And Gold Bounces Back

April 29, 2013

The S&P pulled another u-turn last week, this time rising about 1.7% . But of course volume in this up week was lower than it was in the prior week when the S&P fell. Volatility inched back down into ultra-complacent levels, where it’s been hovering for most of the last four months. Breadth is not getting stronger. In fact, several indicators—such as the percent of stocks above their 150 ay moving average—are topping and are starting to turn down.

Very interestingly, as the US equity markets continue to push up against record highs, the US economic picture continues to darken. Last week, another host of results came if below consensus expectations. A very important (but not widely known) measure of national economic strength is the Chicago Fed National Activity Index, and it fell badly. Existing home sales missed, as did new home sales. Is the ‘recovery’ in the housing market waning? Flash manufacturing PMI missed badly, as did the Richmond Fed Manufacturing survey. Durable goods orders were a disaster. Both headline and excluding transportation results came in far below expectations. The Kansas City Fed Manufacturing Index missed. The first quarter 2013 GDP estimate missed. Just about the only positive result was the initial jobless claims figure which was slightly better than expected.

Technically, the S&P500 is still in very over-bought and overly bullish territory. The blind belief in the Fed’s ability to manipulate the markets higher, and at the very least, keep them high without suffering major pullbacks, has now just about been accepted by most market participants. The consensus is that nothing can go wrong, which means that pretty much all stock buyers have already purchased stocks. This begs the question—who will be left to buy if—for any reason—some of these stock owners decide to sell?

Last week, this blog once again highlighted the opportunity to buy gold…..mainly because it had been offered at prices that are one normally sees at department store clearance sales.

So how has gold fared over the last week or so?

Very well thank you. After bottoming out at about $1,321 gold rebounded (so far) all the way to $1,485 late last week. That’s a gain of $164 per ounce from the lows, or 12.4%.

Keep in mind that’s 12.4% in only a week’s time.

Now, of course it’s unrealistic to expect everyone to nail the exact bottom (so far) at $1,321 but even if you bought at $1,350, you’d be sitting on a gain of almost 10%.

Sadly, most folks who bought gold as a speculative investment were doing the exact opposite—that is, they were selling (most likely their paper ETF gold holdings) near the lows and are now kicking themselves for making the classic investment mistake—-selling near panic lows.

As hard as it is to do, successful investors do the exact opposite—they BUY during panic lows.

And the good news is:  this WILL happen again, not necessarily in the gold market, but certainly in other markets. Be prepared:  develop a buy list and set buying price targets. Then when the panic happens, BUY!

Gold on Sale

April 22, 2013

After rising the prior week, the S&P500 pulled a U-turn and fell 2.1% last week, but this time on rising volume. This means there was more conviction in the week when stock prices fell, than in the prior week when prices rose. To add more weight to the sell-off, the VIX index jumped over 24%, which was one of the largest weekly spikes in volatility in 2013.

US macro data continued to deteriorate. The Empire State Manufacturing Survey plunged. The housing market index fell, instead of rising as expected. And while housing starts were better than expected, the beat came from apartment complexes, not single family homes. The lone good stat of the week was industrial production, which beat expectations. But initial claims, the Philly Fed and leading indicators all missed. In short, there is no true recovery in the US economy, which is not recovering now, nor at any time in the last four years since the Great Recession began. Instead, it’s an economy on life support that barely ekes out any growth at all, and but for the policies of the US government, would be imploding.

Technically, the stock market is still very over-bought and over-bullish. A mere 2% sell-off does very little to change this risky condition. And by risky condition, we mean that the market is priced today to deliver very meager returns over the next 5-10 years. In other words, the equity markets have pulled forward returns that would normally be accruing over the near future to the present day, leaving any new money investors very little true return  going forward. What’s worse, is that a new investor would be vulnerable to experiencing greater volatility and the risk of selling out when prices fall, thereby locking in losses.

