The Dow 11,000 and Gold $1,600/oz levels have been the latest psychological battlegrounds for investors. The Dow was not able to hold the 11K level, but Gold prices have managed to win the battle at $1600 an ounce for at least another day. What makes these levels so important? It’s difficult to say, but I’ve learned through my past experiences to be very skeptical about the business media’s explanations about market fluctuations.
Yesterday’s late-day rally had some commentators pointing to NJ Governor Chris Christie potentially joining the presidential race as the catalyst. In reality, that exact rumor has been around for months, and was actually more prominent the day before yesterday — when the markets closed near their lows.
Wall Street commentators are always looking to attribute a rally or sell-off to one specific event. Why? Because it’s the easy way out. Instead of having to do real research, they just pick out a current event and slap the catalyst label on it. This strategy is also easier for the general public to digest. But in actuality, numerous forces are at play in determining short-term market gyrations (and many of these factors have nothing to do with current events at all). Buying into these over-simplified media explanations can be very dangerous for investors. One simple notion does not a trend make. And when you have a market with no short-term memory (as we have today), investors can often fall victim to volatile market swings.
Looking closer at today’s action, the markets quickly began resuming yesterday’s down move. Cyclical industrial play Ingersoll-Rand’s (IR) earnings warning certainly didn’t help matters any. The stock was down 12% today, even after all the weakness IR shares have seen (along with the other cyclical names). Evidently, the downside has not been fully priced in.
We have been warning readers for the last couple of months about the breakdowns occurring in the cyclical and commodity spaces. There is little in the way of a cushion when the dividend payouts for many of the companies are minimal. Thus, other cyclical plays like Deere (DE), Joy Global (JOYG), and Cummins Inc. (CMI) also paced the losses today, despite being the recipients of positive Wall Street commentary earlier in the week.
Bucking the downtrend were gold-mining shares like Newmont Mining (NEM), Goldcorp (GG), and Barrick Gold (ABX). Some fund managers were probably trying to make some quarter-end additions to spruce up what was unquestionable a tough quarter for many. Lastly, there was a ton of chatter regarding shares of Eastman Kodak (EK) breaking below $1 per share on extremely heavy volume. Many a “value” manager have been burned buying this well-known brand all the way down. For more on my thoughts regarding value stocks and value investing, be sure to read the next sectionHedging and Value Investing: Two Common Misconceptions
Back in the the days when gold prices would almost always rise when stock prices fell, my message was that this trend would not last. Fast forward to the last few weeks and we have seen the effects of what can happen once the gold hedge fails to deliver its expected results.
Up until recently there had been a calm about the market pullback, as a good number of individuals were hedging the drops by buying the Gold ETF (GLD). Most every pundit on business television would play up the fact that investors needed to make gold a growing allocation in their portfolios (as much as 10-20% for some of the recent commentary I saw). Again, the idea was that gold would protect against whatever pullback we would get in stocks. Now we are in the midst of gold teetering on a technical breakdown and numerous investors have been buying the yellow metal at much higher prices. The term “hedging” gives the illusion that an investor has bought themselves an insurance policy, but in reality, it is merely another trade that “works until it doesn’t.”
Now let’s think about another overused and often misconstrued failsafe mechanism. Stock experts love to appear in the media and use the “value” label to defend an underperforming stock (hence the term “value investing”). I can’t tell you how many times I’ve seen the “value” term used during my investing lifetime, whether it was for the real estate a company owned (hidden asset), or the thought that its competitors were going away leaving it the “last man standing.” These articles tend to ignore the fact that a company’s competitive advantage has all but completely eroded. Many, many companies still trading today will show a steady share price deterioration if you pull up a 5- or 10-year chart. It’s very difficult to pull out of a spiral like that, but all too many investors will try and catch the many bounces along the downtrend, erroneously believing there is still much “value” remaining.
Look at the success of John Paulson, who bet big against real estate at the top of the bubble, but is now seeing poor results from ill-timed “value” bets on the likes of Hewlett-Packard (HPQ), Bank of America (BAC), and Citigroup (C). The worst thing an investor can do is pour money into stocks whose brands could be the next batch of “has-beens.” We have certainly made it our business to help investors avoid those value traps.
Turning back to gold, I don’t expect a straight-down move from current levels, but the further the price of gold drops, the harder it will be for prices to get back to recent highs (You can say that about any investment asset, but I am always worried more about any asset that becomes over-loved as gold has been from a retail investor’s point of view). I advise all investors out there to use extreme caution when it comes to gold these days.Just the Mention of Accounting Irregularities Almost Always Means Sell
China’s stock market had been the place to be for many overseas investors up until the last couple of years. The indices have been cut more than in half, and yet until just recently, it was nearly impossible to find much negative commentary about the country’s economic prospects. Wall Street certainly dropped the ball in explaining the asset bubbles that have finally made headlines (real estate bubble talk was the first sign of trouble). The dearth of China-based IPO’s (along with all those investment banking fees for Wall Street firms) could have played a role in the lack of coverage on the inherent risks in Chinese investments. Now, over the last few days, there have been rumors about the Department of Justice wanting to investigate accounting irregularities at Chinese companies listed here on U.S. Exchanges (yes, some of those very same IPO’s that Wall Street investment bankers generated healthy fees on).
Our job at Dividend.com is to help investors build wealth. One of the key factors in doing so is avoiding portfolio disasters that runaway trends like gold and Chinese investing can create. We remain steadfast when it comes to bringing these types of subjects to light, cutting through all the business media B.S., and furthering our own brand of unbiased analysis.A Look to Next Week and a Weekend Preview
Looking ahead to next week, quarterly earnings will be fairly light. We will, however, see results from the likes of Yum! Brands (YUM), Costco (COST), Monsanto (MON), and a few others of note.
Be sure to catch up with our latest watchlist updates this weekend on Dividend.com Premium, including reports on earnings/story stocks, analyst upgrades/downgrades, dividend ETFs, and much more. And as always, you can view our current recommendations on our industry-leading Best Dividend Stocks List.
Thanks for reading, and I’ll see this weekend! P.S. Please pass this e-mail on to someone you think can use some financial motivation as well as being kept in the financial news loop that could affect them.