Oversold Stocks Piling Up (Bespoke)

Thursday, May 10th, 2012

by Bespoke Investment Group

May 9, 2012

Although the S&P 500 is down less than 5% from its bull market highs, the percentage of stocks that are oversold is really starting to pile up.  Using a boundary of one standard deviation above or below the 50-day moving average as the threshold for being overbought or oversold, 49.4% of the stocks in the S&P 500 are now considered oversold, while just 19.0% of the stocks in the index are overbought.  The chart below shows the daily percentage of S&P 500 stocks that are overbought and oversold.  As shown in the chart, the current level of 49.4% is the highest percentage of oversold stocks in the index since 10/3/11.

Tags: Amp, Bollinger Bands, Bounces, Bull Market, Commodity, Dead Cat, Downward Path, ETFs, European Elections, Futures Market, Hallmarks, Intermediate Term, Investment Group, Market Futures, Moving Average, Nbsp, Next Level, Oversold Stocks, Rebound, Relative Strength, Rubber Band, Selloffs, Standard Deviation, Sunday Evening, Swoons, Threshold, Trough
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Highest Number of Oversold Stocks Since October (Bespoke)

Wednesday, April 11th, 2012

Following today’s sell-off in the equity market, there are now 226 stocks in the S&P 500 that are currently in oversold territory (more than one standard deviation below 50-day moving average).  On a percentage basis, this works out to 45.2% of the stocks in the index.  The last time there were more oversold stocks in the S&P 500 was back on October 4th.

Granted, the current sell-off hasn’t been nearly as bad as the one we saw last September (yet), but because of the lack of volatility in the market over the last several months, the trading range for individual stocks became much narrower leading up to the current sell-off.  Therefore, it didn’t take as big of a sell-off to move the market and individual stocks into oversold levels.

To illustrate this, let’s use the S&P 500 as an example.  The chart below shows the price of the S&P 500 along with its trading range of one standard deviation above and below its 50-day moving average (gray region).  In the lower chart we show the size of the trading range in percentage points from top to bottom.  Back in early October, the market was significantly more volatile than it is today.  As a result, the size of the S&P 500′s trading range was above 9% and coming down from as high as 12.5%.  Today, after months of a relatively placid market environment, the size of the S&P 500′s trading range from top to bottom is 4.14%, or less than half of what it was then.

Tags: Amp, Gray Region, Last September, Last Time, Market Environment, Moving Average, Oversold Stocks, Percentage Basis, Percentage Points, S Trading, Standard Deviation, Volatility
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S&P 500 and Sector Trading Range Charts (Bespoke)

Sunday, March 4th, 2012

Tags: Amp, Consumer Staples, Industrials, Long Periods Of Time, Moving Average, Rallies, Range Charts, Rest Assured That, Sector Analysis, Sectors, Shading, Standard Deviation, Standard Deviations, Telecom
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Anxiety Recedes, as Long Term Investors Show Their Hands

Thursday, October 20th, 2011

Financial market volatility has receded significantly over the past two weeks. The CBOE S&P 500 Volatility Index (VIX) dropped from 45.5 at the end of September to 28.2 two days ago, before again edging up a notch.

Source: StockCharts.com

The drop brought the VIX back to less than one standard deviation from its average since 1986. While still high, it signals that anxiety levels have moved away from crisis levels.

Sources: CBOE, Plexus Asset Management.

But what led to the easing of volatilities? In previous articles I indicated that the most important factor that had led to the easing of crisis levels in the past was when prices fell to levels that attracted renewed buying from long-term investors. This is exactly what happened this time round. The Shiller PE10 ratio dropped to 18.67 on Monday, 3 October, the lowest since August 2009. The earnings yield over ten years, or what I call Shiller EY10 (inverse of PE10), therefore rose to 5.36%.

Sources: CBOE, Robert Shiller; Plexus Asset Management.

The value per unit of volatility therefore bounced off the average of the major turning points in the past.

Sources: CBOE, Robert Shiller; Plexus Asset Management.

The S&P 500 bounced strongly and ended last week 11.4% up from its lows on 3 October.

Sources: CBOE, I-Net Bridge; Plexus Asset Management.

Global investors are becoming less risk averse. Emerging-market bond yield spreads are heading south again.

Sources: CBOE, I-Net Bridge; Plexus Asset Management.

