8 signs we’re headed for a bear market in stocks

Every day, it looks more and more like we’re headed for bear country. Here are 8 key signs that we’re a long way from an economic recovery.

Stocks are flirting with a 20 percent decline from market highs in April. A 20 percent decline is the generally-accepted definition of a bear market, and it looks more and more like we’re headed for the dreaded bear country. Here are 8 key signs that we’re a long way from a recovery:

1) The ECRI. There’s just one institution that can legitimately claim to have “never been wrong” at predicting a recession. That’s the Economic Cycle Research Institute (ECRI), and last Friday they sounded the warning bell. “Early last week, ECRI notified clients that the U.S. economy is indeed tipping into a new recession,” the company wrote on its Web site, “and there’s nothing that policy makers can do to head it off.”

If the ECRI is right this time, they’re predicting the official unemployment numbers could rise from 9 percent as high as 15 percent. That would put the “unofficial” unemployment numbers closer to 25 percent.

2) “Close to faltering.” Even Federal Reserve chairman Ben Bernanke acknowledged widespread weakness yesterday when he warned the U.S. economy is “close to faltering.”

“Recent indicators, including new claims for unemployment insurance and surveys of hiring plans, point to the likelihood of more sluggish job growth in the period ahead,” Bernanke told Congress. He hinted that the Fed is prepared to take more action if things worsen. The markets liked that, but it’s a clear indication that we’re far from out of the woods.

3) Manufacturing contraction. For the first time in two years, the Global Manufacturing PMI dipped below 50 – the cut-off line that differentiates growth from contraction. The measure hit 49.9 in August – a low we haven’t seen since June 2009. Things are even worse in Europe where the manufacturing index fell below 50 for the second month in a row.

4) Death to the Hang Seng? Hong Kong’s Hang Seng Index, which includes shares of many of China’s largest companies, sealed up its worst quarter in a decade when the market closed on Friday (per BusinessWeek). All told, the index shed 22 percent in three months. Hang Seng shares haven’t seen losses that steep since September 2001.

5) European contagion. Goldman Sachs slashed their forecasts for U.S. growth in the first quarter of 2012 to a paltry 0.5 percent. “The European crisis threatens U.S. economic growth via tighter financial conditions, reduced credit availability and weaker growth of U.S. exports to the region,” Goldman economist Andrew Tilton said (per the Financial Post). “This impact is likely to slow the U.S. economy to the edge of recession by early 2012.” Late last week, Goldman also published a report arguing that developed markets don’t just face a downturn but rather have a 40 percent chance of economic stagnation for the next five years.

6) Greek debt default looms. Yes, the EU’s frantically trying to find some way to stop Greece from defaulting on its debt, but the long-term picture for the country doesn’t look good. If they don’t get a bailout by November, Greece will have to start defaulting on pensions, salaries and bonds (per CBS). Even if they do get a bailout, it’s unclear how the government will be able to manage a debt load that stands at 150 percent of GDP. Recently, investors grew so pessimistic on three-year Greek bonds, the interest rates rose above 100 percent.

7) Class warfare. Doom and gloom newsletter writers have been talking for years about the coming civil unrest in the U.S. It’s something I’ve started realizing doesn’t just happen in other countries. Protests in Greece and Italy are so common they rarely make the international news. And now, Wall Street’s dealing with its own set of protestors. In a matter of weeks, Occupy Wall Street has spread from New York to Chicago, Los Angeles, Seattle and Boston. Now, several unions are getting in on the act, too (per CNN). High unemployment and a lack of opportunities leads to civil unrest – no matter where you live.

8) Down with bonds. Moody’s downgraded Italy’s government bonds yesterday from Aa2 to A2 (per the Financial Post). Funding’s getting harder and harder to get for the weakest European governments, and that means they’re going to be forced to slash their spending. That doesn’t bode well for consumer-driven economies abroad or at home.

Official government numbers may not show that we’re in a recession yet, but the signs are clear. In the words of ECRI co-founder Laksman Achuthan, “you haven’t seen anything yet.”

“A new recession isn’t simply a statistical event,” Achuthan writes. “It’s a vicious cycle that, once started, must run its course. Under certain circumstances, a drop in sales, for instance, lowers production, which results in declining employment and income, which in turn weakens sales further, all the while spreading like wildfire from industry to industry, region to region, and indicator to indicator. That’s what a recession is all about.”

