The Case for Extreme Overvaluation

This analysis provides insight into the general relationship between aggregate stock valuations and long term returns. The study indicates a strong relationship between real returns and the level of valuation at which an investment is made.

The chart below captures one presentation of the results.

Essentially, the proposition goes like this:

The higher the market P/E ratio when an investment is made, the lower the return over the next decade.

The same thing holds true when dividend yields are low:

The lower the market dividend yield when an investment is made, the lower the return over the next decade.

This analysis suggests that, presently, markets offer little value in aggregate. Currently the S&P 500 sports a ten year normalized P/E of about 27 and dividend yield of 1.8%. Subsequent ten year returns associated with made at these levels have historically averaged about 1% annually or less.

In fact, the case could be made that current markets are extremely overvalued in aggregate.

btw, these findings very closely parallel the work of John Hussman.

position in SPX

Drug Index Strength

A couple weeks ago we noted the favorable near term technical set up in the Drug Index (DRG). The pattern indeed resolved bullishly. Nearly all large cap pharma stocks are currently under accumulation.

Pulling back the time frame, the DRG looks to be poking its nose thru a decade long down trend (there is also a multi-year flag pattern). When drawing the line w/ a crayon instead of a pencil, there has yet to be a technical resolution.

But current price action is most definitely bullish.

position in select pharma

Fed Accomodation and its Consequences

The Fed continued to coo like a dove today. On the back of the accomodative FOMC statement, the dollar tanked. The Dollar Index (USD) appears destined to test its all time low of 72ish. A break below that, and it's a brave new world.

Gold, on the other hand, exploded higher on the news--and marked another all time high. (Silver, btw, rallied 5%).

Can't help but think that today marked a watershed event: the day the Fed sped past the "Stop--Cliff Dead Ahead" sign.

From where I sit, chances of a currency crisis have now ticked up considerably. While I have been working them lower, cash levels in my personal accounts still exceed 50% of total liquid assets.

I am growing increasingly uncomfortable w/ this position. Over the next week or so, I will be looking to swap out of a signficant fraction of my remaining dollars. 

position in gold 

The Fed's Problem

Not sure anyone has analyzed the technical problem that the Fed faces here more than John Hussman. Dr J has examined the historical relationship between T-bill rates and monetary base per nominal dollar of GDP (a.k.a. 'liquidity preference').

The results show an asymptotic relationship. When rates are high, people have less desire to carry money around because of opportunity cost. When rates approach zero, however, people are increasingly prone to hold cash because there are few competing uses for it.

I like to think about this in terms of cash that I am holding in investment accounts. I would like to put this cash to work in short term vehicles, but alternatives such as 3 month T-bills or 3 month CDs are yielding next to nothing. Thus, I'm comfortable just staying in cash because at least I am in a flexible position to deploy it should opportunities arise. To me, that is worth more than the pathetic yields I would be getting by tying up cash in short term fixed income vehicles. Just as John's analysis shows, ultra low interest rates have me holding more cash than I otherwise would.

The problem for the Fed is that in order to press interest rates closer and closer to zero, the amount of base money that the Fed has to pump into the system via its asset purchase programs such as QE2 must grow exponentially. Any exogenous forces putting upward pressure on rates (e.g., perceptions about inflation, slow down in offshore Treasury buying) must be met with ever more money printing by the Fed, otherwise all of this money that has been created would quickly seek other uses, and prices of many things would explode higher.

Since the Fed is approaching the zero bound for interest rates, it stands to reason that at some point, perhaps soon, the Fed will be physically unable to suppress rates further in an environment where exogenous forces are pressuring people to reduce their liquidity preference.

Should we reach this point, the Fed faces one of two alternatives: a) it could sit back and watch prices rip higher as people swap out of cash perceived as a rapidly depreciating asset, or b) it could rapidly withdraw the funny money that it has been pumping into the system.

Remember the nonlinear relationship between money printing and interest rates, however. The Fed would have to remove a disproportionate chunk of stimulus in an attempt to normalize rates just a fraction higher than where they currently stand. Dr J estimates that, in order to normalize short rates at 0.25 - 0.50%, the Fed would have to reverse its entire $600 billion QE2 program.

The point is that, if the Fed tries to tame inflation at this point, it will have to suck gigantic amounts of liquidity from the system. If the Fed decides not to do this, then prices of most things are certainly headed much higher.

This is the box that the Fed is in.

