Seasonality and Gold

Seasonality

Seasonality is the repeating cycle over a calendar year. One example could be the rise of electricity consumed during the winter for heating and also during the summer for cooling. When looking at historical time-series data, seasonality may be a predictable component which can be removed leaving an adjusted dataset (Becketti 2013). Seasonality may however vary between time intervals and be less predictable. This is stochastic seasonality (Becketti 2013).

So what does this have to do with gold? If timed right, the seasonality pattern of gold could be exploited to increase returns. The adage, “sell in May and go away,” may be thought to describe the idea of seasonality. Such consideration might assist with the market timing of buying and selling gold (or any other asset).

 Simple tests support seasonality as shown in the next three graphs (CXO Advisory Group, Inc.). These graphs are based on the closing spot price per ounce of Gold, the S&P 500 Index historical time-series data since January 1979, the NASDAQ PHLX Gold/Silver Sector Index – XAU since December 1983, the AMEX Gold Bugs Index – HUI since June 1996, and the SPDR Gold Shares ETF – GLD since November, 2004. Highlights from Figure 1 and Figure 2 show an average return strength in August, September and November. A weakness may be seen for the months of March, June, July, October, and December (The CXO Advisory Group, Inc.).

 
Figure 1 Average Return by Month
(Courtesy of CXO Advisory - http://www.cxoadvisory.com/5710/calendar-effects/any-seasonality-for-gold-or-gold-miners).


Figure 2 Average Return by Month, different periods
(Courtesy of CXO Advisory - http://www.cxoadvisory.com/5710/calendar-effects/any-seasonality-for-gold-or-gold-miners).

However, when the entire spot price historical time series data is equally divided into two sub-periods, the patterns of gold returns weakens.

Figure 3 Average Spot Return by Month, equal sub periods
(Courtesy of CXO Advisory - http://www.cxoadvisory.com/5710/calendar-effects/any-seasonality-for-gold-or-gold-miners).

The summary seasonality story from the graphs is that simple tests seem to support the notion that gold stocks exhibit a somewhat predictable periodicity, but the sub period spot price returns analysis may cast doubt on this intuition (CXO Advisory Group, Inc.).

Seasonality is not the only story. Gold is a commodity used in manufacturing such as for electronics, but is also a currency and a placeholder for value. Due to being used in multiple markets, multiple influences impact its pricing. When gold is used to store value, the rates of inflation may change its value through time. This is shown in Figure 4.

Figure 4 Gold Spot Price and Inflation

There is a lot of volatility in the growth rate of the spot price of gold as shown in Figure 5.



Figure 5 Gold Spot Price and Spot Price Growth Rate

Also, there may be macroeconomic pricing effects related to the global supply and demand of gold at different points in time. For example, if the manufacture of electronics requires a larger supply of gold, the investors may have to pay a higher price for physical gold bullion that they use to store value. In recent news, a predicted gold supply shortage is expected to push gold premiums up for the upcoming Indian festivals (www.blanchardonline.com). The decrease in gold imports for June and July (Reuters, India) support the idea of a shortage.

As seen in many markets, the Federal Reserve (Fed) comments and reports impact the gold market. On Wednesday, the Fed mentioned that that both bond yields and mortgage rates have been rising (www.blanchardonline). “George Gero, vice president at RBC Capital Markets, said gold was pressured by higher Treasury yields, seen as a gauge of short-term interest rates, a stronger economic outlook, and uncertainty related to the Fed statement” (www.blanchardonline). 

A rise in interest rates may mean more competition for gold investment from bonds, which could initiate gold selling. However, the World Gold Council report from Wednesday stated that U.S. interest rates may have a reduced impact on gold prices due to ¾ of the demand coming from emerging markets (www.blanchardonline.com). Positive correlations between spot price and the DJIA and may indicate macroeconomic effects or be unrelated. For example, in Figure 6 when the spot price growth rate moves in the same direction as the DJIA growth may be showing  but does not imply causality in any one direction on its own.

Figure 6 Adjusted Gold Spot  and DJIA Growth Rates

Summary

A recent academic research paper posits that “gold returns for each month from 1980 to 2010 and find that September and November are the only months with positive and statistically significant gold price changes. This “autumn effect” holds unconditionally and conditional on several risk factors. We argue that the anomaly can be explained with hedging demand by investors in anticipation of the “Halloween effect” in the stock market, wedding season gold jewelry demand in India and negative investor sentiment due to shorter daylight time. The autumn effect can also be characterized by a higher unconditional and conditional volatility than in other seasons” (Baur 2012).

