Sand in the Market’s Gears

August 19, 2013

  • “Trouble down the road”: Chris Mayer uncovers the ugly truth behind second-quarter earnings
  • Forbidden fruit: Indian curbs on gold imports only make the metal more alluring
  • The beginning of the end: The mother of all financial bubbles, visualized in a chart
  • “Spectacular” progress: Byron King on the race to develop new uses of the “miracle material”
  • “Hitler chic” in liquid form… an inquiry about mining stocks… “inflation by portion,” toilet paper edition… and more!

  “There are large parts of the market,” says Chris Mayer, “that are struggling to show any growth.”

Chris made a return appearance on Fox Business last Friday. In an earlier appearance on Wednesday, Aug. 7, he said it was essentially “time to sell.”

Then the S&P was around 1,697. By Friday, it was 1,657. Good enough for another invite…

With earnings season mostly over, Chris says there’s a “hidden problem” in the second-quarter report card: “Overall, earnings rose about 2% for the quarter. But if you take out the financials (banks, insurers), earnings actually fell by 3%.”

That’s a problem, says Chris, because earnings drive the stock market over the long haul. “The market looks ahead. So you can match up the S&P 500 — a broad proxy for the market — with the consensus guess for earnings in the coming 12 months (the so-called ‘forward estimate’).

“So if earnings fall — or if people start to think earnings will fall — the stock market also tends to fall. This is simple stuff. Trying to predict what will happen is, of course, anything but simple. I’d say it’s foolish to even try. But people love this kind of thing — especially TV people.”

Media noise aside, “people are starting to worry about earnings,” says Chris. “They are also worried about when the Fed will stop pouring free drinks and end the party — which, in a roundabout way, still comes down to a worry over earnings.

“For anyone who takes a deeper look into the market’s working engine (those earnings), there are plenty of worn-out parts that look like trouble down the road.”

PRO-level readers can scroll down today for a baker’s dozen list of stocks at risk of falling alongside their earnings estimates — in case they’re lurking somewhere within your portfolio. If you haven’t gone PRO yet, you can do so here.

  Stocks are moving little as a new week begins. As we write, the Dow is up less than a point, to 15,082, and the S&P is literally unchanged from Friday’s close, at 1,655.83.

“This past week,” Options Hotline editor Steve Sarnoff wrote his readers last night, “stocks slipped below support and dropped quickly to the next level of anticipated demand (around the 50-day moving average). Stocks may be set for an oversold bounce, but the overall outlook remains for lower prices down the September road.

“It looks like the market’s nascent downtrend is likely to build until Bernanke and crew are spurred to step in and put the kibosh on any budding bearish enthusiasm.”

Steve’s readers are faring well through the downdraft: Through last Thursday, a bearish play on a social media darling was up 21% in a week and a half. Another bearish play in tech was up 24% in less than a month. And a bearish homebuilder play was up 56% in a month and a half.

Don’t feel bad if you missed out: As Steve is fond of saying, “There’s always opportunity in options.” And now is an excellent time to try Options Hotline by taking our publisher’s “60-day challenge.” It’s really simple: If Steve doesn’t help you rake in a 100% or better gain in two short months… well, take a look at what’s in it for you.

100  Precious metals have slipped a bit from their recent highs as the new week begins: Gold is down about $10, to $1,367. Silver has lost a few cents, to $23.19.

  “India’s demand for gold during the second quarter of 2013 topped all other countries’,” writes U.S. Global Investors chief Frank Holmes — who’s been poring over a new report from the World Gold Council.

That’s despite the Indian government continually jacking up the import duty on gold — a desperate measure to try to arrest a crashing rupee and soaring trade deficit. “When the increased duties were implemented,” says Frank, “I was skeptical that gold demand would be curtailed, because of India’s affinity to the precious metal.”

Indeed, India logged the highest gold demand in 10 years during the second quarter. Meanwhile in China, gold deliveries on the Shanghai Gold Exchange climbed to record levels. Result: “60% of jewelry demand and almost half of all bar and coin demand came from these two countries alone!”

That’s the “love trade” in action — Mr. Holmes’ term for the cultural affinity many Asians have for gold. “Like gold,” he says, “the love trade doesn’t tarnish; it holds its luster.”

  The yield on a 10-year Treasury note has hit another two-year high this morning — 2.88% as we write.

That’s still low by historical standards, but way up from 1.63% less than three months ago. In fact, according to this chart spotted today by Fusion IQ chief Barry Ritholtz, the magnitude of the current move is unlike anything we’ve seen in at least 15 years…

The all-time low came 13 months ago when the yield dipped a bit below 1.4%. We’re not certain that marked the end of the three-decade rally in bonds… but it likely marked the beginning of the end. Are you prepared for the mother of all financial bubbles to finally pop?

  “The room was filled with good ideas,” a researcher recently told our own Byron King, “and most of them have the potential to become billion-dollar industries.”

Though the media hype for graphene has died down a bit recently, behind the scenes, Byron reports things couldn’t be better for the “magic material.”

