To Taper or NOT To Taper?
- Mortgage applications fell by another 11% this week, after falling 8.8% the week before.
- Applications to refinance homes dropped 15%, the fourth straight decline to the lowest level in more than a year.
- Rates for a 30-year home mortgage rose to 3.91% last week, up from 3.35% at the start of May, while 15-year rates also increased to 3.03% from 2.56%.
- The jobs report on Friday showed that we added 175,000 new jobs to the economy last month, and the unemployment rate increased to 7.6%.
- Retailers, the hospitality industry and temporary-help agencies (the lowest paying industries) accounted for 96,300, or 55%, of the 175,000 jobs added in May. The hospitality industry added 43,000 workers last month, paying $13.45/hr., the lowest of any of the 10 major employment categories. Retailers added 27,700 jobs in May, paying $16.63/hr., and temporary help accounted for 25,600 jobs paying $15.74/hr.
- In contrast, manufacturing (which pays $24.22/hr.) lost 8,000 jobs.
- There were 7.9 million people working part-time in May who would have preferred full-time work but couldn’t get it. (The norm is 4.4 million.)
- Real hourly compensation fell by 9.1% - the largest recorded decline in history.
I failed to mention that the Bureau of Labor and Statistics added 205,000 jobs to the report under the ‘birth / death’ model; therefore, on a pure head-count basis – we lost 30,000 jobs last month (205,000 – 175,000 = 30,000 net jobs lost.)
But if you could have ‘picked’ the perfect jobs report – this was it. The report raised the unemployment level a tad, keeping the Fed from Tapering, but it left people to interpret that it only ticked up because people felt so good that they went out looking for work again. The report allows both sides to continue arguing about whether the Fed would or wouldn’t Taper off Quantitative Easing (QE). My only problem is that the Taper Talk will get louder. The jobs number wasn't out ten seconds when CNBC was saying that everything is setting up for a September pull back in QE. I'm afraid we'll hear more of this type of chatter, causing a lot of up and down chop over the weeks to come.
I received a particularly well-written email this week from a reader who vehemently disagreed with me on my stance on gold and silver. Allow me to present – potentially – a personal bias that I have for the metal(s).
Before the advent of electronic watches, a good mechanical watch was a masterpiece of technology. My dad gave me a Hamilton Watch – made in Lancaster, PA for my graduation present – and I have it to this day. I came to realize that the mechanical watch is truly a lost art. Unfortunately the majority of people would rather buy a battery powered Seiko, than a mechanical work of art. So it is with this ‘awe’ of exacting craftsmanship, and beauty that I come looking at gold and silver. I try to do my best to separate the emotional admiration that I have for the metal itself, from the logical side that influences investing in it.
Consider this, the entire world’s above ground availability of silver (1B to 1.5B ounces) – at $22 an ounce – could be purchased for approximately $30B. We will come back to this calculation, but suffice it to say that there just isn't an unlimited amount of silver lying around. I’d like to focus on (a) the supply, and (b) the reasons for owning metals.
Gold’s main purpose is to ‘be pretty’ and make the most gorgeous jewelry. My e-mail writer asked me: “Why is gold better than say tree bark or seashells?” My main difference is that you can’t ‘grow’ or ‘manipulate’ it through other means. Our global society has decided that Gold works perfectly as money. For over 5,000 years man has been judging his wealth by the amount of gold and silver he owns. There have always been other elements like cattle and land but the real "wealth" was usually boiled down to the metals. And, it was uncannily universal. Dollar bills, Yen, Krona, Yuan’s, Peso's, and all other replica's of money are NOT money – they are currency. So, people purchase Gold usually for just one of two reasons: (a) jewelry, or (b) to store value.
But silver is different. It is used in electrical circuits, solar, aerospace, medicine, etc. Silver is in demand, not just for jewelry but for real business applications as well. It’s not uncommon for silver to be mined, put into a business application, and then discarded to the junkyard. Going back to where we started, for $30B someone could purchase every ounce of silver. A very wealthy person – such as Bill Gates – could spend half their net worth on buying the entire silver market. What that logically tells me is that the price of silver is too low. What would you do if you needed silver for high-end radar, defense assemblies for the U.S. Navy – and there was none to be purchased?
