Thoughts from sunny Florida…

The week that should tell all…reporting from Florida today as I have taken the family down for a couple of weeks. Difficult to balance work and play but a nice change.  Markets are at critical inflection points as I write.  This week will be the key as to if we have a breakout to a slight new high or if this rally was nothing more than a solid, suckers one.  Gold has not been as bad an investment for non-Americans as you will see.  And major international organizations are warning us…will we heed them?

A beautiful place to do my research and write blogs….

A hint of spring has hit the Toronto area.  Of course, this always seems to happen as we take our annual family trip in March for two weeks.  First a look at my family as I rarely provide a glimpse of my most important side, as they enjoy the pool:

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Family Picture 2016 Florida

Yes, I am blessed but very busy.  Fortrus is more than a full-time job so I thank my lucky stars that I have a wonderful wife who takes care of our four beautiful kids (yes three girls that should provide some interesting times come teenage years).  Nothing like enjoying a beautiful pool during out stay at the Marriott in Orlando.  It is a wonderful facility with great amenities.

Are the stocks ready to run or still just trying to get us to jump into a rally that will fail?

Anyways, let’s talk markets.  First stocks and where they are today.  The US indices are always most important as they tend to lead much of the world up or down.  The tech-heavy Nasdaq and blue-chip Dow Jones Industrial Average indices showed strength late last week as they had an opportunity to break down but held together.  But volume is below average, and MACD is falling (a solid technical indicator we use). Plus, breadth (number of stocks up versus down), at an average of less than 2-to-1 for the past ten days, is not enough to punch the key indices much higher.  While the major indices have advanced for four consecutive weeks, they are now in the area of maximum resistance. I am cautious, and decisions must wait on stocks’ reactions to this week’s economic reports.  The S&P500 is trading just below the 200 day moving average, and as we stated, this is a very key long-term moving average.  It should be a defining week.

The DJIA has peeked above its 200 day moving average, so this is an important resistance point.  But as you can see, in November and December 2015, the market bounced just above and below this indicator, until it broke down in early January 2016.  The downslope of the 200-day line is also concerning.  We were looking for significant volume and strong breadth, and we have not gotten either.  That probably means that the bears are staying away for now, and bulls are simply jumping on a small group of stock which is pushing the index up for now.  Not healthy, but hopeful for bulls.

The market should break through 17,500 to 17,750 if it is to lift off to new highs.  Late March and early April tend to be a very negative period for both cyclical and seasonal reasons, so if the market is going to rally, it should be sooner than later.

Those who have been invested in gold have felt the pain, but has it been that bad?

Gold, silver and almost all commodities (energy crashed in 2014 on) have been in a bear market since 2011.  But let’s focus on gold as we think that it is starting to look extremely attractive.   There are many fallacies about gold such as it only goes up during periods of inflation.  Not true.  It has rallied during a period of low inflation or even deflationary pressures like the world is in today.  Oh, and by the way, gold has been rallying all year.  First let’s look at the bear market in gold in USD terms:

Gold USD 5yrs toMarch2015

As you can see, gold has been on a tear this year.  It is up over 20% in just 2.5 months.

We do not expect the trend to end as we think it should test the first major territory of resistance $1375 to $1400 US.  As you can see, it has clearly broken out of its down channel in February 2016.  It may slide back to challenge the top line of the down channel, as any technician would agree, but it is not necessary.  After a big run, we expect some consolidation and a minor pull back.

But why is it running?  We believe that the world is finally understanding that Central Banks have little control over world economies and that the natural forces of debt de-leveraging and deflation are taking hold.  Central banks in major economies including the United States, Japan, Europe and China have put historic amounts of monies into their economies via quantitative easing programs and also consistently brought interest rates down since 2007.  The European Central Bank and Bank of Japan have negative rates now.  They are all out of ammunition or, at least, have few bullets left.

The world is coming to the conclusion that fiat currencies of these countries are not as safe as the world originally thought. Debt has gone up dramatically for the past eight years and continued to…why, governments see no options.  Austerity fails as it does nothing but lowers incoming revenues to the governments.  Continued government spending ensures more deficits.  The cycle is over and a major reckoning is coming.  With fiat currencies considered riskier by the month, what currency is not…gold, the oldest currency around. 

Another argument against gold is that it provides no incomes.   Well, now all developed countries do not provide income on bank accounts or bonds for that matter. Some as we stated, are actually negative.  So we can throw this argument out the window for not owning gold.

