Making Sense of Gold’s Strength and Goldman’s Weakness
04/21/11 Laguna Beach, California – The stock market “rallied huge” yesterday…and it continues rallying today – lifting the Dow Jones Industrial Average to a new three-year high. But the shares of market leader, Goldman Sachs (NYSE:GS), haven’t been doing much of anything.
The conspicuously feeble performance of GS is not the only curiosity of recent trading action…
In no particular order: Gold has jumped decisively through $1,500 an ounce to new all-time highs, silver is on a moon-shot that won’t quit – rising to new three-decade highs almost every trading day, the dollar is imploding faster than a Tokyo sidewalk, and sovereign financial conditions – from Athens to Lisbon to Washington – remain disasters-in-progress.
Your editors have no idea what these freakish macro-economic juxtapositions portend. But if forced to guess, we would guess that the strongest trends in the marketplace are the most important trends…and the ones most deserving of attention…and investment.
The strongest trends on the planet right now remain what they have been for more than a decade: “precious metals up.” A related trend – and almost as strong – would be “oil up,” followed closely by an all-encompassing “commodities up.”
These robust trends are both chicken and egg to a very strong, offsetting trend: “dollar down.” As these strong trends interact with one another, a variety of other financial markets thrash around in the resulting crosscurrents.
Stocks, for example, are probably as much a “dollar down” trade as anything else. We have suggested this idea numerous times here in The Daily Reckoning. In a world of near-zero interest rates and a rapidly declining dollar, coincident with rising inflation and rising inflation expectations, the precious metals are the most obvious refuge for capital. Oil and the rest of the commodity complex offer similar appeal.
But commodities are not the only game in town for dollar-phobic investors. Stocks provide a different kind of refuge. While inflation tends to punish stocks over the short term, stocks do “re-price” to inflation over longer time frames. Furthermore, stocks, as partial shares of capitalistic enterprises, provide growth potential that commodities do not. Net, net, a great, big ugly bear market in stocks does not seem very likely very soon…as long as you are measuring the performance of stocks in dollars.
Year-to-date, the Dow is up a robust 8.7% in dollar terms, but up only 2.5% in Brazilian reals…and down 1% in Norwegian kroner terms. Heaven forbid, you conduct this calculation in terms of gold or silver! Since the end of 2009, the Dow has chalked up a hefty total return of 24%…in dollar terms. But in gold terms, the gain flips to a 10% loss, and in silver terms, a 50% loss!
However, since most folks count their stock market winnings or losing in dollars, we’ll do the same. Thus, in dollar terms, an imminent, great, big ugly bear market in stocks seems unlikely…at least not until and unless Ben Bernanke discontinues flooding the financial system with dollars. However, a series of small, annoying bear markets seems very plausible.
From a technical standpoint, the shares of Goldman Sachs seem to portend stock market weakness. The shares of the market-leading, world-beating financial wizard have been conspicuously weak lately.
According to a variety of Wall Street analysts, the stock is weak because of “earnings-sustainability concerns.” But the analysts here at The Daily Reckoning offer an alternative analysis: the stock is weak because the stock is weak. The growth profile of Goldman Sachs has been taking a beating for months, and yet the stock continued rising.
No matter that widespread public contempt for the firm arose from the ashes of the 2008 crisis, and that the SEC sued the firm for a variety of fraudulent activities and that the Dodd-Frank law forced Goldman to divest extremely profitable operations and/or discontinue extremely profitable corporate activities, no matter that various banking reforms have forced the firm to reduce the leverage that contributed to its strong results, the shares of Goldman Sachs continued rising…day after day.
But now that the shares are falling, everyone’s got a reason why. We say the stock is falling because it is falling. And the only other thing we would say is that when market-leading stocks fall for no reason – or for any reason – while the rest of the stock market is continuing to rise, bad things often happen.
Eric Fry
for The Daily Reckoning
Eric Fry
Eric J. Fry, Agora Financial’s Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling. Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research— institutional research products dedicated to international investment opportunities and short selling.
Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts. His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal,International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.
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