David Fuller and Eoin Treacy's Subscriber's Comment of the Day.
Monday 28th November 2011
Stocks Advance as EU Leaders Draft Framework for Bailout Fund - Here is the opening from Bloomberg's market report:
Global stocks rose for the first time in 11 days and commodities climbed after U.S. Thanksgiving weekend retail sales jumped to a record and speculation grew that European leaders will do more to tame the debt crisis. The euro rose, while Treasuries reversed earlier losses.
My view - There was no major catalyst in terms of news behind today's rally but stock markets became extremely oversold last week. That was sufficient justification for at least a temporary short covering rally but will we see more?
Probably, given some of the technical signals. Europe has been the focal point of global concerns but the Euro Stoxx 50 Index (weekly & daily) has found support above its September lows and recorded a clear upward dynamic today. Upside follow through on Tuesday would suggest a higher low of at least near-term significance. However, a push above 2500 and eventually the declining 200-day MA will be required to confirm a major floor near 2000. Of greater concern is the Euro Stoxx Banks Index (weekly & daily) although it bounced from its September lows today which are also in the region of the 2009 trough. A much stronger rebound is necessary to indicate more than temporary support near the former lows.
Upside leadership is required by the US stock market, given the powerful Wall Street leash effect, and the Russell 2000 Index (weekly & daily) rebounded today. Nevertheless, it will need to push above the October high and the declining MA to break the overall downward bias. A cautionary note is provided by the iShares IBOXX Investment Grade Bond Fund (weekly & daily) which has seen an upside failure and sharp reaction over the previous three weeks. It is short-term oversold and failure to rally from here would suggest concern over corporate finances.
"Two things strike me on this. Why pick on Italy? Far better financial shape than UK USA. Even runs primary budget surplus. Why the hysteria about a break up? The Habsburgs separated their currencies the same way as the Czechoslovaks. Some apparatchiks pitched up one Sunday morning (I think it was Sunday) and rubberstamped existing notes with new denominations, OK a few banks probably went bust. So what? Think Northern Rock. The buildings still stand; the staff have not been guillotined. The depositors were protected and, it's back in business. Think too when UK devalued out of Bretton Woods near common currency. And left ERM. Why the hysteria? Meanwhile the Pavlovian lummoxes yet again react to the bell of we're fixing it and pile in. They may be right for the wrong reason per the above. Also Euro shares are I believe good long term value."
My comment - Thanks for the history. I agree on Italy and also long-term equity value, particularly for European dividend aristocrats which export globally.
SINGULARITY - GOLD ADOPTION RATES LOW
My view - If you understand that gold has had a monetary value since our species first discovered and learned how to refine the yellow metal, and if you believe that gold will always represent hard money because it is a unique and scarce asset which is no one else's liability, then Hinde Capital's projections for bullion's price make sense.
The only question is: Over what time period? In other words, are we talking about years or millennia?
No one could possibly know the answer to this question so your guess is as good as anyone else's. Also, while the guessing may be fun, it is largely a waste of time. Instead, we should be monitoring technical and behavioural aspects of gold's performance.
For instance, Hinde Capital and other gold fund managers would like more people to buy their funds because they will make more money and rising demand will help to fuel a rising price trend for bullion. Conversely, plenty of other investment managers do not like gold because they think, rightly or wrongly, that its price appreciation could have negative implications for other investments.
Fullermoney has maintained for over a decade that gold was being remonetised in the eyes of investors. This inevitably meant that more people were considering gold as an asset worthy of inclusion in their portfolios, not least as a hedge. However, short-term extremes in sentiment are a contrary indicator. When everyone is bullish and the price is accelerating above its 200-day moving average, as we saw last August, it becomes temporarily overbought. Conversely, when people are more cautious following a pullback to the MA, as we saw in late September, it is probably somewhat oversold within its overall upward trend.
