- Interim Update 6th January 2021
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US Recession/Recovery
Watch
We called an end to the 2020 US
recession in early-July of last year, mainly due to the spectacular rise
in the ISM New Orders Index (NOI) that had just occurred. This call has
been supported by subsequent data and eventually should be confirmed by
the National Bureau of Economic Research (NBER)*, making last year's
recession the shortest in US history. The latest ISM data, which were
published earlier this week, indicate that the recovery is intact.
The following monthly chart shows that the NOI remains near the top of its
20-year range, meaning that the US economy continues to recover from the
devastation caused by the lockdowns directed by the government during the
first half of last year.
Based on the economic and monetary data published over the past couple
of months it's possible that later this month the US government's
statisticians will report annualised nominal GDP growth of at least 10%
for Q4-2020 and likely that the US economy will achieve annualised nominal
GDP growth of at least 5% during the first half of 2021. Are you long
industrial commodity stocks?
The strength is largely artificial and
will evaporate soon after the Fed is forced by blatant evidence of an
inflation problem to end the monetary stimulus, but that is probably a
story for the second half of this year and beyond. Over the next 1-2
quarters it's a good bet that the monetary tsunami will continue, courtesy
of both the Fed and the government. For example, the US federal government
has just sent $600 "stimulus" checks to most Americans, but that won't be
the end of it. President-elect Biden wants to send another $2000 to every
American and a massive infrastructure spending program is 'on the cards'.
It's amazing what the government can do when it stops pretending to
care about its own indebtedness and embraces the spirt of Modern Monetary
Theory (MMT).
*It can take the NBER, the
official arbiter of US recession dates, a year or more to confirm a
recession start/end date.
Saudi Arabia
takes one for the team
The plan was for OPEC+ (OPEC
plus Russia) to scale back last year's oil production cuts (that is, to
increase production) at the rate of 500K barrels/month starting this
month. However, the government of Saudi Arabia, one of the world's most
evil regimes*, has given the global oil industry a short-term boost by
agreeing to cut its own production by enough to offset the production
increases of other OPEC+ members, thus delaying any net production
increase by at least a couple of months. Refer to the article posted
HERE for more information.
In reaction to this news and the
decline in the Dollar Index to a new 2.5-year low, the oil price broke
above US$50 on Tuesday 5th January. It was the first print above US$50 in
the nearest oil futures contract since last February.
In the latest Weekly Update, we wrote: "If the oil price
moves up to around $55 during the first half of January then we will
consider hedging our O&G exposure via the purchase of USO (United States
Oil Fund) or XLE (Energy Stock ETF) put options." That's still the
case. We also wrote: "...with oil's physical supply-demand situation
being slightly bullish (as indicated by the futures curve) and sentiment
being neutral (as indicated by the COT data) our main focus right now is
identifying buying opportunities in the stocks of O&G producers and
distributors."
We mentioned during the final week of December that the O&G sector of
the stock market had 'corrected' by enough to create some buying
opportunities for anyone with insufficient exposure to cyclical stocks in
general and industrial commodity stocks in particular. We didn't know
whether or not these stocks were ready to resume their intermediate-term
upward trends, but we pointed out that it was better to scale into them on
weakness than to jump in after they confirmed the resumptions of their
intermediate-term advances.
Schlumberger (SLB), BP Amoco (BP) and
Africa Oil (AOI.TO), three O&G stocks that we have been focussing on,
confirmed the resumptions of their intermediate-term advances over the
past two trading days. Therefore, the short-term buying opportunity has
come and gone. Our guess is that a new buying opportunity will be created
by a correction from a January high and will arrive next month.
*If you don't know what we mean, do some
research into the tragic consequences of Saudi Arabia's relentless bombing
of neighbouring Yemen and the treatment of people in Saudi Arabia who are
critical of the regime.
The Stock Market
From the email sent to
subscribers in response to the Georgia runoff-election nervousness evident
in Monday's market action:
"As mentioned in the latest Weekly
Update, the Democratic Party winning both run-off elections would be
short-term bullish for the cannabis sector but could result in a brief
shakeout for the broad market, whereas the Republican Party winning at
least one of the two run-off elections could be taken as short-term
bearish for the cannabis sector but probably would give the broad market a
brief boost. However, at this stage we don't expect this week's US
political events to alter any of our intermediate-term market views. For
example, regardless of whether the Democrats gain control of the Senate or
the Republicans retain control of the Senate, it's likely that we will
remain intermediate-term bullish on the cannabis and industrial commodity
sectors."
The Democrats have gained control of the Senate.
This is a long-term negative for the US economy because it will pave the
way for a more rapid expansion of government and government indebtedness,
but one of the reasons for the popularity of increased government spending
is that it boosts economic activity in the short-to-intermediate-term.
Therefore, the outcome of this week's elections in Georgia bolsters our
intermediate-term bullish outlooks for industrial commodities and cyclical
stocks.
