Tim Price: Losing the loser's game - There are some gems of wisdom in this latest issue, published by PFP Wealth Management. It is posted in the Subscriber's Area but here is a brief sample:

In what ways do institutional asset managers create a rod for their own backs ? The most widespread, and probably the most damaging to the interests of end investors, is in benchmarking. Being assessed relative to the performance of an equity or bond benchmark effectively guarantees (post the impact of fees) the institutional manager's inability to outperform that benchmark - but does ensure that in bear markets, index-benchmarked funds are more or less guaranteed to lose money for their investors. In equity fund management the malign impact of benchmarking is bad enough; in bond fund management the malign impact of 'market capitalisation' benchmarking is disastrous from the get-go. Since a capitalisation benchmark assigns the heaviest weightings in a bond index to the largest bond markets by asset size, and since the largest bond markets by asset size represent the most heavily indebted issuers - whether sovereign or corporate - a bond-indexed manager is compelled to have the highest exposure to the most heavily indebted issuers. All things equal, therefore, it is likely that the bond index-tracking manager is by definition heavily exposed to objectively poor quality (because most heavily indebted) credits. Given that we are living through a once-in-a-generation crisis in the bond markets, chances are that this game will not end well for benchmarked managers.

My view - My suggestion to all subscribers is that you keep an eye on long-dated government bond yields, particularly those in the USA (historic & weekly), whether you hold any of these or not.

This item continues in the Subscriber's Area.

Gold: 'Illogical dumping raises questions about causes of the metal's sharp decline' - My thanks to a subscriber for this Up and Down Wall Street item by Randall Forsyth for Barron's. It is posted in the Subscriber's Area but here is a brief sample:

But with all this dough being thrown around promiscuously at every so-called asset class-as indulgences such as mansions and art have come to be classified, even if they really are forms of conspicuous consumption-why doesn't gold get any ardor? After all, for reasons probably buried deep within the human genome, the precious metal has been sought for thousands of years as an object of adornment and, most importantly, a store of value.

That value has been battered of late, with massive outflows from gold-related exchange-traded funds, notably the SPDR Gold Trust (ticker: GLD.) For a brief time, it actually was the world's biggest ETF, eclipsing the SPDR S&P 500 (SPY), just before gold hit its high of about $1,900 an ounce in September 2011. Indeed, it has been the flight from "paper gold"-ETFs and futures or goptions contracts-that has sent the metal tumbling, from a recent high of $1,800 last October, to around $1,700 at year end, and about $1,600 as recently as the end of March. That was just before the market plunged-or was pushed-into a virtual free-fall in mid-April that slashed the price by more than $200 an ounce in just two sessions. So extraordinary was the 9.4% collapse on April 15, wrote Howard Simons of Bianco Research at the time, that the odds against such a move were 20 trillion to one-"a lower probability of occurrence than randomly selecting a [particular] $1 bill out of pile of singles representing the U.S. national debt."

My view - At the risk of sounding glib, traders have been selling what is going down and buying what is going up. However, today, we have seen some climactic selling in silver, and gold is bouncing following a test of its April low. Technical action suggests that we have seen lows of at least near-term significance.

(See also Eoin's more detailed comments below.)

Additional commentary by Eoin Treacy

Email of the day (1) – on a measure of ETF Holdings of Gold:

“In Friday's audio, Eoin mentioned the 17% decline in ETF gold holdings. Is there chart or index to follow the trend of ETF gold holding?

“I found the "big picture, long-time outlook" very clearly and broadly presented, (in these uniquely changing times). Thank you!”

My comment - Thank your kind words. We first became aware of the Total Known ETF Holdings of Gold chart in November when a subscriber requested that it be added to the Chart Library. Since then we have commented on it on a number of occasions because it represents the actions of an important segment of the gold market. The Index can be found in the Chart Library using any of the title's key words. Alternatively the Bloomberg ticker is ETFGTOTL. It is listed in the Commodity Indices section.

This section continues in the Subscriber's Area.