This situation also goes a long way toward explaining the action in precious metals. Investors have sniffed the Fed's bind out, and are bidding gold and silver up on a bet that the Fed will choose option a) above.

Before us is a game of chicken of historical proportion.

position in gold, silver

Fed Front Running

Pretty breakout above resistance from a multi-month inverse head-and-shoulders pattern in the S&P (SPX) today. New recovery highs once again.

Interestingly, this bullish action is occuring one day prior to the bimonthly FOMC policy statement. Seemingly, market participants are front-running the Fed, anticipating that the central bank will continue its money printing ways.

Should tomorrow's FOMC statement indeed be perceived as accomodative, then today's action may mark the beginning of another leg higher.

However, should Uncle Ben & Co surprise the masses with some hawkish FOMC verbage suggesting that the monetary spigots may be turned off, then today's break out might turn into tomorrow's fake out.

position in SPX

Alternative Consumer Price Index

This price index developed by MIT provides an interesting alternative to the the US government's Consumer Price Index (CPI) data. Check out the steepening slope over the last four months. Amounts to about 8% annualized.

Which is ~3x the increase suggested by official government stats.

TIPS

Many people presume that Treasury Inflation Protected Securities (TIPS) are fixed income securities with protection against inflation. This article suggests that buyers of TIPS get less insurance than they might suppose.

When it sells TIPS, the US Treasury is selling a bond plus and insurance policy (or put option). One question to ask is why would an insurer want to be short a put option unless it believes that the option was priced in its favor?

no positions

Yield Curve ETNs

The 'yield curve' expresses the difference in yields between short and long dated Treasuries. Stockcharts.com has some excellent graphical representations of the yield curve.

Common wisdom says that steep yield curves are bullish for economic activity. Thinking is that increases in economic activity raise demand for longer dated borrowing (plus the spectre for inflation). At the very least, big spreads between T-bills and the 10 yr present a fertile carry trade environment.

When economic activity is forecast to decline, then the spread between short and long rates narrows as as folks swap risk for short term liquidity, thus flattening the yield curve.

Currently (as suggested by the stockchart graphs) the yield curve is pretty steep, and has been steepening since early 2009.

I suppose it was inevitable, but there are now ETNs to play either steepening or flattening of the yield curve. Caveat emptor for sure...but probably products that some folks are considering for their 'alternative assets' category.

no positions

Free Cash Flow

This weekend while doing some valuation work, I began to wonder about the free cash flow (FCF) calcuation, typically found as follows:

FCF = operating cash flow (OCF) - capital expenditures

My question: What exactly should be included in capex? In addition to the capital expeditures line item, which nearly always appears as the first item in Cash from Investing Activities directly underneath OCF, aren't other line items, such as 'acquisitions,' also capex?

By ignoring acquisitions, we would significantly over-estimate FCF for acquisitive companies like Johnson and Johnson (JNJ).

After some research and thought, however, the answer to this question is 'no.' While acquisitions are certainly a form of capex, they should typically not be included in FCF calcuation. The 'free' in FCF is supposed to denote the cash that is 'free' for deployment to shareholders after a company has laid out money to maintain and advance its current asset base. That money deployed toward a company's current asset base is what should be considered capex in FCF terms.

Acquistions nearly always involve procurement of new assets, which is one opportunity of many that FCF may be used for to enhance shareholder value (other opportunities might include new product development, issuing dividends, or paying down debt).

Thus, I have confidently concluded that I have not been miscalculating FCF all these years...

position in JNJ

Silver Streak

Silver got going late last summer about the time of the Fed's QE2 ruminations. It has looked back since.

Current action has that gappy, parabolic look of a blowoff. Various oscillators such as the relative strength index and slow stochastics are pretty much plastered against the ceiling.

There are, of course, plenty reasons why 'White Lightning' could continue to zap higher, not the least of which is the Fed's non stop printing press.

Action like this that demonstrates why it's so difficult to stay on board during a bull market. The moves higher seem too good to be true, and the corrections that follow seem too painful.

position in silver

Gold Milestone

Gold has crossed $1500/oz. Silver now stands above $45/oz.

Another milestone met largely with...quiet.

Remember that gold can be viewed as a bet on disorder.

position in gold

Inflation Explained

Last fall, a video that explained QE2 went viral. A brilliant explanation on what is going on, it seemed to me.

Now, the creator has developed a video that explains inflation. Another homerun, it seems to me.

Those scratching their heads over the widening chasm between rich and poor should make sure they understand what is being said here.

