I can't believe half of 2013 is already over! Time sure flies and I've noticed that the older I get the faster it seems to go by. Not good! The market correction that has taken place appears to be just that - a correction. I think most of the damage has already been done given how rapidly pessimism has swelled in the shorter term trading indicators I track. For instance NAAIM sentiment shows active managers are only 34% long which is in the vicinity of where correction lows have taken place.The concern about "Chibor" which added downside fuel to the fire seems to be alleviated at least for now and I think this is the catalyst that sparked the bounce. Not sure if this bounce is the beginning of a sustainable upswing though (I have my doubts). My forecast for choppy markets in the months ahead seems to be on track. Meanwhile I noticed all the same losers on the yahoo message boards squeeling with delight while the market was dropping along with some of the usual permabear suspects calling for a big drop in the market. You know what? Do yourself a favor and delete any bookmarks you have for these jokers if you actually invest/trade the market. They have poisoned your mind. This is not to say you should never be bearish again, just find another way - find a method that will turn you bearish when it's actually the correct posture. Most of today's doomsters are simply broken clocks who have been singing the same tune for several years or even decades and so when a crash happens they look like geniuses. The truth is, if you followed their advice over time, you'd be in the red and maybe even broke. At the end of the day making or losing money is the ONLY thing that matters if you play this game which is why these guys should be totally ignored.
Gold has been getting hammered quite badly this year and I'm a bit surprised it hasn't been able to get a bounce bigger than the short lived ones it has had so far. Maybe we will finally get a big bounce soon soon but I wouldn't hold my breath. I'd like to know where all those "gold will do well in inflation or deflation" guys are now and I wonder how the doomer gold bugs like Schiff are preforming. They certainly know how to brainwash people into believing the end of world is coming and yet they and their followers must be taking quite a beating. I must say, I have no sympathy for miserable SOBs who lose money. Gold stocks are now closing in on the 2009 bear market lows and gold companies are scrambling to shut down mines and cut costs. Gold stocks have been hit hard by a perfect storm of cost overuns from the likes of the majors like Kinross and Barrick and now a free falling gold price. In fact, Barrick is now trading at where it was in 2001 when the gold bull market had just started! Wow! I can't tell you how many times I saw Barrick recommended on BNN by the "experts" when it was above $40. So, with gold stocks getting hammered so badly even with gold still comfortably above $1000, does this mean that the sell-off is overdone and maybe even over?When you have these conditions where the gold price still hasn't found a bottom and the companies are hurting, slashing payrolls and shutting down mines it's best to avoid the sector no matter how tempting for it usually takes several months for the dust to settle in such cases...sometimes years. Think housing. There will of course be tradable rebounds but they are often elusive and you know what? I used to be interested in such opportunities but as the years have gone by I have passed on committing my capital on ST speculative endeavors like this. I'd much rather look for situations where I can buy a fundamentally strong company trading on the cheap which therefore gives "substance" to my positions or bet on some LT secular trend that I believe is its early innings. Bigger and easier money is made this way and in such situations I can have the conviction to make large bets whereas I can only bet small when I'm looking to "play a bounce" in some sector.
So far I've had a very good first half of the year but I gotta say, it's a bit unsatisfying because it's all due to my holding of gre.v while hwo.to has been stuck in a rut and is flat on the year. The company just announced a 3 year renewal of the big contract it has in place with its customer in PNG. This customer accounts for the bulk of the company's revenues and so it pretty much guarantees significant cash flows for 3 years and when you're trading at sub 4 times earnings, close to book value, no net debt and with a 7% yield, it makes the stock quite a bargain even though the company did say it expects flat EBITDA this year.There is this one huge seller of the stock out of UBS who continues to keep a lid on the stock putting up a brick wall at 2.10. This guy has sold over 1 M shares so far this year which is huge overhang for a microcap. If not for this big seller the stock would be a lot higher because anytime he's not there the stock lifts quite easily. I've been trying to find out who this seller is but I've had no such luck. It's not any insider otherwise it would show up on the insider trading report. Maybe it's a former insider. It's really frustrating to see this action in hwo but in time, the fundamentals always assert themselves and so the stock should work higher but in the meantime its been dead money and I don't like dead money. If I see something else equally enticing out there I might as well just pull the plug and move on.
Greenstar on the other hand has done quite well for me so far this year. Interest in the company is slowly building. When I was buying shares at .50 I was literally the only one buying. Although the company operates out of China which is struggling right now, most of its business is international and the domestic part of it involves the sale of fresh produce which is always going to have steady demand rain or shine. With significant growth pretty much baked in the cake for the next 2 years and stock still trading very cheap, the upside momentum seems poised to continue. The dividend is likely going to be hiked as well sometime down the road too given that it's only a tiny slice of cashflows which are growing. So far mgmt has done a good job in trying to separate the company from the bad image Chinese stocks have thanks to Sino Forrest and some others.
Friday, June 28, 2013
Friday, June 14, 2013
Taper your tapering fears
The buzzword of the month seems to be "fed tapering" and it's this worry that is the apparent culprit of the correction. Isn't it funny how when QE was first introduced it was widely criticized and dismissed? Very few people if any, believed that it would have a lasting impact on the markets. The consensus view was that all it would do is crater the dollar and stoke inflation. Then as the bull market progressed without the dollar disaster that was expected, you heard all this griping about how the bull market is solely due to QE. Wait a minute, wasn't QE supposed to be useless? Where is the mea culpa from all the pessimists? This is why I show so much hostility towards the legions of permabears that are still out there. They have shown ZERO in the way of admitting how hideously wrong they have been about pretty much everything.
As far as the effectiveness of QE I would speculate to say that it has more of a security blanket effect than anything. I doubt very much that it is the underpinning of the bull market despite the charts that show the correlation between the initiation of QE rounds and market performance. At best, it's a moderate contributing factor. If for instance, QE was implemented in early 2001 I doubt very much it would have stymied the bear market that was in place because the excesses of the late 1990's had only begun to be purged. Only when that purging was completed did favorable monetary policy gain traction. I remember clearly how when the fed slashed rates by 50 bps in January 2001 the financial media got all excited pointing out how anytime the fed cut rates like this the market was up a year later every time with the exception of 1931. It turned out that despite drastic easing, the fed was rather powerless to stop the purging that was in process. Once the economy is purged from the excesses and pessimism has swelled, then the path of least resistance is up and so any kind of "push" from the fed/government will be much for effective but it's NOT the main reason the market will go into bull mode - the market has to be primed for it. You do not get a 4 year 140% bull market making new all time highs solely due to the actions of the fed/government. You have to be really delusional to believe that and yet there's so many people who do. It just goes to show you how badly scarred and bitter so many still are from the 2008 collapse. I think this is the true underlying cause of the pervasive pessimism out there. It takes lot's of time to heal from such a devastation and I suspect a lot of people will remain a pessimist for life much like investors who got burned during the depression. Life is too short to be a perpetual pessimist like this.