The yield on the 10-year government bond note has turned and is rising again.

Sources: CBOE, I-Net Bridge; Plexus Asset Management.

The sell-off in gold bullion is over for now.

Sources: CBOE, I-Net Bridge; Plexus Asset Management.

The sell-off in emerging-market and commodity-dependent currencies has receded.

Sources: CBOE, I-Net Bridge; Plexus Asset Management.

Sources: CBOE, I-Net Bridge; Plexus Asset Management.

Global investors have again found value in emerging-market equities, using South Africa as an example in the chart below..

Sources: Robert Shiller, Dismal Scientist; Plexus Asset Management.

Does that mean that the firestorm is over? I think the global financial system is not out of the woods yet as the European Union is still facing headwinds. Be that as it may, what is of particular note is that global long-term investors have shown their hand by buying the market again. The dire position of some European banks also indicates they have probably shut most of their risk positions and taken their pain – I think the sell-off in gold bullion is an indication of this. The global value at risk through derivatives has therefore probably diminished substantially.

Also, the easing of anxiety in financial market will help U.S. consumer confidence in coming months.

Sources: CBOE, Dismal Scientist; Plexus Asset Management.

As I said in a number of posts last week (see “Stock markets: In long-term indicators we trust” and “Global stock market moving averages – a mixed picture“), I would not be surprised to see a further recovery in global stock markets over the next few weeks, with those markets most deeply oversold relative to their 200-day moving averages offering the strongest recovery potential. However, to add conviction to the rally most of the global indices (as well as the majority of individual stocks) need to better their 200-day lines, and do so on better volumes seen thus far. Until this happens, follow a cautious approach.

Tags: 3 October, Amp, Anxiety Levels, Bond Yield, Cboe, Commodity, Crisis Levels, Earnings Yield, Emerging Market, Global Investors, Gold Bullion, Government Bond, Lows, Management Sources, Market Volatility, Plexus Asset Management, Robert Shiller, Standard Deviation, Stocks, Term Investors, Volatility Index Vix
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Global stock market moving averages – a mixed picture

Wednesday, October 12th, 2011

A quick whizz around the moving averages of global stock markets makes for interesting reading. Specifically, I have considered the standard deviation from the 50- and 200-day moving averages for both mature and emerging stock market indices.

As shown in the tables below, the key conclusions are as follows:

• Most developed markets are again trading above their 50-day moving averages (indicating the secondary trend), including the MSCI World Index and all the major U.S. indices. It is not surprising to see markets such as Greece and Portugal bucking the trend, with Japan also an underperformer.

• The recovery of emerging markets is lagging that of the developed ones, and most of these markets are still below their 50-day averages. Pakistan, South Africa, Turkey and Venezuela are notable exceptions.

• Considering the 200-day moving averages (an indicator of the primary trend), all the developed markets with the exception of New Zealand are below their averages, with Austria, Greece and Singapore more than two standard deviations in the red.

• As far as emerging markets go, only two – Pakistan and Venezuela – are above their 200-day averages. The MSCI Emerging Markets Index, as well as three of the BRIC countries – China, Brazil and Russia – is more than two standard deviations under water.

I would not be surprised to see a further recovery in stock markets over the next few weeks, with those markets most deeply oversold relative to their 200-day moving averages offering the strongest recovery potential. But until we see the majority of the indices (as well as the majority of individual stocks) breaching their 200-day lines, one would be hard-pressed to talk of a resumption of the bull market.

Developed markets – ranked by standard deviation from 50-day moving average

Emerging markets – ranked by standard deviation from 50-day moving average

Developed markets – ranked by standard deviation from 200-day moving average

Developed markets – ranked by standard deviation from 50-day moving averages

Tags: Brazil, Bric Countries, Conclusions, Emerging Stock Market, Exceptions, Global Stock Market, Global Stock Markets, Greece, Moving Averages, Msci Emerging Markets, Msci Emerging Markets Index, Msci World Index, Pakistan, Resumption, South Africa, Standard Deviation, Standard Deviations, Stock Market Indices, Stocks, Venezuela, Whizz
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Extreme Moves Leave Markets in Rare Territory

Saturday, September 24th, 2011

Extreme Moves Leave Markets in Rare Territory

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

If you haven’t paid much attention to global markets this week, here’s what you missed…fears that the global economy is dangerously close to a recession due to the financial crisis in the eurozone and flatlining growth in the U.S. sent assets of all shapes and sizes into a tailspin.

