Are you ready? CPI, PMI Manufacturing, and New Home Sales

It is said that time goes by faster when you're busy. Well, expect this morning to pass you by like a Bugatti Veyron with all the important indicators that will be released: CPI, PMI Manufacturing, and New Homes Sales. Lets look at how they can impact gold, the stock market in general, and the stocks I'm currently holding.

Consumer Price Index at 8:30

Let's start by the indicator impacting the most consumers; CPI. The Consumer Price Index measure the increase or decrease in consumer prices for a basket of goods. Through the years, the items in that basket change when the Bureau of Labor Statistics recalibrate the value of different items. For example, is the value of a television set 10 years ago the same as today? 

One of the two indicators that the Federal Reserve is watching closely is the CPI. If there's a surprise today and it increases more than expected ( CPI y/y of -0.1% is expected), then it may be a signal for the FED to increase rates sooner. Even if they don't do it, at least that's what investors and traders will think. Therefore, in that scenario we can expect stocks and commodities prices to go down.

PMI Manufacturing at 9:45
PMI Manufacturing is one of the most important leading indicators. It is basically a survey sent to purchasing executives of 600 industrial companies. Expected is a reading of 54.6. If it's higher than that, then again it could scare investors and traders in thinking that the FED will raise rates sooner than expected. In that scenario stocks and commodities prices would go down also.

New Home Sales at 10:00
New Home Sales is similar to Existing Home Sales, except that it only tracks new homes. Analysts expect a reading of 464K new homes sold for this month. New Home Sales is also a leading indicator. Therefore, a better than expected reading could be bearish for stocks and commodities, again because investors and traders would be scared that the FED hike rates sooner than expected.

I personally own Five Below (FIVE), COS.CA (COS.TO), and Tesla Motors (TSLA). If those indicators readings are better than expected it could be bearish especially for FIVE and TSLA how are positively correlated with major stock market indexes.

Existing home sales and what it means for gold and the stock market

Donald Trump once said: "Well, real estate is always good, as far as I'm concerned." This is from an individual point of view of course, but can we expect the Existing Home Sales numbers that will be released at 10:00 this morning to be good? Let's take a look at what we can expect and what will be the impact on gold and the stock market.

Existing Home Sales, for those who don't know, basically track the number of existing homes, condominiums and co-ops that have been sold during the month. It is considered a leading indicator for the economy, meaning that where it goes the economy goes (in theory). You can see on the chart above that in 2006 the Existing Home Sales started to collapsed before the financial crisis. The stock market followed right after.

The general expected Existing Home Sales figure is 4.92M for this morning. Generally, we can assume that the stock market and gold have already priced in this expectation. There are three scenarios possible this morning. The first one is that Existing Home Sales are in line with expectations, in which case we shouldn't see gold or the stock market react after the release of this indicator.

The second scenario is that there's a better reading that expected; let's say something around 5.2M. This would send the signal (in theory again) that the economy is improving. We could expect an outflow from gold to other assets in this case, because of the decrease in fear of investors. This, among other factors, could pump the stock market and make it run higher, for now.

The third scenario is a worst than expected reading; let's say around 4.6M. This could signal an economy that is stagnating or losing steam. This situation would be good for gold as investors would want to hedge against a stock market dip. The stock market, when not disconnected with economic reality, should in theory follow a bad Existing Home Sales reading down.

In reality, a lot of other factors are influencing whether gold and the stock market will go up or down. What I'm personally looking for is the second or third scenario, in which case I could profit from a surprising reading.

Premarket trading plan summary

This should be a good day! Oil is up premarket and my COS.TO (COS.CA) should benefit from it. I’m still analyzing Canadian oil companies like Suncor Energy. I believe they represent probably the best opportunity out there for those who hold US dollars. This is mainly for two reasons.

The first reason is that when oil will go up, the stocks of those companies will also go up. Secondly is that the Canadian dollar versus the US is positively correlated to oil. Therefore, the potential is enormous.

As an example, let’s say I’m sitting on $10,000 USD that I want to trade/invest with. If I convert it to Canadian dollars I will have about $12,500 CAD. Let’s say I buy COS.CA at $9 per share it gives me about 1390 shares. If oil goes up and COS.CA goes back up to let say $12, and I sell them, I would get $16,680 CAD. Amazing right? Wait! Wait!

If oil goes up it also means the Canadian dollar will go up against the US dollar. So instead of CAD/USD at about 0.78 it could be 0.85 or even 0.9. If it’s 0.85 and I exchange my Canadian dollars back to USD I would now have around $14,200 USD. This is far more than if I would have invested in an equivalent US oil company.

I also see gold zigzagging around $1,170 an ounce and I’ll be watching miners closely today. Have a good trading day!

After hours trading summary

Today was a good day which saw FIVE up a bit more than 3%. However, oil dipped to lose all the gains from yesterday. I normally hang out on on forums and social medias related to trading or investing during the day, and I can see that opinions are polarized and vigorous when it comes to commodities.

The first group of people thinks that commodities are immensly overvalued and that they will sooner or later surge. The second group thinks that deflation will prevail and that commodities will continue their way down. The first group tend to see gold as money with intrinsic value. The second group sees gold as a useless piece of metal that can only be used in jewelries. Who's right?

The platonic truth is that both are right. Value is only created through the eyes of the one looking. Throughout history gold has been money, and then simply a tool used in jewelries. The value people put into anything follow the swing of a pendulum; from one extreme to another. If we admit that is the truth, then the only thing we can do is ask if gold is currently hated or loved by the pool of investors and traders. When most people think its only a tool, its the time to buy, and when most people think its money, its time to sell.

