Month: February 2013

Correlation: Margin Lending Vs. Stock Valuation

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I came across an interesting correlation: Margin Lending Vs. S&P.

Margin loans are programs that allow investors to borrow money to buy equities. So if you think through it: the higher the margin balance in the market, the higher the S&P will go, because people will have more borrowed money to put in the stock market. Today, the total margin balance is at $350 billion for NYSE member firms.

The evidence is presented on Chart 1. You can see that there is no lag between the two charts, so it’s a rather useless correlation to time the market.

Chart 1: Margin Balance Vs. S&P

Although fairly useless, sometimes there are discrepancies that can be spotted. For example, the rising Australian stock market could be overvalued at this moment when you look at their declining margin lending rate (Chart 2). So it can be interesting to watch this correlation.

Chart 2: Margin Balance Vs. ASX200

Update: Beleggerscompetitie

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On the Belgian Investors Competition, I’m still standing on last place with my dreaded declining gold and gold mining stocks. But let’s take a look at the top 10.

It looks like Diddenboyke has held his position rather nicely.

1) tompau: long stocks, France Telecom, Air Liquide
2) pmanager: ING, long stocks
3) Diddenboyke: short gold, Barco, Adidas, Total, GDF Suez
4) DRACHE: Barco, Heineken, long stocks
5) Maarten Janssens: short stocks, Bekaert
6) Freak of Nature: short gold
7) Yamayoze: Gold Fields, Umicore, long stocks, Commerzbank
8) Bouchez: Gold Fields, Harmony, short stocks, Arcelormittal
9) Rover45: short stocks
10) Lapitop: ING, sipef, short stocks

As a summary we see that people aren’t sure if we should be long or short stocks. What is sure is that you should be short gold apparently.

France Telecom, which I recommended in the previous update here, is being held by “tompau” and could be a winner here. It is interesting to see that someone is holding Sipef, which I also hold in my (real) portfolio.

Update: Precious Metals Premiums

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Just wanted to give a status update on the premiums.

The trend in premiums is still in an upward phase. A little side note, the bitcoin price has skyrocketed and continues to do so.

The Leverage in COMEX Silver is about to Explode

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Why is the eligible silver going up at such high pace and open interest going up at the same time?

As I told people before, eligible silver is not allocated. People think they own it, but it is not available for delivery. The ratio of registered to eligible is now: 29.7%. Down from 33% the last time I looked.
As this ratio between registered and eligible goes down, the leverage is going up and up. And when this leverage breaks (due to a short squeeze), the non-eligible supply of smaller bars and coins is going to disappear in front of you.

Chart 1: COMEX Silver

People know this, and as a result are buying physical silver in record quantities. The U.S. Mint just sold a never seen record of 3.37 million ounces in February 2013.

Correlation: The Dow Theory

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Peter Schiff’s Radio Show has reminded me that there is a correlation in the Dow Transports Vs. Dow Industrials.

He said in the 26 February 2013 radio show that when the Dow Transports doesn’t go up together with the Dow Industrials, then it is likely that the Dow Industrials will go down. That’s the Dow Theory.

The definition of the Dow Theory goes like this:
In Dow’s time, the US was a growing industrial power. The US had population centers but factories were scattered throughout the country. Factories had to ship their goods to market, usually by rail. Dow’s first stock averages were an index of industrial (manufacturing) companies and rail companies. To Dow, a bull market in industrials could not occur unless the railway average rallied as well, usually first. According to this logic, if manufacturers’ profits are rising, it follows that they are producing more. If they produce more, then they have to ship more goods to consumers. Hence, if an investor is looking for signs of health in manufacturers, he or she should look at the performance of the companies that ship the output of them to market, the railroads. The two averages should be moving in the same direction. When the performance of the averages diverge, it is a warning that change is in the air.


So if you see that the Dow Industrial goes up, while the Dow Transport doesn’t go up, you’re in trouble.
Now back to Peter’s case. He said that the Dow Transportation Average didn’t confirm the rise in the Dow Industrial Average on 26 February 2013. That was true, but if you look at a longer term, the Dow Transportation average has outperformed the Dow Industrial Average (Chart 1).
So this is one of those times I actually don’t agree with Peter.
Chart 1: Dow Jones Transportation Average (blue) Vs. Dow Jones Industrial Average (red)
This makes me want to go further in my analysis. Let’s subtract both indices from each other, take the percentage change on it and see what happens (Chart 2).
Chart 2: DJTA – DJIA (Percentage Change) Vs. DJIA
As you can see, each time the DJTA goes up more than DJIA (blue chart moving up), the DJIA will go up. And each time we see a spike lower in the blue chart, we hit a recession or a stock market crash.
At this moment we don’t see any of such things happening in the blue chart, so I believe the stock market is pretty stable at the moment.

Record High Insider Selling Marks The Top In The Stock Market

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There are several indicators today, marking a major top in the stock market. One of those indicators is the overvaluation in the stock market according to the “Warren Buffett Valuation” of the total U.S. stock market index as compared to U.S. GNP. We found out that stock markets are overvalued today, because the total U.S. stock market index is at 100% of  U.S. GNP. Normally we see that the total U.S. stock market index is at 80% of GNP. We just recently had news that U.S. GDP was negative and I wrote about it here. When GDP declines, it inherently means that the stock market must decline, taking into account the Warren Buffett Valuation theory.

Investors are much too bullish on stocks at this moment and we can see that in the Dow-Gold ratio, which is hitting a ratio of 9 to 1 as we speak.

I believe though, we shouldn’t be so complacent about stocks. After all, the P/E ratio of the Dow Industrials stands at 15.3 right now, while in the 70’s, the P/E ratio was on average at 10, which is much lower than 15.3. The question is: “Do we expect higher or lower earnings in the future?”. I believe the earnings are going to get worse in the future. One way to measure this is to look at the Citigroup Economic Surprise Index (CESI). This index is defined as weighted historical standard deviations of data “surprises”. In human language it means that if the index turns negative, the chance of an “unexpected” downward revision goes up. You will hear more bad news out of the media. And what do you know, the CESI did turn negative in the previous month. So you can expect more bad news coming. Historically, when the CESI goes down, the stock market goes down a few months later as you can see on chart 1.

Chart 1: Citigroup Surprise Index Vs. S&P

To read more evidence on a top in equities, go here.

100% Chance of a Major Low in Gold Miners

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I don’t know if you have noticed this, but sentiment on the gold miners is at a record low on a 3 year period (because the free chart only goes for 3 years…)

Each time when we see a bottom in sentiment, the gold miners are bottoming out.
I believe the best place to go right now is in gold mining stocks and I’ll put the money where my mouth is, especially when Goldman Sachs tells you to sell your gold.
Some suggestions: ASM, EXK, NEM.