Stock Market News and Thoughts
You have just witnessed a historic crash in gold.
This is a quote from the Yahoo Message Board for gold mining stock GSS posted yesterday at 6:19 PM:
"Terrible, terrible, terrible and tomorrow will continue, unfortunately
I am out. I will sell at opening."
On Friday there was an article on TheStreet.com with the title "Shares of GSS Oversold."
On Monday GSS crashed 25% to close at 94 cents a share making a mockery of the article even if it was right. Consensus analyst estimates are for the company to make 24 cents a share in 2014. It closed with a forward 2014 P/E of 3.36.
NEM is paying a 5% dividend. NSU has a P/E of 4.71 and forward P/E of 3.57. GFI has a P/E of 7 and forward P/E of 5. The gold stock ETF GDXJ is paying a 6.13% dividend.
Gold stocks are cheap on a valuation basis. Dirt cheap. They are so cheap now that no one wants them anymore. People like to chase things as they go up in value and flee as they fall and if they fall fast enough and far enough they scream in panic and pain.
You see yesterday gold fell 119 points for an 8.06% drop while the HUI gold bugs index fell 9.4%. These drops of course came after similar outsized drops on Friday. There was enormous selling in the GLD and GDX exchange traded funds too. GLD saw over 93 million shares trade when it does an average of only 10 million shares of trading volume in a day. GDX did four times its normal trading volume too.
These have been the biggest back to back down days in gold since 1983.
The moves have hurt my account a little. For disclosure purposes even though I'm just about 3% invested in GLD and 3% in GDX that's enough to feel a little pain. I'm roughly 90% invested in my account in stocks and ETF's all over the world, with a heavy emphasis on Ireland, Greece, and Europe and about 6% in gold related issues, so I have a little cash ready to go.
After gapping down in the morning gold stocks put on a weak effort to bounce, but then by the close gold tumbled. By the close yesterday the DOW ended down over 265 points too as every market came under pressure.
When you see a market go down big in the morning and then try to bounce only to collapse towards the end of the trading session what you are seeing on the close are margin calls. On a big gap down people on margin hope for a bounce and if it doesn't happen and the market turns down they are forced to sell in panic. In big down markets that can cause a big volume expansion and sharp move lower in a short amount of time. This appears to have happened in the last hour of Monday's trading.
I will repeat quickly what I told you Sunday - gold has been in a bear market since it peaked in the last quarter of 2011. That is why it is falling. People are trying to come up with explanations for the gold drop, but this is the real one - plus the fact that so many hedge funds flocked into gold.
The chart of gold tells a simple story and makes the real reason for the crash apparent:
After peaking above 1900 in 2011 gold has been in a sideways/downtrend ever since with support at the 1550 level. On Friday it opened below that level.
This meant that everyone who had bought gold since the summer of 2011 was now sitting on a loss. Every hedge fund in the gold trade was down and every investor who bought gold themselves since then was too. Losses lead to panic. That is why the 1550 level was so important - and why it has led to this current gold crash. Every computer program yelled sell once the 1550 level was breached and the selling built up into a crescendo - into a crash.
As I put it in the title of my article yesterday this is the "Final Liquidation of the Gold Bug."
Gold has fallen over 15% in the past four weeks and is now down over 30% from its high of 2011. Gold stocks though have fallen 23.57% in just the past four weeks and are now down 58% from their highs of 2011.
The thing is the moves of just the past four weeks are the type of moves that could take months to happen and not just weeks. This is a crash.
People are saying this is the start of a new bear market in gold, but gold has been in a bear market now since 2011. This is how bear markets end, not how they start. The current action reminds me very much of what happened in Europe last year. European markets had been in a decline for well over a year and then fell huge in the space of a week, with many of them falling 10% in a single day more than one day in a row. All of the news was bad and that was the bottom.
I bought into European markets and made investments in countries such as Greece even though people were saying not to because the news was bad, thanks to this bottom. When a total crash comes it gives you an opportunity to buy stocks at such cheap valuations that it practically doesn't matter what happens in the future.
Last year you could for example have bought one of the largest power companies in Europe based in Greece trading with a P/E around 4 and paying a beefy dividend thanks to the Europe crash. It was a good investment even though the news was bad, because people were not going to stop using electricity in Greece. But talking heads on CNBC said it was too scary to invest in Europe.
Gold stocks are now so cheap that they are at stupid valuations and are paying big dividends. On the close yesterday Newmont had a P/E of 8.99 and paid a 5.01% dividend. That doesn't necessarily mean today has to be the bottom, but what it means is that when the bottom does come it really doesn't matter what the "news" of the future is. People are not going to stop wanting gold just as they are not going to stop using electricity in Greece. But talking heads on CNBC are saying buying gold now is stupid and headlines all over the Internet now are saying the same thing.
But gold will still be around well after I am dead and long gone and long after the Federal Reserve Board ceases to exist too.
I was just a chap in 1987 so I wasn't in the market then, but this move in gold is probably something like what people experienced during the 1987 stock market crash.
Back in 1987 the stock market broke through some key technical support levels and provoked a crash. That crash though came in the context of a secular bull market that didn't end until March of 2000 so it made for wonderful buying opportunity. The current secular bull market in gold started in 2001 so this is likely to become a similar great buying opportunity as that one proved to be for people who were able to take advantage of it.
The "flash crash" we saw happen for a few hours in 2011 occurred when the DOW fell through its 200-day moving average. That technical breach provoked computerized selling and some short-term panic. But it came and went so fast that it didn't really disturb the psychology of most investors. It was over before the close of trading so those who just saw the news in evening felt no pain from it. In fact most people do not even remember it.
