Stocks & Equities

Market Buzz – Never Paint all Dividend Stocks with One Brush

keystonePlease Note: KeyStone’s Senior Income/Dividend Stock Analyst, Aaron Dunn will be speaking on Money Talks with Michael Campbell on Saturday June 29, 2013 at 9:00 a.m. (see below)

The Canadian dollar was lower Friday amid new figures that showed that the economy grew modestly during April.

The Loonie fell $0.39 to $0.9508 US as Statistics Canada reported that gross domestic product grew by 0.1%, in line with expectations.

Fed chairman Ben Bernanke rattled markets on June 19 when he indicated that the central bank could start tapering its bond purchases and the Canadian currency has been volatile ever since, sinking as low as $0.9475 US earlier this week, its lowest level since October 2011.

Chairman Bernake’s statement sent interest rate sensitive stocks (many dividend payers) lower. Higher bond yields have been the major culprit amid speculation the U.S. Federal Reserve could be close to starting to wind up one of its key stimulus measures, the purchase of US$85 billion of bonds every month.

While most commentaries expect Canadian economic growth to pick up in the second half of the year, year-over-year, the Canadian economy grew at an annualized rate of 1.4% — slightly below the Bank of Canada’s most recent estimate for the full year and well short of some private sector estimates for 2013 growth. This should hardly be a rate that instills fear of sharply rising interest rates.

It is true that some yield stocks had been pushed to unattractive levels near term, but to paint all dividend stocks with one brush is symptomatic of how myopic the market has become. Today it seems tech stocks are either good or bad, REITs are either good or bad, or in this case, dividend stocks are either good or bad. There is no middle ground, everything is an absolute. I thought “only the Sith (Star Wars reference) deal in absolutes” – you are either with me or against me – and how did that work out for them (not good for those not following).

This type of one size fits all investing is nonsense. It is entirely short sighted as well. Fortunately it provides us long-term buying opportunities.

It is true that in a desperate search for yield, some dividend stocks were likely pushed too high near term. But those who argue against dividend paying stocks as a general rule in this market sound ridiculous. Are we actually to believe that a stock that trades below its growth rate, generates strong cash, pays us between 3-10% annually and holds a strong business is somehow unattractive because interest rates will eventually move higher? That is absurd. This is precisely the type of investment any true investor should be looking at in ANY investment environment.

But don’t take our word for it. According to a Ned Davis Research firm, over a 35 year time horizon (1970-2005), dividend stocks on the S&P 500 generated a total return of 10.19% per year compared to the 4.39% generated from non-dividend stocks – nearly 6% annual outperformance! Similar research can be sighted back 60 years plus.

That fact is investing in high quality-cash producing dividend stock is no “Johnny-come-lately” strategy. It is simple tried & true and has been used by some of the world’s most successful investors for over a century.

It is one of your best chances at beating the market long term.

However, it can be hard to figure out which dividend stocks to invest in – after all, not all dividend stock are created equal. It is critical to remember that just because a stock has an attractive dividend or yield of say 5, 8, 10 or even 15% – there is by no means a guarantee that it is sustainable at that level or at all.

Dividend stocks are not bonds and if you invest in low quality dividend stocks and chase unsustainable yields, you can find yourself loosing 40%-50% or more of your principal value. The media is full of headlines like “The only 5 dividend stocks you need for a successful retirement” or “Retirement strategy: Buy any dips in dividend winning stocks.”

Do yourself a favour and avoid these short-term fixes and start using our simple proven strategy to uncover profitable dividend paying stocks through intense research.

We specialize in indentifying dividend stocks with;

– Strong sustainable cash flow.

– Reasonable payout ratios.

– Solid balance sheets.

– Strong management teams with strong ownership positions.

– Trading at attractive fundamental valuations.

– Growing businesses.

– A history of dividend growth.

– And in a diverse degree of industries.

Over the past 3-years, KeyStone’s Income Stock service’s average gain (Conservative. Moderate, & Growth portfolios) combined have posted gains of 55.1%, which is more than triple the 16.1% gains the TSX-Composite index posted over that same period. In fact, each year since inception our Income/Dividend Stock Research has substantially bested the TSX benchmark in up and down markets, consistently posting very strong gains.