I'm sure there's a significant cohort of reluctant longs out there who are only long because they think the fed is propping up the market. These people will be very quick to run for the exits at any hint that the fed is going to let off the pedal even just a bit. I'm quite sure these folks have been selling. So far this pullback looks like a run of the mill correction as opposed to something more nasty. Trader types were very quick to run for the exists and the put/call ratio was very quick to zoom higher. I suspect we will see choppy markets for the rest of the summer with a possible downside scare or 2 to work off the very IT overbought condition the market reached in late May. One thing that is concerning is the weak action in bonds. Typically, correction bottoms are accompanied by a strong rally in bonds and that has not been the case. We'll see how things play out. As always I'll make adjustments if warranted.
As far as the effectiveness of QE I would speculate to say that it has more of a security blanket effect than anything. I doubt very much that it is the underpinning of the bull market despite the charts that show the correlation between the initiation of QE rounds and market performance. At best, it's a moderate contributing factor. If for instance, QE was implemented in early 2001 I doubt very much it would have stymied the bear market that was in place because the excesses of the late 1990's had only begun to be purged. Only when that purging was completed did favorable monetary policy gain traction. I remember clearly how when the fed slashed rates by 50 bps in January 2001 the financial media got all excited pointing out how anytime the fed cut rates like this the market was up a year later every time with the exception of 1931. It turned out that despite drastic easing, the fed was rather powerless to stop the purging that was in process. Once the economy is purged from the excesses and pessimism has swelled, then the path of least resistance is up and so any kind of "push" from the fed/government will be much for effective but it's NOT the main reason the market will go into bull mode - the market has to be primed for it. You do not get a 4 year 140% bull market making new all time highs solely due to the actions of the fed/government. You have to be really delusional to believe that and yet there's so many people who do. It just goes to show you how badly scarred and bitter so many still are from the 2008 collapse. I think this is the true underlying cause of the pervasive pessimism out there. It takes lot's of time to heal from such a devastation and I suspect a lot of people will remain a pessimist for life much like investors who got burned during the depression. Life is too short to be a perpetual pessimist like this.
I'm sure there's a significant cohort of reluctant longs out there who are only long because they think the fed is propping up the market. These people will be very quick to run for the exits at any hint that the fed is going to let off the pedal even just a bit. I'm quite sure these folks have been selling. So far this pullback looks like a run of the mill correction as opposed to something more nasty. Trader types were very quick to run for the exists and the put/call ratio was very quick to zoom higher. I suspect we will see choppy markets for the rest of the summer with a possible downside scare or 2 to work off the very IT overbought condition the market reached in late May. One thing that is concerning is the weak action in bonds. Typically, correction bottoms are accompanied by a strong rally in bonds and that has not been the case. We'll see how things play out. As always I'll make adjustments if warranted.
Wednesday, June 5, 2013
So, is this it?
Are we getting the long awaited correction? The one that has foiled both bulls and bears alike? If a bull like me was inclined to buy puts just over a month ago and got ran over with them, I can only imagine the destruction that was laid upon the bearishly inclined...which I reckon makes up the 80+% of the trading community. I'll say this again, it doesn't matter how bad the market gets from here because if you've listened to the bears and followed their advice or what they implied you should do, you're broke.
Correction or not, I don't think this bull market is in danger of being over for the reasons I've cited here before many times. But let's not get complacent here. We've had a huge run and so protect yourself or lighten up if you know you'll end up panicking or staying awake at night if the market were to drop further.
I'm still holding my protective puts (which are underwater from where I bought them) along with my 2 longs which make up 80% of my account. Yeah I know, I'm nuts but you know what? These 2 longs I have are financially solid, trading very cheap and so I can be a strong holder of them throughout any volatility.
Hwo has been disappointing giving up just about all the gains for the year. The main reason of the latest sell-off is probably because mgmt says it expects no growth in earnings vs last year. Now, if the stock had a p/e of 20+ that would be a concern but when it has only a p/e of 4 it's already pricing in very pessimistic assumptions about growth (making it a bargain) and so I don't think this sell off is warranted nor sustainable. The stock now has dividend yield of 7% and is trading close to book value and so I believe downside should be limited. In fact, insiders of the company have been buying shares on the open market at these prices and the company announced a buyback plan - both of which signal the stock is quite undervalued. The last time insiders and the company were buying shares like this was in late November when the stock was near a major bottom. Although this year may not provide any fireworks, the longer term outlook (1-2 years) from now looks very good given what appears to be a forthcoming LNG boom in Canada and with further LNG development in PNG. In the meantime, I collect the generous monthly dividend.
My other holding China Greenstar is looking very good. It looks pretty assuring to me that they will see 20-30% growth in earnings this year. They are in the process of acquiring one of their suppliers for a bargain basement price in Q3 and so that will assure that next year's earnings will grow significantly as well. Meanwhile, the stock is still grossly undervalued even with it's move up to $0.98 since it has a book value of $1.42/share and company will likely earn $0.40-$0.45/share this year. I think I can hit a home run with this stock like I did with bev.to in 2010....but this time I loaded up with a lot more shares than I did with bev and so it could turn out to be a grand slam! So long as I don't get any really bad luck, the stock should easily hit $2 by this time next year. The beauty of this company is that the earnings are constant and rather predictable given that their business consists of selling tomato paste, fresh produce and canned fruits. It doesn't sound very exciting but if you look at the cash flows this company generates, i's future growth rate and how ridiculously cheap the stock is, it is indeed very exciting! Of course the so called "catch" is that the company is based in China and there's been some bad apples there with Sino Forrest being the biggest one. This is why the stock is so cheap. Well, I've done my DD and I'm more than comfortable in believing the company is legit. If they keep producing these kinds of results, it's simply a matter of time that they will get the proper respect by the market and be able to break free of the China stigma and it seems this process could just be starting. If the company is indeed legit, then this is as close as a sure thing as you are going to get in the market. It trades at 2.4 times 2013 earnings and the company has been growing earnings around 15% each year for the last 3 years with this year poised for 20-30% growth and more growth pretty much assured for 2014. You might be thinking if it's too good to be true then it probably is. Well, that's usually the case but you can indeed find these types of situations in the microcap/small cap space since they are overlooked by analysts. My big score with bev.to is a perfect example. When I bought the stock at $0.50 it was pretty much assured that over the next 4 quarters the company was going to earn at least $0.80 a share thanks to a government contract they won. When I realized this I said to myself "I must be missing something here, this is too good to be true" Well it wasn't! The market was quite frankly dumb and I took advantage of it.Only when that cashflow actually started coming in did the stock respond even though the news and mgmt's forecasts made is quite clear that it was coming several months prior. The stock ended up going to $3.40 close to where I sold everything. I sold because I sensed euphoria in the stock and I wanted to cash in on a big winner. I figured I could always get back in on a dip, but as time passed I realized that I no longer had the conviction to buy back the stock because there was no significant earnings to come after that big contract was over which after the big run up, was priced into the stock. With Greenstar I don't have this issue. I can be assured that people are going to be consuming the food they sell year after year after year without worrying about it going obsolete/out of style.
