It's been two months since I posted Lance Lewis. Tonight's is superb.
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Print Version
May 2, 2007
The Gold Shares Roar To Life And Stocks Melt Up Once Again Too
Asia was mostly higher overnight. Japan rose half a percent, and China’s Shanghai Comp rose 2 percent to another new high. Europe was up half a percent this morning, while the US futures were off of their overnight highs but still up just a touch.
We opened flat in the S&Ps and immediately began a rally that would turn into a Harrier jet takeoff-sort of move over the next hour or so that totaled about a percent. After a small pullback, we surged again to another new high for the day and finally seemed to tire out late in the day, as we spent the last hour giving back most of the second push to new highs. Nevertheless, we still ended near the very best levels of the session, with the S&Ps making another new multiyear closing high.
Volume backed off a little (1.7 bil on the NYSE and 2.1 bil on the NASDAQ). Breadth was 3 to 1 positive on the NYSE and 2 to 1 positive on the NASDAQ. New highs swamped new lows on both exchanges (237 to 10 on the NYSE and 134 to 33 on the NASDAQ).
The chips were higher across the board by a percent or so. The equips were mostly higher by 1 to 2 percent. The SOX rose nearly a percent.
The rest of tech was mostly higher but basically a snoozer once again.
The financials were mostly higher. The BKX rose a third of a percent, and the XBD rose over a percent. GS rose half a percent, and MER rose a percent. The derivative king rose half a percent. C and BAC both rose a touch, and GE rose half a percent to another new high for the move since its April low.
GM jumped 4 percent despite its real business (its financial arm) GMAC reporting a loss of $305 mil due to a $910 mil loss at its ResCap mortgage unit. AIG rose half a percent. ABK rose half a percent, and MBI rose a third of a percent. The subprime consumer lenders were mostly higher. ACF rose over a percent, and COF rose half a percent. CCRT rose over a percent.
The mortgage lenders were down across the board, except for CFC, which rose a percent. LEND fell 2 percent. AHM fell 3 percent, and NFI fell nearly 11 percent. The mortgage insurers were higher. MTG/RDN rose a percent, and PMI rose a percent. FRE rose half a percent, and FNM rose a percent.
The retailers were mixed, with the RTH picking up just a touch. WMT fell a hair. TGT fell over a percent, and BBY rose just a touch.
Apparel and retailer Kenneth Cole (KCP) warned that Q2 earnings would be about 50 percent below the consensus. KCP fell 4 percent on that. Again, is this another data point suggesting that the consumer is beginning to cut back? Coming on the back of LIZ yesterday, I want to say “yes”, but you can bet your bottom dollar that the Fed is watching this sort of thing closely too, which could explain why the market didn’t punish KCP all that much today.
The homies were higher across the board by 1 to 2 percent. BLDR fell 2 percent. Here in the Dallas area (where the housing market is a little “better” than the rest of the US at the moment), BLDR has gone to 3-day work weeks in order to cut costs. I’m not sure how they expect hourly wage people to live off that (management of course has not cut their own salaries), but it’s also a sign of how desperate the company is. BLDR managed to report a penny in earnings for Q1, but it’s a good bet that the losses will be showing up soon.
For those that care, I have no position in the stock, but I hope to be short it at some point soon, Perhaps sometime after the Fed potentially eases next week?
Crude oil fell 72 cents to $63.68. The XOI nevertheless rose over a percent to just shy of a new high. The XNG and OSX both rose over a percent to just shy of a new high. The XLB rose over a percent.
The GSCI fell a percent, and the CCI-CRB fell a hair.
The base metals were mostly higher, with copper picking up another half a percent. Of course once this strike in Peru ends, we can probably expect copper and other base metals to come in some (at minimum).
June gold opened down about $5 this morning in the US, apparently in reaction to another bounce in the US dollar index, which made a new high for the week this morning. After the yellow metal dove to a new low for the move since the recent peak and to as low as $670, it rebounded to go out at the very best levels of the session and down just $2.20. Spot silver rose just a hair.
The HUI ignored the metal’s decline basically from the opening on and jumped over a percent to go out just off the very best levels of the session.
The gold complex overall was helped by ABX reporting a 30 percent jump in earnings (ex-losses related to covering its hedgebook) and announcing that it had completely covered all of its remaining corporate hedges. ABX also pledged to not hedge its gold production for at least another decade, which obviously says something about where their heads are at with respect to the gold market. And whether you hate the company for having hedged during gold’s bear market (as many gold bulls do), one has to admit, they’ve been pretty sharp operators. And the stock’s performance of the past 25 years shows it.