I believe that gold has been loved so much these last years, mostly because of the internet and the promotion gold has received, that this pullback is simply healthy. However, like Warren Buffett said:"Gold is basically being long on fear." 

Currently, people are not really scared. The US economy is "recovering" and world tensions seem to have eased. One can wonder what will happen when fear and consumer confidence sink? Gold will probably surge. For these reasons, I see gold more as an hedge than a speculative instrument.

Gold, miners, and their leveraged ETFs like NUGT and JNUG can be traded successfully. In my opinion however, they are not the easiest instruments to trade and make money with. The big advantage is that they will never go to zero. The big disadvantage is that big pockets with a variety of interests will try to influence them, and that may play against you.

That being said, I'm still watching miners to jump back in at one point. In the meantine I'm watching closely stocks like GPRO and TSLA who might turn out to be great opportunities.

Premarket trading plan summary

After the pop of yesterday thanks to the FED, commodities like oil and gold are sinking again this morning. That affects miners like GDX and GDXJ too. The US dollar is up against major currencies and continues to strengthen against assets.

 "Don't take that one day as a preview for the rest of the year though. Investors were largely reacting to language in the Fed statement suggesting that the central bank won't raise rates in April and will likely raise rates only a bit in June or later." - CNN Money 

The market we're in right now is not that complicated: When rates will rise, the stock market will go down. So, as long as the FED keeps this favorable environment alive for stocks, current valuation will stay in place.

My stock COS.CA will get hit today by lower oil price, but I bought it for a swing trade not a day trade. If not, I would have sold it yesterday when it was up 7.5%. I may buy other stocks today, depending on the market's direction. If I do, I will post my transactions here.

After hours trading summary

This was a roller-coaster day where the FED once again saved the market. The fear of a rates hike scared investors, but even if Yellen removed the word "patient" from her speech, rates will remain at their current level.

"The Fed was... far more dovish than what the market was looking for and that's why we rallied," said Krishna Memani, chief investment officer at Oppenheimer Funds. - Yahoo Finance

That automatically made everything from gold to oil to stocks surge. The only big loser was the US dollar against other currencies. 

That's why I transfered a lot of my US dollars in Canadian dollar to invest in oil stocks. I bought cos.to(cos.ca) at $8.97 CAD today, which already jumped 7%. What's even better is that when oil is moving up I'm profiting in two ways; first with the oil stock itself, and then with the strengthening of the Canadian dollar. For those of you who dont know, Canada's economy rely heavily on oil, so oil prices and their stock market are highly correlated.

The stock I bought yesterday, FIVE, didn't move a lot today, and I'm hoping for more action tommorow or friday.

Gold was on fire today after Yellen's speech, with miners up around 5% and NUGT up 15%. I may jump back in gold later this week or next week. 

How was trading for you today?

Banks stress test, stock market, and gold

You probably already heard of the Dodd-Frank Act Stress Test that puts 31 big banks through a crisis scenario. They basically test a wide array of scenarios that goes from a small drop in the stock market to a severe collapse of real estate, the stock market, and main street economy.

Such a scenario would include an unemployment rate of 10%; a 25% decline in home prices; a stock market drop of nearly 60% and "a notable rise in market volatility."   USA today

This test is the first half of the big test (the second one is a qualitative test), and the Federal Reserve concluded that it was a success for all 31 banks. 

All 31 U.S. banks passed a 5 percent minimum hurdle for top-tier capital in an annual health check by the Federal Reserve, the central bank said on Thursday, as the industry continues to rebuild buffers after the crisis. Yahoo Finance

You can access the complete test by clicking here.

Should we be surprised of that good result? I don’t think so. If we look at the chart below, we can see that Reserve Balances with Federal Reserve from banks are at an all time high.

In simple terms, after the crisis the Federal Reserve “printed” the money and sent it to reserve accounts. Banks can then expand the currency supply and create more chequebook money through Fractional Reserve Lending.

This newly created money is supposed to flow into main street economy, but the reality is that it has found its way in majority into some assets such as the stock market. Matter of fact, you can take a look at the velocity of M2 Money Stock on the chart below.

This shows that while banks get healthier and the stock market rises, money is not circulating in the real economy. So I’m not really surprised that banks passed the test with a good score. They have plenty of reserves to support a recession.

The stress tests are so named because they measure whether the banks have enough capital to withstand major economic stressors, such as the 2008 collapse of the housing market. A passing grade means they have enough capital to withstand, say, rising levels of unemployment or plunging commodity prices. - USA Today

Now, the real question that we can ask ourselves is if regular people would pass a stress test. Let’s take a look to Real Median Income to answer the question.

Since the crisis regular people earn less money. But at the same time it looks like they understand the importance of saving money since the crisis as you can see on the chart below.

However, I don’t think the majority of people would pass a stress test. If there was a major crisis, the system and banks would be ok for a certain period of time, but I think regular people would suffer.

Another interesting point is the correlation between Reserves Balances and the S&P500 as you can see on the first chart of this article. It basically shows that if the S&P500 would crash by 60%, banks have a big enough cushion. It also shows that when they’ll start pulling out the money from the stock market there will be a danger for inflation if they inject it in the real economy.

At that step, we may see a rush into gold to protect wealth. But before that turning point, I doubt gold will be traded at August 2012 levels. However, I believe gold will remain of strong value in the meantime.

In conclusion, I don’t think a crisis would crash the whole system and banks like some people say. However, I think it will be a much greater threat to regular people who could see their wealth be wiped out if they don’t protect it.