Platinum is Cheap

March 30, 2015

Suddenly, US stock markets are becoming more choppy—rising a lot for a few weeks and then falling, also by a lot.  Last week, the S&P500 fell by a notable 2.23%. Volatility ticked higher, which one would expect to happen in a down week—the VIX index jumped a bit. But volume did not rise, as it usually does during a sell-off; instead it dropped off. This suggests that the weekly drop in prices was not due to a rush of sellers heading for the exits.

Technical analysis is showing markets that have changed somewhat from their former character. In the recent past, markets would grind higher in a controlled, almost mechanical kind of way. Then, after rising for a few months, they would drop back by a 3-5%. And then the entire process would repeat. But lately—say over the last three months—they seem to lurch upwards and then lurch backwards every two to four weeks, going nowhere. In fact the S&P500 is now pretty much exactly where it started at the beginning of the year.

Also this change in the technical character of the equity markets is indicative of many major market tops. In the past, when markets begin to “roll over”, they’ve done so not all at once, but in a process. And this growing roller-coaster pattern is very often the way that this happens.

In macro news, the bad reports just kept on pouring in. The Chicago Fed national activity index disappointed massively—falling instead of rising as predicted. Existing home sales missed. The house price index missed. The Richmond Fed manufacturing index missed. Durable goods orders missed; so did orders ex-transports. The Kansas City manufacturing index missed. And first quarter GDP growth also missed. On the positive side, PMI flash manufacturing beat estimates. Initial jobless claims and PMI services also beat expectations.

Finally, in a world where almost every asset is back to being over-priced using long-term historical analysis, one interesting asset stands out for its comparatively low price—platinum.

This metal is 15 times more rare in earth’s crust than gold, and yet today, you can buy it for LESS than the price of gold. Its use is roughly evenly split between jewelry and investment on the one hand and industrial applications on the other hand. Back in 2008 it plunged from about $2,200 per ounce to about $800 per ounce, which represented a 64% fall. This time around, it’s fallen from about $1,900 an ounce to about $1,100 an ounce. Since this is only a 42% drop, if recent history repeats (and a long overdue recession finally arrives), then the price could fall some more, say down to $700 or $800 an ounce. And if it did, this would become a screaming buying opportunity.

It takes a supernova to create platinum, so unlike diamonds which can be “manufactured’ in a laboratory, platinum can’t be manufactured by man. And this restriction on its supply, combined with its super rare status on earth, would make it a low risk investment at prices under $1000 an ounce.

Treasuries Continue to Deliver Gains

March 23, 2015

Well that didn’t last long. After three straight weeks of sliding, the S&P500 roared back last week and registered a 2.6% gain. Volume was moderate and volatility, as one would expect in an up week, slipped back down to very complacent levels.

Was there a rash of good economic news that pushed the equity markets higher? On the contrary, the news from Main Street was almost all bad. The Empire State manufacturing survey missed. Industrial production missed badly. The housing market index also missed. Housing starts were atrocious, and logged their worst miss vs. expectations since early 2007.  The current account was worse than expected; this will hurt the 1st quarter GDP results. The Philly Fed outlook missed expectations, and so did leading indicators. Only initial jobless claims beat expectations, and even so, by the thinnest of margins.

So what caused stocks to jump?  Perversely, the in the Fed’s meeting announcement, the Fed noted that the US economy is slowing down. This bad news (which we’ve been noting here for the last several months) suggested that the Fed would not be able to raise rates (in other words, tighten monetary policy) for longer than the markets were preparing, and this was perceived to be good for stock markets. So to summarize, bad news on Main Street means good news for Wall Street.

This has been a theme equity investors have picked up on for the last several years. In fact, it explains most of the stock market exuberance during this time—the thinking has been that as long as the Fed is worried, then one must buy stocks and never….ever….worry about valuations because they simple cannot go down—meaningfully—when the Fed is so accommodating. In other words, the stock market party is not over.

