Gold Market Radar (August 6, 2012)

Sunday, August 5th, 2012

Gold Market Radar (August 6, 2012)

For the week, spot gold closed at $1,603.48 down $19.42 per ounce, or 1.20 percent.  Gold stocks, as measured by the NYSE Arca Gold Miners Index, fell 1.04 percent. The U.S. Trade-Weighted Dollar Index slid 0.48 percent for the week.

Strengths

• Central bank buying of gold continues to be a strong theme.  This week the Bank of Korea, which has the world’s seventh biggest foreign exchange reserves, announced it had purchased 16 metric tons of gold last month, increasing reserves to 70.4 tons. Central banks and the International Monetary Fund (IMF) are the largest bullion owners with 29,500 tons at the end of last year, or 17 percent of all mined metal, World Gold Council data shows.  Central banks have been net buyers for two straight years, the Council said.  Purchases this year will probably exceed the 456 tons added in 2011, the Council estimates.
• Although gold was down for the week we think the price action was positive.  Gold was down somewhat when the strong ADP jobs number came out on Wednesday morning, and then gold initially declined further after Federal Reserve Chairman Ben Bernanke held off on announcing new stimulus measures.  The selloff did not last long before buyers came back in and scooped up the metal.  The simplistic trade of shorting gold on no new Bernanke announcement for another round of quantitative easing has become quite crowded.
• Although global gold mine production has fallen -2.9 percent year-to-date and has registered year-over-year declines for eight months running may sound like bad news, and it has been for certain gold producers, this is certainly a positive for those companies that have maintained or grown their production.  Despite the 11 years of consecutively higher gold prices, gold production has been flat and this should bode well for higher prices in the future.

Weaknesses

• Kinross Gold replaced CEO Tye Burt this week.  This is the second senior gold company CEO to have been removed by their boards in the past month.  The replacement CEO is J. Paul Rollinson, a long-time associate of Mr. Burt. Mr. Rollinson is also a former investment banker, with a geology and engineering background.  In general, analysts lamented that they would have preferred a high profile manager with a proven track record of operating and/or building mines and/or turning companies around.
• Standard & Poor’s has downgraded Barrick Gold from “A-” to “BBB+” with a negative outlook.  The rating agency’s negative outlook on Barrick “reflects our view that the execution risks surrounding Pascua-Lama could potentially stretch the company’s credit measures and free operation cash flow generation beyond the levels we have assumed within our base case scenario.”
• The Indian market is still seeing no relief as the rupee remains weak, the arrival of the monsoon season has been disappointing and the multi-state electric grid collapse last week caused widespread blackouts across the region, obviously curtailing near-term economic activity.

Opportunities

• Nick Holland, CEO of Goldfields Ltd., recently addressed the Melbourne Mining Club and covered a 35-page presentation surveying all the things that gold miners have been getting wrong over the last decade and offering a few ways to solve some of them.   Nick Holland pointed out that one theme has run through the presentations of large gold producers at investor conferences over the last 15 years is that production is going to increase and this will result in the company increasing its earnings.  Nick notes that if the gold industry had actually met all its production promises over the last five years, then it would not have dropped output on a compound annual basis by 2 percent between 2006 and 2011.  Unfortunately gold miners have not met their production promises and investors have become skeptical.
• Nick also highlighted that gold miners need to think differently about costs.  “Who are we trying to kid?  We don’t kid the investors because they know how much cash we really generate after everything is accounted for.  The sell-side also understands this.  The only people we’re kidding are governments and communities, who, not surprisingly, say, okay, you’re making super profits, please pay up.  And before we know it we have windfall taxes, higher royalties and so on.  We’ve got to change the lens through which we and the world view this industry, and start talking about what it really costs to produce an ounce of gold.  I don’t care if we call it NCE or something else, but to talk about cash costs only is not telling the full story.”  We view this type of examination of the industry as a strong positive for management to take full notice of and start delivering on what the investor is expecting from gold mining companies.
• Bank of America Merrill Lynch noted that while the Federal Open Market Committee (FOMC) did not take any easing action at its current meeting, under its forecast, the economic data should weaken enough by the September 13 FOMC meeting to convince most Fed officials to support more QE and extend the forward guidance then.  But the call on further Fed easing remains very dependent on the path of incoming data.  We think only a small portion of recent gold buyers entered with the expectation of a Fed move this week but it is more likely a greater number are looking toward the Jackson Hole meeting at the end of August, and then the September FOMC meeting as key entry points into the gold market.

