Buzz on the Street: And the Bulls Kept a Rollin', All Night Long
A look back at the happenings on Wall Street this week, as seen by Minyanville's Buzz & Banter.
Wednesday, July 17, 2013
Gold Miners Also Face Political and Social Headwinds
If you've considered buying gold companies because of their cheap valuations, make sure to include social and political issues in your analysis if applicable to the company.
Citigroup (NYSE:C) stated earlier this month that all of the major gold companies that it covers will burn cash if gold’s spot price remains under $1,300. Reduced revenues will aggravate the already tense labor situations for some companies.
None of the examples listed below are directly related to this, but the attitude towards miners has turned negative in many countries.
-On Monday, a Chilean appeals court ruled that Barrick Gold (NYSE:ABX), the largest producer of gold last year, cannot continue building its Pascua-Lama gold mine located in the Andes until Barrick builds infrastructure that will prevent water pollution and glacial damage. Local communities filed the suit after fearing for their health. The mine’s first production had been scheduled for mid-2014, but Barrick changed the date to mid-2016 due to the ruling. ABX may write down as much as $5.5 billion on the Pascua-Lama mine due to both the production delay and gold’s price drop. Initially estimated to be $3 billion, ABX's costs of the mine stood at $8.5 billion last year. ABX's total realized impairment charges may reach $10 billion for the second quarter.
-Guatemalan President Otto Perez asked the Guatemalan Congress last week for a two-year moratorium on new metal-mining licenses after tensions have rose between indigenous communities and the mining industry. Tahoe Resources (NASDAQ:TAHO) received the final operating permits in April.
-South African gold mining companies potentially face more labor unrest. The country's mining unions’ have demanded a 60% wage increase, but major mining companies only offered a 4% raise on Monday, which is below the country's 5.6% inflation rate. The small, JSE-listed Village Main Reef (OTCMKTS:VMRFF) reported today that 918 miners at its ConsMurch antimony and gold mine went on strike. The company said the mine may no longer be viable due to the strike.
For more context, AngloGold Ashanti (NYSE:AU), the world’s third-largest gold producer based in Johannesburg, stated Monday that it will take a $2.2-2.6 billion impairment charge due to lower gold prices. Standard & Poor’s lowered AU’s long-term corporate credit rating from BB+ to BBB-.
- Australian gold miners still face a carbon tax, hurting their global competitiveness. Australian Prime Minister Kevin Rudd announced this past weekend that his government will remove the A$24.14/t fixed-price carbon tax, but his government will replace it with a floating carbon tax rate.
- A week-long illegal strike at Gold Fields’ (NYSE:GFI) Tarkwa and Damang mines in Ghana in April caused the ounces of gold produced in the quarter ending June 30 to drop 25,000 ounces, or 5%, year-over-year to 451,000. GFI expects total costs of mining per ounce to remain at $1,360 for the remainder of the year. Also, the Ghanaian government has cracked down on illegal Chinese gold mining operations in country, potentially destabilizing the industry there. 4,500 illegal miners have been deported.
- Yesterday, El Dorado Gold (NYSE:EGO) stated that it will delay the development and initial production of its Skouries, Perama, and Certej mines by about a year due to gold’s price drop. The Skouries and Perama mines are located in a mining-unfriendly region of Greece. The news release did not mention the unrest in the area, but local conflict could potentially cause further delays. For the past decade, tensions have grown between environmentalists and mining groups over developing the mineral rich properties. In February of this year, arsonists damaged the corporate offices and machinery of the Skouries mine. Last August, police fired tear gas and rubber bullets at protesters approaching the Skouries mine. Also, last September, police again used tear gas on protesters, who responded with flares and Molotov cocktails.
Bernanke Speech Notes
Here are some headlines that are making the news:
- Bernanke says pace of bond purchases not on a 'preset course'.
- Bernanke says Fed may taper QE in 2013, halt it around mid-2014.
- Sees strong headwinds created by fiscal policy.
- Jobs situation is far from satisfactory.
- FOMC believes risks to economy eased since fall.
- Factors behind low inflation are likely transitory.
- Fed will retain its Treasuries, MBS after QE end (smells like not selling on the former, but known).
- Very low inflation poses risks to economy.
The D Word
Bernanke once again referenced deflation as a major risk the Fed is well aware of, which the market has interpreted as dovish. At what point that market will question why deflation is still a risk after massive stimulus is unclear, but euphoria stages in equities are not driven by logic.
