The Gold Sector :The Worst Slump In Prices In 30 Years Will Continue

The gold industry, recovering from the worst slump in prices in 30 years, needs more mergers to help

improve investor returns and eliminate unprofitable mines or prices will continue to fall said Jack A.

Bass , author of The Gold Investors Handbook.

ABN Amro’s commodity analysts put it plainly last week. They expect gold’s 11% rise in the first-half of 2014 to be “temporary” because US Fed rates hikes are coming, while the outlook is “positive” for equities. Such thinking makes sense based on 2013’s example. Taper talk pushed bond prices down last year, nudging market interest rates higher. The S&P500 meanwhile returned 32%, a little more than gold prices fell.
Logic might also see a trade-off between gold and rising returns on other assets. Because the metal yields nothing and does nothing. It can’t even rust. Equities and interest-paying investments on the other hand work to increase your money. So gold prices should fall when equities rise, and also when the markets expect higher interest rates. Or so analysts now think.
GOLD was a universal “sell” for professional analysts at New Year, writes Adrian Ash at BullionVault.
Losing 30% in 2013, the gold price faced the long-awaited start of US Fed tapering – widely supposed to make fixed-income bonds go down, nudging interest rates higher – plus strong hopes for further gains in world equities. Who needed the barbarous relic?

Gold producers, which are gathering for the annual invitation-only Denver Gold Forum that began yesterday, cut budgets, sold assets and adjusted mine plans after the metal plunged 28 percent last year, prompting more than $26 billion of writedowns. The industry already has started a consolidation process.

“The industry did a very poor job from a capital-allocation standpoint, from a risk-management standpoint and from an operational-execution standpoint,” he said. “For long-term oriented investors it would be better for the industry to get more right-sized where companies are focused on generating profit at a conservative gold price assumption.”

‘Darwinistic Scenarios’

Combining companies can help eliminate their respective unprofitable operations, he said. Weak companies with good assets may also be targeted by stronger producers, he said.

“Or the least appealing of the Darwinistic scenarios is a company that has gotten all of those things — capital allocation, risk management and operational execution — wrong and they wind up going bankrupt,” he said.

There have already been some moves toward consolidation this year. Yamana Gold Inc. and Agnico Eagle Mines Ltd. bought Osisko Mining Corp. after beating out a hostile bid from Goldcorp Inc. Barrick Gold Corp. (ABX) and Newmont Mining Corp., the two largest producers by sales, also discussed a merger this year before breaking off talks in April.

“I do believe the gold industry is in the process of consolidating,” Wickwire of Fidelity  said.

‘Survivors and Thrivers’

Wickwire said as an investor he focuses on companies he terms “survivors and thrivers”: those with good management and strategy. He is also interested in enterprises that may have poor strategy or boards and management but own good assets that would be better operated by another producer. He declined to name specific companies.

The Fidelity Select Gold Portfolio rose 17 percent this year through Sept. 12, compared with a 2.4 percent increase in New York gold futures. The Philadelphia Stock Exchange Gold and Silver Index of 30 companies gained 8.9 percent.

Wickwire holds both bullion and gold equities in his fund. While gold miners underperformed the metal in the past two years, they can also outperform strongly when companies’ operations, capital allocation and risk-management decisions improve, he said.

“Under the appropriate backdrops, if you have a 10 percent movement in the gold price, some companies out there have the potential to generate 30 to 40 or 50 percent cash flow and earnings-per-share growth,” Wickwire said. “And when the companies are executing, the market rewards that dynamic aspect with a higher valuation.”

WTI – and Gold – Drops on Date – as Global Manufacturing Misses Estimates

West Texas Intermediate crude fell amid speculation that weakening manufacturing from Germany to China will cap global oil demand. Brent declined in London.

Futures dropped as much as 1.2 percent from the Aug. 29 close. Floor trading in New York was shut for the Labor Day holiday, and transactions will be booked for settlement purposes today. Purchasing manufacturing indexes for Germany, Italy, the U.K. and China all came in below estimates for August, while OPEC’s output increased to the highest level in a year.

“All eyes are on the demand side, and weaker statistics for example in China are bearish,” Bjarne Schieldrop, chief commodity analyst in Oslo at SEB AB, said by telephone. “The increase in tension between Russia and Ukraine is bearish for oil” because economic sanctions on Russia may eventually result in a slowdown in Europe, he said.

WTI for October delivery declined as much as $1.19 to $94.77 a barrel in electronic trading on the New York Mercantile Exchange and was at $94.88 at 1:46 p.m. London time. The volume of all futures traded was more than double the 100-day average for the time of day. Prices decreased 2.3 percent last month and are down 3.6 percent this year.