Threats

• While most governments are outright buyers of gold, Vietnam’s government has a different view on gold.  The problem is nobody wants to use their local currency, the dong but instead more and more rely on gold to settle transactions.  The Vietnamese people have a huge affinity with gold, but the country’s government is taking major steps to restrict the gold market and the practice of replacing the dong with gold in transactions.  These restrictions included banning gold as a medium of exchange and issuing seven directives which are designed to reduce “goldization” the practice of replacing the dong with gold in transactions.
• David Rosenberg, of Gluskin Shelf, pointed out that U.S. investors withdrew a net $11.5 billion out of equity funds in the prior week according to the Lipper data that includes ETFs, the sharpest outflow in two years.  Taxable bond funds attracted over $3 billion and that brings the year-to-date tally to $151 billion as the secular shift in investor behavior towards income-generation continues apace.
• Baby boomer investors looking forward to retirement have been burned by the tech bubble, the housing boom and ensuing credit crisis. Much of the shift in money flows has been to extreme risk aversion and government bonds have been the choice for the safety.  Unfortunately, the market has the uncanny ability to move in a direction that will disappoint the most investors.  It is unlikely, given the rising debt burden of governments, that the masses will be rewarded for seeking safety in bonds for the next five years. Under owned assets which are out of favor, such as gold, deserve some consideration for portfolio diversification.

Tags: Central Banks, Company Ceo, Dollar Index, Federal Reserve Chairman, Foreign Exchange Reserves, Gold Company, Gold Market, Gold Mine, Gold Miners, Gold Prices, Gold Producers, Gold Production, gold stocks, International Monetary Fund, International Monetary Fund Imf, Market Radar, Nyse Arca, Selloff, Spot Gold, World Gold Council
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Gold (GLD) is Sneaking Up

Thursday, July 26th, 2012

by Mark Hanna, Market Montage

Gold has been sidelined for many months as it has been in an intermediate term downtrend.  Since the Hilsenrath article it has shown some strength.  As you can see below it has made a series of lower highs throughout most of 2012, and it is now coming to touch the trend line.  If we see gold begin to blast off it would put credence into the idea that action from the Federal Reserve is imminent.

As for the general market, we have a rally in the Euro and weakness in the dollar.  With that this incredibly strong relationship continues to be rooted in the market and equity buyers step in.  S&P 1340 continues to be an incredibly strong magnet.  While this selloff has been sharp the S&P 500 did not actually create a new lower low.  So the potential remains for the range bound action we have seen for the past 2 months…

That said I mentioned housing related as a relatively immune sector, and true to form this is an area seeing a lot of selling today.  It continues to be impossible to buy almost any strength as these areas get attacked.   At this point the only theme I see working ok is perhaps agricultural stocks, due to the U.S. drought.  A few REITs also stand out but the way things are going, those will be the next area for selling to occur.  The lack of themes or groups working in concert showcases an underlying weakness in the tape.

Tags: agricultural, Amp, Blast, Credence, Drought, Federal Reserve, GLD, Gold, Magnet, Mark Hanna, Nbsp, Rally, Reits, Relationship, Selling Today, Selloff, Showcases, Stocks, Term Downtrend, Trend Line
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One Indicator Showing an Extreme Reading

Wednesday, July 4th, 2012

Here is one of the indicators I spoke of this morning – it was 85 coming into the day (the chart does not update intraday) which is a very rare level over the past 3 years.  If today’s ramp holds into the close it would not be surprising to see a reading near 100.  That has only happened once in 3 years, late July 2010.  It happened a few times in late 08, early 09 as well – once even well over 100.  But it’s rare.

Looks like everyone is anticipating not only a 25 basis point ECB cut but some goodies now that they have said they wanted the fiscal authorities to act first.  Again we need not see a big selloff, but usually when you reach these sort of levels you digest for a few sessions.

