lewis thinking out loud
12/8/2005
www.dailymarketsummary.com
Gold Continues To Fly
Asia was mostly lower overnight, with Japan finally tumbling 2 percent. Europe was up just a hair this morning, and the US futures were higher as usual.
We gapped up on the open on what I presume was excitement around TXN after it raised its revenue guidance slightly overnight. We then quickly filled the gap as we fell back to unchanged in the S&Ps, where another rally began that carried us to a new high for the day around noon. That was the peak for the day. The remainder of the session was spent slowly sliding back to the morning’s lows. We took out the lows in the last hour only to recover back to virtually unchanged by the close. The NASDAQ was not so lucky, however, and went out down on the day in what appeared to be some angst ahead of INTC’s midquarter update tonight. Volume picked up once again (1.7 bil on the NYSE and 1.9 bil on the NASDAQ). Breadth was slightly positive on both exchanges.
The chips were mostly lower by 2 to 4 percent. As I said above, TXN tightened up its revenue range guidance slightly overnight by a little over a percent. TXN opened higher as a result and then closed down nearly 3 percent in the wake of the news, as nobody seemed too impressed. NSM won the beat the number game when it reported intraday but was also faded, as NSM ended down over a percent. INTC fell 2 percent ahead of its midquarter update tonight. The equips were also lower but were down less than a percent for the most part. The SOX fell 2 percent.
The rest of tech was mixed and rather unremarkable.
The financials were mixed. The BKX fell a hair, and the XBD off just a touch. The derivative king rose half a percent. C fell half a percent, and BAC fell a touch. GE fell over half a percent.
GM fell 5 percent, reversing the bounce that occurred yesterday when the company reportedly offered a board seat to Captain Kerk. AIG was flat. ABK rose a touch, and MBI fell over half a percent. The mortgage lenders were mixed and mostly up or down a percent or so. FRE fell over a percent, and FNM fell over half a percent.
The retailers were mixed, with the RTH off half a percent. TGT fell a percent, while BBY rose just over 2 percent.
The homies began the day lower but recovered to end up a percent or so across the board. I presume the recovery was due to the drop in long-term interest rates today, but who knows? The reason they initially opened down was because both TOL and HOV guided down 2006 EPS, citing a cooling housing market (shocking isn’t it). Incidentally, we also learned from the latest flow of funds data that US household mortgage debt surged to 65.1 percent of GDP in Q3 of 2005. Consequently, for the first time on record, mortgage debt is equal to non-financial corporate debt. But, remember, there is no housing bubble according to the Fed (wink, wink).
Crude oil rose $1.45 to $60.66 and continues to bounce. Natural gas, however, boomed out a 10 percent jump to a new high. The XOI rose over a percent and continues to move sideways. The XNG rose nearly 2 percent in response to the new high in natural gas, although the XNG still has a ways to go to get back to its September peak. The OSX rose over 3 percent to a new high. The JOC was flat, and the CRB rose almost 2 percent. If the CRB is going to fail, it better run into trouble soon. Otherwise, new highs appear to be in order. The XLB fell just a touch.
Gold opened down 60 cents or so in the US and proceeded to slide down to as low as $515.80 before then rebounding sharply and rallying into the close to end on its best levels of the day, up $4.90 to $522.70 and another new high for its sixth day in a row. $5 a day keeps the bear away, and that’s certainly the case here, as gold continues to go vertical.
In the gold misinformation department, Heehaw has begun talking about gold several times a day now. That’s another thing that bothers me about the metal right now, but that’s not my point. Today, Heehaw interviewed a self-proclaimed gold and natural resource “expert” named Frank Holmes, of US Global Investors. When asked all of the reasons to be bullish on gold (where was this guy 5 years ago when gold was $250?), Holmes claimed that he was bullish because, among other things, China has committed to and is buying gold with 2.5 percent of its trade surplus. Huh? Since when? This reminds us of why we should not watch Heehaw, because this statement is in fact completely and totally FALSE.
As we have said before, the Chinese central bank may buy gold, but at present it’s not buying any and hasn’t for many years. I don’t mean to pick on Holmes (I’m sure he’s a nice guy and all), and he's not the only one guilty of this sort of thing recently when it comes to gold. But I’ve seen him on the tube repeatedly of late spreading nonsense like this, and Heehaw’s talking heads are apparently too dense to call him on it. Either he’s “exaggerating”, or he simply doesn’t know what he’s talking about, which is probably even worse.
The point is that there continues to be a lot of misinformation circulating about gold both on websites and even in the media. I urge subscribers to take everything they read and hear with a grain of salt and look into the facts before making any investment decisions. Whenever something is as frenzied as gold is right now, many people inevitably seem to just start making things up to promote whatever position they are touting. And for what it’s worth, I’ve also found that this sort of misinformation and wild speculation tends to mark extremes in markets that often result in important inflection points too.