Last year (2012), Keystone’s Dividend Stock “Hybrid Portfolio” (our favourite 10-12 income stocks) posted a 24.1% gain versus the TSX-Composite, which managed a 7.2% gain including dividends.

——————————————————————————————

KeyStone’s Senior Income/Dividend Stock Analyst, Aaron Dunn will be speaking on Money Talks with Michael Campbell on Saturday June 29, 2013 at 9:00 a.m.

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A Message from Lord Vader

As long-time readers know, I have a very eclectic group of friends and associates. Colorful, opinionated, generally both fun and funny, they make for interesting times and discussions wherever I go. I am not certain why they associate with such a mild-mannered, soft-spoken, Muddle-Through Texan like me, but most agree that I am at least good for comic relief. Next week I will be in the midst of some unabashed bulls, but today I offer up for your reading pleasure a note from a friend who is on the Dark Side of the fence, though he is hardly what you could call a conventional bear. He is Rich Yamarone, Chief Economist for Bloomberg. – John Mauldin

A Message from Lord Vader

by Rich Yamarone

“There is no dark side of the moon really. Matter of fact, it’s all dark.”

                                                                                                            Pink Floyd

 

A recent gut feeling about a global unraveling has forced the Prince of Darkness to issue the following statement regarding the economic climate (as well as provide an open invite to the annual Dark Side summer soiree): Emerging markets are in turmoil, Europe is spiraling deeper into recession and finance ministers in the region are scrambling to fix the seemingly never ending banking crisis. Turkey is the new hotbed of civil unrest, and central banks and sovereign nations are providing extreme monetary policy accommodation and engaging in currency wars to maintain some sense of stabilization. The World Bank reduced its global economic forecast to 2.2 percent in 2013 – lower than the 2.3 percent performance in 2012.

It was just a matter of time before the conditions started to break down. If you see a 500 lb. man eating a donut and smoking a cigarette, you needn’t be a genius to know the situation isn’t going to end well. Similarly, blistering gains in the equity indexes to record highs amid a sluggish economic performance are simply unsustainable. Look at the bifurcation between the CRB index and the S&P 500; that solid relationship between the market and economy broke down in December of last year, and it now looks as if the S&P will rejoin the commodity benchmark in its tailspin.

GDP advanced by a seasonally adjusted annual rate of 2.4 percent in the first quarter, resulting in a 1.8 percent increase over the previous year – which is usually a recession indicator. For now it’s likely that the economy continues to plod along at this subdued level until one of the many obstacles send it south.

SP 500

We recently saw of a number of possible signals of a downturn.

The ISM’s PMI fell to 49 in May from 50.7 in April, the first sub-50 reading in the barometer since November (49.9) and the lowest level since Jun 2009 (45.8) when the U.S. economy was emerging from depression. Along the same lines, the key subcomponents of New Orders and Production fell to 48.8 and 48.6 respectively – indicating a contraction in business conditions. This slump doesn’t appear to be solely an American condition.

The difference between the New Orders Index (a proxy for future demand) and the level of existing inventories (expectations by businesses of future demand) was -0.2 in May. Historically a negative reading has been a recession indicator. This isn’t foolproof – there have been several negative postings with a downturn surfacing – but there have been six negative readings since the end of the 2007-2009 depression, which supports a somewhat tepid situation.

The other ISM indicator is the Price Index, which slipped below 50 to 49.5 in May. Below-50 readings are always experienced during recessions. The inability of businesses to raise prices in a challenging economic environment, in combination with a sub-50 reading in the headline PMI and a negative New Orders less Inventories index suggests a notable curtailment in economic growth.

Industrial production has peaked (8.5 percent) in mid-2010 to 1.95 percent today (another indicator that has fallen below that magical 2.0 percent recession level), and manufacturers are slashing jobs again. The regional Fed manufacturing indices are all lingering in crummy territory – at best. Electricity output has fallen in each of the last five weeks (on a year-over-year basis), and shipments of nondefense capital goods excluding aircraft plunged 1.5 percent in April – a messy beginning of the second quarter.

The average length of the last ten expansions is 60.5 months, and we are currently 47 months into the most recent recovery. It isn’t inconceivable that the economy contracts at this point, especially since it has been operating at a pace that has historically suggested recession.

Real GDP

If the global equity market sell-off is not a “Sell in May” event, but rather the beginning of the great unwinding then the economy, already skating on thin ice, is even more susceptible to a downturn.

