All day and every day, some of the stock market's best and
brightest traders and money managers share their ideas, insights,
and analysis in real-time on Minyanville's Buzz & Banter.
Here is a small sampling of this week's activity in the Buzz.
Is Silver Basing?
Spot silver continues to carve out a base-like formation for the
past three weeks.
That said, however, to trigger the potential of the formation, the
price structure must hurdle and sustain above 20.30/60 resistance,
which will project upside targets of 21.20/50, and possibly
Only a break of today's low at 19.56 will weaken the pattern, while
a decline that breaks 19.00 will wreck the base-like pattern
Click to enlarge
So far, 2013 has been defined by aggressive V formations, making
any kind of tactical trading quite challenging. The strength of the
(INDEXSP:.INX) has been nothing short of impressive, especially
given weakness in quite literally every other major asset around
the globe. This begs the question -- is the S&P 500 right, or
is everything else by not participating on the upside?
Global growth still remains muted, inflation expectations are not
picking up meaningfully, and euphoria over the equity advance is
unrelenting. While valuation wise this is not a bubble, the pace of
the advance is reminiscent of the latter stages of the 1990s, and
the first 8 months of 1987. Everyone seems to be under the
impression that a stock market up nearly 20% can't go down. Maybe
they are right, but I am much more interested in rotational
leadership than old stories. Emerging markets do look ready to
outperform, especially given reaction to China's GDP report. As
asset allocators around the globe wonder where to put money to
work, a 1999 U.S. market may be much less attractive than a 2009
emerging market trade.
in recent weeks how Q2 was tracking as the worst ever in terms of
earnings guidance, but that companies were playing the expectations
game, setting themselves for earnings beats.
As of Friday,
according to Factset
, of the 30 S&P 500 companies that reported earnings, 73% beat
on the earnings line, though only 47% beat on revenues.
That may not necessarily be a bad thing -- unless of course, you
believe stock prices should relate to actual demand for goods and
services rather than earnings management -- as in four of the last
five quarters, less than 50% of companies beat revenue expectations
(58% is the four-year average). Nonetheless, stocks are up big and
near all-time highs.
In terms of guidance for Q3, 8 companies have issued negative
guidance, and zero have issued positive guidance.
Clear and Present Markets
1. I have mentioned it before, but I want to make sure you "see it"
given the -0.1% Retail Sales report yesterday (ex-auto & gas).
Beware of consumer stocks in the second half. One consistent
message we are hearing on bank earnings calls is that refinance
activity has dried up. Mortgage refinance has been an important
driver of retail sales, because it increased disposable income and
funded both consumer purchases and home renovations. Lower
refinancing volume, combined with higher gas prices and a tax
increase, are creating the conditions for more challenging second
half retail sales than investors expect. Home improvement stores
may have a solid 2Q, as
) commented in May that April and May comps were running at about
10%, which allows for significant operating leverage. However, at
current valuations, the growing downside risks to growth outweigh
the potential upside, and we decided to sell our Lowes position.
2. I made some comments yesterday on Modern Monetary Theory (MMT),
and later in the day heard a portfolio manager on CNBC say "at some
point the Fed has to sell the $3 trillion in assets on its balance
sheet." This person clearly is not familiar with MMT, which views
all "dollars" as debits and credits on an electronic balance sheet,
allowing them to be transferred or canceled at will. The Fed has
"tested" selling small lots of assets back into the market in
"Reverse Repo" transactions, and it has not gone well. I could be
wrong, but I think the plan is to just cancel the securities or
allow them to run-off. Selling the assets on the Fed balance sheet
back into the market removes dollars and reduces liquidity, and
while I think this could be done on a small scale to cool off
inflationary effects if velocity picks up, I don't think it is
possible on the degree required to unwind the entire portfolio.
Bonds Forming Head & Shoulders?
(NYSEARCA:TLT) could be forming a Head & Shoulder's Top here.
However, The next move appears to be higher in price, lower in
yield. Interestingly, Michael Sedacca and I were talking yesterday
(INDEXCBOE:TNX) appears to want to go higher (sending prices
lower). Could we be setting up for an temporarily inverted yield
curve? That would be an interesting spin no one is talking about.
Hello recession, if so...
Click to enlarge
Click to enlarge
Apples for Apples
Recently, we asked
) was coiled to attack its 50 DMA in a mirror image of the coil at
the 50 prior to the June plunge to a test of the lows.
