The New Gold Bull Market Has Begun

This morning, the Fed stated that it was keeping interest rates the same, but was open to cutting rates in the near future “should it be needed” to aid the slightly wounded economy*. We’re not going to go into more detail on what they said exactly because, frankly, it bores the ever-living sh*t out of us. But you can read that stuff if you’re on the toilet here…

Fed Holds Rates Steady, Hints at Future Cuts if Outlook Doesn’t Improve

Here’s what the stock market liked from the Fed

The Fed just defied Trump’s wishes for a rate cut but signaled that one could come soon

What you do need to know, is that interest rate cuts means gold goes up. Why? Well, in a nutshell, for interest rates to go down the Federal Reserve has to “print money” to buy up treasuries and cause the yield to go down. Prices of bonds/treasuries work in a seesaw motion against the yields they have. (Lesson for another time) Printing money means more money in circulation, which means “theoretically” more inflation, and gold is supposed to be an inflation hedge.  It’s all very boring. Gold went up nearly 3% on the Fed news, but here’s what’s important about gold’s recent price action. Gold spiked up in MULTIPLE currencies, not just the US dollar and has been on a steady move up in all of the big 5 currencies for the last month. The big 5 currencies are the US Dollar, Great Britain Pound, Swiss Franc, Canadian Dollar, and the Japanese Yen. Gold is officially having a bull moment when it moves up in ALL 5 currencies. This metric is used so that it can be established that gold is not just being used as a hedge for one currency while not affecting anybody else in the globe.

Gold prices6.19.19

 

Notice how the Japanese Yen price of gold has gone up the least amount in the last month and it’s still up over 2.5%. When we add up the last month’s price action, 1, along with the 3% spike today in all currencies, 2, then note that the high of today for spot gold in the US dollar is $1,394 and that is the highest level gold has reached in over 5 years (in the US of course) …we’ve got a pretty damn good case that the bull market in gold we’ve been waiting for is here.

There IS a major caveat to this article. We may be a bit premature. We need to see gold break the $1,400 level and stay there to really know that the new bull is here, but our money is on exactly that happening in the next week or 2. Our preferred place to look at the spot price of gold is Kitco.

 

 

 

 

*The main thing hurting the economy at the moment is the trade war. Trump wants the rates cut to theoretically unf*ck problems he caused in the first place.

Using Metal Prices To Predict Interest Rates (Master-Level Nerdy Sh*t)

This article is going to fall under the “a quick take our word for it and go do your own research” category. Not just our word, Jeff Gundlach (one of our favorite market geniuses) is a big proponent of this indicator.

How many of you have heard the phrase “the Fed is lowering rates”. Well, in a nutshell it means the government is stepping in to control the interest rate that works as the baseline for the economy. Around this baseline, real estate mortgage loans, bank loans, car loans, etc are going to be be tacked on based on a certain percent spread. It’s all very nerdy and boring. For those of you who already DO understand this concept, a rather esoteric trick to predict where interest rates are going (as controlled by the Fed) is to compare the ratio of copper prices to gold prices.

Copper is often called “Dr. Copper”. Because it’s such a staple in construction, the prices going up typically indicate that the economy is humming along. Buildings are being built, cars are being manufactured, you know the drill.  Gold on the other hand is more of a fear/pessimism metal. It has no way near as much use as a base metal like copper. Gold is usually going to go up when investors are worried the economy is NOT going to do all that well. It’s a safe haven metal that people hold on to in case of emergencies.

So long story short: the price of copper going up typically = economic optimism, gold going up = economic pessimism. When you divide gold price by copper price and the ratio is high you can assume an optimistic outlook on the economy as determined by the pricing. Vice versa, a low ratio means pessimism. How does the Fed react to pessimism? It lowers rates, making it easier for the man on the street to borrow money to use for things that will get the economy back in shape (buying bullsh*t, taking out loans on homes, creating jobs, etc)

This may be a bit more succinct explanation from longtermtrends.net :
Gold is the most widely recognized safe-haven asset among investors. Therefore, during times of economic and geopolitical distress it generally tends to perform well, making it a leading indicator of fear.
Copper is the exact opposite. Because it is a key industrial metal that is used globally in a wide range of industrial applications it performs strongly when the global economy is firing on all cylinders. This makes it a leading indicator of global economic health and has led to it being commonly called Dr Copper.
The ratio prices copper in gold and it represents the number of ounces of gold it takes to buy an ounce of copper.