Brent for October settlement was $1.11 lower at $101.68 a barrel on the London-based ICE Futures Europe exchange. The European benchmark crude traded at a premium of $6.83 to WTI, compared with a close of $7.23 on Aug. 29.

Factory Output

China’s manufacturing slowed more than projected last month, joining weaker-than-anticipated credit, production and investment data in indicating that the economy is losing momentum. The nation is the world’s second-largest oil consumer.

Markit Economics’ euro-area gauge slid more than initially predicted, with the index for Italy unexpectedly falling below 50, signaling the first contraction in 14 months. In the U.K., manufacturing expanded by the least in more than a year.

A final reading of Markit’s U.S. manufacturing PMI is due today, along with the Institute for Supply Management’s factory index for August, which economists forecast will drop to 57, from 57.1 in July.

“There are slowdowns occurring,” Jonathan Barratt, the chief investment officer at Ayers Alliance Securities in Sydney, said by phone. “OPEC is producing enough oil to placate any issues.”

Production from the 12-member Organization of Petroleum Exporting Countries rose by 891,000 barrels a day to 31 million in August, according to a Bloomberg survey of oil companies, producers and analysts. Nigeria, Saudi Arabia and Angola led supply gains as new deposits came online, security improved and field-maintenance programs ended. Iran and Venezuela were the only members to reduce output.

Ukraine warned of an escalating conflict in its easternmost regions as U.S. President Barack Obama headed to eastern Europe to reassure NATO members. Ukraine’s army will take on Russia’s “full-scale invasion,” Defense Minister Valeriy Geletey said on Facebook, a shift away from the government’s earlier communication that focused on battling insurgents.

Dollar Strengthens Before Data as Bonds Decline With Gold

The dollar strengthened to a seven-month high against the yen, government bonds tumbled and gold fell before data that analysts forecast will show expansion in U.S. manufacturing.

The dollar climbed 0.6 percent to 104.93 yen at 8:42 a.m. in New York and gained 0.4 percent to $1.6535 per British pound. Yields on 10-year Treasury notes increased four basis points to 2.38 percent. Futures (SPX) on the Standard & Poor’s 500 Index added 0.1 percent after the index rallied the most since February last month. Gold dropped 1.5 percent.

U.S. investors return after the Labor Day break with manufacturing and construction spending reports. Gauges of factory output in Europe and China signal slower growth, boosting speculation that policy makers will need to boost stimulus measures. European money markets are pricing in about a 50 percent probability that the European Central Bank will cut interest rates by 10 basis points this week, according to BNP Paribas SA.

“In the U.S. across the board we have had strong data,”said Niels Christensen, chief currency strategist at Nordea Bank AB in Copenhagen. “That will keep growth momentum going. We have had a positive dollar trend for the past two months. I find it difficult to see this trend is going to disappear in the short term.”

U.S. Reports

The Institute for Supply Management’s August factory gauge probably held last month near the highest since April 2011, according to the median of 70 estimates in a Bloomberg survey. Another report probably will show U.S. construction rebounded in July, a Bloomberg survey showed. Reports yesterday signaled manufacturing slowed in China, the U.K. and the euro area.

The yen fell to its lowest level against the dollar since Jan. 16 amid speculation Japan’s Prime Minister Shinzo Abe will appoint an ally to head the ministry in charge of reforming the Government Pension Investment Fund, potentially boosting investment overseas. The currency weakened to 105.44 on Jan. 2, a level not seen since October 2008.

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major peers, climbed 0.3 percent to 1,033.71 and touched 1,034.16, the strongest since January.

The pound weakened after a YouGov Plc poll showed growing support for Scottish independence before this month’s referendum. One-month implied volatility on sterling versus the dollar jumped by the most in almost six years.

Government Bonds

European government bonds fell as Germany’s 10-year yield increased four basis points to 0.91 percent and the U.K.’s rose five basis points to 2.43 percent.

The euro overnight index average, or Eonia, which measures the cost of lending between euro-area banks, fell to a record minus 0.013 percent yesterday.

Corporate borrowing costs fell to a record in Europe, with the average yield demanded to hold investment-grade bonds in euros dropping to 1.28 percent, according to Bank of America Merrill Lynch index data. The gauge declined 19 basis points in the past month on stimulus speculation.

The Stoxx 600 of European shares fell 0.1 percent after increasing 0.5 percent in the past two days.

Vallourec SA climbed 4 percent after UBS AG advised investors to buy shares of the French producer of steel pipes for the oil and gas industry. Weir Group Plc gained 2.9 percent after Credit Suisse Group AG raised its recommendation on the British supplier of pressure pumps to outperform from neutral.

S&P 500 Tops Record Level

U.S. stocks climbed, sending the Standard & Poor’s 500 Index above a closing record, as investors speculated the Federal Reserve will continue to support the economy as central bankers meet in Jackson Hole.

The S&P 500 added 0.1 percent to 1,988.94 at 9:34 a.m. in New York, above a closing high of 1,987.98 reached July 24.

“Markets are looking for some indication from Yellen as to what happens once quantitative easing stops,” Peter Dixon, a global equities economist at Commerzbank AG in London, said by phone. “I suspect she’ll say that it depends on the data. The U.S. economy is in reasonable shape. The task for central banks, and Yellen is at the forefront, is how to wean markets away from almost unlimited liquidity provisions when the economy is recovering but remains fragile.”

The S&P 500 rose 0.3 percent yesterday, closing within two points of a record. The benchmark index has rebounded 4 percent from a three-month low on Aug. 7 as investors speculated central banks will keep interest rates low even as the economy shows signs of recovery.

Fed Minutes

Minutes to the central banks’ July meeting released yesterday showed that officials raised the possibility that aggressive stimulus will end sooner than anticipated, even as they acknowledged persistent slack in the labor market. The central bank will probably wind up its asset-purchase program at its October meeting, according to a Bloomberg survey of economists.

Data today showed fewer Americans than forecast applied for unemployment benefits last week. Yellen has highlighted uneven progress in the labor market in making the case for further accommodation.

The Fed minutes showed “many participants” still see “a larger gap between current labor market conditions and those consistent with their assessments of normal levels of labor utilization.” At the same time, “many members” noted that the “characterization of labor market underutilization might have to change before long,” particularly if the job market makes faster-than-anticipated progress, the minutes also said.

Jackson Hole

Fed Chair Janet Yellen will speak tomorrow at the Fed Bank of Kansas City’s economic symposium that starts today in Jackson Hole, Wyoming. European Central Bank President Mario Draghi will also speak.

The S&P 500 has almost tripled since its March 2009 low, helped by three rounds of Fed stimulus, coupled with better-than-projected corporate earnings. The gauge has not had a decline of 10 percent in almost three years. It trades at 17.8 times the reported earnings of its companies, near the highest level since 2010.

Soft Touch

Investors are betting that a soft touch on monetary policy will continue to suppress stock volatility, pouring a record stretch of cash into an exchange-traded note that rallies as calm returns to equities. The Chicago Board Options Exchange Volatility Index, the gauge known as the VIX (VIX), has lost 31 percent this month, closing at its lowest level since July 23.

Among other economic reports today, data at 9:45 a.m. may show a preliminary gauge of manufacturing slipped to 55.7 this month from 55.8 in July. Another report may indicate existing-home sales expanded at a slower pace in July while the Conference Board’s index of leading indicators, a measure of the outlook for the next three to six months, rose 0.6 percent in July, economists forecast.

Gap Inc. and Salesforce.com Inc. are among eight S&P 500 companies reporting earnings today.

WSJ Forecasts for the second half of 2014

I post various economic forecasts because I believe they should be carefully monitored. However, as those familiar with this blog are aware, I do not necessarily agree with many of the consensus estimates and much of the commentary in these forecast surveys.

As seen in the “Recession Probability” section, the average response as to the odds of another recession starting within the next 12 months was 12.1%; July’s average response was 12.13%.

The current average forecasts among economists polled include the following:

GDP:

full-year 2014: 2.0%

full-year 2015: 2.9%

full-year 2016: 2.9%

Unemployment Rate:

December 2014: 5.9%

December 2015: 5.5%

December 2016: 5.2%
10-Year Treasury Yield:

December 2014: 3.04%

December 2015: 3.72%

December 2016: 4.18%

CPI:

December 2014: 2.2%

December 2015: 2.2%

December 2016: 2.4%

Crude Oil ($ per bbl):

for 12/31/2014: $96.08

for 12/31/2015: $94.92

Halfway Through a Correction

By Barry Ritholtz
Last month, we discussed how we might be on the verge of a correction. We also noted the futility of trying to time the start and finish of such events. What actually matters is how you react — or overreact.

As my colleague Josh Brown has observed, “since the end of World War II (1945), there have been 27 corrections of 10 percent or more, versus only 12 full-blown bear markets (20 percent or worse).”

However, the data show that the distribution of corrections isn’t smooth. Indeed, almost half (45 percent) of the corrections occurred either in the 1970s or the 2000s. Both eras were part of longer-term secular bear markets, characterized by strong rallies, vicious sell-offs and earnings contractions.

It is noteworthy that almost half of the corrections occurred in two out of seven decades. I suspect this fact isn’t a coincidence. From a 30,000 foot view, it may be a key to understanding how likely a more severe correction might be.

Consider the various narratives that have been used as an excuse for a correction. The downgrade of U.S. debt by Standard & Poor’s was going to be a deathblow; it wasn’t. Treasuries rallied on the downgrade, just to prove that no one knows nuthin’. The sequestration of government spending was sure to cause a slow down in markets; it didn’t. Rising interest rates, the Federal Reserve’s taper, earnings misses, and of course, our winter of discontent, were all cited as triggers for corrections. And did I mention the Hindenburg Omen?

The punditry then shifted to valuations: We have heard repeatedly that markets are wildly overpriced, that we are in a bubble. Or if not a broad market bubble, then a tech bubble or an initial-public-offering bubble or a merger bubble. Some advanced the theory that Twenty-First Century Fox’s bid for Times Warner was itself proof of a top.

None of those claims gained much traction. The next set of catalysts for disaster was geopolitical. Russia’s annexation of Crimea was going to cause a spike in oil prices and a crash — only it didn’t. Then came the imminent invasion of Ukraine. UBS’s Art Cashin buried that trope yesterday. The Israel-Gaza war is another source of potential oil spikes and market crashes, which have yet to come to pass.

Now, today’s weak futures are blamed on the threatened U.S. airstrikes on ISIS, dragging America into another Middle East war. Each time I think I have finally put George W. Bush’s misadventures out of my mind, something comes about to remind us how utterly bereft of reason or intelligence the decision to invade Iraq was. It is likely to haunt the U.S. even longer than the disastrous Vietnam War.

But is that what is driving the markets? Probably not.

The simple reality is that corrections come along on a regular basis, and for reasons that are undecipherable or indeterminate. This is the way it is and always has been. Anyone who tells you he can predict when a 5 percent or even 10 percent correction is going to start and end, and do so with any degree of consistency, has something very expensive and mostly worthless to sell you.

Almost 500 trading days have passed without a 10 percent retreat. If you have grown so complacent as to have forgotten this, then you might very well be in the wrong line of work.

Corrections happen. Get used to it.

One of the worst trading days this year has even market bulls warning investors to brace for sharper pullbacks and volatility in days to come.</p>
<p>” />   Fears over Argentina’s default sent equity markets tumbling Thursday, as analysts say that investors are becoming less forgiving of worrisome economic and geopolitical news, warning that a stock correction could be looming. The S&P 500 fell 39.4 points or 2%, or to close at 1,930.67, while the Dow Jones Industrial Average saw its gains for the year erased after falling 317.06 points or 1.9% to 16,563.30. The S&P/TSX Composite slid 194.08 points or 1.3% to 15,330.74. “We are witnessing … classic signs of an impending correction,” said Michael Hartnett, chief investment strategist at Bank of America Merrill Lynch who was once seen as the biggest cheerleader of the current rally. “We expect volatility will rise in coming months. TORONTO — North American stock markets had their biggest one-day tumble since early February on Thursday but analysts were hard-pressed to identify a single reason for the drop. The S&P/TSX composite index in Toronto fell 194.08 points to 15,330.74, as a number of big Canadian corporations missed earnings forecasts, but the index remained up about 1,736 points since the beginning of the year. New York’s Dow Jones industrials plunged 317.06 points to 16,563.3, leaving the index below where it started the year by about a dozen points. The Nasdaq lost 93.13 points to 4,369.77 and the S&P 500 index declined 39.4 points to 1,930.67.   The loonie closed down 0.02 of a cent to And volume is less than usual with many market participants on holidays. But the stock market declines also come at a time when many investors have registered substantial gains. “You get thinner markets and it doesn‘t take much to move things around,” said Wes Mills, chief investment officer Scotia Private Client Group. “Clearly everyone has made good money and there is no evidence that people are taking money off the table yet. It‘s probably just an overdue correction in a thin summer market with a combination of factors.” Valeant Pharmaceuticals International Inc., which is making a hostile takeover bid for Botox maker Allergan, posted a quarterly net profit of $126 million or 37 cents a share. Adjusted income was $651 million, or $1.91 per share, missing estimates of $1.98 a share, and its shares fell $9.59 or 7% to $127.83. Barrick Gold Corp. delivered a US$269-million quarterly net loss and $159-million of adjusted earnings in the second quarter, missing analyst estimates on both counts. The adjusted profit amounted to 14 cents US per share, two cents below estimates. Barrick shares dipped 44 cents to $19.70. 91.71 cents US. The U.S. Federal Reserve indicated Wednesday that it will keep short-term interest rates low “for a considerable time” after it ends its bond purchases, likely in October. The Fed is expected to start hiking rates mid-2015, but stronger than expected economic growth in the second quarter has investors concerned that the Fed could raise rates sooner. Argentina moved into a debt default for the second time in 13 years after a deadline of midnight Wednesday night came and went without a deal with bondholders.</p>
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Investment Management: Quarterly Review and Outlook, Second Quarter 2014

