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.

In nominal dollar terms, the BULL market in US Treasury Bonds that began in the early 1980s ended in December of 2008. In real (gold) terms, bonds commenced a secular BEAR market in 2001 that will continue until 2014-2020. (Last update: 4 April 2011)

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 2014 and 2020. (Last update: 22 October 2007)

A secular BEAR market in the 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 2014 and 2020. (Last update: 22 October 2007)

Commodities, as represented by the Continuous Commodity Index (CCI), 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 2014-2020. In real (gold) terms, commodities commenced a secular BEAR market in 2001 that will continue until 2014-2020. (Last update: 09 February 2009)

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Outlook Summary

Can inflation happen when the banks aren't lending?

We can state with absolute certainty that "yes" is the correct answer to the above question. We know for a fact that the total supply of money can increase in parallel with a contraction in the commercial banking industry's collective loan portfolio because that's exactly what has happened in the US since October of 2008. As illustrated by the following chart, "total loans and leases at commercial banks" (the blue line) peaked and began to trend downward in October of 2008. As also illustrated by the following chart, True Money Supply (the red line) has trended upward in parallel with the post-October-2008 decline in bank lending. In fact, the rate of growth of the money supply accelerated after bank lending went into decline!

Considering what has happened over the past few years, why do some analysts continue to claim that commercial banks must be willing and able to expand their loan books, and that the public must be willing and able to take on more debt, in order to get growth in the economy-wide supply of money? We don't know; you'd have to ask them. Clearly, they are wrong.

The US money supply, when properly measured, has grown rapidly in the face of reduced bank lending over the past 2.5 years because the Fed and the private banks have combined to monetise a huge dollar-amount of securities. There is possibly a limit to how much the private banks can monetise, but the Fed's ability to monetise has no rigid bounds. It really just comes down to how much risk the Fed is prepared to take in its efforts to "stimulate" the economy, and how much monetary inflation the bond market is prepared to tolerate.

When the US eventually reaches the point where "inflation" is widely believed to be the most important economic problem facing the nation, actions that put a stop to the Fed's monetary profligacy could become politically feasible. We currently appear to be a long way from that point.

T-Bond Update

Uranium Update

Interesting quote of the week

The Stock Market

As indicated by the following daily charts, the Hang Seng Index (HSI) and the S&P500 Index ended last week at, or near, resistance. Specifically, the HSI ended the week at trend-line resistance and the SPX ended the week just shy of lateral resistance defined by its February peak. Neither index is 'overbought' and both stand a good chance of making additional upward progress over the next 4-6 weeks, but it would be normal for them to consolidate below resistance for a week or so before resuming their advances.

If you thought that a market had a 70% chance of advancing and a 30% chance of declining over a time period, should you be bullish on that market over the time period in question?

The correct answer is: it depends on the potential magnitudes of the advance and the decline. If, for example, you thought that the maximum upside were limited to about 10% whereas the downside risk were 30%, then it would not make sense to be bullish.

The above comment reflects our current short-term stock market outlook. We think there's more chance of senior stock market indices rising than falling over the next several weeks, but we also think that the magnitude of the downside risk is substantially greater than the magnitude of the upside potential. Consequently, we aren't "bullish".

It seems that in being concerned about downside risk we are in good company, in that the 10-day moving average of the OEX put/call ratio (the green line on the following chart) has just moved back to near the 20-year high it reached in early March. This suggests that professional money managers are far more 'hedged' than usual right now. At the same time, the fact that the 10-day moving average of the equity put/call ratio (the blue line on the following chart) has moved back to a relatively low level suggests that the public is complacent. In other words, the put/call situation suggests that the pros are fearful and the public is fearless.

The put/call situation is almost as bearish as it gets.

This week's important US economic events

Gold and the Dollar

Gold and Silver

At the close of US trading on Thursday it looked like gold was about to break decisively into new high territory. However, the US monthly employment data released on Friday morning was significantly better than the employment data released over the preceding few months, which prompted a minor sell-off in the gold market (gold is the ultimate 'safe haven', so it tends to weaken in response to signs of economic strength). As a result, the April gold futures contract (refer to the daily chart below) still hasn't broken out to the upside.

Gold didn't manage to break out last week, but the odds are in favour of it doing so in the near future. One of the main reasons is that the silver/gold ratio ended last week at a new multi-year high. As long as the silver/gold ratio remains in a short-term upward trend it will be reasonable to assume that new highs lie ahead for both gold and silver.

When the gold and silver rallies come to an end we are likely to get substantial weakness in silver relative to gold, causing the silver/gold ratio to plunge. By the same token, any decline in the gold price that isn't accompanied by a much larger percentage decline in the silver price probably won't be indicative of a downward trend reversal.

We expect that an upside breakout will soon occur in the gold market and we have considerable long-side exposure to gold (mostly via gold stocks), but we would actually prefer that the gold price did not break to new highs just yet. A break to new highs and a quick move up to $1500/oz or $1600/oz over the next 6 weeks would create some profit-taking opportunities within our equity portfolio, but we doubt that it would make a big difference to the overall value of our portfolio. Moreover, it would most likely set the stage for a downward correction of at least 6 months in duration.

From an intermediate-term perspective, a more bullish scenario involves the gold price moving down to the low-$1300s over the next 1-2 months. Price action along these lines would, we think, set the stage for another 6-12 month rally.

Gold Stocks

The HUI continues to consolidate below resistance at 580. In order for the HUI to rise above resistance at 580 and above the December-2010 peak of 600, gold bullion will probably have to close above $1450. There's a good chance that this will happen within the next few weeks.