There is something to consider with respect to the sluggish second quarter start: data revisions have an incredible ability to change the economic landscape and the determination of business cycle strengths and turning points. In 2008, the fourth quarter GDP was initial reported to have declined by 3.8 percent…nine revisions later the actual level stands at -8.9 percent. [Hat tip to my friends at Chilton Capital for bringing it to my attention.]

On July 31, the Bureau of Economic Analysis will revise the National Income Product Accounts (including the GDP report). What happens – pure speculation, but not entirely outrageous – if the final quarter 2012 GDP increase is downwardly revised from its current 0.4 gain to a 0.5 percent decline. And the first quarter 2013 increase of 2.4 is shaved a few basis points to a 1.8 percent increase, and the current quarter comes in negative? Will the chatter pick up about recession? Will a recession be declared? Will those folks at the ECRI be heralded as heroes? Will the Street flock to the Dark Side, and will everyone will want in on our glorious Dark Side picnic. Do we have enough chairs? Stay tuned, its less than two months away…

According to (82) economists polled by Bloomberg, U.S. GDP is expected to increase 1.9% in 2013, following a 2.2% gain in 2012. This is extremely weak by historical standards, and with the exception of one event, has resulted in recession every time since 1948.

This said, we are anticipating the addition of several Street economists to come over and join us here on the Dark Side as well as the annual picnic – we are fully prepared as we asked Beelzebub’s Catering and Party Tent Rentals to provide us with a few hundred extra chairs and tables. (Thanks guys.)

This year’s party might not be as exciting or entertaining as in previous confabs. Just as Fed Chairman Ben Bernanke will not be attending the annual central bank conference in Jackson Hole, Wyoming, we are afraid that a long-time Dark Side headliner (and a dear friend) Dave Rosenberg of Gluskin-Sheff, might not be partying with our Doom and Gloom set. This is a mighty blow – you’ll remember the 2004 and 2005 soirees when Mr. Rosenberg was undoubtedly the life of the Dark Side parties, forewarning all that would listen of the pending housing crisis and subsequent economic doom.

To date, the labor market recovery has been unimpressive. The number of Americans on nonfarm payrolls totaled 135 million in April, the same level as in late 2005. On this basis one can claim the U.S. has “turned Japanese” with a near lost decade of job creation. We should expect results that are similarly poor as in Japan in coming decades: we use the same policy prescription for the same ailment, why wouldn’t we have the same result? If you wrap avocado, cucumber, and rice in Nori with sesame seeds, it’s a California roll. Why would you think it’s something else? [For the record, there is no sushi in the Dark Side.]

It looks like 96,300 of the 175,000 new nonfarm jobs created last month were in very low wage industries (retail, 27,000), temporary, (25,600), leisure and hospitality (43,000). The industries with the two lowest hourly wages are leisure and hospitality ($11.76) and retail ($13.92). It isn’t clear how the world’s largest economy gets back on its feet with so many receiving such low incomes.

In the Dark Side wages don’t matter, everything here is free – it’s not that dark! The single greatest hurdle for the recognized U.S. economy however, is flat-to-declining wages. To some this may sound a tad like a broken record [Apparently vinyl records are more popular than cds right now see: http://bit.ly/1aWrtW3 ] but the only thing that matters to the economic recovery is incomes.

Real Disposable

Real disposable personal incomes – the amount that consumers have to spend once adjusted for inflation and taxes – increased 0.1 percent in April, a mere 1.0 percent higher than year ago levels. Similarly, the amount of spending that Americans facilitated with that lowly income inched up 0.1 percent, or 2.1 percent from April 2012. Real disposable personal incomes had a history of advancing at 3.75 percent, which would boost spending by a similarly robust pace. As long as income growth is staid as it is, the economy will continue to spin its wheels in a sideways movement, and subsequently keep a lid on job creation.

Grab some food stamps…they don’t cost nothing. Some things don’t need to be examined to know what kind of an effect they will have on consumer psyches, spending habits, and ultimately aggregate demand. According to the USDA, there are more than 47 million Americans on the Supplemental Nutrition Assistance Program, more commonly known as food stamps. Since the end of the depression in June 2009, food stamp assistance has accelerated by 30.8 percent, dwarfing job creation of 3.8 percent during the same period. This said, it should come as no surprise grocery and health and wellness in aggregate make up about 66 percent of Wal-Mart’s revenues. More stores are adjusting space for the inclusion of groceries.