On Chasing Higher Prices

For the past week or so I've been wanting to add to a 'starter' position in Johnson & Johnson (JNJ). My valuation work has me liking it below $60, and last week I had limit orders in at about $59.50.

As the chart indicates, price never came in for a fill, and today the stock gapped higher on big volume on positive earnings news. Technically, previous resistance at $61.50ish has now become support. Seemingly the stock is now significantly out of range.

It can be hard to keep emotions in check in such situations. "I knew that price was heading higher!" "Why didn't I raise my limit price a dime or so last week?" "You're letting the stock get away from you--better grab some up here at these higher levels in case it's never going to come back down now." "Way to go doofus...another example of being penny wise and pound foolish."

After that bout of second guessing, I remind myself that I am building this JNJ position on an investment thesis rather than on a trading thesis. And investment performance depends on finding attractive gaps between intrinsic value and market price. My work has identified a price that provides a comfortable margin for error.

If I give up on that analysis, and blindly chase the stock higher, then my margin for error goes down and my risk goes up.

So I'll sit on my hands, revaluate the story in the context of the ongoing information flow, and keep an eye out for a price point that I deem more favorable to long term investment returns.

position in JNJ

US Credit Rating on Negative Outlook

The big news today was S&P putting the AAA credit rating of the US on 'negative outlook.' Credit default swaps on Treasury debt have widened, and current spreads suggest 1/3 chance that the US credit rating will be downgraded within two years.

In somewhat related news, Portugal's debt traded at a 10% yield for the first time since the country joined the EU. Greece's debt traded today at a 20% yield. These yields suggest that, despite all of the denials coming from EU officials, sovereign debt restructurings are becoming more likely.

JNJ Rumors

Relevant to our upcoming class investment proposal discussion, note that rumors have Johnson & Johnson (JNJ) making a bid for Swiss medical device maker Synthes. The chatter places the deal at about $20 billion.

JNJ's business model is grounded in acquisitions. The company has made more than 30 material deals in the last 15 years. However, most of JNJ purchases are on the small side; only a few have exceeded $2 billion.

Should the Sunthes purchase rumors become reality, it would be the largest acquisition in JNJ history.

position in JNJ

Longhorns Long Gold

The University of Texas endowment has taken delivery of $1 billion in physical gold. That's about 5% of the endowment. Hadn't realized that the UT endowment was so large, but it apparently manages the endowment of the entire UT system (among the largest public university systems) plus Texas A&M.

What I find most interesting is the choice to buy the physical metal rather than a securitized proxy such as GLD (although the fund may in fact own such instruments as well).

The impetus to buy gold looks to have come from board member Kyle Bass, a most savvy fund manager.

position in gold, GLD

Bullish DRG Pattern

One chart pattern that jumped out at me today was the inverse head and shoulders pattern in the Pharmaceutical Index (DRG).

The pattern is right up at resistance here. Will be interesting to monitor price behavior over next few days.

position in select pharma

Personal Stock Screen

At the RISE conference two weeks ago, many portfolio managers and analysts noted that they employed 'stock screens' to whittle the universe of possibilities into a subset more conducive to in-depth analyses. Most of the screens employed by these people are software algorithms that scour databases and identify stocks with attractive characteristics such as high return return on equity, low dividend payout ratios, or strong price momentum.

Many brokers (like Schwab) and investment info sites (like Morningstar) possess screening capability.

When looking for equity investments (not short term trades but long term investment), there is a screen that I like to employ. However, it is a low tech, non-mechanical screen--one that builds on my analytical strengths and personal taste preferences. One 'edge' that I may have over some market participants is skill in industry analysis and knowledge of factors that drive sustainable competitive advantage. I also have a taste for value, and believe that lower prices reduce risk and provide margin for error.

As such, I like to use that following criteria when looking for potential equity candidates:

Favorable industry structure. Think Porter's (1980) five forces. I like industries where the forces are favorable for industry profits over time. A pile of research suggests that choice of industry explains more variance in company profits than company-specific factors. Thus, I would rather consider stocks where the industry forces are blowing at the propsective company's back rather than in its face. It has become harder and harder, btw, to locate such favorable industry contexts.

Organizational factors. Research (e.g., Collins & Porras, 1994) suggests a number of factors that relate to sustainable competitive advantage over time, such as home grown experienced management, ideosyncratic cultures, demonstrated track records at coping with disruptive change. To evaluate these factors I need access to the inner workings of organizations. This can be obtained by personal contact, or (more frequently) by devouring what has been written about potential candidates by the media. You might be surprised at how much you can learn about organizations thru secondary sources.

