Toro's Running of the Bulls Market Blog

Gold > $455, Stock Market Return = 0%

Interesting post from Crossing Wall Street

I was playing around with some data and I came with an interesting stat: All of the stock market’s gain since 1970 has come when the price of gold is below $455.

OK, now let me explain a little. I took two monthly files; one with the closing price of gold from 1970 though this past May. The other with the dividend reinvested index for the S&P 500 over the same time period.

I then looked at how well the S&P did based on the closing price of gold for the previous month. The results show that the index was net flat whenever gold closed the previous month higher than $455.50.

Not sure about cause and effect but a fascinating piece of information nonetheless.

I wonder what would happen to the stock market if gold were to go to $5,000?

China Pimping Silver

From RealMoney last week.

In a recent televised broadcast, Chinese officials actively promoted public investment in silver bullion. Prior to this, the Chinese silver standard had remained somewhat unclear. But the report has been a definite step in the direction of full public exposure on the commodity.

Held in the Beijing Caibai shopping mall, the broadcast literally unveiled an impressive selection of bullion offerings in 500-gram, and one-, two- and five-kilogram bars. According to Chinese officials, exposure to the metal is a wise investment for individual investors, and could be a good way to cash in.

I am considering an investment in silver to go alongside my position in gold, but I have yet to make a purchase.

Dollar to Lose Reserve Status - PIMCO

From Bloomberg

Pacific Investment Management Co., which runs the world’s biggest bond fund, said the dollar will probably fall as it loses its status as a reserve currency.

The dollar will especially drop against emerging-market counterparts, Curtis A. Mewbourne , a Pimco portfolio manager, wrote in a report on the company’s Web site. Investors should consider cutting their holdings of the U.S. currency, he said.

“While we have not yet reached the point where a new global reserve currency will arise, we are clearly seeing a loss of status for the U.S. dollar as a store of value even in the absence of a single viable alternative,” Mewbourne wrote

Though I agree that the US dollar is losing status and will continue to fall against currencies of fast-growing emerging nations, it is difficult to see any alternative to the dollar as a reserve currency in the foreseeable future.

Having said that, I am long gold, and expect to see gold hit new highs as all fiat currencies lose value relative to real assets.

The Copper Standard?

Is China buying copper as a way to diversify out of dollars?

China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.

Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."

"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.

The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.

John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep."...

The beauty of recycling China's surplus into metals instead of US bonds is that it kills so many birds with one stone: it stops the yuan rising, without provoking complaints of currency manipulation by Washington; metals are easily stored in warehouses, unlike oil; the holdings are likely to rise in value over time since the earth's crust is gradually depleting its accessible ores. Above all, such a policy safeguards China's industrial revolution, while the West may one day face a supply crisis.

Base Metals Rising and a Double-Top in Gold?

Gold appears to be putting in a double top. 

It may be that the bull market in gold is ending.

This is not the general thesis from which I am working.  I believe that inflation will re-emerge in a few years and gold will go to $1500 or $2000. 

However, I may very well be wrong.  It may be that gold is signaling an end to systemic risk in the financial system.

Some will argue that a gold top is signaling deflation.  That may be.  However, base metals appear to be putting in a bottom. 

Copper

Nickel

Zinc

If base metals are putting in a bottom, then deflation is not in the offing.  Rising base metals and falling precious metals would be a signal that the economy will improve in the not-too-distant future.

EDIT - Donald Luskin was on Kudlow tonight, and he said that gold and precious metals were his long-term favorite trade.  I guess the top for gold is in! 

A Fundamental Shift in Sugar?

I first made the bullish case for sugar in February of last year.  Since that time, sugar is roughly flat.  I, however, am not roughly flat, and am, in fact, way, way below flat, having traded the white stuff poorly.  Ah well, lesson learned.

I closed out my last sugar futures position a few days ago so I can invest what is left of my account in another more compelling idea.  However, a long-term shift may be occurring that is bullish for sugar, and I may revisit the trade some time in the future.

Sugar, the nutritional pariah that dentists and dietitians have long reviled, is enjoying a second act, dressed up as a natural, healthful ingredient.

From the tomato sauce on a Pizza Hut pie called “The Natural,” to the just-released soda Pepsi Natural, some of the biggest players in the American food business have started, in the last few months, replacing high-fructose corn syrup with old-fashioned sugar.

ConAgra uses only sugar or honey in its new Healthy Choice All Natural frozen entrees. Kraft Foods recently removed the corn sweetener from its salad dressings, and is working on its Lunchables line of portable meals and snacks.

