-- Weekly Market Update for the Week Commencing
16th November 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)
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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 |
Bearish
(19-Oct-15)
|
Bearish |
Stock Market
(DJW)
|
N/A |
Neutral
(05-Oct-15) |
Bearish
|
Gold Stocks
(HUI)
|
N/A |
Bullish
(23-Jun-10) |
Bullish
|
Oil |
N/A |
Neutral
(26-Oct-15) |
Bullish
|
Industrial Metals
(GYX)
|
N/A |
Neutral
(09-Nov-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
Martin Armstrong botches a critique of Austrian Economics
A great crash is
coming!
Why hasn't the Fed's QE caused "inflation"?
Manufacturing versus
Services
A year ago, both the ISM
Manufacturing New Orders Index and the ISM Non-Manufacturing (that is, services)
New Orders Index were near 10-year highs. Today, the services index is still
near a 10-year high whereas the manufacturing index has dropped back to near the
bottom of its 5-year range. Refer to the following chart for details. What does
this divergence mean?
Apart from the obvious (service businesses are generally doing better than
manufacturing businesses), we think it means that the US economy is less likely
to head into recession within the next three months than would be the case if
both the manufacturing and non-manufacturing indices were near the bottoms of
their 5-year ranges. That being said, if conflict arises between these two
indicators of economic performance, the manufacturing index's signal is likely
to be the more accurate. For example, if the manufacturing new-orders index were
to drop to 48 or lower we would take it as a reliable signal that the US economy
had entered or was about to enter recession territory, regardless of what the
non-manufacturing new-orders index happened to be signaling at the time.
The reason is that even nowadays, manufacturing is the foundation of the US
economy. To put it another way, although the services-oriented industries are
now a large part of the economy, these industries are built on a manufacturing
base. If the base becomes very weak, the entire structure will eventually become
very weak.
The bottom line is that in looking for evidence that the US economy has entered
or is about to enter recession, we will continue to focus on the manufacturing
numbers. At the moment the numbers that have proven to be the most reliable
recession indicators are saying that the economy is lacklustre, but not in
recession.
The Stock Market
Comparisons that make sense
Comparisons between the current situation and 2007-2008 are misguided. The main
reason is that the monetary backdrop is very different. The monetary backdrop is
critical, because the sort of 'liquidity crisis' that characterised the dramatic
2007-2008 stock-market decline is virtually impossible under current monetary
conditions. Also, it is extremely unlikely that the next bear market will follow
the path of the one that is freshest in everyone's minds.
If the US stock market is in the process of transitioning into a cyclical
bearish trend, then the early-1970s, the late-1970s and the early-2000s are
potentially-valid comparisons. Currently, the greatest fundamental similarities
appear to be with the early-2000s, in that in 2000 the US economy was widely
viewed as a bastion of strength, the US$ was strong, the stock market was being
boosted by the performances of a relatively small number of high-market-cap tech
stocks, and the Fed was just beginning to tighten monetary policy.
Interestingly, if we line up the March-2000 top with the July-2015 top we also
find price-action similarities with the early-2000s.
Lining up the March-2000 and July-2015 tops is what we've done in the following
chart. Taking this chart literally suggests a short-term bottom within the
coming fortnight and then a rally that culminates with a successful test of the
high near year-end.
On the other hand, if the US stock market is still immersed in a cyclical
bullish trend then potential comparisons are 1986, 1997-1998 and 2011.
Current Market Situation
The SPX pulled back sharply last week. We wouldn't have been surprised if the
200-day MA had offered support for a few days on the way down, but it didn't.
Instead, this MA was decisively breached on Thursday and there was
follow-through to the downside on Friday.
Our view has been that regardless of whether or not the cyclical bull market
ended a few months ago, a decline that retraces at least half of the
September-October rally was likely to happen in November. At this time we see no
reason to change our view.