Strong, dominant brands. I prefer firms that have gained mindshare with customers and marketshare from competitors. Strong brands drive higher profit margins as customers are willing to pay more for a branded goods relative to me-too generics. Moreover, large market share increases bargaining power and helps companies be a price maker rather than price taker.

High profit margins. I like enterprises that consistently produce gross profit margins north of 50% and net margins of at least 10%.

High cash/low debt. Debt reduces strategic freedom, even when the cost of credit is low. As an investor, I like my companies to have piles of cash since it is likely come back to me either directly or indirectly. As a general rule, I like to see balance sheet cash of at least 2x debt. Conceptually, I like to know that companies I own can extinguish all their debt overnight while still having a nice cash stash left over.

Free cash flow. Cash flow is the lifeblood of a business. Cash flow is also the theoretical basis for securities analysis and valuation. I am attracted to firms that generate gobs of free cash flow (FCF).

Valuation. While I review tradional valuation metrics such as P/E, I prefer valuation metrics directly employ FCF. Lots of FCF alone does not suffice--the price that you pay for the FCF is really what matters. When using my 'quick and dirty' comparison of enterprise value:FCF perpetuity, I like to see ratios of 1.0 or less. The lower the ratio, the greater the potential discount I am getting. Stated another way, cheap valuations provide higher 'margin for error' in my decisions.

Once I have a list of candidates, I can do more in-depth assessment. I can also overlay my macro view on candidates to get a more complete picture of risk vs reward.

Currently, my screen whittles down the universe of stocks into a pretty small list.

References

Collins, J.C. & Porras, J.I. 1994. Built to last. New York: Harper Business.

Porter, M.E. 1980. Competitive strategy. New York: Free Press.

Other Local Endowments

My friend from Morgan Stanley (MS) read the previous endowment missive and passed along this early 2010 article on local endowment performance during the market decline. Note the endowment size at UC, XU, and Miami. Note also that they were hammered in 2008/2009.

NKU appeared to hold up pretty well by comparison.

NKU Endowment AA

The NKU Foundation manages the university's endowment. The definition of an endowment is a gift given by a donor that restricts what can be done with the resources. Usually, the principle is not to be touched.

At the recent RISE conference, I attended an interesting session on endowment management and learned some specifics about the Rutgers endowment and how its investment portfolio was allocated.

Similar info can be found for NKU's endowment, as the foundation produces a variety of reports for stakeholders.

The last annual report for the endowment was issued 6/30/10. In terms of financial securities (cash and investments, but not counting loans, land, and promised donations), the endowment manages about $65 million. That includes about $9 million that the Foundation manages for NKU at large, so the actual endowment part of the portfolio is more like $55-56 million.

The endowment breaks down its $55 investment portfolio (page 14), but that does not include the bulk of its $10.7 million in cash shown on the balance sheet. It appears that the reporting convention is that cash is not an investment class.

To get a feel for overall asset allocation, I added that cash to the investment portfolio. Here's how the asset allocation (cash plus investments) maths out (in $ thousands):

cash $10,754 (16.4%)
fixed income $11,264 (17.2%)
equities $28,313 (43.1%)
hedge funds $8,531 (13.0%)
alternative assets $6,015 (9.2%)
other $795 (1.2%)
total $65,672

Alternative assets are said to include private equity, venture capital, real estate, and real assets. Would guess 'other' includes these as well--and perhaps some credit instruments as well. If we add, hedge funds, alt investments, and other, we get a total of 23.4% allocated to broad 'alternative investments.'

At the end of 2010, the foundation issued this report that summarized overall investment fund performance on a percentage basis. It also reports annual portfolio performance for the past decade. Not surprisingly, the fund experienced some losses in 2008, 2009.

It also reports an allocation toward equites of about 68%--much higher than the 6/30/10 annual report. This suggests that either the investment managers increased commitment to stocks in late 2010, or something's getting lost in the translation.

Rutgers Endowment AA

Wanted to record that Rutgers endowment info learned at RISE. Per its VP of Finance & Associate Treasurer, Rutgers' endowment is about $600 million (which she indicated is a bit above the median size). Their investment portfolio is allocated accordingly:

25% hedge funds
12% real assets (real estate, energy, etc)
10% private equity
15% US equities
10% international equities-developed countries
5% international equities-emerging countries

The remainder, which I believe maths out to 23%, was said to be in fixed income such as TIPs, global sovereign debt.