In the mean time, support provided by the 50-day and 200-day moving averages is rising. The 50-day moving average should soon reach 550 and the 200-day moving average should soon move into the 520s.

Currency Market Update

The following daily chart shows that Australian Dollar (A$) futures have just risen for 11 days in a row. This unusually-long daily winning streak means that the A$ is 'overbought' on a short-term basis and should soon begin to correct/consolidate.

The current short-term 'overbought' condition could be remedied via a routine multi-day pullback, but on a longer-term basis the A$ has substantial downside risk by virtue of its over-valuation and the fact that its intermediate-term upward trend is linked to the global stock market rally. After the senior stock indices commence intermediate-term declines, the A$ will very likely do the same. The corollary is that the A$ is unlikely to commence a large decline until the global stock market rally ends.

The British Pound ended last week in an interesting position. It peaked during the third week of March at 1.64 and then dropped sharply to important support at 1.595. This support has initially held, but the rebound of the past few days could turn out to be part of a 2-3 month topping pattern.

A solid break below 1.59 would suggest that the Pound made an intermediate-term peak in March. Furthermore, if, over the next few weeks, we get a new 52-week high in the euro along with confirmation (via a move below 1.59) of an intermediate-term peak in the Pound, then we will have the sort of divergence between the Pound and the euro that has preceded important lows in the Dollar Index over the past few years.

Update 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)

Pretium Resources (TSX: PVG). Shares: 85M issued, 90M fully diluted. Recent price: C$10.00

The recent sharp pullback in PVG's shares was caused by the secondary offering of part of SSRI's 42% stake in the company. There has been no change in PVG's share count, but when a large shareholder attempts to place part of its holding the short-term effect on the stock price is similar to an offering of new equity. All of a sudden there is a lot more supply, and the stock price reacts in a way that creates enough new demand to balance the new supply.

The good news is that SSRI has successfully placed 10M of its PVG shares at $10/share, which shows that there is presently strong demand at around $10. The bad news is that this represents less than one-third of SSRI's overall position. This could mean that the balance of SSRI's stake will weigh on PVG's stock price over the months ahead. We hope that Bob Quartermain, PVG's CEO, can prevent this from happening by arranging for one large investor or a group of investors to take SSRI completely out of its PVG position.

While the downward pressure caused by SSRI's exit will be an unwelcome development for anyone with a full position in PVG, it is a positive development for anyone looking for opportunities to do new buying. A stock with excellent prospects is having its price reduced for a reason that has absolutely nothing to do with any adverse change in the underlying business fundamentals.

For investors/speculators with no current exposure to PVG, it would probably make sense to take an initial position at around C$10 with a plan to buy more if the price drops back to the low-C$8 area.

    Energy Fuels Inc. (TSX: EFR). Shares: 124M issued, 142M fully diluted. Recent price: C$0.51

EFR has completed its recently announced equity financing. The company has raised $11.5M by issuing 23M shares at C$0.50.

The timing of this financing was unfortunate, coming as it did after the uranium sector had crashed in reaction to Japan's "nuclear emergency". On the positive side of the ledger, the fact that EFR now has the money it needs to begin construction of its uranium mill means that a significant risk has been eliminated.

The following comment from the 21st March Weekly Update remains applicable:

"EFR shares are now riskier than they were prior to the recent events in Japan, but they also now have a lot more upside potential thanks to the large price decline. For risk-tolerant speculators, we think the shares are suitable for new buying below the C$0.50 financing price."

    Fairborne Energy (TSX: FEL). Shares: 102M issued, 112M fully diluted. Recent price: C$5.45

The stock price of mid-tier natgas producer FEL pulled back by a little more than expected during the February-March correction. It would ideally have held at the 50-day moving average in the high-C$4 area, but instead it dropped back to the 200-day moving average in the mid-C$4 area. However, the overall chart pattern remains bullish.

FEL would be a candidate for new buying following a pullback to around C$5.00. A break above resistance at C$5.70 would create a chart-based target of C$8.00-C$8.50.

    Duoyuan Global Water (NYSE: DGW). Shares: 25M. Recent price: US$5.49

The rapid decline in the stock price of DGW has continued. The decline is happening due to suspicion/fear that the company's accounts are fraudulent in some way.

Up until now there has been no evidence of any wrongdoing at DGW. At this stage, it is purely a case of "guilt by association" -- not just association with Duoyuan Printing (DYP), a company that is under SEC investigation and has just been de-listed from the NYSE for failing to meet listing requirements, but also association with many other US-traded Chinese companies that are presently under 'accounting clouds'. The article posted HERE gives examples of such companies.

If its accounts can be trusted, DGW has about US$7/share of working capital and about US$6/share of cash, meaning that its profitable water treatment business is currently being valued by the stock market at less than zero. Obviously, the critical question is: Can the accounts be trusted? Only the senior managers of DGW know the answer. Everyone else -- those who are shorting and those who are buying/holding the shares -- is just speculating.

If the company has the balance sheet and business it claims to have, then at the current share price the best use of its cash would be to buy its own stock. This is exactly what some other Chinese companies with extremely low stock valuations are now planning to do.

We had previously intended to buy more of this stock if it dropped to its cash value, but our plan has changed. In this case, we'd prefer to hold off and pay a higher price after an independent audit has given the accounts a 'clean bill of health'.

Chart Sources

Charts appearing in today's commentary are courtesy of: