Eric,

Think what a 35 year sideway consolidation forming a perfect box means on a break out. It will be geometric.

Regards,
Jim

Danny,

The junior sector is nearly impossible to trace backwards due to a consistent reference point, or what you describe as "even" index. If you wanted to draw statistical conclusions from a time series, it must be unbiased and stationary. Mathematical techniques that can transform a non-stationary to stationary, but it is difficult to handle observation bias. The problem with recreating a junior stock index would be subjective selection methods. There are ways around that, but data required to selection would be intensive.

The ETF sector space provides the junior and major proxies today.  GDXJ and GDX are the tickers.

The real question is what are you looking for?

Many investors fear that the gold stocks will never reflect, in terms of capital appreciation and dividends, a rising gold environment. This is total nonsense. Well-timed headlines and talking heads; nevertheless, often quickly turn from avid “gold bugs” holders to nervous sellers.

The question is will gold stock ever outperform and provide the leverage so many seek? Let me be clear – yes. While recent history (1968-) suggests that gold leads the gold stocks (see the gold vs. gold stocks chart below), investors tend to believe the opposite. This is why their ranks are so easily broken into fear.

Gold vs. Gold Stocks (GPM)

^[1]

While the lag between the breakout in gold and gold shares is much greater than previous ones, it likely reflects the growing global economic stresses. The safety of physical gold, money without liability, carries no business or management risk. This gives it the safe haven trade or leading characteristic into a crisis.

This, however, does not suggest that gold shares do not follow or provide leverage to gold. The table below illustrates the tight correlation between gold and gold shares during gold bull markets. While the correlation has “loosen” a bit since 2006, it will likely tighten as the gold shares continue to edge towards a historical breakout.

Historical Correlation Gold Stocks and Gold:

^[2]

Definition of Correlation: http://en.wikipedia.org/wiki/Correlation_and_dependence ^[3]

In my May 13th commentary gold shares one step closer.html ^[4], I suggested that a massive breakout of a long consolidation pattern is drawing near. To this I will add that such a breakout will not only take gold stocks higher but also once again reaffirm their role as leveraged gold plays. Unfortunately, fear, doubt, and lack of discipline will shakeout many investors before history is made.

CIGA Eric

Dear Jim,

FIRST UPDATE TO STUDY OF KEY FDIC
ENFORCEMENT ACTIONS — 2005 TO DATE

This is the first update to the analysis of key FDIC Enforcement Actions initially performed through January 22, 2010. It includes FDIC announcements of new enforcement actions taken from December 2009 through April 2010, plus new bank failures announced from January 29, 2010 through June 11, 2010.

The past several weeks have been relatively tame in terms of new bank failures. However, the information that follows suggests that probably does not reflect improving conditions in the banking sector as much as it does the government’s policy of “pretend and extend” being practiced to the extreme.

A. Summary of Data

In summary, the explosive growth in the rate of new key enforcement actions has continued unabated. There were far more such actions announced over the past five months – 181 in total — than there were during any other five-month period since the beginning of this crisis.

154 new C&Ds were issued between January 2010 and April 2010. This is a 93% increase over the same period in 2009.

Furthermore, the number of banks whose troubled status the FDIC has been able to resolve — either by closing the institution in question or terminating the C&D in effect against it – has been far outstripped by the number of new C&Ds issued. In the five months since the last study, the FDIC resolved the status of 60 such institutions, 41 by closure and 19 by termination of the C&D.

Since 181 new C&Ds were issued during the same period, there are now 121 more banks operating under C&Ds than there were at the time of the initial study. The number of banks presently operating under C&Ds is now about 425.

B. Review of Methodology

By way of review, the orders tracked in this study are called Orders to Cease and Desist and Supervisory Prompt Corrective Action Directives. For ease of reference, I am referring to both as “C&Ds”.

C&Ds speak directly to a bank’s solvency. The most common findings underlying their issuance are that the bank has become significantly undercapitalized and bank management has become ineffective in managing risk. The bank in question becomes subject to a strict supervisory program aimed at recapitalizing the institution and restoring effective risk management procedures.

As before, the included chart summarizes the number of new C&Ds issued and for each time period specified, tracks the number of banks that have either been closed or succeeded in having their C&Ds terminated. Yearly totals are now provided for years 2005, 2006, 2007 and 2008, with a monthly breakdown beginning in January 2009.

There has been one significant change to the methodology. As this crisis has moved forward, the FDIC has taken to entering multiple orders against single banks. In some cases, a Prompt Corrective Action Directive is entered against a bank that has already been issued a Cease and Desist Order. In others, subsequent Cease and Desist Orders are entered against the same bank without the earlier ones having been lifted. I have made an effort to avoid counting the same bank more than once by including each one only in the first period it became subject to a C&D. Therefore, my numbers for each month will not always match the numbers announced by the FDIC.

