Dave Gonigam – May 2, 2012
- “Crickets” in response to the rally of 2012: “Where are the investors?” asks Frank Holmes… Marc Faber suggests an answer
- Chris Mayer with a sign that gold’s on the verge of a revival
- “OK, you are a nation”… Chuck Butler makes the euro’s latest drop super simple
- Two charts, two yawning gaps… and one huge opportunity you don’t want to miss
- A question about gold ETFs… an on-the-spot report from May Day in Paris… your last chance for discounted admission to our Symposium in Vancouver… and more!
“Investors should be thrilled,” writes U.S. Global Investors chief Frank Holmes, surveying an S&P 500 that’s up 9.5% year to date. “But instead of cheers, the only sounds the markets are hearing are crickets.”
“Many have been asking, ‘Where are the investors?’”
Mr. Holmes reminds us that since Jan. 1, another $12 billion has exited U.S. stock mutual funds. About $100 billion went into bond funds. “This continues a mutual fund outflow trend that has been ongoing for several months now.”
“In the 40 years that I have been involved in finance,” writes Marc Faber, sussing out an explanation for this mystery, “I have never experienced such a complete lack of trust in markets, regulators and financial institutions.”
“Irrespective of whether individual investors are positive or negative about equities,” he writes in his latest Gloom Boom & Doom Report, “they all think that the Federal Reserve, large institutional investors and algorithmic traders are rigging the U.S. stock market.”
“At the same time, they feel that U.S. government bond yields are at an artificially low level because of the Fed’s monetization (another form of manipulation).”
What’s more, “The gold and silver bulls believe that someone manipulates the precious metal markets in order to bring prices down.”
Hold that thought… We’ll get back to it a bit later in our 5 Mins. For now, we turn to the manipulated markets, and other miscellany…
Major U.S. stock indexes are surrendering some of yesterday’s gains. The S&P clings tenuously to 1,400.
“From a purely technical point of view,” says Dr. Faber, “we should expect a stock market sell-off, which would extend on the downside below the October 2011 low at 1,074 for the S&P.”
Essentially, he sees the rally since October as an “extension rally” after a head-and-shoulders top…
And if you don’t find that convincing, consider this, he says: While the S&P and the Dow reached a new high last month, most foreign markets did not. Nor for that matter did the NYSE Composite or the Dow Jones Transports.
Private employers added 119,000 jobs last month, according to the payroll firm ADP. That’s the lowest figure in seven months — and much lower than the 183,000 the “expert consensus” was counting on.
Worse, the number of goods-producing jobs actually fell… which casts a bit of doubt on the rosy ISM manufacturing number yesterday.
Europe’s April manufacturing number — delayed a day because of May Day — rang in overnight at 45.9. That’s way below the 50 dividing line between expansion and contraction, indeed the worst reading since June 2009.
In a separate report, German unemployment rose — which, no surprise, was a surprise to most analysts.
With that, the euro is getting pounded in the currency markets — off a cent, to $1.314.
“Both of these reports,” says Chuck Butler from his post at EverBank World Markets in St. Louis, “left the markets feeling that growth in the eurozone is going to get really slow. And so the euro got taken to the woodshed.
“But didn’t everyone already know that? I mean these bond guys and the economists are supposed to be looking out on the horizon at these markets. And these two reports just now surprised them?”
“Think about it for a minute. OK, you are a nation. Something happens to your income stream, and you have to ‘tighten your belt.’ Spending in your ‘nation’ comes to a halt, except for necessities. But the overall economic activity in our ‘nation’ has slowed down. It’s the same with a country that implements austerity measures — their economic activity slows down. It’s a given.”
“I wouldn’t be surprised,” says Mr. Butler, “to see the euro fall to 1.18, nor would I be surprised to see it recover to 1.40.”
Euro weakness means dollar strength: The dollar index is back above 79 this morning.
And today anyway, dollar strength means gold weakness: The spot price is back to $1,651. Silver’s slid to $30.52.
“We are laying a foundation here for a massive rally in gold,” says our own Chris Mayer.
In addition to the buying by foreign central banks we’ve chronicled this week, Chris passes this along: “The spread between the 3-month Treasury bill and the consumer price index (commonly used as a gauge of price inflation) is negative.”
“Gold tends to do well when this happens, as people look for ways to stay ahead of inflation.”
“A rally in gold,” he adds, “might be just what gold stocks need to get that little kick in the pants.”
With the safety trade on today, however mildly, oil is down nearly 1%. Still, a barrel of West Texas Intermediate fetches $105.23 — more than it did during all of April.
“Today’s extreme divergence in oil and gold stocks and their underlying commodities presents a rare opportunity,” chimes in the aforementioned Frank Holmes.
As evidence of that extreme divergence, Mr. Holmes directs your attention to this three-year chart of West Texas Intermediate and an index of oil stocks. The two tracked fairly tightly… until stocks fell out of bed last August.
“Over the past three years,” he says, “the price of oil and the index have had an average ratio of 0.21. Currently, it’s 0.26. That may not seem like a big difference, but today’s ratio represents a three-year high and is a 3.13 standard deviation event.”
“This means the divergence between oil and oil stocks is in ‘extreme territory’ and, under normal assumptions, there is a 99% probability that the gap will close.”
“Either the price of oil should come down or oil stocks go up, or a combination of both.”
“Gold and gold stocks are also experiencing extraordinary circumstances,” Mr. Holmes goes on.
Gold stocks spent most of the last three years outpacing bullion… a trend that’s reversed big-time in recent months.
“The price of bullion and the NYSE Arca Gold Miners Index (GDM) have had a three-year average ratio of 0.94,” Frank explains. “Similar to oil and oil stocks, the ratio is now 1.28, a 3.06 standard deviation event.”
Or in layman’s terms, a buying opportunity…
“My fibroblasts have multiplied satisfactorily and are now a thriving colony of cells ready for reprogramming,” Patrick Cox reports with enthusiasm.
Perhaps we should back up a bit: A month ago, Patrick volunteered himself for a remarkable experiment carried out by one of the companies he follows. He had a sample of skin tissue taken from under his arm. The CEO himself is now leading the process of turning that tissue into vibrant new heart cells.
“It’s nearly unbelievable to realize,” says Patrick, “that he has the ability to turn them into the rejuvenated endothelial precursors that could give me the cardiovascular and immune health of a teenager.”
“Nevertheless, I believe he will prove it in the relatively near future. He does not have regulatory approval to do so yet, but I have little doubt that he will get it relatively soon in some jurisdiction.”
Imagine the lives that could be changed… and the profit potential. The CEO in question will make a return appearance at this year’s Agora Financial Investment Symposium. We assure you he is not worried about manipulated markets, even though short sellers attack his firm every so often.
[Ed. Note: And you? You can complain all day about manipulated markets, but that doesn’t answer the question of what do you as an investor do about it?
“An enormous difference exists between debating policy and managing assets,” writes Fusion IQ chief Barry Ritholtz, who found himself discussing this matter at a dinner party recently. The conversation was hijacked by a goateed fellow who’d evidently just discovered ZeroHedge.
“Grad students,” said Mr. Ritholtz, “can go to Caffe Reggio on MacDougal Street [in New York], smoke clove cigarettes, stroke their goatees and debate this philosophically all night.”
“Anyone who toils in the markets professionally or manages money for other people (or even their own investments) does not get to enjoy such a lavish, self-indulgent luxury. Their job is not to opine on such matters, but rather to manage cash in the environment that is — the world that exists presently, and is likely to exist in the near future.”
Philosophize all you want… but if you have money that you’re worried about, you need to come join us in Vancouver, July 24-27. Mr. Ritholtz will be there. So will Mr. Holmes and Mr. Butler and Dr. Faber.
Historian Niall Ferguson, whose newest PBS documentary series debuts this month, will join us for the first time; regulars like Doug Casey, Rick Rule and Agora Inc. founder Bill Bonner will be back as usual. So will the Agora Financial editors whose observations you read each day in The 5.
The discussion will be enlightening… and the setting can’t be beat. Vancouver is a gem of a city you have to experience at least once.
For a few more hours, you can register at an extraordinarily low early-bird fee. It expires tonight at midnight; your invitation is right here.]
