Relative Values – Fun with Charts

[4plexowner]

Relative Values – Fun with Charts

Some of the financial matters that we talk about on this forum are complicated by the changing value of the US dollar.

For example, we try to compare the cost of renting against the cost of owning (which is complicated enough) but ignore the fact that our unit of measurement (the US$) is not constant in value.

The dollar is changing in value by at least the rate of inflation that our government publishes (CPI) which is usually about 3%. (reality is more like 8-9% for the last three years).

Because we don’t have a constant unit of measurement in the financial world, we sometimes need to think in relative terms.

I’m a visual person so I like pictures. ‘Pictures’ in the financial world means charts – so, let’s do some charting.

Open a browser window at http://www.stockcharts.com (free charting site). In the upper right hand corner type everything inside the quotes: “$usd:$crb” and hit ‘GO’. Just below the chart there is a field that says ‘Period’ – select the menu for periods, choose ‘Monthly’ and then hit ‘Update’.

We are now looking at a picture that shows us how the US$ has performed RELATIVE TO the commodities index (CRB) over the last ten years.

Look at a few more relative charts – edit the ‘Symbol’ field just above the chart – chart “$usd:$wtic”, “$usd:$copper” and “$usd:$gold”

The pictures we just looked at could be telling us that a commodities rally started in the 2000/2001 timeframe. They could also be telling us that the US$ has been losing serious value against hard assets and that the decline has accelerated dramatically in recent weeks.

Since this is a real estate forum, let’s draw some real estate pictures using the Philadelphia Housing Index (HGX) as a proxy for housing prices. These pictures look better in the weekly timeframe so change the ‘Period’ option to ‘Weekly’ and then chart these relative values: “$hgx:$gold”, “$hgx:$wtic”, “$hgx:$copper” and “$hgx:$crb”.

These charts showing housing vs tangibles might suggest that there are better investments than real estate right now.

Relative charts are also useful when analyzing the equity markets.

Go back to ‘Monthly’ timeframe and look at “$indu:$xeu” . This picture shows what the Dow Jones average looks like from the perspective of anyone using the Euro as their currency – not very exciting and nowhere near a new high.

Compare “$indu” to “$gold”, “$wtic”, “$crb” and “$copper”. These pictures might tell us again that tangible assets are outperforming paper assets by a significant margin.

One last chart and I will be done. Chart “$usd:$gold” in the weekly or daily timeframe. Check out the chart and remember that the US Federal Reserve stopped publishing the M-3 money aggregates in March of this year.

I hope you have fun playing with relative charts. I believe they can be useful when making financial decisions.

[Anonymous]

4plex

Net this out. Where are you putting your money as a result of that analysis? The smart money has left real estate, this we know. The question is, where has it gone. Obviously, blue chip stocks. The Dow has way outperformed the SP500 in the last few months, so that is one place. Interest rates are going to put an end to that any day now with their negative divergence against stock prices.

My question is, with all of that comparative analysis, what does that tell us about the next asset class that will be inflated to save the day from the housing collapse?

I do not have an answer, I am trying to figure it out now. Commodities is a sucker play the herd is chasing now. The music will stop there. Hedge funds seemed a likely bet, but there is starting to be some fall out there. Also, many of them are leveraged in RE, so they will go away.

The Itulip site is debating this very issue right now.

[barnaby33]

Currency?

Josh

[sdduuuude]

4plex – you are a whacko, but your posts are awesome and you don’t insult people, which is a bonus). Add this relative charting feature to the list of awesome things I have learned from this site. I hope you and Chris J have a nice discussion here. Looking forward to your thoughts on his question. It is a good question.

The money I took out of the housing market is sitting as cash so I’m wondering what to do with it myself.

[4plexowner]

I’m going to take ‘whacko’ as a complement since most visionaries are considered crazy until history proves them correct.

[sdduuuude]

As you should.

[4plexowner]

Where to invest?

Before we can answer that question, I believe we have to have a ‘big picture’ view of the economy and what the significant trends are.

Remember the adage, “the trend is your friend”. Before we can befriend that trend, we have to figure out what it is.

Unfortunately, nobody has a crystal ball to identify economic trends so each of us has to decide for ourselves what the trends are and how far along we are in the progression of the trend. There are numerous investing books and newsletters that can provide us with quidance and advice along these lines but there are no guarantees in the investing world.

Right now, for example, some people believe that the US equity markets are in bull mode and headed to new highs. I personally believe the equity markets are putting in a top that will not be surpassed in my lifetime (and I’m only 42) before they crash (3000 or lower on the Dow).

Obviously, I’m not going to invest in common stocks right now based on my beliefs but other people are loaded to the gills with common stocks and even have them purchased on margin.

My point is that we can talk forever about generalities related to investing but actually putting your money at risk in any given market is a TOTALLY personal decision. You have to decide what YOU think the markets will do and take a position based on that belief.

I have formed my view of the economic world and I have invested accordingly.

My economic view tells me to sell investment real estate and put the money in silver and gold and the companies that mine those metals. So far, that view has served me well.

