Monday, May 13, 2013

Aftershock Monthly Investment Outlook - April 2013

Monthly Investment Outlook
Obviously the biggest issue this month is gold. Gold has taken a big hit recently. But while the mainstream media was ridiculing gold owners after its sharp decline, the media has been pretty silent now that it has regained a significant portion of the value it had lost.
The point is that Wall Street generally hates gold. It’s bad for the stock and bond business. Just as it’s easy for the cheerleaders to hail every climb in the markets, ignoring the context and the underlying fundamentals, it’s easy to cast aspersions on gold and those who own it based on its recent downturn. In some cases the tone has been downright nasty, which goes to show you just how hostile some in the mainstream are to anything that threatens their preconceived ideas about the stock market, and how fragile those opinions must be.
That negativity toward gold and support of the stock market is to be expected, but it doesn’t mean the fundamentals for stocks and gold have changed. The short term fundamentals for stocks are that earnings growth is heading down for the S&P 500 and revenue growth has gone negative. Short term for gold, Japan has started printing almost as much money as the US. Long term, gold is up almost 400% since 2000 and the S&P 500 is only up 2%. No wonder the stock cheerleaders are jumping all over gold when it’s down! More on both gold and stocks below:
While the stock market remains high, recently we’ve seen disappointing earnings from a number of big companies that led to disproportionately large drops in their share prices. Take Amazon, for example, which dropped 6 percent after its earnings announcement (and it is flat for the year). IBM was down 10 percent (and flat for the year) after its earnings announcement and Procter & Gamble dropped 5 percent.
Why the big drops for such well-established companies? It could be a sign that the stocks were priced beyond their respective companies’ actual earnings potential, and bringing investors face-to-face with the hard facts sent prices plummeting. And frankly, maybe some investors are finally asking the question: How can stock prices keep going up when the economy continues to struggle?
We’ve already said that the upside to the stock market at these levels is limited, and that is even more apparent now. With reality becoming increasingly difficult to ignore, and some of the big boys already beginning to suffer for it, we are very concerned about the stock market’s stability in the immediate future. We can’t rule out a modest increase, including a run for 15,000 in the next month. But then we can’t rule out a correction beginning to set in either. It’s not an easy gamble to justify.
The bond market hasn’t been terribly exciting in April. But the gradual move to safety—and thus toward higher bond prices and lower yields—has continued. We don’t expect much change in this trend going forward, though it will be more pronounced if we do see any correction in the stock market.
It’s very telling, we think, that even with the stock market doing as well as it is, and even with a lack of any confidence-shaking news over the last few weeks, so many investors prefer the security of fixed-rate securities. This shows that there is a real hunger for bonds right now, and that will only increase should any new development in the coming weeks threaten investor confidence.
With the Chinese economy growing at a slower pace, likely even slower than reported, commodities in general have fared poorly. Some people are even calling this the end of what has been a long term commodities boom. Copper is often seen as a benchmark for commodities and has fallen more than 20 percent since February. With much of the world in or near recession, we expect the pressure on all commodities to continue.
Natural gas, as we mentioned last month, continues to be an exception. Natural gas rose steadily in April and we expect this trend to continue in the coming months.
Gold recently took a 15 percent loss in just two days. It has since bounced back regaining some ground, but remains down from its recent highs. In the short term, gold will remain unstable and subject to extreme volatility (both downward and upward). We expect this volatility to continue through May. Our long-term position on gold has still not changed. As always, one’s allocation to gold has to be weighed against one’s tolerance for that short-term volatility.
The major currencies are seeing much less change in April, with the Cyprus crisis and Japan’s announcement of massive money printing both fading in many people’s minds. There are still unanswered questions surrounding various countries and how they will conduct their monetary policy. As a result, it’s difficult to predict trends in the coming weeks and month. We’re seeing some stability around the world now, but there’s no reason that can’t change next week or the week after that.
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