It takes overnight pain and suffering to create a real memorable crash. Friday's big drop in gold brought weekend misery for gold bugs, but I want to buy more mining and commodity stocks. Yesterday I sent a list of ones I am watching to Premium Power Investors. I am waiting to buy though. I have to be careful, because I'm already 90% invested.
I have seen some gold sell-offs in the past and they seem to have a pattern to them. They start with the gold stocks falling for weeks sometimes for months at a faster rate than gold does. The stocks tend to lead the action in gold so they go down first.
The relative strength gold stock index divided by gold (GDX/GLD) ratio drops as this happens. This is the longest stage of the drop.
Then in the second stage both gold and the gold stocks tend to fall at roughly the same rate over a week or a few days. In the final phase - which plays out over a few hours and doesn't always happen, because sometimes the bottom is instant - gold falls at a faster rate than the stocks do. Sometimes gold stocks go up or are even in a morning in which gold is down big. If this had happened Monday morning I would have bought then.
Looking at a daily chart you can see that since the start of this year gold stocks have been falling at a much faster rate than gold on this correction. Then on Friday the drop in gold speeded up. Take a look at these two charts:
Now this is a short-term 60 minute chart of the GDX/GLD ratio. Below the main chart is a chart of GDX and below that GLD so you can see them separately too.
What happened Monday is that in the morning the gold stocks tried to bounce while gold sat there. Then they got sucked back down when gold and the broad market plunged on the close. In other words the gold stocks tried to display some strong relative strength against the metal and by the close both were down about the same.
I take this to mean that we are in the second phase of this gold correction. The first phase is the long one, the second one can just last a day or two, and the final phase if it happens normally just lasts a few hours. So if I see gold stocks display strong relative strength against the metal I will take that as a sign that a final bottom is being made.
Again I do not take this crash as a sign that some big thing is now happening in the world economy or we are at the verge of an epic new trend in it or anywhere else. Nothing else is crashing like gold is. If we were in "deflation" everything would be in a total meltdown, including the US stock market.
I take this as a technical event, much like the very short-lived "flash crash" of 2011 or the 1987 stock market crash, which happened in the middle of a secular bull market and proved to be a wonderful buying opportunity.
I made money from the crash in Europe and Greece last year. Crashes make stocks so cheap that they become true bargain plays - not simply because they are at low prices, but because they reach low valuations based on P/E's and dividends and in the long run if you want to invest with a time horizon of a few years that is what matters the most in the end.
Once gold, silver, and the mining stocks bottom the miners will outperform the metals going forward. The reason why is because gold has held that 1550 support level up until Friday and has now completely crashed below it. Silver is in the same situation. Look at the charts.
The stocks though didn't exactly do this. They have been falling for months and did not make huge gaps below support like the metals did. So once they bottom they will be in a position to rally strongly while gold will likely go sideways for at least six weeks and maybe a few months much like the S&P 500 did after the 1987 stock market crash and did after the "flash crash" of 2011.
In sum, once the bottom comes I think gold will base in a range for a few months while the gold stocks bottom and take off in more of a V bottom, probably after a few days of stabilization first. Gold stocks have been lagging the metal now for over two years. After this bottom they will lead the metal and take everyone by surprise.
"A Person Would Be A Fool To Sell His Soul For One Of These Decreasing Dollars" - Mike Swanson (04/15/2013)
This is a funny video someone just sent me. It's a recording Malcolm X did of two FBI agents that came to visit him and offered to give him money to become an FBI informant. He had just left the Nation of Islam so they tried to reach out to him to get him to work for them against them.
He turned them down. This isn't to endorse all of his beliefs, but skip to the six minute mark and you can see why this person sent me this video - and why its relevant for the struggle gold investors are facing today:
Video interview with Mebane Faber as he explains why investing in Europe makes sense despite the "risks" the media keeps talking about whenever Europe is mentioned.
What you are witnessing in the gold market right now is the final liquidation of the gold bug. On Friday gold fell $84 an ounce for a 5.38% drop while the HUI gold stock index fell 6%. Big bad moves. What is worse these drops have come after months of falling gold prices all while the S&P 500 has gone higher.
This has been a very painful time for gold and silver bugs. While they have lost money they have for the most part watched the broad US stock market go up, which means that while their gold positions went down in value those not invested in gold and in just about anything else made money while they lost money. It feels awful to do that. There is only one word for this - brutal.
Gold bugs have been holding on to their positions since gold last made a peak in the Fall of 2011. Since then the HUI has dropped 53% since it topped out on September 8, 2011. They have held on through some frightening declines and seeming bottoms that provided nothing but false hope. Last year we saw a potential bottom in the Spring and a rally in the Fall that led to nothing but another top and a nosedive into this year and into the present.
The reward for believing in gold has been to be punished over and over again. Many gold bugs bought into gold with the idea that it was a safe haven - that to buy into the US stock market or stocks anywhere else in the world was just too risky to do. Didn't the 2008 stock market crash prove that? Didn't the European crisis of last year show us all the risks of debt? Not exactly - as European markets have boomed since last summer with Greece of all places being the fastest gaining market in the world.
But many have said that only gold can go up. That only gold will provide a way to make money. They promised that if you bought gold you would come out a winner while one day everyone else will lose money. Now it seems that all of the promises have proven to not be true and that gold has been the big disappointment.
Now many are selling disgust. CNBC is saying that gold is done, because Ben Bernanke and President Obama have put the country on the verge of a coming economic boom. They say command and control economics is the future and anyone who doubts this by owning gold is a dinosaur. In the last month we have seen days in which good economic news comes out that gold has gone done in value. Then on days when bad news has been announced gold goes down too instead of doing up.
