If you woke up this morning from an eight-month coma and happened to glance through the business section of the newspaper, you’d be forgiven for being unaware of any economic slowdown. Don’t get me wrong: Many businesses and families are still struggling. The number of Americans filing for initial jobless claims this week spiked above 1 million, while the number of deaths attributed to COVID-19 remains above 1,000 a day. But there was much else to celebrate this week. Business activity in the U.S. snapped up to a post-pandemic high this month. The preliminary Composite Purchasing Manager’s Index (PMI), a measure of both the manufacturing and services sectors, hit an expansionary 54.7, the highest since February 2019. The upturn was due primarily to stronger exports and new orders as
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If you woke up this morning from an eight-month coma and happened to glance through the business section of the newspaper, you’d be forgiven for being unaware of any economic slowdown.
Don’t get me wrong: Many businesses and families are still struggling. The number of Americans filing for initial jobless claims this week spiked above 1 million, while the number of deaths attributed to COVID-19 remains above 1,000 a day.
But there was much else to celebrate this week.
Business activity in the U.S. snapped up to a post-pandemic high this month. The preliminary Composite Purchasing Manager’s Index (PMI), a measure of both the manufacturing and services sectors, hit an expansionary 54.7, the highest since February 2019. The upturn was due primarily to stronger exports and new orders as overseas economies continue to reopen. China is also currently positive, as I shared with you last week, meaning 40 percent of the world’s economy is now in expansion mode once again.
To learn more on the PMI, watch the video below, taken during my keynote speech at the Vancouver Resource Investment Conference (VRIC). Please also remember to subscribe to our YouTube channel and share with your friends!
U.S. homebuilders are incredibly bullish right now. This month’s National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index climbed to 78, matching a previous all-time record set in December 1988. While I’m on the subject, sales of existing homes soared almost 25 percent in July from June, the strongest monthly gain in U.S. history, on near-zero interest rates.
Finally, the S&P 500 closed at a new record high on Tuesday, ending the shortest bear market in U.S. history. The pandemic-induced pullback lasted only 33 days, compared to the median bear market length of 302 days based on data going back to the 1920s, as Reuters reports.
It’s this final point I’d like to focus on. Is the U.S. stock market’s incredible recovery justified, or is it “irrational exuberance” all over again? Year-to-date, the S&P has outperformed equities in nearly every other major economy, including the European Union (EU), United Kingdom (UK), Hong Kong and Japan. A lot of this has to do with the performance of tech stocks (more on that later), but something else appears to be happening here.
Investors Pricing In Optimism
In a recent whitepaper, GMO’s James Montier questions the rationality of higher U.S. equity valuations “in the face of overwhelming uncertainty.” He colorfully compares the stock market to the “hapless Wile E. Coyote, running off the edge of a cliff in pursuit of the pesky Roadrunner but not yet realizing the ground beneath his feet had run out some time ago.”
Interestingly, Montier doesn’t believe the market’s steady uptrend is correlated with the Federal Reserve’s or U.S. government’s unprecedented levels of monetary and fiscal stimulus. Why? Because both Japan and the EU have comparatively low interest rates and asset-buying programs, and yet “they aren’t witnessing stock market valuations at nosebleed-inducing levels” as the U.S. is.
Instead, Montier believes investors are simply pricing in an overly rosy outcome—from the pandemic, from the economic slowdown—which he says is “absurd.”
I’m not so sure. I believe in the wisdom of crowds, and that markets have gotten it right far more often than they’ve been wrong. Earlier in the month, for instance, I showed you that investors have historically predicted the outcome of presidential elections with a surprisingly high level of accuracy.
More recently, millennial Robinhood investors accurately called the bottom in airline stocks, and they continued to accumulate shares even after Warren Buffett announced in early May that he had dumped his holdings in domestic airlines.
Are We in a Tech Bubble? CLSA Says No
Something else Montier doesn’t bring up in his whitepaper is that tech stocks have driven much of the U.S. market’s gains since March. Were it not for a handful of them, the S&P 500 may have performed more in line with other economies’ stock indices.
Between the market bottom on March 23 and August 20, shares of Apple, Amazon, Microsoft, Facebook, Alphabet and graphics processor designer NVIDIA were responsible for an incredible 33 percent—an entire third—of the uptrend in the S&P 500.
