BCA Research on Gold Shares

From BCA Research Blog

I will provide an update on the gold stock timing models in a bit (hint: still not there) but thought I would provide some other comments on gold stocks.

Gold Shares Versus Gold Prices

The gold equity sell-off probably represents a nadir in investor sentiment, typical of major bottoms.

G old equities are trading back near 2007 levels, despite a twofold increase in the price of gold. The underperformance of gold equities vis-à-vis the price of gold can be mostly explained by ETF flows.
Gold stocks have been cannibalized by the surge in ETF volumes, with P/E multiples moving inversely with ETF flows. Part of the reason is that during times of extreme risk aversion and safe haven demand, investors prefer physical gold.

If we are right that 2013H1 will be dominated by easing “tail risk”, then a gold share rerating (vis-à-vis the gold price) is likely. But even if “tail risk” stays elevated in 2013H1, there are reasons to believe the underperformance of gold shares vis-à-vis the bullion price is overdone.

Investor disappointment over the past three years has left gold equities cheap, unloved and under owned. The final catalyst for gold shares may well be intense investor pressure to contain cost overruns and focus on efficiency. Six gold mining CEOs lost their jobs in 2012.

Such shakeups usually herald a major shift in corporate strategy, and gold equities could do well, even if gold prices go nowhere. (tweet this!)

Bottom Line: Remain tactically long gold shares/short gold and strategically long gold equities.

Jim Rogers Betting Against Bonds- It is All Artificial

From Bloomberg

“I’m short long-term government bonds,” betting the securities will fall, Rogers, the author of the book “Street Smarts,” said yesterday on Bloomberg Radio. “I plan to short more. That bull market, that’s a bubble.”

It isn’t the first time Rogers has predicted an end to the three-decade rally in U.S. government debt. In an interview with Bloomberg News on Oct. 28, 2009, he said Treasuries are the “next bubble in the making” when yields on the 10-year note were 3.42 percent.

U.S. inflation may pick up in 2014 to 2016, Pimco’s Gross said this month on Bloomberg Radio. Faster inflation “will create an upper drift in long-term yields,” he said.


And Roger's interview with CNBC

Beware Big Errors in Big Data- Taleb

This excerpt comes via Wired.com. The whole article can be found here.

But beyond that, big data means anyone can find fake statistical relationships, since the spurious rises to the surface. This is because in large data sets, large deviations are vastly more attributable to variance (or noise) than to information (or signal). It’s a property of sampling: In real life there is no cherry-picking, but on the researcher’s computer, there is. Large deviations are likely to be bogus.



This is the tragedy of big data: The more variables, the more correlations that can show significance. Falsity also grows faster than information; it is nonlinear (convex) with respect to data (this convexity in fact resembles that of a financial option payoff). Noise is antifragile. Source: N.N. Taleb

Well this just made me question my entire effort of segmenting some decision making to automated informational sources and results. Just goes to show you that any model should be validated by other observations.

Volume Off the High Feb 7th Edition

A breve of new volume off the high for the Feb 7th trading day.

High Volume High Feb 7th Edition

A bunch of new high volume highs for yesterday's trading day.

Fleckenstein on The Markets

Fleckenstein is known as an uber-bear and can be 'wrong' for long stretches of time. I can remember him spouting about how the market was overvalued circa mid-1990's, as the market ran up 100's of points. Inn any event, his comments are usually interesting.

 

Wien- The Market is Vulnerable

Bearish Case For Stocks- Doug Kass

Illusions and Perceptions

High Volume High Feb 6th Edition

A few new high volume highs for consideration. Most of the names on the list were following some combination of quarterly earnings ahead of expectations and/or raised guidance. This includes POWL, SFLY, NSR, TMH, and STE. Additionally, TBI also reported better results but also announced it acquired MDT Personal. Lastly, RS was up after announcing the purchase of MUSA.

Volume Off the High Feb 6th Edition

Jumping right in, CFX fell despite reporting better-than-expected earnings. I did not read the press release, but I would suspect the guidance was negative. Similarly, VASC also reported better earnings. However, the later was also met with a host of downgrades. ULTI fell after reporting earnings on Tuesday. The trucking firm's stock, CHRW, fell after missing Q4 analysts estimates. Lastly, WEX declined after the company reduced guidance.

The World Of Tomorrow, Today, From Yesterday

Walter Kronkite looking at the office of the 21st century circa the 1960's

Source:Mediaite

Let Interest Go and Mend the US Economy- Rogers

Relative Cyclical/Non-Cyclical Stocks Corroborating JNK/LQD Divergence

I have not provided an update on this chart in quite a while. The chart shows the price of the S&P 500 versus the relative price of the Morgan Stanley Cyclical Index (ticker CYC) to the IShares Down Jones US Consumer Goods (ticker IYK, and tracks a group of non-cyclical company stocks). The theory behind this relative price comparison is that when cyclical stocks are outperforming non-cyclical stocks, the risk appetite for investors is likely rising. As the risk appetite is rising, so should the equity markets and other risk assets.

