Wall Street's Best Minds

 | FRIDAY, OCTOBER 18, 2013

Does Washington Really Matter?

Investor behavior suggests that government dysfunction is a sideshow to other variables, writes Bessemer Trust's chief investment officer.

The 16-day government shutdown and threat of U.S. default cost the U.S. economy billions of dollars, sharply depressed business and consumer confidence, and dented America's political and financial credibility with the world.
Yet cyclical assets are stronger – it appears investors are saying with their capital that the government dysfunction, while notable and depressing, is a sideshow to other variables.
While we agree with the market assessment near-term, one of the keys to good risk management is weighing when a sideshow might turn into a main event – in the case of U.S. politics, we believe risks are relatively low into the 2014 mid-term elections.
For the average investor, does Washington matter or not?
On one hand, the 16-day government shutdown took a heavy toll on the United States. According to Standard and Poor's, the shutdown took $24 billion out of the economy and reduced at least 0.6% off annualized, fourth-quarter GDP growth.
Even with the government offices reopened, it may take some time for business and consumer confidence to bounce back – especially knowing another policy debate could erupt within months. A Gallup Poll released Oct. 15 showed consumer confidence in the economy plunging 17 points in two weeks – similarly sharp declines have not been seen since the summer 2011 debt-ceiling debacle and the September 2008 Lehman bankruptcy.
Less immediate but perhaps even more important, the U.S.' credibility overseas has been wounded. Monday, China's state-run news agency Xinhua published a commentary pushing for a "de-Americanized world." China and Japan together own about $2.4 trillion in U.S. Treasuries. Without an equally liquid, "deep" bond market outside the U.S., it is unlikely either country could quickly or significantly reduce U.S. bond holdings. That said, their trading activity in U.S. markets could easily create unwelcome bouts of volatility.
The hit to growth and confidence, as well as global credibility, together with potential for more political dysfunction (the next shutdown could come as soon as mid-January), would seem serious enough to weigh on investor sentiment, and in turn, financial markets. But that has not been the case – there is a big disconnect between Washington and Wall Street. Indeed, during the 16 days of the shutdown, the S&P 500 rose about 2.4%.
What gives? We would point to three main factors to help understand the D.C.-NYC disconnect. First, many investors (ourselves included) counted on a repeat of other recent episodes where Washington took Wall Street to the edge of the cliff, but didn't jump. It's interesting that during the previous 17 shutdowns (going back to the 1970s), U.S. equities also rose, probably at least partly on the same notion that policymakers prefer not to risk their seats with such action. Second, there is a reasonable assumption that the economic consequences of the shutdown will result in a Federal Reserve even more reluctant to change its uber-easy monetary policy anytime soon – we will hear more on this front at the next FOMC meeting on October 30. (The U.S. 10-year Treasury yield started falling Wednesday on hopes for a deal - from around 2.76% to levels now around 2.63%.) Lower borrowing costs and ample liquidity, all else equal, are supportive for cyclical assets.
Third, despite Washington, the broader global economic trend is improving, albeit gradually and in fits and starts. Even with a small step back in September, business confidence in recent months is suggesting third-quarter global growth at its strongest level in almost one and a half years. For investors, even U.S. focused ones, this global trend is good news, since what happens globally is increasingly as important as what happens at home. It's worth remembering that nearly half of S&P 500 sales today come from overseas. That global influence is partly responsible for a U.S. earnings season getting off to a decent start: through Wednesday, of the 44 U.S. companies that had reported, 70% beat earnings expectations and 52% beat sales expectations.
We have added incrementally to our equity overweight this year, including in mid-September. We see supports from continued easy developed-market central bank policy (the scale of Japan's asset purchases make the Fed look downright demure), relatively improving global growth, and valuations. On this last point, we would highlight that forward-looking price-earnings ratios suggest stocks that are fairly priced but not yet rich. Additionally, in the case of the U.S. equities, we see support as well from continued, aggressive share buybacks.
Good risk management means that we cannot count on history repeating again - we still need to worry about the possibility that the Washington-Wall Street disconnect disappears; that policy dysfunction becomes a more significant market driver. A diversified portfolio approach helps protect us against that risk. So, too, does frequent "what if" stress tests of a portfolio, to plan what asset-allocation changes may be required under different macro- or policy scenarios.
For now, our disconnect is mainly towards Washington. That is, we are depressed and hopeful at the same time. We are depressed that things have gotten so bad in terms of Capitol Hill compromise. But we are hopeful that opinion polls showing evaporating approval ratings both of Congress and the White House, coupled with aspirations for 2014 mid-term elections, might change dynamics going forward. Talk about upside market risk – no investor today (sadly, us included) is discounting the possibility that Washington actually agrees on a longer-term fiscal plan that would be good for the U.S. economy and its standing with the rest of the world.

