Best Near-Term Price Gains Ahead For: Precious Metals Stocks And ETFs

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Includes: AEM, DBS, GLD, NEM, SIVR, SLV, SPY
by: Peter F. Way, CFA

Summary

Market-makers [MMs] hedge their clients’ (big-money-fund portfolio managers) trades in these stocks every day, protecting their firm’s capital temporarily put at risk filling large volume trade orders.

That price-change insurance tells just how far the MMs expect those clients, who have the money muscle to make things happen, may push prices – both up and down.

Histories of these daily forecasts, many made during the past 5 years or more, at all levels of market enthusiasm and despair, provide expectations for the next few months.

Are you looking for better prospects among these stocks than ones you now have? Or for new entries into this set? Risk~Reward tradeoff comparisons here may help you choose.

We have a special way of looking at stocks and ETFs

If you have seen this explanation before, please jump to the next bold-faced headline.

Technology advances in communications and information have transformed the way securities markets operate, and the way major investors behave as a result. Prices of equities now normally gyrate during one-year elapsed periods in ranges that are typically multiples of the underlier's trend growth.

Which means that during part of the year period their prices are retreating, and are consuming investments of time which cause the "growth" trend rates to be far less than what their better progress periods provide.

Advances in information technology encourage investment professionals (the market-making [MM] community) to protect the capital they must put at risk to do their jobs. Those actions cause the markets for equities and derivatives to become more integrated than they were in much of the 20th century.

So we study what the Pros' behavior causes to happen in the price-change "insurance" derivatives markets, to understand just how far it is reasonable to believe specific stock and ETF prices may move, both up and down, in the next few months.

This analysis has been conducted without material change daily for over a decade on more than 2500 widely-held and actively-traded stocks and ETFs. The resulting price range forecasts provide an actuarial history (unmatched elsewhere in the investment community) of subsequent market prices, as testimony to the strength or weakness of the forecasts made earlier.

Near-term price gains are most important to investors who are now either starting out in building a portfolio's wealth and exploring how it may best be done, or to investors who have come to realize that plans made years earlier are unlikely to be met at current rates of investment wealth accumulation.

Active investing, where capital is constantly put to work in the best odds-on situations to deliver profit within foreseeable time horizons, is the strategy most likely to produce what is needed, at least risk. But active investing needs guidance as to what to do, when to do it, and with what intensity.

Is it all just US election guesswork?

(used with permission)

Each stock or ETF is positioned in this map by its intersection of upside price change forecast on the green horizontal scale and experienced price drawdown exposures (on the red vertical scale) typical after prior forecasts like today's. Any issue above the dotted diagonal has more potential risk than return at its present price.

The SPDR S&P 500 ETF (NYSEARCA:SPY) is included at [17] to provide a "market-average" proxy. The fact that no issues in the group come anywhere near SPY's tradeoffs of risk and return should be a warning of the relative investment quality (or lack thereof) here.

The nearest contender is SPDR Gold ETF (NYSEARCA:GLD) at [7], followed by ETFS Physical Silver (NYSEARCA:SIVR) and PowerShares DB Silver ETF (NYSEARCA:DBS), both at [23]. iShares Silver Trust ETF (NYSEARCA:SLV) at [21] is the next close contender.

All other issues have -12% prior average worst-case records. The best producer stock in terms of risk~reward tradeoff is Agnico Eagle Mines (NYSE:AEM) at [8].

The highly-speculative nature of gold and silver commodity prices creates wide diversity among the character of producer company stocks. To survey those dimensions we provide capitalization and market activity comparative data in Figure 2.

Figure 2

Click to enlarge

Source: Yahoo Finance

ETFs and stocks have been separated here, each group ranked by the size of investor capital commitments. SPY data again is included as a market reference.

Note that the eight largest stocks command over $100 billion of capital involvement, each at a level in excess of $10 billion. The top ETFs only have three drawing comparable levels of capital attention. GLD is the institutional focus, with about twice the investment of the largest stock, Newmont Mining (NYSE:NEM), long an institutional favorite in the group.

