and making a list of stocks we would like to own.  Kind of like Santa, I like to check them twice!  It is easier to pull the trigger after watching a stock for awhile, reading anything you can about it, and watching the stock reaction to different economic headlines.

We recommended five new stocks to our Long-Term subscribers this weekend.  Some were almost immediate buys, others we have our buy price, and we will wait and try to pick them up for a great price.

One of the stocks we recommended was the Market Vectors Gold Miners ETF (GDX).  You may have heard our reasoning from some other analysts; we simply take that as confirmation of our recommendation.

The GDX etf owns stocks in established gold miners, it pays a small dividend.  That isn’t our reason to own it.  We believe it is undervalued.  Gold has been on a run from $1200 to $1600 in the last year, but the GDX has not rallied the same percentage.  Most of GDX holdings do not hedge their production.  This means they sell their production in the spot market, so they are enjoying the higher prices.

Miners are experiencing higher costs in fuel and other commodities.  In the end, higher prices for their production should make it to the bottom line and bring this etf higher.  One way to analyze the value of the GDX is against the value of gold.

The chart shows how many shares of GDX it takes to buy one ounce of gold.  I have drawn a line at 23.5, which looks like a good mean price.  This morning it takes 28.62 shares of GDX to buy one ounce of gold.  Some may look at this and decide to do a pair trade; go short gold and long GDX to capitalize on a prospective return to 23.5  This may work well, but we are not inclined to short gold while the developed world’s governments are trying to print their way to an economic recovery.

Interest rates are also in favor of gold continuing its climb, so we are comfortable making a one way play for GDX to move higher in the short and long run.  We have a buy price that looks to grab this etf right at support in the next few days.  One good way to use dry powder is in the case of price discrepancies that occasionally occur in the market.  We think GDX fits the bill!

There are a lot of questions starting to surface about the debt ceiling bill.  You can almost hear the cold feet running down the hall.  And they should.  This is a sham on the American people.  With all the talk of cuts, I haven’t heard one politician tell the truth.  The Federal Government will spend hundreds of billions more next year than they spent this year, thanks to “baseline budgeting.”  That doesn’t sound too painful.  Families are working to make ends meet, most are seeing no income increase next year, and the government will grow by over five percent and tell us they cut spending?

Wow, they must give away cojones when taking office in Washington, D.C.

Quote:
I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them.---Thomas Jefferson

Editor’s note:  Jefferson…you leave me speechless.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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