All That Glitters

The action of gold bullion and the relative lack of action by the overall Gold Index (although not all of the gold stocks) on the TSX continues to be a bit of a conundrum. How can the price of bullion be so strong and so high and the key heavyweight stocks in the index perform so indifferently. Out of curiosity, we looked at our stock charts from back in the 1980s and made what we think may well be an interesting (re)discovery. The Gold Index tends to stick around and stick around (and stick around), but when it goes [up] it does so at an extremely rapid rate. Watching this Index is like watching a coiled spring. It looks as if it should be doing something, it isn’t, but if it gets going, it could go with a snap.

In other words, if history has any validity at the present time, if the Gold Index breaks out, it is likely make a large move in less than a month or two at the longest and, indeed, there is an excellent possibility – again based on past actions – that we could see a potential gain of roughly 75%. While I would be very hesitant to forecast that such a move is imminent or even in the cards at any time sooner or later, the mad pressure to own gold stocks should bullion proceed much further could easily drive the stocks up at a very rapid pace. The rapid pace that the intrinsic value for the gold stocks is increasing would add further fuel to the fundamental argument that “you have to own gold stocks” if you want to beat the index (or even do well in the market).

I have consistently recommended that you hold at least 10% of your portfolios in gold shares. Although 2010 has provided decent returns from these stocks, if – and admittedly, it is a big “if” – the index does break out, then the move could still be spectacular.

I do not generally enthuse about such things because I do not want to raise hopes and expectations. Such moves are rare, although I note that when they come, it is “vindication” for those who have suffered through long waiting periods. It also tends to be a truism that when such rapid moves are over, they are over, although periods of high volatility can and do follow such emotional spasms. They do not tend to be a precursor to long periods of bullish gains for bullion and the Gold Index.

Remember what a strong movement in bullion “represents” – clear evidence of the failure of US monetary policy to produce stable currency values for that country, and hence the rest of the globe. TheUS is coming under global condemnation from many central banks for its Quantitative Easing II Programme, and it is taken as “proof that theUS wants to have dollar weakness to aid its failed industrial policy” (to which I would add, if theUS even has an Industrial policy).

Cisco Numbers Disappoint: Stock Craters

It is not my usual mandate to report on individual company results in the Weekly Market Sentiment publication, but the market reaction to the recent results from Cisco are interesting. The company reported that its sales were not going to be as high as the analytical community had been expecting and on Thursday morning the stock plunged close to 17% at the opening bell. Cisco is not the only high tech company to report disappointing results. IBM had previously pointed to a drop in new contracts and we would expect that more are to come because business spending is slow and competition, especially price competition is keen.

This story underlines my central thesis that growth in 2011 is going to be much slower than analyst are expecting. Indeed, if the high techs are lucky, growth will be flat to up-ish a bit but it is not going to be the usual robust pickup following the usual kind of recession that we have seen in the post-war era. That in turn suggests that the high-falutin’ earnings forecasts are also not going to materialize. Since the market is priced assuming that these numbers are going to be the case, then clearly the potential for disappointment all around is very high, adding an element of risk to the market from what had been to date a generally unexpected source, poor overall economic growth.

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About rosshealy

C. Ross Healy, MBA, CFA Chairman, Strategic Analysis Corporation Ross Healy began his investment industry career in 1965 as a securities analyst for Midland Osler Securities. He was a co-founder of Sceptre Investment Council in 1970, a leading Canadian money manager. In 1984, he became Director of Research at Merrill Lynch Canada, and during this time provided support for the late Dr. Verne Atrill, the theorist who decoded the mathematics underlying the Theory of Accounting Dynamics upon which the Strategic Analysis Corporation (SAC) methodology is based. After supporting and collaborating with Dr. Atrill for many years, he joined SAC as Chairman and CEO in 1989 following the death of Dr. Atrill. Ross Healy is a past president of the Toronto CFA Society, and served on the board of the Financial Analysts Federation (now the CFA Institute) as Chairman of the Financial Analysts Journal committee, the academic arm of the CFA Society. He has served on the Financial Disclosure Advisory Board of the Ontario Securities Commission, and was a member of the Executive Committee of Trinity College, University of Toronto, chairing the Investment Committee. He currently serves as the Chairman of the Board of Trustees of Eglinton St. George’s United Church of Toronto. He contributes investment analysis to print, radio, and television media, and has been appearing regularly on Business News Network (BNN) for the past 15 years, and the Canadian Broadcasting Corporation (CBC). There is an award-winning book written about his analysis leading up to the collapse of Nortel Networks (The Bubble and The Bear, How Nortel Burst the Canadian Dream, by Douglas Hunter, Doubleday Canada, 2002. He was the “Bear” in the book.). Email Address: rhealy@strategicanalysis.ca Company Website: www.strategicanalysis.ca Telephone (work): 416-498-3604 x 133 Cell: 416-258-8342
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