The First Black Friday
Posted by Eddy Elfenbein on April 16th, 2013 at 12:48 pm

If you got slammed by gold’s sudden drop over the past couple of days, take comfort in the fact that things have been worse. Much worse.

In 1869, Ulysses Grant was in the White House. The government was struggling with massive domestic debt, incurred by four years of civil war and subsequent efforts at Southern reconstruction. To raise money for these expenditures, the Treasury had issued vast quantities of “greenbacks” (paper currency), which Grant promised to redeem for gold as soon as was practical. This he then proceeded to do: over the course of some six months at the start of his administration, the government paid out its gold reserves little by little, thus easing the debt while keeping the price of the precious metal under tight control. If the government wanted the price of gold to go down, it released more of its holdings; if it wanted it to go up, it paid out less.

Enter two unscrupulous speculators, Jay Gould and James Fisk. Their scheme was to corner the gold market by means of insider information. They reasoned that if they could find out beforehand exactly what the Treasury was planning to do as regards the gold supply, they would be able to buy up the yellow metal when the price was low and then sell when it was high. This would not only net them huge profits but also drive up the rate of traffic by wheat farmers on the Erie Railroad, of which Gould was president. Both men were well versed in incestuous economic dealings; both were very much in league with Boss Tweed’s Tammany Hall, and Gould would later post bond when Tweed was indicted.

But to pull it all off, they needed a hook. This was provided in the form of Abel Corbin, Grant’s brother-in-law. It’s not clear whether Corbin fully knew what the pair was up to, but he nonetheless served as their point of entry to the Oval Office, where they tried to persuade Grant to tip his hand regarding the government’s gold policy. This Grant, to his credit, refused to do. But Gould and Fisk now seemed, in the eyes of the financial community, to have the president’s ear. Thus when they started buying up large quantities of gold in early September 1869, prices spiked.

The one to put a stop to these shenanigans was George Boutwell, Grant’s Secretary of the Treasury. Honest and intelligent, he quickly saw through Fisk and Gould’s scam and approved the sale of $4 million worth of government gold to lower prices. Grant, too, realized what was up and told his brother-in-law to cut ties with his sketchy partners. But thieves’ honor prevailed, and Corbin tipped off Gould, who then was able to sell off his gold before the market crashed. Fisk, too, escaped serious economic damage, even though Gould omitted to tell him the news. The only one screwed was Corbin—together with grain farmers (whose prices fell 50%), stockholders (the market lost 20% in a single week), and countless ordinary Americans (who found themselves out of work in the ensuing economic turmoil). On Black Friday, September 24, 1869, gold prices went from a high of $162 to a low of $133 in a matter of hours.

What became of Gould and Fisk? Neither was prosecuted, thanks to a good lawyer and support from Tammany Hall. Gould went on to a glorious career as a railroad and communications magnate; Fisk was shot dead in an argument over a prostitute a few years later. As for Grant, his name was permanently besmirched: the years of his administration were branded ¨The Era of Good Stealings.¨

The Dow’s Average Return by Day of Year
Posted by Eddy Elfenbein on April 16th, 2013 at 12:06 pm

As I mentioned before, I crunched all of the Dow’s daily closings for the last 117 years. Today, let’s take a look at the Dow’s return by Day of the Year.

This chart shows what the Dow does, on average, throughout the year. To make things clearer, I began the chart at 100 as the start of the year.

There’s an old Wall Street saying that investors ought to “sell in May and go away.” Well, there does appear to be some truth to that. From May 6th to October 29th, the Dow has gained, on average, only 0.3%. That’s just shy of half the year. For the other half, the Dow has gained an average of 6.96%.

For the worst part of the year for the Dow, we can zero in the stretch from September 6th to October 29th. Over that span, the Dow has lost an average of 2.51%. I re-ran the numbers to see where the market’s early September peak was in relation to Labor Day. The answer is that it comes on the Wednesday immediately following Labor Day. After that, the market has had a tendency to slide for the next seven weeks.

The best brief period of the year for the Dow has been the famous Santa Claus rally. From December 21st to January 7th, the Dow has gained an average of 2.91%. That’s pretty impressive when you consider that makes up 40% of the Dow’s annual gain, yet it comes in just half a month, and that includes two holidays.

Just to be clear, these numbers don’t include dividends. Also, I don’t believe there’s any advantage for investors in trading around these events. I just think it’s fascinating that after 117 years, some definite patterns have evolved.

This Is What Gold’s Been Saying
Posted by Eddy Elfenbein on April 16th, 2013 at 11:08 am

Today’s inflation report confirms what the gold market has been saying — there are deflationary pressures in the economy. After a blip up in February, consumer prices fell in March.

The message is that real interest rates are too high.

The stock market is gaining back some ground today after yesterday’s plunge. Gold is also making up some lost ground, but it’s still around $1,390 an ounce.

Of the major stocks, Coke ($KO) is doing especially well after a good earnings report. Shares of Microsoft ($MSFT) have been very steady at $28.60 or so since the stock dropped last Thursday. The company will report earnings later this week.

March Industrial Production Rose 0.4%%
Posted by Eddy Elfenbein on April 16th, 2013 at 10:46 am

We got more promising economic news this morning. The government reported that industrial production rose by 0.4% last month. While total production was up, factory production unexpectedly dropped by 0.1%.

The median estimate for total industrial production of the 82 economists surveyed by Bloomberg called for a 0.2 percent gain. Projections ranged from a drop of 0.5 percent to an increase of 0.7 percent. The prior month was revised up to a 1.1 percent increase from a previously reported 0.8 percent advance.

Manufacturing, which makes up 75 percent of total production and accounts for about 12 percent of the economy, was restrained by declines in production last month of metals, computers, electrical equipment and furniture.

One of the bright spots in March was auto making. The output of motor vehicles and parts increased 2.9 percent after a 2 percent gain a month earlier, today’s report showed. Excluding autos and parts, manufacturing production dropped 0.3 percent, the biggest decline since October, after a 0.8 percent rise.

Cars and light trucks sold at a 15.2 million annual pace in March, capping the strongest three months for purchases since early 2008, data from Ward’s Automotive Group showed.

Here’s the chart on industrial production. There are two things to notice: the index hasn’t yet reached a new peak, and the index correlates very well with the economic cycle.

Morning News: April 16, 2013
Posted by Eddy Elfenbein on April 16th, 2013 at 7:44 am

Italy Seizes Nomura Assets Linked to Siena Bank Inquiry

ZEW April Investor Confidence Dropped More Than Forecast

In Surprise, Recovery in China Loses Steam

South Korea Unveils Fiscal Package to Support Growth

Carbon Falls Most Ever After EU Parliament Rejects Surplus Fix

Emerging-Market Stocks Slide Most Since July on China

Homebuilder Confidence in U.S. Unexpectedly Dropped in April

Central Banks at Ease Limit Risk Political Backlash

Dish Network announces $25.5 billion bid for Sprint Nextel

Intel Pressure Grows As CEO Question Looms

U.S. Bancorp First-Quarter Profit Rises 6.7%, Matches Estimates

Penney Has Some Persuading to Do

Drug Makers Use Safety Rule to Block Generics

Credit Writedown: A Reality Check On German Household Wealth

Howard Lindzon: Financial Tragedies Are Always Telegraphed…Gold, Apple and The Next Crash

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Why Is Gold Falling?
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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
Posted by Eddy Elfenbein on 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.