“Across the world,” Byron writes, “literally thousands of entities are pursuing research into graphene and related substances. This includes dozens of governments and government labs — all the usual suspect nations, of course.

“There are hundreds of universities with major, well-funded carbon programs — usually in the chemistry or physics departments, but also in engineering, electronics, robotics, life sciences, material science, computing and more. Plus, thousands of companies with related programs, ranging from giants like IBM, Siemens and Samsung down to little startups.”

The list goes on.

“Thus,” says Byron, “it’s fair to say that despite the often ‘cooperative’ nature of much basic scientific research, when it comes to graphene, everybody is trying to get a jump on everybody else. And progress is spectacular.”

  What’s another lesser-discussed industry taking a wide interest in the “magic material”? Defense.

It was engineers at Lockheed Martin, for example, who discovered a way to remove salt from seawater with graphene — using far less energy than other methods. Graphene research was also part of the Pentagon’s Multidisciplinary University Research Initiative (MURI) program that issued $260 million to specific university research projects.

DARPA, too: The Pentagon’s high-tech arm issued a $2.4 million grant to a company in New York to create graphene-based electronics for military radio applications.

And let’s not forget the implications of the supercapacitor: “Graphene supercapacitors combine the quick charge time of an ordinary capacitor with energy storage capacity comparable to that of a long-life battery,” Byron recounts. “Do you think that the Department of Defense might be interested in these devices to power, say, energy weapons like rail guns and lasers?”

[Ed. Note: Our interest in the defense industry as of late, you might be aware, isn’t arbitrary: The official launch for Byron King’s Military-Tech Alert is this coming Thursday — three days from now. We’ll keep you up on the latest as the details hit our desk. Stay tuned…]

  “Hitler chic” is one thing in Asia… but in the heart of Europe?

For the last year or so, we’ve encountered a smattering of businesses glomming onto the cachet of the madman-mass murderer — from a clothier in India who had no idea Hitler killed millions to a chicken joint in Thailand where the dictator’s head has been improbably attached to the torso of Col. Sanders.

Now from Italy comes… Hitler wine, produced by Vini Lunardelli.

Last week, the Simon Wiesenthal Center called for a boycott of the firm after Norwegian tourists stumbled upon the wine in the coastal town of Rimini.

“Last year,” the London Telegraph further informs us, “an American couple complained when they found that a supermarket near their hotel in the northern city of Garda was stocking wine bottles with Hitler in various poses. They are still widely available despite the integration minister at the time promising an investigation.”

Turns out the wine’s been available since 1995. Evidently, no one saw fit to object until last year…

Seriously? No one piped up for 17 years?

“The labels,” the Telegraph continues, “are part of a series including Mussolini, Churchill and Stalin. Alessandro Lunardelli, who heads the company, defended the labels, saying they were a ‘joke’ and not meant to offend anyone.”

Right, so they’re… like commemorative coins. Or plastic trinkets in a box of cereal. Collect ’em all!

Alrighty then…

  “You have frequently discussed the importance of owning physical gold,” writes a reader. “Isn’t owning mining stocks similar to owning the physical metal, since you own shares of mining companies that own the physical metal?

“Kinross is an incredible buy when you calculate the amount of reserves times the price per ounce of gold. I believe this works out to over $100 billion, or about 20 times the market cap of Kinross.”

The 5: We turn to Byron King, adding to the previous comments of Frank Holmes in today’s episode: “So what do these other people and cultures know that we’re not getting here in the U.S. from our government or mainstream media? (That’s a rhetorical question. I hope I don’t have to explain that point to you.)

“Basically, if you have not bulked up your precious metals holdings, now is the time to get into that play. Buy and… Take! Delivery! (If you don’t have it in your possession, it’s NOT yours!)”

In that sense, mining stocks are in no way “similar” to physical metal. But they do give you leverage to the price of the metal — which feels really good on the way up, and really awful on the way down. Right now is a great time to get in on some bargain mining plays… but you’ve got to choose carefully. Byron helps you get started right here.

  “One of the funniest/unfunniest examples of ‘inflation by portion’ is toilet paper,” writes a reader circling back to the topic of shrinking packages at the supermarket and drugstore.

“Well over a year ago, I noticed my regular paper wasn’t ‘working’ as well. I went to a different bathroom and found an ‘old’ roll. I weighed the old and new rolls, and although both were the same size, the new roll weighed 20% less. Dimples and raised lines had been added to maintain the roll diameter while cutting the actual amount of paper and advertising ‘softer’ paper. Truth in advertising?”

The 5: Um… Thank you for sharing. We think…

Cheers,

Dave Gonigam
The 5 Min. Forecast

P.S. We are *this* close to the cap of 250 people we’re allowing to beta test the aggressive retirement catch-up strategy we wrote about last week.

If you’re still interested, there might be room — but there might not. We’ll certainly be full up before the end of the day, and we can’t guarantee the offer will still be open when you click this link.

rspertzel

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