This stock has the makings of a grand slam homerun. In fact, I've never felt so excited about owning a stock like this ever! The CEO has a very ambitious goal of making this a $1 Billion in sales company. Pipe dream? Maybe, but if we see just 1/5 of this goal reached I'd make out extremely well. Even if the company doesn't grow and simply pumps out the $10 M in profit it made last year every year going forward, I'd still make out very well in the long run. For me to be on the losing end, I'd have to be really unlucky here like for instance if China suffers a complete collapse and goes into lockdown mode.
Correction or not, I don't think this bull market is in danger of being over for the reasons I've cited here before many times. But let's not get complacent here. We've had a huge run and so protect yourself or lighten up if you know you'll end up panicking or staying awake at night if the market were to drop further.
I'm still holding my protective puts (which are underwater from where I bought them) along with my 2 longs which make up 80% of my account. Yeah I know, I'm nuts but you know what? These 2 longs I have are financially solid, trading very cheap and so I can be a strong holder of them throughout any volatility.
Hwo has been disappointing giving up just about all the gains for the year. The main reason of the latest sell-off is probably because mgmt says it expects no growth in earnings vs last year. Now, if the stock had a p/e of 20+ that would be a concern but when it has only a p/e of 4 it's already pricing in very pessimistic assumptions about growth (making it a bargain) and so I don't think this sell off is warranted nor sustainable. The stock now has dividend yield of 7% and is trading close to book value and so I believe downside should be limited. In fact, insiders of the company have been buying shares on the open market at these prices and the company announced a buyback plan - both of which signal the stock is quite undervalued. The last time insiders and the company were buying shares like this was in late November when the stock was near a major bottom. Although this year may not provide any fireworks, the longer term outlook (1-2 years) from now looks very good given what appears to be a forthcoming LNG boom in Canada and with further LNG development in PNG. In the meantime, I collect the generous monthly dividend.
My other holding China Greenstar is looking very good. It looks pretty assuring to me that they will see 20-30% growth in earnings this year. They are in the process of acquiring one of their suppliers for a bargain basement price in Q3 and so that will assure that next year's earnings will grow significantly as well. Meanwhile, the stock is still grossly undervalued even with it's move up to $0.98 since it has a book value of $1.42/share and company will likely earn $0.40-$0.45/share this year. I think I can hit a home run with this stock like I did with bev.to in 2010....but this time I loaded up with a lot more shares than I did with bev and so it could turn out to be a grand slam! So long as I don't get any really bad luck, the stock should easily hit $2 by this time next year. The beauty of this company is that the earnings are constant and rather predictable given that their business consists of selling tomato paste, fresh produce and canned fruits. It doesn't sound very exciting but if you look at the cash flows this company generates, i's future growth rate and how ridiculously cheap the stock is, it is indeed very exciting! Of course the so called "catch" is that the company is based in China and there's been some bad apples there with Sino Forrest being the biggest one. This is why the stock is so cheap. Well, I've done my DD and I'm more than comfortable in believing the company is legit. If they keep producing these kinds of results, it's simply a matter of time that they will get the proper respect by the market and be able to break free of the China stigma and it seems this process could just be starting. If the company is indeed legit, then this is as close as a sure thing as you are going to get in the market. It trades at 2.4 times 2013 earnings and the company has been growing earnings around 15% each year for the last 3 years with this year poised for 20-30% growth and more growth pretty much assured for 2014. You might be thinking if it's too good to be true then it probably is. Well, that's usually the case but you can indeed find these types of situations in the microcap/small cap space since they are overlooked by analysts. My big score with bev.to is a perfect example. When I bought the stock at $0.50 it was pretty much assured that over the next 4 quarters the company was going to earn at least $0.80 a share thanks to a government contract they won. When I realized this I said to myself "I must be missing something here, this is too good to be true" Well it wasn't! The market was quite frankly dumb and I took advantage of it.Only when that cashflow actually started coming in did the stock respond even though the news and mgmt's forecasts made is quite clear that it was coming several months prior. The stock ended up going to $3.40 close to where I sold everything. I sold because I sensed euphoria in the stock and I wanted to cash in on a big winner. I figured I could always get back in on a dip, but as time passed I realized that I no longer had the conviction to buy back the stock because there was no significant earnings to come after that big contract was over which after the big run up, was priced into the stock. With Greenstar I don't have this issue. I can be assured that people are going to be consuming the food they sell year after year after year without worrying about it going obsolete/out of style.
This stock has the makings of a grand slam homerun. In fact, I've never felt so excited about owning a stock like this ever! The CEO has a very ambitious goal of making this a $1 Billion in sales company. Pipe dream? Maybe, but if we see just 1/5 of this goal reached I'd make out extremely well. Even if the company doesn't grow and simply pumps out the $10 M in profit it made last year every year going forward, I'd still make out very well in the long run. For me to be on the losing end, I'd have to be really unlucky here like for instance if China suffers a complete collapse and goes into lockdown mode.
Monday, May 6, 2013
Fresh all time high and still no respect by the herd
Better than expected payrolls and significantly revised March payrolls caught everyone flat footed Friday morning. Given the trend in the disappointing economic data as of late, nobody expected that 165 K print or last month's upward revision. It looks like my protective put purchases on Thursday are going to indeed turn out to be a sacrifice to the trading gods...and I don't have a problem with that at all! Any of you who have been bullishly positioned should thank me!
With the market at a fresh all time high do you think it's changed the ingrained miserable SOB herd mentality out there that have dismissed this bull market from day one? Not one bit. I still keep seeing the same "blow off top!" "It's rigged by the Fed", type comments which have been ongoing for over 3 years. So pathetic, so delusional. Keep reading articles from zerohedge doomers...it's done you really good I'm sure. Keep following Roubini, Schiff, Hussman and the rest of the miserable permabear SOBs who have been utterly humiliated by the market for 4 years and yet continue to display arrogance without giving any mea culpa for being as horribly wrong as they have been. Unbelievable these guys are. I for one don't feel sorry for anyone of their devotees. And as I said before, it doesn't matter if the market were to make a bull market peak shortly and descend into a new bear...these jokers have been wrong for far too long and the market has gone up far too high for them to have any credibility as far as I'm concerned.
