-- Weekly Market Update for the Week Commencing
3rd August 2015
Big Picture
View
Here is a summary of our big picture
view of the markets. Note that our short-term views may differ from our
big picture view.
The BULL market in US Treasury Bonds
that began in the early 1980s ended in early-2015, but there will be many years
of topping action in bond prices and bottoming action in bond yields before
major new trends get underway. (Last update: 29 June 2015)
The stock market, as represented by the S&P500 Index,
commenced
a secular BEAR market during the first quarter of 2000, where "secular
bear market" is defined as a long-term downward trend in valuations
(P/E ratios, etc.) and gold-denominated prices. This secular trend will bottom sometime between 2018 and 2020.
(Last update: 29 June 2015)
A secular BEAR market in the
US
Dollar
began during the final quarter of 2000 and ended in July of 2008. This
secular bear market will be followed by a multi-year period of range
trading.
(Last
update: 09 February 2009)
Gold commenced a
secular bull market relative to all fiat currencies, the CRB Index,
bonds and most stock market indices during 1999-2001.
This secular trend will peak sometime between 2018 and 2020.
(Last update: 29 June 2015)
Commodities,
as represented by the CRB Index, commenced a
secular BULL market in 2001 in nominal dollar terms. The first major
upward leg in this bull market ended during the first half of 2008, but
a long-term peak won't occur until 2018-2020.
(Last
update: 29 June 2015)
Copyright
Reminder
The commentaries that appear at TSI
may not be distributed, in full or in part, without our written permission.
In particular, please note that the posting of extracts from TSI commentaries
at other web sites or providing links to TSI commentaries at other web
sites (for example, at discussion boards) without our written permission
is prohibited.
We reserve the right to immediately
terminate the subscription of any TSI subscriber who distributes the TSI
commentaries without our written permission.
Outlook Summary
Market
|
Short-Term
(1-3 month)
|
Intermediate-Term
(6-18 month)
|
Long-Term
(2-5 Year)
|
Gold
|
N/A |
Bullish
(26-Mar-12) |
Bullish
|
US$ (Dollar Index)
|
N/A |
Neutral
(22-Jun-15) |
Neutral
(19-Sep-07) |
US Treasury Bonds (TLT)
|
N/A |
Neutral
(18-Jan-12)
|
Bearish |
Stock Market
(DJW)
|
N/A |
Bearish
(28-Nov-11) |
Bearish
|
Gold Stocks
(HUI)
|
N/A |
Bullish
(23-Jun-10) |
Bullish
|
Oil |
N/A |
Bullish
(17-Dec-14) |
Bullish
|
Industrial Metals
(GYX)
|
N/A |
Bullish
(22-Jun-15) |
Bullish
(28-Apr-14) |
Notes:
1. Our short-term expectations are discussed in the commentaries, but except in
special circumstances we won't attempt to assign a "bullish", "bearish" or
"neutral" label to these expectations.
2. The date shown below the current outlook is when the most recent outlook change occurred.
3. "Neutral" means that we think risk and reward are roughly in balance with respect to the timeframe in question.
4. Long-term views are determined almost completely by fundamentals and intermediate-term views
are determined by a combination of fundamentals, sentiment and technicals.
Last week's posts at the TSI Blog
We were AWOL for almost
all of last week, so there were no posts at the blog.
Is the US economy too
weak to survive more of the Fed's monetary support?
Everybody knows that the Fed
will eventually hike its targeted interest rate. When it comes to rate hikes,
the only unknowns involve timing. What hardly anybody knows is that the Fed's
interest-rate suppression has damaged the economy and that the longer it
continues, the weaker the economy will get.
Based on the wording of last week's FOMC statement it is still likely, but far
from a certainty, that the first rate hike will happen in September. That is,
the timing of the Fed's first rate hike remains unknown. The bigger unknown,
however, is the timing of the Fed's second rate hike. The reason is that there
could be a large gap between the first and second hikes as a jittery Fed takes
its time assessing the effects of the first hike. It could also be a case of
"one and done".
