Market Outlook | April 22, 2013

“All truths are easy to understand once they are discovered; the point is to discover them.” (Galileo Galilei, 1564-1642)

Beyond collapse

Taking a step back, one should realize that commodities as a whole are in a declining mode. Hints provided since autumn suggest a slowing commodity market. It’s no secret that analysts at big, known banks were downgrading gold price expectations earlier this year. Other pundits warned about gold as well, despite the unpopularity of “gold bashing,” which for some appeared to be a “sacrilegious” act. Many wondered about gold: Is it a commodity or currency or even insurance? That depends. However, it’s safe to say gold is a speculative instrument with a known, tangible feel successful at capturing the attention of currency and commodity traders.

Connecting dots

There’s no mystery as to the waning confidence by chart observers. It’s not a secret that the $1800 mark in gold prices served as a difficult barrier to surpass on three occasions in less than two years. Not to mention the 12-year bull cycle, which was reaching escalated levels. Yet, the scramble to figure out why gold fell sharply is treated with mystery and at times misleading assessment. It’s hardly a shock that gold is not the "safe haven" some made it out to be. Interestingly, even last spring, some pointed out the dangers of labeling gold as a safe haven.
“Right now [May 2012] it’s not a safe haven ‘for the things you want protection from,’ Liam said. The safe-haven money is going into U.S. Treasuries and German bonds. That’s creating another problem for gold because it’s driving up the dollar. Seeing as gold’s priced in dollars, it’s making the metal more expensive.” (Wall Street Journal, May 30, 2012).
All these points are not to claim that what is written is always obvious, but rather to point out the dangers of not appreciating clues. The humbling part of trading is the lessons learned that are not so novel but seem amazing afterwards. Sure, sharp declines are at times followed up by sharp increases, yet this volatility does not justify or erase the shifting cycles. The dynamics of gold prices do not create stability or comfort for long-term holders, even if prices hovered above $1400 in the short-term. At least if one is interested in buying, then a good grasp of the supply of gold is a mystery worth unlocking. Given the mainstream debate on commodities and gold, the following relatively simple point is worth remembering: “The U.S. Geological Survey believes another 114 million pounds of it [gold] have yet to be discovered.” (USA Today, April 7, 2013).

Discovery process

Increasing signs of slowing economic growth are visible from deeply wounded Europe to slowly cooling but maturing emerging markets, as well. Thus, the scramble for clarity is underway. In the US, there is a balancing act between the labor market stability and the additional need for stimulus. If strength is witnessed, then further easing may not be needed. This is the mantra for now. To start, figuring out the natural strength of the labor and housing market is an enigma by itself. The slowing labor participation number and weak non-farm payroll presents a shaky perspective unless the trend shows signs of liveliness. Labor results next month should determine the direction of this very slow job recovery. Similarly, the central bank leaders continue to debate on the next stimulus efforts, which adds on to the speculative market elements. This unknown aspect lingers with suspense, but there is no need to panic as long as the volatility index is calm and broad indexes are not too far from all-time highs. The status quo is slightly comforting, but an inflection point is brewing, triggered by opinions related to “stimulus.” For now, more discovery is needed.

Article Quotes:

“Why are corporations on such a tear? The first clue is that a significant share of these profits have always come from two sectors, as Jordan Weissmann has reported: Manufacturing and Finance. Together, they account for more than 50 percent of domestic corporate profits. But they employ just 13 percent of the workforce. Manufacturing and finance are both global industries, and global industries have advantages on both sides of the profit equation. First, they have access to demand in countries that are growing quickly, especially in Asia and Latin America. Second, they have access to workers in countries with cheaper wages. Meanwhile, the fastest-growing jobs in the U.S. over the last few decades have been in industries insulated from globalization, precisely because so many jobs in worldwide industries like manufacturing have escaped overseas. Between 1990 and 2008, virtually all (97.7 percent) of the net new jobs came from what economists call the "nontradable" sector, which is a funky way of saying the work must be done locally (e.g.: government, education, health care). Even in the recovery, health care, food service, and other local and low-paying industries have led the jobs recovery.” (The Atlantic, April 5, 2013).

“Academics at the Oxford-Man Institute of Quantitative Finance tracked the monthly submissions of 12,128 funds to industry databases between 2007 and 2011, and found that just under half the managers subsequently modified their data. Some tweaks are tiny but many are material: around 30% of managers revised past figures by 0.5% or more, roughly equivalent to a month’s returns. Some revisions may be down to cock-up but a closer look hints at conspiracy. Counter-intuitively, most fixes aim to make performance look worse than originally stated. That is probably because two-thirds of funds charge performance fees only if they are at or above their highest valuations. Eager to bring forward the time when they can charge fees again, such managers have an incentive to belittle past returns. Indeed they are the most avid revisers, knocking an average 0.62% off the numbers. In contrast, funds with no need to beat past high-water marks typically inflated their first submissions by 0.4%, making them look more successful to prospective backers. The suspicion is that managers are either making phoney corrections, or pushing through legitimate corrections only when it helps.” (The Economist, April 6, 2013)


Levels: (Prices as of close April 19, 2013)

S&P 500 Index [1555.52] – Staying slightly above the 200-day moving average. 1540 appears to attract buyers in recent weeks.

Crude (Spot) [$88.01] – Nearly a 12% drop since April 1, showcasing part of the commodity slowdown. Several times this year, breaking above $96 and $98 proved to be difficult as sellers exerted further pressure.

Gold [$1393.75] – Following a severe sell-off confirms the downtrend is in full force after a 12-year bull market run. Clearly deeply oversold, yet it would be too ambitious to imagine a recovery back to $1800 without further re-examination of the current trends.

DXY – US Dollar Index [82.71] – The dollar strength remains a theme thus far in 2013. Stability has been forming in the last few weeks and staying above 80 signals renewed stability.

US 10 Year Treasury Yields [1.70%] – Since March 8, 2013, yields have failed to sustain the early year run-up. The next notable lows are near 1.60%, a level last witnessed toward the end of 2012 on three occasions. The odds of yields holding above 1.60% seem slightly favorable, despite the powerful drop in recent weeks.



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