By John Mauldin
It’s time for our Quarterly Review & Outlook from Lacy Hunt of Hoisington Investment Management, who leads off this month with a helpful explanation of the relationship between the U.S. GDP growth rate and 30 year treasury yields. That’s an important relationship, because long term interest rates above nominal GDP growth (as they are now) tend to retard economic activity and vice versa.

The author adds that the average four quarter growth rate of real GDP during the present recovery is 1.8%, well below the 4.2% average in all of the previous post war expansions; and despite six years of federal deficits totaling $6.27 trillion and another $3.63 trillion in quantitative easing by the Fed, the growth rate of the economy continues to erode.

So what gives? We’re simply too indebted, says Lacy; and too much of the debt is nonproductive. (Total U.S. public and private debt rose to 349.3% of GDP in the first quarter, up from 343.7% in the third quarter of 2013.) And as Hyman Minsky and Charles Kindleberger showed us, higher levels of debt slow economic growth when the debt is unbalanced toward the type of borrowing that doesn’t create an income stream sufficient to repay principal and interest.

And it’s not just the US. Lacy notes that the world’s largest economies have a higher total debt to GDP ratio today than at the onset of the Great Recession in 2008, and foreign households are living farther above their means than they were six years ago.

Simply put, the developed (and much of the developing) world is fast approaching the end of a 60-year-long debt supercycle, as I (hope I) conclusively demonstrated in Endgame and reaffirmed in Code Red.
Hoisington Investment Management Company (www.Hoisingtonmgt.com) is a registered investment advisor specializing in fixed income portfolios for large institutional clients. Located in Austin, Texas, the firm has over $5 billion under management and is the sub adviser of the Wasatch-Hoisington U.S. Treasury Fund (WHOSX).

Some readers may have noticed that there was no Thoughts from the Frontline in their inboxes this weekend. As has happened only once or twice in the last 14 years, I found myself in an intellectual cul-de-sac, and there was not enough time to back out. Knowing that I was going to be involved in a fascinating conference over the weekend, I had planned to do a rather simple analysis of a new book on how GDP is constructed. But as I got deeper into thinking about the topic and doing more research, I remembered something I read 20 years ago about the misleading nature of GDP, and I realized that a simple analysis just wouldn’t cut it.

 

Is This A Stealth Correction – Are We Too Optimistic

The second “stealth correction” of the year had been underway below the surface for a few weeks, with a broadening selection of B-list stocks tiring and investor risk appetites ebbing, and is now threatening to break into the open.

The task of playing for a more damaging break in the upward trend is complicated, though, by the fact that several such threats have proved empty in the recent past. And the sudden rush for safety amid shrill geopolitical news headlines Thursday is just the sort of hasty reflex action that has indicated decent Buy signals during this largely imperturbable bull run.

Yellen’s market call

One of the ironies of Federal Reserve Chair Janet Yellen’s singling out of small-cap, biotech and social media stocks as appearing overvalued is that these sectors have been under pressure for months.

These three market segments – as measured by exchange-traded funds tracking the iShares Russell 2000 (IWM), iShares Nasdaq Biotechnology (IBB) and Global X Social Media (SOCL) indexes – have lagged the blue-chip Standard & Poor’s 500 by between five and 15 percentage points in the past four months. Yellen was mostly voicing the conventional wisdom circa March 31 in commenting on isolated evidence of excessive investor confidence. As Yellen’s remarks were scrutinized, these pockets of the market saw selloffs.
.
Selloffs Post Yellen testimony.
Sliced up differently, the largest 500 stocks in the market as tracked by Russell were up more than 8% in 2014 before Thursday, and the smallest 500 down an average of 6% – a huge performance spread that shows a marked preference this year for stable, global companies over fast-moving, speculative ones. From July 1 through Wednesday, too, the largest 500 names were about flat even as the littlest 500 slid more than 5%, according to Pension Partners.