Silver is simply too cheap. Not because of the ‘gold/silver’ ratio – but because someone like China could purchase all of it, in one evening, with one keystroke. It just doesn't belong at $22, and I am firmly convinced that it won't stay there. Gold deserves to be where it is because it wards off the inflation that everyone tells me doesn’t exist. I can buy the same amount of food, gasoline, clothing in 2013 that I could buy in 2003 with the same half-ounce of gold. In 2003 the base price of a BMW 325i was about $28,000, and today it is about $35,000. In 2003 gold was about $350 an ounce, and today it is about $1,384. Gold has kept my buying power, and for me that is all it is designed to do. Silver, on the other hand, belongs considerably higher. There isn't that much of it. It costs more each day to mine. And more and more people want it. While I sounds like a broken record, I'm still thinking that in the not too distant future, it will see $70 an ounce. I’m starting to scale more into silver at the $22 level, and will continue to add on the dips to average into a nice entry price.
Gold, Silver, agriculture, and select Real Estate are about the only things I see as being substantially "safe" in this era of central bankers gone wild. To think that the printing of all of this currency ends so perfectly and they engineer the ultimate recovery is just too much of a fairy tale for me. So, allow me to be the dinosaur and continue to bulk up on the money of historians. If Gold and Silver end up being completely wrong, I'll obviously pay the price for the mistake. But I’ve been in it for over ten years, and so far so good.
Is the Fed really going to "taper" in the near term – of course not. They may change the description of their games and find a different way to monetize the debt, but they will definitely need to continue to print money. Honestly, they have no choice. Well – they could do the right thing and stop all of it completely. They could just let the chips fall, the banks fail and let us go through the major purge that is so desperately overdue, but there is virtually no chance of that.
To quote Bill Gross of Pimco: “When I see wages flat versus 0.2 percent last month, and see the work week flat, and see unemployment going up, I see GDP in the U.S. of 1 to 2 percent, these employment problems are structural in nature. They are due to globalization, demographics, and to technology, the race against the machine. From a monetary standpoint you recognize that at some point the quantitative easing and the low interest rates are distorting capital markets which are critical to the economy going forward.” This comes on the heels of Gross’s funds suffering the first client withdrawals since May of 2011, as investors sold debt in anticipation of central banks eventually scaling back their unprecedented asset purchases. The Pimco Total Return Fund (PTTRX) – the world’s largest (and one of the best performing) mutual funds with $293B in assets is currently trailing 89% of its peers as it declined 2.1%.
You could see this pull back coming a mile away. The set up was the strongest I've seen in the dozen or so that have developed since November 2012. Not only did we have the technicals line up, the stochastics roll over and the Bollinger bands in overbought territory; moreover, this time we also had horrid economic data, along with taper talk, Japan going crazy and lousy employment data. With all that being said, the trend lines for the DOW and S&P are still intact. On Thursday we touched the 50-day moving averages of the DOW (14,960) and the S&P (1604) and then put in a ‘Vee’ shaped recovery.
But the market reaction to the jobs report is somewhat confounding.
- Due to the run-up on Friday, it’s telling us that there is NOT going to be a taper of the QE.
- But on the other hand, we see gold and the commodities getting sold, which would make sense if the Fed WAS going to "Taper" off their QE.
I think I’m going to have to lean long into this. While I don't have any ambition towards buying into stocks when they're already up 200 points on a Friday, I’ll have to hunt around and try and find some set ups that haven't broken down.
The Fed can't tell the world that they're failing and that QE didn't work, so they will just invent some other program to replace it. They will say it isn't QE. They will tell you that they're decreasing their buying, but they’ll just shuffle it around some more. The numbers tell me that they can't really end printing money. If normal, every day people aren't buying homes at 3.5%, can they buy them at 5%?
I think next week we will see them hold the line here. While you can make the case that the market is still set up for more of a pull down (and frankly it should), the economic numbers prove that Bernanke will continue to print and that's the only reason we're "up" in the first place. If the market fades, you might consider picking up some shares of the TZA - which is an inverse ETF. As the market fades, it goes up. If it moves over 33.25 it might be a good hedge in the short term.
I think you need to remain cautious. Not only are the transports and utilities sucking wind, our housing market dying, but we also have Japan imploding. That's truly a lot to ignore.
This week we ended our consecutive ‘Up’ Tuesday streak at 20 Tuesdays in a row. But this week I did add MUX to the short-term holds.
My current short-term holds are:
- MUX at 2.68 (currently 2.44) – stop at 1.60
- ABX @ 20.20 (currently 20.30) – stop at entry,
- SIL – in at 24.51 (currently 14.06) – no stop yet
- GLD (ETF for Gold) – in at 158.28, (currently 133.60) – no stop ($1,383 per physical ounce), AND
- SLV (ETF for Silver) – in at 28.3 (currently 20.94) – no stop ($21.73 per physical ounce).
To follow me on Twitter and get my daily thoughts and trades – my handle is: taylorpamm.
Please be safe out there!
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