July 14, 2014

Gold Drops 2.2%, the Broader Indexes back at the highs – Is it an Apparition?

One day the media will get it right – but regurgitating basic nonsense just doesn’t cut it anymore.  If I or we were to believe that investors are as fickle as the financial media leads us to believe I would have to think there isn’t a soul on the planet making a dime.  Now we all know that just isn’t true – so what gives?

citigroupHere is how MT Newswires recapped Monday’s markets:

Encouraged by upbeat earnings from Citigroup (C) and multi-billion dollar deals in the pharmaceutical sector, investors shrugged off geopolitical pressures and poured back into equities on Monday, driving the Dow Industrials to another record high.

            Last week’s losses tied to Portugal’s banking crisis and worries over Q2 earnings were reversed after Citigroup shares jumped higher on an earnings beat despite a $7 billion judgment levied against the bank by the Justice Department.  Healthcare and industrials were given a shot-in-the-arm by M&A deals between Mylan (MYL) and Abbott Labs (ABT), AbbVie (ABBV) and Shire Plc (SHPG) and ConAgra Foods (CAG) and Inner Mongolia potato processor TaiMei. 

            In Commodities gold pu in its worst performance this year as the risk-aversion to equities dissipated.  The precious metal fell to a 3-week low of $1302 per ounce, taking platinum and silver down in sympathy.  Energy prices also fell with crude oil at a two-week low and just above $100 per barrel. 

goldengateSeriously, if we are now to believe that investors, (who ever they may be) just suddenly decided on the back of Citigroup’s earnings to jump in and buy AAPL, AMZN, FB, GOOG, IBM, INTC, LKND, NFLX, PCLN, and TSLA and to top it off pile back into lesser names within the pharmaceutical sector because ConAgra is buying a Mongolian potato processor – well let me start with I have a great deal on a bridge – no two bridges here in the San Francisco Bay area.  One is golden and the other has some (small) construction problems but is still bright white and less than a year old, (at least the eastern span is).

Are we to believe that because C rose 3% or $1.42 that investors were convinced that the world is again safe and that is was prudent to take NFLX higher by just under 3% or $12.60 or how about PCLN up $13.60 or 1.12%.  Let’s face it folks, the complacency factor has risen by a factor of “stupid”.

Volumes were again on the extreme light side with the ES barely topping one million contracts and the NQ unable to crack 165,000.  Even Citigroup with all the hoopla and fanfare was held to 36 million.  From the news and the race back into the markets one would think volumes expanded to reflect a renewed interest in buying anything and everything.  Not so, it just didn’t happen that way.

volatilityriskVolatility though, did continue to get crushed with the VIX dropping back below 12, the VX future dipped back below 13, while the short term UVXY is back below 25.  These are in the area of contract lows folks.  This remains an area that should be making traders and investors nervous not comfortable.  The thin volumes might be chalked up to the “summer doldrums” but don’t be fooled – that doesn’t imply or include not paying attention.

Back to gold – this is one market where I believe most are being misled and misinformed as to what is really happening behind the scenes.  Gold is and will remain the ONLY true storehouse of value – and that you can take to the bank  – which you may need to do someday.

gold forecastGod is up by about 9% thus far in 2014 and while this has surprised many due to the misconception of several analysts’ predictions for lower prices.  But consider this – in the current environment of high bond issuance, tighter credit spreads and record low volatility the prime opportunity remains to add gold to your portfolio.  Although consumer demand remains resilient (primarily from the Far East), Central Bank net purchases have begun to uptick adding about 180 tonnes to official reserves during the first 5 months of 2014.  Take a guess on which CB’s are doing the majority of buying – it would be Russia, China, India, and Iran – yes Iran even with all the sanctions to lock the country out of the global payment systems.

In the face of the FED announcing the end of quantitative easing the FOMC continues to suggest that interest rates will remain low for the balance of 2014 and likely for most of 2015.  Low interest rates continue to produce a yield hunt for money managers and investors needing better returns.  Recently there has been a glut of issuances of higher-yielding (lower quality) bonds, collateralized loan obligations and emerging market debt as the race to beef up portfolio returns intensifies.  This in turn has as a consequence tightened credit spreads and dropped volatility to multi-year lows.  I doubt that the excess of lower quality bonds or other fixed income assets will do anything but increase risk in the financial systems.  This in turn increases the likelihood of a more significant correction happening sooner rather than later.

Here’s an interesting trend in the credit markets so far in 2014 – the multi-year issuance of collateralized loan obligations (CLOs) has risen above the pre-crisis levels of 2007.  The total for the first six months of this year is $58 billion, with $35.6 billion of that total occurring within the 2nd quarter.  Europe’s issuance of CLOs has already exceeded the 2013 levels and the US is closing in fast to do the same before the year is complete.

So when the financial news media wants you to believe that the risk-aversion to equities has dissipated accept it for what it is – an apparition – the appearance of something unlikely.

Steer the course and don’t compare yourself to everyone else.  You are not they and they are not you.  Remember to trust and believe what makes you unique at this moment in time and in this situation and allow others to choose for themselves.  Don’t be swallowed up by the chaos and false emotions swirling around.  Remember it’s just a number.

Trading the number remains key to being able to reduce and separate the “noise” from opportunity.  This takes knowing and executing a well-defined strategy and allows you to see opportunities amongst the “chaos” and by trusting the mechanics of your strategy, be able to take advantage of them.

Opportunity continues to knock on our doors.  While it doesn’t come without risk, risk can be defined and more manageable. Volatility and broad moves are exactly what a day trader desires and being able to respond without questioning is a luxury many are unaware of.