% 'pass = Request.Form("pass") IF ((Request.Form("pass") = 1) OR (Session("pass") = "pass")) THEN %>
-- Weekly Market Update for the Week Commencing 30th 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)
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 |
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) |
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
ZeroHedge creates drama out of nothing
Why is the
gold price so high?
Stealing Deflation
Monetary inflation is
still going strong
With the ECB having got around
to publishing its monetary data for October last week, we have been able to
update our own monetary data and charts for the world's two most important
economic regions and currencies.
We'll start with the US, where the situation can aptly be described as more of
the same. As illustrated by the following chart, the US True Money Supply (TMS)
year-over-year growth rate has essentially flat-lined in the 7%-8% range over
the past two years. There was a slight downward move in October, but the narrow
range is intact. This is notable because, as far as we know, the US monetary
inflation rate has never before been so stable for so long (under the post-1971
system).
We consider a decline below 6% in the US TMS yearly rate of change to be a
warning that a problem in the form of an equity bear market and an economic
recession is on the way. Note, however, that the US monetary inflation rate fell
below 6% in early 2005 and yet an equity bear market and a recession didn't get
underway until late-2007. This inconveniently-long delay from the monetary
warning signal to the resulting market/economic 'problem' is due to what was
happening at the time in Europe.
As illustrated by the next chart, when the US monetary inflation rate was
plunging in 2005 the euro-zone monetary inflation rate was skyrocketing. It
seems that the flood of new euros counteracted the substantially-reduced flow of
new US dollars. The chart also shows that as the US monetary inflation rate
flat-lined in the 7%-8% range over the past two years, the euro-zone monetary
inflation rate escalated from 6% to 14%.
Due to the potential for what's happening to the euro supply to counteract
what's happening to the US$ supply, a few years ago we created a monetary
aggregate that takes into account the supplies of both senior currencies. This
new monetary aggregate is called "G2 TMS".
The G2 TMS growth rate is currently around 10%, which is near the top of its
5-year range.
As advised in previous commentaries, 6% appears to be the critical level for the
G2 TMS growth rate. What we mean is that after rapid monetary inflation has
fueled an artificial boom, a decline in the G2 TMS annual rate of growth to
below 6% sets the scene for the inevitable bust to begin within the ensuing 12
months.
That the G2 TMS growth rate remains well above its critical level is by far the
most important argument for a continuation of the US equity bull market. In
fact, it's the only valid fundamental argument. But for those betting on a
continuation of the bull market the risk is that with senior central banks
having done so much more to promote monetary inflation during the current cycle
than they've done in the past, the next bear market could begin at a much higher
monetary inflation rate.
The Stock Market
The US
We have kept an open mind over the past three months as to whether the
July-September decline in US equities was the first leg of a new cyclical bear
market or a correction within an on-going cyclical bull market. There were hints
that it was the former, but there was nothing in the indicators we follow that
could be called definitive evidence and the price action was consistent with
either possibility. The jury is still out, but the probabilities have shifted in
favour of the latter outcome (a bull market correction). Displayed below are
three charts that illustrate this probability shift.
The first chart shows the Russell2000 Small Cap Index (RUT) and the RUT/SPX
ratio, an indicator of small-cap performance relative to large-cap performance.
Prior to last week RUT had been a laggard, which was one of the signs that the
market was being propped-up by a small number of large-cap stocks. Last week,
however, RUT was relatively strong and ended Friday's session at a new 3-month
high. This means that the rally could be starting to broaden-out, although on
its own it isn't significant and on a long-term basis the RUT is still
relatively weak.
Our next chart shows that the SPX has just made a new high for the year in gold
terms. This suggests that new nominal highs lie ahead.
Last up we have a monthly chart of the S&P500 Index (SPX) with a 20-month MA
(the blue line). This chart was most recently discussed in the 2nd November
Weekly Update, at which time we wrote:
"Evidence in favour of the "no bear market yet" view includes the following
monthly chart of the SPX. The blue line on the chart is the 20-month moving
average (MA).
The point we want to make with the aid of this chart is that once a bear market
got underway in 2000 and 2007 and the SPX had achieved a monthly close below its
20-mth MA, it did not achieve a monthly close above this MA until the bear
market was over. However, in 2011 and again this year, a monthly close below the
20-mth MA was quickly reversed.
The upshot is that IF a cyclical bear market has begun then the SPX should soon
-- ideally in November -- give another monthly close below its 20-month MA."