Then on Friday the Cyprus government said it would sell gold and give the proceeds to the European Monetary Union to finance its bank bailouts as it gives up its national birthright. It seems no news is good for gold. Goldman Sachs sent a note to clients last week telling them to short gold. Marc Faber told a reporter this weekend that he thinks gold could drop to $1,300 an ounce before bottoming.
Many are saying gold is over and there are some now that have held on to their gold positions for years and are now selling. Some are taking that money and moving it into the S&P 500 in obedience to the talking heads on CNBC and really more in fear of missing out on more stock market gains than anything else. If that turns out to be a mistake well at least they won't be alone - so for many there is emotional comfort in that. They'll lose money with everyone else and that isn't as bad as possibly being all alone in gold while your neighbors in their boring mutual funds make money not knowing what they are doing. But that is not prudent investment behavior.
And Goldman Sachs isn't always right. What Goldman Sachs does with its own money and what it tells clients can be two different things. Back in March of 2000 Goldman Sachs talking head Abby Cohen told people to keep buying Internet stocks just as they topped. In July of last year Goldman Sachs sent a note to clients telling them to SHORT the S&P 500 due to what they thought were signs of economic weakness in the US economy. That was a mistake and this call now to short on gold on their behalf will be proven to be one too.
"So what is going on then?" you probably are asking. Why is gold falling? What does this mean? Are all the economic risks gone? Is deflation coming? Is Fed QE the miracle CNBC's Steve Liesman says it is? Yes there are some who hate gold bugs, because they represent doubts over the Federal Reserve. They wish they would become extinct.
But gold is not going away. Here is the thing. No one really knows exactly why gold is falling, because there probably is not some big economic reason for it. The truth is markets are cruel. They go up and trap people at tops and then fall far enough to cause as many people to sell on a bottom as they can. This is how bull and bear markets work.
Bear markets do not come to an end when news all of a sudden gets better. They come to an end when every potential seller in them sells out. This is what really causes bear markets - more selling than buying. Gold has been in a bear market now since 2011. However, that is a two year bear cycle within a long-term secular bull market cycle that has been going on for gold now for over a decade and is not over yet.
There are two things you need to realize. When this gold bear market is over a new bull market will begin and those that are invested in that bull market will make an absolute killing. Gold is still up over 580% from 2001 even with its decline of the past two years. And since then gold has gone through two other major declines which lasted over a year that led to awesome gains once they ended. There is no reason to think this time will be different.
Whatever you do you need to make sure that you are in gold during that next bull market. To sell now would mean to give that up. Perhaps though you have to sell. Maybe you own too much. Maybe you are on margin. Maybe you are a hedge fund with investors that now will have no more patience for your gold positions with the S&P 500 going up the past few months. You see bear markets force people to sell for many reasons. Hundreds of millions of dollars are being forced out of the gold market right now.
Second you have to realize that there is nothing easy about trying to make big bucks out of a financial market, because financial markets are cruel. If you thought the gold game was going to be easy than grow up. But realize that nothing else will be any easier. Don't think for a second that the S&P 500 is going to remain an easy game for people either. Since I've been in the financial markets there have been two massive stock market wipeouts that were just as bad - if not worse - than what we are witnessing in gold right now. And I am sure eventually once this bull market in the US stock market ends there will be another cruel bear market that will wipeout another round of investors.
This is how the stock market works and this cycle will never end. You see bull markets thrive on buying. They depend on more people putting more money into use to drive them higher. As people buy they get bullish. If someone has money and is on the sidelines he has doubts about the market. But once he buys he pushes those doubts away and proclaims himself to be a bull! That is why at major market tops bullish sentiment is widespread and just about everyone you know is in. But when there are no buyers left to get in the bull market ends as sellers take control.
As bear market start people hold on in hope. Each rally that comes appears to be the start of a new bull market, but as each successive rally disappoints more and more people sell. Sellers take control of the market. Whether the news is good or bad the market drops anyway.
You see the NEWS DOES NOT MATTER. In bull markets bad news is bought and in bear markets all news gets sold. The news means nothing. All that matters is whether the sellers are in control or the buyers. All that matters is whether the market is in a bull market or a bear market and that is ALL YOU NEED TO KNOW. Trying to figure out why gold is dropping right now is a total waste of your time. It is dropping because it has been in a bear market for almost two years now and at the end of bear markets you can get crashes and extremes in bearish sentiment as every person who is a potential seller finally sells in a giant capitulation. What you are witnessing is not some grand change in the world economy, but the mass liquidation of all remaining gold bugs. It is simply the natural process of a bear market cycle that started in the Fall of 2011.
Right now the sentiment surrounding this gold market is just about as bad now as I've ever seen it. For instance see this comment from the blog Theshortsideoflong.com:
I have hinted at the extreme depressed sentiment including the following important indicators:
• In early March COT reported Gold short positions reached the highest level in over a decade
• In early March Gold's Public Opinion reached one of the lowest levels in at least a decade
• Last week COT reported Silver short positions reached the highest level in almost two decades
• Last week Silver's Public Opinion reached one of the lowest levels in at least a decade
The latest development worthy of "decade extreme" or "record extreme" within the Precious Metals sector, comes to us thanks to Mark Hulbert Financial Digest. According to Mark's latest WSJ column, there has been a huge plunge in exposure of various Gold newsletter advisors. Currently, the Hulbert Gold Newsletter Sentiment index (HGNSI) is at -31% net short, a historical record low since the inception of the survey in 1997. Essentially, this means that the average Gold newsletter advisor is telling subscribers and various other clients to be short Gold with 31% of their portfolio.
