The S&P500 continues its march higher. While encountering difficulty at the end of September and beginning of October, the S&P500 is back to setting record highs.
There is plenty to continue to worry about yet it still climbs higher. We are swiftly nearing new highs in how expensive stocks can get. Using the Shiller PE Ratio, also known as the CAPE Ratio, we can see that the previous high for stocks was just shy of 45.
The CAPE ratio was developed by Robert Shiller. He divides the price of the stock, or index, by the average earnings from the past ten years. These earnings are also inflation adjusted using the CPI.
As you can see, we are in dangerous company. Yet, the market continues its climb higher. Using my understanding of the money supply data and the current margin use among traders, my expectation is the S&P500 will continue to move higher.
However, there are serious potholes ahead for the market. The big one is tomorrow’s Fed announcement. I fully expect Jerome Powell and company to announce the structure and timeline of the tapering of asset purchases. I have no doubt Mr Powell will use colorful phrases like “continued further progress” and the like to not upset the markets too much. Further down the line, Congress will need to address the debt ceiling again. This should start to happen towards the end of the month. Another weight on the market is the fate of the big spending bills that Democrats are attempting to force through Congress. These big bills would be financed by the Fed, who would goose the money supply once more. This would be a helping hand to push the markets higher.
Moving on to the unloved yellow rock, gold continues to languish. The SPDR Gold Shares (GLD) continues its range-bound action. In the past year we’ve seen GLD drop to $159.14 and rise as high as $178.38 after being at $183.19 exactly one year ago. I anticipate gold to get knocked lower again tomorrow. While I don’t agree with Peter Schiff very often, he put out a great piece today that talks about what is going on with gold. He states two things that I really needed to hear.
First
“But if you look at what’s been happening to the price of gold so far this century, this millennium even, it’s been pretty strong.”
Looking at the 1yr and 2yr picture, gold had a very strong move higher in the first half of 2020. We have since begun a new bottoming process. GLD struggles to find a way to get below 160. Now the trading range is getting narrower. It looks like this could eventually lead to a new breakout.
Second
“Gold is not going to act like bitcoin. It’s a real asset, and it’s a real market. And it’s not going to have that kind of parabolic move. Unless, of course, you have a complete implosion of the dollar, which is certainly not off the table as far as what may happen in the future. But, if that’s the case, it’s really not the price of gold going up. It’s just the value of the dollar going down.”
Gold is not bitcoin. 100%. While it could have very dramatic moves, it will not have the same kind of moves bitcoin has and will have. It will trade more like the other commodities than bitcoin. In addition, he hits on an idea that I just covered of gold being a constant.
Finally, coal. David at LiveBetterNow covered the rough day Consol had. Their earnings report disappointed investors. They missed their earnings estimate big-time. Zacks Equity Research (who David quoted) stated that Consol Energy (CEIX) had earnings of $0.07 per share. In reality, CEIX’s own data shows they lost $3.30/share. This sounds terrible right? Wrong.
On page four of their earnings report (which can be found here), CEIX shows the bottom line figure of $3.30/share loss for the quarter. What stands out is how that loss occurred. Looking towards the top (with the red arrow), CEIX states an unrealized loss on commodity derivatives that cost the company over $147 million. In the company’s own words, “the company may sell or purchase forward contracts, swaps and options in the over-the-counter coal market in order to manage its exposure to coal prices.” (Page 24). CEIX has used swaps and options to hedge sales. Instead of securing contracts with customers like the rest of the industry, CEIX has decided to continue to play the market in the expectation that the coal price will continue to rise. The market read into CEIX’s earnings report too quickly to pick up on this little gem. As time goes on, this unrealized loss will evaporate and all that will be left is more coal to sell.
On Ramaco’s (METC) earnings, they blew it out of the water. Ramaco was esimated to have $0.07/share and actual was $0.16/share! That’s more than double the estimate. In addition, they had the highest third quarter revenue figure ever. The good news doesn’t stop there. The company has amassed a large amount of cash. Over $46 million to be exact and now they want to put it to use. They are purchasing new assets from Coronado Global Resources referred to as the Amonate Assets. They are also announcing a dividend which will be paid in the first quarter of 2022. This is one of the most bullish earnings reports I have ever read through. It is summed up well by Ramaco’s Chairman and CEO Randall Atkins.
“This has been a transformative year for Ramaco. As the year has progressed, the markets have served to reward the hard work our team has done to position the Company to take advantage of what we feel will be a multi-year cycle of strength in the metallurgical coal markets. We have been able to achieve new milestones both operationally and financially. Indeed, having started less than five years ago from literally scratch, today we now stand as a company with roughly a $800 million market value.”
He goes on to tout that the company has pre-sold 1.67 million tons for over $325 million for next year. This equates to half of next year’s supply at roughly $196/ton. The current market price is $141/ton. This was a big sale for Ramaco and it sold at a big premium. Unlike the other industry players, Ramaco is holding some coal back in anticipation of higher prices. They aren’t holding as much back as CEIX, but half of their production is much more than Peabody (BTU), Arch Resources (ARCH), and Alliance Partners (ALRP) held back. This company is expecting big things for coal moving forward.