Last week, this blog highlighted that gold is going on sale. In fact, by Monday last week, gold had fallen about 20% in almost two weeks, or about 30% from its all-time highs. Truly, if there was ever a clearance sale on gold, this was it. Astute investors all over the world were accumulating physical gold as the decline was led in the derivatives (or paper) markets only. Evidence of this engineered take down was easy to observe—if the price were truly driven by a new equilibrium between supply and demand, then no shortages or excess supply would be observed. In fact, massive shortages developed all over the world, suggesting that the official price of gold was artificially suppressed.

How far did gold fall and how much further could it fall? Well, a few weeks earlier, this blog addressed that question as well. We suggested at an echo of the fall in 2008 could lead to a drop of 35% from peak. Since gold fell several hundred dollars to $1321 last week, it wasn’t all that far away from this mid-$1200 target.

Will it reach $1250? Very possible, now that it came so close, and in fact, it could get taken down even lower.

But if it does, follow the smart money and buy it.

On Sale: Miners, Commodities and Gold

April 15, 2013

Last week’s sell-off didn’t follow through, as most risk asset markets bounced right back on the buy-on-the-dip mentality. It seems as though many investors are convinced, absolutely convinced, that stocks can never drop meaningfully ever again, because the Fed’s policies will prevent that from happening. Never mind that the same Fed, and even some of the same policies, failed to prevent two 50+% drops in stocks in the early 2000’s and in 2009. This time is different.

The S&P500 climbed over 2% last week, on the usual super low volume. And volatility fell back down to the ultra complacent levels last seen over five years ago, in the build up to the last crash.

US macro data was horrendous. Pretty much ever data point, except initial claims, missed expectations badly. Wholesale trade plunged. Retail sales, both headline and ex-autos, collapsed. Consumer confidence tumbled, in what turns out to be the biggest miss in its history. Business inventories plummeted. And while initial claims beat the forecast, this number will in all likelihood be revised higher (worse) next week, as it almost always has been over the last four years.

Technically, the over-bought and over-bullish condition in the S&P is even more extreme than it was last week, when it was only slightly alleviated by the prior week’s sell-off. Market breadth, while weakening, is also somewhat over-stretched. So technically, equities (and high yield for that matter) are prone to a sudden reset. Because it seems as though everyone is on the same side of the boat (long and heavily so), even a small ripple in the water could cause a significant sell-off, one that’s certainly greater than 10%.

Speaking of significant sell offs, there are few pockets in the investment universe that are deeply in bear market territory. While almost all risk assets are near all-time highs, miner equities, commodities and especially precious metals have recently sold off hard. Arguably, some have even crashed.

Newmont Mining, a member of the S&P500, is now down almost 50% from its 2011 high. Cliffs Natural Resources is down over 80% from its 2011 highs.  Even mighty Freeport McMoran is off almost 50%.

At the same time, copper is down 29% from its 2011 highs. Oil is down 23%. Gold is down 27% and silver is down a remarkable 52% from its 2011 high.

And for the last year, coal stocks remain deeply depressed. Peabody Energy for example, at about $20, is down about 73% from its highs in early 2011.

So while most risk assets in the world are not only over-bought but arguably in bubble territory, there are pockets of great value to be found.

Does this mean that these depressed assets can’t go down further? Of course not. In fact, they may fall, temporarily, a lot further. But assuming the simple adage of buying low and selling high still holds—and it does—then buying any of these depressed assets today, and scaling in more if prices fall further, means that investors will certainly NOT be buying high….which is what most folks who are currently rushing into the stock market are doing today.

A Sell-Off….Finally

April 8, 2013

Well it actually happened. The S&P500 sold off more than one percent in a week; it lost 1.01% to be precise. This still modest retreat, however, was the largest of the year, suggesting that the S&P is still very much over-bought and over-stretched.

As expected, when the stock market drops, volume rises. And it did…..jumping notably on every day the market dropped. Again, this supports the argument that the stock markets are artificially inflated by the Fed; if they weren’t, then rising stock prices would be accompanied by RISING volume instead.

Volatility also rose, as would be expected in a down week. But while the VIX jumped almost 10%, it’s still very much near historical lows, leaving the stock market a great deal of room to fall more with accompanying rises in volatility.