Among the E7 and G7 countries, only two markets increased for the week—Pakistan (up 2.2 percent) and Japan (up 0.5 percent). Russia (down 12.2 percent) and Indonesia (down 10.7 percent) were the leaders in the opposite direction. The average return for the 14 countries was a 5.7 percent decline.

Many investors have used gold and other commodities as a haven from recent volatility, buoying prices while equities sunk, but even those investments weren’t immune to the wave of selling. Silver was hit the hardest, falling nearly 24 percent, with copper (down 16.5 percent) and platinum (down 11.2 percent) not far behind. Gold and oil were down roughly 9 percent and the yellow metal was down more than $100 during intraday trading on Friday.

The U.S. dollar, in contrast, was up 2.2 percent. Much of the dollar’s rally came after the Federal Reserve announced the creatively named “Operation Twist” on Wednesday. The Fed will sell $400 billion of short-term securities and buy an equal amount of long-term debt. The goal is to push down long-term interest rates, which would spur economic activity.

As a result of this week’s actions, the S&P 500 Index is just slightly below two standard deviations from its mean over the past 60 trading days. The MSCI Emerging Markets Index is at a similar position, just greater than two standard deviations from its mean over the same time period.

The two charts above illustrate how rare two standard deviation events are for these markets. Over the past ten years, 60-day percentage changes to the downside of this magnitude have only occurred just over 5.4 percent of the time for the S&P 500 and 4.8 percent of the time for MSCI Emerging Markets.

This rare territory is often called “oversold” by traders and portfolio managers. That simply means too many investors have sold their holdings in a condensed timeframe, driving the price down more than its historical average.

Take a look at the gold/U.S. dollar relationship, for example. Over the past 20 trading days, gold has dropped 8.7 percent while the U.S. dollar appreciated by 6 percent.

This week’s moves are even rarer for gold and the U.S. dollar. The U.S. dollar has experienced similar upward moves only 3.5 percent of the time over the past decade, while similar declines in the price of gold have happened roughly 4 percent of the time.

I point this out because markets have historically reverted back to their mean after crossing into extreme territory, creating a “buy” or “sell” signal for the asset. This gauge has proven a reliable indicator for our investment team as it seeks to limit downside risk and take profits when assets have experienced a big run.

Since mid summer, our investment team has sought to limit exposure to downside risks by raising cash levels, selling mid-caps to buy large-cap companies and downsizing positions in cyclical areas such as industrials while increasing those in more stable areas such as consumer staples. This week’s market volatility provides an opportunity to selectively invest cash and redeploy capital.

The market’s reaction to the Fed announcement is indicative of how little confidence investors have in policymakers in controlling what appears to be an escalating situation. More than half of investors and analysts surveyed believe a global recession is imminent.

While we certainly recognize the current downside risks for the global economy, we think it’s worth noting that investor sentiment and emotions can be significant market drivers, but the math of the market indicates we are probably at an extreme and a price reversal is likely.

One of these is the Conference Board Index of Leading Economic Indicators (LEI), which our director of research John Derrick highlighted for you in last week’s alert. The LEI, has historically been a good predictor of economic growth as it measures peaks and troughs in the business cycle. Despite it being one of the most volatile months for equity markets in recent memory, the LEI increased more than expected during August. In addition, initial July figures were revised upward. ISI Group said in a report on Thursday that “the LEI is not flashing any sign of an impending recession.” In addition, the firm also expects a modest gain for the September jobs report. ISI calls America’s jobs outlook “capital market’s most important economic statistic.”

These are positive developments, but we’re not out of the woods yet. The U.S. economy will continue to inch its way forward over the next one to two years and U.S. companies and consumers must adjust to this low-growth environment. It’s critical investors identify the companies that will successfully compete in this environment.

We believe America is up to the challenge.

John Derrick, director of research, contributed to this commentary.

