Buzz of the Street: Gold 1100?
Some of this week's most insightful and timely vibes.
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Monday, November 2nd, 2009
By James Anderson
One of the things that has amused me during the Cash for Clunkers and the First Time Home Buyer tax credit programs is the unintended consequences of the programs. It doesn't take a rocket scientist to see that the Cash for Clunkers program pulled future sales into the third quarter, which quite possibly reduced the personal savings rate from 4.9% in the second quarter to 3.3%. According to David Rosenberg, of Gluskin Sheff, that big a drop in three months rarely occurs, but it contributed mightily to the 3.5% GDP increase in the third quarter. Auto sales will now be a drag on the economy for the next couple of quarters.
Turning to the first time tax credit, there is a fascinating unintended consequence that is related to household creation and first time home buyers regardless of any tax credit program. Let's look at how new households are created and destroyed. The destruction side is the most fun. In normal times, marriage and death account for the most destroyed households. (Obviously, you could run with that statement in a number of ways, but I will stick to the high road analysis.) If two people have separate apartments, and move in together, married or not, a household unit is destroyed and an apartment frees up. If someone living alone dies that obviously eliminates a household and frees up a living space.
Household creation occurs in several ways. Divorce increases households, immigrants, legal and illegal, increase households, but the normal way households are increased is by children leaving school (high school, college, whatever), getting a job, and then getting their first place of their own. Flash forward to the non-normal times of November, 2009. College grads, not to mention lawyers and MBAs, are having a tough time finding work after graduating. In addition, a number of young people are having to move back home with Mom and Dad after losing their jobs. All of these factors are contributing to a decrease in new household formation.
OK, so what's the point? Let's look at what the tax credit program actually does. There is a family out there with a couple of good jobs, living in an apartment, but they have never been able to save enough for a down payment to buy a house. The combination of lower home prices and the tax credit now allow them to buy the American Dream. Congratulations, and good for them.
Now let's look at the unintended consequences. A lot of the homes being bought by tax credit buyers are some type of distressed property. They are either foreclosed houses, real estate owned (REO) by the banks, or a short sale where the bank takes a hit on the mortgage owed to get rid of the property. Either way, it's good for the bank? Not necessarily. Let's go back down the chain. The tax credit buyer moves out of an apartment, freeing that unit up. Now it is possible that other renters will move up to the bigger apartment, but that will only free up another apartment.
The unintended consequence is that the tax credit program is increasing apartment vacancies. That creates a double hit to the landlords – less cash flow from empty apartments and pressure on monthly lease prices. So, when in doubt, default. Who has the mortgage on the apartment complex? You guessed it, the banks that dumped their REO properties.
From my viewpoint, the tax credit does nothing to solve the home real estate problem, it simply is pushing the problem down to commercial real estate. To solve the real estate problem, household formation has to increase, and that can only occur by creating good jobs for the young people entering the work force. Fixing this problem will not be easy because way too many baby boomers are not going to be able to afford to retire and they will not be willing to give up their current jobs.
I believe innovative stimulus programs are needed to jump start household formation, but the first time home buyer tax credit is not helping. Extending it to April, 2010 is not the solution.
Dendreon files amended BLA
By David Miller
Dendreon (DNDN) filed an amended Biologics License Application (aBLA) for Provenge this morning. This starts a six-month clock for a first-in-class treatment for later-stage prostate cancer. If approved, Provenge could easily sell over a billion dollars in the US alone. Dendreon should hear a positive response from the FDA no later than May 3, 2010.
This filing was done under a Special Protocol Assessment (SPA) from the FDA. This is an agreement the FDA creates with drug companies to guide development. If the company (1) Conducts the pivotal trial precisely how the SPA defines, and (2) The trial is successful, and (3) The drug shows no unusual side effects relative to the patient benefit shown, the FDA will approve the drug. In this case, Provenge passed with flying colors.
Editor's note: David had positions in DNDN at the time this Buzz was published.
Tuesday, November 3rd 2009
By Lance Lewis
Note that gold has squirted up to another new all-time high today. Now most people will no doubt simply blow this off as just the market reacting positively to India's central bank trading in some dollars for 200 tonnes of IMF gold, which is certainly positive. However, there is another far more important message that gold is sending.
Just as was the case in August when the dollar supposedly "bottomed" and then in September when it "bottomed" yet again, gold's rally is once again saying loud and clear to those that are listening that the latest October "bottom" in the dollar is likely to go the way of all the prior so-called "bottoms" as the buck continues to slide down the proverbial slope of hope.
Once the FOMC coos like a dove tomorrow, don't be surprised if the dollar hops off a cliff of sorts given that I suspect a lot of the recent "strength" (assuming we can even call a 2% bounce off the lows in the DXY "strength"?) is based on some combination of "fear of the Fed" and/or hope that the Fed will defend the dollar with some well placed adjectives and adverbs in its statement tomorrow. Both are misplaced in my view. The dollar is going lower, and there's not a whole lot the Fed can do about it.
As the economies outside of the US continue to recover robustly while the US economy remains sluggish with still-rising unemployment, foreign central banks will begin raising interest rates even though the US Fed cannot follow with rate hikes of its own due to continued US weakness. This fact both has and will weigh on the dollar.
But that's not where the story ends. Foreign central banks won't want their currencies to strengthen too much against the dollar (i.e. – they don't want the dollar to collapse) just as we've already seen based on the actions of both Norway and Canada to stem the strength in their currencies with verbiage, so these foreign central banks will likely raise rates slower than they otherwise should in order to prevent inflation.
Thus, the dollar may weaken less than it otherwise would against these foreign pieces of paper, but inflation will consequently accelerate globally, as foreign central banks effectively debase their currencies as well and take on some of the inflationary burden for the US.
As usual, gold is thus the primary beneficiary in a world of fiat currencies that are all being effectively debased. This brings us full circle to gold's new all-time high today and its message, which is once again signaling lower prices for US confetti.
Editor's note: Lance had positions in gold, gold stocks at the time this Buzz was published.
Thoughts on CIEN
By Sean Udall
I view Ciena (CIEN) as one of the truly unique names left in the networking space with well above industry growth potential. They are one of the few remaining survivors of the optical bubble but always had real value driving technology. They have also shown some excellent strategic vision with their acquisitions.
Like many niche leaders, CIEN got dramatically oversold during the crash and frankly the stock should have never traded at those extreme lows.
Basically, I see the stock into the $30's or even $40's again unless someone gets them to cave into a high $20's offer before the end markets become robust again.
Cisco (CSCO) bought Star for a price that I feel Star would have well exceeded had they stayed solo. I don't see CSCO making a run for CIEN but if I was Juniper (JNPR) or Ericsson (ERIC), I would be trying to acquire CIEN before the next big bandwidth growth phase.
Technically the stock is working off a short term overbought level and is now quite oversold while the weekly chart is still strongly bullish with many MA's curling higher.
Editor's note: Sean had positions in CIEN at the time this Buzz was published.
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