On Wednesday 6th January the financial markets set aside
the long-term negatives and focussed on the short-term positives of there
being fewer political obstacles to more fiscal "stimulus". It's now almost
certain that within the next two months another round of "stimulus" checks
will be issued. Also, there's now a high probability that the coming
infrastructure bill will direct a lot more government spending towards the
"clean energy" and electric vehicle industries. This implies that there is
substantial remaining upside potential in the stocks of companies focussed
on the mining of battery metals and Rare Earth Elements (REEs), although
there could be a significant correction during January-February.
The minor bearish divergences in the US stock market that we discussed
last week faded or disappeared during Tuesday-Wednesday of this week. In
particular, the following daily chart shows that the NYSE Advance-Decline
Line (ADL) has confirmed the recent new SPX highs by making a new high of
its own.
There is no evidence that the SPX has reached a short-term top, but
seasonal considerations suggest that it will do so this month. The ensuing
correction could be steep, but all indications at this time point to it
being followed by a rise to new all-time highs.
Gold and the Dollar
Gold
The
US$ gold price broke upward from its 5-month downward-sloping channel on
Monday of this week and then retraced the bulk of Monday's gain on
Wednesday. It remains above its channel top but is up by only about $13
since the end of last week.
The gold market's performance over the first three days of this week
was driven by reactions associated with the Senate runoff elections in
Georgia. Monday's upside breakout resulted from fear about what a
Democrat-controlled government could do and Wednesday's plunge in the gold
price resulted from the realisation that the door was now wide open to
more fiscal stimulus (fiscal stimulus is bearish for gold to the extent
that it makes the economy look stronger in the short run).
The
performance of the gold/commodity ratio often is more predictable and
easier to explain than the performance of gold in terms of any currency.
For example, the gold/commodity ratio (the US$ gold price divided by the
GSCI Spot Commodity Index (GNX)) made a new 6-month low on Wednesday 6th
January. Due to the strong positive correlation between the gold/commodity
ratio and the T-Bond price illustrated by the following daily chart, this
can be explained by the fact that the T-Bond also made a new 6-month low
on Wednesday 6th January.
As mentioned in a recent TSI commentary, a strong rally in the gold
price within the next couple of months probably requires a strong rebound
in the T-Bond price. A strong rebound in the T-Bond could begin in the
near future, but it hasn't begun yet.
Gold Stocks
The channel break by gold led to a channel break by the Junior Gold
Miners ETF (GDXJ). In the cases of both gold bullion and GDXJ, however,
there was insufficient strength to achieve a daily close above the
early-November high.
What occurred in gold and the associated mining ETFs around this
week's US political events is similar to what occurred around the US
elections in early-November of last year. In both cases there was a sharp
upward move and then a reversal. This week's move will differentiate
itself from the early-November upward spike if prices close above
Tuesday's highs over the days ahead.
We expect that at some point
over the next three months the prices of gold bullion, GDX, GDXJ and the
HUI will exceed last year's highs in US$ terms, but at the same time the
fundamental backdrop continues to evolve in a way that favours the
industrial commodities and the associated equities over gold and the
associated equities.
The one thing in favour of gold and the
associated equities is that on a short-term basis they are stretched to
the downside relative to their industrial commodity counterparts. This
creates the potential for a significant countertrend move within the
coming month or two.
The Currency Market
The Dollar Index (DX) has started the new year in the same way that it
ended the old year -- by declining slowly and steadily. We continue to
expect that January-2021 will usher-in a test of long-term support at 88
and a short-term bottom for the DX, but we also expect that any US$
rebound that occurs within the next two months will be a countertrend move
within an on-going cyclical decline.
Updates on Stock Selections
Notes: To review the complete list of current TSI stock selections, logon at
http://www.speculative-investor.com/new/market_logon.asp
and then click on "Stock Selections" in the menu. When at the Stock
Selections page, click on a stock's symbol to bring-up an archive of
our comments on the stock in question.
Subversive
Capital Acquisition Corp. stock (US: SBVCF) and warrants (Canada:
SVC.WT.U)
In the email sent to subscribers after Monday's
North American trading session we advised that the stock and warrants of
the above-mentioned US-focussed cannabis company had been added to the TSI
List. Refer to
Stock
Selection Update #97 for the details.
We thought that cannabis
stocks would do very well in the short-term if the Democratic Party
wrested control of the Senate from the Republicans in this week's runoff
elections in Georgia. The Democrats did win control of the Senate and
cannabis stocks generally were very strong in reaction. For example,
Cronos (CRON), the only official TSI cannabis speculation prior to this
week, was up 15% on Wednesday 6th January. However, the SBVCF price didn't
move. This could be because it still exists in the form of a SPAC (Special
Purpose Acquisition Company).
It is expected that SBVCF will
"de-SPAC", that is, become a traditional operating company with ordinary
shares, later this month. In the meantime, we consider it to be a good
candidate for new buying near its current price of US$10.12. Also, we
think that the warrants, which traded as high as US$2.25 and closed at
US$1.90 on 6th January, would be reasonable speculations at around
US$1.60.
Regardless of what happens in the short-term, the
cannabis sector stands a good chance of doing well over the next 12
months.
Chart Sources
Charts appearing in today's commentary
are courtesy of:
https://stockcharts.com/
