The Gilmo Report

April 7, 2013

April 7, 2013

Friday’s jobs number gave the market a nice alibi to gap down and sell off, but the numbers, if anything, just go to show how contrived the government’s data really is. Despite the fact that analysts were expecting the U3 unemployment rate to remain at 7.7% on a 200,000 increase in non-farm payrolls, the two-sided surprise came in with a drop in the unemployment rate to 7.6% on a far-less-than-expected increase of 88,000 jobs. Only through the magic of the usual statistical massaging and fudging techniques employed by government number-crunchers can you achieve a bi-directional report as we saw on Friday given that the drop in the unemployment rate was due to around 500,000 workers leaving the labor force. Yet the government officials and pundits would have us believe that the economy is “on the mend.” I suppose after the economic train wreck that came down in 2008, a patient in traction with every limb in a cast is “on the mend” on a relative basis, and this is good enough for the government! Whether it is good enough for the market, however, remains to be seen. After the divergence I discussed in this past Wednesday’s report and the continued pummeling endured by a broad swath of leading stocks, including such key, formerly leading groups as financials and housing-related names, the market, internally-speaking, had already been selling off for most of the week prior to Friday’s action, which saw the NASDAQ Composite Index, shown below, gapping below its 50-day moving average. But this market is all about economic reality duking it out with QEternity, and by the close the index had regained the 50-day line.




Meanwhile the NYSE-based indexes continued to hold up much better, as the daily chart of the S&P 500 shows, below. The S&P 500 basically found support at the lows of its prior range after gapping down at Friday’s open as well. But again, the key aspect of this week’s action, in my view, was the fact that the broader leadership had already started to break down earlier in the week and most stocks were in a position on their chart patterns where they were already within prior downside moves of several days’ duration. Thus, when viewed within this “internal context” the market’s action on Friday came off as something of a short-term exhaustion low.




The daily charts of former leaders (CRM), D.R. Horton (DHI), and Commvault Systems (CVLT), all shown below in a “chart triptych,” illustrate this as these stocks had already been in sharp sell-offs prior to Friday. Thus by that time they were somewhat “exhausted” to the downside, at least in the short-term. Other than that, there was virtually no action in individual stocks on Friday that I would consider buyable in terms of valid and constructive buy points. Notice also how CRM and CVLT undercut prior lows in their patterns which provided very logical areas from which the stocks could stage reaction rallies following several prior days of sharp downside action, and by Friday this was the case for most of the weakened leadership.








In my view, QE has created this market where a great deal of uneven action is seen among leading stocks that look brilliant one week only to falter and break the next. Meanwhile, the indexes have crept higher, but the bottom line is that on an individual stock basis one has had to be a very active trader to stay ahead of the game. Sustainable trends in stocks have very much been a hit-or-miss affair. If you don’t think QE is a factor, or that it can’t produce market rallies out of thin air, remember that central banks around the world are printing money like it is going out of style. In the process they engage in round-robin money printing that simply creates a global cycle of currency devaluation as each country tries to stay ahead of the others lest the value of its currency become too dear and harm their exports. While in the long run this has to be harmful, in the short run it can have some pretty wild consequences for the markets. Take the Japanese stock market over the past few days, for example. It’s proxy, the iShares Msci Japan (EWJ) ETF, shown below on a daily chart, provides testament to what happens when central banks go massively “all in,” as the Japanese government and the Bank of Japan decided to after announcing that they were going to double the country’s money supply in an attempt to “revitalize” the Japanese economy, which has remained in a multi-decade state of stagnation. It’s not hard to figure out what is driving the Japanese market’s “gap-down, gap-up” nuttiness – it’s a Japanese version of QEternity, and in many ways I think the action in the U.S. markets has experienced a similar, yet less delirious effect from the Fed’s own current program of QEternity. All in all, it makes this market a tough game to play for those using our particular growth methodology




The sell-off in stocks Friday seemed to have a teeter-totter effect on both gold and silver. This likely due to the fact that the poor jobs number re-instilled investors’ faith in the persistence of QEternity which had been talked down somewhat over the past week by various “Fed heads.” The SPDR Gold Shares (GLD), shown below on a daily chart, bounced 1.67% on Friday, while the iShares Silver Trust (SLV), not shown, bounced 1.54%. Both the GLD and the SLV are bouncing along the lows of long-term consolidations/bases, and the GLD has still held above its 21-month consolidation/base low of 148.27 despite getting close on Thursday. Many find the sustained downtrend in gold and silver over the past six months to be somewhat perplexing, but in my view we have to remember that the vast amount of precious metals trading occurs in paper vehicles. Currently we are witnessing “backwardation” where the spot prices of gold and silver are higher than the futures prices, but this normally occurs in an up market, not a down market. This is likely due to the fact that physical supplies are scarce – nobody wants to unload their physical holdings because they don’t know if they’ll be able to get them back. While silver futures, for example, are at $27.18/oz., try buying a silver coin for less than $30/oz. that won’t also come with a delay in delivery due to lack of supply. Meanwhile, a 1 oz. gold American Eagle will cost you $1,648, even as the futures price of gold is at $1,581/oz. Theoretically, one could unload their physical gold and silver at higher spot prices and buy them back at a 10% discount plus based on the much lower futures prices, but that isn’t happening. This is likely due to the fact that precious metals owners don’t trust delivery on paper metal contracts. Frankly, I wouldn’t either, as some recent developments in the gold market attest to.