Outside of equities, we’ve been chronicling the opportunities in being long US Treasuries since late 2013. And when the yield on the US 10 year touched 1.65% in late January 2015, we noted that it was no longer a good value. Since then, the yield—unsurprisingly—rose. In fact, it jumped all the way up to 2.25% in mid March. At that time and at that yield, it became a much better value.

Over the last week or so, also unsurprisingly, the yield on the 10 year dropped back down to almost 1.9%. So anyone who bought in the 2.2% range has made a huge profit over this short period of time, and more importantly, this profit came with a far lower risk than it would have in high yield or stocks. So on a risk-adjusted basis, this gain is even more impressive.

The bottom line in US Treasuries is that the yield downturn that resumed in 2013 is not over. And until this trend is over, the correct strategy is to buy US Treasuries on big dips in prices.

Commodities Crumbling

March 16, 2015

For the third week in a row, the S&P500 lost ground. Last week, it slipped just under 0.9% on modestly higher volume. Volatility, as would be expected, also inched up a bit, but it remains firmly within complacent territory.

Yet, despite the slight retreat in prices over the last three weeks, the technical picture for the weekly charts has barely changed. Prices are still in an overall uptrend. They’re above the 200 day moving average and this all-important moving average is comfortably sloping upward.  On the daily charts, sure, prices seem like they’ve stalled a bit. But here too, there is still no sign of an imminent and dramatic price drop. While US stock markets remain extremely over-valued (eg. using the Shiller or CAPE price to earnings ratio), we may not see a material retreat in prices—or a correction—until some sort of catalyst triggers the retreat.

Last week’s economic releases continued to mostly disappoint. Job openings, retail sales (both headline and ex-autos), business inventories, small business confidence, and consumer sentiment all missed expectations. More dramatically, retail sales were a disaster and the miss in consumer sentiment was the greatest miss since 2006.

One of the big stories in markets outside of stocks and bonds is the commodities markets which continue not only to erode in price, but lately seem to have escalated their descent. The CRB index, which contains a basket of major commodities, is now dropping to levels last seen in 2008 when the index fell about 50%. Today, it has fallen by about 45%. But interestingly, it bag to slip back in 2011, when US stock markets were still far lower than they are today. And this erosion has escalated in velocity since mid 2014.

One of the key drivers of the drop in commodity prices is the collapse in the price of oil. After hitting post-financial crisis lows a couple of months ago in January, the price of crude bounced back a bit in February. But just now, the price has resumed its decline and just hit fresh six year lows. In other words, the price of oil is back to where it was in 2009.

The biggest takeaways from this collapse in commodity prices are these: 1. the global economy is really not recovering, despite what the mainstream media reports claim. Commodity prices always rise as economies recover; they always fall when economies stumble. 2. the stock market prices are completely diverging from commodity prices, when usually they are more in sync with each other. So the question is—did something change so that stock prices no longer follow commodity prices? Or is it simply a matter of timing—the two will converge in price; it simply hasn’t happened yet.

So You’re a Buy-and-Hold Investor? Really?

March 9, 2015

In another mostly uneventful week, the S&P500 slipped 1.6% on somewhat higher volume, which is of course, what we’ve come to expect whenever the stock market falls. Also not unexpected, volatility nudged higher during this down week; that said, it’s not too far away from the lower end of its long-term range.

Despite the modest retreat in prices last week, the technicals are still screaming “over-bought”, especially on the weekly charts where the price drop was barely visible. Prices on the longer term charts are still very much hugging the upper Bollinger bands. Measures of breadth deteriorated on the week—the McClellan oscillator registered a notable drop. And the percent of stocks above their 50 day moving averages also slipped quite a bit.

Unlike the prior week, there were quite a few economic reports released last week. Personal spending and personal income both missed expectations. Construction spending also missed badly—falling 1.1% instead of rising 0.3% as expected. Initial jobless claims disappointed by surging higher, well above expectations. Factory orders also missed by a wide margin, and so did consumer credit, which rose by far less than the consensus estimate. On the positive side, PMI manufacturing beat expectations, as did PMI services. Finally, the big number of the week, payrolls—on the surface—beat expectations. Jobs grew by 295 thousand instead of the 230 thousand expected. The caveat is that by far, most of the job growth came from part-time (and low-paying and non-benefited) jobs in areas such as hospitality and retail. Think bartenders and store clerks. Also, disappointing was the fact that average hourly earnings grew half as much as expected and the fact that the labor force participation rate fell—this means that while unemployment rate looks good, whereas behind the scenes, a smaller percentage of the population is actually working, which is not so good.