Tags: 3 Years, Basis Point, Fiscal Authorities, Goodies, Intraday, Nbsp, Ramp, Selloff, Sessions
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S&P 500 Quick Fibonacci Peek

Monday, June 4th, 2012

Just as a reminder the S&P 500 broke the 38.2% Fibonacci retrace of the Oct-March move Friday and now is is no man’s land between that level and the 50% retrace which comes in below 1250.  All major moving averages are also below their 200 day moving average of course.   Futures were down sharply Sunday evening but recovered this morning for whatever reason but this selloff is taking the S&P 500 back to where it was at the lows of the overnight session.

The “easy” trade today would have been a very bad open where shorts could cover and traders could flip long for a quick oversold bounce, but the market doesn’t like to make it easy.   The farther we go down from here the more ‘stretched’ we become in the very near term, and difficult for bears as well – it’s been nearly straight down since last Tuesday – almost 70 S&P points.  See chart for the Fibonacci levels I am referring to:

Tags: Amp, Bounce, Fibonacci Levels, Futures, Last Tuesday, Lows, Moving Average, Moving Averages, Overnight Session, Peek, Reminder, Selloff, Sunday Evening
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EM Weakness Spurs Spending and Stimulus Plans (May 28, 2012)

Sunday, May 27th, 2012

Emerging Markets Radar (May 28, 2012)

Strengths

• The State Council, China’s cabinet, on Wednesday called for more economic policies to encourage growth. The new policies are expected to include support for big infrastructure projects, tax cuts for businesses, more loans for small and medium-sized enterprises, and programs to boost domestic consumptions.
• Chinese infrastructure companies rallied after the market heard the government plans to hasten approval of infrastructure construction projects to improve the economy.
• Russian equities earnings yield is at the highest level it has been since 2008 after the recent selloff.

Weaknesses

• The HSBC China flash PMI dropped to 48.7 in May from 49.3 in previous month, a consecutive seventh month below 50, indicating that industrial activities are contracting. Particularly worrisome is the new export order index that dropped to 47.8 from 50.2 in April, indicating strongly that export businesses are declining.
• The big four banks’ new loan growth was at RMB 30 billion as of May 20, versus a quota of RMB 250 to 280 billion, and  their deposits fell RMB 270 billion as of May 20 versus the end of April. Mid- and long-term corporate loans remained weak, and retail loans also showed signs of sluggish growth, further signals that may force the central bank to cut interest rate and reduce the bank reserve ratio.
• The faster-than-anticipated sell off of the Brazilian real has exposed several economic vulnerabilities and has triggered government and a corporate debt sell off.

Opportunities

• The Russian central bank is ready to enlarge its balance sheet to protect the banking system if needed in a “Russian equivalent of QE.”
• Thailand is most involved in exporting to the low income Association of Southeast Asian Nations (ASEAN) economies of Laos, Vietnam, Myanmar and Cambodia. As these countries grow at an exponential rate, Thai companies stand to benefit the most in exporting manufactured goods and exploring natural resources, according UBS research.
• The end of the presidency of France’s Nicolas Sarkozy, a staunch opponent of Turkey’s EU membership, has revived hopes for the country’s accession to the bloc, after little progress since the EU opened entry talks with Turkey in 2005.

Threats

• China’s premier Wen Jiabao warned at a State Council meeting this week that global growth has deteriorated and pressure has increased on domestic growth. There is a need to accelerate railway and other infrastructure projects. The State Information Office is forecasting that second-quarter GDP growth could fall to 7.5 percent.
• The threat of nationalization in Latin America is not isolated to Argentina, according to Business Monitor International.  Actions by the Argentine authorities to reverse its trade deficit with Brazil have also seen retaliations from the Brazilian authorities, who introduced tighter restrictions on perishable imports. Should the trade spat escalate, more Brazilian companies are likely to suffer.
• The uncertainty surrounding the Greek political situation raises the risk that the country’s exit from the eurozone could happen as early as this year and that it could be disorderly.