Tough to say where the market goes in the ST at this point. The rule of thumb is that when a market breaks out to an all time high it's a powerful signal and more ST gains are likely but there obviously has to be a limit to this and given that the market is already overbought, it doesn't seem likely the market will be able to advance a lot further without some sort of consolidation first. I've outlined some factors that support both the bull and bear case in the ST. One thing's for sure though is this...you must respect a market that is making a new high or low and more often then not you get ran over if you try and step in front of it betting the other way. Just look at what happened when I bought those puts last week!
Two weeks ago I posted that global leading indicator chart which suggests that the data is going to start looking a lot better in the immanent future. Is this why the market has been able to ignore any bad news? We are certainly going to find out! This should be an interesting summer. Given my partially hedged position, I can sit back and watch the show with less anxiety. And have you noticed that sovereign yields in PIGS have collapsed to multi year lows? That's the complete opposite of what happened in the springs of 2010, 2011, 2012 when yields were creeping higher until they blew out to "crisis" levels which helped trigger the major spring/summer corrections.
I also want to say something about Doug Kass. This guy has gotta be an ego maniac. He's short Buffett's Berkshire and was invited to Buffet's annual shareholder meeting to challenge Buffet with some bearish questions. Out of all the stocks to short, Kass chooses Berkshire. Jesus. I think he's trying to pick a top on Buffet rather than the stock itself. I remember reading an article by Kass a few years back claiming Buffett has lost his touch. Well Kass, it's YOU who has lost your touch. Buffett proved you wrong then and (so far) again this year. I'm not sure at what price Kass is short, but whatever it is, he's underwater as the stock made an all time high Friday. From my knowledge, Kass has been mostly short the market since the year began as well and so before being critical of others, especially legends like Buffett he should be more critical of himself.
Friday, May 3, 2013
Getting it out of my system
Alright I did it. I bought some index puts to hedge my portfolio. There...fuck off now George Costanza. For now it's a rather small hedge making up 2% of my account value. They may very well end up being a sacrifice to the trading gods because I have to admit there's a bit of paranoia in this trade.
I bought some Aug SPY 155 puts and did so in the first 15 minutes of the trading day which means I got subsequently ran over, but it's all good. I have to treat this position as portfolio insurance, not as an individual position. I have to admit, I have a hard time doing this because I have rarely used hedges in the past 4 years. I have opted instead to raise cash if I had general market concerns but I don't wish to do so this time because the stocks I own (only 2 of them) are still quite cheap and have been able to trade fairly independently of the market. Why then buy index puts if the stocks I own have been able to trade on their own accord? Because you never know. That's the reason you get any type of insurance. If the market was to have a deep correction it's not hard to imagine my non-market correlated stocks will eventually get sucked into the market downdraft.
I pulled the trigger today for a few reasons. First, I can't deny that the economic data has for the most part, been weaker than expected. The market has been able to shrug it off for a month now which could suggest it believes the weakness is only temporary. It's also possible that the market is wrong (yes wrong) and has been able to ignore the bad news because of the strong upward momentum fueled by stubborn top picking. If that's the case, it's just a matter of time before it will acknowledge reality. We saw this behavior in the past few springs whereby there were flare ups in Europe and other bad news but the market ignored it and kept chugging along untill it eventually couldn't ignore the bad news any longer. So, we will only know in hindsight whether the market is correct or not in ignoring the bad news. Given the strong run up we've had YTD and given my long exposure, having at least a small index hedge makes prudence sense at this point while we see which fork in the road Mr Market will take. Another thing that prompted me to pull the trigger was that NAAIM spiked to 80% longs and Rydex traders bought Wedneday's dip which is something they don't do often and the fact that these wrong way traders got away with it makes likely that Thursday's rally will get completely undone and then some in the near future. AAII sentiment is only at 1:1 bulls/vs bears which is still supportive for the market rally and bonds are still strong and so it's certainty not a slam dunk for the bear case in the ST/IT. In fact, we could easily power higher still given the condition of these 2 indicators.
The bottom line is that I no longer feel comfortable with an unprotected 80% long position while we enter a seasonally weak period with the market overbought while the economic data has been deteriorating. While a 2% hedge is not much, the puts have quite a bit of leverage and I may be inclined to add more. I still don't believe that any market weakness we will see is going to be severe given the bullish points I made in my previous post. In, fact I think there's a pretty good chance we will only have a mild 3-4% dip this summer, but given my situation, I don't want to risk being wrong while unprotected.
I've said this before a few times - know yourself. If you know you'll be weak if the market moves against you, you have to either reduce exposure or hedge otherwise you'll end up making an emotional trade.
I bought some Aug SPY 155 puts and did so in the first 15 minutes of the trading day which means I got subsequently ran over, but it's all good. I have to treat this position as portfolio insurance, not as an individual position. I have to admit, I have a hard time doing this because I have rarely used hedges in the past 4 years. I have opted instead to raise cash if I had general market concerns but I don't wish to do so this time because the stocks I own (only 2 of them) are still quite cheap and have been able to trade fairly independently of the market. Why then buy index puts if the stocks I own have been able to trade on their own accord? Because you never know. That's the reason you get any type of insurance. If the market was to have a deep correction it's not hard to imagine my non-market correlated stocks will eventually get sucked into the market downdraft.
I pulled the trigger today for a few reasons. First, I can't deny that the economic data has for the most part, been weaker than expected. The market has been able to shrug it off for a month now which could suggest it believes the weakness is only temporary. It's also possible that the market is wrong (yes wrong) and has been able to ignore the bad news because of the strong upward momentum fueled by stubborn top picking. If that's the case, it's just a matter of time before it will acknowledge reality. We saw this behavior in the past few springs whereby there were flare ups in Europe and other bad news but the market ignored it and kept chugging along untill it eventually couldn't ignore the bad news any longer. So, we will only know in hindsight whether the market is correct or not in ignoring the bad news. Given the strong run up we've had YTD and given my long exposure, having at least a small index hedge makes prudence sense at this point while we see which fork in the road Mr Market will take. Another thing that prompted me to pull the trigger was that NAAIM spiked to 80% longs and Rydex traders bought Wedneday's dip which is something they don't do often and the fact that these wrong way traders got away with it makes likely that Thursday's rally will get completely undone and then some in the near future. AAII sentiment is only at 1:1 bulls/vs bears which is still supportive for the market rally and bonds are still strong and so it's certainty not a slam dunk for the bear case in the ST/IT. In fact, we could easily power higher still given the condition of these 2 indicators.
The bottom line is that I no longer feel comfortable with an unprotected 80% long position while we enter a seasonally weak period with the market overbought while the economic data has been deteriorating. While a 2% hedge is not much, the puts have quite a bit of leverage and I may be inclined to add more. I still don't believe that any market weakness we will see is going to be severe given the bullish points I made in my previous post. In, fact I think there's a pretty good chance we will only have a mild 3-4% dip this summer, but given my situation, I don't want to risk being wrong while unprotected.
