The Stock Market

 

Insider Buying by Gold Mining Executives Increases Further

In spite of the gold price weakening once again this week and coming dangerously close to breaking an important support zone, gold investors have actually reason to take heart. Readers may recall what we wrote in our most recent update on gold about gold mining margins:

 

“The market has not yet really given any credit to the fact that mining margins are improving due to strength in the real price of gold. Management boards of gold companies may be coming around to a different view though – after all, they are acutely aware that the real gold price is the only thing that counts with respect to their margins.”

 

 rocco fazzariImage credit: Rocco Fazzari

 

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Nonsensical Reasoning is Concocted to “Explain” Day-to-Day Market Moves

We were wondering what could have triggered today’s move in the stock market that so promptly negated Friday’s sell-off. On Friday traders were allegedly worried about a) Greece (what, only now?) and b) China – where it was decided to limit margin trading somewhat and expand stock lending for short sellers in a vain attempt to slow the expansion of the world’s latest and currently strongest stock market bubble.

Neither explanation made any sense. If investors were really worried about Greece, they would have been worrying non-stop since late December at a minimum. Instead European stocks ex-Greece have experienced a near parabolic blow-off move to the upside, pushing them to the highest trailing P/E in history.

 

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Corporate Insiders Jump Ship

Corporate insiders are selling 22 times more stock than they are buying. From Fox Business:

 

“What we’re seeing now is a dramatic reversal in that sentiment,” says David Coleman, editor of Vickers Weekly Insider Report, whose firm tracks buying and selling of all publicly traded companies. “The trend has reversed from what had been historically high levels of buying relative to selling.” […]

TrimTabs Investment Research reports that insiders at public companies have sold $2.6 billion worth of shares so far in June. That’s 22 times more than the $120 million in stock they have bought. […] TrimTabs’s 60-day total of insider buying has fallen to the lowest level since December 2004.”

 

What do corporate insiders see coming?

 

Delusional-42614754718

 

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When Will Bad News Cease to be Good News for Stocks?

It is quite amazing to watch this. Even as one economic datum after another indicates that a major slowdown is underway that could well turn into a recession (keep in mind that this is not a certainty – at similar junctures in recent years, aggregate economic data recovered just in the nick of time), the US stock market continues to take everything in stride.

The most recent example was the enormous “miss” of the payrolls report on Friday. The cash market was closed on Friday, but US stock futures still traded briefly after the release and declined sharply. Whatever concerns futures traders had were evidently forgotten by Monday. After all, weak jobs data mean more free money from the central bank for longer, as the much talked about rate hike will likely be put off further.

 

Elnur Amikishiyev - Getty Images

Image credit: Elnur Amikishiyev | Getty Images

 

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“Oh”, or Aiming for a Career on Wall Street

Fátima, our new 10-year-old English-language student, is a stranger to modern economics… as well as to vernacular English.

“What do you think of central bank policies?” we asked.

“What’s a central bank?”

“It’s the bank that provides money to the other banks.”

“Where do they get the money?”

“They create it out of nothing.”

“Oh.”

“Would you like some money from the central bank?”

“I guess so.”

Fátima must be aiming for a career on Wall Street.

 

yellen teaching draghi how to print money funny photoRecent developments indicate he’s got it …

Cartoon via tradingblog.nl

 

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Stock Market Volatility in the 1950s vs. Today

Market volatility has been of concern for many market participants for several years. There are ways to exploit volatility for profit, but it generally is the bane of long-term trend followers. Implicit in concerns about volatility is the notion that it has been unusually high recently, and that in past years was not a major concern.

Some may be tempted to imagine that things were nearly ideal in the sleepy, tortoise-paced years of the 1950s, including the stock market, when scary volatility must have been virtually nonexistent.

I decided to illustrate a few facts about volatility via the accompanying chart. It plots the S&P 500 over two periods, both a little over two years in length. These are plots of the weekly close, and this is my first point: If one can ignore all market activity except the weekly closing prices, most scary volatility all but vanishes.

