In A Special Update to subscribers on May 19th, we allowed that the “requirements we had previously seen for a correction have now been satisfied“ but reiterated that we expect much more in the autumn timeframe.  Our call for the high for the year was Dow 13,436 and we came within 98 points on May 1st.  The odds are decent that we have seen the highs for the year.  We are convinced the odds for a test of last year’s October bottom of 10,404 are significant enough that one should not lose respect for the bear even over the short term.  We do not see much more than a consolidation phase at this point; perhaps even lasting until mid-August with a tight range between Dow 12,300-13,300.  The pool of available investors continues to shrink.  The real estate site Zillo recently reported 31.4% of homeowners with mortgages owe more on their home loans than their properties are worth.  Despite all time low interest rates, the number is 0.3% higher than the fourth quarter of last year.  The economy is far more fragile than commonly thought. 
 

On May 19th, we issued a Special Update to subscribers.  Based on our commentary and forecast from the April 9th issue, we were satisfied that the correction in stock prices had temporarily concluded and that it was then once again, a propitious time to accumulate gold shares. 

We added another 5% to the Investment Stance position in Newmont Mining (NEM) and added a 5% “buyback” of Goldcorp (GG).  Both were previously excised from the Investment Stance at big gains.  We also mentioned Keegan Resources (KGN), a very speculative play that does not belong in the Investment Stance.  

Newmont’s stated dividend policy ensures a continuation of increased dividends depending upon the price of bullion (see http://prn.to/LzKqnB).  If the company’s average realized gold price reaches $2500 per ounce, the dividend has the potential to reach $4.70 per share, a yield of 9.7% based on Friday’s close of $48.39.  The shares currently yield 3.3%.  Goldcorp now yields 1.5%.  Can bullion go to $2500 per ounce?  We believe it can (see April 9th issue).  We remain convinced the Dow/Gold ratio, currently 8:1, will eventually fall to 5:1.  Thus, even at Dow 10,000, we would expect gold to rise to $2000 per ounce.  At Dow 15,000, which will eventually happen as the Fed must continue to print money, we would expect gold to rise to at least $3000 per ounce.   

If there is a salient fact about the U.S. stock market that stands out from all others, it is the arena is rigged to work against the public.  The third biggest IPO in U.S. stock market history ensured underwriters and insiders a nine-figure payday, but those still holding shares purchased at the initial offering price of $38 per share were left holding a very expensive bag, wondering what gives?  
 
FB’s first day was one of the most inauspicious this Editor has witnessed in 48 years as an observer.  While the shares did trade a few bucks higher at the open of $42, the odds of getting out at a profit were not that far from zero.  Nasdaq performed pathetically. Many who transacted were not informed of executions for hours and had no idea how many shares they were allotted in the first place.  How can one sell unless one knows how many shares one owns?  Also, in our view, IPOs should be priced at a level that ensures enough demand to keep the price in the black.  If this means purposely pricing the shares conservatively, that is what should be done.  In the case of FB, the company sucked every penny they could out of the deal.  The offering was so large and prestigious that everyone had to be in it, thus commissions were less than one-third of the typical IPO.  Given the scant 1.1% commissions for the Underwriters, there was every impetus to ramp this up to the heavens.  The difference between the earlier estimates of pricing as low as $28 and the actual $35 IPO price amounted to an additional $35.2 million in underwriter fees.    

As we show in the charts on this page, the public is now well aware of their role in Wall Street and have been conscientiously avoiding the arena like the plague.  Below, weekly inflows into mutual funds remain on a sharp downwards slope since the third week of January 2010 and no matter how stocks rallied, it was typically not enough to catalyze any degree of investor confidence.  Net outflows in the period in which the Dow surged from less than 10K to more than 13K now total $284 billion.  Investor behavior has spoken volumes about trust.  It is quite instructive to understand that the Dow rose in 55.2% (69 weeks) of the 125 weeks pictures, close to the historic average, yet in those 69 weeks outflows averaged $1.78 billion.

Taking the trend back another few years shows that although investors were far more likely to put their hard earned dough into foreign stocks, their enthusiasm wore off quickly in 2008 and is again muted at best.  Over the last four years, net investment in foreign stocks has been minimal.  The secular trend towards stocks lasted for many years and is now in the process of reversing.  From a high of well over 50% of households in stocks, we believe the percentage could easily fall to 36.6%, where it was in 1992.   We’re not quite half way there.  

Wall Street’s many scandals,  a totally inept SEC, a self-interested Congress and industry regulators who have absolutely no reason to punish bad players (themselves) have all conspired to completely excise investor confidence from our capital markets.  Simply put, everyone in the industry comes ahead of the public and the public now knows it.  Until the character and nature of the industry changes, our capital markets and by extension, our economy, will both suffer.

ABOUT ALAN M. NEWMAN

Alan M. Newman has been the Editor of CROSSCURRENTS since the first issue was published in May of 1990. Mr. Newman is also a member of the Market Technician's Association and has been widely quoted for years by the financial press, media, and other newsletters and has written articles for BARRON'S.

The newsletter is published roughly every three weeks and focuses on economic and stock market commentary, often covering controversial subjects. Several proprietary technical indicators are usually featured in every issue accompanied by current interpretation.  Broad samples of our work can be viewed at http://www.cross-currents.net/. 

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