Emerging markets continue to be where the action is, and I do think they, alongside bonds, are a good trade here. The market may be starting to realize that housing could actually suffer given the way yields spiked, as homebuilders continue to be lackluster. This, in turn, might break the small cap momentum later down the line. Because small caps are more sensitive to the domestic economy, and the domestic story is largely driven by reflationary/growth pressure from the housing market, weakness in Homebuilders might precede weakness in small caps.
Continue to watch emerging markets -- mean reversion can be a beautiful thing.
Thursday, July 18, 2013
Perception vs. Reality
Good morning and welcome back to triple-digit temperatures on the east coast. It's fitting, I suppose, given the scorching rally we've seen. Lest you were napping, the S&P has rallied 8% since the June 24 low, 25% since the November low and a sweltering 153% since the March 2009 low. The economy must be en fuego, eh? At risk of overheating? Under-employment is absent and social mood must be off the charts, yes?
Not so much.
I've had meetings the last few weeks with thought-leaders stateside and abroad. One of my closest buddies runs a paper outfit that does the bulk of his business with China, and it's not a small company. He told me months ago that his flow dried up, almost to a standstill, and he's hearing crickets still. Ditto those who have feet on the street in construction, who tell me bids are trading below market.
If I had to sum up their collective take on the stock market, they're in a state of "suspended disbelief." They "don't get" why markets are at all-time highs while their businesses is in a snarl. They ask me "why?," to which I reply, "The markets are no longer free; there is an artificial bid and meritocracy--true, free-market meritocracy--has been left for dead."
I remind myself to never let an opinion get in the way of making money; to respect-but not defer to-the price action. That the reaction to news is more important than the news itself. From a trading basis, those are guidelines that have served us in good stead, or were at least designed to. As I wrote last week in, Does Ben Bernanke have a God Complex?:
One of two things is happening before our eyes: Either the baton is being passed to a new investing world order—one where central bankers and HFT rule the day—or we're approaching an extremely dangerous juncture where following the smart money will be rewarded in spades.
One of our primary principles is that price is the ultimate arbiter of variant financial views. Right behind that is the notion that trading, at it's core, is capturing the disconnect between perception and reality.
We've spoken about how many of the world's smartest investors have gone dark--or are in the process of going dark; conversely, and presuming the market is a zero sum game, others have picked up the slack, more than willing to step in to bag the Benjamins. Round and around we go; where it stops, nobody knows.
Yesterday I posted a discussion I had with the extremely astute Mark Dow, who posits that the Fed is Much Smarter than we think. We strive to see all sides of the forward probability spectrum and I, for one, was psyched to consume his logic.
After the article posted, there was a firestorm of push-back, not dissimilar from what we saw following It's Always Darkest before the Dawn, when the S&P was trading with a $6-handle, The Gold Scold, when the yellow metal was trading at $1900 or Oil of Oy Vey when Crude was at $140. As the profitable position is rarely the popular one, this stuck out to me.
Mark and I continued our discussion last night. "The fact that my position is contrarian," he said, "tells me how far stocks still have to go. Many guys playing in the macro sandbox shouldn't be; they're talking themselves out of participating in a bull market. We do have a slow growth problem (demographics and globalization) but people are still way too bearish and way too under-invested."
I told him it's hard to argue with that logic, although my view is that underlying fundamentals don't support stock prices absent the Fed, and that his take make a ton of sense in a vacuum--but we don't live in a vacuum, for if we did my Delta Tau Chi pledge name would be "Hoover."
He responded, "I think the Fed is propping up the market less than people think. It catalyzed positive psychology and then helped the balance sheet healing. The market would react if the Fed stepped away now but look how fast stocks came back from the last sell-off. That's not a Fed-dependent market, in my opinion."
I share his views in our collective attempt to better understand the dynamic between the Fed and the Treasury, what is allowed and what can or cannot happen. We're in uncharted waters through a historical lens and while nobody can possibly know how this grand experiment will end, we would be wise to learn as much as we can about potential outcomes. The truth, as they say, will likely be found somewhere in the middle.
Lot's going on today so lemme get this to you in a timely manner. As always, I hope this finds you well.
Multi-Family Drop-Off the Start of Something?