I've said this before a few times - know yourself. If you know you'll be weak if the market moves against you, you have to either reduce exposure or hedge otherwise you'll end up making an emotional trade.
Friday, April 26, 2013
Sell in May or stay?
Two Mondays ago gold took a 10% hit and all because China reported 7.7% GDP instead of the expected 8% the night before. That's not really a big miss and so such a catalyst doesn't seem justify that kind of damage but I guess since this "bad news" came at a time when gold was already trading very weak breaking major support, it doesn't take much to trigger an avalanche of selling with margin calls fueling the fire. I'm not surprised to see the rebound that gold has had and I suspect a full retracement of that panic sell off will take place. I'm kicking myself a bit for not buying calls on GLD a few days ago. My finger was on the trigger but I just couldn't pull it.
Gold the "commodity" is another thing I wanted to talk about in my previous post.. In the 2000's commodities became "financialized" as institutional investors embraced it as a major asset class. As a result we have seen large "investment demand" of commodities via commodity futures and commodity backed ETFs for the past 10 years. There have been debates as to how much impact this had in driving commodity prices. I suspect it had a lot of impact both on the upside and downside. Gold was right in the thick of things went it came to the financialization of commodities. The arrival of GLD in 2004 was the primary conduit for "investment demand" to flow into. GLD has been responsible for massive accumulation of physical gold (since its required to be backed by gold) which no doubt drove the price up. Gold bulls have enjoyed the tailwind of the investment demand for about a decade and make no mistake about it, the investment demand for gold is responsible for the vast majority of the rise in the price of gold - I'd say 80% or more (jewerly demand has been flat and the drop in the dollar mathematically only justified about a doubling in the gold price from its low at $260 ). But if you live by the sword you die by the sword. If the investment demand has peaked and is now heading south, then gold bulls are in for a world of hurt longer term.
Gold is such a debated topic. You can find strong arguments pro and con. At first I was going to go through some of the major points of these arguments but I'm going to cut to chase and talk about what counts - where is the price headed. I think in the short to intermediate term, gold will continue to rebound as it got very ST/IT oversold at its recent low and sentiment as measured by trader type indicators, got extremely negative. Longer term, I believe there's a good chance we have seen the end of the bull run that began in 2001 and here's why...
At the very beginning of a secular bull market for any asset, conditions had been bleak for it for quite some time to the point where nobody wants to own it and the price had been taking a beating to the point where it's significantly undervalued, which of course is the best time to be buying. That's where gold was in 2000. Equities had been in a 10 year bull run, unemployment was at record lows, central banks were selling and the US dollar was king. At a major top/beggining of a bear it's the opposite. Things look the most promising, the price had been going parabolic and by then everyone who ever wanted to buy has bought, which of course it the best time to sell/short. I believe this situation is where we stand with gold.
Gold had a 10 year run from 2001-2011 without a down year gaining about 550% from the bottom. Constrast the conditions I mentioned above for gold which prevailed in 2000 just prior to its epic bull run to now. It's the total opposite. During the span of these last 10 years you had a significant decline in the value of the US dollar, 2 huge bear markets in equities, a once in a century meltdown of the global financial system, central banks buying, the most accommodating Fed in history, stubbornly high employment, ongoing concerns of a European collapse and I'm sure I'm missing some other major negatives that support the "gold is a safe haven" notion. Aside from a collapse in the fiat monetary system, things pretty much can't be better for gold and so I think most of the people who ever wanted to own gold owns it by now. So, if we're at that point there's only way for the price to go longer term that that's down....all it takes is the unwinding of one of the major supporting catalysts to trigger the transition.
I've been reading stories about how there have been line ups of people buying physical gold on the dip in Asia. You might think this is a bullish thing but it's not. Shorter term, yes, but not longer term because it shows the type of behavior you see in the first major decline of a bear market - denial. When you see people embrace a big decline like that it's a bad sign longer term. These dip buyers probably represent the last bastion of buyers who have always wanted to buy gold but have been waiting for a "pullback". Once these dip buyers are exhausted the downtrend will resume but in the interim, there could very well be a strong rebound. When the tech bubble burst the initial decline was about 40% but that decline was followed by a 40% rally before the real damage took place!
Switching gears now to the equity markets. We are now approaching the "Sell in May and go away" period. For the past 3 years this strategy worked out pretty well. I've been saying since early this year that we would probably not see a significant correction begin until sometime around May. I gotta tell you though, as of right now, conditions do not support anything more than just a minor dip. AAII has shown 3 consecutive weeks of bears outnumbering bulls by a significant margin, bonds have been very strong for a month and retail inflows into equities has been flat for a month as well. In fact, despite the strong market this week, there was a sizable outflow! I've never seen a major correction begin with such conditions..it instead suggests that the market will go higher still or go sideways with only modest dips. Perhaps people have been catching on to the "Sell in May and go away" notion and if that's the case, it makes it less likely to work this year!
On the fundamental side of things, everyone's talking about the slowdown in emerging markets and it's no secret that Europe is in recession. Lot's of people are also saying that the weakness in commodities, especially copper, is ominious for the global economy/market. I say that's bullshit. I say the action in commodities is a coincident/lagging indicator. Look at every significant top in the past few years and you will see "Dr. Copper" gave no such warnings. The most flagrant example was how copper and other commodities were making new highs in the first half of 2008 while equity markets were rolling over. What signal did that give? I believe commodity weakness in the face a strong equity market is bullish not bearish for lower prices are economically stimulative. We have seen strong rallies get short circuited anytime commodities run up too much like in the spring of 2010 and 2011 as it provided an economic drag.
The following charts shows the recent state of the global economy.
This doesn't look too great, but the market doesn't care about what just happened, it cares about what's going to happen. This chart shows that the global picture will be a lot brighter in the near future.
Perhaps this brighter outlook as per the leading indicator above, is why the global markets (especially in Europe) have held their own despite the economic data having been piss poor in recent months. The brighter outlook for the global economy also bodes well for commodities in general which would be a tailwind for gold. I think commodities bottomed this week.
Bottom line: Unlike last the 3 years, conditions are not suggestive at this point that a major correction is going to begin in May. The market seems poised to either go sideways or higher at this point. If conditions change I will change with them.
Gold the "commodity" is another thing I wanted to talk about in my previous post.. In the 2000's commodities became "financialized" as institutional investors embraced it as a major asset class. As a result we have seen large "investment demand" of commodities via commodity futures and commodity backed ETFs for the past 10 years. There have been debates as to how much impact this had in driving commodity prices. I suspect it had a lot of impact both on the upside and downside. Gold was right in the thick of things went it came to the financialization of commodities. The arrival of GLD in 2004 was the primary conduit for "investment demand" to flow into. GLD has been responsible for massive accumulation of physical gold (since its required to be backed by gold) which no doubt drove the price up. Gold bulls have enjoyed the tailwind of the investment demand for about a decade and make no mistake about it, the investment demand for gold is responsible for the vast majority of the rise in the price of gold - I'd say 80% or more (jewerly demand has been flat and the drop in the dollar mathematically only justified about a doubling in the gold price from its low at $260 ). But if you live by the sword you die by the sword. If the investment demand has peaked and is now heading south, then gold bulls are in for a world of hurt longer term.