Growth Foodstamps

Anecdotes from the Bloomberg Orange Book – admittedly a far too bright colour for those residing here in the place of torment – point to a number of headwinds.

Bllombery Orange

The Bloomberg Orange Book Sentiment Index has been below 50 (a reading of contraction) for eighteen consecutive weeks. Comments continue to paint a picture of souring business conditions.

Consumer companies complain:

Church & Dwight: “I have been a long-term pessimist about the business environment. The latest forecast of weak GDP growth, continuing high unemployment and weak same-sale stores (sic) [same-store sales] (10:30) growth by our major retailers provides little hope for near-term improvement in the U.S. economy.” “2013 is shaping up to be another very challenging year due to the weak consumer demand.”

Denny’s: “We faced significant headwinds in this quarter, as we lapped our strongest quarter of last year. And our customers felt the impact of higher payroll taxes, gas prices and delayed income tax refunds. As a result, we ended up with our first quarter of negative system-wide same-store sales in almost two years.”

Shoe Carnival: “The government’s delay to act on tax policy and their subsequent decision to raise payroll tax withholding rates had an immediate impact on our consumer. The decision the IRS made to delay accepting tax returns until January 30 also had an immediate and calculable impact on our sales results for the last 10 days of the quarter.”

Express Inc.: “At the same time, traffic is down noticeably compared to last year. Consumers appeared cautious due to the macroeconomic environment and uncertainty around budget cuts and also the impact of higher payroll taxes.”

Kona Grill: “During the quarter, the restaurant industry in general experienced a pullback in consumer spending due to the payroll tax increase, delays in income tax reform, and spiking gas prices, which impacted guest traffic and we were no exception.”

The catatonic state of affairs in Washington, DC is really upending many companies – kind of shocking that in the aftermath of depression, fiscal policy is so incredibly restrictive. Sequestration is on the minds of many companies, and it is not limited to the aerospace and defense industry: 

Kelly Services: “We expect the current pace of growth will continue as the U.S. labor market remains fragile and unpredictable with no clear signs of momentum. Add to that there is ongoing uncertainty about the effects of sequestration and rising anxieties surrounding the impending Affordable Care Act, which is one of the most significant issues facing our industry today.”

Armstrong Worldwide: “On the commercial front, in the U.S., we anticipate a continuation of flat to slightly down commercial volumes, with ongoing weakness in education and, to a lesser extent, healthcare.”

Hertz Global Holdings: “In April, we experienced some softness in both the car and equipment rental businesses in the U.S. due to the holiday shift and the initial impact of the sequester. Volumes in our government businesses were down double digits this month, and our commercial accounts with exposure to government customers also cut back on travel.”

UPS: “Although the U.S. economy is poised for growth, it is being restrained somewhat by the tax increases and sequestration implemented during the first quarter. This will be a drag on 2013 GDP expansion with current expectations for about 2% growth.”

Lockheed Martin: “I think as we looked forward for the next three quarters, we do expect to see some pressures from sequestration. They’ve not played out at this point, but we do expect them to happen in the next three quarters.”

Internationally, Bloomberg Orange Book anecdotes have highlighted great concern: 

Sealed Air: “As a Frenchman, I can tell you I’m very concerned about the French economy. It’s been moving towards Spain and Italy instead of moving towards Germany. And it shows in our equipment business, equipment and tools business.”

Air Products & Chemicals: “In North America we experienced modest growth; Europe sunk deeper into recession, with Southern Europe remaining particularly weak while the Northern Continent and Central Europe worsened; and in Asia there was a slower-than-expected ramp-up after the Lunar New Year holiday.”

Cooper Tire & Rubber: “China’s economy continues to grow at a slower pace than recent historical rates and Europe’s economy remains stalled. Combined, all of these challenges resulted in Cooper’s shipping volumes being 8% lower than the prior-year first quarter…” 

Avis Budget: “Interestingly the markets that were weak last year Italy and Spain seemed to have stabilized thus far in 2013, while France and the UK continued to show some signs of weakness. Germany, which was the lone moderately strong performer last year, has softened this year in line with its softening economy.”