I can't help but wonder if AAPL's relative strength today is a tell
that it is poised for an Expansion Pivot buy signal (largest range
in 10 days over the 50).
See the daily AAPL chart from May below.
Click to enlarge
Wednesday, July 17
Gold Miners Also Face Political and Social Headwinds
If you've considered buying gold companies because of
their cheap valuations
, make sure to include social and political issues in your analysis
if applicable to the company.
) stated earlier this month that all of the major gold companies
that it covers will burn cash if
gold's spot price remains under $1,300
. Reduced revenues will aggravate the already tense labor
situations for some companies.
None of the examples listed below are directly related to this, but
the attitude towards miners has turned negative in many countries.
a Chilean appeals court
), the largest producer of gold last year, cannot continue building
its Pascua-Lama gold mine located in the Andes until Barrick builds
infrastructure that will prevent water pollution and glacial
damage. Local communities filed the suit after fearing for their
health. The mine's first production had been scheduled for
mid-2014, but Barrick changed the date to mid-2016 due to the
ruling. ABX may write down as much as
on the Pascua-Lama mine due to both the production delay and gold's
price drop. Initially estimated to be $3 billion, ABX's costs of
the mine stood at $8.5 billion last year. ABX's total realized
impairment charges may reach
$10 billion for the second quarter
-Guatemalan President Otto Perez asked the Guatemalan Congress last
week for a two-year moratorium on new metal-mining licenses after
tensions have rose between indigenous communities and the mining
) received the final operating permits in April.
-South African gold mining companies potentially face more labor
unrest. The country's mining unions' have demanded a 60% wage
increase, but major mining companies only offered a
4% raise on Monday
, which is below the country's 5.6% inflation rate. The small,
Village Main Reef
(OTCMKTS:VMRFF) reported today that
918 miners at its ConsMurch antimony and gold mine
went on strike
. The company said the mine may no longer be viable due to the
For more context,
(AU), the world's third-largest gold producer based in
Johannesburg, stated Monday that it will take a
$2.2-2.6 billion impairment charge due to lower
. Standard & Poor's lowered AU's long-term corporate credit
rating from BB+ to BBB-.
- Australian gold miners
still face a carbon tax
, hurting their global competitiveness. Australian Prime Minister
Kevin Rudd announced this past weekend that his government will
remove the A$24.14/t fixed-price carbon tax, but his government
will replace it with a floating carbon tax rate.
- A week-long illegal strike at
(GFI) Tarkwa and Damang mines in Ghana in April caused the ounces
of gold produced in the quarter ending June 30 to
drop 25,000 ounces, or 5%, year-over-year
to 451,000. GFI expects total costs of mining per ounce to remain
at $1,360 for the remainder of the year. Also, the Ghanaian
government has cracked down on
illegal Chinese gold mining operations in
, potentially destabilizing the industry there. 4,500 illegal
miners have been deported.
El Dorado Gold
(EGO) stated that it will delay the development and initial
production of its
Skouries, Perama, and Certej mines
by about a year due to gold's price drop. The Skouries and Perama
mines are located in a mining-unfriendly region of Greece. The news
release did not mention the unrest in the area, but local conflict
could potentially cause further delays. For the past decade,
tensions have grown between environmentalists and mining groups
over developing the mineral rich properties. In February of this
arsonists damaged the corporate offices and
machinery of the Skouries mine
. Last August, police fired tear gas and rubber bullets at
protesters approaching the Skouries mine. Also, last September,
police again used tear gas on protesters, who responded with flares
and Molotov cocktails.
Bernanke Speech Notes
Here are some headlines that are making the news:
- Bernanke says pace of bond purchases not on a 'preset
- Bernanke says Fed may taper QE in 2013, halt it around
- Sees strong headwinds created by fiscal policy.
- Jobs situation is far from satisfactory.
- FOMC believes risks to economy eased since fall.
- Factors behind low inflation are likely transitory.
- Fed will retain its Treasuries, MBS after QE end (smells like
not selling on the former, but known).
- Very low inflation poses risks to economy.
Net/net this seems par for the course, no difference from the
The D Word
Bernanke once again referenced deflation as a major risk the Fed is
well aware of, which the market has interpreted as dovish. At what
point that market will question why deflation is still a risk after
massive stimulus is unclear, but euphoria stages in equities are
not driven by logic.