I just want to plead with you, do not give up on gold! You see no one cannot predict at what exact price the current gold price drop is going to end, but I can tell you two things for sure. I can tell you first of all that gold stocks are super cheap now on a fundamental basis with many gold stocks paying big dividends - dividends bigger than you can get from buying a US treasury bond. Newmont for example has a P/E of 10 and is paying a dividend over 4.30%.
I know you are probably thinking well they were cheap a month ago too and that doesn't mean that gold and gold stocks can't go lower. And yes you are right! They can. But one thing we both know for sure all bear markets come to an end and this one will too. And once it does gold prices will explode in value and a whole new cycle of gold investors will make a mint off of it.
I plan on being a part of that. I have a little gold and gold stock position so this drop has barely made a dent in my portfolio. You see I own positions in markets all over the world and gold has just been a tiny part of my portfolio. I didn't want to buy a whole lot of it until I was sure the bear trend was over.
Now I am getting excited about the idea of buying more of it. Tomorrow morning I am going to send premium WSW Power Investors my game plan for doing just that. We are all learning lessons from these markets. You never stop learning.
If you have had no choice but to sell gold positions because of this decline or feel like you must due to the impact a further drop in gold would have on your portfolio or your job if you are a fund manager then the lesson you need to take away from this is not that gold is now bad, but that you need to manage your money differently in the future. The mistake you made was not in owning gold, but in owning too much of it or not reducing your position at the right time and taking some profits if you sold years ago.
Maybe you are in cash and are feeling no pain at all though. I do not know what your personal position is on gold as I am writing this for myself and thousands of others who will read it. What all of us must do, no matter what our current investments are, is figure out what is the best way to make money in these markets going forward. If you believe like I do that gold will go higher once again once its current decline that started way back in the Fall of 2011 is over than you must figure out how you want to be a part of that next bull run in gold and precious metals. You need to figure out when you want to buy it and how much.
You need to figure out how you want to manage your money in a bull market. You see people buy in tops and sell on crashes over and over again never learning anything, because they never stop to learn from what they have already done. Once you learn then you make money in a sustainable manner.
Bull markets come and go. So do bear markets. These cruel cycles and patterns never will end, because they are human nature. With gold we are witnessing climatic bear market crash action. We are witnessing the liquidation of the gold bug and the beginning of a bottom. The only thing left once all of the potential sellers are gone will be the few strong hands left - those will be the people who just own a little bit so they don't get crushed so much they have to sell and those simply tough enough to hold on. They are the few and the brave.
What you have to think about though isn't being tough - but getting smarter when it comes to investing. Market action like this is when it makes sense to make plans to buy. Think about last year when European markets crashed and everyone said it was stupid to invest there. No one believed, because no one was left to believe. And now the gold bugs are almost all gone too.
CREDIT: BLOOMBERG TELEVISION**
Faber on the fall in gold prices:
"I love the markets. I love the fact that gold is finally breaking down. That will offer an excellent buying opportunity. I would just like to make one comment. At the moment, a lot of people are knocking gold down. But if we look at the records, we are now down 21% from the September 2011 high. Apple is down 39% from last year's high. At the same time, the S&P is at about not even up 1% from the peak in October 2007. Over the same period of time, even after today's correction gold is up 100%. The S&P is up 2% over the March 2000 high. Gold is up 442%. So I am happy we have a sell-off that will lead to a major low. It could be at $1400, it could be today at $1300, but I think that the bull market in gold is not completed."
"$1300. Nobody knows for sure but I think the fundamentals for gold are still intact. I would like to make one additional comment. Today we have commodities breaking down including gold. At the same time we have bonds rallying very strongly. If you stand aside and you look at these two events, it would suggest that they are strongly deflationary pressures in the system. If that was the case, I wouldn't buy stocks or sovereign bonds because the stock market would be hit by disappointing profits if there was a deflationary environment."
On gold falling lower if we have a deflationary environment:
"Yes, I agree. That's why I said if the gold market collapse is saying something about deflation and at the same time we have this sharp rise in bond prices and the signals are correct that we have deflation, I wouldn't buy stocks because in a deflationary environment, corporate profits will disappoint very badly."
On whether a deflationary environment is possible right now:
"Everything is possible…In the economy of the cuckoo people that populate central banks, everything is possible. What you have is gigantic bubbles, the NASDAQ in 2000, then the housing bubble and then commodities in 2008 when oil went from $78 to $147 before plunging to $32 within sixth months. That kind of volatility comes from expansionary monetary policies from money-printing."
"All I'm saying is that I think we're going to have a major low in gold in within the next couple of weeks. Gold, as of today, you should actually buy as a trade. I think it can rebound in the next two days by $40."
On why gold will rebound $40 in the next two days:
"Because we are about in gold as oversold and we were essentially during the crash in 1987. From there we have a strong rebound. All I am saying as a trader I would probably enter the market quickly for a rebound of $20 or $40. From a longer term perspective, I would give it some time. We may go lower. I am not worried. I am happy gold is finally coming down, which will provide a very good entry point."
On whether investors should also stay in cash:
"My argument is that you should always have in this kind of high volatility environment a fair amount of cash because opportunities will always arise again and again and if you have cash you can then buy assets at a reasonable price. I think Patience is very important in this environment. The question is, how do you hold your cash? Hopefully not with a Cyprus bank."
Natural gas prices have been in a free fall for the past two years thanks to a vast rise in natural gas production in the United States.
That very reason though has caused famed investor Jeremy Grantham to now recommend investments in natural gas.
