Archive for April, 2013

• Why Is Gold Falling?
  Eddy Elfenbein, April 15th, 2013 at 6:39 pm

  The price of gold was smashed on Friday and again today. Gold for June delivery fell 9.3% today to close at $1,361.10 per ounce. That was gold’s biggest fall since March 27, 1980. Silver, often called “poor man’s gold,” fell 11% to $23.36 an ounce, it’s lowest price in two-and-a-half years.

  So what’s behind the dramatic plunge? My view is that gold responds to real short-term interest rates. In this case, I don’t believe traders expect a Fed rate increase soon. Instead, I think they’re hinting that deflation is acting up, and that’s causing real rates to rise.

  So real rates are rising in that nominal rates are stable but prices are falling. Gasoline prices, for example, have been falling recently and it’s possible they’ll soon hit a two-year low.

  Tomorrow the government will release the CPI report for March. Consumer prices were unexpectedly strong in February. Prior to that, prices had been pretty flat, and there was even a downtrend late last year.

  

• Ugly Day In Many Ways
  Eddy Elfenbein, April 15th, 2013 at 5:12 pm

  The S&P 500 closed down 2.3% today. This was the biggest drop in five months. The Morgan Stanley Cylical Index fell 3.91% to 1,117.76.

  There was a big split today between large- and small-cap stocks. The Russell 2000 fell 3.78%, while the S&P 100 dropped 2.06%. There was a 51 basis point difference between the Dow and S&P 500 today. The Dow was down 1.79%.

  Gold was absolutely demolished today. This charts shows you how bad the damage was:

  

• Companies Have Lowered Expectations Which May Be Good News for Stocks
  Eddy Elfenbein, April 15th, 2013 at 12:39 pm

  Rodrigo Campos and Caroline Valetkevitch of Reuters have an interesting article which points out that companies have been tempering expectations over the past several weeks. But the lower guidance may actually be good for stocks.

  S&P 500 earnings were expected to increase just 1.5 percent for the first quarter when earnings season began and the latest estimate stands at 1.1 percent. But investors and strategists say that earnings will more than likely look substantially better when the season comes to a close.

  So far there have been 108 warnings for first-quarter results. The 4.5-to-1 negative-to-positive ratio is the seventh worst for any quarter since 1996. Yet four of the previous six of those dire warnings periods have been followed by quarterly gains in the S&P 500; the average gain for those four with gains is 6.68 percent while the average gain for all six periods is a much lower 0.6 percent.

  A 6.68 percent gain this quarter would take the S&P 500 to 1,674 by the end of June, extending a rally that has already taken it to record highs.

  A look at a greater sample shows the persistence of this pattern. Of the 20 quarters with the most negative ratios since 1996, the average gain in the S&P 500 in the following quarter was 2.3 percent. By comparison, the average move for all of the past 68 quarters dating back to 1996 is 1.7 percent.

  It is in the best interest of companies to avoid disappointments. Warnings have outnumbered positive pre-announcements in all but five of those 68 quarters, and yet companies almost always report results above analysts’ expectations.

  The last time earnings have fallen short of analysts’ forecast was the fourth quarter of 2008 was when the impact of the financial crisis was so sudden and severe that it took time for everyone to assess its depth.

  In the last 16 quarters, in all but one, the analysts’ expectations at the beginning of earnings season have been exceeded by anywhere from one to 22 percentage points, with an average difference of 6.4 points.

  On average, 63 percent of companies beat earnings estimates, according to Reuters data going back to 1994. Investors have come to anticipate this, and recent gains may be in part due to the belief that earnings, once again, will not be as dire as forecast.

• Earnings from JPMorgan and Wells Fargo
  Eddy Elfenbein, April 15th, 2013 at 12:26 pm

  I didn’t get around to mentioning the earnings reports from JPMorgan Chase ($JPM) and Wells Fargo ($WFC) on Friday. Both were quite good. For the first quarter, JPM earned $1.59 per share which was 20 cents better than estimates. Net profits rose 33% to $6.53 billion. Revenues, however, were “only” $25.8 billion which was $100 million below estimates. The earnings benefitted by $1.15 billion thanks to lower loss provisions.

  Bloomberg quoted analyst Charles Peabody as saying the reserve releases plus a tax-benefit and a one-time accounting adjustment helped JPM’s bottom line by 26 cents per share. Without those, the bank would have missed earnings. While the mortgage business is soaring, the profits from mortgages aren’t because rates are so low.

  Wells Fargo ($WFC) reported earnings 92 cents per share for the first quarter which topped analysts’ expectations by four cents per share. Net income jumped 22% to $5.17 billion which is a record for the bank. WFC’s revenues dropped 1.2% for the quarter but they’ve been able to cut costs to please analysts.

  Profits at Wells’ community banking division rose 25% to $2.92 billion. Profits in wholesale banking rose 9.5% to $2.05 billion. In their wealth and brokerage unit, profits were up 14% to $337 million. Unlike JPM, the last group is a small portion of their overall business. Wells recently got approval from the Fed to raise their dividend to 30 cents per share. Thanks to the improved financial conditions of JPM and WFC, both banks are borrowing costs have dropped and they’re wisely raising tons of cash from investors.

• The S&P 500 Drops Below 1,580
  Eddy Elfenbein, April 15th, 2013 at 10:31 am

  The stock market is retreating again today. The S&P 500 is currently just below 1,580. The big news today is of course out of the gold pits.