Emerging markets continue to be where the action is, and I do think
they, alongside bonds, are a good trade here. The market may be
starting to realize that housing could actually suffer given the
way yields spiked, as homebuilders continue to be lackluster. This,
in turn, might break the small cap momentum later down the line.
Because small caps are more sensitive to the domestic economy, and
the domestic story is largely driven by reflationary/growth
pressure from the housing market, weakness in Homebuilders might
precede weakness in small caps.
Continue to watch emerging markets -- mean reversion can be a
Thursday, July 18
Perception vs. Reality
Good morning and welcome back to triple-digit temperatures on the
east coast. It's fitting, I suppose, given the scorching rally
we've seen. Lest you were napping, the S&P has rallied 8% since
the June 24 low, 25% since the November low and a sweltering 153%
since the March 2009 low. The economy must be en fuego, eh? At risk
of overheating? Under-employment is absent and
social mood must be off the charts
Not so much.
I've had meetings the last few weeks with thought-leaders stateside
and abroad. One of my closest buddies runs a paper outfit that does
the bulk of his business with China, and it's not a small company.
He told me months ago that his flow dried up, almost to a
standstill, and he's hearing crickets still. Ditto those who have
feet on the street in construction, who tell me bids are trading
If I had to sum up their collective take on the stock market,
they're in a state of "suspended disbelief." They "don't get" why
markets are at all-time highs while their businesses is in a snarl.
They ask me "why?," to which I reply, "The markets are no longer
free; there is an artificial bid and meritocracy--true, free-market
meritocracy--has been left for dead."
I remind myself to never let an opinion get in the way of making
respect-but not defer to-the price action
. That the reaction to news is more important than the news itself.
From a trading basis, those are guidelines that have served us in
good stead, or were at least designed to. As I wrote last week in,
Does Ben Bernanke have a God Complex?
One of two things is happening before our eyes: Either the
baton is being passed to a new investing world order-one where
central bankers and HFT rule the day-or we're approaching an
extremely dangerous juncture where following the smart money will
be rewarded in spades.
One of our primary principles is that price is the ultimate arbiter
of variant financial views. Right behind that is the notion that
trading, at it's core, is capturing the disconnect between
perception and reality.
We've spoken about how many of the world's
smartest investors have gone dark
in the process of going dark
; conversely, and presuming the market is a zero sum game, others
have picked up the slack, more than willing to step in to bag the
Benjamins. Round and around we go; where it stops, nobody knows.
Yesterday I posted a discussion I had with the extremely astute
Mark Dow, who posits that
the Fed is Much Smarter than we think.
We strive to see all sides of the forward probability spectrum and
I, for one, was psyched to consume his logic.
After the article posted, there was a firestorm of push-back, not
dissimilar from what we saw following
It's Always Darkest before the Dawn
, when the S&P was trading with a $6-handle,
The Gold Scold
, when the yellow metal was trading at $1900 or
Oil of Oy Vey
when Crude was at $140. As the profitable position is rarely the
popular one, this stuck out to me.
Mark and I continued our discussion last night. "The fact that my
position is contrarian," he said, "tells me how far stocks still
have to go. Many guys playing in the macro sandbox shouldn't be;
they're talking themselves out of participating in a bull market.
We do have a slow growth problem (demographics and globalization)
but people are still way too bearish and way too under-invested."
I told him it's hard to argue with that logic, although my view is
that underlying fundamentals don't support stock prices absent the
Fed, and that his take make a ton of sense in a vacuum--but we
don't live in a vacuum, for if we did my Delta Tau Chi pledge name
would be "Hoover."
He responded, "I think the Fed is propping up the market less than
people think. It catalyzed positive psychology and then helped the
balance sheet healing. The market would react if the Fed stepped
away now but look how fast stocks came back from the last sell-off.
That's not a Fed-dependent market, in my opinion."
I share his views in our collective attempt to better understand
the dynamic between the Fed and the Treasury, what is allowed and
what can or cannot happen. We're in uncharted waters through a
historical lens and while nobody can possibly know how this grand
experiment will end, we would be wise to learn as much as we can
about potential outcomes. The truth, as they say, will likely be
found somewhere in the middle.
Lot's going on today so lemme get this to you in a timely manner.
As always, I hope this finds you well.
Multi-Family Drop-Off the Start of Something?