McDonald’s: “Japan’s performance for the quarter was negatively impacted by the difficult economy, a declining IEO industry, and ongoing consumer sensitivity to prices and promotions. Japan continues to evaluate and adjust its plans to complement existing value initiatives with new product news that drives long-term profitable sales and guest counts.”

Central banks all over the world are singing the song of unconventional monetary policy. Now we are all lead to believe that the Bank of Japan’s most recent announcement to adopt a $1.4 trillion quantitative easing program will be the magical elixir to its multi-decade ailments. This seems a little doubtful; as Tanya Tucker sang, “It’s a little too late to do the right thing now.”

The incomes and wage channel hold the answers to countless economic issues. Other than the obvious influences on confidence, spending, corporate profits, and hiring, there is the impact on policy prescriptions. As long as there is disinflation or deflation in average hourly earnings, the Fed should be expected to its foot on the accelerator, and refrain from tapering in the near term.

Fed Funds

Many pundits are pointing to geopolitical uprisings as cause for concern to the U.S. economic recovery efforts. Economically speaking, the American consumer – the ultimate driver of aggregate demand – cares little about the goings on overseas. You’ll never overhear Mom pushing junior in a Wal-Mart or Target saying, “We’re not buying any toys today, there’s civil unrest in Turkey.” Investors should expect any meaningful impact from the strife in Cyprus, Syria, or any other nation that is not economically influential.

Our friend Lucifer of Lucifer’s Econometric Forecasting & Astrology informed us that this year might not be something to get excited over.  Earlier this year, the Chinese zodiac welcomed the Year of the Snake. Previous “snake years” haven’t been kind to the U.S. economy; of the last ten (1893, 1905, 1917, 1929, 1941, 1953, 1965, 1977, 1989, and 2001), the U.S economy had experienced two recessions (1953, 2001) and two depressions (1893, 1929). Other years experienced similarly profound bouts of calamity, i.e.; in 1917 the U.S. entered WW-I, and in 1941 entered WW-II. Snakes are seldom overlooked and have a tendency to strike sharply when ignored.

So while you are making your plans for this summer and the early fall, remember: here in the Dark Side there’s an open invite for the excellent assortment of dark beers for your consumption – they are warm. After all, this is the Dark Side.  There’s a wonderful dark chocolate cake for dessert, and Marilyn Manson is scheduled to be the warm-up band for Alice Cooper on Laborless Day, who will be performing at 5:00 pm in the Satan’s Den. Thanks again for considering, your table is ready.

Lord Vader

Richard Yamarone is an economist who focuses on monetary and fiscal policy, economic indicators, fixed-income, commodities, and general macroeconomic conditions for Bloomberg Brief: Economics, a daily newsletter that features analysis, data and news on the forces shaping the global economy. Mr. Yamarone and the Bloomberg Brief economics team provide in-depth analysis of macroeconomic data, policy, and trends and how they will impact financial markets.

You can download a sample issue of Bloomberg Brief: Economics here. Subscribers get Rich’s Orange Book as part of the deal.

 

 

 

Disclaimer

John Mauldin is president of Millennium Wave Advisors, LLC, a registered investment advisor. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.

Opinions expressed in these reports may change without prior notice. John Mauldin and/or the staffs at Millennium Wave Advisors, LLC and InvestorsInsight Publishing, Inc. (InvestorsInsight) may or may not have investments in any funds, programs or companies cited above.

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No Real Recovery Without “Hitting Bottom” First…

Screen shot 2013-06-28 at 10.14.46 AMThe Dow continues its rise. Up another 114 points yesterday.

Gold dropped another -$18 an ounce… Mr. Market is working his devious magic… scaring away the Johnny-come-latelies… putting the fear of God into the rest of us.

Hazarding a guess, the price of gold has about another $100 to fall. Then it will probably rebound a bit, as the “strong hands” take advantage of the opportunity.

But the fireworks in the gold market are still, probably, far ahead. You’ll hear the explosions when consumer prices begin to rise. And that won’t happen for a while.

And here is where the story gets interesting… and hard to follow. The bond market has turned. This could push the economy into a deeper funk unless growth starts to pick up. But it could be years before the new trend is firmly established.

We remember the last turn… in the early 1980s. Paul Volcker announced it in 1979. But it was almost four years before investors fully absorbed the news.