Implies that 47% of the endowment portfolio is tied up in what many would call 'alternative assets.'

Dollar Weakness

The US dollar is at key support right here.

If the 75 level gives way, then 71 becomes quite literally the last line of support.

Pls keep an eye on this one...

QE2 and Inflation

As noted in this article, the following chart pretty much says it all:

Bernanke and other Fed heads have been claiming that their actions have not been stoking inflation.

Correlations don't get much stronger than the one portrayed above.

position in gold

The Gold Confiscation Order of 1933

Did you know that private ownership of gold was outlawed in the 1930s? FDR ordered that gold be confiscated so that he could devalue the dollar in attempt to inflate the country out of the Depression.

The formal ban on gold ownership lasted over 40 years until President Ford lifted the law in 1975.

Here's an interesting review of the relationship between the banks runs of 1932 and FDR's ban on gold. One insight is that the bank runs were people seeking to front run the US going off the gold standard--something that FDR had publicly hinted in the months leading up to his inauguration.

In 1933 a NYC lawyer with unsurrendered gold holdings challenged the confiscation order. A Federal judge upheld the order, saying that the government was justified in compelling individuals to surrender their gold, and declared 'the right of the government to take private property of any kind when it is deemed necessary by the appropriate authority for the public good.'

Scary words for those who believe in liberty and property rights...

In any event, a bit of economic history that has some connection to what is going on right now.

position in gold

Copper Speculation

Stories like this should give commodity bulls cause for pause. Reports suggest that a significant fraction of China's high stockpile of copper is being used for investment (read: speculative) purposes.

When farmers in China are piling copper rods in their barns thinking that their price will go up, sentiment may be getting frothy.

I myself have moved nearly all my 'paper' commodity exposure to gold via the SPDR Gold Trust (GLD).

position in GLD

The CSCO Disco

Calling a bottom in Cisco (CSCO) has been a risky endeavor recently. Three times in the past year, CSCO has gapped lower after disappointing earnings reports.  Previous gaps lower have been followed by upward price movement to fill the gaps.

The most recent gap lower in Feb, however, was followed by further price weakness. After meandering lower for weeks, CSCO stormed some 5% higher--thought to be linked to an internal company memo issued yesterday by CEO John Chambers stating that the company had to make some changes.

Note the chunky volume on today's move higher. Note also the possibility of a 'double bottom at $17ish.

Perhaps this will turn out to be another false signal. But one factor that is providing tailwinds rather than headwinds at this level is valuation. CSCO generates $9-10 billion in free cash flow. As a perpetuity, $9 billion in annual cash amounts to $9 / .1 = $90 billion.

CSCO has $40 billion (!) in cash and $15 billion in debt. That's $40 - $15 = $25 billion in net cash. Market cap is currently $100 billion, meaning that enterprise value is $100 - $25 = $75 billion.

So the way I see it, I can currently buy a cash rich, high profit margin large cap stalwart with a dominant position in its sector and strong brand for about a 17% discount from list price. Is this discount warranted because CSCO is losing its edge like some market participants fear? I don't think so. CSCO operates in an industry that is attractive for profits. Moreover, it has a strong franchise and some of the most capable managers in industry.

My only reservation is my bearish macro view--which keeps me from getting really aggressive in a situation like this.  That said, I added to my position last week and will look to add more now that the technicals have perked up.

I'll be watching for pullbacks below $18.

position in CSCO

Breakout in Gold

Last weekend we noted the bullish technical set up in gold. Today the pattern resolved itself to the upside in classic 'breakout' fashion. The move once again finds gold in price discovery, exploring time highs.

Whenever one of these upside resolutions occurs after you were watching it form, there will always be some regret that you weren't long enough ahead of the move. But then remind yourself about the prudence of risk management, and that opportunities can be made up easier than losses.

That's what I was telling myself today ;-)

Besides, past resistance at 140ish GLD has now become support. A pull back in price toward that 140 level may present a nice opportunity to add to a position...

position in GLD

Managing Real Risk

Last week's RISE conference reiterated my sense that portfolio managers generally do not manage tail risk well. They have been raised on the portfolio theory concept and know how to manage idiosyncratic, security specific risk. But they are largely unprepared for systemic risk that takes all risky assets down in a correlated fashion.