Rebecca Patterson is chief investment officer at Bessemer Trust.

Why The Price Of Silver Will Recover And How To Play The Rebound

Oct 17 2013, 08:49 

During this prolonged downturn in the precious metals market, many mining companies are struggling to turn a profit and have either slashed or completely abandoned exploration activities to lower their total all-in costs. While I do believe that gold (GLD) and silver (SLV) are due for a breakout because of the debt situation facing the US and the inevitable spike in inflation from the easy-money policies of the Fed, it is very hard to say when this will happen and it could take longer than expected. I had previously predicted a breakout of $1,500 gold by November, but it is looking like it could take a little bit longer for this to play out.

For this reason, it is important to own gold and silver miners (SIL) that have a significant cash balance and those that produce the metals at a very low all-in sustaining cost, because it remains difficult, if not impossible, to predict the price movements of gold and silver in the short term.
These companies that have solid balance sheets and industry leading cash costs will not only survive, but thrive going forward. Here I will discuss the price of silver and offer some miners I believe are the best in class.
Silver Price Forecast - Bright Future Ahead?
Right now the price of silver sits under $22 an ounce with gold under $1,300. Most silver miners, even the lowest cost producers, are struggling to record a profit and the all-in cost of production for the industry is basically around this $20-22 mark.
(click to enlarge)Credit: StockCharts.com
While this is worrisome for some companies in the short term, I believe in the long term this could lead to a higher silver price on that fact alone, as the higher cost mines shut down production and supply is taken off the market.
More importantly, virtually no new major supply of gold or silver is expected to hit the market as companies have scaled back exploration and development by a very large amount. Many mining companies are focused on survival at this point, and rightly so.
- Others face issues unrelated to the price of the metals. One example of a major silver project facing issues is Barrick Gold (ABX) and their Pascua Lama project. This project was originally expected to come online in 2016 and average 35 million ounces of silver each year. The project is up in the air as the company ran into some permitting issues with the government of Chile. The company aims to construct the project's water management system in compliance with permit conditions for completion by the end of 2014, after which Barrick expects to resume remaining construction works. It is really hard to tell when this project will come online, if it ever does. That is a huge amount of silver that may never even hit the market.
- In July of this year, Alexco Resource (AXU) announced a shutdown of their Bellekeno mine in the Yukon because of lower silver prices. The company is hoping to bring the mine back online in Spring of 2014, but will need higher silver prices to do so. This mine produced 2.2 million ounces in 2012.
- The Treasure Mountain Mine in Canada was shut down in June of 2013. This was a mine that was expected to produce over 1.5 million silver equivalent ounces a year. Even with super-high grades, both these mines could not produce a profit at current silver prices.
These are just a few examples and there are many more. While the silver supply and demand story could take some time to materialize, it is definitely something investors need to keep an eye on.
Silver Supply and Demand
What is the supply and demand of silver?
- In 2012, total mine production finished the year at 787 million ounces of silver, and total supply came in at 1.048 billion, up slightly from 2011.
- We can simply compare this to gold to get a better idea of the rarity of silver compared to gold.
For the full-year 2012, total mine production for gold was 2,700 tonnes or 86.4 million troy ounces.
*So, 787 million ounces of silver was produced, compared to 86.4 million ounces of gold, giving us a gold to silver ratio of just 9.1.
- Total demand came primarily from industrial applications (465.9 million), implied net investment (silver ETF, 160 million), and coins and medals 92.7 million. Full numbers can be found at SilverInstitute.com.
Investment demand in 2013 is expected to finish a bit lower in 2013, somewhere around 105 million ounces, according to Kitco.com.
Still, I expect demand to pick up in the coming years as more and more investors start to realize the true value of silver.
Silver Over Gold?
There is a very good case that investors should choose silver over gold:
- First, silver is more affordable for the average person to invest in, unlike physical gold which requires a pretty significant investment.
I believe silver holds more potential than gold because any "average Joe" can get in the game. It's a very small market, so even just a few big investors coming into the market would push prices up a great deal.
- Next, silver has many, many industrial applications, after all 465.9 million ounces of demand came from industrial applications in 2012. These include insulation and energy, as silver is the best conductor of electricity. Silver is used in photography, medicine, electronics, the automotive industry, etc. There is not enough time to discuss all of silver's uses here so I will save that discussion for another day.
- Another interesting point about silver is that the historical gold:silver ratio is 16 to 1. The next interesting fact is that the ratio of silver in the ground to gold is estimated to be somewhere between 10-13 ounces.
- Next, the ratio of silver to gold production is just 9.1 to 1, as mentioned above, meaning about 9 ounces of silver is produced for every ounce of gold.
- Finally, according to gold/silver investor Eric Sprott, the actual ratio of investment in silver to gold is 1:1, meaning that investors are spending just as much money investing in silver than they are with gold.
- Despite all this, the current gold:silver ratio is 60.59, as you can see from the above chart. So, 60 ounces of silver can currently buy you one ounce of gold. This is nowhere near where the ratio should be, in my opinion, and I feel silver is very undervalued compared to gold.
Credit: StockCharts.com
- A conservative estimate of the gold:silver ratio at 35:1 would put silver at $36 an ounce at the current gold price. With gold at $1,500, silver would sit over $42 an ounce. With gold back at the 2011 highs of $1,900 an ounce, we could see silver top $54 an ounce, or higher.
There is no telling what silver will do in the short term. However, I believe in the long-term, silver possesses tremendous upside potential. Silver has so many industrial uses and is used up and tossed away, while the primary use of gold is jewelry and investment. Silver tends to outperform when both are rising in price, and I expect silver to continue to do so in the future.
Why The Miners? Leverage is the Key
- While owning physical silver could result in more than a double from current prices if I am right, owning some high-quality silver miners could easily produce a return of over 300 - 400 percent.
For example, Endeavor Silver (EXK) rose from $3.50 a share to over $12 a share, a gain of over 350 percent.
I am not guaranteeing this type of result in the future, but anything is possible. With many of these miners increasing production and with an increase in the price of silver, we could see real fireworks ahead.
Still, You Should Plan for the Worst
Silver investors need to ask themselves this question: if silver were to stay at $20-22 an ounce for the next 6-12 months, would your silver stock survive? I'm not predicting this will happen, but I believe investors need to select companies that, in a worst-case scenario, will survive at $20 silver for an extended period of time.
The bottom line is that there is a ton of upside in silver, but nobody knows for sure when its value will be realized.
What are the Best Silver Miners?
Here I will list some of my top 3 favorite silver miners. I am basing my rankings on balance sheet strength (cash and debt balance), all-in cost of production per ounce of silver, estimated production in 2014, and total reserves. There are many more silver miners I like, but some are too small to write about here on Seeking Alpha, and these are the safest picks I know.
CompanyMarket Cap (Million)Silver Production '13 (million, Aq Eq)Reserves (M, Aq Eq)All-In Cash CostsWorking Capital
First Majestic$1.25 (Billion)11.5269.3$9.43 (Note below)$80.4
#1 SilverCrest (SVLC)
SilverCrest is currently my favorite pick of the three because of their industry leading cash costs, solid balance sheet and production upside potential.
SilverCrest is still profitable, even at these depressed prices for precious metals. For the last quarter, SilverCrest reported cash flow from operations of $5.58 million with an impressive all-in sustaining cost per ounce of $13.26.
The company sold 647K of silver equivalent ounces, putting them on track to beat their 2013 full-year estimate of 2.4 million ounces.
Even more impressive, the company has a rock solid balance sheet. SilverCrest reported cash and equivalents of nearly $30 million at the end of last quarter, with a working capital position of $41.6 million.