There have recently been numerous comments in the press to the effect that the
Fed should stay with its zero% target, the reason being that the US economy is
not yet strong enough to cope with even the smallest of rate hikes. This is
downright weird, given that the economy is supposedly now 6 years into a
recovery from the 2007-2009 recession. Just to be clear, we are referring to
comments that there SHOULD be no rate hike in the near future, not to comments
that there WILL be no rate hike in the near future. The first type of comment is
a policy recommendation based on the wrongheaded theory that keeping the Fed
Funds Rate at zero will help the economy, whereas the second type of comment is
based on the recognition that the Fed's senior management is guided by
wrongheaded theory.
Not to put too fine a point on it, only someone who is economically illiterate
could believe an economy can be helped by forcing the risk-free short-term
interest rate down to zero and holding it there for years. The reality is that
when a central planner distorts price signals it causes investing errors in the
affected parts of the economy, and when a central planner distorts the most
important of all prices (the price of credit) it leads to investing errors
across the entire economy. Many economists, and as far as we can tell all
Keynesian economists, haven't figured this out because their analyses are based
on models that treat the economy as if it were an amorphous mass instead of what
it is -- an extremely complex network comprised of millions of individuals
making decisions for their own reasons.
Strangely, the commentators on the financial world who claim that the Fed should
continue its Zero Interest Rate Policy haven't put two and two together. They
haven't twigged that it's not a fluke that the greatest experiment in
money-pumping and interest-rate suppression in the Fed's history coincided with
the weakest post-recession recovery since the 1930s. It's not a fluke because
the extraordinary stimulus is the main cause of the apparent inability of the
economy to get out of its own way. A former Fed chairman (now blogger) and
current Fed officials routinely take bows for having brought the economy back to
health, and yet over the past three years the compound annual growth rate of
real US GDP has been slightly less than 2%/year using the government's estimate
of "inflation" and probably around 0%/year using a more realistic estimate of
"inflation". And this 3-year period should have been the sweet spot of the
post-2009 economic expansion!
To be fair, the failure to link the weakness of the recovery with the dramatic
scale of the policy response is not actually strange. It is, in fact, completely
understandable. After all, if the economic model to which you are totally
committed is based on the assumption that money-pumping and interest-rate
suppression give the economy a sustainable boost, then an unusually weak economy
in the wake of aggressive intervention of this nature can only mean two things.
It can only mean that the situation would have been even worse without the
intervention and that the problem was too little, not too much, monetary
accommodation.
It's testament to the resilience of whatever capitalist elements remain that the
Fed hasn't yet driven the US economy into the ground. There must, however, be a
limit to the amount of monetary accommodation (that is, to the amount of price
falsification) that the economy can withstand. We wonder what that limit is.
Unfortunately, by the looks of things we are going to find out.
Commodities
We were planning to do delve
into the recent performances of industrial commodities such as oil, natgas and
copper in today's report, but due to time constraints the discussion has been
postponed a week. This week we'll do no more than highlight the following
monthly chart of the "inflation"-adjusted (IA) Continuous Commodity Index (CCI).
The chart indicates that in real terms the basket of 17 commodities represented
by the CCI just hit a new all-time low. In real terms, commodities are now
cheaper than they have ever been.
As we have pointed out numerous times over the past 10 years, the "commodity
supercycle" concept is bogus.
The Stock Market
The US
The S&P500 Index (SPX) fell for 5 days in a row and bottomed at its 200-day MA
on Monday 27th July. It then did what it has consistently done over the past
several months and rebounded from short-term support.
Last week's price action continues a repeating pattern that began about 5 months
ago. Whenever the SPX becomes slightly 'oversold' and/or reaches a short-term
support level of significance, it reverses upward. It then rallies until it
becomes slightly 'overbought' or reaches a short-term resistance level of
significance, at which point it reverses downward. Since late-February there has
been no follow-through in either direction and no moves that we would consider
tradable.
Does the SPX's stability near its high in the face of lacklustre earnings
growth, tumbling commodity prices and weakness in market breadth suggest direct
intervention to prop-up the senior stock index? No, the US government and its
central bank have neither the means nor the motive to directly and
surreptitiously support a high stock-market valuation. What it does suggest is
increasing downside risk.
