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Gold stopped shining

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Sunday, October 08, 2006

On the seventeenth of Aug -where gold were trading around $640 per ounce- I published my article "Why Gold won't go too far?" clarifying my point on why gold will not go higher. In that article, 2 things -in my point of view- were drawing the future of gold prices: The Euro as a new world alternative currency to the US dollar, and the nature of gold as a luxury commodity. Let me now add one more thing, the US dollar inflation fears are fading out, and it's clear now that we went too far with fears at that time. The US economy looks healthy and better than everybody's expectations.

Today's gold spot price played around $575 per ounce, the show just started, we are going to see more losses, let's just wait.

Why stock exchange crashes?

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Saturday, September 23, 2006

Why stock exchange crashes? This is a very popular question and associated with some painful memories for those who lost a lot in these crashes.

As any other mysterious phenomena, people try to find reasons and causes, and usually they create reasons that are based on fictions more than facts.
I will start explaining my point of view of why stock exchange crash from the most famous ratio in the accounting and company evaluating world "P/E ratio".

What is P/E ratio? P stands for the current market price of a certain share; E stands for the earnings per that share, when you talk Annual P/E that means you are using the last annual earnings per share reported by the company. Of course this number should be audited by some other specialist company or it will be doubtful.

I will list here some example of real P/E ratio:
EBAY: 22/Sep/2006
Last Trade: 26.11
EPS (Earning per Share) (ttm): 0.73
P/E (ttm): 35.96

In the case of Ebay share, P/E according to the last trade on 22/Sep was 35.96.
What does P/E mean for an investment decision?
Suppose you bought eBay share at a price of 26.11, then suppose that the earnings reported by the company last year, 0.73 per share, IS NOT GOING TO CHANGE, in other words the company will make same profit over the next 100 years, this means that you will need 26.11 / 0.73 = 35.96 = 36 years to get back your investment, in other words, your break-even point will be after 36 years!

Of course, no one will put his money in such investment, but still we see people buying and selling the share at this price and even higher, so what is the point here? They keep trading because they know that companies' profits are not fixed, and they are going to change up or down, so eBay earnings per share might get doubled in the next year, and my break-even point will become noticeably closer, and if some analysts could assure that the expected eBay growth in the next few years might double its earnings several times, I would go and buy quickly, knowing that my break-even point could be decreased to 5 years or less which will make it very good investment.

So I buy, not based on the current reported profits, but based on the expectations of the future profits, in other words I'm buying at a price that is considered "over-valued" in the point of view the last annual profits, but might be considered very cheap in the point of view of the realized profits over the next year.
So I'm betting on the company's profits and buy its shares at over-valued prices which is the key-point here to understand why stock exchange crashes.

When the country's economy is growing rapidly, this will reflect on the companies profits, and accordingly on its shares prices in the stock exchange. While the growth is making confident steps, we will see profits doubling every year, we will see people go in and buy shares at high P/E ratios, and sell it at even higher P/E ratios and making good profits.

This is fine, but it is a cycle, and any national economy will start slowing down at a certain peak, and the profits will stop doubling from a year to year, as people used to see it. But most traders, who knows nothing about stock exchange except they are buying and selling and making good profits for several years, most of them don't notice this slowing down, and they keep doing what they were doing as this high growth numbers will last forever, while the smart ones are selling their portfolios and making out of the market.

Then after one of less than expected quarterly report, and after quick but small down pulses in the index, the market will realize that there is no more of doubled profits, the late traders wake up and they start selling their portfolios quickly, and this will take the stock exchange index down for weeks, and this will never stop till the prices reach a fair level according to what is expected from the upcoming quarter reports.

Now, is there any sign for this upcoming crash?
Yes of course, you can see it. When the growth is still there, and we are at an early stage of the cycle, you will see the index making new record high every while. Whenever you notice that there is a level that the index couldn't break for a long while (usually couple of months or quarter period) this means that we reached a saturation level and don't ever think to enter the market at this point, there is something painful at the door.

Another sign that you can recognize easily, when you start seeing very high levels for AVG P/E ratio per industry or for all companies listed in the index, this means that the crash is close. Every stock exchange committee publishes such reports, showing AVG P/E ratio and some other useful figures, when you see AVG P/E for some industry more than 40-50, this is a very high AVG, and it's dangerous to get into this industry market at this point.

So does it mean that low P/E ratios are attractive to buy? Not always, because low P/E ratios might mean that the market sees no future growth for this industry or company. And if the market don't see hope in some industry, don't expect much of its share prices.
Of course there are some exceptions, where the market underestimates certain company, but it will quickly realize the situation and adjust its position.

"What To Buy?" is not the only question that you have to ask yourself before making a decision, but also "When To Buy?" timing is very important, you might buying the right share but at the wrong time.

Real Estate Prices in Jordan

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Friday, August 25, 2006

As I had the chance to be in Jordan watching the Housing Market, I've seen the prices making very confident jumps since 2003, since the American war on Iraq, when the Iraqis, mostly the rich ones, start moving into Amman and buying assets.

But really the biggest jump ever, happened in 2006, where the prices got almost doubled comparing to 2005's summer.. It was something un-believable and at the same time unreasonable.

As I've learned from trading, that the biggest jumps in any prices are usually the last jumps before falling down, these jumps is almost done by the late comers who have less experience in the market, and these guys themselves who will pay very high prices for an over-valued items. This is very traditional in any market, in the time where the early comers are taking their profit and making out of the market, you will see the newly comers are buying the stuff and entering the market.

