Dear PGM Capital Blog readers.
In this weekend blog article we'll elaborate on the approaching inevitable reversal of the capital markets in the West.
The stock markets in the West, specially those of the USA are dangerously stretched in terms of valuation and sentiment, and they do not accurately reflect the country's economic situation and fundamentals such as earnings and sales growth.
It is important to care if a stock market is overvalued or that it doesn't correlate with the Economic reality of a country, because those who sell near the top before the market drops preserve not just their initial capital, but their winnings from the over five-year bull market. Those who fail to sell, risk losing not just their gains, but quite possibly a material chunk of their initial capital.
Another reason to care is that those who correctly bet on a market's reversal will profit handsomely, just as those who bought at the bottom of a decline profit.
That few manage the apparently simple task of making three accurate predictions in a row (and being confident enough in the technique to leave all the chips on the table), is powerful evidence that no such technique works consistently enough to last even three trades.
The following three basic tools can be useful in prognosing of a trend reversal in the capital markets:
- FUNDAMENTAL ANALYSIS:
Fundamental analysis involves analyzing the characteristics of a company, such as; earnings, sales, lifecycle of product mix, valuations, financial conditions, in order to estimate the value of its shares.
- TECHNICAL ANALYSIS:
Technical analysis is a method of evaluating securities by analyzing statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity or trend reversals.
Cycles do not presume to predict the causes of trend reversals; they only reflect that such reversals often follow patterns over time. There are many cycles of varying durations such as:
- DOW to GOLD cycle:
The DOW to Gold ratio tells you how many ounces of gold it would take to buy the Dow on any given month. Previous cycle lows have been 1.94 ounces in February of 1933 and 1.29 ounces in January of 1980 as can be seen from below chart.
- Housing Market cycle:
As can be seen from below chart, housing prices seem to move in 18-year cycle.
- The Exter pyramide,
developed by John Exter says, that in times of crisis, depending upon the level of crisis, money moves down the triangle. Small business (In today's world probably derivatives) and real estate are the first to get hit.Money flows to commodities then from it to bonds and T-bills. And when bonds and T-bills start to become risky, it finally ends up in Gold.
- The Kondratieff cycles:
More than eighty years ago, a prominent Russian economist, Prof. Nikolai D. Kondratiev described and theoretically substantiated the existence of grand
(45-60 years) cycles of economic development.
The internal dynamic of the cycles (named K-cycles after him) and the principle of fluctuations is based on the mechanism of accumulation, concentration, dispersion, and devaluation of capital as a key factor of the development of the market (capitalist) economy.
- DOW to GOLD cycle:
CENTRAL BANKS INTERVENTION:
In the past six years of unprecedented central banks intervention, the belief that we’re in a “New Normal” that’s immune to downturns has taken hold—mostly because every downturn has been reversed by some additional central bank monetary intervention.
Central banks intervention seems to have generated a new cycle: five years of a roaring bull market that reaches bubble heights and then crashes over the following two years.
If the New Normal is truly permanent, then cycles and technical/fundamental analyses have been mooted: they no longer work because the central banks can push stocks higher essentially forever.
PGM CAPITAL COMMENTS:
Below Economic data published last week shows that the USA Economy isn't in a good shape, as the country's policy maker wants us to believe:
- Manufacturing PMI Posts the Biggest Miss on Record:
Flash Manufacturing PMI posted the biggest estimate miss on record. The index unexpectedly declined to 56.3 in July, down from 57.3 in June (revised down from 57.5), while it had anticipated to rising further to 57.5.The most concerning part of all of this is the fact that new exports have weakened while manufacturing production has fallen as input costs have surged and the employment component has tumbled to a 10-month low.
See below chart below chart for details.
- New Home Sales Collapse by 20% from May to December 2012 Levels:
New Home Sales plunged by -8.1% to 406K in June while it had anticipated to decline around -5%. What is more interesting here is that May's figures have been revised down by more than 10%, from 18.6% to 8.3%.
See below chart for details.
Two important questions most investors will ask themselves are:
- Are these misses in the USA Economic figures due to the tapering of the FED Bond purchasing?
- Is there some reason to believe that the stock markets can loft ever higher, other than central bank intervention?
The one fundamental metric that matters is profits. Let’s look at corporate profits and the S&P 500 (SPX):
It appears the stock market is responding to central bank intervention to the degree that the interventions have enabled corporate profits to soar. How has intervention boosted profits? One easy way is that by lowering the cost of credit to near zero, corporations have booked the savings in interest payments as profits.