Negative real interest rates (below the rate of inflation) and accommodative monetary policy are tailwinds for gold. Conversely, positive real interest rates (above the rate of inflation) and restrictive monetary policy are headwinds for bullion. Today, monetary conditions are reasonably favourable for gold, although less so than in 2009, due to higher interest rates in growth economies. A flight to cash triggered by a worsening European sovereign debt crisis or any other significant factor would be a headwind. However, in this latter instance gold would probably fall less than a number of other assets, as we last saw in 2008.
Since gold is a monetary asset the strength or weakness of the USD will clearly be a big factor in bullion's performance in that currency. The greenback has been strong recently, as you can see from this chart of the US Dollar Index and the Asian Dollar Index which has fallen, but the US currency has weakened whenever stock markets rallied in recent months.
Lastly, and most importantly, we should consider gold's medium-term uptrend, which I prefer to view on a weekly chart with a 200-day MA. The progression of higher reaction lows evident on this chart are the defining features of the uptrend, which is smoothed by the MA. Accelerations such as we saw in August increase short to medium-term risks because they are unsustainable and followed by corrections. However, we can continue to give the medium-term trend the benefit of the doubt while the price is trading to the left (above) a rising MA and the reaction lows are still rising.
Investors in gold bullion will also want to monitor gold's trend in their local currencies. You will find them in the Relative Charts section of the Library. One of the more interesting of these, and relevant for a number of subscribers, is gold in AUD over 10 years. This has been less consistent than gold in USD during the same period because the AUD has been a strong currency for most of the last decade. Consequently, gold in AUD ranged mainly sideways until the second half of 2005 before surging higher and becoming temporarily overextended. Note the similar sized reactions. When any trend is that consistent, the first reaction which is clearly larger will probably break the short to medium-term momentum. When Eoin conducted TCS in Sydney in early May, there was less enthusiasm for gold in AUD because it had traded sideway for a lengthy period. Nevertheless the lows were still rising and that remains true today.
For additional perspective, here is a long-term chart of gold adjusted for US CPI inflation.
(See also Eoin's comments on gold shares below.)
The biggest bond dealers in the U.S. say the Federal Reserve is poised to start a new round of stimulus, injecting more money into the economy by purchasing mortgage securities instead of Treasuries.
My view - This certainly looks like QE3 to me. Wall Street may like it but there must be a serious risk that Mr Bernanke's deflation fighting measures are increasing the longer-term risk of uncomfortably higher inflation.
Santa Claus rally anyone? - Thanksgiving represents the busiest day of the year for US online retailers. Black Friday passed off with the usual scuffles, highlighting the desire of everyone to get in on a bargain as they start their Christmas shopping. Stock markets too have seen prices slashed over the last month.
Sentiment has deteriorated to abysmal levels. Some notable evidence of this has been the increasingly popular fire and brimstone approach to analysis. More than a few "It is God's will" style reports have crossed my desk. When markets fall, blame tends to get sprayed around. Rather the opposite occurs for many as they rise, with self-aggrandisement the predominant trait. Both extremes are to be avoided.
In Comment of the Day last week David and I highlighted how attractive the yield on some stock market indices had become as well as the consistency of relative strength and temporal leaders. Most stock markets and commodities performed impressively during October but gave up much of their gains in November. Short-term oversold conditions are widely observable in stock markets. Concurrently, the US Dollar has become overbought.
We have hypothesised that the October lows represented the bottom of what we described as a short, sharp bear market. If that view is to prove correct, most stock markets will have to hold above those lows. So far this month, the majority have returned to test those levels but today's upward dynamics suggest demand is beginning to return to dominance and at a progressively higher level among the leaders..
This is still a highly volatile, uncertain environment dependent on news flow and the activities of highly leveraged traders. However, that should not eclipse the perception of value where it is evident. A secular bull market is evident in some multinational companies we have described as Autonomies. Many are among some of the best relative and absolute performers in their respective stock markets which supplements that view. Provided last week's lows hold, the upside can be given the benefit of the doubt for at least for the short term and probably the medium-term.