In the meantime, there is no pressure on consumer prices… because there is no real recovery. The news media was confused on the subject yesterday. Some sources reported big improvements in consumer confidence, durable goods orders and house prices. Others focused on the downward revision to first-quarter GDP growth.

The Phony Economy

 

You can believe anything you want. But on this we are certain: There will be no real recovery.

We are unsure of practically everything. Ask us our phone number…we will hesitate and check twice. Ask us who won World War I… we will have a whole barge-load of equivocations. Ask us which way the stock market is going… we will chuckle.

But ask us about a recovery and we have a ready answer: There will be none.

Why? How can we be so sure?

A recovery needs something solid to recover from. And the period 2003-07 was just the opposite. It was the feverish end to a long ailment that has plagued the US economy since the early 1980s. That was when America’s economy shifted from real growth to phony, debt-driven pseudo growth.

Before then the ratio of total debt to GDP had been about 150% for decades. Americans went about their business – saving… borrowing… spending… creating… producing in a reasonable way. Growth came from where it was supposed to come from – increases in productivity which were shared between workers, lenders, investors and businesses.

Then the confluence of a number of strange things sent debt levels soaring…

America was lucky enough to have the world’s reserve currency in an age of paper money

…the Chinese produced things cheaper than Americans. Wal-Mart pushed prices down further

…the Reagan administration decided that “deficits don’t matter”

…and the financial industry found innovative ways to package and sell on debt.

As a result, total debt-to-GDP levels rose to 300% by the end of the century… and then to 360% by 2007.

This extra debt changed the NATURE of the economy. It was no longer an economy that grew by producing things; henceforth, it was an economy that required larger and larger injections of debt to get high.

In 2007-08 subprime lenders got the shakes and it was over. At least, for them. In a matter of hours, the feds appeared on the scene with stronger drugs. They’ve been trying to relive that glorious “first toke” experience ever since.

Hitting the Bottom

 

And they’re still at it. A headline from today’s Financial Times: “Fed big-hitters seek to quash QE fears.”

What?

Investors are afraid the Fed might stop delivering the drugs. They needn’t worry. Those fears are “out of sync” with Fed thinking said “two senior Federal Reserve officials.”

The drug addiction analogy has been widely used to describe the situation. Like any analogy, it has its limitations and its dangers. But there is one element of it that has been widely ignored.

We spent some time with a psychologist recently. We we’re at a closed-door meeting of members of our family wealth investment advisory, Bonner & Partners Family Office.

There’s as much voodoo in psychology as there is in economics. Still, there are things one trade can learn from the other.

 “Drug addicts rarely just decide to recover,” said our friend, a family therapist.

“They have to hit bottom first,” she replied. “And that can be a very long way down.”

The feds are not even trying to help the economy overcome its addiction to cheap credit. Instead, like a sleazy therapist, they want to keep it in expensive and ineffective therapy. Running a rehab clinic can be a good business, especially if the patients never recover. Patients are never allowed to hit bottom. And the quacks keep transferring more and more wealth and power to themselves and their friends.

But like drugs, you can’t increase the dosage forever. An economy that depends on ever-greater hits of credit is an economy destined to blow up.

Then, and only then, can a real “recovery” begin. But it will not be a recovery to the feverish credit bubble of the 2003-07 period. It will be something very different.

Stay tuned…

Regards,

bbonner-sig

Bill

Stocks Swing To Best Gain In 6 Months…..

shutterstock 112959457…..Volume & Credit Slumping. In 3 days the Fed has talked the S&P 500 up 4% (amid collapsing volumes)….

…..read more HERE

 

Some Hard Numbers on the Western Banking System
 

by Simon Black

‘If one of you stands up right now and heads for the exit, the rest of the audience probably won’t pay much attention. If ten of you do it, one or two people may notice and follow. But if 400 of you suddenly head for the exit, the rest of the audience would probably follow quickly.’

It’s a great metaphor for how our financial system works. The entire system is based on confidence. And as long as most people maintain this confidence, everything is fine.

…..read more HERE

 

Will Gold Mining Stocks Drop Any Further?

Last week was very disappointing for those who had previously been long precious metals and very profitable for precious metals bears. A lot happened after the FOMC meeting and the Federal Reserve Chairman’s statement on June 19, 2013.

