Doug Kass on why today’s stock market drop is just the beginning. For example:
…today’s median P/E of 20.5 times trailing earnings of the Value Line composite of 3,000 leading companies compares to 14.5 times at the market’s top in the fall of 2000; meanwhile, credit spreads and volatility –expressions of copious complacency — remain at record low levels.
Read the whole thing.
Pan American Silver’s (PAAS) conference call indicated a well managed company in a bullish industry. Here’s a key quote from chairman Ross Beaty:
Our share price is just off an all-time high and yet we are cheaper today than we have ever been, when our share price is compared to our net asset value by current metal prices.
Here’s another one from CEO Geoff Burns:
Here is how I see our production unfolding in 2007. We plan to produce 17.6 million ounces of silver, up 35% from 2006. Estimated cash costs are just over $3 per ounce, using some pretty conservative base metal byproduct credit prices.
From John Hussman:
As I inquired in a recent weekly comment, if the parents or the children of Wall Street analysts were to ask for wise investment advice, would the first thought of these analysts really be to encourage stock purchases at a multi-year market high, in a long-uncorrected and strenuously overbought advance, at a multiple of over 18 times record earnings on unusually wide profit margins, with wages and unit labor costs rising faster than inflation, while interest rates are rising, bullish sentiment is unusually high, and corporate insiders are selling heavily? Would the potential for further gains in that environment exceed the next inevitable correction by an amount that would make the net gains worth the risk?
My advice would be to patiently defend capital until conditions emerge that have historically produced acceptable returns, on average, given the risks involved. Those conditions will inevitably arrive, but they are currently not present.
Chris Mayer reminds us of the 800 pound guerrilla in the room. Or to put it another way, if China is going to need it — buy it. Also, remember that during the last great bull market in commodities China wasn’t even a factor.
Mark Hulbert takes a look at what’s keeping gold from going higher. Bottom line: all the known bullish news has already been discounted, so it will take a sell off or a period of stagnation to get it going again.
Personally, I don’t think gold has been held back at all. It looks like a typical primary bull market to me. Gold doesn’t have to sky rocket this year or next. This is a bull market that’s likely to last for years. My question is not, what’s holding gold back? My question is what’s the hurry?
Doug Kass on the growing problem with subprime loans:
We entered 2006 with most investors holding the highest degree of confidence in rising prices for their homes. As it turns out, homeowners were materially disappointed last year.
We enter 2007 with investors having the highest degree of confidence in rising prices for their stock holdings. They too might be disappointed as the year progresses when the hidden fragility of an overpriced, overleveraged world will soon be revealed.
I have written that “in time we will undoubtedly see a mean reversion in home prices, interest rates, credit spreads (and losses), corporate profit margins … and in the world’s equity prices.”
Last night’s subprime mortgage news that credit losses are skyrocketing is the first shot across the bow of the boat called market optimism.
From The Financial Times:
Red Kite Management, a $1bn metals-trading hedge fund, has suffered losses of up to 15 per cent so far this year – and is now trying to stall investors who might want their cash back, MarketWatch reports, citing documents it has obtained, as well as people familiar with the firm’s performance.
The news sparked heavy falls on the metals markets, with one stressed trader declaring to Reuters: “The market is collapsing.”
Red Kite, run by Michael Farmer, Oskar Lewnowski and David Lilley, has reportedly asked investors in its metals fund to approve an amendment that would require 45 days notice before money can be withdrawn – up from 15 days. The change will mean that investors have to send redemption notices to Red Kite by Feb. 15 to get their money back at the end of the first quarter.
Red Kite’s problems reflect the volatility inherent to commodity markets. Last year, returns generated by the firm’s Compass fund – which bets on metal prices – topped 90 per cent, MarketWatch said. But copper prices have slumped more than 20 per cent since December, with March futures trading at around $2.53 a pound – down from December’s highs of $3.29.The report had a marked impact in the metals markets on Friday afternoon. In trading on the London Metal Exchange the price of copper fell 6 per cent, while aluminium was down 3 per cent and zinc slumped more than 8 per cent. “Fund liquidation…a lot of stops triggered…a lot of the stuff on the back of the Red Kite news,” another trader told Reuters.
Sheesh… these people are supposed to know what they’re doing?
I always like to check in with Bill Fleckenstein from time to time:
I have no idea what drives the “thought” process on the part of those folks who buy tech stocks these days. Perhaps they have a romantic notion about how wonderful these names are to own. So they buy them, and therefore the stocks act “OK” — even though companies report disappointing news. In turn, that stock buying just begets more buying.
And what’s going to end this insanity?
To undermine that illusion of invincibility, it’s going to take lower stock prices. And what will cause lower stock prices, you might ask? Exhaustion. Exhaustion causes lower prices, regardless of what the bullish crowd wants. And, while occurring in fits and starts, I think that process might be under way.
