Good Evening: After spending the past week bracing themselves for both this week’s employment figures and President Obama’s financial rescue package next week, U.S. equity investors finally decided to do a little buying today. There has been no shortage of either advice or possible plans. Two weeks ago, the promise was simply to spend the next round of the TARP “wisely”. Last week brought forth the “bad bank” concept, and this week’s trial balloon for our financial system centers on the government asset guarantees previously given to Citigroup and Bank of America. Mr. Obama himself is tight-lipped about which approach his plan will take, but heretofore impatient stock market participants welcomed today’s “guarantee” idea with a “yes, we can” rally.
Fourth quarter earnings season is starting to wind down, and so is the economic data compiled for the month of December. One of the last data points for December came in the form of this morning’s pending home sales figures. Expected to be flattish, this measure of future home sales stunned almost everyone by rising 6.3% (see below). Price concessions and lower mortgage rates are starting to help, but housing has quite a ways to go before we can declare a bottom is in place. The only other data point came in the form of auto sales for January, the first glimpse of economic activity in 2009. Each company reported sales numbers at different times today, but the sales figures were so poor that many economists thought a company or two had been left out of the totals. Expected to be a dismal 7.7 million units, the seasonally adjusted annual rate came in at 6.8 million (see BAC-MER’s take below). To give this shockingly low number some context, 6.8 million units is less than half the peak sales figures recorded a few short years ago. Quick…guess which large Midwestern city is home to three big companies that will soon be back in Washington with their hands extended?
Since auto sales dribbled in over the course of the session, stock market investors keyed off the pending home sales numbers in the early going. Opening a touch higher, the major averages essentially traded sideways until mid afternoon. A rally commenced when word spread on the Street that the Obama economic team was about to take the gloves off and get “aggressive”. New York senator, Chuck Schumer, offered the following today during an interview with Bloomberg Television:
“Schumer, a New York Democrat, said the bad-bank option is prohibitively expensive and could value the securities at too low a level, spurring a wave of bankruptcies. Insuring banks’ illiquid investments ‘is one possibility that seems to be gaining some currency’…” (source: Bloomberg article below)
This latest trial balloon from the Obama administration may or may not ever become law, but equity investors liked what they heard. If nothing else, whatever comes out of the White House next week will at least give investors some clarity. The major averages headed higher during the final 100 minutes of trading, and the final gains ranged from 0.75% (Russell 2000) to almost 4% (Dow Transports). The budding confidence in whatever Team Obama comes up with next week hurt Treasurys every bit as much as it helped stocks. Yields rose 7 to 20 basis points as the curve steepened, taking back all of yesterday’s move — and then some. The dollar also reversed course, closing down some 1.4% against its major competitors. Commodities, however, couldn’t sing from the same songbook. Auto sales hurt, the weak dollar helped, and cuts in output by OPEC were received with little more than a hopeful shrug. Every sector within the CRB index finished mixed and the index itself could manage a gain of only 0.25%.
The commodity that usually receives the lion’s share of investor attention is crude oil, but lately this role has assumed by gold. The yellow metal was a topic of discussion in Barron’s annual Round Table, famous investors are starting to offer their opinions, and gold even played a starring role in a Super Bowl commercial (see below). Contrarians will want to know if all these signs point to an imminent top in both bullion and the companies that mine it. Today a friend of mine sent a gold chart out to his clients, and he then made a reasonable case for buying a put spread against the GLD (the gold ETF).
I have no quarrel with anyone who thinks gold might go down in the short run (it’s a commodity; it can go anywhere), but those who are calling for a top based on a Super Bowl commercial are just plum loco. Cash4Gold.com did indeed bring the barbarous relic to the attention of Super Bowl viewers, but the top-callers might want to review what Cash4Gold asked everyone to do: “Sell your Gold — to us — for cash”. Perhaps I’m a little fuzzy on the concept of bubbles and contrarian signals, but I thought a key component of all bubbles was in urging the public to BUY the bubbly item in question. This marketing company is asking the public to SELL gold while trusting both them and the U.S. postal service throughout the process. The next time you see a Cash4Gold commercial, especially the one starring Hammer and Ed McMahon that first aired Sunday night, don’t look at it as a sign of a top in gold. Look at it as yet another junky commercial — As Seen On T.V.! — not a source of actionable investment insights.
— Jack McHugh