The Toronto Globe and Mail reports:
The flood of new gas has driven down prices to around $4 (U.S.) for a million BTU, a measure of energy content.
But the surplus won’t keep prices down for much longer.
Mr. Grantham said within five years “the price will have tripled” and market conditions will switch to a long-term shortage.
The well-known investor, who is founder and principal at Boston-based money manager GMO, has recently become an outspoken advocate for the idea that many important commodities will become scarce in coming years.
Commodities have been in a bear market since 2011. Gold prices have fallen. Everyone is negative. When the commodity the next commodity bull run begins it will take everyone by surprise. Prices will soar.
I don't know if you have heard of Bitcoins, but they are a virtual currency that trades in real time. People buy Bitcoins and then sell them to each other as an alternative to paper currency.
You can trade them by going long Bitcoins and even by shorting them. Some hedge fund has even been set up to trade in them.
This chart shows you how it went up in price into April 1st:
From April first to this Tuesday Bitcoins went up to $266.
On Wednesday suddenly Bitcoin prices crashed to a low of $105. They then bounced back up over $200. It was a 60% intraday drop.
This morning there are dozens of articles in the newswires saying that Bitcoins are over. That the bubble in them has popped.
Actually, I've seen several bubbles pop like this. Usually what happens though is they have a day in which they have a fast plunge and then comeback like yesterday and then they rally back up for a week or so and then make a final bubble top. That final move traps short sellers.
Bitcoins are true crazy for me. I'll just stick to investing in stocks with low valuations myself. My HLTOY is up 4% today and is already up about 14% from when I bought it the other week and I don't have to worry about it crashing 60%, because it has a P/E of 5.93.
I just did an interview with Matt Frailey of BreakPointTrades.com.
In this interview we talked about gold and the broad market.
To see the charts Matt and I talked about in this video click here.
You check out Matt's Breakpointtrades.com premium service by clicking here.
You can also download the mp3 audio file for this interview on your computer by clicking here WITH A RIGHT BUTTON CLICK and selecting SAVE FILE AS from the drop down menu.
If you have an itunes, ipod, or rss reader you can subscribe to the podcast by clicking here.
Yesterday European markets were up big across the board. The Greece ETF GREK was up over 8%. EWI was up 1.69%. EWP was up 1.88% At the same time the S&P 500 was up only 0.35%.
One day's action doesn't mean anything in itself and must always be taken in context with the larger trends - but when you look at the charts and do this yesterday's action may prove to be very significant.
You see in the second half of last year European markets and markets all over the world went up much more than the S&P 500. From June of 2012 to February of this year Greece was the top gaining market in the entire world.
But since February Greece and the rest of Europe went into a correction while the US stock market went higher. The US started to outperform most other world markets in January. You can see this by tracking the performance of the GWL ETF to SPY.
This caused US stock investors to feel triumphant. CNBC talking heads began to proclaim of a new economic boom and argued that investors all over the world had to now be in US stocks. The DOW making new highs prompted people to look for new explanations for the market action and rationalizations to become a part of it.
Some began to feel left out and sold positions they have had that have lagged such as in commodities or made nothing like in CD's to jump into the US stock market out of fear of missing out on further gains.
Now earnings reports are coming out and CNBC is talking about them.
Everyone is now ignoring the action overseas. Many people have become convinced by the action since January that its useless to do anything but invest in the S&P 500 and DOW. And the TV has now stopped talking about Europe and commodities.
In reality the action of the two months of February and March of superior performance by the US stock market relative to Europe is not a new long-term trend, but a short-term trend that is probably now over.
European markets went through a correction into the Cyprus debt crisis. Once that news hit they formed a base last week and now appear to be launching a new rally off of it.
You can see all of this in the above chart.
This is a chart of GREK, the Greece stock market ETF. You can see the base it formed last week and how it went up 8% yesterday.
Below that chart are two relative strength charts, which is really the important thing I want to bring your attention to today.
The first one is GREK/SPY. You can see how the relative strength of GREK went up until this February and then went down, but now appears on the verge of breaking its downtrend line.
The second one is the relative strength plot of GWL/SPY. It appears to be in the same situation.
Bottom line - European markets went into a correction that caused them to not only drop for a few weeks, but to lag the action in the US stock market. I believe that leadership is going to shift in the next few weeks from the US stock market again into world markets and we will start to see those markets outperform again just like they did in the second half of last year. These are markets all with lower valuations than the US stock market and markets that began bull market last year while the US stock market has been in one now for four years. As a result they have greater upside potential and it appears the technical action is starting to firm up in them.
Of course no one is paying attention to any of this.
And I also think this has bullish implications for gold.
David Petraeus In Political Comeback Sees More Defense Spending As Key To "An American future filled with promise" - Mike Swanson (04/09/2013)
America is the place of comebacks. David Petraeus was touted as a hero in Iraq and became director of the CIA. He was a man talked about as a future candidate for President and then he got caught up in a sex scandal. After that the media and talking heads who once praised him turned on him and kicked him as he lay on the ground.
This week he is starting to make a comeback in the media.
His first attempt is an editorial he co-wrote in the Washington Post with neoconservative strategist Michael O'Hanlon.
The two argue that America is on the cusp of a new national economic boom that will drive the whole world economy - if it gets its act right.
They argue that the recovery won't come if the United States government cuts federal spending too much. They see opportunities for innovation in the internet, new energy, 3-d printing, and robots, but don't think any of them will happen without government spending to fuel them.