Before the S&P 500 on Thursday dropped 1.14%, breaking a 62-day streak without at least a 1% move, Canaccord Genuity strategist Tony Dwyer was citing other signs of ragged tape action and subtle weakness in reiterating his call for a 5%-plus market correction (which he feels should be bought for a powerful surge to his year-end S&P 500 target of 2,185, up more than 11% from Thursday’s close).

A time-proven gauge of internal market energy, the Lowry’s Buying Power index, has sagged to the lowest reading of the year. And despite the headline indexes being right up against all-time highs, fewer than one quarter of New York Stock Exchange names were within 2% of a 52-week high.

Such indicators “tell us the broad market is already in correction mode,” Dwyer says. “Many times, the correction shows up in the mega-cap stocks and major market indexes toward the tail end of a market correction.” Of course, in the springtime the damage never hit the headline large-stock benchmarks hard, as what I call an “immaculate rotation” shifted money from aggressive stocks to stable, bond-like shares instead.

The already-substantial pain in smaller-company stocks could even mean this trend of small-cap underperformance, something that often occurs later in a bull market, might not have quite as far to run in the immediate future as the growing consensus seems to believe.

Will Nasgovitz, portfolio manager of Heartland Select Value Fund (HRSVX), who hunts for inexpensive, out-of-favor stocks of all sizes, says, “It’s unfair to make a blanket statement about elevated [valuations] of small caps.” He says it’s mostly the lower-quality, more speculative subset of small stocks in the Russell 2000 index that are making the whole category appear overvalued. Indeed, the iShares Morningstar Small-Cap Value ETF (JKL) has handily outperformed its all-inclusive Russell 2000 counterpart during this choppy period.

Worrisome optimism

A nagging vulnerability of the market coming into the summer has been the pervasive optimism among active investors and traders. The proportion of investment-advisory newsletter writers tracked by Investors Intelligence who were bullish on stocks has been near historic highs since May, and the Bank of America Merrill Lynch global fund manager survey this month showed the second-highest tilt toward equities in 13 years.

Michael Hartnett, global strategist at Merrill and steward of that survey, has been firmly and correctly bullish on stocks and other riskier assets in recent years. Yet the fund manager ebullience – along with Merrill retail wealth management clients riding their highest equity allocation in at least nine years – prompted Hartnett to say Thursday that “an autumn correction is increasingly likely.”

As noted, of course, persistent predictions of a true, cleansing correction that pares stretched valuations and tempers investor expectations have failed to take hold since late 2012. The list of would-be or actual crises overseas that put a fleeting scare into the market includes the Cyprus insolvency episode, the Arab Spring, Syrian civil war, Iraq insurgency, Ukraine-Russia conflict and the current Israel-Hamas conflict.

If the current bout of unnerving foreign unrest proves a catalyst for a deeper and more inclusive Wall Street pullback, it will likely be more excuse than cause. The annals of major bull market tops and subsequent bear markets are generally free of pure military or geopolitical triggers.

The fact that the market conversation is now focused on whether or when a correction might arise – rather than whether a severe and prolonged market downturn is on the way – reflects the general sense that leading indicators of the economy are relatively encouraging.

Credit markets, while a bit softer lately, are far from signaling economic distress to come. Stocks are more expensive than the historical norm, but not dramatically so. Earnings have held up OK, even if they’re no longer growing rapidly. And corporate animal spirits, in the form of capital spending and mergers and acquisition activity, are on the rise yet haven’t tipped over to recklessness.

One sign that prior periods of news-driven market setbacks have run their course has been a spurt in trader anxiety, which has tended to well up forcefully with fairly shallow 2% or 3% index dips. There were some hints of this Thursday, with a rush for protective stock options driving the CBOE Volatility Index smartly higher – a jump well in excess of what would generally accompany a 1%-ish daily market drop. And the CNN/Money Fear and Greed Index sinking fast toward extreme fear.

One of these times, such familiar tactical signals for buying a dip won’t work and the market will break rather than bend. Are we there yet?

Stocks Slide With Portugal Bonds as Treasuries, Gold Gain

European stocks fell and Portuguese bonds dropped as concern deepened over missed debt payments by a company linked to the nation’s second-largest bank. Standard & Poor’s 500 Index futures signaled a selloff earlier this week will resume, while the yen, Treasuries and gold gained.

The Stoxx Europe 600 Index lost 1.3 percent at 8:35 a.m. in New York, led by a gauge of banks dropping to this year’s low. Financial bond risk increased in Europe for a fifth day. Standard & Poor’s 500 Index futures fell 0.9 percent. Portugal’s 10-year bond yield rose 11 basis points to 3.88 percent while Treasuries gained and the yen advanced against all but one of its 16 major peers. Indonesian stocks climbed to a one-year high as polls showed Jakarta’s Governor Joko Widodo won the presidency. West Texas Intermediate oil slid 0.3 percent to $101.62 a barrel while gold climbed 1.1 percent.