A major expansion is currently underway at Santa Elena to increase production to 3,000 tonnes per day by 2014, bringing production to 3.5 million Aq eq ounces. The company's long-term goal is to produce more than 10 million a year from Santa Elena and the La Joya project.
SilverCrest has 37.7 million silver eq. ounces in reserves with 16.7 million in the indicated category and 223 million in inferred, for a total resource base of over 276 million silver eq. ounces.
The potential for SilverCrest is massive and I believe they are lower-risk due to their solid balance sheet, low cash costs and bi-metal production of both gold and silver.
Click here for further analysis of SilverCrest Mines.
#2 Endeavor ((EXK))
Endeavor Silver comes in at a close second.
The company is projecting total production of 10 million silver eq. ounces in 2013. Last year, the company produced 6.4 million, so this is a substantial increase in produce year-over-year.
The company is well on their way to completing that goal. For the second quarter of 2013, Endeavor reported production of 1,855,846 oz Silver (up 63%) and 22,947 oz Gold (up 95%) for total Aq eq. production of 3.23 million ounces.
- As of the last quarter, Endeavor had cash and equivalents of $22.3 million with no long-term debt. The company also has a $10 million line of credit available, so I believe the company has a pretty solid balance sheet.
- For the first half of 2013, Endeavor has reported operating cash flow of $43.3 million.
- Endeavor reports cash-costs of $10 an ounce, net of by-products, but the actual, all-in sustaining cost of production per ounce is $18.8, according to MD&A for Q2 2013. For the last quarter, the company reported mine earnings of $6.4 million and a net loss of $361K.
Endeavor has an aggressive growth plan to get to over 16 million Aq eq ounces a year by 2016 from its four mines. With an increase in the price of silver and the company holding the line on cash costs, this is a stock that holds enormous upside potential in my view.
#3 First Majestic (AG)
First Majestic is perhaps the safest pick on this list because of their size and experience. They are projecting 11.3 to 11.7 million Aq eq ounces of production in 2013 from five mines, with a goal of getting that number to 16 million by the end of 2014.
First Majestic has cash and equivalents of $78.9 million with total working capital of over $80 million.
In the past quarter, First Majestic recorded operating cash flow of $20.7 million and mine earnings of $14.3 million, on an average realized silver price of just $22.19. This shows that the company is profitable at current silver prices and holds big upside should the price of silver rebound.
First Majestic also contains the most reserves of any company on this list, with a massive resource base of 269.3 million Aq eq ounces.
For First Majestic I have listed total cash costs of $9.43; please note that this is the total cash cost but not the all-in sustaining cost per ounce, which is the actual total cost. That number is likely around the $18-20 mark, but I could not get an exact number.
While this could be the best company on the list, that doesn't mean it will be the best performing stock on a silver rebound. I believe a company like SilverCrest, for example, holds more upside since they are such a smaller company. That is one main reason I've ranked First Majestic lower on the list, even though I believe they are the lowest risk here.
*Please Note: I have not mentioned Silver Wheaton (SLW) here as the company has been covered a number of times on Seeking Alpha. This is also a much larger company than the ones mentioned here. I believe the companies mentioned above provide the most upside, but Silver Wheaton possesses the least amount of risk. Silver Wheaton is also technically a streaming company, and not a silver miner.
These are all great companies that I will be covering in detail in the coming weeks, so please follow me for individual articles on each company.
Some Advice and Thoughts for Potential Silver Investors
- This is a very volatile market that isn't for everybody.
- You have to be able to stomach big swings in the price of your shares.
- Don't try to time the market, because in reality, nobody can buy at the exact bottom and sell at the exact top. Instead, dollar cost average or value cost average your positions every month.
- Always try to keep some cash on hand to average down positions if you need to.
- Stay away from options, futures, margin, etc.
- Finally, have some patience.
Investing in silver and the mining companies isn't for everyone. I believe an investment in physical silver should come before owning some of the mining companies. After all, the price of silver wouldn't rise if we all just put our money into the stocks.