However, they don't think these things will happen without government spending. They want to see Democrats and Republicans make a deal to control the budget cuts. If they don't happen they fear that government spending will go away from programs they believe are vital for this technology driven economic boom they see coming.
Specifically Petraeus argues that continued defense increases is critical, because they "provide the foundation and seed for future growth" which makes cutting the money to the defense industry "far from optimal as a deficit-cutting action."
In reality defense spending is out of control and the greatest threat to future growth is not cuts in defense spending, but a looming debt crisis, brought on by the wild orgy of spending in everything - including defense - that no one is seriously putting an end to.
Nor do I believe that cuts in defense spending would ruin the economy or prevent innovation in the economy. It's nonsense. In fact money freed up from the government can go into the private sector and be used to invest in real businesses and into the real economy.
We'll see if this article catches on and if Petraeus can refashion himself as a big government neoconservative talking head.
It's also interesting to see that those who fight against defense cuts no longer do so on the basis that this huge defense spending is actually needed to defend the country, but do so based on other arguments - no matter how strange they may be.
A reporter for the Washington Post today makes an interesting observation. New housing starts are up over 20% from last year, but new hires for construction have only grown 3.8%.
There is talk on CNBC of a "strong" economy, but last month we saw poor employment figures.
The problem is that we still historically have too many people in the construction industry. As this reporter writes:
Back in the early 2000s, before the housing bubble took off, the number of construction jobs per housing unit under construction tended to hover around 2.6. It’s at about 3.7 today.
There are a few exceptions where labor markets have become tight — Washington, D.C., Denver, Seattle, San Francisco. In fact, some areas are now suffering from shortages of skilled laborers, from carpenters to roofers to plumbers. ”But these markets are the exceptions,” Kolko writes. “In most of the country, employment relative to construction activity is high now compared with the bubble and pre-bubble years.”
So what does this all mean? If the U.S. housing market continues to grow, that should mean new construction jobs, but the pace will continue to be relatively sluggish. Goldman Sachs estimates that a 14 percent rise in residential investment spending will translate into just 350,000 new construction jobs this year — or about 30,000 per month.
The reason why we have yet to see a big economic boom in this "recovery" is that the Great Recession was caused by the explosion of a real estate and mortgage bubble. That bubble has still not yet been completely been worked off and the problem we now face in the future is that Bernanke has created a new one in the US bond market. Normally recessions are times that work of excess debt and bubble pockets in the economy, but instead of allowing these times to do that the Fed has stepped in over and over again in the past 25 years to try to make them go away, but as a result they have created even greater imbalances in the economy, thereby insuring that the next downturn in the economy and the stock market is worse than the last one.
The maddening thing is that the US media won't speak out against this. It won't say a word against the Fed and its mismanagement of the economy and the President and Congress seem to be beholden to the same corporate interests that are behind the Federal Reserve itself.
Take Jack Lew. He is the guy Obama appointed to take Geithner's place as Treasury Secretary back in January.
Who is he?
Well he was the Chief Operating Office of Citigroup in 2007 and 2008. He was there when the company blew itself up in the mortgage market and he left it with a $900k bonus while it went into collapse.
If you owned a company would you hire such a failure to run it?
This is the kind of guy Obama thinks is a great leader.
He is the "right guy" because he is a Wall Street operative, and it is Wall Street interests that funded Obama and own him, so he is doing just what his own backers want even if it is not good for the country as a whole.
This is endemic corruption and it is why in the end there will never be a balanced budget and no steps will be taken to thwart the next Fed induced collapse. Don't worry we got a few years to go - and no one else is worried either!
Podcast - Ike Iossif On The VIX, His Indicators, And The Time Risk In The Next Bear Market - Mike Swanson (04/08/2013)
I just did this podcast with Ike Iossif of www.marketviews.tv. In this interview Ike talked about the recent action in the VIX, how his intermediate-term indicators remain bullish, and the time risk that may be involved in the next bear market when it comes that no one is talking about - let alone thinking about.
During this interview Ike referred to these three charts:
Also check out Ike's site at www.marketviews.tv.
You can also download the mp3 audio file for this interview on your computer by clicking here WITH A RIGHT BUTTON CLICK and selecting SAVE FILE AS from the drop down menu.
If you have an itunes, ipod, or rss reader you can subscribe to the podcast by clicking here.
Video: How Crony Capitalism Corrupts the Free Market with David Stockman - Mike Swanson (04/08/2013)
Archived from the live Mises.tv broadcast, this lecture by David Stockman was presented at the Mises Circle in Manhattan: "Central Banking, Deposit Insurance, and Economic Decline." Includes a welcome and introduction by Llewellyn H. Rockwell, Jr. Music by Kevin MacLeod.
CNBC has a crazy article today saying that Central Bankers around the world are thinking of buying stocks. Not now, but maybe in five years.
The reason is that most of them put their excess reserves in US Treasury bonds and they can't make any interest there anymore - and they are at risk of LOSING money in them if US bonds go down in value someday due to the debt mess Bernanke and the Washington politicians are creating.
"A poll of 60 central bankers responsible for reserves worth $6.7 trillion, conducted by trade journal Central Banking Publications and the Royal Bank of Scotland, sheds light on the secretive world of official sector investments. The response to the crisis by the major monetary authorities has had a profound impact, the poll found - more than four-fifths of respondents said the aggressive monetary easing of the Federal Reserve and the European Central Bank had altered their behavior.
"Central bankers, increasingly frustrated with ultra-low returns and the depreciation of the dollar and the euro, have invested in currencies which until recently they would have avoided along with riskier, higher-yielding assets such as equities and lower-rated government bonds."