The question of the New Normal boils down to: Can corporate profits continue soaring? Or perhaps more to the point: Can central bank intervention keep pushing profits higher? Since interest rates are already near 0%, the answer seems to be that the fruits of Quantitative Easing and Zero Interest Rate Policy have already been picked, and there is little more profit to be gained from these policies.
Below chart shows that corporate profits have rolled over in the first quarter of 2014:
And there is a number of other reasons to suspect the New Normal market is stretched. As can be seen from below chart, bearish sentiment is low, and bullish sentiment is at multiyear highs, which are both good contrarian indicators.
Other conventional metrics of market activity such as corporate buybacks, mergers and acquisitions, issuance of junk bonds, margin debt, etc. are also at extremes.
A continuance of the New Normal requires these extremes to become even more extreme, with no blowback (unintended consequences) or snapback.
Some analysts also see the emerge of inflation as a precursor to a market correction.
Two basic drivers of inflation are the fact that wages are rising and that bank credit since mid 2012, has started to grow again as can be seen from below chart.
It will be interested to hear the comments of USA policy makers on the above mentioned fundamental Economic data of the country.
Will they try to blame these soft data to the June weather as well?
Will the FED Chairlady Mrs. Yellen, label them as noise as well?
The last extreme to consider is volatility, which has slipped to multiyear lows on complacency born of a belief that central banks can enforce the New Normal of ever-rising markets at will.
The Big Questions are:
- Is the New Normal enforceable even as markets reach extremes?
- Is the faith in the central banks’ power to bend markets to their will just the latest manifestation of hubris?
No one knows at the moment. But there are numerous persuasive reasons to be skeptical of the New Normal and the utmost faith it places in the notion that markets are in a permanent state of low volatility and rising profits and therefore can only loft higher.
Last but not least is the question whether the "New Normal" isn't enforceable and the rule of physics - that everything that rises artificially will come plunging down - is applicable to the USA Stock Market
History shows us that all market crashes have happened in the months of September and October. Due to this can we expect this great reversal or even massive crash of the markets to happen this fall?
Keep in mind that regarding capital markets past history is no guarantee for future performance and that the market can remain longer irrational than you can remain solvent!
Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you the signs based on which we may conclude, that the precious metal bear market that started in April of 2013, may be coming to an end.
After the massive decline of the gold and silver price in 2013, which led prices to as low as respectively US$1,180.00 an ounce for Gold and US$ 18.68 an ounce for silver, a number of indicators might suggest that the bear market for precious metals might be ending.
In this article we'll analyse the following key points and their effect on the price of Gold and other precious metals.
As can be seen from below chart, the price of Gold dropped to US$1,180.00 an ounce for a few minutes on 28 June 2013 but has been trending up ever since, reaching as high as US$1,433.00 an oz, in August of 2013.
Another selling wave followed and gold dipped to US$1,182.00 an oz, on 31 December 2013, but again, bears failed to break through and gold took off toward US$1,392.00 on 17 March 2014. Since then, gold has been easing some of its gains by dropping to as low as US$1,240.00 in June of this year and to as high as US$1,332.00 on July 1st of this year. On Monday July 14, someone dumped US$ 1.37 billion in Gold futures, causing it to have its biggest drop for the year, but on Thursday July 17, geopolitical tension regarding Malaysian flight MH17, that crashed when flying over Ukraine, pushed the price as high as US$ 1,324.46 an ounce as can be seen from below chart
Global tensions (Ukraine, Iraq, Russia, Libya, Syria) showed how gold remains a safe haven asset. Recently, there was a massive number of stops that were triggered on panic buying on June 19, and July 17 2014, when respectively Iraq asked the USA for air support against insurgents and when Malaysia Airline flight MH17, was shot down over Ukraine with 295 people on board.
For centuries Gold has been considered as the safe haven in time of political tensions.
INFLATION EXPECTATIONS ON THE RISE:
Inflation expectations in the USA are on the rise and the tensions in the oil rich Middle East, will put an upside pressure on Oil prices which will function as tail wind for inflation in the World.
Due to weather conditions, climate changes, life-stock & crops deceases and increase of the world population, food prices have risen the most this year, since 1990.
Although, both food and energy are excluded from the core inflation, indirectly they both have put an upwards pressure on the core CPI.
As can be seen from below chart the USA core CPI has risen in June, to its highest level in two years and above the 2 percent target of the FED.
