% 'pass = Request.Form("pass") IF ((Request.Form("pass") = 1) OR (Session("pass") = "pass")) THEN %>
-- Weekly Market Update for the Week Commencing 18th July 2016
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 |
Neutral (27-Jun-16) |
Bullish |
US$ (Dollar Index) | N/A |
Bullish (29-Feb-16) |
Neutral (19-Sep-07) |
US Treasury Bonds (TLT) | N/A |
Bearish (19-Oct-15) |
Bearish |
Stock Market (DJW) | N/A |
Neutral (04-Jul-16) |
Bearish |
Gold Stocks (HUI) | N/A |
Neutral (04-May-16) |
Bullish |
Oil | N/A |
Neutral (26-Oct-15) |
Bullish |
Industrial Metals (GYX) | N/A |
Bullish (04-July-16) | Bullish |
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
The US banking system has no control over its reserves
Shipping rates will never go to zero
Are central banks out of bullets?
Summary of current
thinking/positioning
1) Concerned about short-term
downside risk in gold, silver and the associated mining stocks, but
comfortable maintaining substantial 'core' exposure in anticipation of
large additional gains over the next two years. Continuing to pick away at
'special situations' -- small/illiquid gold stocks that could generate
large gains independently of sector-wide performance.
2) Building
up exposure to non-gold commodity-related stocks (primarily base-metals
producers/explorers, but also energy and agriculture companies).
3) Thinking that the US stock market is unlikely to do much on either the
upside or the downside over the coming 1-2 months.
4) Thinking that
industrial commodities (oil, copper, platinum, etc.) and the main
commodity currencies (A$, C$) made long-term bottoms during Q1-2016. The
bottoms could be tested during the second half of this year as part of a
basing process, but prices are likely to be markedly higher a year from
now.
5) With regard to short-term price moves, focused mainly on
the upside potential of commodity-related equities and the downside
potential of the 'safe haven' government bonds. These ideas are related,
in that rising commodity prices are likely to go with falling
government-bond prices.
6) Thinking that an intermediate-term top
is in place for the Yen.
7) Maintaining a large cash reserve in
recognition of the downside risk in almost all equities, but steadily
reducing the cash percentage via the accumulation of non-gold commodity
stocks.
Brief comment on
the attempted military coup in Turkey
As soon as we began to read
about the attempted military coup in Turkey that began on Friday and
appears to have ended in failure on Saturday it occurred to us that the
whole drama was probably being staged by Turkey's President Erdogan.
Considering Erdogan's not-well-concealed desire to become a dictator, the
fact that he was in almost-constant communication with the press as the
drama unfolded, his use of "false flag" events in the past and the signs
that the coup attempt was so poorly executed that its quick failure was
inevitable, the turn of events looks like it could be a manufactured
excuse to assign greater power to the Presidency and purge the military of
anyone suspected of being loyal to Erdogan's political opponents.
Whatever the truth behind the event, if some semblance of stability hasn't
returned by the time the financial markets open on Monday then there will
probably be price gains in gold and T-Bonds early in the week. If so,
these gains would subsequently be given back because neither gold nor the
T-Bond attains additional value due to political instability in Turkey.
On a related matter, the risk of owning assets in Turkey or the stocks
of companies operating in Turkey is rising. This was the case prior to
last week's failed coup attempt and will be the case even if the veneer of
political stability returns in the near future. We wouldn't necessarily
sell the stocks of companies with Turkish assets, but we would assign a
sizable country-risk discount when valuing these assets.
Are stocks wrong
or are bonds wrong?
Many pundits have remarked on
how strange it is for the T-Bond yield to be at an all-time low at the
same time as the S&P500 is at an all-time high. This has prompted many to
ask the question: are stocks wrong or are bonds wrong?
The answer
to the question is: yes. The prices of almost all financial assets have
been distorted to such an extent by the monetary machinations of central
banks that both stock prices AND bond prices make no sense by traditional
valuation standards. However, given the monetary backdrop we think that
bond prices are more wrong than stock prices.
There is always a
reason for prices to be 'out of whack', and in the case of the US Treasury
market the main reason is probably the European government bond market.