Tags: Chief Investment Officer, Commodities, E7, Economic Activity, Eurozone, Extreme Moves, Frank Holmes, G7 Countries, Global Economy, Global Markets, Gold, Intraday Trading, Msci Emerging Markets, Msci Emerging Markets Index, Outlook, Percentage Changes, Same Time Period, Shapes And Sizes, Standard Deviation, Standard Deviations, Tailspin, Term Interest, U S Global Investors
Posted in Commodities, Gold, Markets, Outlook | Comments Off

Volatility: The Pulse of the Market

Tuesday, September 20th, 2011

The extreme volatility in U.S. equity markets and other global equity markets prompted me to analyse the current situation in comparison with history and to ascertain what causes significant changes in volatility.

The CBOE S&P 500 Volatility Index, better known as VIX, is constructed by using the implied 30-day volatilities of a wide range of S&P 500 Index put and call options. With the VIX only available from 1990 I have extended the volatility index by adding the CBOE S&P 100 Volatility Index or VXO from 1986 to 1989 to the VIX series.

The VIX is generally used as an indicator of greed/complacency or fear. I call it the pulse of the market. Any move above the average of 20.8 is a reflection of anxiety, while a move below is a reflection of calmness. The current anxiety of the market is clearly evident in the graph below.

Sources: CBOE; Plexus Asset Management.

In the graph below I indicate the average VIX since 1986 (20.8) with one standard deviation above (28.8) and one below the average (12.8). It is evident that VIX values greater than one standard deviation above the average can generally be associated with a large amount of volatility as a result of significant events – as is the case currently.

Sources: CBOE; Plexus Asset Management.

During sustained bull markets the pulse of the market is calm but moves towards neutral and anxiety towards the end of rising markets and the commencement of declining markets. It was evident in the run-up to the 1987 crash when the market went into anxiety mode nine months prior as well as at the end of 1989. In 1997 the VIX started trending towards neutral and anxiety mode three years prior to the spectacular end of the extended bull market in 2000. Anxiety persisted until the first quarter of 2003 before calmness set in. In the second quarter of 2007 the VIX started to trend to neutral and anxiety mode 12 months before the S&P 500 topped out and entered a declining trend. Although the market briefly went into a period of calmness in the first quarter of last year this was followed by brief snaps of anxiety and calmness, ending in the current state of anxiety.

Sources: CBOE; I-Net Bridge; Plexus Asset Management.

But what is the main determinant of volatility as measured by VIX? Greed and fear from my point of view as investor is not indifferent to expanded or contracted market valuation levels. I therefore used Robert Shiller’s PE10 where the price level of the S&P 500 is expressed as a ratio to the average trailing earnings of the past ten years as valuation model and compared it to VIX.

Sources: CBOE; Robert Shiller; Plexus Asset Management.

Timeline:

• The significant jump in the PE10 from 13.4 in 1986 to 18.3 in 1987 was accompanied by a significant increase in volatility and therefore anxiety as measured by VIX. The volatility only returned to neutral levels after the crash of 1987 induced by program trading when the PE10 retreated to 13.4 or to pre-blow-off levels.
• 1990 mirrored 1987’s situation with the Gulf Crisis the trigger to bring valuation levels back to levels that restored calm in the markets. In 1997 the VIX started trending towards neutral and anxiety mode as the PE10 rose.
• Although the Asian crisis in 1997 increased anxiety or volatility it had no lasting effect on the PE10. The Russian crisis of 1998 also had no lasting impact as the PE10 briefly fell from 38 times to 33.5 and rose further afterwards.
• Volatility remained at anxiety levels until the market topped out early in 2001 with a PE10 of 44.2 when the Dotcom bubble burst. The tragic 9/11 followed and corporate scandals such as Enron kept the anxiety levels high but the PE10 remained at elevated levels above 30.
• The September 2002 market crash led the PE10 to bottom in February 2003 at 21.2 – levels similar to that of 1995 when the market last experienced “calmness”. The VIX dropped significantly and the PE10 thereafter remained stable at around 26 for the next 4 years.
• In June 1997 the VIX again rose to and reached anxiety levels in July that year. As anxiety increased the market finally cracked in January 2008 as the PE10 started to fall as the subprime crisis unfolded and crashed in October as volatility increased significantly on the back of the Lehman saga and ensuing interbank collapse. Anxiety started to subside only when the PE10 dropped to a level of 13.3.
• The debt crisis in Greece in June last year saw a significant increase in volatility but the PE10 retreated moderately to 19.7 from 21.8 in April. Calmness was restored and the PE10 rose to 23.7 in May.
• Since then anxiety levels have increased as the European debt crisis deepened and a consumer confidence crisis in the U.S. developed. At the same time the PE10 dropped to 19.8, which is where we are now.

