Below, we look at what the price action in gold, silver and even Tesla might have to say about the odd road upon which we and our markets are currently traveling.
As for traveling, I’ve been doing a lot of that lately, enjoying looooong overdue moments on horseback and with the right people.
While recovering my sense of what matters, the headlines I have been reading, from Mexico to Montecito, nevertheless remind me that the rest of the world is getting swampy, angry, and further, from, well…what matters.
Tweets, Twits and Tariffs
It’s all kind of infantile… we launch a $50B trade attack here, China responds with a $50B trade response there; then we roll out a bigger $100B middle-finger and the international game of recess bullies serving as sovereign leaders continues…
All this muscle-flexing in the tariff war has been interesting. The markets initially took the news badly, proceeded to tank, then rallied, then tanked again…
Folks, we are basically seeing the first signs of increasing volatility, which can be a good thing for those who know how to trade it and a bad thing for those who prefer to ignore it.
How to Trade in the Backdrop of a Trade War?
Investors are increasingly asking how to respond as the world’s two biggest economies are reaching for their economic revolvers at high noon.
Of course, our first response is to become a subscriber to Signals Matter (wink).
But I’d also suggest we prepare ourselves for increasing currency action in the months ahead –perhaps even some currency shredding. As debt-soaked sovereigns embark upon trade sanctions, then it’s ok to assume that currencies and economies will inevitably feel some pain.
But how to investors historically prepare for pain, big or small?
In such scenarios, assets like gold, silver and the miners who procure them may be worth a deeper look for those who understand their cycles and moves… (In the case of mining stocks, however, the risks may far outweigh the rewards and should only be traded by those who respect both.)
The GDX, for example, has been inching higher along a rising 20-day moving average, which is at least short-term bullish yet up against a falling 50-day moving average. Those who track precious metals are waiting patiently for a break out.
Will it come?
The answer to that question lies in the signals not the gut.
Speaking of precious metals, perhaps you noticed that JP Morgan has recently been buying silver, lots of silver …
Is this big bank worried as well about tariffs, missiles, debt levels and currencies? Are they sensing unease ahead?
I venture that the answer is partially: yes. Others say it’s just a big fat hedge play on the future’s market. Who really knows?
But the value-play is also there as the silver-to-gold ratio is hitting 20 year lows. Between 2011-15, the price for this metal was basically a one-way trade down, with a brief rally in 2016.
Since then, the spot price has continued to tank by 18% and now trades sideways.
The big question today: will the market (besides one big TBTF bank) start buying silver again?
Silver’s 52-week range is now the most compressed it has been in 15 years and feels ripe for a breakout, and as Bloomberg recently reported, is likely to revisit its 2016 high of $20.00, which would be a 20% move upwards.
Silver bulls see the metal as more than just an antidote to bad fiat currencies around the world. It’s also an industrial metal used in everything from solar panels to batteries. In short, one could make a case for silver as a macro bull (GDP expansion) or macro bear (currency hedge).
Furthermore, most traders know that this metal is one of the most concentrated assets on the street– held by a few big players (i.e. banks) and rumored, at times, to be a rigged asset.
That’s not for me to decide here—but the fact that one of these concentrated players (JP Morgan) just stock-piled an additional 600,000 ounces of this metal to its 140M ounce collection is food for longer-term thought and thus worth chewing on.
(Folks, JP Morgan now holds enough silver to equal greater than 50% of the silver supply currently monitored by the CME Group.)
This silver stock-piling, moreover, is not a standard course for the bank. It only began its methodical collection back in 2011, when markets were feeling nervous and unsure as to just how long the Fed (soon to be notorious) would continue its QE drug-pushing on an otherwise sub-prime broken market.
Well, since then we know the Fed went wild, the markets got high… really high… I mean just plain “stoned.” The addiction to this Fed-stimulus (printed money and low rates) and debt-driven “growth” only got worse—postponing the 08 pain a decade-plus into a future “recovery” that has recession (i.e. hangover/withdrawal) written all over it.
This is precisely why I think JP Morgan is looking for a smart asset when the rest of the world is getting complacent. Hence the silver buy…
Gold, Miners and Energy?
Gold and miners have also been churning while looking for a break out. The same is happening in the energy sector in general and lithium in particular, two tariff-sensitive asset classes that tend to do well when the rest of the world—and markets—are doing badly…
And do I think markets are about to turn, well, bad?