The relationship is no one-for-one, but can be illustrative in conjunction with other measures, such as the relative price of junk bonds to investment grade corporate bonds. Notice the recent divergence in the CYC/IYK relative price and the S&P 500. This corroborates the divergence in the JNK/LQD relative price. I do not think this means that the market is about to immanently tank, but it is a bit of evidence suggesting that investors are becoming concerning about growth and may be reducing their risk exposure.

Earth-Like Planets Around Red Dwarfs In our Back Yard

From Space.com

This Is Housing Bubble 2.0: David Stockman

From Yahoo Finance and video after the jump.

And data seems to support this analysis, despite a slowdown in sales momentum at the end of the year. Existing home sales in December were up 12.8% from the same time in 2011, with the total number of sales in 2012 rising to the highest level in five years, according to the National Association of Realtors. Meanwhile, the annual price for existing homes also jumped to the highest level since 2005, with the median price of a home up 11.5% in December from the same period in 2011.

But David Stockman, former director of the Office of Management and Budget in the Reagan Administration sees little to get excited about.

I don't have the same sanguine opinion (I actually think the market has seen the lows but it will take years and years before we return to some form of normalcy) as Mr. Stockman, but he does point out the risks in the housing recovery.

Junk Bonds Flashing a Warning Signal for Equities?

From Yahoo Finance and video after the jump....

One of the most elusive and fickle trends that professional investors constantly refer to is risk appetite. You've surely heard the terms "Risk-on" and "Risk-off" used to describe how willing (or reluctant) investors are to play in traffic, so to speak, and take on the uncertainties of the market. While stocks are off to a great start in 2013, at least one trend watcher says he's picking up warning signs that the good times might be coming to an end.

Looking at the relationship between the S&P 500 and the relative price of the Barclay's High Yield Bond Fund (ticker JNK) and the IShares Investment Grade Corporate Bond Index (ticker LQD), you can see the divergence the commentators in the video from link were talking about.

So is this the beginning of the end of the rally? I know I am getting mixed messages. If you have followed my price/volume diffusion index commentaries you would have seen that that their appears to be some momentum strength behind this move, but that this rally may be getting into the twilight stages. Additionally, I have seen evidence (for instance, GDP growth at stall speed, a drawdown in the acceleration/deceleration in employment, and more) that suggests that the risks of a recession are increasing. I have also noted this a few times, but the demand trend here do not seem to be enough to push prices through the November and December 2007 supply lines shown in the volume levels on downdrafts more than five years ago.

High Volume High Feb 5th Edition

A few names on the new high volume high list for the Feb 5th trading day. Most of the names on the list are here following upbeat Q4 results. Outside of earnings, EMR's comments of an improving demand back drop also may have helped the shares of ETN, while the the increase in the dividend at POWI most definitely helped the shares. Lastly, VMED was up on the announcement that Liberty was looking to buy the company.

Cat Ousts Iron- Facebook Monopoly Vote is In.

The results of the Monopoly vote are in. The iron is out and in its place is voted...... the cat. So we replace one lame piece with another lame piece. At least the the iron represents a virtue, namely work. What does the cat signify?

Dow 14,000, GDP, Jobs, Fed, Inflation, Treasuries, & Gold- Schiff

Volume Off the High Feb 5th Edition

Hopefully you don't strain yourself by going through all the names. FDUS is the only name making the list in Tuesday trading, and was off on the announcement of a secondary offering.

Risks of Recession are Increasing- Part 2

Previously, I had provided commentary from Art Cashin, who stated that when the year-on-year growth in GDP was at or below 1.5% that the risk of a recession rises materially versus the base case. I had also shown that the ascertain was corroborated by the data. The post can be found here.

To further elaborate on this line of thinking, the employment statistics are also suggesting that the risk of a recession are growing, or at the very least are elevated. Specifically, I am looking at the year-over-year acceleration and deceleration in total, nonfarm NSA employed persons. These figures have been reported monthly and run back until the early 1940's, making the data set appealing in that it encompasses many business cycles and well over 800 data points. Additionally, these figures are not subject to the same assumptions and modeling (for instance the birth/death model) that make monthly the job openings number so suspect.

Comparing this data to year-on-year GDP growth shows a fairly tight correlation with a 71%. I provide two historic views of this relationship. The first since the early 1990's and the second since the employment statistics and GDP figures began being recorded.

Since early 1990's


Since early 1940's


The relationship should appear obvious. Getting back to the premise of the post though, I believe current employment statistics are indicating elevated risks of a recession. The acceleration/deceleration in the employment figures has been decelerating for a few months now. Additionally, January figures show a decline, a first in a long while. Historically, a decline in the acceleration/deceleration of employment that follows a falling trend is met with subpar GDP growth in the next two quarters. In fact, the median GDP growth rate after this occurrence is just above the zero line versus a median of 3% in all periods. This is another indicator leading me to think that recession risks are elevated.