 

This is where it gets pretty cool to look at… If you overlay the copper to gold ratio with the Fed controlled interest rate IT’S A PRETTY F*CKING CLOSE CORRELATION. Not exact, but pretty damn close. See below for somebody else’s fancy example of the correlation in action…

copper to gold ratio april 2015 to june 2017

See what we mean? Pretty damn close. Granted that’s an older time line and we’re too lazy to make our own graphic at the moment. But you can use the following two links to find updated graphs.

StockCharts Copper-to-Gold Ratio

Longtermtrends Copper-to-Gold Ratio

 

The current graphs indicate rates going down a bit.coppergold2

Low and behold, the jobs report that came out this morning led to the Fed saying that they may be cutting rates back down.

 

It’s no longer a question of if the Fed will cut interest rates, but when

Fed Begins Debate on Whether to Cut Rate as Soon as June

So that is where we leave you today. Go out and do your own research and know that now you can make an educated guess about where rates are going when people want to sound smart mentioning the economy at “cocktail parties”. But in all seriousness… who the hell still has cocktail parties.

 

 

 

 

Further Reading and Resources:

The Power of Copper-Gold – Jeff Gundlach’s Double Line Fund Report PDF

Validating Gundlach’s 10-yr Treasury relation to the Copper:Gold Ratio

How the Gold-to-Copper Ratio Can Make You a Smarter Investor

Copper-Gold Ratio Signals Treasury Yields May Be Set to Drop (July 2018 Article)

The Copper-Gold Ratio

Value Size!! Becoming a Better Investor By Grocery Shopping

There are two ways to value things that come in multiples. By multiples I mean things that contain a number of ounces, liters, gallons, shares of a stock, etc. The first and most common way is to look at absolute price. Perfect example from a recent trip to the grocery store. A 12 oz bottle of a cleanser costs $10.99. A brightly labeled “Value Size!”  bottle has 16 oz and costs 14.99. Well, the value size is… obviously supposed to be a good value. You buy the $14.99 bottle.

You done gone and f*cked up.

The second way to value things is by unit cost. The math here is simple. Divide $10.99 by 12 (ounces). The result means 1 oz costs apx .92 cents. So if the other bottle of 16 oz should obviously cost less than .92 cents per oz. Right? Easy enough. Well, 16 x .92 cents = 14.72. Hold up… that’s .27 cents cheaper than the 14.99 price.

You’ve now 1. bought more of a product and 2. paid a higher price. Pretty sweet deal for the manufacturer and the retailer.

You may say “well, it’s only .27 cents, who gives a sh*t” and that’s fair. But if you start multiplying these price differences up in the hundreds and thousands of dollars it makes a bit more of difference. Especially if you keep making the same stupid mistake.

It’s tiring to hear over and over again that the share price of a stock is too high so it’s too expensive. One share of NVR (a phenomenal homebuilder stock) is $2,639.98. A share of AMD (a semi-conductor stock thats massively popular with gamers) is $24.17. New investors look at the 2 stocks and say that obviously AMD is a hell of a lot cheaper than NVR. Well, AMD is actually over 5x times more expensive…

In this example, we’re going to use the price/earnings (p/e ratio) that we discussed in our last lesson. Remember, Price to Earnings is simply the price you pay for a stock divided by the earnings your share makes in a year. In the last year (TTM or trailing twelve months) NVR has earned $195.31 per share. God d*mn…nice. AMD, the “cheap” stock, has earned .32 cents per share.

