The Gold Stocks Bull Market In Uncertainty
Commodities / Gold & Silver Stocks Jun 09, 2010 - 04:23 AM GMTBy: Q1_Publishing
The herd is running for the exits. Mutual fund investors are selling out at a faster and faster pace each week.
The Investment Company Institute, which tracks mutual fund inflow and outflows, reports redemptions have been surging in equity mutual funds. The last week of April, investors put in a net $1.85 billion into stock mutual funds. Since then though, it has been all downhill.
Investors pulled out a net $1.44 billion in the first week of May, $10 billion the next week, $1.1 billion the week after that, and $17.4 billion in the last week of May.
It’s happening all over. Canadian investors pulled out between $1 billion and $1.5 billion from mutual funds in May.
The size and consistency of the redemptions has had a noticeable impact on the markets. Aside from the general decline, there real impact can be seen in the last thirty minutes of each trading day.
The last half hour of trading is usually dominated by mutual funds. This relatively brief period is when mutual funds, if they have to meet significant redemptions that day, are forced to sell stocks and raise cash.
The industry which has had as much as $11 trillion of other people’s money to throw around in the U.S. plays a very big role in the markets. That’s why over the last few weeks there have been sizeable sell-offs at the end of a lot of the days (today’s late-afternoon uptick was a rare rebound).
Worried about this startling new trend in mutual fund investors running for the exits?
You shouldn’t be. As history has proven time and time again, mutual fund investors buy and sell at the worst possible times.
So with the mutual fund investors pulling out of stocks, it’s time to take a step back, look at what’s really going on, and get prepared to seize opportunities when they present themselves.
The Bull Market in Uncertainty Continues
Right now there’s not much to be excited about.
No one knows what European country will be next to need a bailout. We’re counting down days until the return of the drachma (the former Greek currency). Then Spain, Italy, etc.
Last week’s admission from Hungary’s incoming government mention of default have brought eyes back to how big the boom-and-bust is in Eastern Europe and how the East is probably in worse shape than the West.
Then here in the United States, we were handed a stark reminder the jobs situation isn’t about to get any better anytime soon. When the Department of Labor reported 431,000 jobs were created last month, no one was buying. More than 95% of the jobs were temporary census workers.
But all these are just symptoms of the much bigger hurdle – uncertainty.
No one knows what’s going to be happening in the next few months or years.
When it comes to sovereign debts, will there be more bailouts or will inevitable defaults become the new standard?
When it comes to operating a business, most managers are just holding steady. There’s too much uncertainty. Taxes, regulation, mandatory healthcare expenses, or customer demand…there are a lot of variables.
And they’re not making any big commitments either. For example, the one bright spot of the jobs report revealed how careful businesses have become. Last month 31,000 temporary jobs were added. The total temp jobs created since the height of the credit crunch in September 2009 is 362,000 and growing.
Then to top it all off, what will be the long-term impact of the BP oil spill? What will halting offshore oil production mean for gasoline prices next summer? Are we looking at $3, $4, or more per gallon?
Also, this week the 2010 World Cup kicks off in South Africa. And if reported threats and indications from security leaders are indication, the event could really be viewed as a very soft target.
The Herd Hates Uncertainty
Cleary, there’s a lot of uncertainty out there. And with the lessons of 2008 still relatively fresh in their minds, most investors are voting with their feet and leaving stocks aggressively.
But all is not lost. There are a couple of places to look for opportunities when the time is right (more on timing below).
For instance, when it comes to the Hungary situation, who says a default a really be all that bad?
Sure, there will be short-term pain. But if history is any example, there will be a lot of long-term gain.
In time, the markets always reward the countries who rip the band-aid off quickly. Recent defaults of Russia, Mexico, and Argentina, have all turned out to be excellent buying opportunities for investors who wait for “maximum pessimism” which normally coincides with a default.
Then there’s financial industry reform legislation pending in the U.S. Congress. Although no one is sure what it’s going to look like, how the big banks will benefit and/or be hampered by the legislation, or what it means for smaller regional and community banks, one thing is for sure – payday lenders will lose.
The populists can’t help but hit “predatory” lenders hard. And given the recent run-ups many of shares of the industry’s leaders have had, they’re great “short-and-hold” candidates.
Also, the recent news out of China must get investors excited. Foxconn, a maker of iPhones and other electronics in China and Taiwan, recently announced a 70% pay hike for workers.
If the trend continues, we’ll see wage hikes across China’s manufacturing sector. And more consumers with more disposable income will, over the long run, be a very good thing.
Finally, all of this uncertainty has pushed gold bull market to extraordinary levels. The combination of general uncertainty, massive government deficits, and negative real interest rates has propelled gold back to its all time highs.
The thing is though, gold stocks haven’t gone along for the ride. During gold’s current record-setting march, the Market Vectors Gold Miners ETF (NYSE:GDX) has fallen almost 10% and Market Vectors Junior Gold Miners ETF (NASDAQ:GDXJ) has fallen almost 15%.
What to Do Now
So that’s where we’re at right now. There’s no end in sight for the current sell-off. Sure, there will be occasional bounces, but the trend is down. And with the mutual fund investors continuing to unload stocks, the trend is likely to stay that way.
The news isn’t all bad though. The only positive catalyst for a rebound on the horizon is earnings season. But that’s another month away.
Although we hesitate to predict short-term market movements, we know the best strategy is normally just to wait out the sellers, build up cash, and get emotionally prepared for buying truly out of favor stocks and assets.
It’s times like these that we try to ensure we’re keenly aware of being overly positive, we know opportunities have come along and will come along again.
We live by the mantra “take what the market gives you” here.
Right now it looks like the market wants to give us a lot. But it will want to gives us more in a few weeks.
In the next Prosperity Dispatch, we’ll look at some sectors of the U.S. economy that are actually growing. And why this correction is another opportunity to get on board.
Good investing,
Andrew Mickey
Chief Investment Strategist, Q1 Publishing
Disclosure: Author currently holds a long position in Silvercorp Metals (SVM), physical silver, and no position in any of the other companies mentioned.
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