The turnaround comes after three decades during which high-fructose corn syrup had been gaining on sugar in the American diet. Consumption of the two finally drew even in 2003, according to the Department of Agriculture. Recently, though, the trend has reversed. Per capita, American adults ate about 44 pounds of sugar in 2007, compared with about 40 pounds of high-fructose corn syrup.

“Sugar was the old devil, and high-fructose corn syrup is the new devil,” said Marcia Mogelonsky, a senior analyst at Mintel International, a market-research company.

With sugar sales up, the Sugar Association last year ended its Sweet by Nature campaign, which pointed out that sugar is found in fruits and vegetables, said Andy Briscoe, president of the association. “Obviously, demand is moving in the right direction so we are taking a break,” Mr. Briscoe said.

Blamed for hyperactivity in children and studied as an addictive substance, sugar has had its share of image problems. But the widespread criticism of high-fructose corn syrup — the first lady, Michelle Obama, has said she will not give her children products made with it — has made sugar look good by comparison.

Most scientists do not share the perception. Though research is still under way, many nutrition and obesity experts say sugar and high-fructose corn syrup are equally bad in excess. But, as is often the case with competing food claims, the battle is as much about marketing as it is about science.

Some shoppers prefer cane or beet sugar because it is less processed. High-fructose corn syrup is produced by a complex series of chemical reactions that includes the use of three enzymes and caustic soda.

Others see the pervasiveness of the inexpensive sweetener as a symbol of the ill effects of government subsidies given to large agribusiness interests like corn growers.

But the most common argument has to do with the rapid rise of obesity in the United States, which began in the 1980s, not long after industrial-grade high-fructose corn syrup was invented. As the amount of the sweetener in the American diet has expanded, so have Americans.

Chefs and connoisseurs have also driven sugar’s rehabilitation. Although even a sugar expert would be hard pressed to tell the difference between the taste of cane and beet sugar, some enthusiasts have elevated cane sugar to near cult status.

The Coke that is made from sugar for Jews who avoid corn during Passover has become so popular among cane-sugar fans that some stores have taken to rationing it.

At Jason’s, a chain of delis with 200 restaurants in 27 states, cane sugar has replaced high-fructose corn syrup in everything except a few carbonated beverages. “Part of this is a huge rebellion against HFCS,” said Daniel Helfman, a spokesman for the chain, “but part of it is taste.”

Reasons to be Bullish

Frankly, I am having a hard time being bullish because everything feels so bad.

I was in the office on President's Day and watched the S&P 500 futures tick down to near-term support at 806, such that futures are indicating a 20 point decline at the open on Tuesday.  Now, it appears the market has formed a short-term double-top, and with stocks continuing to reach lower highs, it feels like we are about to break to the downside and re-test the November lows.

Emotionally, selling feels like the right thing to do.  However, cerebrally, since I have a time frame longer than my nose, there are many reasons not to sell at these levels, and to in fact buy stocks.  But it is difficult not to walk away in disgust, especially after last week's action, which was just horrible.

Everyone knows why you should be bearish - the credit crunch continues, the economy is terrible and earnings estimates continue to come down.  The reasons to hate stocks are very well known.  So I made a list of reasons why stocks could be substantially higher within the next year or so.

• Credit spreads have improved.  Credit remains tight, but spreads have come in.  Over the past 50 years, the average gain to stocks has been 18% when credit spreads are falling.

 

• Cash spreads are improving.  The TED spread and swap spreads are at levels last seen before the crisis began last fall.
• Treasuries are backing up and yields are rising.  The bond market has experienced a violent sell-off in the long end of the curve, while short-term T-bills - which were yielding negative returns a few months ago - have seen rising yields.
• The yield curve is steep.  When the curve is this steep, it almost always signal economic expansion over the next 12 months.
• Corporations issued the highest volume of debt in January than in any month since May.  In fact, debt issuance was greater than the last four months of 2008 combined.
• The dollar may be topping.  Some may argue that this is because of all the debt that the Treasury will flood onto the market.  However, a rising dollar has also been indicative of fear and a flight to safety.  A falling dollar may indicate that fear is seeping out of the market.

• The euro/yen cross has been moving sideways for months and may be basing.  The euro/yen carry trade had been popular over the past several years as investors bought higher-yielding euro-denominated bonds and financed the purchases by borrowing in lower-yielding yen.  This carry trade has been seen as a proxy for risk appetite in the global capital markets.  It may be signaling that investors are becoming less fearful.