  For the last six months, gold has been slowly sliding. In October, it was close to $1,800 per ounce. Two weeks ago, it was down to $1,600, but the big plunge started on Friday when gold dropped from $1,560 to $1,480. Today’s fall may be even larger.

  What’s the reason for gold’s big fall? The reason comes down to real short-term interest rates. The farther interest rates are below inflation, the better it is for gold. The higher they are above inflation, the worse it is.

  The dramatic shift in gold over Friday and today most likely signals to us that traders think the Fed will raise rates sooner than expected. Interestingly, while most stock sectors are down today, the financials are down the least. JPMorgan ($JPM) and Wells Fargo ($WFC) are up a bit. The big losers are the commodity stocks—materials and energy. Halliburton ($HAL) is down 4% and Freeport-McMoRan ($FCX) is off by 6%. Many of the big banks are higher. Citigroup ($C) is up about 3% thanks to a good earnings report.

  I wouldn’t say this is a big turn against cyclicals, but it’s a turn against commodity-based cyclicals. Many of the heavy-industry stocks are down basically inline with the broader market. Treasury bonds continue to hold up well, and have laughed off any notion that there’s going to be a Great Rotation out of bonds. If anything, the rotation has been out of commodities.

• Gold Is Crashing
  Eddy Elfenbein, April 15th, 2013 at 9:59 am

  The yellow is getting slammed again. Gold has been as low as $1,385 an ounce this morning.

  

• New Ticker Symbol for WEX Inc.
  Eddy Elfenbein, April 15th, 2013 at 9:45 am

  Just a reminder that WEX Inc. no longer trades under WXS. The new ticker is WEX. This may cause some confusion today with quote services.

• Morning News: April 15, 2013
  Eddy Elfenbein, April 15th, 2013 at 7:46 am

  Japan Gets Calls From U.S. to Europe Not to Drive Down Yen

  Soft China GDP Explains Slow Commodity Import Growth

  Gold Price Falls Below $1,400 For First Time Since March 2011; Chinese Figures Weigh On Stocks

  Greece on Track to Receive Next Aid Tranche

  Europe to Face Washington Disbelief With Economic Claims

  Treasury Bears in Uphill Battle Against BOJ, Fed

  EVERYONE Should Be Thrilled By The Gold Crash

  Bitcoin Mining Is Not A Real World Environmental Disaster

  Dish Launches $25.5 Billion Bid for Sprint

  Thermo Life Technology Bid Said to Exceed $75 Per Share

  EADS In Talks To Buy Back 1.56 Percent From French State

  Intel Tries to Secure Its Footing Beyond PCs

  Liberty Global’s $15.8 Billion Virgin Media Deal Cleared In EU

  Joshua Brown: Q1 Earnings Season Kickoff – Here’s What You Should Know

  Jeff Miller: Weighing the Week Ahead: A Critical Eye on Earnings

  Be sure to follow me on Twitter.

• Remarkable Stats for the Dow
  Eddy Elfenbein, April 14th, 2013 at 7:01 pm

  The invaluable FRED database run by the Federal Reserve Bank of St. Louis recently added Saturday closings to its data series of daily closings for the Dow Jones Industrial Average. The data runs all the way back to the beginning of the index in 1896. I’ve often found the numbers going back to the beginning but they usually exclude Saturday trading which ended in 1952, so this find has a datahead like me pretty excited.

  I downloaded all the numbers and crunched some interesting results. I’ll present some here and add more later on during the week.

  First, let’s look at average daily returns by Days of the Week:

  Day	Count	Average Daily Gain
  Monday	5,662	-0.0961%
  Tuesday	5,904	0.0388%
  Wednesday	5,963	0.0484%
  Thursday	5,867	0.0221%
  Friday	5,845	0.0599%
  Saturday	2,601	0.0525%

  Mondays have been the worst day by far, but Mondays performed a lot better after Meltdown Monday in 1987. Consider this fact: Since November 13, 1987, Monday and Tuesdays combined are up 595.68% for the Dow, while Wednesday, Thursday and Friday combined are up 9.72%. For more a quarter of a century, nearly the Dow’s entire gain has come during the first 40% of the week.

  Here are the cumulative gains by each day of the week. With my version of Excel, I could only make a chart going back to 1912.

  

  You can see how poorly Monday has done, although it’s done much better since 1987. Tuesday has also improved.

  I’m struck by how poorly the other three days have done in recent years. Going back to July 1995, all the Thursdays combined are flat; the same for Fridays going back to April 1983, and Thursdays haven’t made a single dime for the Dow going back to January 1976. Since March 22, 1979, Tuesdays have returned more than the other four days of the week combined.

  After 117 years, there have been 31,842 trading days. The average daily gain is 0.02458%. In simpler terms, that’s roughly a one penny gain each day for every $40 invested. The standard deviation is 1.10018%. This means that the Dow swings, on average, 45 times its average daily gain. Think about that at the end of each trading day.

  The Dow’s total gain after 117 years is equal to its best 98 days combined, or its best 0.3%, those 98 days when the index gained 4.54% or more. Fifty-four of those days came between 1929 and 1933, and ten more came during a six-month span from late 2008 to early 2009. There hasn’t been one since.

• Gold Drops Below $1,500
  Eddy Elfenbein, April 12th, 2013 at 11:50 am

  Gold is getting crushed today. The metal is currently down over $60 per ounce. For the first time since July 5, 2011, gold fell below $1,500 per ounce today. On September 6, 2011, gold got as high as $1,923.70. At the same time, the S&P 500 was at 1,165.