The gold sector is peopled by a high concentration of contrary indicators because it is a relatively (to the vast world of equities and bonds) small market that offers refuge from some of the damaging aspects of the spectrum of investment products that are supported by the manipulation of interest rates and printed (and digitally created) money supplies. Thus, gold has moral high ground if an asset can be thought to have morality.
There is a lot of talk now about a flattening of the yield curve. This talk has been among the most intense right here at the website you are reading at this moment. A flattening curve is commonly viewed as bad for gold, and according to Mark Hulbert, is an indicator of a coming recession.
But is the curve really flattening or is this all hype based on Janet Yellen’s press conference comments? Here is a chart the likes of which we have been using in NFTRH for many months now, the 30 year vs. the 5 year yield.
MarketWatch shows a similar chart in its article…
Excerpted from the 31 page NFTRH 283 (dated 3.23.14), which also thoroughly analyzed the precious metals and several other markets from a technical standpoint.
Gold’s Macro Fundamentals
This spike in short-term yields (2-year shown) is what harpooned gold last week and finally got it under control.
More importantly, this spike in the 2-year vs. the 30-year really hurt gold.
These spikes predictably came as the FOMC successfully managed to get the market thinking about an end to the damaging Zero Interest Rate Policy, ZIRP.
Today as I watch a former holding (TAS) plummet after being errr, promoted last week at (where else?) SeekingAlpha by some genius… on the heels of watching the gold ‘community’ get Ukrained and FOMCed in a double barreled assault, I am reminded just how dangerous herding behavior has become in the social networking phase of the information age, where every fucking genius has got a pitch and a play, every news outlet has got ready made reasoning and the whole cacophonous mess needs an ever more finely tuned Bullshit Detector.
Hence last week’s opening NFTRH segment. And by the way, I do not view Dan Norcini as any sort of a hype monger. Quite the contrary. From what I have seen he is a well grounded and honest person.
Tune Out the Noise, Follow Technicals & Macro Fundamentals
Mail from a subscriber highlighting Dan Norcini’s view of the precious metals rally being little more than Ukraine-inspired hedge fund short-covering is but one of many inputs I have either received or seen on the internet that for my purposes at least, will be tuned down. I don’t doubt that Mr. Norcini has good experience as a professional trader, but I do question the importance he seems to assign to what the “hedge fund community” is doing at any given time.
Other inputs received or observed range from the utterly ridiculous ‘China copper demand is declining, so a decline in China gold demand will push gold prices down’ to a wide range of bull and bear rationalizations that vary from unlikely to plausible. They have one thing in common; they serve to amp up emotions.
Consider this post-2009 litany: Flash Crash → QE2 → Euro Crisis → Greek Austerity Vote → Cyprus → Operation Twist → Fiscal Cliff → QE3 → Taper → Ukraine → [today we can add in the Yellen 'you know, like 6 months after taper ends, sort of...' rate hike hysteria]
Everyone expects Janet Yellen to be a rolling over, inflationist stooge just like they did Ben Bernanke. Bernanke came on board after Alan Greenspan had taken the Fed Funds rate up to around 5% if I remember correctly. Inflationists and gold bugs thought they had it in the bag when ‘Helicopter Ben’ assumed control.
Indeed, Bernanke did what he was supposed to do (per the ‘Helicopter ‘Ben’ script) as systemic stresses began to gather in 2007, addressing that pesky Funds rate, culminating in December, 2008′s official ZIRP (zero interest rate policy). Here again is the chart showing the S&P 500′s ‘Hump #3′ attended by this most beneficial monetary policy.
As noted again and again, the much trumpeted ‘taper’ of QE is not only not a negative for the economy, we have made a strong case that its mechanics are actually a positive, in the near term at least. But putting ZIRP on the table would be a whole different ball of wax.
Excerpted from this week’s premium report, NFTRH 282:
Last June when tidbits about a would-be future ‘taper’ of T bond purchases (QE) were popping up in the media NFTRH 241 (June 2, 2013) put forward a theory that a tapering of bond monetization could begin to act as a delivery mechanism for inflation, with banks and lenders the key:
A ‘Carry Trade’ Returns? (6.3.13)
‘Taper to Carry’ is Still Loaded (6.19.13)
‘Taper to Carry’… a Logical Chain (7.8.13)
Gold: “Taper This” (9.17.13)
Characteristics of the ‘carry’:
- An incentive for the banks to finally start lending funds out into the economy due to the ‘carry’ spread (a profit mark up for lenders) between rising long-term yields and the officially held ZIRP on the Fed Funds.