There was a noticeable decline in new housing starts yesterday, most pronounced in multifamily. I spoke with my Multi-Family guru, "the Chabes", perhaps the foremost expert on the topic in the country, and executive chairman of the NAHB, and asked "what gives"? He laughed, saying first, you can only examine mutli-family starts, at the least , on a quarterly basis because of the volatility and inconsistency of when permits are pulled. He said there's ZERO read here...Zero, and what we will find, is most likely by year end, we we see a trend of continued "steady progression." He said overall, banks remain constrained, but he could "not be more optimistic" over next few years with regards to both single family and multifamily, as he stated,"life goes on" and the supply/demand curve is still waaaay in the builders favor: More housing is needed... a lot more housing.
I asked if rates were a factor, he said of course! But we're not even close to an inflection where it affects overall demand. He said the most likely scenario, is buyers may just buy "less" of a house. I've been working with my intern this summer on mortgage rates and housing prices. Thus far we've seen that the higher correlations are with housing prices increasing; not rates increasing. He did say, the same loan he attained 1.5 months ago at 3.74%, would now be 5.3%, on a $111mm portfolio, that would be approx. $2m more in interest per year. But, he said EVERYONE, in his industry has been anticipating this.
T-Report: Tightening Credit Conditions
Click to enlarge
Where Is the Economy Headed?
We can get 20 more Fed speakers and it doesn’t really matter, as we wrote yesterday, we have a good idea of what the Fed will do under various economic scenarios.
The real question is what scenario is likely to play out and how will it impact the market?
Ben Seemed More Concerned About Economic Growth
Yesterday felt like the first time in months that Bernanke seemed worried about economic growth. Part of it may have been him downplaying growth to keep those who don’t like his policies at bay. On the other hand part of it resonated with me because of the repeated mentions of “credit conditions tightened” and he was unsure of what that means.
While we have been focused on the potential impact of higher interest rates on the economy and the housing sector, he went beyond that.
Bankrate.com 30 year Mortgage Rate
We don’t think we have seen the full impact of rising mortgage rates and we do think there will be an impact. Our base case had been that the initial rise will have convinced some buyers to buy now. Those buyers would have been on the fence and the move higher in rates would have been a catalyst to action.
After that initial surge, the market might have been sustainable, but rates moved even higher. Anyone who didn’t buy is likely going to wait and see how things work out.
If you were not comfortable enough in your economic situation in April or May to buy a house, it seems highly unlikely that your economic condition improved faster than rates shot higher.
We aren’t saying that the economy is worse, it is definitely better, but the move in rates is all out of proportion to the improvement in the economy.
So far the data is mixed on housing. NAHB was surprisingly good but that peaked in late 2005 right before the real estate crash got going. It doesn’t seem to be a very useful number in terms of predictive powers. Starts and permits seemed very weak, which would support our view, but that data is notoriously volatile.
Mortgage applications decreased yet again, which is a concern and at some point you would expect a bounce given the size of the decline.
Credit Conditions Tightening is more than Just Higher Rates
The implication is that loans are getting harder to get. Maybe that has rebounded already now that Fixed Income mutual fund outflows have abated and possibly reverted to being inflows, but I don’t think so.
Many investors were limit long fixed income heading into the sell-off. Many high yield investors ignored the potential impact of rates even with “high yield” bonds yielding 4%. There are times when high yield is negatively correlated to treasuries but it had been clear that this was not one of those times. High yield had been becoming more correlated with treasuries as spreads were tight and the chase for yield had reached new heights. While money is coming back, it is hesitant.
On the investment grade side, the selling pressure was more than most thought. Hedge funds run IG risk with rate hedges so should have been fine, but normal investors don’t. Those investors pulled money out of corporate bond funds which are yield/price based (not spread based as is needed). The selling pressure forced spreads wider in spite of decent economic and company specific data. Spreads still seem “soft” relative to equities which haven’t had those flow problems.
Even CLO’s have slowed and the leveraged loan market (which really isn’t a floating rate market) has come under some pressure.
So there is less lending. There isn’t any real fear and the market appears reasonably healthy (we still currently like high yield bonds and IG CDS) but there is a hesitancy that wasn’t there a couple of months ago.
So domestically we need to watch rates and credit and see if we get some slowdown from that. The market is not prepared for that and it is clear from yesterday that Ben can be more dovish than anyone thought possible without really producing a dramatic pop.