We are anticipating a 10%-20% SPX decline between now and mid-October that would
either turn out to be the first leg of a new cyclical bear market or the first
meaningful bull-market correction since 2011. We consider this to be the
highest-probability outcome, but other outcomes are possible.
One of the other possible outcomes is a sustained upside breakout from the
multi-month horizontal trading range, marking the start of a new bull-market
leg. Another is an extension of the dreary back-and-forth price action through
to year-end.
Of the plausible scenarios, the one with the lowest probability is a decline of
substantially more than 20% (the crash scenario). Regardless of whether a
decline over the next three months is the first leg of a new bear market or a
correction within a continuing bull market, at this stage there's only a remote
chance that it will be much greater than 20%. However, the probability of a
crash would increase if, over the next few weeks, the market were to trace out
what we've previously described as a crash pattern. The first two steps in the
crash pattern are a quick initial decline of around 10% and a rebound that
retraces at least half of the initial decline.
Japan
EWJ (Japan iShares) is a US$-denominated ETF that holds a large basket of stocks
that trade in Japan. It therefore tracks the performance of the Japanese stock
market in US$ terms, which means that its performance is affected by the
Japanese stock market and the Yen/US$ exchange rate. For example, a 10% decline
in Japan's stock market in parallel with a 10% rise in the Yen would result in a
roughly flat performance by EWJ. For another example, a 10% rise in Japan's
stock market in parallel with a 10% rise in the Yen would result in a roughly
20% gain in EWJ.
With that introduction out of the way, here is a chart showing EWJ and the EWJ/SPY
ratio (the Japan stock market in US$ terms relative to the US stock market). The
point we want to make with this chart is that Japan's stock market has been
strong since the beginning of this year -- not only in Yen terms but also in US$
terms, and not only in nominal currency terms but also relative to the US stock
market. Moreover, the January-2015 upward reversal in the Japanese market's
relative strength has the potential to be the long-term variety.
If there's a 10%-20% decline in the US stock market within the coming three
months then the Japan stock market will come under irresistible downward
pressure, but EWJ will likely fare better than the SPX and could even hold its
ground. The reason is that a sizable decline in the US stock market would
probably lead to a sizable advance in the Yen (despite everything, the Yen still
trades like a safe haven).
Alternatively, if the US stock market continues to trade sideways or breaks out
to the upside from its sideways range, EWJ is likely to extend the rally that
got underway in January. The reason is that whereas the Fed is looking for an
opportunity to tug gently on the monetary reins, the Bank of Japan is still
aggressively trying to boost prices (bad for the economy but initially good for
the stock market).
We therefore continue to like the pair trade of being long EWJ and long the Yen
via January-2016 call options.
This week's
significant US economic events
[Notes:
1) The most important events
(to the markets) are shown
in bold. 2) A list of global economic events can be found
HERE]
Date |
Description |
Monday
Aug 03 |
Motor Vehicle Sales
Personal Income and Spending
ISM Mfg Index
Construction Spending |
Tuesday
Aug 04 |
Factory Orders |
Wednesday
Aug 05 |
International Trade Balance
ISM Non-Mfg Index |
Thursday
Aug 06 |
No important events
scheduled |
Friday
Aug 07 |
Monthly Employment Report
Consumer Credit |
Gold and the Dollar
Gold
The total speculative net-long position (the inverse of the commercial net-short
position) in COMEX gold futures shrank a little more during the latest week.
Speculators, as a group, are still net-long gold futures, but less so than they
have been at any time since early-2002. This suggests that speculative
enthusiasm for gold is at a 13-year low, which is bullish in that sentiment is a
contrary indicator. This won't cause a turnaround, but it means that the scope
for speculative buying to boost the gold price is much greater than the scope
for speculative selling to cause a further decline in the gold price.
Last week's price action in the gold market was uneventful, especially compared
to the drama of the preceding week. The US$ gold price made a couple of
unsuccessful attempts to break above $1100 and a couple of unsuccessful attempts
to break below $1080. In the end, it simply oscillated within the $1080-$1100
range.