US macro data was, in a word, ugly. While most mainstream media pundits are peddling stories of organic economic growth and slowly improving job markets, the actual data are not complying.  ISM manufacturing, for example, plunged. Instead of coming in unchanged, as expected, slumped to near-contraction levels. Factory orders, less volatile transportation, also missed. ISM services fell notably; it was expected to come in unchanged. Initial jobless claims soared, instead of falling as expected. Claims are now perilously close to the critical 400 thousand level typically associated with recessions.

Finally, the March payrolls results were a total disaster. Only 88 thousand jobs were added, not the almost 200 thousand that were expected. And even this figure was boosted by the magical Birth/Death model which conjured up almost 100 thousand jobs out of thin air. Average hourly earnings stagnated’ they were supposed to rise 0.2%. And worst of all, almost 500,000 people left the workforce pushing the labor force participation rate down to its lowest level since 1979. This means that the job market is so bad that folks are giving up even bothering to look, while at the same time the overall population of the nation is growing. And perversely, this massive exodus from the labor force is what caused the headline unemployment rate to actually drop. It dropped not because the labor market got better. It dropped because the labor market is so bad that unemployed people give up even trying to find a job…..and this means that they’re no longer counted as being unemployed!

Technically, the US stock markets are still very over bought. It would take a drop of at least 5%, and better yet 10%, to conclusively relieve this over-stretched condition. Breadth continues to weaken and price appears to be losing its upward momentum. Upward volume, as already noted, is not strong. So the technical picture is still one where the risk to the downside seems to be greater than the risk that the market will suddenly surge much higher.

Again, a wide variety of catalysts could spark such a move lower. In the US, economic growth fears or concerns about corporate profits or even doubts about the commitment of the Fed to easy money ALL could do the trick. Internationally, problems in euro-land, the middle east, or Asia could also do the trick. Worst of all, would be the catalyst that nobody has on their radar screens.,…the unknown, unknown. If such a risk were to materialize, then the markets would certainly not be prepared.


April 1, 2013

Despite series of daily ups and downs, the S&P500 managed to scratch out a gain of 0.79%. But this gain was built on the lowest weekly volume of the year, which in part was due to the holiday shortened week. Volatility fell back down into the mud. With VIX below 13, the S&P volatility index returned to multi-year lows.

Meanwhile, US macro data continued to struggle, with most of the results coming in below expectations. Durable goods orders (excluding the volatile transportation sector) fell, instead of rising as expected. New home sales missed, as did pending home sales. Consumer confidence plunged. While the Dallas Fed manufacturing survey beat expectations, the Richmond Fed and the Kansas City Fed both missed….badly. Fourth quarter GDP growth missed expectations and came in just above zero growth, which indicates that the economy is stalling. Jobless claims surged back up to almost 360,000. And personal income and spending came in just about as expected, again showing that the average family, by eroding their savings rate, is struggling to buy essentials.

Technically, the S&P is, in a word, over-stretched. Today’s prices are about as far above the 200 day moving average as they get, historically speaking. As already mentioned, volumes are anemic. This suggests that the recent market advances are built on a flimsy foundation, which could easily crumble. Breadth indicators are also over-stretched and weakening. The percent of stocks above their 50 and 150 day moving averages is near former peak levels and starting to turn down.

So what does this mean? Simple. The US stock market has divorced itself from the fundamentals of the  US economy. Prices are now implying that the current level of earnings—which are 70% above their long-term average ratio to sales—will continue indefinitely. This is the only way to argue that the P/E ratio is ‘cheap’. Not only will this extremely distorted ratio of profits to sales most likely not continue to be elevated, but history argues that this ratio will revert to and even below the long-term average.

Why? Because it always has in the past.

Suddenly, the E (or earnings) will come down….way down. And this means that if prices stay where they are, that the P/E ratio will soar and stay at those new lofty levels.

Once again, history shows that this will most likely NOT happen. What history suggests is that when Earnings revert back down, the price of stocks will follow them…….back down.

In short, the US stock markets are over-stretched. Buyer beware.