Skewed Rhetoric On Metals And Markets Obscures Best Plays

by: Emmet Kodesh

The currency chief for Goldman Sachs (NYSE:GS) last week decreed another lower target price for gold. Jeffrey Currie said the precious metal now is worth $1000/oz. and may sink to $800. He has followed up this tarot reading by saying it was a "slam dunk" to sell gold. The rationale for this latest downgrade is tendentious: the economy is recovering and next year will strengthen further. Markets may well rise but the economy is impaired. In any case, GS guidance was echoed by the astrologists at Credit Suisse who YTD have issued almost monthly downgrades on gold. The next two weeks will show whether rhetoric and selling guidance prompt panic and tank prices as happened in April or if the cries of "wolf" are losing impact like infusions of liquidity into the markets.

Perhaps GS has a dart board in its commodity suite with numbers printed erratically around its circle. Perhaps a couple of times a month during an odd happy hour they lob darts to find the next gold price. It's gotten so predictable and extreme that one expects them to announce, just in time for Halloween, that next year an ounce of gold will barely buy a happy meal. Maybe, but given current fiscal policies, by then a Happy Meal may cost $3842.

In the meantime, PMs (precious metals) miners have suffered more damage in a year to forget. As often has happened, a collapse in the miners early this week occurred even when bullion prices were little changed. As the market suffered major pain stemming from media-amplified panic about reductions in government services, PMs again were the first risk-off assets. Those investing in the sector must understand that until PM sentiment from major banks and media changes, they will continue to suffer disproportionately on most red days despite strong fundamentals, especially for silver.

Let's consider market outlook as affected by government discords and try to understand the nature and importance of the discord. At present, the tussle looks like a fraternity food fight. However, beneath the headlines and posturing, the issues bear greatly on the dyad of compulsion and compromise in civil and personal life. The boundaries of the latter are in danger of being erased.

After briefly reviewing this macro background, I will examine some key support levels and trend lines in the indices and mention companies that should outperform in the mid and long term.

In chapter 7 of his classic, Interventionism, von Mises noted that the modern State works by "compulsion and coercion" that displaces voluntary collaboration. In striving to "resuscitate the totalitarianism of the Pharaohs," he added, the State seeks to impose "cradle to coffin" mandates and, at least de facto, acquires increasing "police powers" to secure what it defines as "socially desirable conduct." Like Nietzsche, Kafka, Spengler, Orwell, Molnar and many other philosophers, von Mises saw in the managerial State a drive to enslave that crushes spontaneity and wealth creation.

The disagreement in DC is about the power of government to mandate (i.e. compel) citizen behavior in increasing areas of life, to monitor activities and punish non-compliance with a vastly enlarged scope of control embedded in "to serve man" apologetics. Whether one likes one, neither or some other party to this contest, the fact is that the administration has shut down some services in order to force the House majority to submit to the misnamed Affordable Care Mandate. However, most members of the House, and many in the Senate from both parties are in office because they ran against or ran away from the Health Insurance Mandate in 2010 and/or 2012. If there is to be representative government in this nation that allows dissent from and opposition to Statist plans, then this debate should be conducted honestly and reported accurately. This has not yet happened and at this point it is difficult to be sanguine about the possibility that it will happen.

For two months, I have been identifying and examining companies that should survive and thrive in a perennially challenged economy with worsening demographics. Socio-economic, cultural and governmental dynamics point to Healthcare, Media-entertainment, some energy, consumer discretionary (until the new housing bubble bursts and the drag of "Affordable Care" imposes itself), and, among industrials, a few companies in aerospace-defense. PMs are essential to technology, healthcare and many industries and the best companies in them now are both value and growth plays.

The case for PMs strengthens as prices decline. At current levels, bullion-linked ETPs like Central Fund of Canada (NYSEMKT:CEF), Swiss Gold Trust (NYSEARCA:SGOL) and Sprott Physical Silver (NYSEARCA:PSLV) as well as bullion coins are value buys. Nearly the entire mining sector is so extremely depressed that it stands out amid overbought markets as the value area. After the heavy sell-down October 7-8, the best companies are compelling buys. Endeavour Silver (NYSE:EXK) just reported excellent Q3 results: silver production +63%, gold 95% and revenue +31%Y/o/Y while costs have been cut and new veins of high mineralization identified and readied for operations. Below $11/share, First Majestic (NYSE:AG), whose YTD progress is strong, is a compelling buy. The same is true for streamer Silver Wheaton (SLW), McEwen (NYSE:MUX) and Yamana Gold (NYSE:AUY) below $10. All these companies and much of the sector and markets generally rebounded strongly today after a late morning plunge to 1646 that broke the support line that runs from last November 15 through December 12, June 24 and August 27 this year.

Looking at the April 18 and June 24 lows this year indicates support near 1630. Retail investors may not place much stock in trend lines but fund managers and algorithms key on them, so they bear watching. There is a large but limited supply of "silver bullets" like the feel-good nomination of QE-supportive Janet Yellen for next Chair of the Federal Reserve. In the meantime, fundamental disagreement about the debt ceiling and the impact, costs and scope of the Health Insurance mandate are likely to bring more days with steep plunges until there is resolution by or shortly after October 17. Capping the debt ceiling would improve the nation's credit and support the USD but such policy is fiercely criticized and unlikely to prevail against Statist trends.

There are a few dozen companies in strong sectors that should outperform deteriorating economic fundamentals in an environment of rising debt, declining work hours and real income. The analysts at generally align with profitability and growth metrics. In the media-entertainment space, CBS (NYSE:CBS), Time Warner (NYSE:TWX) and Disney (NYSE:DIS) get high strong buy marks. In aerospace-defense, Boeing (NYSE:BA) and United Tech (NYSE:UTX) get some of the best grades in the markets. General Dynamics (NYSE:GD) and Honeywell (NYSE:HON) also rank as strong buys with HON like UTX and BA having powerful revenue / debt ratios and growth. In consumer issues, Starbucks (NASDAQ:SBUX) shows one of the best profitability profiles in the markets, closely followed by TJX (NYSE:TJX), debt-free Whole Foods Market (WFM) and Home Depot (NYSE:HD). Remember, however, that the latter is tied to the housing market and, thus, to bond prices and yields.

Among mixed commodity miners Freeport-McMoRan (NYSE:FCX) has a preponderance of strong buy ratings and a price target of $37 - $40. Two of my focus articles on it are here and here. In my view, its energy acquisitions and 60-40 partnership with Rio Tinto (NYSE:RIO) at Grasberg Minerals District in West Papua, New Guinea give it enormous leverage, upside and staying power based on its output of copper, molybdenum, gold and, upcoming, oil and gas.

Since April 24, the S&P has traded between 1573 and 1726 (August 27): intraday October 9 we were below the mid-point of this range and closed at 1656 slightly above it. Expect more deep drops and buying opportunities in companies like those above in the next 7-10 trading sessions. Keep in mind that we are in a one-year pattern of bi-monthly corrections but that, aside from a likely scattering of crises, the markets should ride a QE-push through most of 2014. After that, governance and debt issues will leave only the sturdiest trees standing.

Disclosure: I am long AG, DNKN, MUX, WFM. 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.