Monday, August 4: Week in Review

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Includes: DBB, DIA, GLD, GM, QQQ, SLV, SPY, XOM
by: Jonathan Cavuoto

All three major stock markets were flat last week…the Dow Jones Average (NYSEARCA:DIA) was down 45 points (less than ½%), the S&P 500 (NYSEARCA:SPY) gained 2 points (1260 vs. 1258), and the NASDAQ (QQQQ) composite of more than 3000 stocks finished unchanged from the week before, at 2311.

Making these statistics all the more remarkable is that the Dow gained more than 400 points on Tuesday and Wednesday, but gave all of it back. Trends like this suggest an absence of investor commitment to stocks.

The major international stock markets did not fare much better. London, Germany and France--flat. Japan and Hong Kong--also flat, while China sank another 2%, which isn't too bad in relation to its 47% erosion so far this year (see "Research Lab" at end of this report). China's dismal stock market performance also explains why the only 3 companies with new listings on NASDAQ last week were all Chinese: China Cablecom (CABL); China TransInfo (NASDAQ:CTFO); and Sinoenergy (SNEN).

Financials

Bank failures have now become a weekly event. 8 banks have failed so far this year. To place the current financial crisis into historical perspective, as illustrated in this link, there were 3 bank failures in 2007, none in 2005 and 2006, and 3 in 2003.

The S&L crisis (1985-1991) was small change by comparison. Losses in that crisis totaled $161 billion. We're already at $412 billion in losses…and still counting. According to Bill Gross, CIO of PIMCO, the world largest bond fund, losses are expected to reach $1 trillion before we "finally write the gravestone of this housing bubble" (direct quote). FDIC insurance notwithstanding, its financial resources have limits, just like Fannie Mae (see here).

It is unlikely that growth in the economy will be the lifesaver in this crisis. While GDP grew at 1.9% in Q-2, less than consensus expectations, a closer inspection reveals some alarming information. Personal consumption advanced 1.5%, however, overall GDP would have contracted by 0.5% were it not for a 9.2% growth in exports, which was, in turn, fueled by a depreciating US dollar. Here's a link, for more data.

Earnings

It was the best of times; it was the worst of times. Any review of last week would be incomplete without including second quarter results of General Motors (NYSE:GM) and ExxonMobil (NYSE:XOM). GM reported a loss of $15.5 billion; Exxon reported a profit of $11.7 billion. If the adage "How GM goes, so goes the country" has any merit, we encourage embracing Teddy Roosevelt's Rugged Individualism as an investment strategy, which should include owning physical assets.

What particularly drew our attention was the comment made by GM's Chairman, Rick Wagoner, who said that GM has got to learn to make the kind of fuel efficient cars that the American consumer is demanding…prompting us to query "What planet has this guy been living on the past 8 years" and "How much is the GM shareholder paying this guy for such wisdom, or lack thereof". Turns out he gets paid a stunning $4.8 million…! Here's the link, for those who don't believe this (source: Forbes).

Our curiosity was relentless…we had to check out the compensation of Exxon's Chairman, Rex Tillerson. To our absolute surprise, not counting stock options, etc, only cash compensation, he is paid less…$4.1 million.

Precious Metals

Gold opened the week at $927 an ounce, then traded as high as $932 on Monday and as low as $893 on Wednesday. Gold settled at $910 on Friday, down $18 for the week. Gold support levels on the downside: $903, $898 then $882. Gold resistance levels on the upside: $918, $927 then $936.

Platinum prices opened the week at $1,760, traded as high as $1,785 (Monday) and as low as $1,640 on Friday before settling at $1,655. Platinum support levels at $1,640 and $1,625 on the downside; on the upside, expect resistance at $1,713 then $1,776. 

Silver prices opened the week at $17.35…traded as high as $17.90 on Thursday, and as low as $16.82 (Wednesday), and a closing settlement price of $17.52 on Friday, up 15-cents for the week. Silver support levels: $17.42…then $17.26 and $16.50. Expect resistance at $17.65, then $18.15.

We repeat our observation from last week's client communiqué: "Don't time your silver purchases--don't try to find bottom. Buy silver now, and wait."

Here's silver's track record, since 2003, in relation to the S&P 500 Index, an index that represents approximately 75% of the market value of all stocks in the USA.

Closing thoughts, paraphrased from David Morgan, editor of The Morgan Report newsletter, in commentary posted on his silver-investor.com website on July 31st:

The main stated function of the central bank is to maintain monetary stability, and yet this has not been the case anywhere in the world.  Taking the United States as an example, the value of the 'dollar' has eroded to 3.5 cents since the last central bank was established, so in less than one hundred years the reserve currency of the world has lost almost 96% of its value.  This fact escapes many people because it has taken more than two generations and has happened at a slow enough pace for people to adjust their thinking, to believe that inflation is normal, that a little inflation is necessary, or that, 'My wages are going up so who cares about inflation?'

RESEARCH LAB

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