Gold is such a debated topic. You can find strong arguments pro and con. At first I was going to go through some of the major points of these arguments but I'm going to cut to chase and talk about what counts - where is the price headed. I think in the short to intermediate term, gold will continue to rebound as it got very ST/IT oversold at its recent low and sentiment as measured by trader type indicators, got extremely negative. Longer term, I believe there's a good chance we have seen the end of the bull run that began in 2001 and here's why...
At the very beginning of a secular bull market for any asset, conditions had been bleak for it for quite some time to the point where nobody wants to own it and the price had been taking a beating to the point where it's significantly undervalued, which of course is the best time to be buying. That's where gold was in 2000. Equities had been in a 10 year bull run, unemployment was at record lows, central banks were selling and the US dollar was king. At a major top/beggining of a bear it's the opposite. Things look the most promising, the price had been going parabolic and by then everyone who ever wanted to buy has bought, which of course it the best time to sell/short. I believe this situation is where we stand with gold.
Gold had a 10 year run from 2001-2011 without a down year gaining about 550% from the bottom. Constrast the conditions I mentioned above for gold which prevailed in 2000 just prior to its epic bull run to now. It's the total opposite. During the span of these last 10 years you had a significant decline in the value of the US dollar, 2 huge bear markets in equities, a once in a century meltdown of the global financial system, central banks buying, the most accommodating Fed in history, stubbornly high employment, ongoing concerns of a European collapse and I'm sure I'm missing some other major negatives that support the "gold is a safe haven" notion. Aside from a collapse in the fiat monetary system, things pretty much can't be better for gold and so I think most of the people who ever wanted to own gold owns it by now. So, if we're at that point there's only way for the price to go longer term that that's down....all it takes is the unwinding of one of the major supporting catalysts to trigger the transition.
I've been reading stories about how there have been line ups of people buying physical gold on the dip in Asia. You might think this is a bullish thing but it's not. Shorter term, yes, but not longer term because it shows the type of behavior you see in the first major decline of a bear market - denial. When you see people embrace a big decline like that it's a bad sign longer term. These dip buyers probably represent the last bastion of buyers who have always wanted to buy gold but have been waiting for a "pullback". Once these dip buyers are exhausted the downtrend will resume but in the interim, there could very well be a strong rebound. When the tech bubble burst the initial decline was about 40% but that decline was followed by a 40% rally before the real damage took place!
Switching gears now to the equity markets. We are now approaching the "Sell in May and go away" period. For the past 3 years this strategy worked out pretty well. I've been saying since early this year that we would probably not see a significant correction begin until sometime around May. I gotta tell you though, as of right now, conditions do not support anything more than just a minor dip. AAII has shown 3 consecutive weeks of bears outnumbering bulls by a significant margin, bonds have been very strong for a month and retail inflows into equities has been flat for a month as well. In fact, despite the strong market this week, there was a sizable outflow! I've never seen a major correction begin with such conditions..it instead suggests that the market will go higher still or go sideways with only modest dips. Perhaps people have been catching on to the "Sell in May and go away" notion and if that's the case, it makes it less likely to work this year!
On the fundamental side of things, everyone's talking about the slowdown in emerging markets and it's no secret that Europe is in recession. Lot's of people are also saying that the weakness in commodities, especially copper, is ominious for the global economy/market. I say that's bullshit. I say the action in commodities is a coincident/lagging indicator. Look at every significant top in the past few years and you will see "Dr. Copper" gave no such warnings. The most flagrant example was how copper and other commodities were making new highs in the first half of 2008 while equity markets were rolling over. What signal did that give? I believe commodity weakness in the face a strong equity market is bullish not bearish for lower prices are economically stimulative. We have seen strong rallies get short circuited anytime commodities run up too much like in the spring of 2010 and 2011 as it provided an economic drag.
The following charts shows the recent state of the global economy.
This doesn't look too great, but the market doesn't care about what just happened, it cares about what's going to happen. This chart shows that the global picture will be a lot brighter in the near future.
Perhaps this brighter outlook as per the leading indicator above, is why the global markets (especially in Europe) have held their own despite the economic data having been piss poor in recent months. The brighter outlook for the global economy also bodes well for commodities in general which would be a tailwind for gold. I think commodities bottomed this week.
Bottom line: Unlike last the 3 years, conditions are not suggestive at this point that a major correction is going to begin in May. The market seems poised to either go sideways or higher at this point. If conditions change I will change with them.
Monday, April 15, 2013
Infection points
Quite an eventful week! Lot's to talk about. The SPX powered its way to a fresh all time high and is closing in on 1600 yet all I see is more whining and complaining. The latest complaint is that it's the "defensive" names that are leading the market and so the rally is false. Then of course you have the perennial "the bull market is phony because it's all due to the fed" complaint. Back in 2009 and 2010 there was a lot of complaining about how the advance was occurring on low volume and yet another complaint was that the rally was occurring at the expense of the US dollar and so the bull market was false. Complaining, whining and staying angry at the Fed -that's all people seem to be able to do. By the way the market is up 140% from the bottom and the dollar is only down about 6% from that point and so the "rally is phony" argument is total bs.
A really bizarre thing happened this week with AAII sentiment. Despite the market making fresh all time highs, the bull/bear ratio plummeted to .35 which is the lowest level since March 2009! When I first saw this number I was shocked and I figured it had to be an error but it's not! Normally you see such extremes in bearish sentiment when the market has been getting hammered. I have never seen such a extreme bearish reading like this when the market has been so strong not to mention making all time highs. On a stand alone basis this has enormous bullish contrarian implications but you should never hang your hat on just one indicator. Other measures of sentiment aren't nearly as bullish, but there are some corroborating indicators which suggest that in the ST the market still has the fuel to power higher still. Bonds once again are indicative of this which are in the same condition as I pointed out last week which led to a ST bottom as I expected. Fund flows into equities have been quiet the past 3 weeks which again supports the notion that shorter term, the road is cleared for the market to make a further advance. One thing's for sure....there's no way I'm going to play the short side with the above mentioned conditions for it suggests that any downside from here will be limited...for now.