Apple alone was responsible for more than 11 percent of the market’s moves. This week, the iPhone-maker became the first U.S. company to surpass $2 trillion in market capitalization, nearly as much as all the companies in the Russell 2000 Index of small-cap stocks combined. Apple is now valued more highly, in fact, than German stocks in the Deutsche Boerse Index and is closing in on Canadian stocks in the S&P/TSX Composite Index.
And then there’s Tesla, whose stock we really like. Tesla isn’t a member of the S&P 500 (yet), but its shares cracked $2,000 this week ahead of its stock split, bringing its market cap to $370 billion. As of Wednesday, that was enough to make the electric vehicle manufacturer more valuable than Walmart.
Some see a bubble forming. But in an interesting report dated August 12, CLSA analysts Laurence Balanco and Jonathan Estrada argue that tech doesn’t yet meet the requirements of a bubble, based on observations from the past 43 years. Those seven criteria are: 1) price gain of 555 percent over a 52-month period, 2) rising trend for four years or more, 3) gains of over 119 percent over the past 12 months, 4) 55.7 percent premium to its 200-day moving average, 5) 10-day average true range (ATR) of over 2.4 percent (volatility), 6) prime momentum divergence and 7) churning price action or a V-shaped reversal pattern.
According to Balanco and Estrada, the Nasdaq 100 (tech stocks) meets only three of those seven criteria, as does the price of silver, which some people have also said may be in a bubble.
We should also add gold to that list. Even though a short-term correction in its price was expected after rising for nine weeks straight, we’re nowhere near a gold bubble.
In fact, I maintain my call of $4,000 gold over the next three years due to unprecedented global economic stimulus and money-printing. Watch my interview on CNBC below, and again, make sure to subscribe to our YouTube channel and share with your friends!
Colombia’s Classic Case of the Gold Love Trade
On a final note, Colombia sold 67 percent of its gold holdings, valued at $475 million, in June, just weeks before the yellow metal hit its all-time high of $2,075 an ounce. Even though the timing could have been better, it was a smart move by the South American country. According to Bloomberg, the sale was based on “optimization exercises,” in which the central bank “monitors interest rates and asset volatility to determine its international reserve portfolio holdings.”
This is classic Love Trade. As I’ve said many times before, it’s rational and prudent to hold gold for love of family and country. Once Colombia finds itself in a better financial situation, it can buy the gold back.
Speaking of gold and Colombia, one of our favorite gold mining stocks remains Gran Colombia. Headquartered in Toronto, the company is the largest gold producer in Colombia. It’s high-grade, and based on a cash flow basis, it’s the cheapest gold stock among 75 gold stocks in our investible universe. It trades at only three times cash flow whereas a basket of gold miners trades at closer to 13 times cash flow. Gran Colombia currently has a free cash flow yield of 15 percent, compared to large-cap Barrick, which has one of only 4 percent. It trades on the TSX under the ticker GCM and in the U.S. under the ticker TPRFF.
This week spot gold closed at $1,940.48, down $4.64 per ounce, or 0.24 percent. Gold stocks, as measured by the NYSE Arca Gold Miners Index, ended the week higher by 1.50 percent. The S&P/TSX Venture Index came in off 1.00 percent. The U.S. Trade-Weighted Dollar rose 0.13 percent.
|Aug-19||Eurozone CPI Core YoY||1.2%||1.2%||1.2%|
|Aug-20||Initial Jobless Claims||920k||1106k||941k|
|Aug-25||Conf. Board Consumer Confidence||93.0||—||92.6|
|Aug-25||New Home Sales||776k||—||776k|
|Aug-26||Hong Kong Exports YoY||-3.9%||—||-1.3%|
|Aug-26||Durable Goods Orders||4.0%||—||7.6%|
|Aug-27||GDP Annualized QoQ||-32.5%||—||-32.9%|
|Aug-27||Initial Jobless Claims||1000k||—||1106k|
- The best performing precious metal for the week was palladium, up 2.90 percent. Impala Platinum Holdings reported earnings for the full year surged more than 10-fold as a weaker rand and higher metal prices offset mining disruptions from the virus. Basic earnings are estimated at 15.81 billion to 16.1 billion rand in the year ended June 30, versus just 1.47 billion rand a year earlier.
- Swiss gold exports to India hit an 8-month high in July after falling to record lows amid the pandemic. Chirag Sheth, a consultant at Metals Focus in Mumbai, said purchases are slowly returning to normal in the world’s second-largest gold consuming country.