Crystal Ball: Good or Bad Ahead?
Hmmm. As we’ve written so many times regarding the great bull v bear debate in the foreground of a world gone crazy in debt, such speculating on just how dangerous the market wave ahead will be is nice for intellectual debate.
We like that. But here at Signals Matter, we trade (quite well, I might add) on data from the tape, not opinions from the mind.
That said, my mind is full of opinions, and yes, for so many reasons, I think this market is (and has been for years) heading toward, well: bad…
The symptoms are numerous, from the massive bubble in the bond market and real estate woes to the over-valuation of the tech sector in general and certain members of the FANG family in particular. But for now, let’s just consider the case of Tesla as just one among a myriad of symptoms of the prognosis ahead…
Tesla: The Electric Canary in the Market Coal Mine?
As for Tesla, I started poking fun at this stock back in May of 2017. Some people thought I was a bit unkind to the grand vision of the great Elon.
After all, one has to applaud the stock move. Tesla’s share price surged at 18X since 2013 to last January, crushing the S&P’s equally astounding run during that same period of the Fed-tailwind “recovery.”
Such a stock surge creates hype, and hype can create confidence, even faith. Certainly, Tesla became a household name on the rising tide of its rising valuations.
But then came the cruel winds of time, free cash flow, balance sheets, debt levels and well…you know: reality.
Beneath the hood of this household-name stock lurks a credit disaster whose warning signs were there to see but understandably ignored in chasing the trend of a broke company with a great PR arm.
But now it seems a kind of “buyer’s remorse” has set in at Tesla. The stock is tanking, down 20+% from its September peak.
Thinking about buying the dip?
Well if you trade on hunches rather than signals or balance sheets, do so at your own propensity for risk.
Debt, Debt, Debt: The 4-Letter Word for an Era as Well as for Tesla
As I’ve written elsewhere, Tesla drives on debt, not batteries. Its balance sheet has been a mockery to common sense for years yet an homage to wishful thinking, fantasy forecasting and founder egotism. But such fluff only lasts for so long.
Which is why Moody’s downgraded Tesla’s credit rating last week from a B2 to a B3—which is seven notches below investment grade.
This little hiccup for Elon means the cost of borrowing for his super-hyped car is about to get much higher/worse. Given that Tesla is already paying over $600M per year just to service its debt, this is gonna hurt.
It basically means that nearly $5000 for every Tesla car already sold goes to paying interest on a loan…Think about that if you ever took a management class in B-School…
Meanwhile, for those of you who remember the equally important concept of FCF, it might chill your mellow to know that Tesla burns through $6500 of cash per minute, meaning the company will be broke by year end. Once upon a time, analysts used to consider such facts important…
But Tesla has other headlines besides Elon’s “genius” to worry about. I was out in Santa Barbara with a friend a couple of weeks ago. As we sat overlooking the Pacific and debating restaurant choices, one of Tesla’s Model X’s caught fire in a fatal crash near Mountain View while cruising along on auto-pilot.
I think Tesla’s auto-pilot stock climb is headed for a similar crash.
Spin vs Reality—Another Symbol of the Post-08 Era
Meanwhile, Elon Musk continues to shovel out the positive spin. He recently announced that the company will not require any more debt, and as a result the stock rallied big last week on words rather than numbers.
But what investors forgot to consider is that Mr. Musk said the same thing back in 2012, just before embarking upon a $9B series of funding rounds, seven layers deep.
This suggests that Tesla’s problem (like so many other “story stocks” in today’s “new normal”) is not only one of credit, but of credibility, and, yes…character.
Why do I mention Tesla now? Because, again, I think Tesla’s fate and fallacies in many ways mirrors the fate and fallacies of the broader markets in general.
Signals not Speculations
Does that mean I’m timing the markets? Shouting “fire” in a crowded theater? Am I saying when and how it will all end with Tesla in particular or the markets in general?
I’m just pointing out the obvious. The recession ahead and the signals today are for subscribers who watch our signals, not just my blogs…
Still, it feels good to keep an eye on the rocks ahead rather than the tweets today or media in general…
As always, be careful out there and don’t invest on auto-pilot or under the influence of market hype—of which Tesla’s woes are a perfect example…