• The gold/silver ratio has fallen below 70.  The ratio was as high as 80 a few months ago.  Both gold and silver have been rising the past few months, but silver has been rising faster than gold.  From September through November, silver fell 30% to the trough whereas gold fell 10%.  Silver is a thinner market but it is also an industrial metal and more exposed to the general economy than gold.  Gold is a haven during crises.  Silver prices rising faster than gold prices may be signaling that the economy is going to get better in the future and/or investors are less fearful about financial markets.
• Metal prices may be bottoming. Though it is still early, a bottom in stocks is sometimes presaged by a bottom in metals and commodity prices. 
• Commodities may be bottoming.  Oil may be putting in a bottom as well.

 

• Canadian stocks may be bottoming.  Energy and metals comprise roughly half of the total market capitalization of the Toronto Stock Exchange.  Materials stocks in Canada have been performing fairly well.

• Chinese stocks may be bottoming.  Stocks in China have been acting well as of late.  I am long the FXI.

• Semiconductor stocks have been outperforming and may be in the beginning of an uptrend.  Semiconductors are often an early indicator of the health of the technology industry.  I am long a basket of semiconductor and semiconductor equipment stocks.

• The VIX is acting like it wants to break below 40.  On Thursday's intra-day reversal, the VIX closed sharply down.  On Friday, when the market sold off during the last 20 minutes of the day, the VIX gave up less than half the decline of the prior session.  This may be a sign that investors are getting more confident of the future.

• Asset allocation by individuals towards equities is at or near all-time lows whereas allocations towards cash is at or near all-time highs.  The public is generally positioned like this at bottoms.
• Cash levels are at multi-decade highs.  There is nearly $9 trillion in cash on the sidelines currently.
• Hedge funds are heavily in cash.  There are very few hedge funds that are bullish now.
• Private equity investors are sitting on their hands.  After incurring large losses in their portfolios and wary of the cash crunch of their limited partners, private equity funds are doing little.  It seems that everyone is waiting for a turn before investing.
• Everybody whom I talk to is negative.  I have had in depth discussions with two dozen highly knowledgeable investors this month, and they are all overwhelmingly and uniformly bearish.  Every.  Single.  One.  Even those who are buying because they see value in the market are bearish on the market and the economy as a whole.  I had to talk a friend and a 20-year veteran of the business off the proverbial window ledge last week.
• Reversion to the mean suggests at least a bounce.  Last year was one of the worst years on record.  Tremendous selling usually begets a significant rally.
• Stocks are cheap.  Whether you want to measure by the 10-year moving average of earnings, Tobin's Q, or measures of book, sales and normalized earnings, stocks are inexpensive.

Now, as I tell you all this, I think there is a fairly good chance - 60% or 70% perhaps - that the market is about to re-test the lows over the next week or two.

Even after I listed all those points above, I cannot tell you that I feel bullish.

Maybe that is a sign a bottom is near.

Are Metals Bottoming?

I scanned through several commodity charts today.  I am wondering if it is time to start looking for a bottom in the metals.

Copper

Lead

Nickel

Zinc

 

Aluminum is trading at beyond five year lows.

It is as if the housing bubble nor the boom in China, India and all the other emerging markets never happened.

From everything I am hearing, it is probably still too early to begin buying.  However, the charts are intriguing.  If the metals are bottoming, it bodes well for the economy.

I have begun compiling a list of metals stocks for when that day arrives.

Gold Demand

From EconomPic Data

Gold/Silver Ratio

I was looking at the ratio of the price of gold relative to the price of silver last week. 

Serendipitously, Bespoke offered up a chart of the gold/silver ratio a few days ago.  This is the chart.

I find this chart intriguing.  Going long silver and shorting gold looks like an interesting trade.  The gold/silver ratio is at a decade high. 

However, the chart only goes back 10 years.  Prior to 1998, the the gold/silver ratio was even higher.

This is the ratio since 1984.

 

The current ratio is 77.  Since 1998, the gold/silver ratio has averaged 60.  Since 1984, it has averaged 66.  The ratio hit 99.7 in February 1991.  So the gold/silver ratio is high, but it has gone higher in the past.

I thought about putting this trade on but have opted not to so far.  Buying silver and shorting gold is essentially a beta play on the economy since silver is used in industrial production more so than gold.  If the economy improves and investors regain confidence in asset markets, this ratio will close.  You can get the same beta exposure to the economy by buying stocks.

Thus, though I find buying silver and shorting gold an intriguing arbitrage trade, I have yet to put it on because I do not know any other reason to think it will close other than an eventual return of confidence to the asset markets.