for those wondering what's wrong with miners (besides soaring energy costs) Lance has a pretty good theory.
The Fed Panics Again With Another Liquidity Scheme
dailymarketsummary.com
Asia followed the US market’s post-Fed decline and was mostly lower overnight. Japan fell a percent. Hong Kong fell over 2 percent, and China’s Shanghai Comp fell over a percent.
Europe was up just a touch this morning, and the US futures were also higher on more rumors of an imminent Fed Christmas miracle.
Well before the open, we learned that the trade deficit expanded again in October to $57.8 bil from $57.1 bil in September. Recall that the dollar was smashed in October, yet we see that the trade deficit still rose. This is the way the J-curve works. Even as the dollar’s drop does encourage some additional exports, it causes import prices of oil and such to go up even more. The result is that the trade deficit gets even worse, not better. The markets, as usual, barely seemed to notice this data point.
Then just ahead of the open, the Fed finally broke the news on its new liquidity injection scheme. This time the scheme was going to be coordinated with the ECB, the Swiss National Bank, the BOC, and the BOE. What this amounts to is apparently a discount rate cut in drag, but the specifics are that $24 bil is to be made available to the ECB and the Swiss National Bank in order to pump more dollars into the European banking system. On top of that, the Fed plans to do 4 auctions of around $20 bil apiece, in which banks will able to bid for the additional funds (and that also probably means they will be colluding to bid one at a time in order to insure the lowest possible rate and therefore make a better spread on the money… wink, wink).
All this really does is buy more time, and if it doesn’t smooth things over for all the year-end refundings that need to be done, I suspect we could be looking at another global easing by the Fed and other G7 central banks in order to free up the interbank market and push LIBOR down.
The reaction in the markets was an upside explosion in the S&Ps of about 2 percent. Gold jumped about $5. The dollar gyrated wildly, and the bond market slumped.
We gapped up big in the S&Ps and immediately printed the high for the day. From there, we began a steady slide as people began to understand that this new Fed scheme was unlikely to solve any of the current problems.
By mid-day, we had given back virtually all of our gains, and after a small bounce in the early afternoon, the S&Ps plunged into the red to eventually even marginally take out yesterday’s lows. But before things could get ugly, a closing rebound in the final 30 minutes of the session saved a marginally positive close, sending us out back in the middle of the day’s trading range.
Volume was even chunkier than yesterday’s (1.7 bil on the NYSE and 2.3 bil on the NASDAQ). Breadth was slightly positive on both exchanges. New lows swamped new highs on both exchanges (86 to 45 on the NYSE and 144 to 37 on the NASDAQ).
The chips were mostly higher by a percent, while the equips were mostly higher by 1 to 2 percent. The SOX rose just over half a percent, although that was well off the initial highs that were seen on the open.
The Fab Four initially went nuts on the open and then gave up much of their gains. AAPL rose just over a percent, while GOOG was flat. RIMM rose over 2 percent, and BIDU rose nearly 3 percent.
The rest of tech was a mixed bag, with the NASDAQ picking up just over half a percent and well off its high of the day.
The financials were the worst performers despite the Fed’s targeted action. The BKX fell nearly 2 percent, and the XBD rose over half a percent (although that was well off its highs). BSC, GS, and MER all rose half a percent, while LEH rose a percent ahead of its Q4 report tomorrow.
The derivative king (JPM) rose half a percent. C slumped over 5 percent, and BAC fell nearly 3 percent after it said it would take another $3.3 bil writedown in Q4 and warned of further writedowns to come. BAC‘s CEO said, "the economy is definitely slowing… I think you certainly can assume results will again be quite disappointing." Elsewhere, WB said it was doubling its loan-loss provision to $1 bil for Q4 and warned of further writedowns to come (I wonder if its loan to NFI will be on that list soon?). WB slumped over 3 percent. GE gapped up with everything else but then reversed to end up just half a percent.
GM fell half a percent. AIG fell 2 percent. ABK fell 8 percent, and MBI fell over 3 percent. The subprime consumer lenders were mostly lower. CCRT fell 11 percent, and COF fell over 3 percent. ACF rose just over half a percent.
The mortgage lenders were mostly lower. CFC fell 7 percent. TMA fell 5 percent, and DSL fell 3 percent. NFI rose another percent on more short covering more than likely given the WB has given them a free pass for a month. The mortgage insurers were mostly lower. PMI fell 7 percent. MTG fell 4 percent, and RDN fell half a percent. As for the GSEs, FRE fell 3 percent, and FNM fell over 6 percent.
The retailers were mixed, with the RTH ending flat on the day. WMT fell just over a percent. TGT rose a hair, and BBY fell a hair. Tomorrow we’ll get November retail sales.
The homies bounced in the wake of yesterday’s sharp decline, but like everything else, they ended well off their highs and well below their peaks of two days ago. Most of the closing gains amounted to 1 or 2 percent, but HOV and TOL were so heavy that they actually ended down another percent.
Crude oil (Brent) jumped $4.03 to $94.02. The XOI rose nearly 3 percent to a new high for the move since its November low, and the XNG rose over 2 percent to just shy of a new all-time high. The OSX rose nearly 3 percent to a new high for the move since the November low. The XLB rose over a percent.
The GSCI popped nearly 4 percent and just 3 percent shy of a new all-time high, while the CCI-CRB jumped over a percent to another new all-time high.
The base metals were mostly lower, with the GSCI Industrial Metals Index falling half a percent. Nevertheless, it still continues to hover above its recent low and above the low of its 2-year trading range.
Feb gold opened down about $3 this morning in the US (which means that during overnight trading it had recovered virtually all of its post-FOMC losses that had occurred yesterday in the electronic market) and immediately began to rally. When the Fed’s latest liquidity scheme hit the wires, gold’s rally accelerated to as high as $822.80. For the close, we gave up some of our gains but still ended up $1.70 to $818.80.