An exact 50% retracement would take the SPX down to 1994, but there is support
at around 2000 that could limit the decline. There is also a not-insignificant
risk that a lot more than half of the preceding rally will be retraced before a
short-term bottom is in place, although very little chance that the
August-September lows will be breached between now and year-end.
The Dow Transportation Average (TRAN), the US stock market's leader to the
downside over the past 12 months, ended Friday's session at the support level we
mentioned in last week's Interim Update. TRAN should soon confirm the overall
market's downward reversal by closing below this support.
It's a good bet that an effort to rally the market will begin during the first
half of this week, although given the news backdrop (the horrific attacks in
Paris on Friday night) we certainly wouldn't bet on an immediate turnaround. The
effort to get a rally going will be led by hedge funds that now have a vested
interest -- having piled into long positions over the past few weeks in a
desperate attempt to rescue their annual results -- in a strong stock market.
However, any rally in the SPX that begins without a preceding drop to 2000 or
lower will probably fail within a few days at no higher than the 200-day MA and
be followed by a decline to new multi-week lows.
What to do?
Traders with short-term bearish positions (put options, for example) should look
for opportunities to exit over the next two weeks, beginning on Monday if there
is downward acceleration in reaction to the latest economic and political
developments. Just as the best times to exit bullish positions are when the
future looks incredibly bright and the average investor doesn't have a care in
the world, the best times to exit bearish positions are when the future looks
bleak and there is panic in the air.
We have a stock market put-option position. Our intention is to sell at least
half of this position if the market falls sharply during the first hour of
trading on Monday and to hold the full position if the market immediately begins
to rebound. As noted above, a rally that begins without a preceding drop to 2000
or lower on the SPX probably won't get very far.
The next good opportunity to enter bearish speculations will probably arrive
during the second half of December.
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
Nov 16 |
Empire State Mfg Survey |
Tuesday
Nov 17 |
CPI
Industrial Production
TIC ReportHousing Market
Index |
Wednesday
Nov 18 |
Housing Starts
FOMC Minutes |
Thursday
Nov 19 |
Philadelphia Fed Business
Outlook Survey
Leading Economic Indicators |
Friday
Nov 20 |
No important events
scheduled |
Gold and the Dollar
Gold
Gold COT Reality
Proponents of the story that the gold market is dominated by a grand,
never-ending price-suppression scheme will often point the finger of blame at
the bullion-bank commercial traders whenever there's a sizable decline in the
gold price. In doing so they are obviously reliant on their readers/followers
being poorly informed, since the bullion-bank commercials (the largest
"commercial" operators in gold futures) are almost always net buyers during
periods of significant price weakness. For example, during the sharp price
decline of the past three weeks the "commercials" operating on the COMEX
substantially reduced their collective net short position in gold futures
contracts, that is, the "commercials" were substantial net buyers of gold
futures contracts. Furthermore, the net-buying on the part of the "commercials"
started as soon as the price began to decline.
The reality is that IF the futures market was the driving force behind the
recent sharp pullback in the gold price, the price decline MUST have been driven
by speculative selling. There is no other possibility.
The word "if" is capitalised in the preceding paragraph because while the recent
sharp pullback was probably driven by speculative selling in the futures market,
we can't know for sure that this was the case. What we mean is that we can't
rule out the possibility that the decline was driven by selling in the physical
market.
It is of little consequence to us whether a move in the gold price is led by the
physical market or the futures market. In fact, we question whether it serves
any useful purpose to view the physical and futures markets as being separate.
However, analysing the physical and "paper" gold markets as if they were
separate has certainly become a popular endeavour.
We've noticed that the proponents of the gold-suppression story will usually
attribute a rally in the gold price to physical buying and a decline in the gold
price to "paper" selling, but please understand that they have no way of
actually knowing which market was the driver. More to the point, they generally
have no way of even hazarding an educated guess, because they rarely look where
they should be looking for clues. The fact is that the only definitive indicator
of whether a price move was driven by the physical market or the futures market
is the change in the spread between the spot price and the futures price,
although a rapid change in speculative positioning in the futures market can
also be a clue.