- It could be a positive for gold and commodities as ‘price’ signals in the economy finally start to gain traction (ex. Last 2 ISM ‘prices’ data were quite elevated) as a long-bemoaned lack of ‘velocity of money’* (i.e. deflationary drag) transforms, at least temporarily into a phase where inflation drives up costs.
It’s an inflationary fix and is part of the reason we have followed the bank sector’s leadership. They would benefit. Precious metals and commodities could benefit as people chase price signals and think “uh oh, INFLATION!” [although is should be noted that a period of 'cost chasing' and inflationary hysterics is not the preferred long-term fundamental underpinning for gold; ongoing economic contraction is]
In short it all plays into the current theme that while things may remain positive for the economy and the stock market for a while yet, it is no longer a Goldilocks style bullishness with US stocks sucking up all of the [inflationary] benefit.
I’ll plan to do a public article on this since there are articles showing up in the blogosphere talking about the recent rise in lending, yet without illustrating what I think is the proper path of bread crumbs that were laid to get us to this point.
New (Public) Content
The primary reason I dug this old subject back up in NFTRH is this post by Sober Look (with contributing views from Barron’s and ISI Research), a blog you will find linked on the right side bar of our site. That means I respect what I have seen of this author, FWIW. Here is the post in question…
The subject matter caught my eye after an NFTRH subscriber sent me a link to it. Finally, the funds are getting out there into the economy! Well, who’s surprised? With due respect to the author, there is nothing sudden about this situation. Per the first link above from June 3, 2013 and NFTRH 241 dated June 2:
“The Bank Index ratio to the S&P 500 (BKX-SPX) is breaking out to the upside in defiance of a bear case in stocks. The BKX has modestly led the SPX since 2011. We have noted that this is a necessary bullish factor for the financialized economy, which is quite different from a real or organic economy.
Remember the ‘carry trade’ of the Greenspan era? That would be the same carry trade that helped bloat the banking sector, putting its big, fat too big to fail hands in just about every cookie jar in America.
The banks love rising long-term yields because they basically receive free money from the Federal Reserve as the first users of newly created funds on the short end, which is being held down by ZIRP. They then roll these funds into loan products, mark them up per long-term yields and voila, instant profits courtesy of a ‘borrow short, lend long’ gimmick.
Let’s see how this develops, but we should note that Bernanke has not created anything new under the sun. The great carry trade of last decade was just another unnatural systemic stress that led to the 2008 resolution.
Do you suppose that Fed officials are ready to let the banks do the heavy lifting, now with the incentive (carry) to get the funds ‘out there’ to the public? This condition came hand in hand with an inflation problem last decade and now that everybody seems to know there is no inflation, would not a new phase of rising inflation expectations go well right about now?”
Per Sober Look:
“It’s worth mentioning that the bottom in loan growth just happened to correspond to the start of Fed’s taper. Coincidence?”
“The key to this change in trend is that improvements in loan growth have been primarily driven by a sudden jump in corporate lending. Why is corporate America increasing its borrowing all of a sudden? The most likely answer is the improvement in capital expenditures (capex), which is evidenced by firmer capital goods spending by US companies.”
In my opinion that is the tail wagging the dog. A frustrating aspect of the entire recovery out of 2009 has been lenders’ refusal to lend sufficiently for the economy to gain traction. It was not so much a demand (for credit) problem as creditor reluctance or even outright fear.
It is not corporate CapEx that is the driver but very simply, the ability for corporations to gain access to plentiful funding with a now incentivized banking sector.
“Thus the similarities in timing of the bottoming of loan growth in the US and the start of Fed’s taper may not be a coincidence after all.”
No not at all. The trail of bread crumbs was visible over 9 months ago as the Fed started to leak a coming QE taper, which would be the ultimate kick start to the activation phase of the inflation, where the banks are now incentivized to get the inflation ‘out there’, right down Main Street, USA.