PGM CAPITAL COMMENTS:
As can be read from the above analysis, the fundamentals for Gold are very strong.
From a technical point of view, as can be seen from below chart, Gold has failed to break down significantly from the tight coil pattern it created over a 2-month period.
A price US$1,280.00 an ounce will be an important level going forward for gold since it represents resistance from the coil, and is also where the 50-day moving average sits currently. If gold can surprise the bears to the upside and complete the failed breakdown things could get interesting.
What's even more interesting than gold though is what has happened in the mining stocks. The Market Vector Gold Miners ETF (NYSE: GDX) and Market Vector Junior Gold Miners (NYSE: GDXJ) experienced only two-day breakdowns from their coils.
These breakdowns occurred on high volume, but the buyers overwhelmed the sellers after merely two days as can be seen from the technical chart of the Market Vector Junior Gold Miners (GDXJ).
In a healthy gold market you want to see gold stocks outperforming the metal, and this failed breakdown in gold at the end of May is starting to look like it is forming a launchpad for a continued move higher in gold and gold stocks.
Regarding silver, when looking at the Silver data of "The Commitments of Traders "(COT) of the US Commodity Futures Trading Commission (CFTC), we see that Non-Commercial Longs increased by 24% in the first week of July; however, shorts tumbled by almost 60% in two weeks only while the Net Long/Short ratio, increased by 4000% from a near-zero figure to a 40,299 contract.
See below chart for details.
Looking back at its history, it seems silver might be preparing for another bull move, like the one of 2010-2011.
In 2010, Silver Longs reached a record high in October 2010 when the price of silver was at US$21.40 an ounce. Silver advanced significantly in the following months, reaching a record high at 47.90 (weekly close) on the week of April 29 – 2011.
Please keep in mind, that past performance of a security or commodity is no guarantee for its future performance and like John Maynard Keynes said:
'The market can stay irrational longer than you can stay solvent."
Last but not least, before following any investing advice, always consider your investment horizon and risk tolerance and financial situation and be aware that prices of commodities, precious metals and the stock of their miners can be very volatile.
Keep also in mind that prices don't move in a straight line and that sharp corrections may happen in the short term.
Dear PGM Capital Blog readers,
In this weekend's blog edition, we want to discuss with you, why Investing in Canadian Oil Sands Ltd (TSX:COS) can be so lucrative.
Canadian Oil Sands Limited, was founded in 1995, by PanCanadian Petroleum - now Encana Corporation (TSX:ECA) - and is headquartered in Calgary, Canada and generates its income from its oil sands investment in the Syncrude Joint Venture.
Syncrude operates an oil sands facility and produces crude oil through the mining of oil sands deposits in the Athabasca region of northern Alberta, Canada.
The Athabasca deposit is the largest known reservoir of crude bitumen in the world and the largest of three major oil sands deposits in Alberta.
As of January 2, 2007, the company holds a 36.74% interest in Syncrude, which is the largest stake of any of the joint owner as can be seen from below chart.
Syncrude produces about 100 million barrels of oil each year from its proven and probable reserves of 4.5 billion barrels with contingent and prospective resources of at least that amount again.
As can be seen from below chart, the shares of the company have earned high returns on equity for many years, averaging 24% since 2001.
Based on its high returns, the shares of the company have also outperformed the Toronto Stock Exchange for the past decade by a wide margin as can be seen from below chart.
PGM CAPITAL COMMENTS:
As can be seen from below chart, Canadian Oil Sands can be seen as a life annuity since it is likely to be an oil producer for the next 100 years.
We believe shares of Canadian Oil Sands will continue to outperform for many years to come.
At its closing price of CAD 22.93 a share of last Friday, July 11 and annual dividend of CAD1.40 a share the shares of a company offer a sustainable yield of over 6%.
As a producer of solely light sweet crude oil, Canadian Oil Sands is a pure play on long term trends in oil prices.
Since its costs are in Canadian dollars, Canadian Oil Sands benefits from a lower Canadian dollar in relation to USD and Euro.
Canadian Oil Sands is highly leveraged to oil prices and estimates that every US$1 per barrel increase in the WTI prices adds US$25 million to cash flows of the company.
The company's April 30, 2014 guidance for the current year projected cash flows of US$1,194 million or US$2.46 per share based on an average WTI of US$92.00 a barrel for the year.