There was a noticeable decline in new housing starts yesterday,
most pronounced in multifamily. I spoke with my Multi-Family guru,
"the Chabes", perhaps the foremost expert on the topic in the
country, and executive chairman of the NAHB, and asked "what
gives"? He laughed, saying first, you can only examine mutli-family
starts, at the least , on a quarterly basis because of the
volatility and inconsistency of when permits are pulled. He said
there's ZERO read here...Zero, and what we will find, is most
likely by year end, we we see a trend of continued "steady
progression." He said overall, banks remain constrained, but he
could "not be more optimistic" over next few years with regards to
both single family and multifamily, as he stated,"life goes on" and
the supply/demand curve is still waaaay in the builders favor: More
housing is needed... a lot more housing.
I asked if rates were a factor, he said of course! But we're not
even close to an inflection where it affects overall demand. He
said the most likely scenario, is buyers may just buy "less" of a
house. I've been working with my intern this summer on mortgage
rates and housing prices. Thus far we've seen that the higher
correlations are with housing prices increasing;
not rates increasing
. He did say, the same loan he attained 1.5 months ago at 3.74%,
would now be 5.3%, on a $111mm portfolio, that would be approx. $2m
more in interest per year. But, he said EVERYONE, in his industry
has been anticipating this.
T-Report: Tightening Credit Conditions
Click to enlarge
Where Is the Economy Headed?
We can get 20 more Fed speakers and it doesn't really matter, as we
wrote yesterday, we have a good idea of what the Fed will do under
various economic scenarios.
The real question is what scenario is likely to play out and how
will it impact the market?
Ben Seemed More Concerned About Economic Growth
Yesterday felt like the first time in months that Bernanke seemed
worried about economic growth. Part of it may have been him
downplaying growth to keep those who don't like his policies at
bay. On the other hand part of it resonated with me because of the
repeated mentions of "credit conditions tightened" and he was
unsure of what that means.
While we have been focused on the potential impact of higher
interest rates on the economy and the housing sector, he went
Bankrate.com 30 year Mortgage Rate
We don't think we have seen the full impact of rising mortgage
rates and we do think there will be an impact. Our base case had
been that the initial rise will have convinced some buyers to buy
now. Those buyers would have been on the fence and the move higher
in rates would have been a catalyst to action.
After that initial surge, the market might have been sustainable,
but rates moved even higher. Anyone who didn't buy is likely going
to wait and see how things work out.
If you were not comfortable enough in your economic
situation in April or May to buy a house, it seems highly unlikely
that your economic condition improved faster than rates shot
We aren't saying that the economy is worse, it is definitely
better, but the move in rates is all out of proportion to the
improvement in the economy.
So far the data is mixed on housing. NAHB was surprisingly good but
that peaked in late 2005 right before the real estate crash got
going. It doesn't seem to be a very useful number in terms of
predictive powers. Starts and permits seemed very weak, which would
support our view, but that data is notoriously volatile.
Mortgage applications decreased yet again, which is a concern and
at some point you would expect a bounce given the size of the
Credit Conditions Tightening is more than Just Higher
The implication is that loans are getting harder to get. Maybe that
has rebounded already now that Fixed Income mutual fund outflows
have abated and possibly reverted to being inflows, but I don't
Many investors were limit long fixed income heading into the
sell-off. Many high yield investors ignored the potential impact of
rates even with "high yield" bonds yielding 4%. There are times
when high yield is negatively correlated to treasuries but it had
been clear that this was not one of those times. High yield had
been becoming more correlated with treasuries as spreads were tight
and the chase for yield had reached new heights. While money is
coming back, it is hesitant.
On the investment grade side, the selling pressure was more than
most thought. Hedge funds run IG risk with rate hedges so should
have been fine, but normal investors don't. Those investors pulled
money out of corporate bond funds which are yield/price based (not
spread based as is needed). The selling pressure forced spreads
wider in spite of decent economic and company specific data.
Spreads still seem "soft" relative to equities which haven't had
those flow problems.
Even CLO's have slowed and the leveraged loan market (which really
isn't a floating rate market) has come under some pressure.
So there is less lending. There isn't any real fear and the market
appears reasonably healthy (we still currently like high yield
bonds and IG CDS) but there is a hesitancy that wasn't there a
couple of months ago.
