Updating Old Coverage and Introducing a New Favorite Group of Stocks

With family having left, I wanted to update the topic of recent posts. 

AAPL:  I penned a bullish note pre-earnings.  Sales and earnings disappointed, but leaks of upcoming product intros have spurred a massive rally.  This has occurred on significant declines in current quarter and next fiscal year estimates from the analysts.  AAPL fans are not deterred.  40% yoy increase in earnings estimates are expected from a number of members of an AAPL-oriented forum in which I participate, whereas analysts are looking for perhaps half that yoy gain.  For the first time since I started blogging enthusiastically about AAPL in spring 2010 around $250/share,  except for the period of uncertainty regarding SJ's illness/impending demise, I think that AAPL is a good but not great stock going forward-- though it is a great company.  I'd like to see more fear and improving fundamentals to think it's a great stock prospectively, which are situations I see with several other companies that unlike AAPL are well off prior highs though along with Apple they have record sales and earnings.

I have handled the commodities situation well so far, as well.  I stood back from PPLT and PALL a couple of months ago when they just didn't act right.  However, platinum was already at the marginal cost of production for a number of mines.  Probably, similar for palladium, which is a thinner market.

As soon as I read about the tragedy at the Lonmin mine in South Africa, with dozens of people shot dead by police for protesting, I bought the early surge up in PPLT from lower levels than where it had been when last I blogged on it.  I also bought PALL, which trades with PPLT.  These stocks (commodities) are "acting well".  I speculate that even in a "sluggish" global economy, these industrial (and ornamental) metals are going to rise over time.  In the short run, Johnson Matthey put out a report around March of this year suggesting that platinum would like sell around $1600 this fall, and palladium would be around $715 (per ounce prices).  They know the market super-well and have had a good track record on price projections so far as I have seen.  These are thus both "value" metals and I think they can be bought here despite the recent price surge.

Of my current favorite stocks, one is old, two are new.  Old is Con Ed (ED), which after hitting an all-time high took a tumble correlated with the sell-off in T-bonds and the NAZ surge.  Relative strength collapsed to 14 from a period of time at above 80.  Yet the fundos are fine operationally, earnings are rising.  Unbelievably for this boring company, Value Line's computer gives it above average price potential (rank 2) and a technical ranking also of 2.  I have been getting Value Line for decades.  If Con Ed has ever been a #2 for timeliness of stock price movement, I can't remember it.

Remember, ED is a bond substitute in my book.  I continue to foresee it trading to a 3% dividend yield, even in a scenario in which the 10-year T-bond rate rises to 2.5%.  I have no idea when this might occur.  (I thus see little need for most investors to hold bonds.) 

New entrants, and my current momentum favorites, are AGU and CF.  These fertilizer companies have P/E's below 10, strong financial strength, and rising earnings estimates.  CF has the best stock chart around.  AGU looks strong, as well.  AGU has the advantage here of having a catalyst.  Jana, a hedge fund, is an activist shareholder with a 5% stake.  They want AGU broken up, as it has a large global farm retail division.  I like ag over consumer electronics here.  One has shortages, the other is moving to saturation in parts of the world that don't require low prices to buy the product.

Getting back to electronics, the other strategic (not necessarily tactical) fave I have are the telecoms that are "doing well".  These include T, VZ and BCE.  These can be yield stocks when the market again starts to worry about growth, but they participate in the growth of data usage, etc. etc. from the spreading use of mobile devices.  All are rising out of bases on the stock charts, offer over 4% dividends which are expected to rise, and (importantly) have gently accelerating earnings growth already reported.  These stocks could all trade much higher simply as bond substitutes, as well.

The stock market, in fits and starts, overvalued by numerous metrics as it is, has thus begun to make the (usually slow) turn to being less overvalued than bonds.  This turn is just beginning, but it is clearly established for the stronger blue chips. 

Dangerous Markets

In my last post, a while ago pre-vacation, I talked up AAPL's virtues.  Events proved this correct, in a funy way.  AAPL disappointed on sales and earnings, yet the stock is close to its all-time high.  IMO, AAPL is at best a weak hold now on a trading basis.  The fanbois are loving it that a new iPhone will be out soon.  LOL, that's a surprise?

If one compares the platinum ETF, PPLT, with the SPY for as long as PPLT has been in existence, and goes back to the platinum futures markets for prior history, one will see a close correlation between the two.  This has diverged over the past year or so.  Platinum, and even more so palladium, are priced on the margin largely because they are used in the real economy.  The ETFs are secondary in importance; they are not "money" a la gold and perhaps silver.  If the central banks were inflating everything so much, or about to, said inflation would include these very rare and essential metals.  I thus take them as proverbial canaries.  I "think" that stocks have been carried aloft on a similar mode as bonds.  If I saw real strength in copper, platinum, palladium prices etc., I would suppose that bonds were all wet and go with the growth stuff.  But I don't see that.  In fact, the last few months that the Billion Prices Project covers (up to June 30) shows no inflation.  (Note they do not cover services.)