As for the shares, the HUI rallied over a percent and back to yesterday’s intraday highs. The gold shares still don’t seem to believe gold’s move for some reason, as investors continue to distribute the shares into the metal’s rally. The juniors were also higher, although the moves were mixed once again. NSU was the biggest leaper on my recent buy-list, as it jumped nearly 10 percent.
The more I look at the valuations in the junior sector right now, the more bullish I am getting on them. Even if gold were to correct back to $450 and consolidate for a while, which certainly seems reasonable to me, the junior golds could have dramatic rallies from their depressed valuations. I can only speculate as to what is holding back the seniors and intermediates that are primarily responsible for the moves in the HUI, but I do know that tax-loss selling is most definitely holding back a lot of the junior names right now.
Once we get past the end of the year, we’re likely to see big jumps in the juniors even if gold has a big correction. There is even a historical precedent for this occurring. Back in 1996, gold briefly broke out to new highs and was rallying in all currencies (sound familiar?). The juniors continued to rally even after the metal and seniors had peaked out together. That breakout in gold and the XAU (which made a marginal new high at the time) turned out to be an important peak in gold and the seniors, but the junior names had big runs that continued for several more months until they too finally fell because the price of gold continued to slide, and as we know now, eventually made new bear market lows in the years to come. The current situation is a little different because gold is not just bouncing in a bear market like it was back in 1996, and is likely to merely correct, if anything, rather than collapse as it did in 1996. But the cheap valuations and the potential for takeovers do make buying the juniors at this point pretty compelling, even though there appears to be a big risk in my view that gold could have a big correction at any time.
On the subject of takeovers in the junior space, consider what gold miner AEM’s CEO said today:
Consolidation is a theme that will continue because the real question there is reserve replacement. As an industry, we spent a lot of money on exploration the last few years. We haven't found a lot of big deposits. You're seeing senior companies having an extremely difficult time replacing reserves because they have got to replace 5 million to 7 million ounces a year. Those deposits are not easy to find.
The only way that the seniors and intermediates can realistically grow reserves is through buying the juniors, and that takeover activity should give the sector a nice lift early next year once we’re past tax-loss selling, regardless of whether gold has a correction or not. I can’t say that for the intermediates and seniors, because they could be vulnerable to falling back into the HUI’s 2-year trading range if gold has a big setback. But after a horrific 2-year bear market in the juniors, I tend to think the juniors may have bottomed recently.
I know that may sound a little strange coming from someone that is still pretty cautious about the recent run-up in gold and the larger mining shares of the HUI at the moment, but using similar valuation analysis is also what tipped one off back in 2003 that the gold shares had potentially topped when many were discounting $500 to $600 gold already (where gold is now, some two years later). Here we have junior shares that are discounting the exact opposite. In essence, the worst-case scenario for gold (a trip back to the $400-$450 area and a long period of consolidation, in my opinion) is already discounted into them.
We’ll see what happens, but my bet continues to be that gold is going to have a big correction here soon (probably after the FOMC next week or at year end). The HUI could also get hit pretty hard in the process, and if history is any guide, it will top out in front of the metal. But I don’t think the junior shares will make new lows on such a correction if it occurs. If I see that happen, I plan to add aggressively to my current list of junior names as well as others, for whatever that is worth, because I think there’s a high degree of probability that the juniors will begin rallying even though the metal may do nothing for a while once the current meltup runs out of steam.
The first leg up in the gold shares was all about the bigger senior and intermediate shares. The juniors lagged until the last year or so when they finally began moving in 2003. But the next leg up in the gold shares is likely to be more about the juniors than the larger cap shares in my opinion.
The US dollar index fell nearly a percent and back to just shy of last week’s lows. The yen rose half a percent, and the euro rose nearly a percent. If the dollar can’t rally off the FOMC next week, it’s bear market rally days may be over. We shall see… What would that mean for gold and commodities? Well, considering they’ve been rallying with the dollar all year, they’ve already discounted a fair amount of further depreciation in the buck. So, it could be that the big wrinkle here is that gold and the CRB actually correct just as the dollar finally rolls over once again because the market has already discounted the next leg down in the buck. I don’t know if that’s going to happen or not, but I do think it’s something that we want to keep an eye out for.
Treasuries rallied once again, with the yield on the 10yr falling to 4.46%. The 2/10 spread narrowed half a bp to 10 bps.
The 10yr junk spread to treasuries narrowed 3 bps to 333 bps over treasuries.
Stocks once again dipped a bit today, and if INTC drops a bomb tonight, we might even see them sink a little lower tomorrow. But I still think the odds are that we get one more push in the S&Ps back up to near the highs after the FOMC. At the moment, the market is still being ruled by year-end dynamics and gamesmanship. Bears will have to continue to wait patiently until the new year before there’s a chance to draw blood, in my opinion.
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.
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