The S&P 500 posted a third lower rally high in late November and has fallen back below the 200-day MA to test the lower side of the August/September range. Today's upward dynamic is the first indication of activity to pressure short positions. Follow through tomorrow would lend further credence to the short-term bullish outlook. A sustained move above 1300 would break the medium-term progression of lower rally highs and confirm a return to medium-term demand dominance. The FTSE-100 has a similar pattern.
During October, Germany's DAX Index rallied from deeply oversold levels to close the overextension relative to the 200-day MA. It encountered resistance and pulled back sharply. Today's upward dynamic suggests at least some short covering is underway.
India's Nifty Index has posted a progression of lower rally highs since retesting the 2008 peak late last year. It rallied well today from the region of the reaction lows and a countermanding downward dynamic would be required to question potential for some additional upside.
Following a volatile few months and weak overall environment over the last four weeks, of the 1100 shares in the Dow Jones Europe Stoxx 600 and the S&P500 139 are currently trading above their 200-day MA.
Here is the list segregated by subsector, then country of primary listing then by dividend yield. Shares with utility-like characteristics such as tobacco, pipelines and electricity providers are unsurprising constituents.
The relative strength of a large swathe of the healthcare sector, both among the reliable dividend payers as well as those representing the cutting edge of technology is also observable. Intuitive Surgical has a notably consistent chart pattern.
In the USA, the relative strength of companies leveraged to lower per capita spending remains a dominant theme with automotive parts and discount retailers continuing to exhibit relative strength.
In the technology sector, Cisco Systems continues its march higher from relatively depressed levels.
A pervasive theme across markets remains the relative strength of shares leveraged to the growth of the global consumer. Globally oriented food, beverage, cosmetics & toiletries and luxury goods companies all continue to exhibit consistent trends.
My view - The Amex NYSE Gold Bugs Index has been ranging mostly above the 2008 peak for much of the last year. It found support above 500 today, in line with stock and commodity markets. A sustained move to new high ground would confirm the return of medium-term demand dominance.
Newmont Mining Corp rallied well today and has so far held the short-term progression of rising reaction lows and remains above the 200-day MA. A sustained move below $60 would be required to check current scope for additional upside. Yamana Gold has yet to post new highs but otherwise has a relatively similar pattern.
IAMGold has been ranging mostly above $18 for most of the year and rebounded from near that level today. Eldorado Gold, Harmony Gold Mining, Gold Fields and Compania de Minas Buenaventura are also rallying from the lower side of their respective ranges. Coeur d'Alene Mines remains in the region of the upper side of its six-month range and a clear downward dynamic would be required to check current scope for some additional upside.
Following today's downward revision of production, Rand Gold Resources was one of the only shares in the Index to post a negative return. It has now almost completed a reversion towards the 200-day MA and will need to hold above the $95 region if the medium-term upside is to continue to be given the benefit of the doubt. New Gold Inc also pulled back today, extending a fall below the 200-day MA for the fist time since mid 2009. A clear upward dynamic will be required to indicate a return to demand dominance.
"Would much appreciate if you can provide the following charts from Bloomberg:
(1) long-term (50 years?) daily or weekly PER graph, and
for each of the following indices:
"Many thanks in advance."
My comment - Thank you for these requests. As mentioned previously we do not have access to a data feed supplying P/E ratio and dividend yield information. I have attached charts for the above indices from Bloomberg. However Bloomberg does not have 50 years of data for these indices.
Additionally, it should be noted that Bloomberg quotes P/Es based on operating earnings as opposed to reported earnings. The latter are based on Generally Accepted Accounting Principles (GAAP) while the former allow for many more write-offs in the form of "one-off items" Since operating earnings have come more into vogue over the last two decades it is questionable whether long-dated P/E charts are truly reflective of historic market conditions.
"Could you please add EGP.AU the newly refurbished Sydney casino? TIA."
"Can we have the charts for these 2 stocks? -
(i) New World Department Store China Ltd ; Bloomberg = 825:HK
(ii) Beijing Capital Land Ltd Bloomberg = 2868:HK
"Again, many thanks in advance."
My comment - Thank you for these suggestions which have been added to the Chart Library.