I also assessed the impact of the underlying economy on volatility or VIX. I identified two major indicators of the underlying economy in my analysis, namely consumer sentiment and my calculated GDP-weighted PMI for manufacturing and non-manufacturing combined.

Until the end of 2007 the Conference Board Consumer Sentiment Index (please note the reverse axis) and VIX maintained a narrow relationship but it broke down early in 2007. In August 2007 the Consumer Sentiment Index started to weaken when VIX entered anxiety territory and continued to weaken through March 2008. Sentiment only started to improve when the S&P 500’s volatility started to subside.

Sources: CBOE; Conference Board; Plexus Asset Management.

It is evident that high volatility is consistent with a GDP-weighted PMI below 57 (please note the reverse order of the PMI axis). From July 2006 the PMI started to falter but the VIX remained in “calmness” territory until a year later when the VIX caught up.

Sources: CBOE; ISM; Plexus Asset Management.

The relationship since July 2007 when the VIX entered anxiety level is evident in the following graph (please note the reverse order of the PMI axis). Until September 2008 the VIX reflected the underlying level of the PMI, but since then it has led the PMI by approximately one month. A major diversion is evident in March this year, though. The PMI weakened significantly from February to April but the VIX kept on declining and only started to play catch up in July. Currently the VIX is pointing to the PMI falling to 50 and below in September/October.

Sources: CBOE; ISM; Plexus Asset Management.

In summary, it is clear to me that the volatility of the equity market and that of the S&P 500 in particular as measured by VIX is influenced by valuation levels and the underlying economic trends. But what are the mechanics behind it and who is responsible for the increase in volatility?

Suffice it to argue that when the majority of investors become concerned about extended valuation levels and/or the threat of weaker economic circumstances ahead, the demand for derivatives to lock in profits and to reduce downside risk increases. The demand for, say, put options increases, resulting in higher prices of the options. The higher value investors are willing to pay for put options theoretically implies a higher value for volatility. The implied volatility of the options therefore increases and so does VIX. Therefore it can be said that investors are willing to pay more for the same option and thus are inclined to accept higher volatility.

On the other hand the writer or grantor of the option has the choice of leaving the option naked, thereby effectively going long of the market or to delta-neutral hedge the option by selling sufficient exposure of the underlying asset or the S&P 500 against the written option. The writers of put options who are bullish in a strong rising market tend to do so to collect the premium on the option to boost income.

When the S&P 500 starts to lose momentum or fall, the grantors of the options need to neutralise their positions by selling the underlying asset or buy put options as their value at risk increases. A vicious circle ensues. The price of the underlying asset (in this case the S&P 500) drops and actual volatility increases, while the implied volatility soars due to higher demand for put options. The volatility and downside of the market is often exacerbated by investment banks and other institutions who granted far out of the money put options for plain premium income considerations that all of a sudden threatens the balance sheets of the grantors. The grantors are then forced to sell indiscriminately to protect their balance sheets at all costs.

The price of the underlying asset continues to drop until it finds a level where the majority of investors become less risk averse and comfortable enough to buy the underlying asset. Demand for protective measures falls away and so does VIX as implied volatility drops.

What about the current situation? Where is the VIX heading? What are the implications for the S&P 500?

The current situation is similar to that of the middle of last year with concerns about the global economy given the debt stress in Europe, a weakening trend of the U.S. GDP-weighted ISM PMI and weakening consumer sentiment. The rating of the S&P 500 as measured by the earnings yield (inverse of PE10) is at levels similar to those in July/August last year.

Sources: CBOE; Robert Shiller; Plexus Asset Management.

The current rating is in the same region as in 2003 after which the market turned for the better and volatility dropped. It is evident that the market is extremely vulnerable to further shocks that could see a surge in volatility and a further massive derating. Barring any other unforeseen crisis that could lead to a further spurt in volatility, I believe the S&P 500 offers value at this stage. But do the majority of other investors share my view? Only time will tell, as calm needs to be restored before we will see any sustained upward momentum in the S&P 500 and other global equity markets. What is clear to me is that the market has entered a period of above-average volatility that is likely to be sustained in coming years �’ similar to that of 1997 – 2003.

Sources: CBOE; I-Net Bridge; Plexus Asset Management.