Email of the day (2) – on Malaysia

“Just a note to tell you I thought your commentary on Friday was superb. I have only one complaint and that relates to your unequivocal comment to the effect that the outcome of the recent Malaysian election was ‘good': in fact, unless you support the principle of power at any cost, it was anything but. Gerrymandering tilted the outcome heavily in favour of Barisan National with some rural (and Malay) constituencies having only 15,000 voters and some multi-racial urban seats had almost 200,000 voters. That was only the beginning. BN openly bought votes, one gimmick being to give redeemable coupons to constituents, exchangeable for cash after they had voted appropriately. Another ploy was to pay a person to have his finger daubed with ink indicating that he had cast his vote and then transferring that person's vote to an imported Bangladeshi or other foreigner. In short it was an appalling election. The opposition won over 50% of the popular vote but were left with nothing to show for it except control of Selangor, Penang and Kelantan. The BN is now desperately trying to ‘buy' some of the opposition MPs to give themselves a two thirds majority. In fact, it is all rather sad, not because Malaysia is suffering economically, but because it all could be so much better. I've been involved with Malaysia for over 5 decades so feel quite strongly about the place. The encouraging aspect of it is the increasing numbers of Malays who now have an abhorrence of the sickening corruption practiced by the elite and their increasing prominence in the opposition ranks.

“On a more trivial note, I think I have my share portfolio more or less right except for one rather worrying shortcoming: I still have quite a big exposure to gold miners and basic resource stocks – all quality companies but nevertheless suffering badly. Like a rabbit in the headlights, I'm doing nothing.”

My comment – Thank you for your kind words and this highly informative email. My intent in mentioning Malaysia was to highlight that the election result has been positive for the stock market at least in the short to medium term. Malaysia remains an interesting market not least because of its developing middle class. I agree that governance will need to be seen to improve if the stock market is to continue to be given the benefit of the doubt. In the meantime, a break in the 4-year progression of higher reaction lows would be required to begin to question medium-term scope for continued higher to lateral ranging.

This section continues in the Subscriber's Area.

Email of the day (3) – on Friday's big picture long-term audio:

“Thank you so much for last Fridays long term outlook, reminded me of the old saying, "When in doubt, stand back and try to interperate what the charts are telling us".

“Could you be so kind as to smooth out the data feed for the Yen index, see attached.

"Wonder why you and many others use the 200 day MA, I`ve always used the 250, i.e. one year ?

“Noticed last week and this, the Topix 2nd section seems to have put in a useful tail on the daily!

“Agreed on India, I`m wondering whether it can break out of it`s 6 1/2 year triple peak, where the S & P took 13.”

My comment – Thank you for your kind words and for highligting the Yen Trade Weighted Index. Unfotrunately, the data for this Index is prone to erroneous spikes which have now been corrected. We will endeavour to monitor it more regualrly. The Index rallied my approximately two thirds from the 2007 lows and has given up the majority of that advance since the beginning of the year. A break in the progression of lower rally highs would be required to question the consistency of the declilne.

This section continues in the Subscriber's Area.

Email of the day (4) – on the Berkshire Hathaway shareholder meeting:

“A friend of mine from Dublin who goes to Berkshire Hathaway's AGM every year in Omaha has written an account of his experience again this year, which I've attached. His final paragraph resonates with me:

“........Buffett and Munger's response to this would be to say that what happens in the short term is not that important and if you invest in good businesses, the short term share price shouldn't matter to you. This, I think is the hardest lesson to learn. Most of us are much younger than Buffett and Munger but we would still be devastated if the market were to fall by 30% or more.”

My comment – Thank you for this account of Berkshire Hathaway's annual general meeting contributed in the spirit of Empowerment Through Knowledge. Following my piece on the cost of US healthcare in Friday's Comment of the Day, I thought it was interesting to hear Warren Buffett's opinion on the subject. The full report is posted in the Subscriber's Area's but here is a section on the eventual removal of quantitative easing which may be of interest to subscribers:

A shareholder from Kansas wanted to know whether the Federal Reserve was doing too much in the way of quantitative easing and "how do we stop". Initially Buffett suggested he pass the question to Munger as he had answered the same question on CNBC. Munger replied that he had no idea how the US would reverse the process but it was going to be difficult. Buffett then said that it was always easier to buy than to sell. Quantitative easing had the potential to be inflationary but currently the money was sitting in banks rather than "hitting the market". He would guess that at least some Fed members would like to see more inflation. He added that when the market gets a signal that buying ends and selling starts that could be a shot that would be heard around the world and cause anyone holding securities to "re-evaluate their hand".

This section continues in the Subscriber's Area.

Email of the day (5) – on uranium miners:

“There seems to be something wrong with the chart of the Global X Uranium ETF (URA). Could you please correct it? Thanks in advance.“

My comment – Thank you for highlighting this stock split which is now reflected in the Chart Library. Uranium miners have been through a difficult few years particularly following the 2011 Japanese tsunami. The ETF remains in a relatively consistent downtrend and a break in the progression of lower rally highs, currently near $20, would be required to question indicate a return to medium-term demand dominance.  

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