Tags: Association Of Southeast Asian Nations, Brazil, Corporate Debt, Corporate Loans, Earnings Yield, Exponential Rate, Export Businesses, Infrastructure Companies, Infrastructure Construction, Infrastructure Projects, Laos Vietnam, Loan Growth, Reserve Ratio, Retail Loans, Russian Central Bank, Russian Equities, Russian Equivalent, Selloff, Sluggish Growth, Southeast Asian Nations, Thai Companies
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Market Gut Check Time, Again (Boyle)

Thursday, May 24th, 2012

by Mike Boyle, Advisors Asset Management

From 4/2/12 through 5/18/12 the S&P 500 lost 8.73%. This marks the18th time since 3/9/09 (the beginning of the current bull market) that the S&P 500 has corrected by at least 3% and the eighth time that the S&P 500 has corrected by at least 7%. In addition, our research of the last 50 years shows 3% pullbacks occur on average four times a year. So, clearly pullbacks are commonplace during a normal bull market; however, every time they occur they still set investor emotions on edge and test their resolve. At times like this we like to try and decipher what drove the selloff and try to resolve if we think it is just a normal correction or the beginning of a longer trend down and possibly the start of a new bear market.

In late March, we highlighted that the equity markets appeared to be due for a correction and consolidation as the run from the 10/3/11 bottom seemed unsustainable and the equity markets appeared overbought. April then began with a mild selloff (-4.26%) but then it traded back towards its near-term high in late April and early May. However, as May progressed investor appetites soured and the equity markets turned south again driven by seasonality fears (Sell in May…), banking concerns (JP Morgan’s trading loss) and worries over the viability of the Eurozone due to the recent elections in France and Greece. On their own, any one of these factors was enough to push the market lower and together they drove a pretty strong selloff of 7.87% for the S&P 500 (5/1/12 – 5/18/12). Yet it wasn’t all bad news, but the good news on corporate earnings and U.S. economic strength was just that, good news, and the markets were in need of great news to help stem the short-term tide.

Some of this good news includes an earnings season that is, statistically, better than last quarter. In addition, EPS (Earnings Per Share) for the S&P 500 has risen over 10% year-over-year and is expected to grow about the same over the next year. On the value side the P/E (Price per Earnings) for the S&P 500 now sits at 13.29 well below its value of 15.32 from a year ago and its 60-year average of 16.4. Other good news includes reports of home inventories shrinking over 20% year-over-year, existing home sales rising and vehicle sales hitting levels last seen four years ago. This reinforces our thesis that the U.S. economy is continuing to mend (albeit slowly) and should continue to do so and should be helped along the way by the positive feedback cycles we are beginning to see from a number of industries including housing and autos.

Will there be more bumps in the road and more gut check moments? Absolutely! However, we still like the outlook for equities and are standing by our end-of-year target of 1430 for the S&P 500. We would continue to recommend investors take advantage of the dips as they come (disciplined dollar cost averaging if they can) and would favor our themes of investing in companies and strategies that offer quality dividends, quality balance sheets and quality (above trend) growth.

This commentary is for informational purposes only. All investments are subject to risk and past performance is no guarantee of future results. Please see the Disclosures webpage for additional risk information at ~/blog/about/disclosures. For additional commentary or financial resources, please visit www.aamlive.com

Copyright © Advisors Asset Management

Tags: Appetites, Bad News, Bear Market, Corporate Earnings, Earnings Per Share, Earnings Season, Economic Strength, Eighth Time, Elections In France, Eurozone, Great News, Gut Check Time, Jp Morgan, Last Quarter, Mike Boyle, Pullbacks, S Trading, Seasonality, Selloff, Viability
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Flight From Risk: Treasury Plummets To Record Low Yield As Gold Surges

Thursday, May 17th, 2012

Now its getting interesting. 30Y yields fell the most in 5 months today back to 5 month lows, 10Y yields crashed to all-time closing lows, and Gold surged by its most in 4 months (and 2nd most in 7 months) as stocks started to accelerate lower. Gold is unch on the week now as 30Y is -21bps and 10Y -14bps – incredible. Between the Philly Fed’s confirmation of deceleration in US macro data and Europe’s increasingly crescendo-like implosion, is it any wonder that the decoupling thesis has given way to reality. S&P 500 e-mini futures repeated the early rally late fade pattern of the last 8 days but this time it was more aggressive as ES pushed towards 1300. CAT was a dog today accounting for 25% of the Dow’s losses and AAPL tumbled further – heading towards a 20% retracement off its highs. Financials tumbled further with Citi inching very close to red YTD (and JPM falling rapidly). Credit markets, which led the selloff, continue to slide but this time with equities in sync. Equities went out at their very lows of the day – at 3.5 month lows as VIX soared over 24% to close at its highest in 5 months.