* A review of the current Velocity of Money graphs shows an indicator still burrowing lower. This is a measure of the number of times one dollar is turned over in economic transactions. In other words, it is probably a laggard to the front line credit and lending just starting to get going. Since an inflationary economic recovery is not expected to be a lasting economic recovery, it is highly debatable as to whether the Velocity of Money will ever get untracked and into an uptrend.
In January of 2013 NFTRH used the Semiconductor sector as a ‘canary in a coal mine’ to a potential coming phase of US manufacturing strength and an economic bounce. This had negative implications for gold but normally would have had positive implications for commodities positively correlated to the economy.
That did not materialize in 2013 (as China decelerated) although with the recent launch of various ‘outlier’ commodity sectors like agriculture, natural gas and uranium along with persistent strength in crude oil and the highly speculative TSX Venture Exchange (CDNX), we now consider the view that some inflationary chickens (rising cost effects) may be coming home to roost. The economic bounce was after all instigated by an inflationary mix of ZIRP on the Fed Funds rate and long-term Treasury bond buying.
We are managing precious metals and commodities on an ongoing basis, but today I want to focus back where it all began, with the canaries in the coal mine. Our early alert came in the form of personal information received about a ramp up in Semiconductor fab equipment orders from a friend in the field. If fab equipment companies like Applied Materials and Lam Research were ramping up then it meant that the Semiconductor companies themselves were gearing a new build cycle. This was ‘early warning’ stuff.
But now the Semiconductor index itself, which has led the rally since Q4, 2012 (and is still leading despite some other leadership indicators like the BKX-SPX ratio falling off lately) is at a very important big picture pivot point. Here is SOX-SPX, showing leadership during the most intense phase of the cyclical bull market…
Dialing out to a monthly view of the nominal SOX index we find the really compelling picture. The Semiconductors are technically above 10 year old resistance! ← You know I don’t use (!) very often in my analysis. A March close above 560.68 is needed to confirm this breakout.
NFTRH has incidentally, added the SMH Market Vectors Semiconductor ETF to the extensive list of strategic ETFs charted each week (joining several precious metals, commodity and stock ETFs) due to SOX’ current status.
What I find interesting is that most rallies over the last decade have pinged along from the bottom to the top Bollinger Bands and back again. But the current trend is much like the pre-2000 (and pre-blow off) trend as it hugs the top BB line. This is very much in line with the current question we are asking of the markets, ‘melt up or correct here and now?’.
Put it this way, if the SOX holds above the resistance line through March, the odds become heavily tilted toward an upside market blow off, which I believe would be the nature of the bull’s end. We have had bull market termination scheduled for spring to mid-year for many months, but a picture like the above could force the analysis to adjust this potential out to Q4, 2014. We’ll just have to be patient and let things unfold.
The red line on the chart directly above represents a key level for market players. It is exquisite in that the implications of success or failure at this line are so very different.
Success means a cyclical bull market blow off is probably engaging that would kill every bear before eventually wiping out greedy bulls (silver 2011 style) who over stay their welcome. Alternatively, take the breakout as a given at this moment and one risks the pain of a potential reversal and failure.
Regardless, the potential of the SOX is very clear. The best (and crazy sounding) measured target is 953. Improbable I know, but how much about this bull market has seemed probable well in advance? Respecting potentials and probabilities while keeping ego and intellect under control will see us through. So will following the market’s road maps, like the one above. It is very clear.
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If the monthly chart of the COMP is to be believed, 4% is the ‘reward’ side of the risk/reward equation in tech stocks. COMP could gobble that up in 3 days.
Bulls have surely won. The market has gone much higher than I for one thought it would when I got bullish on its prospects in late 2012. Much higher; but then I am not a bubble chasing momo. I am a conservative player with a negative view of the mechanics that have produced this bubble. Still, there is no use denying its reality.
 Immediately after publishing this post I noticed DDD down nearly 6% this morning due to a downgrade by Merrill Lynch.
Valuation – Tech, 1999?
At a current price to sales ratio of 17.99 and a forward PE ratio of 93.88 (according to Yahoo Finance), we’ll let the individual reader decide what represents value when talking about 3D Systems (DDD). Similar lofty valuations are present in competitors like Stratasys (SSYS) and ExOne (XONE). But we will make a case that these companies should be valued closer to traditional automated manufacturing equipment makers than some sort of first mover in a transformative and disruptive technology. Or at least that this is going to be their eventual destiny.