Getting back to gold. When I first turned bullish on gold in late 2000 it was because confidence in the US was just starting to roll over from an all time high and I figured that since I believed a big bear market in stocks was underway, the status of the US being the economic powerhouse of the world would fade considerably along with confidence in the US dollar as a reserve currency. Basically, I believed that there would be a gold bull market due to a substantial rise in pessimism towards the US in general which would make people flock to gold which at the time was very under owned. Also, the avg cost of producing gold was well above the gold price at the time ($260/oz) which meant that gold strictly as a commodity was undervalued . We all know what happened afterwards (and by the way I got off the gold train waaaaaay to early).
So, if the gold bull market was to have ended and a new secular bear has begun I ask myself do we have an inverse of the conditions that I noted back in late 2000? The answer to that is yes! Let's first look at factors I outlined above
1)confidence in the US/dollar.
There's no doubt in my mind that pessimism towards the US and the dollar hit extremes these past few years. There's is the notion that the US is in a state of decline equivalent to the fall of the Roman Empire. The dollar has been beyond trashed and it's status as the world's reserve currency severely weakened as central banks have looked to diversify out of dollars and into Euros and gold these past few years....the same gold by the way that they were willing to sell en masse in the 1990's for sub $400/oz. Despite all the trashing of the dollar and how the fed has been "debasing" it, it's about the same level as it was 6 years ago (trade weighted as per ticker $USD) and has been on an uptrend for about 2 years which started right about the same time gold peaked. I doubt this is a coincidence. There have been many reasons cited as to what drives gold but it's been my opinion that the main factor is the US dollar. Gold as a "reserve currency" or "safe haven" has only one major competitor and that's the US dollar.
2) ownership level of gold
A secular bull market begins when an asset class is under owned like gold was in 2001. Only the hard core gold bugs held gold and/or gold stocks. I cited here a few times how in 2001 when gold started rising I specifically recalled the "pros" on CNBC dismissing the move saying gold should be traded not invested in.. That notion has been completely reversed. In recent years the pros have stated that gold is in a LT uptrend and should be a component of one's portfolio at all times to protect them from upheaval and central bank "money printing." They also said that gold will do well in inflation or deflation conditions. lol! What a crock of shit that statement is. Investment demand in gold surged over the past 10 years especially since 2008 and so it's definitely not under owned anymore. I don't think it's as over owned like tech stocks were in 2000 but I think there's enough people "in the pool" to fuel a big bear market should they start unloading gold.
3) avg cost of production
This one is a bit tough to ascertain From what I can gather the avg cash cost of gold production is about $950/oz give or take but the "all in cost" could be average about $1250. That suggests that the gold price isn't over inflated on a commodity level. This suggests we shouldn't see a complete collapse in the gold price should there be a gold bear market but if things get bad for gold a fall to $800-$1000 is quite doable as bear markets often send a commodity below the cost of production...sometimes well below it. Just look at what happened to nat gas.
WTF? For some reason blogger didn't save what I had written after the above paragraph. Well, it's too late to rewrite it now...I'm off to bed!
A really bizarre thing happened this week with AAII sentiment. Despite the market making fresh all time highs, the bull/bear ratio plummeted to .35 which is the lowest level since March 2009! When I first saw this number I was shocked and I figured it had to be an error but it's not! Normally you see such extremes in bearish sentiment when the market has been getting hammered. I have never seen such a extreme bearish reading like this when the market has been so strong not to mention making all time highs. On a stand alone basis this has enormous bullish contrarian implications but you should never hang your hat on just one indicator. Other measures of sentiment aren't nearly as bullish, but there are some corroborating indicators which suggest that in the ST the market still has the fuel to power higher still. Bonds once again are indicative of this which are in the same condition as I pointed out last week which led to a ST bottom as I expected. Fund flows into equities have been quiet the past 3 weeks which again supports the notion that shorter term, the road is cleared for the market to make a further advance. One thing's for sure....there's no way I'm going to play the short side with the above mentioned conditions for it suggests that any downside from here will be limited...for now.
Lots of buzz about gold this week and its 20% slide into "bear market territory" as the media is calling it. Readers of this blog know that I've not been a fan of gold for some time but anytime it had a setback I was quick to admit that it looked like a correction rather than the start of a bear. This time however, we could actually be looking at the start of a bear market and if it is...better hang on your hats! First of all, I don't automatically assume a 20% drop constitutes a bear market. It all depends on how that 20% drop takes place. A sudden decline of 20% of a market that had been climbing relentlessly most likely represents a steep correction in an ongoing bull market rather than the start of a new bear market. Examples of such are the 1987 crash, the 1998 correction and the correction in 2011. The 20% decline in gold did not occur this way. It dropped to its most recent low in a multi-month downward trending fashion characterized by lower lows and lower highs - that's bear market action. It also registered a 21 month low and that's something you tend to see in the early stages of a bear market - not a bull market correction.
Let's look at the explanations for the drop in the gold price. From what I've gathered the main explanation is that the drop is due to the restoration of confidence in the US and in the dollar which is the result of the relative strength of the US economy and its equity markets. Last week's drop in gold was probably exacerbated by Goldman's downgrade of gold and the news that Cyprus might sell reserves, but since gold had been declining prior to this, I don't think these factors are soley responsible - they simply added fuel to the fire that was already burning. Basically, I believe that the decline in gold price could be summed as the unwinding of pessimism towards the US and the dollar.
Now having said all this, there are a number of signs that suggest the negativity towards Gold is at a ST extreme. I turned on BNN Friday and all they talked about was the decline in gold and it's not just them; there's tons of coverage out there in the financial media pointing out how gold has dropped by 20% . I read an article in the Globe and Mail Friday titled "All shine and no substance: the reality of gold." Talk about kicking someone where they're down. I also noticed every single "technician" out there is expecting a lot more downside this week now that gold closed below a key support level. Volume in the GLD etf spiked to an extreme which is often indicative of capitulation. GTU is trading at a 6% discount to NAV. The last time this happened was late April-early May 2011 when gold had a sharp but short lived pullback. So, I think there's a good chance that this breakdown in the gold price last week could end up being a massive bear trap and a vicious snapback to 1550-1600 could take place. I may intend to play this I get the right set up. We could be in a situation with gold similar to that of March 2008 in the equity market when the market dropped 20% before making an IT bottom which lead to a strong rebound for 2 months. It's also possible of course that all we are seeing here with gold is a lengthy consolidation/shakeout phase which began in August 2011.If you pull up a LT chart you could make the case that, with the exception of Friday's close, the gold price has been going sideways for several months.