Spot gold rose $16.50 to $813.48. Spot silver rose just shy of 2 percent, and spot platinum rose over a percent to within a freckle of a new all-time high.
The GLD Gold ETF picked up another tonne today, bringing its gold holdings to another new high of 616 tonnes.
The HUI reversed its initial gains as the equity market slumped but still managed to end up just over half a percent. However, I’d also note that today’s gain in the HUI would have been well over a percent but for a 13 percent collapse in HL after it announced another share offering. As we’ve noted many times before, HL and CDE are notorious repeat offenders for this sort of dilution. In fact, many would argue that both of these companies are basically in the business of issuing shares rather than producing precious metals.
The XAU/Gold ratio rose a freckle to 0.2134, and the HUI/SPX ratio was virtually flat at 0.2736.
Our junior basket rose half a percent. NSU led the way with a 7 percent rally after the company said that it had concluded a mining agreement with Eritrea and that Eritrean government has advised the company that its mining permit will be issued “soon”. Recall that LMC has been rumored to be set to bid for NSU once the Bisha mine is actually permitted.
Elsewhere, BAA rose a hair, while MFN and MRB both rose a percent. CGR picked up just over 2 percent. As for the losers, UXG fell of a percent, and GSS fell over 2 percent. However, both of these stocks have obviously made big moves off their recent tax selling nadirs, so I don’t find a pullback at this point to be a big surprise.
The gold shares still seem to trade as if many people are still terrified that the equity market is going to take down their gold miners in another August collapse. However, what they fail to realize, in my view, is that it’s not August. What hit the gold shares in August was fear that the system might seize up and basically there would be no bids for anything, which triggered a rush to liquidate anything and everything in a mad liquidation dash that also happened to include the gold shares.
The Fed’s actions (and other Western central banks) have made it more than obvious since then that the central banks are committed to keeping the markets functioning (which I would argue was also obvious even before that, but I’m obviously not “the market”). That doesn’t mean the Fed can solve all the financial and economic problems out there, but they certainly can keep the markets functioning if they want to.
And by pumping more money into the system to keep the markets functioning, it creates even more excess liquidity in the system that has nowhere to go. The liquidity doesn’t want to go into the US credit markets or into US stocks because it fears losses in both, and no matter how much liquidity is created, it won’t go there. The liquidity does have to go somewhere though. And at the moment, it continues to pour into the commodity markets and into gold.
As we’ve said before, this is analogous to what we saw with the 1998 bailout that led to the tech bubble and the 2000-2002 monetary response to the stock market crash that led to the housing bubble. The Fed is already being forced by the housing bust to run the “printing press”, and even more “printing” is coming (including from other central banks). The result is going to be another bubble, except this time, there’s no bubble to blow that benefits the US economy. That leaves only one outcome: a collapse in the dollar and the fiat dollar-based monetary system, more inflation, and an eventual “bubble of all bubbles” in the likes of gold.
But returning to the short-term for the gold complex, the metal continues to work its way higher, while the shares seem to be capped to some extent by the volatility in the equity market. I’m not sure what’s going to change that, but higher gold prices certainly won’t hurt. The low in the HUI and the vast majority of the gold shares continues to be the mid November low, and repeated tests of the breakout above the 2006 peak since then have held every time. That’s about as bullish a technical base as once can build. Likewise, the XAU/Gold ratio has now made an apparent higher low above the November low down near 0.20.
I’m not sure what the shares are waiting on (it’s obviously not the metal), but I still expect a rally to begin imminently. And when it does, it’s a good bet that many that are sitting on the sidelines due to fear of the stock market will be left behind, just as we saw in August. That’s the wall of worry that the gold shares climbed then, and I suspect the same is going to happen again. I just don’t know exactly when?
The US dollar index fell just a hair to 76.144, and the trade-weighted dollar rose a hair to 99 and a new high for the week.
The yen fell over a percent. The euro rose half a percent. The AUD rose over a percent, while the CAD and pound both rose half a percent. The dollar/yuan was also allowed to slide a touch to another new all-time low of 7.372.
Treasuries were lower, with the majority of the damage occurring in the long end. The yield on the 10yr rose 9 bps to 4.057%. The 2/10 spread narrowed 9 bps to +96 bps, while the 3M/10uyr spread widened 17 bps to +125 bps. The yield on the 3M bill fell 4 bps to 2.85% and another new 52-week low.
The 10yr junk spread to treasuries widened 17 bps to 512 bps over treasuries and just shy of its recent peak.
Yesterday-today’s whipsaw in the equity market is another perfect example of why I believe the best position to have with respect to equities at the moment is “no position”. With the Fed easing and defending the system, it’s too difficult to be short stocks without the risk of being run over when the Fed suddenly pops out of its box with a surprise. And one certainly doesn’t want to be long the general market given the stagflationary environment.
Again, how much more plain can it be that the Fed will inflate regardless of the inflationary costs? And now other central banks are now joining in the fight as well? Don’t fight the Fed. Simply bet on more inflation… Simply buy more gold, as well as more gold and oil shares.
My best guess continues to be that major equity indices may bounce around a lot into year-end, but they’re unlikely go anywhere in a hurry (either up or down until sometime in the New Year). And if the Fed happens to surprise the market with an intermeeting ease, we could even end slightly higher. Barring that, traders are likely to simply get chopped up over the next couple weeks, just like they were over the past two days.
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 is a registered investment advisory firm in Dallas, Texas. The firm regularly buys, sells, or holds securities that are the subject of Mr. Lewis’ 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 firm in its capacity as an advisor. 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 advisor’s clients, and investment decisions made on behalf of clients 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. |