With the ECB's actions having driven the yields-to-maturity on relatively
low-risk government bonds into negative territory and the yields on
relatively high-risk government bonds to barely more than 1%, the 10-year
US T-Note's current yield of around 1.5% looks downright attractive.
With the yields on US Treasury securities being held down by the
goings-on in Europe, it's a good bet that early signs of a turnaround in
European bond yields will result in a 'surprisingly' sharp rise in US bond
yields.
Commodities
Commodities, as a group, usually
trend in the same direction as emerging-market equities. That the Emerging
Market Equity ETF (EEM) broke out to the upside last week (refer to the
top section of the following chart) is therefore a positive sign for
commodities, although of greater importance (for commodity prices) than
EEM's performance in dollar terms is its performance relative to the
S&P500. As illustrated by the bottom section of the following chart, the
EEM/SPX ratio turned higher in January but hasn't yet broken above its
April high.
The following chart compares the copper price with the EEM/SPY ratio
(the emerging-market equity ETF relative to the S&P500 ETF). Both came
close to breaking out to the upside last week, but both ended the week at
resistance. For the EEM/SPY ratio, resistance is defined by the April
high. For copper, resistance is defined by the April high at $2.30 and the
channel top at around $2.25.
We expect that the copper price will break above $2.30 in the
not-too-distant future and in doing so provide the next piece of evidence
that a multi-year bottom was put in place in January. The main reason is
gold's price action. Once the gold price turned upward last December it
effectively set the meter running on the downward trends in other
commodities.
Under the current monetary system, at major price
bottoms gold reverses upward first and other commodities follow suit over
the ensuing months.
The Stock Market
The US
The SPX broke decisively above its 2015 high last week. A break above an
obvious resistance level sets up the possibility of an upside breakout
failure (a reliable bearish signal), but market 'internals' are strong so
there is no reason to anticipate such a signal.
It's unlikely that a substantial decline is about to get underway, but
a 1-2 week correction will probably soon begin. A routine correction would
take the price back to former resistance (now support) at 2120-2135.
Short-term downside risk could return to centre-stage during August or
September. In fact, we will be surprised if it doesn't. However, when it
does reappear it will probably be signaled by the sort of internal
weakness that was evident prior to the tradable declines that began last
July and December.
Europe
The Europe 600
Banks Index (FX7) is a proxy for the weakest sector in one of the world's
weakest regions. It bounced over the past several trading days, but at
this stage the bounce has done nothing more than return the price to
nearby resistance.
While there's definitely a risk that the current stresses in the
European banking industry will soon evolve into a full-blown crisis, we
caution against being overly influenced by some of the hyperbolic
commentary doing the rounds. It's possible that short-sellers of European
bank stocks will make large additional profits over the weeks ahead, but
we appear to be close to the point where every man and his dog are well
aware of the bearish fundamentals. When that happens, the path of least
resistance shifts from down to up.
A good example of what we are
talking about is provided by this year's action in the oil market. In
January-February of this year 'everyone' knew that oil's fundamentals were
bearish and were likely to remain so for a long time to come, but in the
financial markets what everyone knows is usually not worth knowing. The
oil price bottomed in the face of the obviously-bearish fundamentals and
then doubled over the ensuing four months. This didn't happen because of
manipulation; it happened because at the bottom in January-February the
worst-case scenario was already factored into the current price. We warned
at the time that this was probably so.
We are therefore now on the
lookout for an upward trend reversal in the European banking sector. Not
betting on it, just on the lookout for it.
If a short-term bottom
wasn't put in place over the past two weeks then the days around 29th July
is a potential time-window for it. This is because the results of EU-wide
bank stress tests
(https://www.eba.europa.eu/-/eba-clarifies-use-of-2016-eu-wide-stress-test-results-in-the-srep-process)
are scheduled to be published on 29th July.
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 July 18 | TIC Report |
Tuesday July 19 | Housing Starts |
Wednesday July 20 | No important events scheduled |
Thursday July 21 |
Existing Home Sales Philadelphia Fed Business Outlook Survey |
Friday July 22 | No important events scheduled |
Gold and the Dollar