Unless the SPX plunges by more than 70 points (the equivalent of about 600 Dow
points) on Monday it will achieve a second monthly close above its 20-month MA.
This constitutes a meaningful divergence from the price action in the early
stages of the preceding two cyclical bear markets and is more consistent with
the bull-market correction scenario.
The bull market is 'long in the tooth', valuations are high and earnings growth
(on a market-wide basis) is non-existent, so even if the bull market is still in
progress there's a high risk that it will end sometime next year. Also,
regardless of whether or not the long-term trend is still up, there will
periodically be tradable declines and rallies.
As things currently stand, we do not see a good opportunity to speculate on
either additional short-term strength or a short-term decline. The market is
currently neither 'overbought' nor 'oversold' and there is no persuasive
evidence that a tradable multi-week move is about to get underway in either
direction.
The Emerging Markets
There was enough strength in the iShares Emerging Markets ETF (EEM) in dollar
terms and relative to the SPX from late-August through to mid-October to suggest
that an intermediate-term trend reversal could be underway. However, subsequent
price action tells us that this was not the case. As illustrated by the
following chart, EEM has just broken below its 50-day MA in dollar terms and
made a new bear-market low relative to the SPY (the S&P500 ETF).
EEM tends to turn upward relative to the SPY prior to a sustained upturn in the
commodity world, so last week's new low for the EEM/SPY ratio indicates that a
sustained upturn in commodity prices is probably not about to happen.
Also, it occurs to us that although sentiment towards the "emerging markets"
appears to be very bearish, EEM has held up fairly well in nominal dollar terms
and extremely well in terms of the average commodity. This suggests that there
is a lot more remaining downside risk in emerging-market equities than there is
in commodity prices and that a bearish EEM speculation could be a reasonable
hedge for investors with sizable long-term exposure to commodity-related
equities.
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 30 |
Chicago PMI Pending Home Sales Dallas Fed Mfg Survey |
Tuesday Dec 01 |
Construction Spending ISM Mfg Report Motor Vehicle Sales |
Wednesday Dec 02 | Fed's Beige Book |
Thursday Dec 03 | Factory Orders |
Friday Dec 04 |
Monthly Employment Report Trade Balance |
Gold and the Dollar
Period | Decline in BGMI | Decline in XAU | Decline in HUI | Decline in BGMI/SPX | Decline in XAU/SPX | Decline in HUI/SPX |
1968-1970 | 62% | 62% | ||||
1974-1976 | 69% | 77% | ||||
1980-1982 | 73% | 67% | ||||
1983-1986 | 60% | 76% | ||||
1987-1992 | 54% | 59% | 71% | 73% | ||
1994/6-2000 | 75% | 73% | 84% | 92% | 90% | 94% |
2011-2015 | 82% | 81% | 84% | 89% | 89% | 91% |
Current Market Situation
The gold-mining indices have held up well as gold bullion has made new
bear-market lows over the past two weeks. This is undoubtedly because they have
been sold down to levels at which the prices of the component stocks already
discount a lower gold price. We suspect that when the HUI bottomed in the
low-100s in September a majority of gold-stock traders was already convinced
that the gold price was headed to $1000 or lower, so the stocks have been
insulated to some extent from such an outcome.
The following chart shows the HUI and the HUI/gold ratio. Last week the HUI
traded sideways within a narrow range while the gold price fell $20. This
resulted in a small rise in the HUI/gold ratio and the bullish non-confirmation
mentioned above in the gold discussion. We also mentioned above that the bullish
non-confirmation could be important, but isn't sufficient to justify the
purchase of a short-term trading position in either gold bullion or the
gold-mining ETFs.
As noted at the time in TSI emails and commentaries, we did some selling of gold
stocks from our own accounts into strength during the second and third weeks of
October. This was an automatic response to the run-ups in the prices of some
individual stocks and the fact that both GDX and GDXJ reached the bottom ends of
our short-term upside target ranges. At the time we were selling we thought that
there would be a little more upside prior to a short-term peak and that the peak
would be followed by a pullback to no further than the 50-day MA. We weren't
expecting that the September-October rally would be retraced in full, but by
always taking some money off the table following surges we put ourselves in a
better position to deal with unexpectedly-large subsequent purges.
Up until now we have done very little in response to the gold-mining purge of
the past month. We have made two small purchases for company-specific reasons,
but apart from that we have waited on the sidelines for certain stocks to reach
lower price levels or for evidence of a sector-wide turnaround.
