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pm stocks update/comments on credit markets
Posted by trotsky
|
pm stocks update/comments on credit markets August 22, 2007 11:51AM |
Registered: 3 years ago Posts: 241 |
last week's market volatility hit the comparatively illiquid pm stock sector hard; apparently some of the quant funds that suddenly found themselves upside down also played in this sector , and there was forced deleveraging/unwinding of positions. the HUI not only broke through its previous medium term support level at about 315-320, it nearly reached the next support level (280) in a single trading day thereafter (regarding the quant funds, here is a striking comment by an analyst: "a 5.8 standard deviation loss event occurred, that according to back-testing had zero probability").
apparently there was also quite a bit of margin related selling by individuals, as a number of the smaller exploration/development companies were thrown away at prices way below even very conservative valuations - which goes to prove a previous contention of mine, namely that many people bought gold and gold related investments for the wrong reasons (a refresher: if you buy gold stocks 'because commodity prices are going up' you're buying the wrong sector. if one believes in the commodity super-cycle based on global economic growth, base metals are the better bet. if you believe that the world is in a crack-up boom-type situation with money supply growth out of control, and la likely money pumping orgy by the CBs when it all goes wrong, you buy gold).
it's a bit disconcerting to see the gold sector hit hard in a week during which the fundamental backdrop for gold improved in great strides. sharply rising credit spreads, and a huge steepening of the yield curve, coupled with the biggest spread between the t-bill yield and the FF rate ever observed, and one of the biggest one-day moves in the TED spread ever all are bullish for the one thing that actually counts for the gold miners - namely gold's real price.
30yr./t-bill yield spread:
http://stockcharts.com/h-sc/ui?s=$TYX:$IRX&p=D&b=5&g=0&id=p48782982682
Bob Hoye is the keeper of a real price index of gold, which has actually risen from a low of 141 registered a few weeks ago to a new high for the move at 191 points by last week. in short, gold's real price has actually tacked on some 35% - if the nominal price rose by that much, everybody would be ecstatic. in reality, the effect of nominal gold price rallies on gold mining margins is often overestimated. margins depend only on the real price. it doesn't help when the nominal price rises by a 100 bucks concurrently with the RP index losing 10 points. this is also why the best percentage gains in the HUI were registered during the 2000-2002 stock bear market/recession, in spite of a relatively tepid nominal gold price surge. gold stocks exhibited negative beta to the S&P index on account of an enormous rise in gold's real price during the period.
here is a chart i now and then present as a proxy for the RP index (i've appropriated the idea from S. Saville), namely the gold/GYX (industrial metals) ratio:
http://stockcharts.com/h-sc/ui?s=$GOLD:$GYX&p=D&yr=2&mn=0&dy=0&id=p48782982682
this measure appears to have double-bottomed and has rallied sharply since the low. it's probably due for a pullback right now, but this has the looks of a trend change.
regarding quantitative sentiment data, i must confess that i have overlooked an important part of same that will be included in future updates, namely GDX options open interest. i hadn't noticed that GDX options have apparently become very popular and have experienced a remarkable growth in open interest. as of today, the following put/call open interest ratios obtain: XAU : 1.41 , GDX 1.05 (all options combined; XAU three front months only is at 1.58). it is noteworthy that specifically the GDX ratio has been much lower previously, so the XAU/GDX combo looks quite good right now.
individual issues combined p/c OI at 0.61 remains higher than 93% of all readings over the past year, so there has been no unwinding of fear yet.
the Rydex pm fund 's cumulative cash flow ratio has risen slightly to 122 points, and once again diverges from the fund's price, in this case because the latter obviously made a lower low concurrently.
a fly in the ointment is the current CEF NAV premium, which clocks in at a very high 11.34%, however, the closed end fund stock ASA sports a large 13% discount to NAV at the same time, so we have two contradictory messages here.
as i always point out, fundamentals and sentiment data are one thing, price action is quite another (and more important). the fact remains that a previous strong support level in the HUI has been cracked, and in the short term, this support now threatens to turn into resistance. what's more, it seems at the moment unlikely that we have seen the last of the general market turbulence that was on display last week.
although there were some signs of a bottom being formed in evidence , such as an extreme spike in one-day volume p/c ratios and a buy signal in the OEX/equity p/c volume spread (10 dma) , the overall trading volume and the level of the VIX were not yet commensurate with the level of fear the ongoing credit dislocation should create.