But substantial interest exists among individual investors for both stocks and the ETFs. Trading activity in many favored issues provides market liquidity sufficient to turn over total capitalizations entirely in three or four months among stocks, and in some ETFs in one month or less.

ETF bid-offer spreads typically are quite tight in most issues, but exceptions exist. In stocks they tend to be wider, and even during trading hours investors need to be cautious about the costs in some issues. After-hours spreads are illusory, but sometimes entrap the unwary.

Both ETFs and stocks have seen strong up-markets over the past 52 weeks. Average price ranges have tripled from their lows among ETFs, and nearly quadrupled among many stocks. From their lows, ETFs are up on average by 80 percent of their ranges, and stocks by 71 percent of their larger average ranges. Only one stock out of 30 can be found that is below its past 52-week mid-range point. None of the ETFs have edged off by that much.

Yahoo Finance does not report target prices or P/E ratios for ETFs, but for stocks the diversity is staggering. More than half have negative EPS. Fantasy-land. But only four carry target prices below their current market quotes.

Despite such strong recent market moves, the implied price changes of moving to the 1-year price targets is another +20% gain.

A comparison among stocks along conventional reasoning is nearly futile, but among ETFs it may be more meaningful. Please consider Figure 3.

Figure 3

Click to enlarge

Source: blockdesk.com

Columns (5) and (6) are the source for Figure 1 coordinates. The (7) metric tells what % of the (2) to (3) range lies below (4). It discriminates among (12) prior forecasts to select the similar sample from which columns (8) to (14) data is provided. (13) compares (5)'s promise to (9)'s prior delivery; (14) compares (5) to (6). (15) is a figure of merit combining the several qualitative measures into an odds-weighted, risk-conditioned number.

For this exercise we ranked the top equity interests by the (15) figure of merit.

All it tells us is that what the Market-makers have thought about these stocks and ETFs in the past is of "precious" little help in forecasting the future.

We have what the MMs current self-protecting hedging actions say their concerns are now, but when they did and said similar things in the past, the results were pretty poor.

So, is this all a waste of valuable research time?

Perhaps not at all.

This raises a very interesting, possibly educational, possibly profitable area to explore:

The Market-maker actions we have been customarily focused upon are the ones driven by the actions of the "buy-side" clients. Ones driven by an orientation by clients of wealth-accumulation through lengthy periods of time, usually regarded as "investing."

Suppose we look at the process from a different point of view, perhaps as speculators might, one of capital transfer opportunity. Here what matters is the potential to seize upon errors of judgment occurring from any of a variety of sources: Ignorance from lack of adequate information, emotion from either fear reaction to sudden or building external evidences or greed from witnessing transfers in process; cultural orientations that prevent shifting one's perspective when another perspective might ultimately be more beneficial, even when the shift is only temporary; or just plain cussedness in a competitive situation.

Many things might create (or appear to create) the opportunity. That is not as important as what might be understood from the shift in perspective from "investor" to "speculator" to learn from a different orientation.

Think of their juxtaposition in this (less-than-perfect) way: Figure 1 pits the basic, opposing sides of the proposition against one another - risk vs. return - on a security by security basis through informed potential price change forecasts, and forms a group impression of the overall in relation to an "overall" market norm.

Figure 3 looks intently at today's appraisal of each security's situation as expressed by the MM community's forecast of likely price change possibilities, as measured by each forecast's Range Index [RI] - the proportions of upside to downside, in terms of the downside as a percent of the whole perceived possible range. Those RIs are then used to see how prices subsequently behaved and the details are shown in Figure 3's various columns.

The "pretty poor" appraisal above stems from column (8)'s blue-line averages of 49 for the ETFs and 48 for the stocks. A 50-50 odds of winning is best evaluated as a no-information, coin-flip kind of outcome. Further, the -0.9% TERMD (investor orientation) payoff of (9) for ETFs and -0.7% for the stocks is probably within statistical noise limits of basically "no return or loss."

Compare those to the results (for an investor) of SPY in the same exact period, of 75% odds for a win, with +2.6% gains net of the 25% losses, which compounds into a+13% CAGR. The SPY results are not overwhelming, but it turns out that they are above average over longer period experiences.

