Bulls outran bears at Friday's finish line as stocks just managed to finish last week in the black. The primary driver? Early evidence reveals that the four-quarter earnings recession may be nearing an end game. As S&P 500 Q3 earnings are now expected to squeeze out a 0.5 percent advance. Largely, we believe, on the wings of improving energy sector earnings.
Alas, after plummeting from $120 to $28 per barrel last year, WTI Crude stands at $50. And many models suggest that significantly higher prices await. Which is why we've turned bullish on facets of the energy sector. As Sherlock Holmes said, "Data, Data, Data! I can't make bricks without clay." Accordingly, when data presents itself, smart investors make bricks.
Of course, we're emboldened in such calls as many of our peers feel so contrarily.
Fund managers have pushed cash balances to 5.8 percent of portfolios in October. Up from 5.5 percent last month. And matching levels last seen after the Brexit vote. The share of cash hasn't been higher since November 2001, the aftermath of the 9/11 terrorist attacks.
Moreover, a recent money manager survey by Bank of America Merrill Lynch reveals that today's level of dry powder outweighs that seen during both Europe's sovereign-debt crisis and 2013's U.S. debt-ceiling debacle. How bearish investors have become. Fearing an EU breakup. A bond crash. The election outcome. And a myriad other market goblins. My, my but we are a fearful species.
And that's good news.
Elevated cash balances set the stage for a potential stock-market rally. "When average cash balance rises above 4.5 percent a contrarian buy signal is generated for equities. When the cash balance falls below 3.5 percent a contrarian sell signal is generated," The BOA analysts report.
Elevated cash balances? Extreme bearishness? Positive seasonality? Something bullish this way comes.
On the subject of bullishness...
Precious metals (PM) and PM mining companies were in a multi-year bear market that finally bottomed and turned higher this year.
The precious metals mining stocks typically rally over the course of 25-30 weeks during the first leg up. This year's initial run lasted 29 weeks. Ending with GDX up over 100 percent seven months later. Then a correction started which typically lasts five to eleven weeks. We're nine weeks into that. And the depth of that correction has fulfilled the 25 percent or more requirement. Which has been the historical average.
In the bull market's stage one, precious metals prices have advanced from 50 to 200 percent. In stage two, price gains have historically been similar. We feel that stage two is underway.
Much rationale exists as to why stage two has begun.
The specter of inflation has increased. A specter for which gold is not priced. The last gold rally started just after the Fed hiked rates in December 2016. We think the Fed will move again in December. So both gold and the Dollar will price that in. Further, Syria's war is approaching the point where a winner is declared and that is always the most dangerous point in a conflict. A sad juncture at which point almost anything goes. Higher oil prices have reduced the amount of gold being sold by Mideast countries that are in need of cash.
In India, gold prices recently traded at a premium for the first time since January. As dealers begin to stock up for the holidays. Whatever the reason, stage two in what should be a three-phase bull market is likely underway.
Accordingly, our PM mining positions should prosper.
In Election Land, things have taken a turn towards the absurd.
Some Democrats actually believe that the Vlad "The Impaler" Putin and his Russian minions are "hacking" the presidential election. Not to be outdone, Republicans have discerned that uber-liberal billionaire George Soros has manipulated U.S. voting machines to achieve his electoral bidding.
Truth be told, nobody injects more effort into affecting electoral outcomes than our domestic labor unions. As these anachronistic organizations will contribute nearly $110 million this year to defeat their political enemies nationwide. Playing an outsized role in the election, as only 11 percent of American workers belong to unions.
Still, scapegoating the Russians or evil billionaires sounds much cooler.
While on the topic of influencing the election, Wall Street has poured millions into the Clinton campaign. Which, we surmise, may be the equivalent of polishing the locks on Pandora's Box. As Senators Warren and Sanders and their ilk remain convinced there are nothing but sinners in these financial markets, we can't help but wonder if those political contributions will prove a poor investment.
This week's widespread internet outage reveals how vulnerable our national system remains to those who would do us harm. The outage began with hacks against a domain name service. Engadget posted the following map, which shows where the attacks were concentrated.
The attack began with those home devices being integrated into the "Internet of Things." Specifically those often having the weakest security protocols. The resultant "distributed denial of service attack" took down a list of major sites, including Twitter, Spotify, Reddit, The New York Times, Pinterest and PayPal. Analysts have speculated that the attack looked like an initial probe. Perhaps portending other malicious activities to come.
Finally, after a 14 year struggle, Congress has cleared the way for the families of 9/11 victims to sue Saudi Arabia, overriding a veto by President Obama. The families hope to pin the responsibility for the attacks on agents within the Saudi government. Even if any legal victories remain largely symbolic.
Stay tuned...
Weekly Results
Major indexes finished higher last week. The DJIA gained 0.04%. The S&P 500 rose 0.38%. The Nasdaq climbed 0.83%. While small cap stocks gained 0.47%. 10-year Treasury bond yield climbed 6 basis points to 1.74%. Gold closed down $14.85 per ounce, or 1.19%.