ABX does still have about 9 mil oz hedged, which is related to two projects that are still in the development stage (the hedges were a condition of bank financing). But basically the company is completely unhedged with respect to production going forward. Besides, a 9 mil oz hedge out of 123 mil oz in P&P reserves isn’t anything to be concerned about anyway. In fact, if I wasn’t pretty well already fully invested at this point, I would have bought some ABX today. ABX jumped 6 percent on the back of all that and back to its April peak.
Given that the “3 pigs” (which is what I like to call senior miners GG, ABX, and NEM due to their poor price performance over the past year) have been the dogs holding back the gold indices such as the HUI and GDX. The fact that ABX finally got into gear today is a major plus for the entire gold complex. GG also rose over 2 percent today.
Now, if we can just get NEM to crawl out of the garbage can. Interestingly, Bloomberg did carry a story this morning that cited takeover/LBO rumors around NEM. Who knows if these rumors are true, but given my comments yesterday about the company being so undervalued and hated, I decided to buy some December deep out of the money calls on the stock, especially since the calls were selling for well below “fair value” (people hate the stock so much that they are apparently thrilled to give them away at any price). NEM rose just over a percent.
As for our junior basket, it rose nearly 3 percent, led by 3 percent gains in MRB, CGR, NSU, and MFN (which also made a new closing high). GSS was the dog of the group and only rose half a percent.
We’ve been looking for the gold complex to resume its rally after the dollar index made some sort of attempt to bounce at the critical 80/81 area. That bounce (albeit pretty pathetic) began about 4 trading days ago and continued today with a move to a new high for the week. As if on cue, the metal had a flush down to just below its 50 dma to a new low for the move on the back of today’s initial bounce in the dollar index. However, gold obviously quickly recovered.
Meanwhile, the shares never even seemed to notice that the metal was down and rallied the entire session today, giving us one of the strongest positive divergences we’ve seen in long time. Admittedly, this indicator has had a spotty record of late, but I can’t recall the last time that the gold shares were this strong in the face of both a decline in the metal and a rally in the dollar.
Thus, it could just be that the rally we’ve been expecting to begin in the gold complex once the dollar’s attempt at a bounce was out of the way is in fact now beginning and beginning with a classic positive divergence between the shares and the metal on the low of the pullback.
Let’s see if we get any follow through tomorrow, but I think there’s a good case to be made that over the next 5 to 7 trading sessions, the shares are once again about to challenge the HUI 370 resistance line and the metal is about to challenge the $700 spot mark.
Regarding sentiment in both gold and the gold shares, I found the following extremely interesting. Thanks to a friend pointing it out to me today, I discovered that we can track the pageviews that occur on the popular gold website kitco.com. Take a look at the following chart of kitco.com pageviews over the HUI for the past several years. Notice how the spikes in pageviews (when excitement among gold bulls is at its highest), tend to mark peaks in the gold shares?
Today, however, we can see that sentiment among gold bulls according to this indicator is actually near a multiyear low, despite many gold shares being right off their all-time highs, the dollar index sitting at just shy of all-time lows, and gold making a new all-time monthly high close on Monday at just shy of $700. I’d say that’s a pretty powerful contrarian argument that “being bullish” on the gold shares at the moment is “right”.
Along with the XAU/Gold ratio, which bottomed out at 0.2 back in March, this sentiment indicator once again appears to confirm that not only are the gold shares set up for a big advance, but also that the move is still in its early stages. Obviously, I will be monitoring this indicator rather closely going forward as well.
Looking ahead to the economic data that we have tomorrow and Friday and what it could mean for the gold complex. Tomorrow, we’ll get the Services ISM, and with 80 percent of US nonfarm employment being service related (manufacturing is only about 13 percent), tomorrow's Services ISM is much more important than yesterday's manufacturing ISM with respect to what the Fed is going to do next week.
Then on Friday, we obviously have the employment data. Both of these data points are likely to disappoint, in my view (think about all the mortgage brokers and real estate-related jobs that have been lost over the past couple months, and we all know that GDP growth collapsed in Q1).
Should both of these data points come in on the weak side like I expect, the odds will greatly increase that the Fed will panic next week and go ahead and try to ease even though it shouldn’t given that inflation is still building and will only be made worse by a rate cut.
Given the inflationary implications of a rate cut and the fact that it’s unlikely to stimulate the economy that much, we’re still left with stagflation, although the inflation component would now be made worse (not to mention the damage that would be done to the dollar).