The VIX was down today on a down day for stock prices.  This joins the metals in non-confirming the action.  Meanwhile, fundos matter.  The European recession, misnamed a debt crisis, continues on.  The sedative of the Olympics is over.  For some time I have been analogizing what's been going in in Europe the past few years to what was going on in the US beginning in about 2006.  Europe 2012 continues to have similarities to the US 2008 that trouble me. 

There have been a few times in my investing career in which I had an atypical sense that I was smarter than the markets or the pundits and actually was right (i.e. lucky).  In the 1990s, this sense was that the insanity would continue on until it didn't.  I was lucky to stay with the trend until 2000 and get very much out of stocks that year, to get back in in the spring of 2003.  In the summer of 2007, I got out of stocks and into cash and bonds around Dow 13000, and when it went to 14300+, I was untroubled.  A year later, it had been halved.

I have a similar feeling now about things.  As was the case in the US through August 2008, the markets were trading as if things were normal.  But they manifestly were not.  While the authorities were on the case, they were not gods, and they did the best they could.  But troubles are troubles, and Europe has troubles; and the US economy has continued to trail expectations.  The president's plans for the country to double exports in a five year span is not on track, as the ROW is not cooperating. 

The VIX is 14.  It is 1/3 below its 200 day sma.  14 on the VIX is support (resistance for stocks) for the past 5 years.  Either the economic news is about to turn sunny, or the VIX is overbought.  Right now, I continue to like ED and WGL over AAPL and the growth stuff.

Silver Approaches a Major Price Breakdown

A quick note about the spreading weakness in the four major traded precious metals (PMs), with the focus on silver (the "people's choice" PM).  Silver is testing a triple bottom formation that begins with the January 2011 bottom (after which it almost doubled in short order).  You can see this on a futures chart or simply with SLV.  This strikes me as a sort of opposite formation to the triple top that gold was testing in late summer/fall of 2009, about which I blogged positively in several posts at that time; and, more important, personally bought the impending breakout big-time.  At that time in 2009, the received wisdom was that resistance at triple tops rarely held; usually there was follow-through on the upside.  I suspect that a similar phenomenon will hold for silver on the downside now.

Palladium (and platinum) has a weak chart that is consistent with the silver chart.  I like to focus on it as it has the least public participation in ETFs that hold it; thus it "should" be the PM most related to industrial demand.  In any case, what I find bearish is that it is testing levels that are triple the price levels that marked the 2008/9 bottom in this commodity.  I think there has been lots of speculation in the commodities that is in the process of being negated, as investor preference continues to shift to muni bonds at, say, 50X "earnings" (i.e., a 2% interest rate) or utility stocks at, say, 16X earnings and a 4% dividend payout.
 
Investors and traders also may want to be aware that ETFs serve as a vehicle for the commercial interests to get the public to pay storage costs for excess inventory of these metals.  It is not an unfair deal, and the costs are fully disclosed, but if rising commodities prices were close to a sure thing, would the commerical interests be eager to form ETFs to allow the public in on this near-sure thing?

Update on Today's Commodities Turnaround: What's Going On?

Brief update from prior post.  The apparently pending deal announced today between the IAEA and Iran on nuclear cooperation/inspections and concomitant turnaround intra-day and drop in the price of oil "should" make traders think that more growth is coming.  It's understandable that gold and silver would drop on a diminution of tensions, but "Doctor Copper" and platinum "should" be up, not down hard.  As suggested, palladium has held up the best of the four precious metals I focus on, but this is a surprise in the tape action.  Thus I've gotten out of the trade at a minimal loss because, as stated multiple times, my major thesis is in line with the general trend of ECRI and John Hussman that U.S. growth is truly challenged.  I'm not an economic forecaster, so I don't make or "approve of" (or disagree with) recession calls, but I continue to be perplexed (and more) at the complacency within the U.S. that a recession just won't happen this year.

For some reason, the ag commodities have turned sharply lower intra-day as well.  Their price "should" be boosted if the cost of fuel falls.  But Treasuries haven't traded up.  So when things that should correlate do not, then I don't want to be the guy at the poker table who's the sucker b/c he's the only one who doesn't know who the sucker is. 

Note I'm still positive on palladium, but I also don't want to be distracted from my major investing themes.  The fundamental problem with all these ETFs is that the investor/speculator ends up paying the storage costs that should accrue within the industry.  To that extent the entire industry is skewed toward the industry and against investors.  (What's new?)

More broadly, since I'm a fan of ECRI, my investment posture is to fear more economic weakness than I think the average investor expects in the U.S., which broadly leads to a pro-bond/anti-commodity set of longer-term positions for now.  This is the opposite of what I described was my posture in the summer of 2010 into spring 2011, for those who haven't followed me over the months.  Everything changes.  Anyone interested in that history can look at my post Changing On a Paradigm from early May, last year.  This article also has links back to my pro-inflation hedge articles from about September 2010.

Tuesday Trading Thoughts

A quick trading note or two. 