Is BTFD DOA?

30Y Treasuries plunged but 10Y fell to record closing low yields!!!

and Gold is back near unch of ther week as the PMs soared today…

Financials are rapidly losing ground with Citi and JPM about to go red YTD…

Tags: 4 Months, 5 Months, 7 Months, Aapl, Confirmation, Credit Markets, Crescendo, Deceleration, Dow, Futures, Jpm, Losing Ground, Lows, Macro Data, Pms, Retracement, Selloff, Treasuries, Unch, Ytd
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Warren Buffett Visits with CNBC

Monday, May 7th, 2012

Today is Warren Buffet-palooza day on CNBC and I’d encourage those who are newbies (or veterans) to the market to take a listen to his interviews as he always has a lot of interesting things to say, even if he manages investments in a way that is (nowadays) contrary to the majority.  CNBC videos can be found here, but I embedded his introductory comments below.  You will actually hear a lot of similar thoughts on Europe and the U.S. situations to what I have outlined in recent interviews.

14 minute video – email readers will need to come to site

As for the market futures are down some this morning, but well off the worst levels seen overnight as Spanish and German markets have turned green.   Despite a lot of hand wringing over European elections, the results in France were not a surprise to anyone and how a politician governs versus how they campaign are two different things… Greece is probably more of a mess but we’ll see how it all plays out.   Bigger picture, U.S. markets – after failing the follow through day scenario last week – remain under distribution but are apt to snap back rallies within the context of said distribution.  The S&P 500 did break through the lows of the past month at 1357 in the overnight session but have recovered to get back into “the box” of upper 1350s to low 1390s.  Things have become more herky jerky in markets since early March, and it would be no surprise to see that continue or accelerate.  The largest bounces often happen in downtrends.

Economic data is going to lighten up dramatically this week but a lot of Fed talk and the market should begin demanding assistance on every selloff from here.  We know how this cycle works – the demand for pacifiers should begin to hockey stock with each drop in equities go forward.  Earnings season is on its last legs, but some high profile names such as Priceline (PCLN) remain.  The next few weeks should focus on the demands for new rounds of central bankers assistance, and Europe.

Tags: Cnbc, Earnings Season, Economic Data, European Elections, Forward Earnings, German Markets, High Profile, Interesting Things, Introductory Comments, Last Legs, Lows, Market Futures, Overnight Session, Profile Names, Rallies, Selloff, Two Different Things, Video Email, Warren Buffet, Warren Buffett
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The Most Important Line in Financial Markets Today

Thursday, April 12th, 2012

(note: facetious financial website hyperbole intended)

Yesterday began the “obvious” oversold bounce.  By obvious I simply mean it was due after a pretty hectic selloff, but with the poor close Tuesday it was not necessarily obvious that it would begin in the overnight futures session.  A negative open yesterday would have created a low risk ‘trade’ – unfortunately the market did not give that opportunity.  This morning futures continue the bounce.

Day one of the move up was not enough to get the S&P 500 through the very obvious 50 day moving average, around 1373.  But even if regained, the more important line is the mega trendline created from connecting the lows of the move from early October.  It is difficult to put an exact number on it, because if you change the angle by a degree or two you get a different outcome but let’s call it 1385-1390ish. But the key thing to note is Monday’s selling took the index to that support, and Tuesday’s selling broke through it.  Now for the bulls to continue their 2012 party – after this oversold bounce finishes – this level needs to be recaptured.  To be safe let’s say it’s important to get back over 1400 and stay there.