Instead of tracking an indicator that could possibly give them the information
they desire, it seems that the aforementioned storytellers usually just make
guesses and 'support' these guesses by citing irrelevant news/data such as the
number of gold coins being bought by the US public or the amount of gold being
imported by China. As long as it can be shown that someone is buying, their
conclusion is that the physical market is strong. Since someone is always
buying, their conclusion is always that the physical market is strong and,
therefore, that any meaningful price decline must have been caused by the
selling of paper gold.
Current Market Situation
The COT data for 10th November will be interesting, because it will show what
happened to speculative positioning in the gold market in reaction to the strong
US employment numbers that were announced on 6th November. The COT data would
normally have been published by the CFTC on Friday 13th November, but due to a
federal holiday on 11th November the publishing date has been delayed to 16th
November (we know, it doesn't make sense, but this is a government department we
are dealing with). If it turns out that the change in speculative positioning
indicated by the 10th November numbers is large enough to be important then
we'll send out an email with our related comments on Monday-Tuesday.
The US$ gold price has now fallen on 12 of the past 13 and 19 of the past 22
trading days, an extraordinary short-term streak. However, the decline has lost
momentum and last week's price action was mostly uneventful. The only noteworthy
development last week was Thursday's spike down to the July low. This could turn
out to have been a successful test of the July low, but no conclusions can be
drawn at this time.
Our view continues to be that the start of the next tradable gold rally is
probably still at least a month away, with the days around the 16th December
FOMC announcement currently being the most realistic time window (for a rally
start). In the interim we expect that there will be a 1-2 week rebound.
Gold Stocks
Current Market Situation
As was the case with gold bullion, last week's performance by the HUI was
uneventful. The HUI performed slightly better than gold (it moved sideways while
the gold price fell $6), but there is no evidence that a short-term bottom is in
place or even that a 1-2 week rebound has begun.
There is no change in our short-term outlook. We suspect that a rebound over the
coming 1-2 weeks will be capped by the 50-day MA (near 120) and that a test of
the September low will occur in December.
Due to a deal announced last week, a brief note about Kinross Gold (KGC) is
appropriate.
KGC announced the acquisition of two Nevada-based gold-producing assets from
Barrick Gold. These assets came at a total cost of US$610M and are expected to
add 430K ounces/year to KGC's production (annual production will increase from
around 2.6M ounces to around 3M ounces). KGC has ample cash on hand to fund the
purchase.
Prior to this deal KGC offered the best value among the senior gold stocks. As a
result of this deal KGC's relative value is even better. Furthermore, its
country/political risk will decline due to the addition of production in a
low-risk jurisdiction.
We thought that KGC would rebound to its 200-day MA (but not much further)
during September-October, which it did. It has since declined with the overall
sector and stands a good chance of making a higher low within the next several
weeks.
We will be on the lookout over the weeks ahead for a new opportunity to
establish a trading position in KGC.
What to do?
The significant sector-wide decline of the past three weeks has taken almost all
gold-mining stocks down.
With many of the lowest-risk stocks having again reached the bargain basement
and with there not yet being any evidence that a short-term bottom is in place,
the lowest-risk stocks should be the primary focus of any new buying on the part
of intermediate-term and long-term traders who currently do not have much
exposure to gold mining (those who already have substantial exposure should
probably wait for evidence of a short-term bottom before doing any new buying).
With regard to the TSI Stocks List, this means that most new buying should
currently be directed towards stocks with a Risk Rating of 1 or 2.
Short-term traders should not do any buying until there is evidence that a
short-term bottom is in place.
The Currency Market
The Yuan
Aside from a small official devaluation in August, China's government has been
propping-up its currency (the Yuan) relative to the US$ over the bulk of the
past 12 months. That is, China's government has acted to prevent its currency
from doing what it would otherwise have done, which is to weaken relative to the
US$.