I have shared aspects of my economic view in these forums. Here are some highlights:

> we are in a commodities bull market that will run until at least 2013 and probably longer

> silver will be $80/oz and gold will be $1650/oz before the bull market is over – perhaps much higher for both

> the US dollar is in the process of losing its status as the world’s reserve currency

> the US dollar has been debased at a tremendous rate since 9/11 and this debasement has accelerated since the US Fed stopped publishing the M-3 money aggregates in March of this year

> we have seen the end of cheap energy whether we are at peak oil or not

> war with Iran serves many purposes for the Bush administration and is most likely inevitable – this war will cause the energy and precious metals markets to soar

> the baby boomers have been promised retirement bennies (social security, medicare, prescription drug benefit, etc) to the tune of about 30-50 TRILLION dollars and NONE of this money currently exists – there is no “Social Security Trust Fund” that the boomers are going to start drawing on when they retire – this money will come straight off the printing presses

In summary: I can’t tell you where to invest – all I can do is share with you how I am investing and why. All my investment money is in the commodities bull market with a heavy emphasis on silver. I will add to this position as funds become available and I will be holding this position until at least 2013 unless events dictate otherwise. Hope that helps.

I will post later in the week about the newsletters and web sites that I find most valuable inre the commodities bull market.

[Raybyrnes]

Poly -silica is simultaneously used in micro chips and solar panels. Intel’s pain is Poli-Silicas pleasure. Stocks such as MEMC (WFR) and other alternative energy seem to be the play. Evergreen Solar(ESLR) Daystar technologies (DSTI). These are speculative. You might also consider basic materials. Cemex our of mexico has been on a tear and CRH out of Ireland has benefitted from emerging markets. If you like the Basic Materials sector but don’t like to play individuals stocks you could take a look at ICBMX.

[Anonymous]

Great summary

My thoughts are as follows:

Many of those intermarket comparison charts I look at often. The rule of thumb I use, is that a correlation across markets has to be conceptually correct to be a valid predictor of the future. Some of those relationships do not meet that criteria in my opinion.

As a trader or investor it depends on the time frame for your investments. Large picture fundamentals do not have much effect if you are looking at short time frames, 90 days or less for example. However, they are important for longer time holds.

The two most important relationships that I study are interest rates vs S&P 500, and gold vs. interest rates. I like to keep things as simple as I can. Many trader friends of mine get so tied up in so many different things, that they cannot make any decisions. Historically, stock market crashes have not caused Gold rallies, just look at the charts.

The primary mover for stocks historically have been interest rates and earnings, one causes the other. We have rising interest rates on a relative basis, which is a problem for stocks. We are roaring higher, but the SP500 is lagging the Dow alot. This has been a problem historically. Commercials are currently heavily short the SP500, a very bearish sign. Large rallies in the past have not launched from this type of setup.

Inflation is the primary mover for Gold from my studies, and we clearly have inflation issues. Whether this translates into the levels you mention, I have no idea. My view on investing is as follows. Those who hold positions a long time, take the most risk. Why? They have to be right for a much longer period of time.

Taking a long position in Gold right here is very risky, where would the stop be carried? We have a parabolic move at hand which will not last. After it calms down, if I get a good solid setup with the commercials heavily long on a drop, I might be a player on the long side. However, barring that, I am looking for a short sale setup to develop. It is not here yet.

I have found it much easier to predict short term moves with higher reliability, so that is where I live mostly. I do not share the 3000 Dow prediction. I think over time stock prices will eventually be much higher than where they are now for many reasons.

I think history is the best indicator of what is likely to happen in the future. There is nothing that I have seen that indicates over a long period of time, stocks will not move ever upward, just like real estate. Bumps will be there along the way. They may be big ones at times.

Congrats on the shift in your assets, that was a great call. One friend of mine, I call Chicken Little, was so afraid the sky was falling that he leveraged all of his assets on oil more than a year ago, and hit a home run.

At that time I have to admit I did not think Oil was going this high, but I do not trade on my opinion. Thankfully!!!!!!!

[sdduuuude]

A while back I asked about the prospects of Japanese real estate. Rich thought it would help hedge against a falling dollar and I thought it may be a good time given the 13 year slump, though I have not analyzed it at all. Any thoughts on that? Is there an ETFs that would follow Japanese real estate?

[superfly19]

So if I’m thinking about buying some Silver, what is the best way to go:

ETF (SLV)?
Physical?
Pool account? (available on Kitco.com)

The ETF is the easiest for me, but is it a good way to go?

[OwnerOfCalifornia]

Yes, ETFs are the way to go. A few hardcore goldbug types may recommend taking physical possesion, and I don’t necessarily see a problem with that if you are willing to pay for it (1-2% on each side of the trade and a safe-deposit box fee).

I am leery of PM’s right now. I stopped buying about 8 months ago, and I am thinking about taking some off the table. There is hopefully an entry point lower than this. I enjoy both Chris J’s and 4plex’s comments. Chris says he has a short term view and 4plex has a long term view, so I think they are both generally correct in their views.

[Anonymous]

ETF’s are a good way to play that. A futures position would require a stop too large to make any sense at this level. The hard asset itself, as per the other post is more expensive in terms of transaction costs. Proxies are also good for foreign stock markets as well.

[Anonymous]

Can anyone tell me how to post a chart here? I would love to be able to show what the commercials are doing in these markets visually to everyone who cares to see it.

I have emailed charts to a few of you. Anyone interested, send me an email at [email protected] and I will send you a chart so you can see how things look right now.

[john67elco]

chris send me the chart to [email protected] and ill place on my site and post a link 🙂

[Author]

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