As has been the case for the past few weeks, a price bottom is likely to be
signaled by the gold-mining sector before it is signaled by the performance of
the bullion market. This is because the gold-mining sector is far more
'oversold' than gold bullion and because the start of a meaningful rally should
involve substantial strength in the gold-stock indices relative to gold.
In euro terms, gold broke well below its 200-day MA over the past two weeks and
is now testing lateral support at 985-1000. The break below the 200-day MA is
not a problem in that this MA was a minimum, not a maximum, downside objective
for the correction that began in January. Some other intermediate-term
corrections in gold/euro that occurred over the past 15 years also resulted in
short-lived declines to well below the 200-day MA. However, a solid break below
the lateral support shown on the following chart would be a problem.
With reference to the following chart, note that the 50-day MA is about to cross
from above to below the 200-day MA. This is an event that will often occur near
a short-term price bottom.
Gold Stocks
Our best guess at this time is that the first leg of the coming rally will take
the HUI back to former support (now resistance) at 140-145 and that the second
leg of the coming rally will take the HUI up to around 180. However, it won't be
appropriate to give much thought to short-term rally targets until after an
upward reversal has been confirmed.
The HUI generated a preliminary reversal signal at the end of the week before
last, but there was no follow-through to the upside last week. Instead, the
preceding week's low was tested.
GDXJ generated a more definitive reversal signal at the end of the week before
last and remained well above its 24th July low last week, but even in GDXJ's
case it's not correct to say that an upward reversal has been confirmed.
Confirmation would require a daily close above resistance at $20-$21.
What we have, at the moment, is the potential for a substantial rally over at
least the next two months and some early-warning signs that a bottom was put in
place over the past two weeks.
The Currency Market
Last Friday at 8.30am EST a quarterly indicator of labour costs called the
employment cost index (ECI) was published by the US Bureau of Labor Statistics.
The ECI rose only 0.2 percent in the second quarter, which was far below
expectations that ranged from +0.5% to +0.9%. To put this in perspective, the
ECI's 0.2% increase in Q2-2015 is the smallest quarterly increase in its 33-year
history.
The US$ sold off (and the gold price jumped) in a knee-jerk reaction to this
news, but then it occurred to speculators that nothing had really changed and
the US$ rebounded. That's why the last candlestick shown on the following daily
chart of the Dollar Index has a long tail.
We don't have an opinion regarding the likely performance of the Dollar Index
over the next few months, other than we do not think it has upside potential
beyond a test of the March high or downside potential beyond 90. However, last
Friday's price action drew a line in the sand below which the price shouldn't
fall if a test of the March high is to remain a realistic short-term
possibility. More specifically, if the Dollar Index were to achieve a daily
close below 96.3 then we would rule out a short-term test of the March high and
begin to anticipate a decline to 90-92 within the ensuing two months.
Updates
on Stock Selections
Notes: 1) 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. 2) The Small Stock Watch List is
located at http://www.speculative-investor.com/new/smallstockwatch.html
Company
news/developments for the week ended Friday 31st July 2015:
[Note: AISC = All-In Sustaining Cost, FS = Feasibility Study, IRR = Internal
Rate of Return, MD&A = Management Discussion and Analysis, M&I = Measured and
Indicated, NAV = Net Asset Value, NPV(X%) = Net Present Value using a discount
rate of X%, P&P = Proven and Probable, PEA = Preliminary Economic Assessment,
PFS = Pre-Feasibility Study]
*Almaden Minerals (AAU) advised that 7th August will be the record
date for the spin-out of Almadex shares to existing shareholders, meaning that
anyone who wants to participate in the spin-out -- and receive 0.6 shares of
Almadex for each of their Almaden shares -- will have to own Almaden shares by
Friday 7th August.
Almaden shares will begin trading 'ex-spinout' on 10th August and Almadex shares
will probably begin trading on the TSXV a few days later under the symbol AMZ.
Refer to AAU's
press release for further details.