The expected reversal in bond prices has occurred.  I got lucky yesterday, selling a large piece of a zero coupon very long-term Treasury just off the recent low yields (high price) that I had bought months ago when ECRI had insisted a U.S. recession was just around the corner or had started.  Then we had some strong jobs numbers and the sell-off occurred.  So I held on and got out with a small profit.  Still beat stocks and cash for the period.  I am guessing that more talk about money-printing is going to send yields higher for a while.  But I remain "constructive" on bonds, especially the 10-year Treasury.

Europe is talking "growth" (easier discussed than achieved, but the illusion of growth is easiest when money gets "printed").  Reports from Reuters and the Financial Times show gluts of commodities building up in Chinese ports.  Thus I bought PALL today favoring the view that said glut is old news but the Europe growth/inflation push is newer news (PALL is the palladium ETF.  Palladium is rarer than platinum but not as good a catalyst.  Of the four major precious metals, it is the least investor-driven.  It's shown the best relative strength of all of them lately, and my (amateur) read of palladium on the futures board is bullish.  This is a conscious trade thinking it moves at least to the lows of April.  This is not an investment, just a trade-- but I can sit with it if it drops in price. 

I continue to look with skepticism about stocks broadly.  Mostly this is because the media focuses on them, and uses the almost irrelevant price-earnings ratio as if that were the only way to value stocks.  That said, the valuation formulae much of the Street uses suggests the current rally probably has legs.  However, now that ECRI has, sort of, done a victory dance by saying that the recent back-up in unemployment claims and deterioration in the monthly BLS employment surveys gives them the fourth "leg" of the "chair" for their recession call has made me swing from thinking/hoping that 2011 was our cyclical equivalent of 2008-- a durable price bottom for risk assets-- to thinking/fearing that worse is yet to come.  So I'm waiting with cash, lots of trading profits already banked for the year, and mostly waiting for a fat pitch in the stock market.

For what it's worth, my research suggests that most people's investments that are not in tax-deferred accounts should be in tax-free bonds, in one form or another.

Gold: Comments on Price and Relationship to Stocks

The accompanying chart is an about 22-year chart showing long channels of first, gold outperformace v. stocks, then the opposite, then back to gold. Gold was price-controlled for much of the 20th century; we saw long periods of a 5:1 ratio in the pre-FDR days, and at the depths of the Depression after gold was raised to about $35 per ounce, we say 2 or 3 to 1 as the ratio, rising at the maximum pre-WW II to 5 to 1.

From a sentiment standpoint, the only free sentiment data I can follow daily comes from the premium of Gold-Trust's NAV to the value of its gold holdings. That premium has been about 2.5% the past 2 days, and is about 2.1% as I write this.

Having followed GTU for the past year or so, I can say this is about as low a premium as it has carried.

At gold's peak price in early December, that premium surged to about 9%.

Similarly, the much larger and much better known Central Fund of Canada (CEF) is down to a 3.9% premium over NAV. This fund, which owns both gold and silver, has often traded at a double-digit premium to NAV. CEF and GTU are run by the same organization; www.gold-trust.com; www.centralfund.com.

(In case you are wondering, there are various reasons to value precious metals held in these ETFs over those held by the much larger GLD and SLV ETFs; at least many people believe so, which accounts for their premia.)

I take the above to be encouraging signs that the hot money is leaving or has left the precious metals market.

Structurally, gold but not silver is in a confirmed bull market. Similarly, platinum (PPLT) is in a moderately bullish long-term configuration but has not taken out its high of prior years as gold did late last year. Palladium (PALL) is nowhere long-term; its recent strength vs. gold has been a source of concern as it is the most speculative of the bunch.

Currently, gold is holding at the same price, roughly, as the S&P 500. For them to perform equally, gold would have to go up 2% to account for dividends from stocks. Based on the above, definitely fallible indicator, and considering various measures of investor optimism re stocks, outperformance in the months and year ahead for gold is my guess.

Copyright (C) Long Lake LLC 2010

Economic Reports Taken Bullishly by Metals Traders

Meanwhile, while it may be slightly ancient news, the Commerce Dept. reported today that manufacturing and trade shipments for Sept. were $988 B, down 0.3% from August and down 13.1% from the year earlier. The inventory/sales ratio was stable month on month at 1.32.

Thought you might like to know. End of recession/depression turning point? Could well be. But we must be careful in watching large percentage moves off of a low base.

And for all the excitement about retail sales and the moves in stocks, these moves are matched by gold once again.

More to the point: platinum, palladium and silver are screaming to the upside.

More and more to the point: Longer-dated Treasuries are up in price.

Money is chasing all sorts of financial assets. In times like this, the safest short-term strategy is to go with the flow. And so prices of metals are being bid up. Louise Yamada had spied strength in silver as she stated in a recent interview. Great call! And breaking out silver is, attracting new buying as it does so.

Its back to the reflationary '30s for now

Copyright (C) Long Lake LLC 2009