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Nov 23 2013 – Weekend Market comment

Nov 23 2013 – Well things are pretty much the same as last week. The market is strong and money continues to flow into equities based on the TINA effect. The Dow Jones industrial average closed above 16,000 points for the first time and the Standard & Poor’s 500 index closed over 1,800 points.

There is a rotation in to smaller cap stocks, and regional banking is doing better. In other words it is a bull market and this coming week looks to continue the party.

The problem with investing in the stock market is that most amateurs don't feel safe until the market has already gone up. The safer you want to feel, the further it has already gone up, and the later you are to the party. Most investors are starting to buy right now and are starting to make a little money. But in the not-too-distant future, the market will start to come back down because this increase in prices is not sustainable. In short the little guy buys at the top.

So remember the market is a game of musical chairs and in the next 20 days the music should stop, and we will finally get a healthy 5% - 10% pull back. I hope you have a chair picked out in the form of a trailing stop.

On reason I think the pull back is not right away is this graph:
It shows a ratio of SPY and IWM. as the graph turns up the market moves form big cap stocks to smaller equities. That is a very bullish sign.

However the same graphs I pointed out last week, NYSE over 50 day average and the VIX bumping into giddy territory are even worse this week and so clearly we are overbought.

So this is a good time check your stop loss and hold your nose as we see if “trees will grow high enough to touch the sky”.

Refine Your Portfolio

Refineries in the US are running at full capacity and there are no new ones being built for a long time. That means refiners are getting crude for cheaper but they can still screw the consumer. Take a look at Phillips 66:

Canadian refiner Parkland runs fast gas stations and is on a recent upturn.

Charge It
If you like stocks that make a nice smooth diagonal line from left to right (who doesn't) you will love MasterCard.

Well since the equity markets are not doing anything interesting except rising, lets look at gold. Well gold bugs just look at this graph. 

Not a lot of happy stories here. Clearly the message we dodged a bullet and no inflation have hit home as people dump these hunks of worthless metal. Gold is almost intrinsically worthless, as any object's value is only assigned by the collective value put on something by its consumers (otherwise known as "the market"), and that the use of gold as reserve currency is more a tradition than anything else. There are a few practical industrial uses for gold, such as gold-plating electrical contacts to resist corrosion, but the demand for gold in such uses is tiny when compared with the current world gold supply.

In other words gold’s long-term value is purely a matter of the cost of production and speculation. In my post called “After the Gold Rush” I was concerned that as panic set in to sell gold the situation would be exasperated by over production and huge vaults of physical gold in London. So far that has not come true, and due to few reasons.
  1. One is that HSBC has put huge resources in to propping up the value of gold
  2. India and China have been hording the stuff and
  3. Speculators have held to the belief that 1,200 an oz is the cost of production and that level cannot be violated.
  4. Some possibility of inflation born out by high oil prices.
  5. There are a few gold bugs hanging on to the idea of economic collapse if the fed taper program end. 

But this last week has been a real gold game changer. HSBC’s influence in the market has greatly diminished since it got caught a while ago and fined for market manipulation. This week in India a 1.9 million dollar shipment of gold was seized entering the country in an aircraft bathroom. That has got to get someone’s turban in a knot. China’s leaders are going to make more avenues for investing available besides housing and hording commodities. China’s leaders pledged reforms that include allowing more private investment in state-controlled industries. There are other new markets like futures -- the Shanghai International Energy Exchange will allow the listing of crude-oil futures as new investment market open up for China’s cash rich billionaires.

The gold price on Monday gave up some of last week's gains, sliding more than $16 to a day low of $1,269.20. As the market flirt for the second time this quarter with $1,200  fear that gold miners are "dead men walking" builds. The miners are not very well hedged and if the hedge now it will drive a spike in the price of gold. The situation is very tenuous.

Inflation looks less likely as the price of crude plummets due to over production in the US and a real possibility of Iranian oil returning to global markets. The supply report for the week ended Oct. 11 was released Monday after being delayed due to the government shutdown. It showed crude supplies up by 4 million barrels. That expectation of 3 million barrels increase was too low. The actual number this morning was 5.2 million, as inventories continue to build.

In lunch time trade December gold futures were changing hands for $1,372.80, retreating from highs of $1,294 set Thursday last week following Fed chair nominee Janet Yelen's comments on the bank's stimulus program. Taper talk so far is just that talk.

As I said the miners are getting the worst of this sell off, just look at Barrick Gold head for the abyss. Barrick Gold Corp. has launched a monster US$3-billion equity offering in an effort to repair its debt-laden balance sheet. It also suspending construction of the troubled Pascua-Lama project. The company is carrying US$15.4-billion of debt, much of it tied to the disastrous $7.3-billion takeover of Equinox Minerals Ltd. in 2011.

It is not just one miner. Newcrest, Australia's biggest gold miner, said it would write down the value of mines in Australia, Papua New Guinea and Africa.

The idea that the cost of production is tied firmly to a cost based on overpaying for acquisitions -- not the real cost of men going in to a mine and pulling out gold. The real cost of normal production is $400 and if gold goes that way, there is no saving the miners who bet to big on endless gold price rises. 

"Over the next three months, we will see a substantial amount of the gold equities sector getting rid of high-cost ounces," said Gordon Galt, a former managing director at Newcrest.

At the start I said that in a few weeks the market should correct a bit, and when that happens gold may bump up a bit but no one is going to go rushing in to gold miner stocks and I expect they will follow the market downturn like all equities. 

That is why I have a VERY small position in DUST. This is an ETF of Gold miner stocks leveraged 3:1.  Now let me tell you this is not a place to go put your nest egg, this thing is 3X leveraged and bounces like mad, my trailing stop on this is out about 15% because it is so volatile. Still in just November I am up over 25%

I have always dreamed or renting a Supercar and going to a place with no speed limits like the Isle of Mann. Think of it driving in England in an James Bond like Aston Martin or a car for an evil genius like a Mercedes SLR McLaren.  I guess I am not the only one to think of this, and perhaps it is not my best idea

A woman drove her car at speed over a cliff edge before plummeting 200 feet onto rocks at a National Trust beauty spot. The motorist, in her 40s, drove her red Fiat across 20-ft of grass before plunging over the cliff. Police were scrambled to the scene in Brook, near Freshwater, on the Isle of Wight.

The woman, from Dorset, died at the scene from her injuries. Her body was recovered and taken to hospital where a post-mortem is due to take place. Her car, which is worth £12,000, could today be seen lying on the jagged rocks. The bodywork, painted with a white stripe, had been badly damaged by the impact. All that seemed to be left intact were the alloy wheels.

I am not sure who she was but I hope there is some comfort in that she must have felt fully alive in those final moments. Not everyone get to go out on a high. Ok well the exhilarating moments before she left the road and plummeted inevitably to her death.

This incident happened just a week after a 20-year-old man drove his van off 300 ft high cliffs on the east side of the Island. The vehicle was discovered under water at the bottom of Culver Cliffs, near Sandown.

Yes I know it is not my best idea -- but still it would be kinda cool . . . varooom!