For the past two months, yields on U.S. Treasuries have been pushing higher. Why? Well dear reader, the economic establishment has jumped in to explain: the U.S. economy is strengthening and the Fed is going to raise rates. Facts be damned.
In my opinion, the situation is mixed but with a positive bias. The over-extended Large Speculators on COMEX continue to liquidate their positions, exactly what we need to see before the market turns up.
Sell side analysts argue it is not. They use measures like future operating earnings per share, a measure that has two major flaws. First, it is based on next analyst estimates of future earnings which are always way too optimistic. The estimates are then slashed as they come closer, but never mind, it’s on to the next estimate of a brighter, better future. Second, operating earnings are not like GAAP earnings which look at actual performance and include the bad stuff…write-downs, discontinued operations…all those so-called ‘one-time’ events that seem to come around every year.
In a nut shell, the metal looks like the correction needs more time while the gold stocks are saying they may be done.
As readers know, I have been waiting for a correction in gold since May. Finally, here it is. You should be thinking of buying, dear reader, not selling. For those who missed the chance to load up in February at lower levels, as I recommended at the time, this is your chance to get aboard. Maybe not quite yet but it’s close. The 200 day moving average tends to mark the bottom in gold bull market corrections and that number is just under $1260.
Janet Yellen of the Federal Reserve likes to tell us that the U.S. economy is getting stronger thanks to Fed monetary policy. So, in response, here is a little tour of reality.
The CEO of Deutsche Bank (DB) has a message for you: The balance sheet is strong, liquidity is good and there is no need of an equity infusion. He may be right but it absolutely does not matter. Once a bank loses confidence, the worst fears are always realized. Your stock falls, your bonds drop, depositors leave, other banks refuse to do business with you, and down you go. That’s the reality of a fractional banking system whose assets are long term and illiquid, leaving the bank dependent on overnight access to funds to meet daily requirements.
American corporations continue to pile on the debt to buy back shares and acquire each other while earnings are now down six quarters in a row. Is this bothering anyone else?
European bank stocks were very weak on Friday. The catalyst was the fact that the U.S. Department of Justice wants Deutsche Bank to cough up a $14 billion fine, which is going to be rather difficult since the company only has a market cap of about $17 billion. But the problems go much deeper than one bank. The biggest issue is in Italy.
Jeff Gundlach of DoubleLine Capital, one of the smartest minds in the money business, said last week that after nearly 35 years, the bond bull market has ended. Interest rates have stopped going down. In fact, he says July 5 marked the top in bonds (bottom in yields). If so, this has major implications for all markets. Why? Rising rates mean that central banks are losing control of the credit markets, governments may have more trouble running deficits and the stock market is on borrowed time.