"Respondents to the poll said their forays into foreign currencies would help stabilize global financial markets. But the shift from traditional reserve currencies has spooked some foreign-exchange investors, even though this still only makes up just over 6 percent of central banks' total investments."
Of course this is all madness. In fact they are more likely to step up buying in gold and precious metals before they do in stocks.
In this wide ranging video Jim Rogers notes that never before in history has every central bank in the world been engaged in an easy money policy at the same time. Rogers is still very bullish on gold and commodities and owns shares in Russia and Japan.
I'm still watching National Bank of Greece for a potential trade. Greece banks are in the process of raising money for a recapitalization.
They just got their deadline extended to do this by another couple of weeks and the financing is expect to close now by the end of May.
Reuters reports this morning:
Greek banks, which are being recapitalized with funds from the country's latest EU/IMF bailout, have been lobbying for the terms of the recapitalization scheme to be sweetened and also sought an extension to an end-April deadline for the plan.
"There will be a small extension of a few weeks, it may be pushed to the end of May," Provopoulos told state TV.
Officials from the European Union, the European Central Bank and the International Monetary Fund are due in Athens this week to resume an inspection visit and talks on key issues, including the bank recapitalization and public-sector layoffs.
Crazy Goldman Sachs Rogue Trader Was Doing 20% of S&P E-Mini Futures Volume - Mike Swanson (04/04/2103)
I don't know if you have heard of Matt Taylor - he's the Goldman Sachs trader that defrauded the bank by doing $8.3 billion dollar unauthorized traders in the futures market.
The Goldman Sachs employee pled guilty in court yesterday.
According to Reuters:
"The Massachusetts Institute of Technology graduate pleaded guilty about four months after the Commodities Futures Trading Commission filed a civil complaint against him. The CFTC accused Taylor of fabricating trades to conceal a huge, unauthorized position in e-mini Standard & Poor's futures contracts, which bet on the direction of the S&P 500 index."
"Taylor on Wednesday told U.S. District Judge William Pauley that his trading position at Goldman exceeded risk guidelines set by his supervisors "on the order of 10 times." He also admitted to making false statements to Goldman personnel who questioned him about the position, which led to a $118 million loss for Goldman Sachs."
This is what is truly crazy, from Reuters:
"A person familiar with Goldman's equities trading business said Taylor's trading position was significant - representing roughly 20 percent of e-mini trading volume the day it was established. The market moved against Taylor's position, leading to the loss, said the person, who declined to be named."
"For perspective, the $8.3 billion position Taylor took in the e-mini futures market was twice the size of the $4.1 billion trade the U.S. Securities and Exchange Commission highlighted in a report on the causes of the May 6, 2010, "flash crash" in which a series of e-mini trades caused the Dow Jones Industrial Average to plunge 700 points in a matter of minutes."
"Taylor said he knew his actions were wrong and illegal but established the trade anyway to augment his reputation and increase his compensation."
If You Are Against War, Support Gun Rights, Care About Abortion One Way Or the Other,Like the ACLU Or Ron Paul Than You Are Considered An Enemy of The State - Mike Swanson (04/04/2103)
This quote is from an article written by John Glaser:
Government documents obtained by the Partnership for Civil Justice Fund (PCJF) through its FOIA records requests reveal that the Department of Homeland Security (DHS), an agency created after the September 11 attacks under the rubric of combating terrorism, conducts daily monitoring of peaceful, lawful protests as a matter of policy.
Functioning as a secret political police force against people participating in lawful, peaceful free speech activity, the heavily redacted documents show that the DHS “Threat Management Division” directed Regional Intelligence Analysts to provide a “Daily Intelligence Briefing” that includes a category of reporting on “Peaceful Activist Demonstrations” along with “Domestic Terrorist Activity.” (p. 68)
The documents show a Department of Homeland Security that appears obsessed with the question of whether any and all protests that are being surveilled receive media attention and coverage. Reporting within the DHS on media coverage of First Amendment protected activities, even in the smallest places, appears to be a routine part of DHS intelligence reports. None of the documents explain why media coverage of peaceful demonstrations is of interest to law enforcement or concerns “homeland security” in any way.
Are you an enemy of the state?
"Think of the resources – billions of dollars and massive human effort – wasted on abridging the free speech rights of America’s political dissidents. This is what happens when the government is given the power and a blank check to perform seemingly legitimate functions like protecting us from terrorists."
"But since there is not enough of a terrorist threat to obstruct, the state has been busy countering the real threat they face: dissent."
For full article click here.
Let me say I do not think this bull market is over or is about to end before someone gets angry at me for bringing this to your attention.
The Investors Intelligence Survey released this morning showed a jump in the number of people bullish in the market to 52% while the number of bearish respondents are 19.4%.
Last year the market made two peaks once the number of bulls passed 54%. Once this happened the stock market went through short-term corrections in size of around 10%.
It could happen again.
First quarter earnings season will start in two weeks. The stock market has a tendency to rally into earnings and then correct during and after them as traders buy the rumor of good earnings and sell the news of them to the general public.
The US stock market has gone virtually straight up since the start of the year. I think we could easily see a pullback sometime after the second quarter earnings start to come out. If it happens it probably would just be a short-lived affair over. I take this survey as a warning sign, its not yet at the manic point, but very close.
It comes out every Wednesday morning. You can get it live by going here.
In an interview with Bloomberg former Reagan budget director David Stockman told Bloomberg that the "Fed Is Off the Deep End." You can listen to an mp3 of the interview here.