Thus, such a rate cut could be a catalyst for a monster move up in the gold complex, even though the dollar index might actually bounce for a bit on that based on the hope that the US might avoid a recession. But if long-term interest rates move up as a result of the Fed cutting rates at the short end, that hope is likely to be eventually dashed as well.
The Fed has already opened the door to easing with March's "neutral-ish" statement. Note the Fed also did another $1.3 bil coupon pass today as well. That's not the sign of a Federal Reserve that is worried about the dollar or inflation. Remember, these guys have sat on their hands since August while the equal-weighted CRB (CCI) has made 2 new all-time highs and the dollar has hopped off a cliff (something that is inflationary by definition). Let's also not forget that money supply is surging once again.
Can it be any more obvious where the Fed’s head is truly at? Like most things in life, actions speak louder than words, and the Fed’s actions say quite clearly that when put to a choice, the Fed will risk inflation potentially accelerating (while hoping that it turns down of course) in order to try and save the economy from recession and get in front of any potential systemic risk to the banking system as a result of any further spread of credit rot emanating from the subprime (and now Alt-A) mortgage meltdown.
The bottom line is that if the economic data over the next couple days is weak, I would expect the gold complex to rally in expectation of the Fed potentially easing next week (not to mention the death knell it would sound for the dollar).
The US dollar index bounced just a touch to a new high for the week. The yen fell a third of a percent, and the euro fell a hair. The buck is still trying to bounce, but what a pathetic bounce it is…
Treasuries were lower, with the yield on the 10yr rising to 4.642%. The 2/10 spread narrowed to virtually flat. The yield on the 3-month T-bill was unchanged at 4.755% and continues to hint that a Fed rate cut may soon be around the corner.
The 10yr junk spread to treasuries narrowed 1 bp to 289 bps over treasuries.
The meltup in stocks continues. I guess that’s what happens when liquidity (i.e. - too much confetti in the system) is desperately searching for a home? At the end of the day, that’s inflationary, and that inflation will eventually find a home in gold, as the ultimate store of value.
But for now, the chickens continue to run around with their heads cut off chasing anything that moves in the stock market, with the leaders continuing to be the stocks that benefit the most from a weaker dollar and sales to stronger overseas markets.
Purely US domestic stocks are underperforming, but they’re not exactly going down. I can only assume that this is due to the expectation that the Fed will soon be handing out rate cuts like candy (just as it always does when the economy begins to stumble) and this will solve all the problems in the US economy (even though it won’t).
A rate cut next week (should we get one) will no doubt be celebrated by the stock market initially, but if the bond market frowns on such a cut (like I would expect it to), the developing stagflationary environment in the US may finally cause a problem for the entire US stock market, even though it might not be right away.
In the meantime, the stock bulls are still overdue for a spanking, even if it’s just a pullback. After all, for the Dow to rally 21 out of 24 days is a bit historic. In fact, according to things I have read elsewhere, the only time in the past that this has occurred was in the summer of 1927 and then again in the summer of 1929. Obviously, the latter occurred several months before something extremely ugly occurred, namely the crash of 1929 and the kickoff to the Great Depression.
Perhaps a drop below 50 in tomorrow’s Services ISM will be the catalyst for the stock bulls to finally blink? I don’t know, but I’m sure not going to stand in their way. In the meantime, the stagflationary environment should allow for the gold and oil shares to rally regardless of what the broader stock market does, just as we saw during the stagflation of the 1970s.
While I cannot provide personalized investment advice or recommendations, I welcome feedback and observations by subscribers. You can email me at Lance Lewis.
Disclaimer: Lance Lewis periodically publishes columns expressing his personal views regarding particular securities, securities market conditions, and personal and institutional investing in general, as well as related subjects.
Mr. Lewis is the president of Lewis Capital, which manages a hedge fund in Dallas, Texas. This fund regularly buys, sells, or holds securities that are the subject of his columns, or options with respect to those securities, and regularly holds positions in such securities or options as of the date those columns are published. The views and opinions expressed in Mr. Lewis' columns are not intended to constitute a description of the securities bought, sold, or held by the fund. The views and opinions expressed in Mr. Lewis' columns are also not an indication of any intention to buy, sell, or hold any security on behalf of the fund, and investment decisions made on behalf of the fund may change at any time and for any reason. Mr. Lewis' columns are not intended to constitute investment advice or a recommendation to buy, sell, or hold any security. |