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Photo credit: svilen001.

Silver price manipulation case narrows in on JPMorgan; drops HSBC for now

The media tends to brush off reports of manipulation in the silver market. Hopefully, this lawsuit will change that.

A new wrinkle in the silver price manipulation lawsuit against JPMorgan Chase & Co. (NYSE:JPM) has dropped the spotlight off HSBC Holdings PLC (NYSE:HBC) for now. The fresh lawsuit amendment, which was filed last Tuesday, now names JPMorgan as the sole defendant in the case (per the Wall Street Journal).

Here’s what we know: a lawsuit filed by individual silver investors alleged that JPMorgan and HSBC amassed massive short positions in silver futures between 2008 and 2010, then reaped the rewards as silver prices declined in the face of the large short positions. The new move drops allegations against HSBC, as investors have entered into a tolling agreement with the London bank.

Tolling agreements give both sides in the case time to negotiate a settlement. Should those talks crumble, HSBC could be re-added to the lawsuit. A tolling agreement certainly isn’t an admission of guilt on HSBC’s part, but it’s a clear signal that they don’t want to go to trial (perhaps to avoid the massive legal fees, the bad press, or because they fear they’d be on the losing side of the case). What bothers me about the agreement is the fact that we may never know whether HSBC was truly involved in attempting to manipulate the price of silver – especially if JPMorgan enters into a similar agreement in the future.

New numbers in the amended lawsuit allege that JPMorgan’s shorts pushed silver prices down 12 percent in a single day – a move that, if true, made the bank $220 million.

All told, more than 43 separate silver price manipulation lawsuits were filed against JPMorgan and HSBC (per Reuters). Those lawsuits were eventually combined into a class action lawsuit.

“The complaint alleges that HSBC and J.P. Morgan made large, coordinated trades, among other things, to artificially lower the price of silver at key times when the precious metal should have been trading at higher levels,” the law firm Girard Gibbs LLP writes on its web site. “By depressing the price of silver, the class action alleges that the defendants made substantial illegal profits while harming investors and restraining competition in the COMEX silver futures market.”

Due to it’s small size and relative lack of liquidity, the silver market has often been the target of price manipulation (see my post Silver Thursday, the Hunt Brothers, and the collapse of a precious metal for more). But there’s also a tendency for the media to brush off reports of manipulation in any markets – particularly emotionally-charged markets like precious metals. This lawsuit could help bring visibility to a problem that’s lost a lot of money for a lot of people. Let’s just hope it makes it to trial.

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Time to buy Silvercorp Metals (SVM)?

Despite anonymous allegations of wrongdoing, I’m more bullish than ever on Silvercorp Metals (NYSE:SVM). Here are three reasons why.

NOTE: Information released today (Sept. 13, 2011) at AlfredLittle.com negates much of the information here. It sounds like it might be time to dump SVM.

Sometimes allegations of fraud are a good thing, and that might be the case for Silvercorp Metals, Inc. (NYSE:SVM). Shares are starting to look like a bargain. The Vancouver-based silver mining company, which does most of it’s mining in China, got slammed on Friday falling more than 10 percent on four times the stock’s average trading volume.

Why did Silvercorp plunge?

On Friday, Silvercorp announced a dramatic increase in short positions in the company’s stock. Over the past two months, 23 million shares (fully 13 percent of the outstanding shares!) were sold short. On top of that, the company got its hand on an anonymous letter that was addressed to numerous governmental agencies and media sources. The letter was purportedly written by an investment firm that was shorting the stock, and the same firm said it planned to publicize wrongdoings at the company – namely a $1.3 billion accounting fraud.

Three reasons to invest in Silvercorp despite the allegations

You’ve got to make your own call on whether now’s the time to buy into Silvercorp, but I like what the company’s done. It’s fighting back aggressively against short-sellers and the anonymous firm that’s accused the company of wrongdoing. Here are three reasons why I’m still a bull:

1) They’re facing the allegations head on. First, Silvercorp proactively sent out a press release acknowledging the short sales and anonymous letter. In it, Silvercorp provides links to documents that refute the allegations against the company.