Tags: Anxiety, Bull Markets, Calmness, Cboe, Commencement, Complacency, Current Situation, Extreme Volatility, First Quarter, Global Equity Markets, Greater Than One, Greed, Nine Months, Plexus Asset Management, Second Quarter, Significant Events, Standard Deviation, Vix, Volatility Index, Vxo
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Placing This Week’s Selloff Into Context

Sunday, August 7th, 2011

Placing This Week’s Selloff Into Context

By Frank Holmes, CEO and Chief Investment Officer, U.S. Global Investors

Cascading negative news over the past couple of weeks have frightened investors and sent the S&P 500 Index below levels where we began the year. BCA Research says “The U.S. economy has stalled, the euro area debt crisis has intensified, and inflation problems continue to plague emerging market countries.” On Thursday, we lived through the worst market decline since December 2008.

How extreme were this week’s markets? The 7.2 percent decline for the S&P 500 represents nearly a three standard deviation move for the index. That means the move was nearly three times the average move in a given week, going back 10 years.

Though extreme, selloffs are common this time of year. According to the Stock Trader’s Almanac, August has been the second-worst month of the year for the Dow Jones and S&P 500 since the 1987 crash. The 7.2 percent decline for the S&P 500 was the worst week ever recorded during the month of August, beating out another dismal week for performance in 1974.

What does this mean? Many stocks can are now on “sale.”

We believe volatility can be your friend if you’re not overleveraged and take advantage of downdrafts. We often look to add to our top positions during down days, weeks or months.

In order to successfully navigate their portfolios through shifting markets like today’s markets, investors must understand the inherent volatility in commodities and international investments. I often coach investors to “anticipate before they participate.”

There are a few reasons to remain cautiously optimistic:

• Today’s job number was better than many expected
• Second-quarter earnings for S&P 500 companies are up over 17 percent on a year-over-year basis, according to BCA Research. This has been driven by a 13 percent rise in revenues for those companies.
• Current conditions are similar to 13 months ago when the S&P 500 was down 15 percent and prompted the Federal Reserve to initiate the QE2 program, BCA says. This means the door to QE3 has begun to swing open.

Being optimistic in today’s difficult market is certainly not traveling with the herd. Regardless of market conditions, those searching for reasons to be pessimistic will always poke holes in the optimistic viewpoint. This is a because “most people don’t want to risk looking dumb when it’s so easy to just go along with the herd’s view that the world is going to hell in a hand-basket,” writes Loretta Breuning, Ph.D. for Psychology Today. Breuning continues “Your brain scans for facts that fit the [your beliefs], and skims past facts that don’t fit.”

It’s also important to remember we must always view today’s market in a global context. The world has 7 billion people fueling the global economy. Today’s globalized world is quite different from the 1970s when many of the world’s 3 billion people were isolationists, non-participants in global commerce. Today, China and India are large contributors to the global economy. In these countries incomes are rising and consumption of goods and services is increasing.

Zachary Karabell did a great job of explaining this in a piece for The Daily Beast. In his piece, Karabell described this week’s selloff as “indiscriminate” and “programmatic.” Mainly, Karabell makes the case that focusing on the selloff ignores the shifting dynamics of global markets we’ve discussed for many years.

“So where does this sell-off leave us? The panoply above is vital—because it indicates that there is no cliff off of which the global economy is about to plunge, despite the blathering of pessimistic talking heads.”

“Yes, there is and will continue to be a risk of collapse; the events of 2008-2009 showed that we don’t have a safety net for our interconnectivity, and that is a real risk. But we do live in a much less levered world, and one in which there is a level of confidence, albeit new and untested, in the world beyond the reach of Wall Street and the capitals of Europe, to say nothing of the forgotten behemoth Japan.”

“Again, you’d be a fool to make a definitive market call for today or next week, but it’s hard to panic about a system that thrives where it used to lag and lags where it used to thrive. Those realities meet on the balance sheets of thousands of global companies who have been reporting just that for the past two years—booming abroad, treading water at home. This stock sell-off has little to do with profits, and everything to do with the relentless need for capital in Europe, plus an American investing class that is only slowly awakening to the fact that yes, this time it’s different.”

Karabell wrapped up his article with a piece of advice for investors

“This sell-off speaks to the continuing anxiety that a world not led by the United States and Europe and Japan is a world adrift. The smart money should bet that this swoon isn’t based on what we can see, but rather a fear of the unknown and the new. Welcome to the 21st century.”