Gold bulls have their reasons to remain bullish the main one being that there is unprecedented "money printing" going on all over the globe via QE and it's just a matter of time before the inflationary impacts of this gets unleashed. Well, first of all, QE is not money printing per se because it doesn't permanently raise the supply of dollars for the Fed can reverse QE and therefore "destroy" the money they created at will. Gold bugs have been warning about hyperinflation for over a decade now and it hasn't happened. We never had an inflation problem. If we did, it would be reflected in the bond markets via high interest rates and rates have been historically low even before QE. If you want to see a period of high inflation look to the 70's where interest rates were double digits and there was broad based inflation in all goods and services. Yes, we saw a dramatic rise in energy prices over the past 13 years but that was primarily the result of supply/demand dynamics of commodities namely a surge in emerging market demand - not monetary policy and the commodity price spike didn't spill over much into the general prices of goods and services. I'm sure you can find exceptions but for the most part, you can't honestly say we've had an inflation problem in North America. And if monetary policy was the main driver of commodity prices explain to me how the prices of coffee, natural gas, orange juice, olive oil and other commodities have plummeted in value over the past few years to multi-year lows. Easy money probably has an exacerbating effect on a bullish supply/demand situation for a commodity or any asset class but it's not the primary driver...at least that's my view. Anyhow, I digress
Let's look at the explanations for the drop in the gold price. From what I've gathered the main explanation is that the drop is due to the restoration of confidence in the US and in the dollar which is the result of the relative strength of the US economy and its equity markets. Last week's drop in gold was probably exacerbated by Goldman's downgrade of gold and the news that Cyprus might sell reserves, but since gold had been declining prior to this, I don't think these factors are soley responsible - they simply added fuel to the fire that was already burning. Basically, I believe that the decline in gold price could be summed as the unwinding of pessimism towards the US and the dollar.
Now having said all this, there are a number of signs that suggest the negativity towards Gold is at a ST extreme. I turned on BNN Friday and all they talked about was the decline in gold and it's not just them; there's tons of coverage out there in the financial media pointing out how gold has dropped by 20% . I read an article in the Globe and Mail Friday titled "All shine and no substance: the reality of gold." Talk about kicking someone where they're down. I also noticed every single "technician" out there is expecting a lot more downside this week now that gold closed below a key support level. Volume in the GLD etf spiked to an extreme which is often indicative of capitulation. GTU is trading at a 6% discount to NAV. The last time this happened was late April-early May 2011 when gold had a sharp but short lived pullback. So, I think there's a good chance that this breakdown in the gold price last week could end up being a massive bear trap and a vicious snapback to 1550-1600 could take place. I may intend to play this I get the right set up. We could be in a situation with gold similar to that of March 2008 in the equity market when the market dropped 20% before making an IT bottom which lead to a strong rebound for 2 months. It's also possible of course that all we are seeing here with gold is a lengthy consolidation/shakeout phase which began in August 2011.If you pull up a LT chart you could make the case that, with the exception of Friday's close, the gold price has been going sideways for several months.
Gold bulls have their reasons to remain bullish the main one being that there is unprecedented "money printing" going on all over the globe via QE and it's just a matter of time before the inflationary impacts of this gets unleashed. Well, first of all, QE is not money printing per se because it doesn't permanently raise the supply of dollars for the Fed can reverse QE and therefore "destroy" the money they created at will. Gold bugs have been warning about hyperinflation for over a decade now and it hasn't happened. We never had an inflation problem. If we did, it would be reflected in the bond markets via high interest rates and rates have been historically low even before QE. If you want to see a period of high inflation look to the 70's where interest rates were double digits and there was broad based inflation in all goods and services. Yes, we saw a dramatic rise in energy prices over the past 13 years but that was primarily the result of supply/demand dynamics of commodities namely a surge in emerging market demand - not monetary policy and the commodity price spike didn't spill over much into the general prices of goods and services. I'm sure you can find exceptions but for the most part, you can't honestly say we've had an inflation problem in North America. And if monetary policy was the main driver of commodity prices explain to me how the prices of coffee, natural gas, orange juice, olive oil and other commodities have plummeted in value over the past few years to multi-year lows. Easy money probably has an exacerbating effect on a bullish supply/demand situation for a commodity or any asset class but it's not the primary driver...at least that's my view. Anyhow, I digress
Getting back to gold. When I first turned bullish on gold in late 2000 it was because confidence in the US was just starting to roll over from an all time high and I figured that since I believed a big bear market in stocks was underway, the status of the US being the economic powerhouse of the world would fade considerably along with confidence in the US dollar as a reserve currency. Basically, I believed that there would be a gold bull market due to a substantial rise in pessimism towards the US in general which would make people flock to gold which at the time was very under owned. Also, the avg cost of producing gold was well above the gold price at the time ($260/oz) which meant that gold strictly as a commodity was undervalued . We all know what happened afterwards (and by the way I got off the gold train waaaaaay to early).
So, if the gold bull market was to have ended and a new secular bear has begun I ask myself do we have an inverse of the conditions that I noted back in late 2000? The answer to that is yes! Let's first look at factors I outlined above
1)confidence in the US/dollar.
There's no doubt in my mind that pessimism towards the US and the dollar hit extremes these past few years. There's is the notion that the US is in a state of decline equivalent to the fall of the Roman Empire. The dollar has been beyond trashed and it's status as the world's reserve currency severely weakened as central banks have looked to diversify out of dollars and into Euros and gold these past few years....the same gold by the way that they were willing to sell en masse in the 1990's for sub $400/oz. Despite all the trashing of the dollar and how the fed has been "debasing" it, it's about the same level as it was 6 years ago (trade weighted as per ticker $USD) and has been on an uptrend for about 2 years which started right about the same time gold peaked. I doubt this is a coincidence. There have been many reasons cited as to what drives gold but it's been my opinion that the main factor is the US dollar. Gold as a "reserve currency" or "safe haven" has only one major competitor and that's the US dollar.
2) ownership level of gold
A secular bull market begins when an asset class is under owned like gold was in 2001. Only the hard core gold bugs held gold and/or gold stocks. I cited here a few times how in 2001 when gold started rising I specifically recalled the "pros" on CNBC dismissing the move saying gold should be traded not invested in.. That notion has been completely reversed. In recent years the pros have stated that gold is in a LT uptrend and should be a component of one's portfolio at all times to protect them from upheaval and central bank "money printing." They also said that gold will do well in inflation or deflation conditions. lol! What a crock of shit that statement is. Investment demand in gold surged over the past 10 years especially since 2008 and so it's definitely not under owned anymore. I don't think it's as over owned like tech stocks were in 2000 but I think there's enough people "in the pool" to fuel a big bear market should they start unloading gold.
3) avg cost of production
This one is a bit tough to ascertain From what I can gather the avg cash cost of gold production is about $950/oz give or take but the "all in cost" could be average about $1250. That suggests that the gold price isn't over inflated on a commodity level. This suggests we shouldn't see a complete collapse in the gold price should there be a gold bear market but if things get bad for gold a fall to $800-$1000 is quite doable as bear markets often send a commodity below the cost of production...sometimes well below it. Just look at what happened to nat gas.
WTF? For some reason blogger didn't save what I had written after the above paragraph. Well, it's too late to rewrite it now...I'm off to bed!
Subscribe to:
Posts (Atom)