Friday, July 19, 2013
"I should like to pay the highest tribute for the gallant fight put up against impossible odds." . . . Admiral John Tovey, after the sinking of the Bismarck (May 27, 1941)
Similarly, the equity markets have put up a "gallant fight against impossible odds" year-to-date, but I digress about the Greatest Generation as reflected in this article titled, "On D-Day - the gift the Greatest Generation gave us 68 years ago" (read about it here). However, I have termed today as another D-Day (of sorts) in that I think the "buying stampede" that began with the back-to-back 90% Upside Volume Days of 12-31-12 and 1-2-13, and is now 137 sessions in duration (a record), is ending. I have held that belief for at least a month, if not more. As stated, the only question in my mind is if the stampede ends with a whimper or with a BANG (read: upside blow-off into the 1700 - 1730 level on the S&P 500). In past missives I have stated many reasons for that view, but here is yet another. In the stock market's decline from its May 22nd downside reversal day, into its subsequent bottom on June 24th, the S&P 500 (SPX/1689.37) fell roughly 7.5%. Yet, the NYSE Advance /Decline (stocks up versus stocks down) fell a lot more with a swoon of 16.6%. This is the same thing that happened in late 2007, although I am not forecasting a decline similar to that of 2008. Rather, I think over the next few sessions we are making a short/intermediate "top" to be followed by the first meaningful decline of the year. The emails I received yesterday only reinforce that view. For example, this is one of over 30 similar emails I got yesterday, "What would we have to see happen for you to reverse your downside 'call'?" My response was, "A 10% decline, but we have not even gotten to this Friday's timing point;" and then I added, "Ask me that question in 2 weeks!"
Subsequently, one stock market pundit was heard to utter this on CNBC late yesterday, "NOTHING can stop this rally!" I don't know about y'all, but such statements leave me looking over my shoulder. Accordingly, I sold the last of my "long only" ETF trading positions yesterday and actually considered buying some downside ETF hedge positions, but decided to wait until today to see what happens with the option "expiration expiation." Meanwhile, a couple of technology giants missed their respective earnings estimates overnight; and as for yesterday's Dow Theory "buy signal" (new closing highs from the Dow and the Trannies), we have used up soooooo much internal energy achieving it, I think it's "sell." Even if we get an upside "blow-off," I believe there is VERY little upside from here.
I'm feeling pretty good that I can trim some Google (NASDAQ:GOOG) (2 tranches), which is only down around 23-24 (at 886). In fact, I'm currently net short the GOOG and do think the analysts are giving it too much of a pass on the current results.
Again, and I repeat, the GOOG report doesn't change my long term view. The stock still remains my favorite large-cap name over a multi-year time frame. However, for the short term and tactical traders out there, my view is that GOOG is at best dead money until at least halfway through the next quarter. Upon the release of the Moto X, I think the Motorola merger, which I still view as brilliant, will finally start to be seen as brilliant by all the rest of the lemmings.
In short, over the course of days to weeks, I think GOOG is a sell or a hold at best, and I believe I'll be able to buy shares I'm currently selling lower. Right now I'm thinking I can get entries in the 800-850 range. Should the stock fall below 800, then I still see very strong support between 770-785 and would be almost shocked to see the stock trade below that range.
If I'm wrong, then I'll miss a little upside. But I've called (and milked) GOOG very well over the last 4 years. In fact, I've batted back the naysayers at every turn and also bought into the post earnings dips following the weak quarters. I can always buy the shares back on a breakout. But as I alluded to above, the other scenario is that the stock doesn't drop much more but is simply stuck in a dead money trade for much of the next quarter.
Bottom line: facts are facts and GOOG missed pretty badly. Moreover, as I posted yesterday, I didn't really see a quarter good enough to make shares rise meaningfully. As it turns out, the stock produced a miss and the selling thus far is mild. I have no problem selling some in here and letting the stock's trading over the coming days/weeks show me the next entry point.
To the Barricades?
While the financial media and TV pundits are all focused this morning on the legal rights of the various Detroit creditors, I'd offer that Europe provides a much better template for what is likely ahead. And in that regard I'd once again offer these thoughts.
In 2010 in "The Robinhood Economy" I wrote about the looming battle between the "faced" and the "faceless". Needless to say that moment is here with Detroit as faceless bondholders and city residents and employees now face off for real.
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