What Karabell is pointing out is that the global fundamentals remain supportive of long-term growth.

This week was an outlier and extreme moves often present a buying opportunity. In a note yesterday, ISI Group’s John Mendelson framed this week’s selloff well: “There is nothing more bullish than fear nor more bearish than certainty.” Mendelson is saying that that if everyone is convinced the market is going higher, it may be a good time to sell. If everyone’s bailing out because of fear, it may be the time to buy.

Director of Research John Derrick contributed to this commentary.

Copyright © U.S. Global Investors

Tags: Chief Investment Officer, Commodities, Current Conditions, Debt Crisis, Dow Jones, Downdrafts, Emerging Market Countries, Frank Holmes, India, International Investments, Market Decline, Month Of August, Month Of The Year, Negative News, Second Quarter Earnings, Selloff, Selloffs, Standard Deviation, Stock Trader, Time Of Year, U S Global Investors, Volatility
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Dow 30 Trading Range Screen (Bespoke)

Wednesday, July 27th, 2011

Tags: Bac, Copyright, Dow 30, Dow Jones, Dow Jones Industrial, Dow Jones Industrial Average, Dow Stocks, Investment Group, Lockstep, Major Indices, Money Managers, Moving Averages, Neutral Territory, S Market, Same Direction, Standard Deviation, Stock Picker, Stocks In The Dow
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Commodities 2011 Halftime Report

Sunday, July 17th, 2011

Commodities 2011 Halftime Report

By Frank Holmes, CEO and Chief Investment Officer
U.S. Global Investors

Commodities don’t all perform in the same way. In any given year, a particular commodity will go gangbusters and outperform the group. However, that commodity will typically come back to Earth and underperform the following year or the year after that. This is why active management is important when investing in commodities. Active managers can benefit from rotating from winners to laggards or by investing in the companies which produce, farm or mine commodities most effectively.

After two straight years of tremendous gains for many commodities, the first six months of 2011 haven’t been as kind. As of the end of June, only two commodities (silver and coal) saw double-digit increases, and only six of the 14 commodities we track—less than half—were in positive territory.

Silver was the leader, rising more than 12 percent, followed closely by coal (up 11.95 percent). Other commodities increasing in value included gold (5.6 percent), crude oil (3.83 percent), lead (2.16 percent) and aluminum (1.73 percent).

Returns are based on historical spot prices or futures prices. Past performance is no guarantee of future results.

Silver
Silver prices got ahead of themselves earlier this year, climbing 58 percent to nearly $50 an ounce. This registered a four standard deviation move, representing extreme territory on our models. Thinking silver, which has historically been a narrowly-traded market, had become a potential haven for speculators, officials stepped in and raised margin requirements on the Comex. This quickly deflated the bubble and prices naturally reverted back toward the mean but remain well above where they began the year.

Coal
Strong demand from reconstruction projects in Japan along with reduced supply because of flooding in Australia, Indonesia, South Africa and Colombia led coal to be the second-best performer.

No country was more affected by the lower supply than China as coal powers the Chinese economy. The country is the world’s largest consumer, gobbling half of the world’s coal. Coal accounted for 71 percent of China’s energy in 2008—more than three times the United States’ share. The Electricity Council estimates that China’s coal demand will reach 1.92 billion tons in 2011, up nearly 10 percent from 2010. Chinese electricity use was up 13.4 percent on a year-over-year basis in May and is now expected to rise 12 percent this year. (Read: Coal Use in China Shines Light on Growth)

Gold
Gold prices passed $1,500 for the first time ever in mid-April of this year and ended the quarter just slightly below that mark as a mixture of the Fear Trade and Love Trade proved to be an enticing concoction for investors here and abroad. The World Gold Council reported that demand for gold as an investment was up 26 percent on a year-over-year basis during the first quarter. In China, demand for gold was so strong it outpaced the combined gold demand of the U.S., France, Germany, Italy, Switzerland, the U.K. and other European countries. (Read: Asian Tiger Sinks Teeth Into Gold)

Although gold prices held steady during the first half of the year, the share prices of gold companies have lagged. Ralph Aldis and I discussed this hot topic in depth a few weeks ago. (Read: Will Gold Equity Investors Strike Gold?) Many gold companies’ corporate cash flows and earnings per share have been rising, and more companies are paying dividends. Gold stocks also appear cheap compared to the price of gold. We believe investors will be drawn to these qualities, lifting gold stocks along with the strong bullion price.