So domestically we need to watch rates and credit and see
if we get some slowdown from that. The market is not prepared for
that and it is clear from yesterday that Ben can be more dovish
than anyone thought possible without really producing a dramatic
Friday, July 19, 2013
"I should like to pay the highest tribute for the gallant fight put
up against impossible odds." . . . Admiral John Tovey, after the
sinking of the Bismarck (May 27, 1941)
Similarly, the equity markets have put up a "gallant fight against
impossible odds" year-to-date, but I digress about the Greatest
Generation as reflected in this article titled, "On D-Day - the
gift the Greatest Generation gave us 68 years ago" (read about it
). However, I have termed today as another D-Day (of sorts) in that
I think the "buying stampede" that began with the back-to-back 90%
Upside Volume Days of 12-31-12 and 1-2-13, and is now 137 sessions
in duration (a record), is ending. I have held that belief for at
least a month, if not more. As stated, the only question in my mind
is if the stampede ends with a whimper or with a BANG (read: upside
blow-off into the 1700 - 1730 level on the S&P 500). In past
missives I have stated many reasons for that view, but here is yet
another. In the stock market's decline from its May 22nd downside
reversal day, into its subsequent bottom on June 24th, the S&P
500 (SPX/1689.37) fell roughly 7.5%. Yet, the NYSE Advance /Decline
(stocks up versus stocks down) fell a lot more with a swoon of
16.6%. This is the same thing that happened in late 2007, although
I am not forecasting a decline similar to that of 2008. Rather, I
think over the next few sessions we are making a short/intermediate
"top" to be followed by the first meaningful decline of the year.
The emails I received yesterday only reinforce that view. For
example, this is one of over 30 similar emails I got yesterday,
"What would we have to see happen for you to reverse your downside
'call'?" My response was, "A 10% decline, but we have not even
gotten to this Friday's timing point;" and then I added, "Ask me
that question in 2 weeks!"
Subsequently, one stock market pundit was heard to utter this on
CNBC late yesterday, "NOTHING can stop this rally!" I don't know
about y'all, but such statements leave me looking over my shoulder.
Accordingly, I sold the last of my "long only" ETF trading
positions yesterday and actually considered buying some downside
ETF hedge positions, but decided to wait until today to see what
happens with the option "expiration expiation." Meanwhile, a couple
of technology giants missed their respective earnings estimates
overnight; and as for yesterday's Dow Theory "buy signal" (new
closing highs from the Dow and the Trannies), we have used up
soooooo much internal energy achieving it, I think it's "sell."
Even if we get an upside "blow-off," I believe there is VERY little
upside from here.
I'm feeling pretty good that I can trim some
(GOOG) (2 tranches), which is only down around 23-24 (at 886). In
fact, I'm currently net short the GOOG and do think the analysts
are giving it too much of a pass on the current results.
Again, and I repeat, the GOOG report doesn't change my long term
view. The stock still remains my favorite large-cap name over a
multi-year time frame. However, for the short term and tactical
traders out there, my view is that GOOG is at best dead money until
at least halfway through the next quarter. Upon the release of the
Moto X, I think the Motorola merger, which I still view as
brilliant, will finally start to be seen as brilliant by all the
rest of the lemmings.
In short, over the course of days to weeks, I think GOOG is a sell
or a hold at best, and I believe I'll be able to buy shares I'm
currently selling lower. Right now I'm thinking I can get entries
in the 800-850 range. Should the stock fall below 800, then I still
see very strong support between 770-785 and would be almost shocked
to see the stock trade below that range.
If I'm wrong, then I'll miss a little upside. But I've called (and
milked) GOOG very well over the last 4 years. In fact, I've batted
back the naysayers at every turn and also bought into the post
earnings dips following the weak quarters. I can always buy the
shares back on a breakout. But as I alluded to above, the other
scenario is that the stock doesn't drop much more but is simply
stuck in a dead money trade for much of the next quarter.
Bottom line: facts are facts and GOOG missed pretty badly.
Moreover, as I posted yesterday, I didn't really see a quarter good
enough to make shares rise meaningfully. As it turns out, the stock
produced a miss and the selling thus far is mild. I have no problem
selling some in here and letting the stock's trading over the
coming days/weeks show me the next entry point.
To the Barricades?
While the financial media and TV pundits are all focused this
morning on the legal rights of the various Detroit creditors, I'd
offer that Europe provides a much better template for what is
likely ahead. And in that regard I'd once again offer
In 2010 in "
The Robinhood Economy
" I wrote about the looming battle between the "faced" and the
"faceless". Needless to say that moment is here with Detroit as
faceless bondholders and city residents and employees now face off