Weekend Update December 26

By Everett Millman, head content writer at Gainesville Coins,

a leading gold and silver distributor.

 

ABSTRACT: This week was a bit of a see-saw for commodities, which tracked with the crude oil benchmarks as they alternated between days in the red and the green all week. This left the precious metals largely unchanged before spiking on Friday morning. Meanwhile, U.S. stock indices hurtled to new all-time highs yet again.

GOVERNMENT & POLICY

Spinning What the Fed Said

It is sometimes refreshing–in a morbid way–to watch the mainstream media perform its laughable song-and-dance in lockstep with the government, the banks, and the rest of the fiat cabal. In fact, it is less about the stock markets predictably responding to the Fed’s promise of patience in raising rates with fresh rallies to new all-time highs; what is far funnier is how the pundits and analysts justify the exuberance in equities by hewing to the headline narrative.

One shining example of this line-towing is the analysis proffered by Ralph Acampora from Financial Sense. Mr. Acampora comments on the recent surge in stocks, playing the contrary card (defensively so, one feels) by asserting in the title that there is “No Bubble In Stocks,” and that the “U.S. Economy [is] Stronger Than People Think.”

When pressed to provide a fundamental driver for skyrocketing U.S. equities, Acampora insists that “[t]he economy is super strong.” I’m not one to let questionable diction shape my assessment of someone’s opinion, particularly when it comes to financial analyses, but his choice of words here is telling: Like a school teacher attempting to put a good spin on a pupil’s mediocre performance, Acampora settles on the modifier “super.”

That’s because he is super wrong.

Acampora’s analysis repeatedly discounts short-term over-leveraging and short-term weakness in the markets as temporary, and inconsequential to the long-term outlook for the economy. Yet, they are nagging concerns that he feels obligated to address. Despite the mountain of sparkling data and record closing numbers supporting his view, Acampora seems to be defending himself (and the good reputation of the permabullish American economy) against some unseen critic, some invisible dissenter from the market dogma.

That invisible dissenting opinion is Truth.

Therein lies the key to this whole charade: the more the truth about the economy and the financial system is obscured and obfuscated by the MSM, the easier it is to keep the markets propped up at record highs. Even when adjusted for inflation, does anyone really believe the economic environment warrants an 18,000+ Dow Jones Industrial index? Is the system really any better off now than it was in 2007-2008?

One thing is clear about the current inflated equity valuations: More than anything else, this market is a battle for people’s minds. For now, whether real or imagined, the “economy is super strong” crowd is decidedly ahead. 

That should worry all of us; position yourselves accordingly.

MARKETS

Rally, Sell; Rally, Sell; Rally All the Way!

U.S. stock indices advanced throughout the week, as the holiday season uptick that many were hoping for indeed came to pass. Plenty of market activity was driven by tax loss selling, where traders and investors sell certain securities at a loss in order to mitigate their tax liability for capital gains.

Monday saw the S&P 500 push to a new record high close, while crude oil dragged down precious metals (except for palladium). The release of an array of positive data on Tuesday helped thrust the Dow Jones above 18,000 for the first time ever: U.S. home prices rose more than expected in October; consumer spending numbers beat forecasts; and third quarter GDP was revised up from 3.9% to a whopping 5%, which is the fastest pace of growth for the U.S. economy in 11 years.

The revised GDP figure was boosted in large measure by the fudging of Obamacare numbers from the first quarter, while also coinciding with a 4-month low for new home sales and a 0.7% decline in durable goods orders for November. In spite of these shaky signs in the real economy, the Dow advanced over 1,000 points in a matter of 7 trading days. Even the small-cap Russell 2000 index hit a new all-time high, the ninth time the index posted a record close in 2014, but the first time since early March.

Crude oil played ping-pong all week, posting sessions 2% in the red as well as days 2% in the green. This alternately helped and hurt precious metals, as well as the energy-heavy Nasdaq. In general, volatility is down in most of the markets; the VIX index fell by 39% over 6 days. So, overall volatility is down, but we have been seeing increased volatility of the index itself–the volatility of volatility has been rising, an indication that when the market has swung, it’s been dramatic.

The dollar has been robust, touching a 5-year high above 90.0 on the DXY index. The strength of the currency held gold prices down, as the yellow metal fell through support to close around $1,175 per oz on Wednesday. Stocks were modestly higher during the shortened trading session due to Christmas Eve on Wednesday, but coughed up all of their gains in the last 5 minutes before the early bell to end unchanged. When markets reopened on Friday, the precious metals jumped. Platinum added $25 to cross back above the $1,200 plateau, while silver moved comfortably above $16. Palladium matched a 3-month high, and gold moved toward a weekly gain of over 1%.

The precious metal markets have been experiencing seasonally thin volumes, amplifying the effects of individual trades on prices. Gold ETF holdings are at their lowest level since 2009, as the metal continues to flow from Western vaults to Eastern markets. Although most financial institutions project a similar average gold price around $1,200 during 2015, Société Générale notably sees gold finishing next year at $950, while Goldman Sachs expects the gold price to fall to $1,050 by the end of 2015. The rising dollar has somewhat deceptively kept dollar-denominated gold prices down; year-to-date, gold is actually up 12% in yen and 10% in euro.