C. Updated Chart

[Information current as of June 11, 2010]

Date Covered	New C&Ds Issued	Bank Closed After C&D	C&D Terminated
April 2010	40	0	0
March 2010	44	4	0
February 2010	35	3	0
January 2010	35	1	0
Total 2010	154	8	0
December 2009	27	2	0
November 2009	34	3	1
October 2009	41	10	1
September 2009	26	7	1
August 2009	25	3	1
July 2009	24	6	2
June 2009	28	11	1
May 2009	20	4	1
April 2009	23	13	2
March 2009	22	7	1
February 2009	22	12	1
January 2009	13	2	1
Total 2009	305	80	13
TOTAL 2008	91	28	17
TOTAL 2007	48	3	27
TOTAL 2006	23	1	21
TOTAL 2005	16	0	16

Sources: FDIC Press Releases March 3, 2006 through June 11, 2010 (http://www.fdic.gov/news/news/press ^[5]); FDIC Enforcement Decisions and Orders Search Engine (http://www.fdic.gov/bank/individual/enforcement/begsrch.html ^[6]);

Failed Bank List (http://www.fdic.gov/bank/individual/failed/banklist.html ^[7]).

D. Observations Based On Data

1. The FDIC’s backlog of troubled banks continues to grow dramatically.

Over the past five months, 181 banks became newly subject to C&Ds. During that same period, 41 banks previously subject to C&Ds failed, and 20 had their C&Ds lifted. That is a ratio of nearly 3 new “problem” banks to 1 whose status was resolved.

As a result, the number of banks presently operating under C&Ds is about 425 – a 33% increase over five months. That is nearly five times the number of banks that became subject to C&Ds during years 2005, 2006 and 2007 combined.

2. The majority of bank closures have still occurred outside the FDIC enforcement apparatus.

So far in this crisis (beginning late 2007), 250 FDIC-insured banks have failed. Of these, 120 had been subject to C&Ds. The remaining 130, slightly more than half, were not subject to any ongoing FDIC enforcement action at the time they were closed.

Most recently, the percentage of failures that had previously been subject to enforcement action appears to have been increasing. For example, of the 73 banks that failed after January 22, 2010, 44 (60%) were subject to a C&D, while only 29 (40%) were not.

Still, a very significant number of bank failures continue to involve banks that are already beyond repair by the time the FDIC intervenes. This suggests the FDIC still has not been able to identify all the banks that are in imminent danger of failure.

3. The potential number of future bank failures remains staggering.

In a press release dated May 20, 2010, the FDIC announced the number of institutions on its “Problem List” rose to 775 in the first quarter of 2010, up from 702 at the end of 2009. It also announced that the total assets of “problem” institutions increased during the first quarter to $431 billion, from $403 billion at the end of 2009. Source: http://www.fdic.gov/news/news/press/2010/pr10117.html ^[8]

Factoring in the banks that failed during the first quarter of 2010 (41, with total assets of about $26 billion), the FDIC actually identified 114 new “problem” banks and an additional $54 billion in “problem” assets during the quarter. This is additional evidence that the FDIC has been uncovering new “problem” banks at a faster rate that it has been disposing of old ones.

The head of the FDIC was quick to note, “the vast majority of ‘problem’ institutions do not fail.” This has no doubt been true historically, but at the moment we are in uncharted water.

Looking at what happened over the past five months in the enforcement arena, there were 41 new closures compared to 19 new instances of C&Ds being lifted, a ratio of about 2 to 1. Looking at all of the banks that have become subject to a C&D since January 1, 2007, there have so far been 119 closures versus 57 instances of C&Ds being lifted, again a ratio of about 2 to 1.

Should these ratios hold steady going forward, we could expect to see another 515 failures at least based on current numbers alone. Meanwhile, what has been happening over the past several months suggests the number of “problem banks” will continue to increase significantly over time.

Finally, we need to keep in mind that the degree of failures experienced so far has taken place in the context of the Financial Accounting Standards Board having caved in to political pressure last year and rolled back fair value accounting requirements, permitting banks to mark their least liquid assets up to fantasy levels. This has, in turn, permitted banks to raise new capital by making their balance sheets look much healthier than they really are.

That sanctioned fraud was a one-time “gift” to banks that cannot be repeated. Chances are, banks will have less success raising new capital as time goes on, and will therefore be increasingly susceptible to failure.

Respectfully yours,
CIGA Richard B

 

Gold
CIGA Eric

Watch for Three Taps and Out today on a sign of strength. Anything in excess 32-32 million shares would be a clean jump. Target for the A-wave remains in the $1350 zone.

Paper Gold ETF (GLD):
^[9]

More.. ^[10]