Oil
After two straight years of solid gains, oil prices finally surpassed the $100 per barrel mark once again early in 2011. This time, it was a dose of geopolitical risk and a natural disaster that sent oil prices shooting upward. Oil prices have since bounced around the $90-$100 range for West Texas Intermediate (WTI). That range has held up despite U.S. consumers cringing at gasoline prices, the International Energy Agency (IEA) releasing an additional 60 million barrels of oil to the market and China’s ardent attempts to cool its economic growth. (Read: Playing Cat and Mouse with Global Oil)

Despite tightening measures, China’s per capita oil consumption has retained its upward trajectory and is headed toward levels similar to Taiwan and South Korea. There’s still quite a gap to close before that happens, but China’s oil consumption per capita has increased over 350 percent since the early 1980s to an estimated 2.7 billion barrels per year in 2011. Nearly 100 percent of that has taken place in the past decade. In addition, oil consumption per capita has risen sharply in recent decades in other Asian countries such as Malaysia (nearly quadrupled) and Thailand (doubled).

Looking Forward to the Second Half of 2011
We think commodity price movements will fare better during the second half of the year. Goldman Sachs wrote in a report last week that it expects global economic growth to be “generally supportive of rising commodity demand” and “this demand growth will be sufficient to tighten key commodity markets over the next six to 12 months.” We believe gold, oil and copper are some of the commodities which could see the biggest gains. For the sake of brevity, we’ll highlight gold here today.

Gold
As BCA Research puts it, “[gold] prices have benefited from a ‘perfect storm’ in recent months: falling real interest rates, a weak dollar, fears of a U.S. recession and/or debt default, and European stress.” Those factors, which I affectionately refer to as the Fear Trade, are what sent gold prices flirting with the $1,600 an ounce level this week. There was also the release of Federal Reserve meeting minutes that showed QE3 is possible, though not yet probable given Chairman Bernanke’s testimony this week. By the way, if you haven’t already seen Bernanke’s exchange with Congressman Ron Paul on gold, go to YouTube and check it out for a good chuckle. Washington’s reluctance to present a solution to the debt ceiling issue also contributed heavily to gold’s performance.

Paul was bringing attention to the threat of currency debasement, a major reason investors all over the world are turning to gold. According to U.K. research firm Capital Daily, the U.S. monetary base has increased more than 200 percent since September 2008. Meanwhile, gold prices have risen only about 70 percent over the same time period. Capital Daily says “if the two had been directly related, gold should already have risen to around $2,800 [an ounce].” That’s obviously a lofty expectation but illustrates that gold prices haven’t appreciated nearly as much as currencies, such as the U.S. dollar, have been debased.

In fact, don’t believe what you read about record high gold prices. Yes, gold hit a high in nominal terms, but the price is more than 30 percent below the 1980 peak of $2,400 an ounce if you adjust for inflation.

This was a banner week for the Fear Trade but don’t count out the Love Trade. Gold is about to get even more attractive because we are heading into the fall and winter gift-giving season. This is the time of year when gold jewelers typically do their biggest business. The kickoff is the Muslim holy month of Ramadan, which starts next month and ends with generous gift-giving in early September.

The key to this seasonal strength over the past few years has been demand from China and India. You can see from the chart that the rise in gold prices has been closely tied to the rise in gold demand from China and India. Back when the average per capita income in China and India was well below $1,000 a year, gold prices hovered just above $200 an ounce. As average incomes have approached $3,000 a year over the past decade, gold prices have followed. With the long-term outlook for wages in both these economies rather rosy, gold demand should continue to feel the trickle-down effect.

Those investors looking for more of a technical indicator can take a look at the ratio of gold and oil. Capital Daily says that the ratio of the price for one ounce of gold to one barrel of oil (Brent crude) is currently 13.5. Since 1970, the average has been around 16. Gold prices would need to rise to $1,870 an ounce in order to reach historical ratio levels with $117 per barrel Brent crude oil, according to Capital Daily.

Based on seasonal demand strength and sovereign debt fears of the U.S. and several European countries, we think gold prices could be headed higher.

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