NVR’s Price/Earnings (p/e) is then $2639.98 (share price) divided by $195.31 (earnings)
which equals a p/e ratio of 13.26.

AMD’s p/e is $24.17 / .32 cents, which equals 74.61.

What would you rather pay 13.26 or 74.61? It’s not dollars, it’s a relative valuation, but it works the same way. Which leads to the conclusion that…

 

Just because the price is low, does NOT mean that something is cheap. Just because the price is high, does not mean it’s expensive.

 

If you want to get better at valuing things quickly, the grocery store already has a perfect way built in with many products. Most people never look at this, but it’s on nearly every label. Unit cost is written directly on the label. Think of unit cost as the p/e ratio in stocks.

sticker price for blinker fluid
Graphic from All Day Organics

From now on you need to start looking at that unit price label before making your decisions. In the above example, the bulk buy is truly a good deal. The unit price for the 62 oz bottle is less than half the true cost of the 8 oz bottle. In reality though, it can be about a 50/50 chance depending on the store. One thing to note is that if something is on sale you want to look at the adjusted unit price written on the sale label and not the white (typically) regular price label.

Start doing this on a regular basis and you will quickly and completely change how you think about the prices of things. It’s an easy one step closer to becoming a better investor.

 

 

NOTE: Arm & Hammer Baking Soda is made by Church and Dwight (CHD stock symbol). CHD has returned an annualized 18%+ since 1995… May be worth a look when it’s not too expensive. Hint Hint

 

Investing 101: Should Walter White Buy The Local Car Wash Company Or The Laser Tag Company?

Comparative valuation sounds boring, but when you understand the premise you’ll realize it’s easy as hell. The problem you run into when trying to pick stocks is that you’re comparing apples and oranges all to often. Unfortunately, most newbies make 1 of 2 mistakes. The first is looking at the share price of a stock and deciding “well, that stock is way overpriced”. You need to realize that share price is only a small part of the equation. If you don’t know how many shares a company has, then you don’t know how much of the piece of pie you get when you’re buying a share. The other mistake is not having a method of comparing 2 companies like Apple and Walmart. Those 2 companies are NOTHING alike obviously, and without a way to compare them most people usually then revert to which has a cheaper share price. So how do you figure out which one is a better deal. THIS is where we get into comparative valuation.  This one won’t hurt a bit.

Walter White* is laundering his meth money. He needs to find a company in that looks like a legitimate investment. Well, he’s a science teacher so he’s not just going to buy any crappy company out there. People will know he’s not buying a good investment. He’s narrowed it down to either buy Saul’s laser tag company suggestion or the car wash he used to work at. These two companies are nothing alike, so how the hell is he going to figure out which is a better investment. These are the 2 most common ways to compare companies…

Price/Earnings

The laser tag company is $500,000. It earns $75,000 a year. Earnings are sales/revenue for the last year minus all the costs of operating the company. It’s the money the company gets to keep. So the price/earnings ratio for the laser tag company is $500K divided by $75K. We get a P/E of 6.66.

The car wash is $800,000. It earns $160,000 a year.  So it has a P/E of 5 (800K/160K)

So somebody new to investment will typically look at the two and say “obviously, 500K is the better deal”. But now we have a way to compare the two. Laser tag has a P/E of 6.66 vs the cash wash at P/E 5. When buying an investment you typically want to buy the LOWER P/E between two or more investments. In this case, the car wash (while more expensive in dollar terms) is the better deal. It earns more in relation to the price.

 

Price/Sales

The next most common way to value companies is simply price vs sales. The only difference here is that instead of bothering comparing the money the company gets to keep, you just compare who sells more in relation to their price. The car wash is $800,000, but takes in $200,000 in sales every year. It has a price/sales ratio of 4 (800K/200K = P/S 4). Laser tag takes in $130,000 in sales every year. So it’s P/S is 3.85 (500K/130k = 3.85. Obviously, 3.85 is less than 4, so if you were valuing the companies just on sales, the laser tag company would be a better deal in this case.