Coincidently, this morning I happened across this article on John Mauldin's fine site. The author distinguishes between trivial risk and real risk. Real risk is the risk that can wipe you out. He argues that many measures of risk in the mainstream finance demand (e.g., beta, standard deviation, VaR) do not capture real risk.

He includes the above chart to demonstrate that severe stock market losses occur much more frequently than predicted by normally distributed models (we've shown similar data in class).

He offers the interesting concept of birthday risk. Most people have a 15-20 year window for serious investing. Depending on when you were born, this window fall over a 15-20 year period where risky investments go thru the roof (e.g., 1981-2000), or when risky assets tread water at best (e.g., 1966-1980).

He implies that the argument that 'stocks always go up in the long run' is an impractical one. It won't matter for investors who by chance are dealing with the 'wrong' investment window and who may not be able to stick around for the 'up' cycle.

He concludes with some ideas on how to manage tail risk, including the potential value of market timing and considering asset allocation in terms of assets that are truly uncorrelated.

Overall, an interesting and recommended read.

position in SPX

AAPL Losing Some Weight

Apple's (AAPL) weighting in the Nasdaq 100 Index (NDX) will be cut significantly on May 2. Currently 20% of the index, AAPL's weighting will fall to about 12%.

The weightings of Microsoft (MSFT) and Oracle (ORCL) will double as part of the adjustment.

The move is being done to rebalance the stock weightings to better reflect underlying market capitalizations. Currently in the NDX, AAPL's weighting is 6x higher than MSFT even though AAPL's market cap is only 46% higher currently.

Because there are index products based on the NDX such as the Powershares QQQ Trust (QQQQ), the shift will likely put near term selling pressure on AAPL and a bid underneath those stocks whose weighting will significantly increase.

position in MSFT

Wealth vs Money

People often equate weath with money. Wealth and money are not the same.

Wealth is created by productive work. Productive work combines labor with other factors of production to create economic resources of value. If I am a baker, then my labor in concert with capital equipment (stove) and raw materials (flour, water, etc) creates bread. The bread is wealth, as it is an economic resource that can add to standard of living.

Money is not an economic resource. It is merely a piece of paper or a digital accounting entry. Save for the effort required to create the money, there is no productive work or value creating outcomes.

Envision a world where all people are sloths. Everyone sits around all day engaging in leisure; no one engages in productive work. The only 'worker' is someone who prints money and distributes it to the masses. Everyone receives a pile of dollars adding up to $1 million.

Is this a wealthy people? Of course not. There has been no productive work. Valuable economic resources have not been created. The standard of living of all those paper millionaires will be primitive.

While money does not create wealth, what it does do in modern economies, however, is facilitate wealth transfer. Society currently treats fiat currency as a legitimate claim on wealth. Thus, if someone who does not engage in productive work can procure dollars from the 'money printers,' then they can use those dollars to obtain the bread baked by others.

Those who engage in productive work to accumulate real wealth lose some to those people who hold the freshly printed dollars.

People who equate the massive money printing programs of central banks with general increases in economic activity, i.e., productive work and real wealth creation, are disillusioned. General standard of living does not increase with more money.

Money printing can at best transfer wealth--meaning that some will gain economic resources at the expense of others.

Bill Gross and US Debt

Am personally not a huge fan of Bill Gross of Pimco, but he captures our problem pretty well. If we suppose that future entitlement liabilities were in fact fully funded via the infamous 'lockbox' by borrowing, then the interest expense on the $75 trillion in total debt required to fund these liabilities would be about $2.6 trillion. We currently pay about $250 billion in interest expense. 

As such, the total debt burden of the US approaches 500% of GDP. This is higher than Greece.

Gross posits that absent large entitlement cuts (which the federal government seems reluctant to do), then the US is likely to default on its debt. Rather than a 'conventional' default, which entails outright failure to uphold contractual obligations, the US would be more likely to default by printing money to pay the bills (i.e., inflation).

Perhaps the strength of gold can be explained in part by the possibility that increasing numbers of investors are factoring this scenario into their asset allocation decisions.

position in gold 

Strong Gold Chart

While catching up on some chart gazing, the gold chart stood out right away. Multiple reverse head and shoulder patterns are evident, as demand seems to be absorbing any price weakness.

During a break at the RISE conference, I noticed early morning weakness. My limit order never got filled as price didn't come back in later in the day. Will be looking for to add to my position here early in the week.

position in GLD