 

Slot-Machine-Winner

Image credit: Mircea Maties

 

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The Game Is Up

Today … a warning concerning the new highs in the Nasdaq. Stocks fell hard on Friday. The Dow saw a massive sell-off of 278 points – or 1.5%. Gold was flat. You’ve heard by now why stocks fell – because of Friday’s Employment Situation report. Nonfarm payrolls rose 295,000 in February versus expectations of the consensus forecast of 230,000 new jobs added.

Investors took this “good news” to mean that maybe the Fed would allow interest rates to return to normal sooner rather than later. After all, the crisis that led to its zero-interest-rate policy (ZIRP) is plainly over.

 

NASDAQ_stock_market_display

Photo credit: bfishadow / flickr

 

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Everybody Agrees: Stocks Can Only Go Up More …

We have recently come across a paragraph contained in a Marketwatch “need to know” summary that strikes us rather ominous. The title was: “Corporate America and retail investors agree: We love equities”. It goes on to say:

 

“A box of chocolates, some Barry White and a stock market that just won’t quit. Whatever the aphrodisiac, love was in the air last month as investors embraced the Valentine’s Day spirit.

If there’s any fear of an imminent retreat in the markets, you wouldn’t know it by how enamored individual investors have been with equities lately. Stock and stock-fund allocations grew to 68.3% in February, marking the second-highest level since the financial crisis, according to the American Association of Individual Investors. We’re now going on 23 months in a row of equity portfolio allocations above the historical average of 60%.

Corporate America is every bit as smitten with equities. Its own equities, to be precise. Buybacks surged to the highest level ever recorded by TrimTabs, which started tracking the data in 1995. In February, CEOs announced $104.3 billion in repurchase plans.

A year earlier, that number was $55 billion. A contrarian might see that as reason to sell. But it wouldn’t have worked the last time buybacks took out a monthly record. That was $99.8 billion in July 2006, and the S&P 500 surged 23% the following 14 months before hitting an all-time high, Bloomberg data showed.”

 

(emphasis added)

 

moma soundings

Photo credit: Stephen Vitiello

 

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Oil Production and Consumption

 

oilstock

Image via Taylor Russell

 

The first chart shows global oil production, by month, based on latest EIA data.  2014 saw significant production increases after fairly flat production in ’12 and ’13.

 

1-global oil productionGlobal crude oil production (source, EIA) – click to enlarge.

 

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The King of Lydia

“Count no man happy until he be dead,” said Athenian statesman and poet Solon.

The man to whom Solon gave the advice was the richest man alive at the time (the 6th century B.C.) – the king of Lydia, Croesus.

Croesus considered himself to be the happiest man alive. But he discovered that fortune could turn against you, no matter how rich and powerful you were. His son died in an accident. His wife committed suicide. And he was captured and burned alive by Cyrus, king of Persia.

And now, poor Warren Buffett must be feeling the heat. He’s 84 years old and the most successful investor of all time. Respected. Admired. Beloved, especially by the thousands of people he has made into millionaires. And “as rich as Croesus” himself. Buffett celebrated the golden anniversary of his investment conglomerate, Berkshire Hathaway, last week. And what a success!

 

975px-Honthorst_solon_and_croesus Croesus and Solon , painting by Gerard van Honthorst,  1624

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The Market Isn’t Cheap

We frequently run across assertions that the US stock market is allegedly “cheap”, because the trailing P/E of the S&P 500 Index has not yet reached the dizzy heights of 1929 or 2000 (of course, quite often the “forward P/E” is cited rather than the trailing P/E. We believe this to be a worthless indicator, as it relies on overoptimistic analyst estimates that are continually revised lower as time passes).

Apart from the fact that the valuation peaks of the two biggest stock market manias in history hardly represent a useful yardstick for determining whether the market is attractively valued or not, these assertions are focused on an index that is capitalization weighted and the average P/E of which is greatly influenced by a small number of momentum stocks. In 2000, the extreme valuations accorded to technology stocks ended up producing a trailing P/E for the S&P 500 in cloud cuckoo land – however, the market as a whole was actually noticeably cheaper than it is today.