If you have the risk tolerance and can stomach the volatility, and if you believe that silver prices hold upside in the coming years, you should definitely check out the miners mentioned above. Comment below to let me know what you think of my picks and follow me here on Seeking Alpha for further coverage of the silver sector.

Nathan S. Lewis, William J. Royea

Reinventing Photosynthesis

16 October 2013
PASADENA – For decades, the development of renewable energy – and the policy debates that surround it – has focused largely on electricity generation. But more than 60% of the world’s energy is provided directly by chemical (mainly fossil) fuels, with no intermediate conversion to electricity. No realistic effort to combat global warming by cutting carbon emissions can ignore this fundamental constraint.
Indeed, in the United States and other industrialized countries, many applications that rely on fossil fuels (such as air transport or aluminum production) cannot be reconfigured to use electrical power. Moreover, fossil fuels are required to produce electricity as well, both to meet demand and to compensate for the intermittency of renewable energy systems such as wind or solar power. Is there really a scalable, low-carbon alternative?
One promising approach is artificial photosynthesis, which uses non-biological materials to produce fuels directly from sunlight. The sun is a nearly inexhaustible energy source, while energy stored in the form of chemical bonds – like those found in fossil fuels – is accessible, efficient, and convenient. Artificial photosynthesis combines these features in a viable technology that promises energy security, environmental sustainability, and economic stability.
While natural photosynthesis provides a complex, elegant blueprint for the production of chemical fuels from sunlight, it has significant performance limitations. Only about one-tenth of the sun’s peak energy is used; annualized net energy-conversion efficiencies are less than 1%; significant amounts of energy are expended internally to regenerate and maintain the exquisite molecular machinery of photosynthesis; and the energy is stored in chemical fuels that are incompatible with existing energy systems.
However, artificial photosynthesis, inspired by its natural variant, has demonstrated a potential for far superior performance, and provides energy in a form that can be used in our current energy infrastructure. Moreover, a fully artificial system would not require arable land or potable water, nor would it force a choice between food and fuel production in land use.
Existing energy technologies already can be combined to generate chemical fuels efficiently, though indirectly, from sunlight, but not yet in a configuration that is simultaneously practical, scalable, and economically feasible. Likewise, the overall efficiency of a fully integrated sunlight-to-fuel energy-conversion system can be more than ten times greater than the most energy-efficient biological systems, but the capital costs are too high for commercial deployment. Researchers’ top priority must therefore be to develop a solar-fuel generator that combines cost-effective scalability with robustness and efficiency.
The key to creating such a system lies in using earth-abundant materials that can perform the essential functions of absorbing light and facilitating fuel-forming chemical reactions. Just as chlorophyll serves to absorb light in natural photosynthesis, suitable materials are needed to capture and convert sunlight in artificial systems. Although silicon’s light-absorbing properties are suitable for photovoltaic devices, the near-0.5 volts that it generates is too weak to split water in a solar-fuel generator.
An artificial system also requires catalysts to facilitate the efficient production of chemical fuels. These catalysts must be highly active, stable, and, for global scalability, composed of earth-abundant elements, such as iron, nickel, or cobalt, not the scarce metals now used, such as ruthenium or iridium.
In addition, the system components must be integrated in a manner that ensures that they all function optimally under a common set of operating conditions. A deployable system must also incorporate cost-effective architectures, manufacturing processes, and installation methods.
Most important, such systems must work safely. In most implementations of artificial photosynthesis, energy-rich fuels are co-produced with oxygen, resulting in dangerous explosive mixtures. Membranes, or other physical and chemical barriers, must be developed in order to isolate the products from one another in a reliable fashion. Such partitions would also eliminate the need for complex peripheral processing equipment that would be necessary to separate the products prior to use in most applications.
So, what would an artificial photosynthetic system look like? The template is not a solar panel connected to an electrolysis unit, but rather a thin roll of sandwiched plastic-like layers, much like the high-performance fabrics found in rain jackets, that can be unfurled as needed. The top material would absorb the water and carbon dioxide from the air, and the next, light-absorbing layer would harness the sun’s energy to produce the fuel. Separated by the membrane, the fuel would not be vented to the air but instead would wick out through the bottom of the material into a collector tank for use on demand in our existing energy-supply infrastructure.
Ideally, solar-fuel generation should offer flexibility in the types of chemical fuels that can be produced from sunlight. In its simplest incarnation, water is split into hydrogen and oxygen gases. The hydrogen could be converted into a liquid fuel by upgrading biofuels, for example, or it could be reacted with carbon dioxide from flue gas or otherwise processed to produce liquid fuels for use in transportation applications. Alternatively, catalysts, as in natural photosynthetic systems, could directly reduce carbon dioxide, in this case to methanol or methane. The most effective systems would be able to offer either gaseous or liquid fuels.
Recent advances in nanoscience, materials science, chemistry, and physics have provided the tools needed to make rapid progress in this field. The ultimate prize is a clean-energy technology that is within reach and that could provide the basis for a safe, secure, and sustainable energy future.