2) They’re going after the bad guys. Silvercorp’s set up an independent task force to find out who authored the anonymous letter. The task force has some heavyweights on board, too, including Canada’s former ambassador to China, Earl Drake. If they can uncover the source of the letter, Silvercorp has vowed to pursue “all legal options” in multiple jurisdictions to recover damages caused by the allegations.

3) They’re still buying back their stock. Silvercorp apparently thought the company’s shares were a bargain at roughly $8 a share when they first announced their stock buyback plans in June. On the heels of the anonymous allegations that surfaced on Friday, the stock dipped as low as $7.08 a share, and Silvercorp’s looking at the price move as another great opportunity to buy more shares.

“While we are fighting these manipulation schemes, we will continue with our ongoing share buyback program, increase our investor relations efforts, and continue to focus on growth through exploration, acquisitions, and mine development,” CEO Dr. Rui Feng said in the press release. “We are pleased with our current operations and look forward to reporting another profitable quarter.”

Of course, there’s still a lot of uncertainty surrounding accounting practices in China (just take a look at my recent story on Puda Coal), but this one has the feel of a rogue smear campaign. Once the market regains its senses, Silvercorp could soar to catch back up with the jump in silver prices we’ve seen of late. That’s good news for investors with the fortitude to stay long.

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Top 5 best ways to short the dollar

Here are five simple ways to bet against the dollar; from opening a savings account in a foreign currency to investing in precious metals or American Blue Chip stocks.

1) ETFs. Perhaps the easiest way to bet against the dollar is by investing in an inverse dollar ETF. The PowerShares US Dollar Index Bearish ETF (NYSE:UDN) is the best in class with a daily trading volume around 156,000 shares. UDN shorts futures contracts as it tries to track the Deutsche Bank Short US Dollar Index (USDX) Futures Index. A better option, though, might be shorting an ETF that’s long the dollar in the form of UDN’s sibling, the PowerShares DB US Dollar Index Bullish ETF (NYSE:UUP). UUP has a trading volume that’s 16 times higher than UDNs, and some sources argue shorting long ETFs is a better strategy than going long short ETFs.

2) Buy gold. Since the supply of gold is relatively stable, the precious metal’s price tends to behave independently of the actions at the Fed’s printing press. If the value of the dollar goes down, gold prices can stay the same, but it’ll still take more dollars to buy the same amount of gold. Throw increased investor demand for gold into the mix when inflationary fears are building in the economy, and you’ve got a recipe for surging gold prices.

3) Convert your dollars to yuan. The Chinese government has loosened the strings it has the yuan of late, finally allowing allowing Americans to open yuan savings accounts directly in the U.S. The Bank of China branches in New York and L.A. allow investors to save cash in the form of renminbi (deposit up to $20,000 a year). Kiplinger also recommends checking out EverBank, which offers savings accounts in 20 foreign currencies (provided you pay a 0.75 percent transaction fee when you buy and sell currencies). Accounts can be started with as little as $2,5000.

4) Invest in multinational Blue Chips. While companies like tractor-manufacturer Deere & Company (NYSE:DE), The Coca-Cola Company (NYSE:KO) and software company Oracle Corporation (NASDAQ:ORCL) are all headquartered in the U.S., they derive significant portions of their income overseas. In the case of Oracle, 70 percent of the company’s revenues come from business outside of the U.S. Not only does these investments give you exposure to emerging economies, they hedge your exposure to the dollar while paying a modest dividend.

5) Invest directly in foreign companies. In the tech realm, the Chinese market operates behind what’s been dubbed The Great Firewall. American tech companies can’t get in, and a lot of the country’s biggest tech companies aren’t yet trying to capture audiences outside the domestic market. That means growth in your investment is unmoored from the performance of the dollar. In tech, consider SINA Corporation (NASDAQ:SINA), the maker of a Twitter-like microblogging service called Weibo. China’s financial markets has a new player in wealth management company Noah Holdings Limited (NYSE:NOAH) and the Chinese advertising industry looks like it’s led by Focus Media Holding Limited (NASDAQ:FMCN). There are also numerous plays in China’s solar industry from JA Solar Holdings Co., Ltd. (NASDAQ:JASO) to Trina Solar Limited (NYSE:TSL) to name a few.

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Three tips to make money shorting stocks

Here are three ways for you to make money shorting stocks. Do it by shorting stocks that are on their way down. Only short shares in fundamentally weak companies, and only do it when the market has temporarily pushed shares too high.

