By Michael Lombardi, MBA for Profit Confidential
This is a story of how the big banks pulled gold prices from under our feet, but why their plan for the stock market won’t pan out…
When gold bullion prices went into semi-crash mode in late spring of this year, some stories written by financial analysts suggest big banks colluding together to bring gold bullion prices crashing down. If you remember, The Goldman Sachs Group, Inc. (NYSE/GS) came out with a report saying gold bullion prices would go down…and magically, they did!
At about the same time Goldman Sachs gave a “sell” recommendation on gold bullion, JPMorgan Chase & Co. (NYSE/JPM) was selling gold bullion on the paper market. The plunge in gold bullion prices started in April—but JPMorgan was selling gold since the beginning of the year. From January to April, the big bank’s house account had a net short position of 14,749 100-ounce COMEX gold contracts—or about 1.47 million ounces of gold bullion. (Source: “Year to Date Delivery Notices,” CME Clearing, August 19, 2013.)
I’ll be the first to admit it: the gold bullion price takedown that started in April sure looks and smells fishy.
Once the sell-off in gold bullion began, no one cared about demand or supply (the reason why gold bullion prices increase or decline). The fundamentals were thrown out the window. Irrationality and emotions took over, and investors ran for the exit.
Gold bullion prices have started to climb back up. They are above $1,300 an ounce and marching towards the next big level at $1,400.
The gold “play” is over for the big banks; they’re onto something else—the stock market.
The wave of optimism towards the stock market continues to gain momentum. Big banks are telling us the stock market is going to go higher.
Some calling for higher stock prices say earnings are good, some say valuations are good, some say the economy is improving, and others say investors will move out of the bond market and into the stock market.
Goldman Sachs says the S&P 500 will increase eight percent in the next 12 months. Its target for the S&P 500 is 1,825. Its reason: economic growth will pick up its pace. (Source: Bloomberg, August 13, 2013.)
When I look at Goldman Sachs’ latest prediction, I have two questions: Will it and other big banks be right on the stock market like they were on gold? And will the key stock indices continue to increase in their desired direction?
This time, dear reader, big banks won’t be right. They could be longing stocks and they could be saying stock prices will rise so their bets on the market get even more profitable; but this time around, they’re simply too optimistic.
If the theorists are right and big banks did drive gold bullion prices lower, we must remember that big banks were only able to drive the gold bullion market lower for a very short period of time, as the metal’s price is now bouncing back.
The stock market will also snap back to reality, as optimism faces the facts.
What am I talking about? Take a look at the chart below of margin debt (the amount of money people borrow to buy stocks).
The margin debt on the New York Stock Exchange (NYSE) is at a record high—it stood at $376.6 billion in June, higher than what it was before the “Tech Boom” bust in 2000, and just about the same level it was at in 2007, just before stock prices started to come down. (Source: New York Stock Exchange web site, last accessed August 20, 2013.)
The higher the margin debt goes, the bigger the sell-off in stocks will be, because with so much leverage, one negative move in the stock market will result in a domino effect, as investors make good on their margin calls.
Earnings for public companies are dismal. So far, 72% of the companies on the S&P 500 were able to beat their already lowered earnings expectations for the second quarter. Great? Don’t be so quick to judge. Only little more than half of them—53%—were able to beat revenue estimates (source: FactSet, August 16, 2013), and companies have been engineering earnings growth through a record amount of stock buyback programs. But earnings at the big banks—they were stronger than ever!
Of the S&P 500 companies that have already provided guidance for their third-quarter corporate earnings, 75 offered a negative outlook, while only 17 have given a positive outlook. (Source: Ibid.)
As for the economy, I don’t think I have to go into detail here again. My family of Profit Confidentialreaders knows the real scoop on the economy: it’s anemic at best.
While the majority of jobs created in the U.S. since the credit crisis have been in the low-paying retail and service sectors, millions of Americans still live in homes with negative equity. And with mortgage rates rising, the housing market is in trouble again. Look at Wells Fargo & Company (NYSE/WFC), one of the big banks. It announced yesterday it was laying off 2,000 people from its mortgage unit because higher interest rates are cutting demand! (Source: Bloomberg, August 21, 2013.)
If I have to bet, I would go against Goldman Sacks in its call that the stock market will be eight percent higher in the next 12 months. I’d take the opposite position. I like ProShares Short S&P500 (NYSEArca/SH), an exchange-traded fund that shorts the S&P 500; I also like SPDR Gold Shares (NYSEArca/GLD), a play on rising gold bullion prices ahead. I, for one, am betting against the big banks—all “shows” can only go on for so long.
(Michael says there are a total of six reasons why the stock market is coming down. In case you haven’t seen his Dire Warning for Stock Market Investors video yet, you can see it here now.)
What He Said:
“In 2008, I believe investors will fare better invested in T-Bills as opposed to the stock market. I’m bearish on the general stock market for three main reasons: Borrowing money in 2008 will be more difficult for consumers. Consumer spending in the U.S. is drying up, which will push down corporate profits.” Michael Lombardi in Profit Confidential, January 10, 2008. The year 2008 ended up being one of the worst years for the stock market since the 1930s.
By Michael Lombardi, MBA for Profit Confidential