Tower Private Advisors
- Commodity smash-up–oh, why not . . . commodity crash
- Contradictory employment stuff
Capital Markets Recap
The biggest story of the week had to be the utter bloodbath in commodities. The chart below shows four common ones; from top to bottom: crude oil, silver (hello!), copper, and gold.
They say that no one rings the bell at the top of a market, but there are often big pronouncements that accompany the exhaustion of moves in prices or sentiment. For example, I”m guessing it was within $10 of the peak in crude oil that Goldman Sachs issued its $200 forecast, which it insisted wasn’t a forecast, but just a potentiality or some such nonsense. A more recent one was PIMCO’s announcement that Bill Gross’s Total Return Bond fund had eliminated all U.S. Treasuries from its holdings; look what has happened to yields since then.
Well, here’s the latest one. The chart below displays the Dow Jones Industrial Average of commodities, the Commodity Research Bureau’s CRB index. I have pointed out the publication date of GMO’s latest quarterly letter. It’s penned by Jeremy Grantham, one of the brightest of Wall Street sages. He’s a master of mean reversion, and his firm’s returns back up his thinking. (You can navigate to the GMO website by clicking here and sign up for what is an excellent publication.) I’d like to think his timing was just bad, rather than him being subject to the same mortal whims I’m subject to. Nevertheless, this was a pretty loud bell.
I pointed out in this space two weeks ago that the gold:silver ratio was getting badly stretched in the direction of silver. It was getting to the point where–not that it couldn’t get more stretched, but the number of observations at lower ratios were beyond two standard deviations. The silver market addressed some of that this week, as can be seen below.
Albert Einstein–I think–was said to have labeled compound interest one of the most powerful forces. To it, I would add mean reversion. Silver has been in a powerful upward trend since 2008, and it recently went parabolic, at which point it caught my attention. I think one of my colleagues is ready to brand me a charlatan, but I think there is support for the 30% correction in silver to be just acts I and II of a 3-act show. When something gets as stretched –what is that, four standard deviations above the trend?–as silver did on the upside, that it’s likely to overshoot to the downside, and that suggests another 30% downside. Were I to advise you on silver, I’d say wait for a while yet.
I have good company in this thinking as two of our key services came out today and said this (and we pay enough for these services that one could buy a very nice starter home with the funds):
“Use every rally in the silver market to short the metal”
“Silver has the potential for more downside as key trend and support lines are in the $20s, not the $30s.”
The two biggest reports of the week presented a contradiction. On the one hand, Initial Jobless Insurance Claims astounded the dismal scientists by exceeding their estimate of 410,000 new claims by a whopping 64,000 (!). The Bureau of Labor Statistics–as Dennis Gartman put it–went out of its way to explain away the jump, saying that the spike was related to seasonal, one-time factors like auto-plant shutdowns. It seems to me, though, that it would have been an easy matter for economists to have figured out and factored that into their forecasts. That jump confirmed last week’s break of the trendline shown below, and which was hinted at two weeks ago in this dispatch. The correct direction for this chart is to the lower right.
On the other hand, today’s Nonfarm Payrolls Report produced the highest weekly increase in Private Payrolls added since the first quarter 2006, also as shown below. The Unemployment Rate, however, ticked back up to 9.0% from 8.8%. You have read here that, as the economy improves, we should expect an initial blip up in the unemployment rate. That’s a function of folks becoming more excited about the outlook for finding a job and becoming part of the labor force. This jump wasn’t because of that, and it hinted at a big source of weakness in the report. The payrolls figures come from the Establishment Survey, the survey of large, established companies. On the other hand, the unemployment rate is calculated from the survey of Households, and that survey indicated that employment had fallen by (-)190,000.
So, on the one hand, the indicator that has been showing declining layoffs (jobless claims) spiked higher; that’s bad. On the other hand, the payrolls report, which has shown a lack of hiring, had its best result since 2006.
I am sticking by my earlier observation that, if the chart below doesn’t improve, we’re in for trouble. The orange line in the top panel is a chart of the S & P 500–the stock market. The white line in that panel is chart plotting the direction of economic surprises. When it’s heading northeast the economists’ estimates are being beaten by the actual results. If it’s declining, economists are overestimating the strength in the economy. Notice how both moved up in sync from about August 2010 through part of March, at which point they parted ways. The Dow Transports index is shown at the bottom. Since these companies ship the goods of our economy I thought any weakness might show up there, but you can see it’s been stronger than the S & P 500.
Key indicators to watch
- Initial Jobless Claims (Thursday) – weekly
- Producer Price Index (Thursday) – April
- Consumer Price Index (Friday) – April
- University of Michigan Consumer Confidence (Friday) – May, preliminary