Hans-Werner Sinn

Hans-Werner Sinn, Professor of Economics at the University of Munich, is President of the Ifo Institute for Economic Research and serves on the German economy ministry’s Advisory Council. He is the author of Can Germany be Saved?

In Praise of Debt Ceilings

17 October 2013
MUNICH – The wrangling about raising the US government’s borrowing limit – now thankfully over, at least for a few months – underscores the hazards posed by excessive state indebtedness. Governments nowadays are essentially running gigantic redistribution machines that steer funds from taxpayers to transfer recipients and other beneficiaries of public expenditure. The latter permanently ask for more, while the former zealously try to defend their purse.
In the end, the solution to this “redistribution battle” tends more often than not to be found in more government borrowing. For today’s democracies, the fact that those who will eventually have to pay the taxes to service the resulting debt cannot yet vote makes borrowing the most expedient way out of a messy political battle.
The lure of borrowing becomes irresistible if it can be assumed that the burden might be shifted to population groups other than those benefiting today from low taxation or higher public spending. That is, for example, the case with childless people: they benefit from public borrowing and manage to shift to other families’ descendants the part of the debt service that will fall due when they are no longer around.
Only insofar as parents, taking into account the interests of their children and grandchildren, participate in the political process can the borrowing addiction be kept in check. If this is what motivates the Republicans’ hardline stance in the ongoing US redistribution battle, then theirs is a worthy cause – that of attempting to protect their descendants from being exploited. From this perspective, the Republican sentiment underlying the recent debt-ceiling impasse might be just as commendable as, for example, the prohibition enshrined in the German Constitution against debt financing of any sort, which will take effect no later than 2016 at the federal level and in 2020 for Germany’s länder.
Another example is debt mutualization among countries, such as that being carried out now in the European Union. First, individual countries borrow far above any sensible level, knowing that they will be saved from insolvency by rescue operations financed by the other member countries. The rescue initially takes the form of intergovernmental loans, so that the fiction can be preserved that each country pays back its own debts. But, as soon as the loans are dished out, mutualization shows its real face, taking the form of debt forgiveness.
In the case of Ireland, €40 billion ($54 billion) in Emergency Liquidity Assistance loans from the European Central Bank were converted into long-term bonds at below-market interest rates after the collapse of the bank established to consolidate the failed Anglo Irish Bank’s non-performing loans. About a year ago, the maturity of the intergovernmental loans given to Greece was extended to around 30 years on average, at highly preferential interest rates; indeed, interest was waived for a full ten years. That move represented debt forgiveness, in present-value terms, of €47 billion.
And that is not the end of it. There is talk now of another maturity extension and a further lowering of interest rates for Greece.
In all of these cases, the debt burden is, for all practical purposes, being shifted onto other countries. As a result, eurozone countries’ appetite for borrowing remains unbridled, while at the same time the sanction mechanisms included in the European Union’s “fiscal compact” are quietly set aside. Instead of shouldering the burden of reducing expenditures or raising taxes, countries opt for borrowing, because they know that they can unload part of the burden onto others.
Jointly guaranteed Eurobonds are already waiting in the wings to be used as instruments of debt mutualization. If a country proves unable to service such bonds, the other member countries will have no option but to pick up the tab.
During the United States’ early decades, debt mutualization triggered an irresistible urge to borrow. After Alexander Hamilton, the country’s first treasury secretary, mutualized the states’ Revolutionary War debts in 1791 by turning them into federal debt, the states went on a borrowing binge to finance infrastructure projects. Canals were dug at huge cost – only to become obsolete not long after railroads started to operate. 
The economic boom that borrowing ushered in turned out to be nothing more than a credit bubble that eventually burst (with the financial panic of 1837). By the early 1840’s, eight of the 26 US states then in existence (along with the territory of Florida) had gone bankrupt as a result, while several others teetered on the brink.
But further mutualization was no longer an option. In the end, mutualization led to nothing but strife and growing animosity. The festering debt question poisoned the atmosphere in the US for years afterwards and contributed to sectional tensions that were already inflamed by the dispute between the North and the South over slavery.
So, let us be grateful for strict debt ceilings, for they can help to nip disaster in the bud – even if bumping up against them can leave politicians slightly bruised.