To see what the investment competition presents (as an attraction to the investor) check out the prior experiences of the (on 5/25/2016) top-20 ranked stocks. They show an 84% win rate, with +11.6% gains net of the 16% losers, in 8-week compounding period to produce CAGRs of +98%.

That leaves the whole precious metals group (at this point in time) as a "no contest" contestant. The lack of any advantageous win odds produces a nearly-universal negative value to our (15) ranking figure of merit that weights the gain prospects of (5) by the odds of (8) and the loss exposures of (6) by the complement of (8).

But what might the speculator's perspective produce?

Now let's look at Figure 2. It was not designed with this intent, but the selection of the precious metals focus provides what may be an extreme opportunity to observe.

Figure 2 is a study of what has been going on recently (issue by issue) in the market.

The top 2 ETFs have a daily transaction value of $3.5 billion. Along with all the other precious metals issues, they total just under $8 billion a day. That compares with SPY's daily trading of $19.5 billion, and SPY is typically the arbitrage target for most professional market hedging activities.

What we are talking about here is the relative scope of capital transfer capacities.

Precious metals, along with energy commodities, are in the big-leagues when it comes to the capacity to transfer capital from one party to another, singly or in groups.

How have these issue prices been changing over the past 52 weeks' year? The ETFs have an average price range of 200% (high above the low), which means the buyer's capital "invested" at the low now has tripled when prices are at their highs.

But where are prices now? The average ETF RI is 80, meaning 80% of the 200% range is below the current price, so the capital advance from the low is +160%. The buy capital at the low is now 2.6 times what it was then. What some observers would call a 2 ½ bagger.

The baseball analogy now might be useful. The base-runner is in jeopardy if the shortstop has the ball and play is still in progress. Moral: In this game a speculator (or investor) caught off base is going to suffer a loss, perhaps a substantial one.

Let's look at the price ranges and (past year) RIs for the stocks.

There the price range sizes average highs at 283% of the lows, an almost 4-bagger. With the average price up 71% of the way from the lows, that's a stand-up 3 bagger, with a capital advance of +200%.

Now while Yahoo does not usually report 1-year target estimates for ETFs, they do for stocks. Despite these issues being at levels three times their 52-week lows, the targets are a full 20% higher than the present quotes.

An investor perspective may have some problems here with fundamentals, since 17 out of the 25 have no E to put into a P/E ratio, let alone a PEG ratio. The combination of their P/E and P/L ratios produces a meaningless 23 P/? ratio, with extremes ranging from triple-digit P/Es to P/Ls <-80.

But that doesn't bother the speculator-marketers from presenting a greed+ "incentive" of another possible +20%.

Perhaps if one already has a 3-bagger, they shouldn't try to stretch it into an inside-the-park home run. My guess is that there are speculator-outfielders that have target-rifle arms just waiting for you to try to make it to the home plate.

But that's just my buy-side investor bias.

Conclusion

So maybe better not to pay much attention to the MMs today.

The real meaning is that these securities and the commodities they represent are complete wild-cards that few can really forecast.

The MM's history as investment forecasters from these market levels is pretty dismal. Maybe they can do better under other circumstances, so we will continue to keep them under review.

As a game of blind-man's bluff, though, it seems to continue to be entertaining. So have fun if you choose to play, just don't confuse it with investing. Hopefully, you can find a way to be on the beneficial side of the potent capital transfer actions. Arbitrage and hedging are the way the pros do it.

Additional disclosure: Peter Way and generations of the Way Family are long-term providers of perspective information (earlier) helping professional and [now] individual investors discriminate between wealth-building opportunities in individual stocks and ETFs. We do not manage money for others outside of the family but do provide pro bono consulting for a limited number of not-for-profit organizations.

We firmly believe investors need to maintain skin in their game by actively initiating commitment choices of capital and time investments in their personal portfolios. So our information presents for their guidance what the arguably best-informed professional investors, revealed through their own self-protective hedging actions, believe is most likely to happen to the prices of specific issues in coming weeks and months. Evidences of how such prior forecasts have worked out are routinely provided. Our website, blockdesk.com has further information.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.