So, then there is the idea that equities pose less risk than gold.  Not where they are trading today.  Economies worldwide are slowing down with nine major economies already in a recession.  We expect this trend to continue this year. That should include both the US and Canada.  So as corporations’ revenues and earnings fall, and stocks are at extremely high levels, the risk they pose is great.  And we have seen this so far in 2016.  For many countries, 2015 was also an awful year.  If you take out the top 10 companies from the major US indexes, you would have had a horrid 2015 as well.  A few companies have been holding up the big ship, but that trend is changing.

So if there is no interest available in fixed income investments, equities are overpriced and risky, world economies are slowing down, financial system is still very fragile as it has not been able to build up a strong enough base since the financial crash, and risk of crash is now accepted…one of the best investment options is GOLD.

Let’s look if gold has been hit as hard in other currencies…

First, let’s have a look at gold in Canadian dollars:

Gold CdnDollars 20yrs toMar14.2016

Well, this picture presents a different picture than gold trading in US dollars.  Here, gold is only about 5% of its all-time high in 2011.  We would not be surprised to see it surpass that level in the first half of this year.  It corrected but not near to the extent it did in US dollars.  One simple reason – the Canadian dollar has been falling, so that means that the fall in gold has been muted relative to its fall in US dollars.  Canadian investors should feel pretty good if they have held gold.  We first recommended buying gold back in 2001, hedged our long positions in 2013, as gold started to fall and rebought in early 2015.  Hedging means we bought inverse ETF’s that offset the fall in gold prices.  We sold those in early 2015 as we reversed and went long again.

Here is gold in Japanese Yen:

Gold JY 5yrs toMar4.2016

It is not far off its high in 2013 either, as it is only 7% below its all-time high.  As far as gold in Euro terms:

Gold Euro 5yrs toMar4.2016

Gold for Europeans still has a ways to get back to all-time highs but still much better than US investors.

The glitter has not gone off of gold as bad as most have thought.  Its shine is coming back fast in 2016 so make sure that you don’t miss the ride for the next while.

When significant independent world organizations warn us, you better listen, as they are always late…

The International Monetary Fund has warned world investors over the last six months that world growth is expected to come in much lower than they and most people expect.  We have been saying this for a long while…maybe we have to get the IMF to sign up as coaching customers.

Now, Moody’s has put out some warnings.  They recently released their Global Macro Outlook 2016-17.  This world rating agency states that growth prospects were being hammered by China’s slowdown, a slump in commodity prices and tighter financing condition in some emerging markets.  They say this will outweigh the benefits of loose monetary conditions of low and negative interest rates and quantitative easing in Japan, Europe, and the US.   They have ratcheted down their growth expectations.  They also bluntly stated that Central Banks now have limited room to battle the risks looming overgrowth. As we have said, they are nearly out of bullets.

They noted that Europe and Japan fiscal policies are severely constrained by elevated debt.  In other words, they are passed being broke…they are a fiscal mess and worsening each year.  This is a ticking time bomb.

The tumbling Japanese yen has not gotten Japan out of a recession, and it has not created inflation as they wanted…failed policies again.  They sure are slow learners as they have been trying this over and over since the late 1980’s, and the only result has been in and out of recession and deflationary conditions.

Europe needs growth to try to deflate their debt away, but instead, they are flat lining and getting closer to dying. They are very damaged by their leveraged burdens, and they aren’t going away.  The one country who has been holding up the EEC is Germany, and now they are strained by a slowing economy and the influx of migrants…tough times in Europe.

The one world hope, beyond the US, which is severely slowing, is China.  After growing by 6.9% last year, a 30-year low, Moody’s expects them to grow by 6.3% in 2016.  That may not sound bad but the trend if very dangerous.  Many fear that a bank implosion will hamper any growth in China.  Some top strategist, led by Kyle Bass, a brilliant hedge fund manager, expect China to severely depreciate their currency, the Yuan.  This would be deadly for other emerging countries, hurt foreign company’s profits and fuel further deflation in Japan and Europe.

Nothing is sounding too good, but as we have always said, there are no free rides and the world’s desire to keep avoiding a necessary period of de-leveraging is doing nothing but leading us to a bigger collapse.

We live in very interesting times.  Do not hide from it but embrace it, accept it, and take appropriate actions to ensure you win by it.

Matt Sammut