Based on the above mentioned fundamentals and the company's strong balance sheet a quick ratio of more than one (1) a P/E ratio of 14.20 (based on the closing price of last Friday, July 11) we have a BUY rating on the shares of the company.
Last but not least, before following any investing advice, always consider your investment horizon and risk tolerance and financial situation and be aware that stock prices don't move in a straight line and that sharp corrections may happen in the short term.
Dear PGM Capital blog readers.
In this weekend's blog edition, we want to discuss with you whether or not the following data are signalling a coming crash of the USA stock-markets:
- Margin Debt at all Time High
- VIX at a 7-year low
- The CNN Fear & Greed index, currently at Extreme Greed
NYSE MARGIN DEBT AT ALL TIME HIGH:
USA stocks have advanced significantly over the last nine months associated with increases in Margin Debt. However borrowing to buy equities or USA stocks could have reached a turning point, raising concerns that equity prices may have plateaued or could even decline.
The margin debt at the New York Stock Exchange rose to an all-time high of about US$ 465.72 billion in February of this year. The highest margin debt, prior to this one, was US$ 381 billion which was recorded in July of 2007, right before the financial crises.
The increase in NYSE margin debt came as the SPDR S&P 500 ETF's (SPY) adjusted monthly closing value also hit an all-time high of US$185.47 during the same period.
NYSE margin debt is the aggregated dollar value of issues bought on margin (i.e. borrowed money) across the exchange. Many equity-market participants consider it a gauge of speculation in the stock market. The U.S. Federal Reserve currently has the initial margin requirement set at 50 percent.
As can be seen from below chart, there is a strong positive correlation between NYSE margin debt and SPY.
THE VIX AT LOWEST LEVEL SINCE 2007:
The CBOE volatility index, or VIX ( ), measures investors' expectations for market volatility in the near term.
The VIX is often called the fear index. When it is high investor sentiment is toward increased volatility and corresponding higher risk.
A lower number indicates investors are less concerned (fearful) about the market and anticipate low volatility.
As can be seen from below chart, on Friday June 8th, it dipped below 11 for the first time since February 2007.
We all remember 2007. The S&P 500 was hovering around the 1,400 level in February and then rallied up to 1,576 in October, for its value to be cut in half in the next 17 months.
The VIX jumped to 37.50 in August 2007 to peak at 89.53 in October 2008.
THE FEAR & GREED INDEX:
This is an index developed and used by CNNMoney to measure the primary emotions that drive investors: fear and greed. The Fear and Greed Index is based on seven indicators:
- Stock Price Momentum - as measured by the S&P 500 versus its 125-day moving average
- Stock Price Strength - based on the number of stocks hitting 52-week highs versus those hitting 52-week lows on the NYSE
- Stock Price Breadth - as measured by trading volumes in rising stocks against declining stocks.
- Put and Call Options - based on the Put/Call ratio
- Junk Bond Demand - as measured by the spread between yields on investment grade bonds and junk bonds
- Market Volatility - as measured by the CBOE Volatility Index or VIX
- Safe Haven Demand - based on the difference in returns for stocks versus Treasuries
As can be seen from below chart, on Friday, June 13, this indicator shows extreme greed in the markets:
PGM CAPITAL COMMENTS:
There is a rare complacency in the markets. At this very moment, volatility is near all-time lows, optimism is at record highs, and mainstream forecasters are once-again calling for ever-climbing prices -- just like they were in 1999 and 2007.
Margin Debt indicates that investors are leveraging their stock market bets, which is what happened in 2007. Leverage can be used as a sentiment indicator because it is correlated to investor confidence. A decline in Margin Debt may therefore signal bearish sentiment in the equity market, regardless of the fact that equities are at a record high.
Looking at the NYSE's Margin Debt chart with the S&P500 index, Margin Debt posted its second monthly decline in more than nine months. The figures are a few weeks old, but last time the NYSE's Margin Debt ended a bull period there was a significant correction in the equity markets.
- Back in 1987, when the Margin Debt hit a record high, S&P500 corrected by a 30% decline.
- In 1998, S&P500 slipped by 15.5%.
- Between 2000 and 2002 S&P500 lost more than 46%.
- In the bear market and great recession of 2007 and 2009 the S&P500 crashed more than 52%.
Due to this most investors are asking themselves;
Is the VIX at its lowest level since 2007, combined with the NYSE margin debt at all times signalling a coming Crash of the US Markets?
Last but not least maybe this quote of Warren Buffett is applicable:
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
Until next week,