As expected, the confirmation of the Fed’s intention to withdraw from QE3 clearly helped the American dollar. After about three weeks of the currency declines, last week brought the breakout and a start of a rally.

The strengthening of the U.S. dollar was a strong blow not only to the currencies, but also to commodity markets. 

After Bernanke’s comments, pessimism transpired to the precious metals markets and we saw some of the biggest swings in this sector.

The sell-off in precious metals pushed gold and silver to lower levels and last week they hit new 2013 lows but haven’t found the bottom quite yet, as it seems. On Friday gold fell below its technical support around $1,285-1,308 per ounce. The decrease in the yellow metal triggered a plunge in silver. The white metal has been beaten in the recent months even worse than gold, and on Friday morning its price accordingly went down to the lowest level since September 2010. 

Could these events trigger a more profound correction in mining stocks? 

It’s said a picture is worth a thousand words. So let’s take a look at some charts below and try to come up with a thousand words to describe what we see (charts courtesy by http://stockcharts.com ).

(click HERE or on Chart for Larger View)

1

When you take a look at this chart you can ask a simple question: is the bottom already in? Several weeks ago we mentioned the silver-gold ratio as one of the key things to look at when making the call.

We have previously discussed how the final bottom for the white metal is often preceded by a big underperformance of silver to gold. This is yet to be seen, so lower prices are likely still in the cards for the white metal, and the rest of the sector as well.

There’s been no sharp drop so far, so the bottom is likely still ahead of us. If that’s the case and the entire precious metals sector is about to move lower, how low can mining stocks go?

Let’s take a look at two of the most followed commodity stock indices – the Philadelphia Gold/Silver XAU Index and the AMEX Gold Bugs HUI Index.

radomski june262013 2

The XAU Index is above our initial target (84) for this decline (or at least it was at the moment of creating the above chart). As you know this target level was created from the rising support line based on the late 2000 and 2008 lows.

However, it seems that we could see a move even below that level and a local bottom will probably form slightly above 80. This is the range that likely needs to be reached before the declines in the mining stocks and the precious metals sector come to a close.

This might be a great buying opportunity or – more likely – there beginning thereof.

Now, let’s have a look at the HUI Index. The chart below expresses a simplicity that betrays potential information on where this market may ultimately be heading. 

(Click HERE or on Chart for Larger View)

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Last week gold mining stocks have continued their decline. Although investors have been selling their shares fear remains in control. However, this may not last much longer. As we mentioned above it seems that miners might move even below the initial target of 84 for the XAU Index.

In this case, it is the HUI Index that enables us to create a better price target.

There is a major support zone drawn on the chart which is a worst case scenario. The red ellipse on the above chart includes both important support levels – the 61.8% Fibonacci retracement level and the 2008 low. There’s one more thing that we didn’t mark on the chart and that is the price gap close to the 300 level (the gap was formed in April). Such a price gap sometimes indicates that at the time when its formed, the market is halfway done rallying or (in this case) declining. Taking this analogy provides us with a target in the marked area as well.

Our final chart today is the gold-stocks-to-gold ratio which is one of the more interesting ratios there are on the precious market.

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The above chart provides a very bearish picture. We see that the decline continues and that the ratio is quite far from its target – the 2000 low.

Please note that the trading channel and the next horizontal support intersect at a point much lower than where this ratio is today. 

As we wrote over a month ago in our Premium Update on May 17, 2013:

The ratio has already broken below the previous late 2008 major low (…). This is a major breakdown and it was confirmed. The implication is that the trend is still down.

With the trend being down and accelerating and the recent breakdown being confirmed, there is a good possibility that the miners will decline significantly once again.

The ratio might move to its target level – the 2000 low – close to the 0.135 level, which is a quite clear forecast as far as direction of the next move is concerned.

Summing up, the outlook for mining stocks remains bearish and the correction is likely still not over.  There may be many obvious, and not so obvious reasons for this recent underperformance of the precious metals sector, but the charts are quite clear. In our view it does not seem that the final bottom for mining stocks is already in at least not based on last week’s closing prices.

Thank you for reading. Have a great and profitable week!

Przemyslaw Radomski, CFA

Founder, Editor-in-chief

Gold Investment & Silver Investment Website – SunshineProfits.com

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Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits’ associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski’s, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits’ employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.