Stockman on why he's so gloomy on the U.S. since every time we've gotten into this mess we get out of it with technological progress:
"We didn’t get out of this mess entirely with technological progress. I believe in it. I believe in the free enterprise economy, and I think it does generate productivity, growth, and wealth over time. What I am arguing in the book is that the machinery of the state has failed badly because we piled on way too much. We are out of control fiscally. It is almost a doomsday machine, I can explain. And second, the central bank is off the deep end with this money printing, which is dramatically distorting and deforming the financial markets. You can’t have capitalism without prices in the bond market, in the debt markets, in the money markets. And the fed has essentially destroyed prices. It administers everything."
On Bill Dudley of the New York Federal Reserve Bank saying that he has confidence we can unwind all the damage we've done with a huge balance sheet:
"I don’t buy that because that huge balance sheet has gone nowhere. It has stayed right within the canyons of Wall Street. They have taken their balance sheet from $800 billion, which took 94 years to assemble, and in seven weeks they doubled it. They were printing money like $600 million an hour. It is now tripled, quadruple, up to $3.2 trillion.
And what happened? During that period, from September 2, ’08, excess reserves in the banking system went from nothing - $40 billion – to $1.7 trillion today. So the money is staying in the canyons of Wall Street. It funds the carry trade where you can buy anything that might have a return, a yield, a risk asset."
On whether the Fed is going to be able to pull money out of Wall Street in an organized manner:
"Not a chance because everybody in Wall Street is basically front running the Fed. What the Fed is buying, the belly of the curve, I am buying. What the Fed is buying, short term, I’m using to fund my position. So no one really owns the treasury bonds today, it is all rented on huge repo spreads. And the minute the yields start heading up a little bit and the bond prices go down, you are going to destroy the arbitrage, the fast money is going to sell, then the slower money is going to have to sell because the fast money is selling. And where is the bid? At the bottom of the market…The Fed never gets up."
On what the alternative is given the deflationary trap that the U.S. is caught in:
"I don’t think we are caught in a deflationary trap…Well, because you are suffering, my friend, from the recency bias. Yes, prices in Phoenix are way down, but they are still a heck of a lot higher in real terms than they were in 1995. The only thing that happened is a bubble collapsed which had to because it was an artificial bubble fueled by the Greenspan one percent interest rate policy and now the Fed is basically saying that bubbles can’t collapse, we’ll just do it again…"
On whether the Fed is trying to manage the bubble collapse:
"Well, we’re getting in deeper and deeper every time. And the ultimate consequence will be more of a train wreck. Today, at 1560 plus or minute, we are at the same point the S&P was in March 2000, 4,750 days ago. We have had two massive collapses in the interim – the dot.com $5 trillion evaporated, the Lehman meltdown $7 trillion evaporated. So it is serial bubble. They are bicycling the thing up and down. It happens in Wall Street."
On whether he has patience that the U.S. will grind its way out and get to a better place five or ten years from now:
"No, because the ten year ago forecast said that we would have a surplus in 2012, that revenue would be $3.5 trillion, and it was $2.5 trillion. What they are using today is a rosy scenario forecast for ten years that would make the rosy scenario I did in 1981 in the Reagan administration look like an ugly duckling by comparison. They are saying that we are going to create 17 million jobs in ten years compared to two million in the last ten years, that we are going to go 14 years without a recession. It has never happened in history. Most cycles last 48 months. So when you actually do a forecast based on the last ten years, just say the performance in the last ten years, the growth rate, the business investment, job creation, you have $15 trillion to $20 trillion in deficits in front of us, not $7 trillion. We are not on a glide path going downward."
On what Paul Krugman, Brad DeLong and others are getting wrong right now:
"They don’t see the elephant in the room called the Fed, and the other central banks buying hand over fist almost all the treasuries that are being issued. The interest rate is not two percent, that is administered, pegged, set by the fed. Ask yourself, if the Fed said we’re going fishing for six months and we are not going to be in the market, we’re gone, do you think the treasury at ten years would stay two percent? Not a chance…It would go way up. There would be a tremendous panic sell off in the bond market because it is entirely propped up. So therefore, they are disingenuous."
On the Republican Party:
"That is the problem. We have no conservative party left. The Republicans have simply adopted Keynesianism for the prosperous classes by using the Tax Code for this stimulus, that stimulus, to help this part of the economy or that part of the economy."
On whether he agrees with Glenn Hubbard who suggested that we need to go after entitlements on a long glide path and against the wealthy first:
"No, because we have been kicking the can for decades and decades, according to the advice of Keynesians like Hubbard. Hubbard is a complete Keynesian. He is a brilliant guy who told Bush cut taxes in 2001, cut taxes in 2003, oh, why you are at it, go have two unfinanced wars and don’t worry about the deficit because it doesn’t matter. This is the kind of advice Republicans are getting from the likes of Professor Hubbard, and it is no wonder that we are heading towards national bankruptcy. It has got to stop."
On what would happen if we went cold turkey:
"It’s too late to go cold turkey. Nobody is going to do it, that is why we are drifting towards the wall. The deficit is much bigger than they are saying. As I indicated, with an honest economic forecast, just like we’ve had for ten years, you are looking at $15 trillion, $20 trillion. You are looking at a national debt $30 trillion."
On whether he believes in American optimism and that we will grow and find a path through this:
"No, the optimum was in the people of Main Street, the entrepreneurs, the businessmen, the hard workers, the bus drivers, the farmers. I am attacking the elite. I am attacking the people that run Wall Street, the people inside the Beltway in Washington. I am attacking all of the Keynesian professors from both parties who have gotten us into this idea, just print enough money and we are going to get wealthier, just borrow enough money and we’re going to stimulate the economy."
Source: BLOOMBERG SURVEILLANCE
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