If you are located in Amman, or if you had the chance to be there for a while, you can notice how relaxed city it is, comparing to the other known capitals in the region.
You will notice also how many free, inbuilt and unused spaces in the city itself, lands that are not used for anything, in every street in the city, in all areas, high class areas or the areas that is less. Knowing that the real estate prices added 150% to its values since 2003, someone could ask, is there any need for these high prices, does it really reflect the demand and supply in this market? My answer is absolutely NOT.

This summer we start seeing people suffering from these high prices, and some of who had planned to make out of his rented apartment and buy one, he declined his plans as long as these prices are exist. Getting back to the driving horse of the market, supply and demand, I expect that we will see starting this winter, slowing down in the housing market, and this will have a clear effect on the prices sooner or later. I really don't know when we'll see the prices going down, loosing 30 or 40 percent of its current values, but what I know for sure, that we will not see any more jumps in this market.

My message: the prices had reached unreasonable levels, we will not see it staying there for long.

Why Gold won't go too far?

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Thursday, August 17, 2006

Many analysts expect that, according to its history, when the US dollar inflates, gold will go higher and higher like what happened in the early 80s, when Gold made its highest ever peaks.

Why analysts think that gold will break its 80s records and will go far beyond $700 per ounce, some of them expects $2000!?

Actually they sit on top of rules that are proven valid nearly so far, but not anymore. Here I'm going to list these rule to tell why it's not valid anymore form my point of view:

1- Gold is not anymore the only world alternative currency

Gold was and still considered as an alternative currency to the US dollar. The US dollar is "the world currency", everyone accepts it, and all national banks have reserves of it. Even more, some countries around the world don't issue their own national currencies, instead they use the US dollar. So when it starts -the dollar- loosing its purchase power, the world will move gradually into some other accepted currency and more stable than any national currency -Gold- to protect their money from deprecation. Gold, was the only available alternative, this is absolutely correct before the Euro! Why Euro, because it is now, very similar to the US dollar, very trustworthy, and the Euro-Zone has some of the most powerful and stable economies in the world. So the gold is not anymore the ONLY alternative currency to the US dollar, and lately we hear that some national banks are diversifying their reserves mainly between US dollar, Euro and Gold.

2- Gold is a Luxury Item!

Gold as a commodity, has some special features, that prevent its price of going too high. Some of us argues that the precious metals reserves -mainly Gold- are declining, while the demand is increasing, supported by the world population growth. This is absolutely right. But as the Gold jewelries are considered a luxury commodity, people have always pre-defined budgets to buy such things. So what happened when the prices went up, that the demanded volume declined to fit consumers budgets. And this is clearly shown in the World Gold Council report for the second quarter of 2006, that overall demand was down 16% from one year ago. India was most affected by the volatility, declining 43% when compared with the second quarter of 2005. Saudi Arabia was next, reporting a 32% decline, followed closely by Egypt with a 30% drop. China, however, was less affected than others, falling just 2%, but Hong Kong by itself was down 27%. The United Arab Emirates fell 19%, Taiwan 18%, Italy 12% and the US 10%. And here again, the great market mechanism, demand and supply creating the market prices, which will reverse back any extreme move in the prices, is shown greately in the gold market.

My conclusion, if the under-ground gold reserves are vanishing, if the national banks lost their reserves forever in the jewelries market, or in other words on the women's necks, and no way to get it back, gold will not find its way to $2000 per ounce as some people argues, because the demand will react against these high prices.

Wikipedia: United States dollar
World Gold Council report

The Future of Oil Prices

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Friday, August 11, 2006

All signs that we are receiving from all over the world since Aug 2005, the bloody hurricanes season in the US, all signs are telling clearly one message, that there is enough oil supply for the energy addicted countries, and this is valid so far, and it will be valid for several years, as we don't see any shortage in the energy supplies anywhere in the world considering the high growth we've seen in the most oil addicted countries like China and India.

No doubt that the world's oil demand is increasing noticeably, and no one can deny it, but what I want to explain here, that we are still in the area where the supply can meets this increasing demand, remembering that the growth that we were seeing in some countries, is not going to sustain its speed in the long term nor the short term.

So, someone could ask why are these high oil prices, and why everyone is talking energy?

Actually the answer is political more than economical, it's all about political tensions in some top OPEC countries.

Iran, will be the keyword when you talk oil prices in the next few months, and more precisely in the few upcoming weeks, we could see unreasonable oil prices, hitting $100/Barrel or more.

Iran on top of 132 billion barrels as an estimated reserve, or the second largest oil reserve after Saudi Arabia and 4.1 million barrels as a daily production, Iran is threatening the world by cutting off its oil if the international community, or in the other words, the UN security council, agreed on any sort of sanctions against Iran due to its nuclear activities.

The Security council have given Iran 31 Aug as a deadline to stop enrichment, otherwise they will go for sanctions. On the other hand, Iran said that it will reply for the incentives package offered by western countries on 22 Aug.

Iran is mad to get into this nuclear club, of course they're talking about peaceful enrichment, which no one believes it. Iran most likely will reply with NO on 22 Aug, and we will see oil prices skyrocket.

Already, one of the smartest nations on the earth, Japan, it had stopped its oil imports from Iran months ago, preparing itself for the cut off before it happens, where India and Shell are still the biggest clients for the Iranian oil.

What will happen the day after closing Iran nuclear case for good ?

This is something is not going to happen soon, and we will pass painful times before we see this issue closed, but once it is closed, we will abslutely see a bloody crash in oil prices, the final target for this crash might be in range $40/Barrel.

As an clear example clarifying that the current prices are political more than economical, Oil lost $3-$4 a barrel immediately after announcing a ceasefire in Lebanon!
Can you imagine what will happen to the prices in case we get Iranian nuclear case closed forever!?