Yuan strength would normally be perceived as a disadvantage by the Keynesians
and mercantilists making government policy in China, but there are two reasons
to believe that China's apparatchiks have done what they needed to do to create
a stronger Yuan over the course of this year. One reason is to discourage
capital outflows, which reached problematic levels over the past several months.
The other reason is to smooth the way for the Yuan's inclusion in the IMF's
Special Drawing Rights (SDR).
Late last week IMF staff recommended that the Yuan be included in the SDR
basket, alongside the US dollar, the euro, the British pound and the Yen. This
almost certainly means that the IMF's executive board will approve the Yuan's
inclusion in the SDR when it meets on 30th November. That is, the Yuan's
inclusion in the SDR basket is now pretty much a done deal. What does this mean
from a practical investing/trading perspective?
Not much, because this development won't significantly alter global Yuan demand.
The reality is that no private entity cares about SDR composition when making
capital allocation decisions and that central-bank decisions regarding
international currency reserves are primarily dictated by considerations that
won't be affected by having the Yuan as part of the SDR. However, China's
leaders apparently view SDR inclusion as a badge of honour -- a symbol of
China's ascension to a position of global power.
Because the Yuan's insertion into the SDR will not significantly alter the
demand for this currency, it will probably not lead to strength in the Yuan
beyond a possible short-lived reaction to the news. In fact, it will probably
lead to a weaker Yuan. The reason is that having done what was needed to attain
the prestige that goes along with being part of a very exclusive club, China's
senior policy-makers won't be so concerned in the future about propping-up their
currency.
The Dollar Index
The Dollar Index ignored last week's stock market decline and appears to be
heading for a test of its March high at 100-101. Due to the lopsided sentiment
backdrop indicated by surveys and the COT situation, we do not expect that it
will make a solid/sustained break through the March high within the next three
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 13th November 2015:
[Note: AISC = All-In Sustaining Cost, FS = Feasibility Study, FY = Financial
Year, 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) published its financial statements for the
September quarter. Taking into account the balance sheet at 30th September and
subsequent spending, we estimate that AAU presently has only about C$3M of
working capital. This is probably only enough to fund the company for another
3-6 months, so it is reasonable to expect that AAU will soon raise additional
money. We suspect that it will do a $3M-$5M equity financing, but there are
other possibilities. For example, it could choose to finance itself by selling a
silver and/or gold stream linked to future production from its Tuligtic project.
*Dalradian Resources (DNA.TO) issued its financial report for the
quarter ending 30th September 2015. The report showed that the company had C$20M
of working capital at 30th September, which is down from C$33M at 30th June.
However, shortly after the end-of-quarter cutoff the company completed a C$40M
equity financing, so it should now have C$55M-$60M of working capital. This
should be more than enough to fully fund DNA through to the September-2016
estimated completion of the FS for its Curraghinalt gold project.
*Endeavour Mining (EDV.TO, EVR.AX) reported its financial results
for the September quarter. The results were satisfactory in absolute terms and
very good compared to what most other gold-mining companies have been reporting.
EDV made a profit of US$7M during the September quarter, bringing its 9-month
profit to US$57M (about US$0.11/share). However, the profit didn't alter the
balance sheet, as net debt remained at US$223M.
*Premier Gold (PG.TO) published its financial results for the
September quarter. According to these results the company had about C$79M of
working capital at 30th September, down from C$90M at 30th June. PG continues to
be in a very strong financial position.
PG previously advised that it expects to end this year with C$75M of working
capital and to end next year with about C$100M of working capital assuming an
average gold price of US$1200/oz in 2016. Next year's expected working-capital
increase is due to PG becoming a gold producer courtesy of its 40% stake in the
South Arturo project.
*Pilot Gold (PLG.TO) published its financial statements for the
September quarter. The most important number for an exploration-stage mining
company is the working capital, which in PLG's case was US$10.2M (C$13.6M) at
30th September (down from US$12.7M at 30th June). At the current rate of
spending this would be enough to fund the company for 9-12 months, although we
suspect that PLG's management will look for an opportunity to top-up the
treasury within the next 4 months.