Meantime, looking back on 2014, U.S. equities performed mind-bogglingly well. The Dow Jones has rallied over 12% since hitting an 8-month low in mid-October, and is up 11.6% year-to-date. Both the Nasdaq and S&P 500 were even more impressive, adding 16.6% and 15.5% YTD, respectively. Tech stalwart Intel rose 43% this year, while Microsoft advanced 28%. Apple shares rose by about 40% in 2014, increasing the company’s market capitalization by $160 billion–that’s more than the total market cap of all but 24 of the companies listed on the S&P. For perspective, Apple’s total $660 billion market capitalization is more than the combined market cap of Facebook, Google, Cisco, and Amazon. (Combined!) When the dust settles, the Dow will have gained 175% over the current five-year bull market run.

GEOPOLITICS & WORLD EVENTS

Ukraine Roils Russia as Asia Eyes Stimulus

It would seem that the U.S. economy has thus far been insulated from the brunt of the negative consequences relating to the world economy’s slowing pace. (That doesn’t mean it will continue to be immune–merely an observation.) The crash in oil prices this year has left many other economies in search of inflation, however.

In the case of Japan, the country is reacting to the global economic slowdown with muted concern, attempting to combat deflation while humming an optimistic tune to avoid spooking investors and consumers. Prime Minister Shinzo Abe decisively won a snap election earlier this month, gathering public support for his administration and its “Abenomics” stimulus policies.

Although Abe’s convincing re-election amounts to a fresh show of support from Japanese consumers for the government’s approach to solving the country’s economic woes, the results so far haven’t been overwhelming: Japan’s core consumer price index fell to just 0.7% in November, while household spending (and thereby consumption) was down 2.5% year-over-year. Factory orders also dropped in November, while analysts have rolled back their inflation expectations to the lowest levels in over a year.

Abe and his cabinet are planning to announce another $29 billion (or ¥3.5 trillion) in monetary easing sometime soon. On the bright side, the job market has been strong in Japan (although much of it is made up by part-time workers) and experts are predicting a significant jump in industrial output for December and January. Despite the public’s support for Abe’s new mandate, the yen has suffered its longest skid in a month, currently trading above 120 yen to the dollar.

For the most part, China has avoided the stimulus measures employed by its Pacific rival, but that is expected to change. A similar deflationary brush fire has spread to mainland Asia, as both energy consumption and industrial output have been gradually creeping lower. This led the People’s Bank of China to announce that it would pursue more monetary easing, loosening restrictions on lenders by adjusting rules for loan-to-deposit ratios. As has been the case with most other forms of quantitative easing implemented by other countries, the Chinese stock market took off on the news, as the Shanghai Composite index rose by about 6% over the course of just two days.

While China and Japan attempt to spend their way to prosperity, Russia has been forced to sell off massive amounts of its foreign reserves in order to stave off further devaluation of the ruble. The Russian currency has been the worst performer over the last quarter among its 170 peers, declining 27% against the dollar over that period. To stem further losses, the Russian Central Bank has dumped more than $15 billion in its forex reserves over the last week alone through market interventions and repurchase agreements. This has depleted the central bank’s stockpile of liquidity down to only enough funds to cover about the next 6 months of imports. On top of it all, Ukraine has further shunned its Russian adversaries by voting to drop its non-alignment status with NATO and perhaps pursue membership with the alliance of Western countries.

The move by Kiev has roiled the folks at the Kremlin, as it seems every day brings another bout of bad tidings from the West. Standard & Poor’s has scheduled a reassessment of Russian credit, a move which could end in a downgrade of Russian sovereign debt, which is currently just one grade above junk status. Ukraine may be wise to detach itself from Russia’s influence–if the months-long conflict along the two countries’ border isn’t indication enough–considering its own sovereign debt is rated CCC-minus, nine full notches below investment grade. 

With few other options, Russia has chosen to strengthen its ties with China, agreeing to a currency swap deal worth $24 billion, or about 150 billion yuan, as a line of credit. As much as is made about the rivalry between the world’s two largest economies (China and the U.S.), the pair are still highly integrated and–for the time being–have no apparent interest in bringing on their ensured mutual destruction. This means that the more Russia must rely on China, the more it ironically becomes indirectly subservient to U.S. policy. While the Russian Bear struggles under the pressure of overt U.S. sanctions, in the future it may be subdued by the more hidden cage created by America’s cooperative trade partners.

News & Notes

Despite the hack of Sony Entertainment, credited to a North Korean group, the controversial comedy “The Interview” was shown in theaters without incident.

Credit Suisse is under pressure to settle a $10 billion lawsuit over its role in mortgage-backed securities during the financial crisis.

Standard & Poor’s may face fines and a suspension of its credit rating services pending a judgment on alleged inflation of grades for certain institutions before and after the financial crisis.

A LOOK AHEAD: Markets will be closed Thursday in observance of New Year’s Day, and the pickings of U.S. economic data coming out next week is rather slim. Consumer confidence numbers will be released Tuesday, while jobless claims and the Chicago PMI are scheduled for Wednesday. Friday closes out with manufacturing and construction data.

By Everett Millman, head content writer at Gainesville Coins, a leading gold and silver distributor.

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