Why Walter would value based on P/E vs P/S gets a little bit more advanced. If he compares the two based on P/E, the car wash is a better choice. If he compares the two based on P/S, the laser tag company is a better choice. As time goes on, you will figure out which is typically the best way to compare companies. In the beginning, we recommend just looking at Price/Earnings P/E.

A few of you are probably saying “that’s all well and good, but how do you compare companies when you’re buying stocks that have shares”. Simple, a company has a certain number of shares at any given point. So to compare the stocks vs buying a whole company you would just divide price of the overall company (it will be labeled as market cap) by how many shares are available. The good news is the price AND the earnings or sales will be divided by the same number (the number of shares doesn’t change). So NOTHING is different in finding the P/E or P/S with stocks/shares.

The good news is that looking at at the P/E of a company is so common that any stock site that you go to will have it already listed somewhere. Usually on the stocks main page or under a page called “valuation ratios”.  Here’s an example on Yahoo Finance:

 

aapl-2.14.19-pe
Yahoo Finance

By the way the (TTM) means trailing twelve months. Meaning the number is based on the last year worth of earnings.

 

 

So that’s it… you’re done. You can go now…

 

 

 

 

 

*He’s from Breaking Bad. Why are you reading this instead of watching it?

For Your Consideration: Palladium

The average person has no idea what the hell palladium is. You can’t blame them. It’s used by nearly everybody, but in something that nobody gives much thought to. Catalytic Converters. If you have a fossil fuel powered car, you have a catalytic converter. The quick explanation, for those that don’t know, is that the catalytic converter helps clean the exhaust from an engine before releasing it out into the air. It’s the main thing that cuts down on your car’s “emissions” Palladium is one of the main 3 metals used in the manufacture of the converters (the others are platinum and rhodium).

What does that have to do with investing? Well, the price of the metal itself has gone up nearly 60% since August. When the guys you see on financial news talk about precious metals as an “investment” they typically only focus on gold, possibly silver, and occasionally platinum. Palladium isn’t really even spoken on-air. It’s the red-headed stepchild of precious metals, typically trading at a massive discount to the other 3. When gold was going nuts in 2009 and reached over $1,900 an oz, palladium was trading at less than 1/3 of that. While the other 3 are typically looked at as the only “precious”metals, palladium could easily be used (and often is) interchangeably with platinum. It’s a commodity with incredible industrial application that doubles as a precious metal.

Here’s the crazy part: palladium is about 30x more rare than gold and about 15x as rare as platinum. Right now, after this massive run up, palladium is trading near $1,330 per oz. (an all-time high) Gold is about $40 less per oz. That seems to make sense regarding it’s rarity, but it hasn’t traded at a premium to gold in over 15 years.

We can speculate all day long on the exact reason palladium is up where it is, but the overriding theory at the moment is that it’s a product of the tensions the US, Russia and China. Russia is the top mining producer (followed by South Africa) and we’ve all seen what’s going on between the US and them. China and the US are duking it out in the trade wars and in what looks to be a type of hoarding holding pattern. China is now the world’s largest motor vehicle market with about 332 million in 2018, but they have A LOT of room to grow when you consider the population and middle-class upward mobility. America has about 932 vehicles for every 1000 people, China has only about 173. So it’s a pretty safe bet to say, China wants a ready supply of the metal for manufacturing usage.

If you think that palladium has already topped out after the 60% run and there can’t be much more left we’ll leave you with this:

Last time palladium surpassed gold in price/oz, it ended up rising to about 4x the price of gold. Right now we’re just over 1…

palladium to gold ratio
Palladium to Gold Ratio (Stockcharts.com)

Here’s why palladium just hit an all-time high

Top Palladium Producing Countries In The World

The Biggest Palladium Producers

The Big 3 Types of Funds: Mutual, ETF, Closed-End… The Necessary Explanations

Below you will find links to Investopedia’s dry, long-winded explanations as well as ours, which will give you a good enough understanding that articles make sense. Use the links or google if you still have questions. And yes, some of the definitions are repeated on purpose.