Finally a word about all the enthusiastic stock buyers and owners over the last several years, who’ve enjoyed tremendous success as the US stock markets have continued chugging higher despite the cautions and warnings from many of Wall Streets most experienced analysts.

The fact is that most retail stock market participants jump in well after stock markets have made huge moves higher, thereby missing a large portion of the move. Why did they have to “jump in”? Since most claim to be “buy and hold” investors, why weren’t they already in the markets from the beginning of the move?

It turns out that most retail investors also don’t really have the stomach for big losses, and end up getting out—and losing money—near the bottoms of big market down moves.

Here’s how veteran investment manager John Hussman puts it:

Investors often convince themselves to follow a buy-and-hold strategy only after lengthy market advances, and even raise their expectations about the level and safety of future returns at exactly the point when elevated valuations imply poor long-term market prospects …… They later abandon their buy-and-hold convictions after lengthy market declines. What I am urging is that investors vividly imagine realistic market losses ahead of time (the 2000-2002 and 2007-2009 declines each wiped out half of the stock market’s value, and the average run-of-the-mill cyclical loss exceeds 30%). One may believe that the timing of such losses is unpredictable, and that’s fine. The point is that such losses are the way that market cycles regularly conclude. Even Jack Bogle, for whom we have great respect, encourages investors to “prepare for at least two declines of 25-30 percent, maybe even 50 percent, in the coming decade.” That’s not a timing call. It’s simply historically-informed realism. Particularly in light of current valuations, investors should set their portfolio allocations to allow for such risk without later abandoning their discipline if it becomes painful.

So just remember that good times NEVER last forever in stock markets and that when the inevitable downturn finally arrives—be prepared to ride out the entire roller coaster move….which is what buy and hold investors MUST do to truly adhere to their professed approach to investors.

Historical evidence strongly suggests that most will not be able to do this. So the challenge will be to determine if you’re able to break this tendency—-to sell out near market lows, and thereby booking major losses, just before the markets begin their major rebounds.


Quiet Week in February

March 2, 2015

The ended almost unchanged for the S&P500 which slipped about 0.3% on relatively light volume. Stock market volatility also didn’t change much—the VIX index ended the week just a bit lower than where it started.

So there was a lot of watching and waiting.

Technicals point to the same conclusion that was reached last week—that of a market hugging highs, highs that are still extremely overstretched, by historical standards. Both daily and weekly charts show prices remaining near their respective upper Bollinger bands. At the same time, many measures of internals and breadth are still not confirming the elevated prices. The McClellan Oscillator actually dropped last week in another sign that as index prices head one way (up) many smaller, individual firm prices are headed the other way (down).

The US economic story remains unchanged—over the last two months, the pace of deterioration has continued, as judged by the percentage of economic reports that have missed expectations. This figure is close to 90%. Not a good sign of things to come.

Last week, only PMI services and new home sales beat expectations. The other dozen or so reports all missed, and some very badly. The Chicago Fed National Activity Index missed. Existing home sales missed (badly). The Dallas Fed survey missed. Consumer confidence missed. The Richmond Fed index missed. Durable goods ex-transportation missed. Initial jobless claims missed. The Kansas City Fed index missed. Chicago PMI missed (very badly). And pending home sales missed.

So while the tensions in Greece and Ukraine have simmered down….for now, the US stock markets did not take off nor did US Treasury yields soar. If both of these happened, then that would be a big sign from markets that all is well in the world and money can flow back from safe havens (US Treasuries) to risky assets (US stocks).

That didn’t happen.

Let’s see what this week brings, especially with the big jobs report on Friday.