Bonds of Europe’s most-indebted nations declined as speculation resurfaced that the euro region remains vulnerable to shocks as it emerges from the sovereign debt crisis. The sell-off comes after minutes of the Federal Reserve latest meeting showed yesterday some policy makers were concerned investors may be growing too complacent. The value of global equities climbed to a record $66 trillion last week, data compiled by Bloomberg show.

Photographer: Dimas Ardian/Bloomberg
One-month rupiah forwards added 0.2 percent as unofficial counts showed Jakarta… Read More
“The concern of an event like this is always determining whether it’s occurring in isolation or whether it’s the first domino,” said Lawrence Creatura, a fund manager at Federated investors Inc. in Rochester, New York. His firm manages about $363.8 billion. “People will shoot first and ask questions later when news like this hits. It’s a classic flight to safety across the equity, commodities and bond markets. Portugal has been perceived as a weaker link so it’s not a particular surprise they’re encountering this kind of trouble now.”

Fewer Americans than forecast filed applications for unemployment benefits last week, a sign the labor market is strengthening, a government report showed today.

Peripheral Bonds

Portuguese bonds fell for a fourth day. The yield on 10-year Italian notes rose six basis points to 2.94 percent and Spain’s rate jumped six basis points to 2.82 percent. The Markit iTraxx Europe Senior Financial Index of credit-default swaps on 25 European banks and insurers rose two basis points to 71 basis points, the highest since June 4.

While Portugal’s central bank said Banco Espirito Santo SA, the nation’s second-largest lender, is protected after its parent missed debt payments, Moody’s Investors Service downgraded a company in the group citing a lack of transparency and links to other companies.

Banco Espirito Santo tumbled 17 percent before the Portuguese securities regulator said it stopped trading in the shares pending an announcement. Espirito Santo Financial Group SA, which owns 25 percent of the lender, fell 8.9 percent before the company suspended trading earlier in stocks and bonds, saying it’s “currently assessing the financial impact of its exposure” to Espirito Santo International, which has missed payments on short-term paper.

Fugro Tumbles

More than nine shares declined for every one that advanced in the Stoxx 600, with trading volumes 72 percent higher than the 30-day average, according to data compiled by Bloomberg. The gauge of banks tumbled 2.7 percent to the lowest since Dec. 18.

Banco Popular Espanol SA (POP) dropped 4.8 percent. The Spanish lender said it postponed a planned issue of the riskiest bank debt because of “heightened volatility” in credit markets.

Fugro NV (FUR) sank 20 percent, the most since November 2012, after the Dutch deepwater-oilfield surveyor forecast a drop in profit margin and writing off of as much as 350 million euros ($477 million). Skanska AB lost 2.5 percent after the Nordic region’s biggest construction company by global revenue said it will scale down operations in Latin America after booking 500 million kronor ($73.7 million) in project writedowns and restructuring costs.

Jobless Claims

The S&P 500 index (SPX) rebounded 0.5 percent yesterday following two days of losses.

Jobless claims declined by 11,000 to 304,000 in the week ended July 5, the fewest in more than a month, a Labor Department report showed today in Washington. The median forecast of 45 economists surveyed by Bloomberg called for 315,000.

Federal Reserve Bank of St. Louis President James Bullard said yesterday that a surprisingly fast decline in unemployment will fuel inflation and back the case for higher interest rates.

The Jakarta Composite Index added 1.4 percent to 5,095.20, heading for its highest close since May 2013. The rupiah gained 0.7 percent to 11,555 per dollar, according to prices from local banks, after touching the strongest level since May 22.

Both Widodo, known as Jokowi, and his opponent Prabowo Subianto claimed victory in yesterday’s presidential vote. Jokowi had about a five percentage point lead in the poll, according to unofficial counts from two survey companies that declared him the winner. Official results aren’t due for about two weeks. Bank Indonesia will probably hold its reference rate at 7.5 percent today, according to the median of 21 estimates from economists surveyed by Bloomberg.

The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong advanced 0.3 percent, after losing 1.6 percent yesterday, its biggest decline in two weeks. The Shanghai Composite Index slipped less than 0.1 percent, extending yesterday’s 1.2 percent retreat.