“I am concerned about your remarks concerning metals ETFs,” a reader writes after yesterday’s issue. “Are you saying that some of them might actually go broke due to the fact they may not have actual physical gold and silver coverage?”
“Thank you for another interesting 5 Min. Forecast.”
The 5: “You don’t have to don a tinfoil hat to be suspicious of the precious metals ETFs,” Addison tells every new reader of Apogee Advisory.
“The financial crisis of 2008 spotlighted a problem that infests many investment classes. It’s called ‘counterparty risk’ — that is, the risk that whomever you’re doing business with won’t, or can’t, live up to their promises. A metals ETF has counterparty risk that a gold coin doesn’t.”
If you want a precious metals position in a tax-advantaged account, as this reader does, you don’t have to be held hostage to the ETFs. You can opt instead for a closed-end trust. Just make sure you don’t pay too high a premium.
Addison walks you through the finer points of this guidance in a special report we send to every new Apogee reader. You can join their ranks here.
“If I were in charge of the Chinese national wealth and had foolishly loaned $900 billion to the US of A,” writes a Reserve member from Indiana, “I would be buying all the gold I could find as well.”
“Knowing that I had to power through international influence to essentially remove the dollar from reserve status and suddenly be a nonparticipant in the Treasury auctions, I would be confident in my ability to force QE3 into existence quickly. The subsequent plummet of the dollar and resulting inflation would make my gold holdings increase in value rather quickly. This would more than make up for my foolish investments from the U.S. Treasury.”
“Seems obvious enough to me where all this is heading.”
The 5: Us too — the mother of all financial bubbles, indeed.
“How timely was The 5 yesterday,” writes a Reserve member, “as I’m in Paris and watched the May Day spectacle in person.”
“A lot of marching and chanting, but I couldn’t help but think how it all looked like an excuse to skip work. I explained to my socialist friend (eat the rich) that just because an employer is enriched from an employee’s labor the employee is not entitled to the employer’s profits (he who takes the risk of loss, provides capital, etc.), but to little avail.”
“While here, I was looking for a vacation rental and was told that it is illegal to rent your property for less than one year. A misguided attempt to make more affordable housing available, which in turn makes people less likely to rent at all (equaling higher rents and less availability) as longer-term leases often turn into squatting situations.”
“I was told not to worry though as it is rarely enforced on the 20,000-plus short-term rentals, and then only in cases of ‘denouncement’ by neighbors, who unable to keep up with the Joneses (through, God forbid, hard work or talent) instead pull the Joneses down to their level.”
“Off to Spain tomorrow, hope it doesn’t implode while I’m there! Love The 5, keep it going! See you in Vancouver.”
The 5: Thanks! As a reminder, Reserve members get free admission to Vancouver. If you’re not a Reserve member, you can still snag a substantial early-bird discount… but only for a few more hours.
Cheers,
Dave Gonigam
The 5 Min. Forecast
P.S. “I don’t know whether it’s because of social media or the Internet,” said Dr. Marc Faber in a recent interview, “but you have today far more polarzied views than before.”
“You have blogs for the gold bugs. All the gold bugs are together in these blogs. Then you have the blogs for the super stock market bears, and all the bears are there. Then you have newsletters that are oriented toward mining stocks, and all the mining stock owners are there. And there is actually very little cross-interaction.”
“You want to have interaction with people who have precisely a different opinion from you. This is very important.”
This is one of the attractions of the Agora Financial Investment Symposium: Enlightened discussions by experts who don’t always agree on everything… and conference attendees who are confident enough to examine the arguments and make up their own minds.
(Of course, we have our limits — which we were reminded of yesterday when Alan Greenspan said on Bloomberg TV that U.S. stocks are “very cheap.” But you get the idea…)
We expect disagreements this year too — especially over the outlook for China. Heck, by the time of the Whiskey Bar on Wednesday night, there might be blood on the floor.
Here’s the point: If you can think for yourself, you’ll find yourself in excellent company in Vancouver. “I have spoken at hundreds of events,” says Dr. Faber. “The Agora Financial Investment Symposium is among the best, anywhere in the world.”
And for a few more hours, it’s ridiculously accessible. The early-bird registration discount expires tonight at midnight.