my opinion regarding the credit crisis is that it is much more serious than many market participants seem to think. the mainstream consensus has it that this is a mere liquidity problem that will soon blow over, but in fact it is more serious than previous comparable dislocations.
the 'dispersion of risk' via derivatives, hailed as a systemic stabilizer by Greenspan et al. has mostly led to just about everybody being affected by the growing problems now.
as Nouriel Roubini has correctly remarked, this is not a 'mere' liquidity crisis, but something far more devious - at its root it is a solvency crisis, as the unrelenting rise in mortgage credit defaults destroys the cash flows to the many CDOs that have been stuffed with mortgage backed securities. the losses that are literally piling up in this one segment of he credit markets in turn affect all other segments, as banks are forced to raise loan loss reserves and tighten lending standards.
it is not even known which banks sit on what losses, and the trouble in the asset backed commercial paper market has added a fresh layer of insecurity that has led to banks not even trusting each other anymore. the reason is that many of the special purpose vehicles that have been set up by the banks to play tiny credit spreads with huge leverage depend on short term financing via ABCP. failure to roll maturing commercial paper over forces the banks to extend the credit to those conduits themselves, or be faced with having to sell assets in a market without bids.
this latter point shows how thoroughly confidence has been shattered - there are not even the many vultures in sight that usually try to take advantage of this type of situation - no-one wants to touch anything.
as Mr. Sedacca has reported over at Minyanville, most trading desks are in 'offer only' mode, w.r.t. all types of debt paper, as their firms are desperate to reduce inventory.
at the moment, the situation has calmed down a little bit, as the flight into t-bills is pausing , and everybody waits if there's another shoe to drop. it seems almost certain that another shoe will drop, due to the still growing crisis in housing. recall that 63% of all US bank assets are in some way tied to real estate, while loan loss reserves have been at an all time low as recently as March of this year. since the rate of defaults and forced sales of property (again in a market with few bids) continues to grow, more impairment of existing securitizations seems likely, and this will continue to pressure all segments of the credit markets. this is now a typical vicious cycle, as the tightening of lending standards comes just as the supply on the housing market is literally exploding - and as Hank Paulson has admitted 'it will take time to sort this out' (in Japan it took 13 years, so it's no wonder he wasn't prepared to be more specific).
so in conclusion, we can definitely not rule out that the equity markets will be subject to another round of extreme downside volatility - levels to watch are Dow 13245 (61% retracement level) and SnP 1503 (the most recent interim high). these are the levels at which renewed selling is likely to emerge (conversely, if it doesn't, then the worst may actually be over for equities for a while). note also that August 27-31 is a cycle turn date window, so a market high in this time frame should be viewed with some suspicion, especially if it coincides with new sell signals from indicators such as the above mentioned OEX/equity p/c ratio spread.
in the short term, this may well lead to another test of the 270-280 support layer in the HUI , however, longer term the recent developments should lead to an increasingly bullish backdrop for the sector and eventually it should decouple from the broader market as it has done in 2000-2002. meanwhile, we now have the opportunity to see what happens at the HUI 320 former support, which is tackled from below today. a significant rise above this level may re-establish it as support. that said, any future failure to hold the layer of support below (270-280) should be seen as a negative long term signal, indicating a beginning mid cycle correction in the gold price.
since gold itself has held within its trading range of recent weeks (645-690 spot) , the XAU/gold ratio has tagged the below 0.20 area (at last week's extreme it went below 0.185 actually, not far from an all time low), which in the past has always been an opportune moment to buy gold stocks. this counts as a significant positive - however, similar to all the other data points this is marred by the likely resumption of stock market volatility this fall.
if both the cyclical and secular bull market in gold remain intact (and as of yet there's no indication that this won't be the case) then the sector correction has likely seen the bulk or even all of the price damage that is likely to occur, although more time and retests may be needed to actually finish the correction.
apparently there was also quite a bit of margin related selling by individuals, as a number of the smaller exploration/development companies were thrown away at prices way below even very conservative valuations - which goes to prove a previous contention of mine, namely that many people bought gold and gold related investments for the wrong reasons (a refresher: if you buy gold stocks 'because commodity prices are going up' you're buying the wrong sector. if one believes in the commodity super-cycle based on global economic growth, base metals are the better bet. if you believe that the world is in a crack-up boom-type situation with money supply growth out of control, and la likely money pumping orgy by the CBs when it all goes wrong, you buy gold).
it's a bit disconcerting to see the gold sector hit hard in a week during which the fundamental backdrop for gold improved in great strides. sharply rising credit spreads, and a huge steepening of the yield curve, coupled with the biggest spread between the t-bill yield and the FF rate ever observed, and one of the biggest one-day moves in the TED spread ever all are bullish for the one thing that actually counts for the gold miners - namely gold's real price.