 

buborek

 

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Consolidation or Topping Pattern?

From a technical perspective, the recent trading range in the US stock market is not really telling us much about what to expect next. It is possible to regard it as a drawn-out consolidation pattern prior to a renewed surge, but it is just as likely that it is in fact a distribution pattern.

We have discussed the sentiment backdrop a number of times recently. Although the public exuberance that was visible in 2000 is largely absent, virtually every other measure of sentiment, whether in terms of positioning, surveys or of the anecdotal variety, seems stretched like rarely before. In many ways it is the exact opposite of what was seen near the 2009 lows. Anecdotal evidence includes items like the stock market valuation accorded to a company that owns four mobile grilled cheese dispensers in the OTC market (a cool $100m.), which is discussed in more detail by Barry Ritholtz here.

 

uniformity

Image credit: fmh

 

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A Disturbance in the Farce?

We usually like to keep an eye on indicators that are not getting a lot of attention, in an attempt to circumvent the “what everybody knows isn’t worth knowing” problem. Recently, several noteworthy things have happened with the $VIX, or rather, the derivatives traded on the VIX. The VIX is a measure of implied volatility, referring to front month options on the S&P 500 Index (it used to be the S&P 100 back when OEX options were still the most liquid index options – the OEX version is these days called VXO). While the first OEX version used only at-the-money options expiring 30 days hence, the calculation has been expanded over time. Now it is a blend of front and second-month at-the-money and out-of-the-money options. Those interested in the precise calculation procedure can take a look at it here: CBOE VIX White Paper (PDF). The aim is to calculate the expected 30-day volatility of the SPX at a 68% probability (one std. deviation) as expressed by the options market.

 

gi-takingstock01rb1

Image credit: James Steidl / Thinkstock)

 

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Helpful Analysts

As we have occasionally mentioned, it is often hard to fathom why sell-side analysts exist at all. After all, in a bear market you don’t want them, and in a bull market you certainly don’t need them. However, as Brett Arends informs us, there is a sure-fire way to make a lot of money from analyst recommendations: at the beginning of the year, simply make a list of the 10 stocks they hate most, buy them in equal weightings and watch your net worth soar. Easy-peasy.

Below is a chart of three stocks that inhabited the “10 most hated” list at the beginning of 2014 – they returned 30% or more each (dividends included). The entire list returned 19%, beating the S&P 500 Index by one third, and featured just one loser (DE), which lost a mere 1%.

 

Hated StocksThree exceptional performers from the 2014 “10 most hated by Wall Street analysts” list, returning 30% + each over the year, including dividends – via StockCharts, click to enlarge.

 

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Still “Patient”, but too Upbeat for the Stock Market

As a look at the WSJ’s FOMC statement tracker reveals, the Fed currently sounds quite upbeat about the US economy. Given that organs of the State are usually the last to recognize a trend (in this case the trend of a subdued, but better than elsewhere US economic performance), this should be taken as a warning sign that the trend may be close to reversing.

There was only one word for liquidity junkies in the statement: the term “patient”, in the context of the widely anticipated, but continually postponed, rate hike. While the Fed ponders rate hikes, US macro data have begun to weaken rather noticeably of late. Not to an extent yet that would be worrisome, but they offer a strange contrast to the upbeat FOMC statement. Also, the Fed keeps stressing that it sees the recent collapse in inflation expectations as “transitory” (it may well turn out to be), again removing a reason for waiting much longer with a rate hike. Meanwhile, central banks from Canada to Singapore are cutting their administered interest rates, or are adopting a dovish stance (New Zealand, Australia), or are engaging in outright money printing (ECB, BoJ). Bond yields keep plummeting all over the show, including those on treasuries, which benefit from still offering a sizable spread pick-up in today’s world of ZIRP, NIRP and negative yields on government bonds.

 

FOMC

 

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