A daily close above 113 by the HUI would be the first sign of a sector-wide
turnaround.
The Currency Market
The Dollar Index remains within the short-term 'rising wedge' pattern mentioned
in last week's Interim Update and is testing intermediate-term resistance
defined by its March high. This is a likely time and place for a downward
reversal, but the short-term downside potential is not large enough to warrant a
bearish position.
The A$ has been gradually strengthening since early-September, which is
interesting in part because it is at odds with recent price action in the
commodity markets. The strength in the A$ will take on greater significance if
it results in a daily close above 74, whereas a daily close below 70 would tell
us that the strength was nothing more than a counter-trend bounce.
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 27th 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]
*Clifton Star Resources (CFO.V) published its reports for the
quarter ending 30th September. The financial statements included with these
reports confirmed that the company still has net cash of about C$13M
(C$0.27/share), which is the same as it had at the end of the preceding two
quarters and is well above its current stock price (CFO shares ended last week
at C$0.15). CFO remains cash rich and asset poor.
*Endeavour Mining (EDV.TO) announced that the La Mancha
transaction is complete and that the approved 1-for-10 share consolidation will
become effective this week (most likely on Wednesday). The share consolidation
results in the same pie being cut into a smaller number of pieces and has no
effect on the fundamental value of any shareholder's stake.
*Energy Fuels (EFR.TO, UUUU) has agreed to sell a package of
small, non-core uranium projects to EnCore Energy (EU.V) for US$330K in cash and
14.2M EU shares (worth C$430K at Friday's closing price of C$0.03). This deal is
not financially significant for EFR.
*Energold Drilling (EGD.V) reported a 10% rise in revenue (from
the same period last year) from its drilling business and a net loss of C$3.8M
for the September-2015 quarter. It also reported a stable balance sheet, in that
adjusted working capital (working capital minus long-term debt) remained at
around C$62M during the quarter. This means that adjusted working capital is
only $2M lower than at the end of last year, which is a remarkably good result
considering that the market environment for EGD's drilling businesses has been
incredibly difficult this year. In other words, EGD's management has been doing
a good job of protecting the company's financial position.
With about C$1.29/share of adjusted working capital and a $100M/year drilling
business, EGD offers exceptional value near its current share price of C$0.39.
It hasn't been near the top of our buying list at any time over the past 12
months because its business probably won't begin to improve until at least 6
months after a sustained turn to the upside in commodity prices (which hasn't
yet happened). However, the stock price is now so low relative to the company's
asset value that it could make sense to do some buying prior to year-end.
Apart from the absence of any evidence of a commodity turnaround, the one
concern we have about EGD is that the "Current Assets" category includes C$54M
under "Inventories". This is unchanged from the end of last year and is a
concern because it is an unknown -- we don't know the composition of the
"inventories" amount and whether or not this amount is an accurate reflection of
present market value.
*McEwen Mining (MUX) advised that it would seek approval of its
shareholders, at a meeting scheduled for June-2016, to implement a reverse split
of its stock if such an action were needed to comply with the NYSE listing rule
that requires an average stock price of at least US$1.00. It's unlikely that
such an action will be needed, because MUX's stock price will probably have
moved well above US$1.00 by June of next year due to a recovery in the gold
market.
*Resolute Mining (RSG.AX) has spent the past 12 months building a
base in the A$0.25-A$0.45 range. At least, we think that the pattern shown on
the following chart will prove to be a base.
It challenged the top of its basing range in October and has since almost made
it back to the bottom of the range. Buying near the bottom of the range has
worked well in the past, if only for a 1-3 month trade.
*UEX Corp. (UEX.TO) and Areva announced the 2016 exploration
budget for the Western Athabasca joint venture (WAJV) projects of C$2.2M, of
which UEX will finance approximately $660K. The amount that UEX will be
financing is enough to maintain its 49% stake in the Shea Creek project, which
currently has an "Indicated" uranium resource of 67M pounds, but will cause its
interest in two of the smaller and earlier-stage WAJV projects to be diluted.
This is sensible, because with such a tough market environment it is important
that the company maintain its stake in the valuable Shea Creek project and
devote the balance of its financial resources towards the recently-acquired
Christie Lake Project.
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) EDV.TO (last Friday's closing price: C$0.60)
2) EVN.AX (last Friday's closing price: A$1.25)
3) PG.TO (last Friday's closing price: C$2.21)
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://bigcharts.marketwatch.com/