30yr./t-bill yield spread:
http://stockcharts.com/h-sc/ui?s=$TYX:$IRX&p=D&b=5&g=0&id=p48782982682
Bob Hoye is the keeper of a real price index of gold, which has actually risen from a low of 141 registered a few weeks ago to a new high for the move at 191 points by last week. in short, gold's real price has actually tacked on some 35% - if the nominal price rose by that much, everybody would be ecstatic. in reality, the effect of nominal gold price rallies on gold mining margins is often overestimated. margins depend only on the real price. it doesn't help when the nominal price rises by a 100 bucks concurrently with the RP index losing 10 points. this is also why the best percentage gains in the HUI were registered during the 2000-2002 stock bear market/recession, in spite of a relatively tepid nominal gold price surge. gold stocks exhibited negative beta to the S&P index on account of an enormous rise in gold's real price during the period.
here is a chart i now and then present as a proxy for the RP index (i've appropriated the idea from S. Saville), namely the gold/GYX (industrial metals) ratio:
http://stockcharts.com/h-sc/ui?s=$GOLD:$GYX&p=D&yr=2&mn=0&dy=0&id=p48782982682
this measure appears to have double-bottomed and has rallied sharply since the low. it's probably due for a pullback right now, but this has the looks of a trend change.
regarding quantitative sentiment data, i must confess that i have overlooked an important part of same that will be included in future updates, namely GDX options open interest. i hadn't noticed that GDX options have apparently become very popular and have experienced a remarkable growth in open interest. as of today, the following put/call open interest ratios obtain: XAU : 1.41 , GDX 1.05 (all options combined; XAU three front months only is at 1.58). it is noteworthy that specifically the GDX ratio has been much lower previously, so the XAU/GDX combo looks quite good right now.
individual issues combined p/c OI at 0.61 remains higher than 93% of all readings over the past year, so there has been no unwinding of fear yet.
the Rydex pm fund 's cumulative cash flow ratio has risen slightly to 122 points, and once again diverges from the fund's price, in this case because the latter obviously made a lower low concurrently.
a fly in the ointment is the current CEF NAV premium, which clocks in at a very high 11.34%, however, the closed end fund stock ASA sports a large 13% discount to NAV at the same time, so we have two contradictory messages here.
as i always point out, fundamentals and sentiment data are one thing, price action is quite another (and more important). the fact remains that a previous strong support level in the HUI has been cracked, and in the short term, this support now threatens to turn into resistance. what's more, it seems at the moment unlikely that we have seen the last of the general market turbulence that was on display last week.
although there were some signs of a bottom being formed in evidence , such as an extreme spike in one-day volume p/c ratios and a buy signal in the OEX/equity p/c volume spread (10 dma) , the overall trading volume and the level of the VIX were not yet commensurate with the level of fear the ongoing credit dislocation should create.
my opinion regarding the credit crisis is that it is much more serious than many market participants seem to think. the mainstream consensus has it that this is a mere liquidity problem that will soon blow over, but in fact it is more serious than previous comparable dislocations.
the 'dispersion of risk' via derivatives, hailed as a systemic stabilizer by Greenspan et al. has mostly led to just about everybody being affected by the growing problems now.
as Nouriel Roubini has correctly remarked, this is not a 'mere' liquidity crisis, but something far more devious - at its root it is a solvency crisis, as the unrelenting rise in mortgage credit defaults destroys the cash flows to the many CDOs that have been stuffed with mortgage backed securities. the losses that are literally piling up in this one segment of he credit markets in turn affect all other segments, as banks are forced to raise loan loss reserves and tighten lending standards.