*Endeavour Mining (EDV.TO, EVR.AX) reported its financial results
for the June quarter. The results were excellent and mean that the company is on
track to do better than its 2015 guidance.
Record quarterly production of 131K ounces was achieved at a low AISC of
US$898/oz. More importantly, at a time when the majority of gold-mining
companies are struggling to break-even EDV achieved a net quarterly profit of
US$33M (C$0.10 per share). Most importantly, there was a US$29M improvement in
the balance sheet.
These results confirm that EDV is one of the best buys in the beaten-down
gold-mining sector.
*Evolution Mining (EVN.AX) reported its results for the June
quarter during the week before last, but for no good reason we failed to mention
it in the 27th July Weekly Update.
Like EDV.TO, EVN.AX is firing on all cylinders. In the latest quarter the
company had record-high production, record-low production costs (the AISC was
slightly above US$800/oz) and record-high cash flow. Production for the
financial-year ending 30th June 2015 was near the top of the company's
400K-440K-oz guidance and costs were lower than the low-end of the annual
guidance.
Assuming no change in the gold price, EVN should be even more profitable and
generate a lot more cash over the next 12 months. This is due to the
recently-completed acquisitions, which together will push EVN's annual
production above 800K ounces.
If you desire exposure to the stocks of mid-tier (500K-1Moz/yr) gold producers,
EVN should be your first choice.
*Golden Star Resources (GSS) issued its financial report for the
quarter ending 30th June 2015. The report showed that the company produced 55K
ounces of gold (down from 63K ounces during the March quarter), made a net loss
of US$69M and ended the quarter with a working capital deficit of US$86M (up
from a deficit of $32M at 31st March). The balance sheet deteriorated by US$31M
during the quarter, with net debt (the working capital deficit plus long-term
debt) rising from US$163M to US$194M.
This was a terrible result, although largely expected due to the
previously-reported problems at the Bogoso plant that resulted in the premature
cessation of refractory operations at the mine. Impairment charges related to
the Bogoso problems contributed $34.4M to the reported net loss.
GSS's financial situation has been at least temporarily rescued by the $150M
funding deal with Royal Gold (RGLD) that was announced in May and completed last
week. The first $60M due under this deal should have now been received by GSS.
The remainder is due in installments over the coming 14 months.
Thanks to RGLD's support, GSS has the opportunity to improve its profitability
via the construction of two new low-cost mines over the coming 18 months. If the
gold price is currently in the process of bottoming then it will probably
survive, but, as has been the case for a long time, there are far better
candidates for new buying.
*Kinross Gold (KGC) isn't in the TSI Stocks List, but the TSI List
has some exposure to KGC via January-2016 call options and we've mentioned a
number of times that it offers the best value among the gold-mining seniors. In
today's report we are therefore including a note about KGC's results for the
June quarter.
Considering the overall market environment, KGC's June-quarter result was
satisfactory. During the quarter there was a $5M decline in its working capital
(from US$2022M to $2017M) and no change in its long-term debt (US$1987M),
leaving the company in the enviable position of having no net debt. Furthermore,
it is tracking at the high end of its production guidance and at the low end of
its cost guidance for 2015.
KGC therefore remains in good financial shape and is performing well on the
ground. Political/country risk is high (due to the importance of its Russian
operations) and prevents it from being anything more than a short-term trade,
but at current prices the risk/reward is the best among the stocks of senior
(>1M-oz/yr) gold producers. Gold Fields (GFI) has the second-best risk/reward.
*Premier Gold (PG.TO) provided some financial details for the
in-construction South Arturo project in Nevada (40% PG, 60% Barrick Gold). This
project is scheduled to go into production early next year and to produce about
200K ounces of gold at an all-in cost of US$730/oz in 2016. After funding its
share of the construction costs and receiving its share of next year's cash
flow, PG expects to end this year with C$75M of cash and to end 2016 with C$100M
of cash assuming a gold price of $1200/oz in 2016.