Also, PLG announced a change of CEO. Matt Lennox-King has left and has been
replaced on an interim basis by Rob Pease. Provided that Rob Pease's appointment
really is an interim measure while a permanent replacement is sourced, this
management change is neutral. However, we would consider the change to be
negative if Pease's appointment becomes permanent, as we were unhappy with his
performance in a previous role as CEO of Sabina (SBB.TO).
*Sabina Gold and Silver (SBB.TO) published its financial
statements for the September quarter. According on these statements and the
company's press release, SBB had C$19.8M of working capital at 30th September
and will end the year with about C$17M of working capital. This suggests that
SBB is fully funded for at least the next 12 months or until a decision is made
to commence mine construction.
By the way, the fact that SBB is fully funded for the next 12 months doesn't
mean that it won't do an equity financing within the next few months. It means
that the company is not under any pressure to raise money and should therefore
not be forced to accept onerous financing terms.
The demand for SBB shares remained relatively high over the past three weeks
despite the sector-wide downturn. As a result, daily trading volume has been
greater than usual and the stock has held onto the gains achieved during the
September-October rally.
*Timmins Gold (TGD) reported results from infill and confirmation
drilling at its development-stage Ana Paula gold project in Guerrero province,
Mexico. The results were generally very good.
Ana Paula is currently undergoing a Feasibility Study that is scheduled to be
complete in mid-2016. A PEA completed last September indicates that it could be
developed into an open-pit 116K-oz/yr gold mine with an AISC of only $567/oz.
The M&I resource is 1.86M ounces, and at a gold price of $1200/oz the after-tax
NPV(5%) and the IRR are estimated to be $185M and 28.1%, respectively.
Furthermore, the economics have since improved due to TGD's acquisition of the
El Sauzal plant from Goldcorp.
The biggest problem with the Ana Paula project is its location, in that Guerrero
is a moderately high-risk province due to the large drug gangs that operate
there. However, if the security-related risk is mitigated by the company and/or
reduced by greater diligence on the part of Mexican authorities, this project
alone could be worth a multiple of TGD's current market cap.
When TGD agreed to buy the Ana Paula project in February in an all-stock deal,
we thought that it was paying far too much. This is because we were blissfully
unaware that TGD's current assets were massively overstated on its balance sheet
and that the company's flagship San Francisco mine was performing well below
plan. Now that light has been shone on the true state of TGD's balance sheet and
flagship operation, the Ana Paula purchase looks much better.
The most important short-term issue for TGD will be the renegotiation of a
US$10M loan repayment due to Sprott Asset Management on 31st December 2015. If
this loan repayment can be postponed by one year then TGD's financial situation
will be greatly improved and the stock price will probably continue the recovery
that began last week.
*UEX Corp. (UEX.TO) issued its financial report for the latest
quarter. The report showed that the company had C$5.8M of working capital at
30th September, which probably means that it currently has about C$5M.
As noted two weeks ago, the company has made an interesting acquisition that
obligates it to pay C$6.5M by the end of next year, including C$2M by the end of
this year. It will also have to fund exploration on its current projects and the
usual G&A costs, so it's a good bet that UEX will do an equity financing within
the next couple of months. Our guess is that it will raise at least C$5M in the
near future by issuing new shares.
As we wrote two weeks ago: "We think that the completion of the
aforementioned financing will create a very good opportunity for patient
speculators to take a new position or add to existing positions in UEX."
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) AKG (last Friday's closing price: US$1.58)
2) DNA.TO (last Friday's closing price: C$0.71)
3) EDV.TO at C$0.65 or lower (last Friday's closing price: C$0.67)
4) EVN.AX (last Friday's closing price: A$1.24)
5) PG.TO (last Friday's closing price: C$2.33)
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
http://research.stlouisfed.org/