Two weeks ago the Dutch bank, ABN-Amro, announced that they would no longer deliver gold to customers who had placed their bullion for safe-keeping at the bank, and would instead give them cash at the current bid price. Well “Dank je wel!” In January Germany demanded the return of all 374 tons of gold held by the Bank of France, and 300 tons of the 1500 tons of its gold held by the New York Federal Reserve. Unfortunately for Germany, it will take the Fed seven years to return 300 tons of their gold, despite the fact that the Fed claims to own 6,720 tons of gold. Why is this? Some claim that this is due to the fact that the Fed has lent all its gold out to large banks, perhaps to facilitate short-selling of the metal in order to suppress its price. Allegedly, 96% of all outstanding short interest in silver, for example, is held by J.P. Morgan (JPM), according to some sources. If that’s true, it is certainly an unusually large short position relative to the broader silver market. While all this might sound like a silver and gold bug’s nut-case conspiracy theory, the fact is that a lot of what is going on in the precious metals markets currently just doesn’t add up, in my view.


Meanwhile, I doubt very much if we are seeing a major top in gold or silver, although it would not surprise me to see the prices continue to languish. The fact remains that the world is awash in fiat currencies, and the supply of said fiat currencies is not decreasing, it is increasing, and in some cases exponentially so. Consider that the Bank of Japan’s move to start injecting $78 billion worth of yen into its financial system on a monthly basis is just shy of the Fed’s own $85 billion per month program on a nominal basis, but in relation to a much smaller Japanese economy this is a massive amount of Japanese QE. Thus it is no wonder to me that their stock market is going ballistic. At some point, I would not be surprised to see our own stock market go ballistic in the same manner, as the answer to the question of how the Dow gets to 36,000 over time can be summed up in one word: hyperinflation. Therefore investors should consider that QE could continue to keep our own markets propped up for a while, even as progress in individual stocks that conform to our methodology remains difficult.


Now back to individual stocks. As advertised, Facebook (FB) came out on Thursday with their unveiling of “Facebook Home,” described as a “software layer” for Android-based phones. Thursday’s media event also clarified that the “Facebook phone” turned out to be an Android-based phone manufactured by someone else but which will have Facebook Home pre-loaded on the device. It isn’t clear to me how this is a ground-breaking development that will drive huge revenues for FB, although I tend to think that while Facebook might be a nice place to visit one might not necessarily want to call it “home.” In any case, some analysts noted that FB’s new “software layer” is essentially back-stabbing Google (GOOG), which has made its Android operating system open source, something that FB has clearly taken advantage of. This however, could end up diverting users away from GOOG ads and towards FB’s ads, and one has to wonder whether GOOG will not eventually take some action to prevent this. As I discussed in my report of this past Wednesday, one had to watch for a rally on this news that could carry as far as the 50-day line, which is exactly what happened as FB pushed right into the 50-day line at 27.79 by hitting an intra-day high of 27.80 before stalling out on above-average volume. I’m still looking at the 50-day line as a short-sale point for the stock, but I want to see buying volume decline further as evidence of a lack of buying demand.




Northstar Mortgage Holdings (NSM) paused after testing the late March low at 31.89 without actually undercutting it, as we see on its daily chart, below. However, the “bounce” over the past two days has come on very weak volume, and so I’m still looking for the stock to move towards its 200-day moving average, currently running through the 30.87 price point. I should point out that some members have requested that I always mention the price where a particular moving average is at whenever I discuss said moving average, but I would point out that moving averages are called “moving” averages because that’s what they do – they move. Thus simply assuming that the 200-day moving average five days from now will be at 30.87 is, by definition, an incorrect way to approach moving averages. You have to check where it is at, price-wise, every day, because they do move, sometimes more, sometimes less, but they rarely stay at one price level for very long. Obviously, the only way to be short NSM at this point is if and only if one has already shorted the stock near the 50-day line per my discussion last weekend. Shorting in this market is still not likely to be a highly fruitful affair just yet, and I still believe one should be patient and pick out the most optimal set-ups as stocks rally into logical areas of resistance.




Among leading stocks perhaps only LinkedIn (LNKD) acted like a leader as it found support at its 10-week line, as we see on its weekly chart, below. While the weekly chart shows the stock closing in the upper half of its weekly trading range, however, the daily chart shows a heavy-volume sell-off on Wednesday (see April 3rd report) with the last two days showing a rally on very light, declining volume. This is constructive action, however, as long as LNKD holds above its 10-week line. The 50-day moving average, however, is a fair bit lower down at 159.57 currently, and for me that would be the ultimate area of support that I would look for in the stock. Earnings are due out in early May, so the stock may simply continue to build a base throughout April.




With the markets coming off this past week and leading stocks showing even more severe breakdowns, I tend to see the market as being in “no-man’s land” here with little that I find actionable on either the long or the short side. As I’ve said many times before, there are times when doing nothing in the market is the right thing to do, and this precise moment strikes me as one of those times. Currently, I remain in cash, but the situation could change quickly as we progress through April and the spring earnings season begins to take hold. The fact that most leading stocks are looking rather weak within their chart patterns tells me that this latest bout of weakness may not turn out to be a massive shakeout in the manner that the late-February breakdown was, but in a market that is driven primarily by QE nothing would surprise me. Stay tuned.


Gil Morales

CEO, Gil Morales & Company, LLC
Managing Director & Principal, MoKa Investors, LLC
Managing Director & Principal, Virtue of Selfish Investing, LLC

At the time of this writing, of the stocks mentioned in this report, Gil Morales, MoKa Investors, LLC, Virtue of Selfish Investing, LLC, and/or Gil Morales & Company, LLC held no positions, though positions are subject to change at any time and without notice.

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