PG is in a very strong financial position and at this stage its recent purchase
of 40% of the South Arturo project appears to be one of the best deals
negotiated by a junior gold miner over the past few years. Its establishment of
a joint venture with Centerra Gold on the Trans-Canada project early this year
was also one of the best deals negotiated by a junior gold miner over the past
few years.
*Pretium Resources (PVG) announced that it has received the final
environmental approval for its Brucejack project in British Columbia, Canada.
The project can now proceed to the mine-construction phase.
Although a failure to obtain the final permit would have been a big surprise,
this is still good news as it removes a risk and opens a window in which a
takeover is more likely. We suspect that the Strathcona-created controversy over
PVG's resource model back in 2013 will prevent a takeover from happening prior
to the unequivocal verification of the resource, which can only happen via
full-scale mining. However, if there is going to be a takeover prior to
production then the coming three-month period is the most likely time for it to
happen.
If the figures in the project's Feasibility Study are an accurate reflection of
reality (the big 'if'), then the Brucejack project is economically viable down
to $800/oz and is probably the best undeveloped gold deposit in North America
not currently owned by a senior producer. This makes it a potential takeover
target despite the fact that most senior and mid-tier producers are currently in
financial lockdown mode.
*Ramelius Resources (RMS.AX) issued its quarterly report for the
June quarter (the final quarter of its financial year). The report confirmed
that the company was debt free and had A$36M of cash-plus-gold at 30th June,
which was already known.
The most important new information in the report was the forecast for the
2015-2016 FY. RMS expects to produce about 100K ounces of gold at an AISC of
A$1250/oz (US$940 at an A$/US$ rate of 0.75) during the next year, with 57K
ounces coming from the base Mt Magnet mine and the remainder coming from
satellite mines (Kathleen Valley and Vivien). Given that about half of its
production is forward sold at A$1570/oz, RMS looks set to make a substantial
addition to its cash hoard over the coming 12 months.
*Sabina Gold and Silver (SBB.TO) advised that it is targeting
September-2015 for the completion of a Feasibility Study for a smaller-scale
mining operation at the Back River project (smaller-scale, that is, than the
390K-oz/yr operation considered in the FS completed in May-2015). The
smaller-scale operation would focus on the higher-grade sections of the overall
resource with the primary objective of substantially reducing the pre-production
capex from the US$700M figure estimated in the May-2015 FS.
The smaller-scale operation is now called the Initial Case scenario and would
probably entail a 250K-oz/yr mine. What was originally called the base case is
now called the Large Project Case.
As well as resulting in a mine plan that would be less difficult to finance, the
Initial Case FS should make SBB's Back River project more directly comparable
with the Hope Bay project of TMAC Resources. As noted in the 13th July Weekly
Update, TMAC currently has a much higher market valuation than SBB, so a study
that shines a light on the similarities between Back River and Hope Bay should
boost the demand for SBB shares.
*Timmins Gold (TGD) reported sub-par production of 23K ounces of
gold and a near break-even profit result (a very small net profit) for Q2-2015.
The small reported profit masked an $8M balance-sheet deterioration during the
quarter, meaning that it was another poor performance by this company. With
US$40M of working capital and no long-term debt, the balance sheet remains
healthy. However, a few more quarters like the last one and TGD's financial
position will be weak.
Production is expected to improve during the second half of this year, but the
well-under-plan performance during the first half has caused the company's 2015
gold production guidance to be reduced from 115-125K ounces to 100-110K ounces.
List
of candidates for new buying
From within the ranks of TSI stock selections the best candidates for new buying
at this time, listed in alphabetical order, are:
1) AAU (last Friday's closing price: US$0.62)
2) DNA.TO (last Friday's closing price: C$0.86)
3) EDV.TO (last Friday's closing price: C$0.51)
4) EVN.AX (last Friday's closing price: A$1.00)
5) PG.TO (last Friday's closing price: C$2.02)
Note that the above list is limited to five stocks. It will sometimes contain
less than five, but it will never contain more than five regardless of how many
stocks are attractively priced for new buying.
Chart Sources
Charts appearing in today's commentary
are courtesy of:
http://stockcharts.com/index.html