Dr. Strangelove's comment seems appropriate to me this day. It's always our duty to try to make money for subscribers but getting there is now an emotional challenge certainly. Logic and your education in this regard needs to be checked at your desk before you turn on your computer with the news "off." It's made harder yet since most people want to know the why of things. Well, the dissatisfying answer remains the same: "Markets are rising because… well, because they are dammit."
The day after the congress voted to reopen the government and go to $17 trillion in debt stocks rallied sharply, especially away from the Dow Jones Index, which we'll discuss in a moment. New highs were seen in the S&P 500 (SPY), Small Caps (IWM), Tech (QQQ), Bonds (TLT), REITs (VNQ), Financials (XLF) and even (GLD) since the dollar (UUP) fell sharply.
Some of the news starting to dribble out after the deal was reached was a nice little $2 billion freebie for Mitch McConnell and HR 2775 where by the Treasury Department is authorized to suspend the debt ceiling. In other words, No Limit to government borrowing. As for McConnell's pay-off, there surely are many others who got their pocket lined.
As most investors know, the Dow Jones Industrial Average is a price-weighted index. This means International Business Machines (IBM) has had the heaviest influence by far in the performance of the index over the past couple of years. We saw much the same situation with Apple (AAPL), which had heavy weightings to many tech indexes as well. When those two companies were doing well the indexes did well and vice versa as those stocks fell. When IBM was over $215 per share, the Dow Jones Index was disproportionately pushed higher. But things turned around recently and then fell precipitously Thursday to $173 on earnings news, which took the index lower. The same situation happened to tech indexes when Apple's price soared to over $700 over a year ago only to see the price fall to just under $400 in June driving many Apple-weighted tech indexes lower.
For those wanting long-term exposure using equal-weight ETFs is the best way to go. For tech First Trust NASDAQ 100 ETF (QQEW) keeps you exposed to tech but not pushed around so much by just a handful of stocks. There is no equal-weight Dow Jones Index but there is for the S&P 500, Guggenheim Equal Weight S&P 500 ETF (RSP). We utilize both of these ETFs in our core growth portfolios.
There was a trickle of economic data Thursday. Jobless Claims were 358K vs 330K expected, and prior 373K. That was rather funny since California data is still for the most part FUBAR. The Philly Fed Survey was 19.8 vs. 15 expected and prior 22.3. Basically you can't trust any data you see at this time whether from the U.S. or abroad. Earnings from Goldman Sachs (GS) were disappointing even with those always trusty "ex-factors," you know those earnings ex-adjusted for this and that item.
Volume was modest but even crummy earnings from two bellwethers couldn't slow bulls down. Breadth per the WSJ was positive.
I guess now we know that it's up to the Fed to keep printing money until that policy is rejected by markets. Until then bulls will keep bidding stocks higher since the Fed has given them no other choice or sector to invest in. It's really that simple.

It isn't a joke to say this is all quite new. All the education and experience you bring to the table after 40 years of business experience is now rendered useless from a fundamental view. The real deal is just to follow the tape no matter what's driving it higher.

Let's see what happens.

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  • NYMO
    The NYMO is a market breadth indicator that is based on the difference between the number of advancing and declining issues on the NYSE. When readings are +60/-60 markets are extended short-term.
  • NYSI
    The McClellan Summation Index is a long-term version of the McClellan Oscillator. It is a market breadth indicator, and interpretation is similar to that of the McClellan Oscillator, except that it is more suited to major trends. I believe readings of +1000/-1000 reveal markets as much extended.
  • VIX
    The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge." Our own interpretation is highlighted in the chart above. The VIX measures the level of put option activity over a 30-day period. Greater buying of put options (protection) causes the index to rise.