[Early] Weekly Recap & Outlook – 08.25.11

Tower Private Advisors

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  • Jackson Hole
  • Apple
  • Gold contest

Capital Markets Recap

Last week and changes are from Friday, August 19.

Top Stories

If there is a single reason behind the festivities outlined above (i.e. the markets’ rallies), it has to be that the Federal Reserve is meeting in Jackson Hole, Wyoming, as a group–sans the vacancies that the Congress refuses to vote on. This event last year was when Helicopter Ben announced the launch of Quantitative Easing (QE), Round II, and that sparked the market rally and bunch of other unintended consequences. In fact, those butterfly wings might have even caused the riots in Tunisia. All indications are, however, that Uncle Ben will not announce another sweeping program. That could be on account of the political climate, or the fact that it follows hard on the heels of the zero-rates-forever annoucement, or because there are doubts about the efficacy of QE 1. If that’s the case, we’re back to a lousy stock market and one that’s dominated by European silliness. For example, right now, in most European countries there’s a ban on short selling of bank stocks. This is sort of like saying that if bank stocks don’t go down there’s nothing wrong. Germany has yet to institute that rule, but there was a rumor it was getting ready to, so there was  flurry of selling late in the day there, although the losses were later pared back, as is shown below.

The story shouldn’t have been a surprise, but, of course, the timing is. Steve Jobs, Apple‘s iconic CEO, announced in a letter to the company’s Board of Directors that his pancreatic cancer had progressed to the point where he wasn’t able to keep up his daily responsibilities. He will stay on as Apple’s Chairman of the Board. Naturally, the question on everyone’s mind–at least everyone on NPR this morning–is can the company continue to lead in innovation. If you wonder the same thing but need another portent to get you to sell the shares, consider that for just one day, August 9, Apple surpassed ExxonMobil as the world’s largest company as measured by market capitalization. Companies that become the largest tend to underperform after reaching largest-company status.

The kneejerkers weren’t waiting around to find out, as the stock sold off in after-hours trading to as low as $350. As I type the shares are down just 1% (-$3.658).

Clearly gold has been pummeled over the last three days. The chart below indicates it’s down more than 9% since Monday.

There are any number of reasons for it. Stocks are in rally mode this week, so perhaps it’s–as they say–risk on. On the other hand, margin requirements were raised for gold, and that’s probably resulted in some liquidations of the metal. Bloomberg, naturally, is like the annoying kid in class who has all the answers, and they say it’s a result of waning investor demand. I was an annoying kid in class, I’m sure, so I’ll put in my own annoying two cents worth:  buyers got tired of buying.

Here’s a look at 10 years of gold. A regression is fitted to the entire series and 1 and 2 standard deviations are added/subtracted. This sort of regression assumes a normally-shaped distribution of values, meaning that most of them occur around the mean (the red line) and as one goes further away from the mean the air gets thinner and thinner.

 

So, where does gold get interesting as a buying opportunity? This chart says you don’t buy before $1,550/ounce, which is the top (i.e. +2 SDs) band. A regression to the mean would take the price to $1,307/oz, but regression to the mean wouldn’t be regression to the mean; it would result in an accelerating line. Unless the trend itself if changing, we should expect to see regression to the $1,080 – 1,307 neighborhood. But what if the trend is changing?

Let’s say you’re a paradigm shifter and you think the world changed in 2008, with the fall of Lehman Brothers and the massive government interventions. I don’t buy paradigm shifts, although for some they seem to be a way of life. I do think the world changed on 2008, at least for a while. The chart below shows what the trend looks like in that case. $1,700/oz is the first level to consider buying at; $1,623 being a better price.

How about a contest?

How about a gold price-guessing contest? Guess the price of gold at year-end, and I’ll send an Amazon gift card to the one who’s closest. Either leave your guess as a comment, below, which I won’t show but will see, or click here to e-mail your guess to me.

This Week

The economic news was mixed this week. Mortgage Delinquencies were p by 8.44% in the second quarter. On the widest possible basis, home prices (House Price Index) fell at a year-over-year rate of -4.3% in June, and New Home Sales were less than expected. On the other hand, Durable Goods Orders rose nicely, both on a headline basis and when stripped of volatile transportation orders (jet aircraft tend to not be predictable, unlike the other things that economists guess about.) If there was one data point that might have sparked the rally in stocks, it was the durable goods figures.

Graig Stettner, CFA, CMT

Chief Investment Officer

Tower Private Advisors

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2 Responses to “[Early] Weekly Recap & Outlook – 08.25.11”

  1. Larry Dent says:

    Gosh, last week I sold all my bank stocks and bought gold. I plan on re-investing all the dividends off my gold holdings. Do you think I’m on the right track, or should I take the dividends and buy back my bank stocks ? Gosh I love playing the market !

    Larry Dent

  2. Bob Fraser says:

    Gold will be 2,150.00 per oz. I am guessing.

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