- Ghana is moving ahead with its initial public offering of the gold royalty fund in September to be listed in London and on the local bourse. Africa’s biggest gold producer hopes to raise $500 million through the IPO, reports Bloomberg. The fund will pay dividends from the government’s income from gold operations.
- The worst performing precious metal for the week was platinum, down 2.34 percent. Gold had a second weekly loss as the dollar rose against other currencies amid concern over mixed economic data.
- Colombia sold $475 million its gold in June, equivalent to 67 percent of its holdings, according to the central bank’s website. This means the nation missed out on gold’s record price surge just a few weeks later. Gold now accounts for about 0.4 percent of Colombia’s international reserves, compared to much higher percentages of other South American countries, reports Bloomberg.
- The Bank of Nova Scotia, also known as Scotiabank, agreed to pay $127.4 million to settle U.S. allegations that the company engaged in gold and silver futures contracts spoofing. The bank will also pay a $17 million fine on CFTC claims that it misrepresented the scope of the alleged wrongdoing. It was reported that three Scotiabank compliance officers knew of the unlawful trading by one of its traders but failed to prevent further unlawful conduct.
- SkyBridge Capital, which recently added exposure to gold after exiting in 2011, says that gold will continue its record-setting rally due to massive currency debasement as the world prints money like crazy. Chief investment officer Troy Gayseki said “gold is obviously a natural alternative currency” as the dollar weakens against other paper currencies. Bloomberg notes that Gayseki went on to say that it wouldn’t surprise him to see bullion around the $2,100 to $2,200 an ounce range by the end of 2021.
- News broke late last week that Warren Buffett’s Berkshire Hathaway bought $565 million worth of Barrick Gold in the second quarter. This reversal by Buffett, who has many times complained that gold does not pay a dividend or have any real use, could attract more generalist investors to the space. Buffett is one of the most respected and well-known investors, and hopefully other investors follow suit by adding to their gold exposure through miners, funds or the physical metal itself.
- Northern Star Resources boosted its fiscal year 2021 production estimate after reporting a 67 percent increase in resources to 31.8 million ounces and a reserve jump of 102 percent to 10.8 million ounces. Newmont and Kirkland Lake Gold signed a strategic alliance agreement to jointly assess regional exploration opportunities around both of their projects in Ontario. Evrim Resources and Renaissance Gold completed their merger-of-equals and changed its name to Orogen Royalties. According to a statement, Orogen’s mission is to create and acquire precious metal royalties.
- The Pebble Mine in Alaska, what would be the largest in North America, may have its federal approval put on hold after a small group of Republicans, including President Trump’s son, moved to block the project. The proposed mine was about to win a key permit despite concerns from environmentalists that it would damage Alaska’s salmon fishery. The Trump administration is now reportedly rethinking the permit, reports the Washington Post. This is a surprising turnaround since President Trump is largely anti-regulation. But not too surprising once you find out that Donald Trump Jr. often fishes in what could be a potentially impacted area from the mine’s operations.
- Initial jobless claims rose by 135,000 to more than 1.1 million in the week ended August 15, according to Labor Department data. This unexpected increase comes just one week after claims fell below 1 million for the first time since April and underscores hopes of a swift recovery.
- Corporate America is more indebted today than ever before. More than $1.6 trillion of “fresh cash” was injected to help scores of companies stay afloat during lockdown, but now many companies will have to divert even more cash to repay those obligations. Bloomberg Intelligence analysis found that the average junk-rated company had debt levels relative to earnings that were so high in the middle of this year that they almost would have tripped “do-not-touch” alerts from baking regulators a few years ago. This overburdened corporate sector could slow the whole economic recovery down.
- The major market indices finished mixed this week. The Dow Jones Industrial Average gained 0.12 percent. The S&P 500 Stock Index rose 0.70 percent, while the Nasdaq Composite climbed 2.44 percent. The Russell 2000 small capitalization index lost 1.73 percent this week.
- The Hang Seng Composite gained 1.17 percent this week; while Taiwan was down 1.22 percent and the KOSPI fell 5.45 percent.
- The 10-year Treasury bond yield fell 9 basis points to 0.63 percent.
Read the remainder of the article at http://www.usfunds.com/investor-library/investor-alert/wisdom-of-crowds-says-better-days-are-ahead/
August 21, 2020
By Frank Holmes
CEO and Chief Investment Officer
U.S. Global Investors