it is not even known which banks sit on what losses, and the trouble in the asset backed commercial paper market has added a fresh layer of insecurity that has led to banks not even trusting each other anymore. the reason is that many of the special purpose vehicles that have been set up by the banks to play tiny credit spreads with huge leverage depend on short term financing via ABCP. failure to roll maturing commercial paper over forces the banks to extend the credit to those conduits themselves, or be faced with having to sell assets in a market without bids.
this latter point shows how thoroughly confidence has been shattered - there are not even the many vultures in sight that usually try to take advantage of this type of situation - no-one wants to touch anything.
as Mr. Sedacca has reported over at Minyanville, most trading desks are in 'offer only' mode, w.r.t. all types of debt paper, as their firms are desperate to reduce inventory.
at the moment, the situation has calmed down a little bit, as the flight into t-bills is pausing , and everybody waits if there's another shoe to drop. it seems almost certain that another shoe will drop, due to the still growing crisis in housing. recall that 63% of all US bank assets are in some way tied to real estate, while loan loss reserves have been at an all time low as recently as March of this year. since the rate of defaults and forced sales of property (again in a market with few bids) continues to grow, more impairment of existing securitizations seems likely, and this will continue to pressure all segments of the credit markets. this is now a typical vicious cycle, as the tightening of lending standards comes just as the supply on the housing market is literally exploding - and as Hank Paulson has admitted 'it will take time to sort this out' (in Japan it took 13 years, so it's no wonder he wasn't prepared to be more specific).
so in conclusion, we can definitely not rule out that the equity markets will be subject to another round of extreme downside volatility - levels to watch are Dow 13245 (61% retracement level) and SnP 1503 (the most recent interim high). these are the levels at which renewed selling is likely to emerge (conversely, if it doesn't, then the worst may actually be over for equities for a while). note also that August 27-31 is a cycle turn date window, so a market high in this time frame should be viewed with some suspicion, especially if it coincides with new sell signals from indicators such as the above mentioned OEX/equity p/c ratio spread.
in the short term, this may well lead to another test of the 270-280 support layer in the HUI , however, longer term the recent developments should lead to an increasingly bullish backdrop for the sector and eventually it should decouple from the broader market as it has done in 2000-2002. meanwhile, we now have the opportunity to see what happens at the HUI 320 former support, which is tackled from below today. a significant rise above this level may re-establish it as support. that said, any future failure to hold the layer of support below (270-280) should be seen as a negative long term signal, indicating a beginning mid cycle correction in the gold price.
since gold itself has held within its trading range of recent weeks (645-690 spot) , the XAU/gold ratio has tagged the below 0.20 area (at last week's extreme it went below 0.185 actually, not far from an all time low), which in the past has always been an opportune moment to buy gold stocks. this counts as a significant positive - however, similar to all the other data points this is marred by the likely resumption of stock market volatility this fall.
if both the cyclical and secular bull market in gold remain intact (and as of yet there's no indication that this won't be the case) then the sector correction has likely seen the bulk or even all of the price damage that is likely to occur, although more time and retests may be needed to actually finish the correction.
Current Ratings: 0 negative/6 positive
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Re: pm stocks update/comments on credit markets August 22, 2007 12:34PM |
Registered: 3 years ago Posts: 900 |
Moin Trotsky from Germany,
i want to thank you for your excellent update!
Current Ratings: 0 negative/1 positive
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Re: pm stocks update/comments on credit markets August 22, 2007 02:19PM |
Registered: 3 years ago Posts: 126 |
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Re: pm stocks update/comments on credit markets August 28, 2007 10:44AM |
Registered: 3 years ago Posts: 900 |
Interesting move (post made after the spike to 321)... S&P 500 near daily lows down 13...The first decoupling for a few month....
Will be interesting to see of this relative outperformance will hold and if we can close over 320
Edited 3 time(s). Last edit at 08/28/2007 11:23AM by jmf.
Current Ratings: 0 negative/0 positive
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Re: pm stocks update/comments on credit markets August 28, 2007 12:34PM |
Registered: 3 years ago Posts: 241 |
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Re: pm stocks update/comments on credit markets September 06, 2007 10:17AM |
Registered: 3 years ago Posts: 900 |
What a difference a week makes.
I think we can say now for sure that the decoupling is for real....
Current Ratings: 0 negative/0 positive
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