China Exports

China’s overseas shipments fell short of the 10.4 percent expansion that was the median of 47 economists’ estimates compiled by Bloomberg. Imports grew by 5.5 percent in June, less than the 6 percent increase projected. The trade surplus fell to $31.6 billion for June, from $35.92 in May. Data yesterday showed producer prices fell last month at the slowest pace in more than two years.

“Extreme cautiousness towards China’s economy has receded overall, with the government showing signs it will step in to support growth when needed,” said Mari Oshidari, a Hong Kong-based strategist at Okasan Securities Group Inc.

West Texas Intermediate oil dropped to $102.01 a barrel. Gasoline inventories increased by 579,000 barrels last week as a measure of consumption slid, the Energy Information Administration said yesterday. Brent declined 0.2 percent to $108.10 a barrel, the ninth consecutive decline in the longest streak since May 2010. The crude closed at a two-month low yesterday amid signs that Libya, the holder of Africa’s largest crude reserves, will boost exports, while Iraqi production remains unaffected by an insurgency.

Treasury Sale

Gold for immediate delivery jumped to $1,342.23 an ounce, the highest since March 19. Palladium rose 0.3 percent to $876.25 an ounce, the 14th consecutive advance and the longest streak since June 2000. Cotton fell 0.4 percent to the lowest price since July 2012 on ample supplies.

The yield on 10-year Treasuries dropped five basis points to 2.50 percent. The rate on 30-year notes declined five basis points to 3.33 percent as the U.S. prepares to sell $13 billion of the debt.

Greece’s five-year note yield increased 11 basis points 4.33 percent. The government sold 1.5 billion euros of three-year notes via banks, priced to yield 3.5 percent. That’s higher than forecasts earlier this week for a rate of about 3 percent from HSBC Holdings Plc and Royal Bank of Scotland Group Plc.

The yen strengthened 0.3 percent to 101.36 per dollar and gained 0.3 percent to 138.31 per euro.

Australia’s dollar retreated from the highest in a week, falling against all of its 16 major counterparts after the nation’s jobless rate climbed. The Aussie weakened 0.4 percent at 93.74 U.S. cents.

Bill Gross : U.S. Still Faces Permanent Slump

When the Federal Reserve meets this week, the Wall Street Journal reports the most challenging question won’t be where to push interest rates in the near term, but where they belong years into the future. The WSJ indicates policy makers have believed the benchmark interest rate — known as the federal-funds rate — should be about 4% in a balanced economy, but officials are now debating whether interest rates need to remain below that threshold long after the economy returns to normal (i.e. once inflation is stable at 2% and unemployment around 5.5%).

Pimco, the world’s largest bond manager with close to $2 trillion in assets under management, believes the federal funds rate will remain well below the “neutral” policy rate of 4% once the economy returns to full health. The firm is predicting a “new neutral” rate of 2% (nominal), given the highly leveraged economy. In the video above, Pimco founder and CIO Bill Gross says the difference is “critical” as the neutral policy rate “basically determines the prices of all assets.”

He tells us the biggest investment theme for the next five years will be, “how far does the Fed go in terms of their tightening and their journey back up, as opposed to down,” as the central bank moves to get out of the business of buying treasury bonds and mortgage-backed securities, and begins to raise rates from near zero.

The head of the International Monetary Fund on Monday said the Fed should move rates up only gradually when it finally begins to lift borrowing costs, Reuters reports.

While tightening may be the next phase of the monetary policy story, what does Gross think about the impact of the Fed’s easy money policies and how successful they have been over the last five years — with rates held near zero and the balance sheet expanded by trillions of dollars?

 

He says, “so far, so good.” Gross credits the Fed for over five years of “beautiful deleveraging,” as hedge fund titan Ray Dalio calls it. Gross also sees success in other factors, including real economic growth of 2%, institutions being shored up, the stock market being close to record highs and employment growing at 200,000 a month. He says it remains a legitimate question what the central bank can do when it stops buying bonds and starts raising rates, though, conceding that things could get ugly.

And while 2% growth is less than stellar considering a historical norm of 3.5% to 4%, the lower growth is inline with what Pimco dubbed the “new normal” for the economy back in 2009. More recently, economists such as Larry Summers have advanced the idea that the U.S. may be facing secular stagnation — a permanent slump, with the economy hindered by structural issues such as demographics and the automation of jobs.

Related:  Has the U.S. Economy Entered a ‘Permanent Slump’?

In the video below, Gross says he agrees we are in a secular stagnation period and says it is difficult to get out of. He jokes that Summers “took our [new normal] idea and called it secular stagnation,” adding, “come on, Larry … give Pimco some credit!” Check out the bonus video for more.

 

 

 

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