Please note, the DJIA has a very similar setup but the index formerly known as NASDAQ and now goes by NASDAPPLE has not broken this trend line.  The Russell 2000, on the other hand, is just a big mess.

As for the next 24 hours – key reports from Google (GOOG) tonight, JPMorgan (JPM) and Wells Fargo (WFC) tomorrow morning, with Chinese GDP overnight.  So the market most likely will gap one way or the other tomorrow morning as well.  Janet Yellen’s speech last night was not quite as overtly “free money-ish” as I assumed it would be.

EDIT 8:32 AM – weekly claims in relatively poor at 380,000 but it is getting blamed on the Easter holiday.

EDIT 8:45 AM – the weekly claims data has taken some steam out of the market as futures are back to flat.

Tags: DJIA, Easter Holiday, Exact Number, Facetious, Financial Markets, Free Money, Google, Hyperbole, Janet Yellen, Jpm, Lows, Moving Average, Nasdaq, Russell 2000, Selloff, Tomorrow Morning, Trend Line, Trendline, Wells Fargo, Wfc
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Positioning a Portfolio for Rising Rates (Morillo)

Monday, April 9th, 2012

With the recent selloff in the US Treasury market we have received numerous questions on how to position a portfolio in the face of rising interest rates. To answer that question, it’s important to first look at what factors are causing rates to rise.

In a typical economic cycle, rates rise as economic activity improves, raising demand for credit as well as increasing expectations for future inflation. The Fed then attempts to keep the economy from overheating by raising short-term rates to match the improved economic prospects. In this scenario fixed income instruments generally perform poorly as the higher rates paid for newly issued debt makes existing debt less attractive particularly at longer maturities. Simultaneously, the improved economic conditions will generally result in equities performing well as they reflect expectations for earnings growth and increased pricing power across the economy.

I believe this scenario is, by far, the most likely to play out in the medium term, and it is certainly the scenario that has the most extensive historical precedent. With that in mind, how could an investor reposition a portfolio to navigate this scenario? I would advocate some reallocation from fixed income to equities. Looking at data since 1975[1], a reallocation in the 10-20% range appears to be a reasonable compromise between the increased risk to the portfolio from a larger holding of equities and the goal of protecting against the potential for raising rates.

Within the fixed income component of the portfolio the improving economic conditions will generally result in diminishing concerns of credit default. That provides some boost to returns of credit instruments, which can potentially make up some of the negative effects of rising rates.

There are, however, two additional potential “tail risk” scenarios that can also cause rates to rise:

1: In the “policy error” scenario, the Fed allows improving economic conditions to significantly overheat the economy. This results in a material increase in inflation expectations as well as long-term rates, which may eventually require a painful inflation-fighting contraction. There is only one period in the last 100 years of US history that plays out this way — during the 1970s “stagflation”. Given the significant attention that policymakers have placed on the risks of associated with this scenario, I believe it has a low probability of taking place.

2: In a “loss of confidence” scenario, rates rise in the absence of improving economic conditions simply as a result of creditors pulling away from the market due to concerns about the US government and/or the economy’s ability to meet its obligations. There is no precedent for this scenario in US history, and I believe it to be highly unlikely in the medium term.

For investors who are concerned with these “tail risk” scenarios, a shift to equities may no longer make sense. Instead, a shift to TIPS or other inflation-hedging instruments in the case of scenario 1 or to cash in the case of scenario 2 could be warranted.

Investors should discuss their own portfolio allocation with their advisors.

Past performance does not guarantee future results.

TIPS can provide investors a hedge against inflation, as the inflation adjustment feature helps preserve the purchasing power of the investment. Because of this inflation adjustment feature, inflation protected bonds typically have lower yields than conventional fixed rate bonds and will likely decline in price during periods of deflation, which could result in losses.

Tags: Compromise, Credit Default, Credit Instruments, Earnings Growth, Economic Activity, Economic Conditions, Economic Cycle, Economic Prospects, Fixed Income Instruments, Income Component, inflation, Investor, Maturities, Medium Term, Reallocation, Rising Interest Rates, Risk Scenarios, Selloff, Treasury Market, Us Treasury
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