 

Learn these words first:

Fund
Buying a stock is  buying a share (or portion) of a company, but only that one company. A fund is more like a basket that can hold lots of different stocks or investments. So instead buying a portion of one thing, you can buy a portion of lots of things at once. Investors in a fund are buying a share of the basket.

Active
There’s somebody actively making decisions on what to buy and sell in a fund.

Passive
Nobody is making decisions, the fund tries to follow an index as closely as possible.

Index
A number that is follows how well or poorly things are doing compared to history. For instance, the Dow Jones takes 30 big companies in the US, adds their stock share prices together and based on the result people can gauge how the stock market is doing. Indexes (or indices) usually follow different markets based on things like size of companies, geography, how they grow, etc. People who want to just “buy an entire stock market” like the US stock market can then just buy a US stock market index.

Net Asset Value
The value of all the things in the fund or “basket” added together.

 

The Fund Types:

Mutual Fund
An investment product that pools money together in a basket to invest in stocks, bonds, real estate, etc. Mutual funds will have a stated objective to decide on what it will buy. They can be active (with a manager choosing  what to buy or sell) or passive (just following an index without making decisions) They can create as many shares as they want for investors to buy into this basket or “pool of money”.  The price of the fund’s shares are calculated after the markets close and the value of all things owned by the fund (Net Asset Value) are divided by the number of shares available. Mutual funds only trade once a day, after market close. Taxation on mutual funds is different than other types of funds. Typically carry a lot of hidden fees that are disclosed in small print. Usually the only type of fund available in a 401k. Mutual funds are largely outdated and individual investors nearly always prefer ETFs.

ETF (Exchange-Traded Fund)
Nearly everything is the same as mutual fund as far as active/passive investments, but these can trade any time the markets are open, just like stocks. Fees and expenses are usually much less than mutual funds. Taxation of the fund depends largely on what the fund does. Like mutual funds, can create or destroy the number of shares available in order to fit with objective of the fund. SPY (that’s the symbol, but is said just like the word) is the most commonly traded ETF in the world, it follows the S&P 500 index.

Closed-End Fund
Almost exactly like ETFs, but only have a finite (limited) number of shares. Because of the limited number of shares, a great opportunity can arise: if there isn’t much demand for the fund’s shares, but the value of assets (NAV) held by the fund haven’t dropped, investors can essentially buy the stocks or assets at a discount. Most commonly used by investors looking for income.

 

Other helpful links:

Active vs Passive Investing

Mutual Fund vs ETF: Which is Right For You?

Closed-End vs. Open-End Funds

MARKET CRASH!!! SELL EVERYTHING… Nah…nevermind.

Nearly everybody we’ve spoken to for the last week has been talking about how scared they are (or pissed off) when they look at their 401k’s. The market has been acting like shit and nobody seems to know who to blame first. The truth is, there are a few catalysts (as always) including the government shutdown, Apple (AAPL) slashing orders on the iPhone, Mattis resigning, the trade war, etc. It doesn’t matter though, not in the long run.

The fact that everybody is freaking the f*ck out is EXACTLY the kind of reason we’re not worried about a dot com or 2008 crash. Several things, tend to happen preceding the major crashes. A recession begins, the yield spreads have already inverted, the leading economic indicator is down, etc etc technobabble. For the layperson though, what you really want to know is this: when NOBODY is worried about their stocks going down, they crash. Bull markets end with a period of euphoria. Nobody in their damn right mind would call 2018 euphoric before stocks dumped off. This is what’s referred to as a sentiment indicator and how the big money makers bet against the crowd. You have to remember that in the beginning of learning, you are the crowd. So rest assured, this is just a correction. It may take a while to bottom out and it won’t feel good, but there is no reason to panic.

Please bear with us when news updates are few and far between. Alottt of research is being done at the moment to help in consulting clients and plan future lessons. We will be covering the real crash warning signs in-depth in the future.