This post is part of a series on shorting stocks. Read the first post, How to short a stock, if you’re not sure how to place a short order with your broker.

Shorting stocks is riskier than going long on stocks for one reason: you can lose more than 100 percent of your original investment. If you short a stock at $5 and it more than doubles to $11, you’re out more than 100 percent. You’ll actually owe your broker money, or the losses will cut into your other positions.

The first rule of shorting stocks then is not to lose money. You’ve got to be especially vigilant since you can lose so much money. Be sure to set a stop order so that your broker will automatically cover your short in the event that the company gets some good news.

If you’re not completely turned off from shorting stocks, please follow these three steps to make money shorting stocks:

1) Don’t short a stock until it’s started declining. The key to shorting stock is finding a company that’s significantly over-valued, but those over-valuations typically happen in a powerful bull run. You don’t want to short a stock that’s on its way up. You should wait until it starts declining before selling short.

2) Short stocks that are fundamentally weak. If you’ve got the option between two companies, pick the one that’s got more debt, a P/E ratio of zero, or companies that have issued lowered guidance. Never short a stock that has good fundamentals such as a track record of raising dividends, a low P/E ratio or solidly climbing earnings.

3) Short stocks that the market has pushed too high. When a particular company gets good news that hits the press, it’s not uncommon for investors to push shares in that company too high, too fast. The impending crash after the market regains its senses is a great way to capture five or 10 percent in gains by selling the stock short.

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How to short a stock

How to short gold

Not convinced that gold’s upward march in price is going to continue? One of the best ways to profit in that scenario is to short gold. There are several ways to go about it from puts and options to ETFs and shorting shares.

Not convinced that gold’s upward march in price is going to continue? One of the best ways to profit in that scenario is to short gold. There are several ways to go about it:

1) Short shares in a gold stock. Find a gold company that seems particularly overbought and start a short position in that company.

2) Short shares in a gold ETF or ETN. The flagship gold ETF is offered by ProShares. Known as the SPDR Gold Trust (NYSE:GLD), the ETF seeks to reflect the spot price of gold. As of Sept. 7, the fund had a market cap of $51 billion.

3) Buy shares in an inverse ETF or ETN. Inverse ETF’s seek to move in the opposite direction of the underlying stock or commodity that the fund is matching. ProShares UltraShort Gold ETF (NYSE:GLL), for example, seeks 2X the inverse of the daily performance of gold bullion in London. A small move in the gold spot price would be compounded 2X in GLL.

4) Buy and sell a put option in gold. A put is a bet that the future price of gold will be lower than the current market price. You can buy and sell puts and options at most online brokerages. Options, however, aren’t as heavily traded as stocks, and may involve substantial risk.

Keep reading: How to Short Gold, Part II

How to short a stock

Shorting stocks sounds more intimidating that it actually is. If you’ve bought and sold a stock, you can short one, too. When you short a stock, you take ownership of the shares (i.e. borrow them) out of the hopes that the stock will go down in value. If and when the shares decline in value, you “cover” your short (i.e. buy back shares), and you pocket the difference.

Shorting stocks sounds more intimidating that it actually is. If you’ve bought and sold a stock, you can short one, too.

What exactly is shorting a stock?
When you short a stock, you take ownership of the shares (i.e. borrow them) out of the hopes that the stock will go down in value. If and when the shares decline in value, you “cover” your short (i.e. buy back shares), and you pocket the difference.

How to short a stock
Follow these three steps to get the most out of your short sale:

1) Place a short order just as you would buy order. Most stock brokerages provide a pull-down box where you can select “short” instead of “buy”, when you’re entering the total number of shares you’d like to buy or short. The cost of shorting a share is the same as buying the share on the open market.

2) Monitor your position regularly. Unlike buying stock, shorting is actually riskier since you can lose more than your original investment. Say for example, you short a $10 stock, and the price of the stock goes up to $25, you’d be out $15 or 150 percent of your original investment. Utilize a cover limit order, so that you won’t lose more than you can afford to.

3) Place a “cover” order to buy back the shares you’ve shorted. Instead of selecting “sell,” you’ll choose “cover” when you want to close out your short position. You’re actually buying back the shares you’ve predicted will go down in value (and hopefully you’re doing it at a price that’s lower than where you shorted the stock!).