Sources:
1) Baur, Dirk G., “The Seasonality of Gold - The Autumn Effect”. May 13, 2012.    
    The Seasonality of Gold.
2) Becketti, S. 2013. Introduction to Time Series Using Stata. College Station, TX: Stata
    Press. pp. 91-93.
3) Raw gold futures data (GC1, COMEX).
     Raw Data.
4) Raw gold spot data (LBMA Gold Price).
     Raw Data.
5) Raw U.S. inflation data (CPI, 1982-1984 reference base).
    Raw Data.
6) “Gold Negative on Selling Pressure; COMEX Gold, Negative”.
    Gold Negatice on Selling Pressure.
7) “Any Seasonality for Gold or Gold Miners?”.
    Seasonality-for-Gold-or-Gold-Miners.
8) “Gold logs late rebound as Fed keeps money-printing mechanisms in overdrive”.
    Fed Money Printing in Overdrive.
9) “Gold imports rise, premiums double in India as huge buying season nears”:
    India Gold Imports.   
10) “India holds off on gold imports as new rules cause uncertainty”.
    India Gold Imports Uncertainty.

NFLX Stock Movements

Year to date, minus the past week (until July 23, 2013), stock prices for Netflix Inc. rose from $92 per share to $262 per share. Investors have held high expectations regarding this sixteen year old, video rental and streaming company.  Netflix became "the best performing U.S. stock in the Standard & Poor's 500 Index in 2013 and the second most expensive."¹  In addition, their Second Quarter Reportings stated $1.07 Billion in revenue and an Earnings Per Share (EPS) of 49 cents, in a quarter where analysts were only expecting and EPS of 42 cents.

Despite the favorable reports, Netflix stock dropped 7% in after-hours trading Monday July 22, 2013.  And, continued falling through Wednesday July 24, 2013.  For a stock raising steadily for most of its life, it raises eyebrows. Analysts were expecting 900,000 or more new subscribers during the second quarter.  This is much in part due to the debut of the new season of Arrested Development, a well beloved American Television Situation Comedy that was cancelled sooner than expected by Fox Broadcasting Company years before.  However, Netflix received only 630,000 new subscribers in the quarter.  To put it in perspective, this number is about the same as the previous year.  Arrested Development was one of five original shows that debuted through Netflix in 2013.  All shows began successfully with each one netting a higher first week viewership than its predecessor.

Netflix boasts a quantity of 27.9 million paying subscribers.  Yet, it ranks second to Home Box Office (HBO) with around 28.8 million.  Other competitors state: less than 10 million (Amazon), and greater than 4 million (Hulu).  Yet, Netflix calculates it has 1.3 million users with free trials. Simple addition shows that this would increase their totals to over that of HBO, a forty-one year old premium cable and satellite television network powerhouse.

Netflix has an annual content budget of around $2 billion, 5 percent of which is spent on originals. The company plans to continue to increase its library of films and television reruns.  It plans to soon obtain rights from Walt Disney Co. (DIS) and DreamWorks Animation SKG Inc. (DWA).  And, in the future it projects to expand its listings in documentaries and stand-up comedy.

Netflix's last annual report stated:

“To the extent subscriber and/or revenue growth do not meet our expectations, our liquidity and results of operations could be adversely affected as a result of content licensing commitments and accelerated payment requirements of certain licenses.”

Which means that if they do not increase their numbers of paying subscribers, their services will soon diminish in quality and/or quantity.  Which is a very abysmal thought for its core consumers.

The unexpected drop in stock price is daunting especially when juxtaposed with its 2011 fall. During that year Netflix announced that it would separate its DVD-by-mail and streaming plans.  The joint plan was originally priced at $9.99.  The split caused the option of either receiving the streaming portion for $7.99 or to get both at $15.99.  Soon after this 800,000 subscribers cancelled.  The stock price per share fell from $299 in July 2011 to $63.86 in November 2011.  Nearly two years later the price has still not recovered.

Carl Icahn, an American business entrepreneur, made a $168.9 million bet on Netflix stock and options in October 2011.  He speculated that Microsoft, Amazon, or Verizon might buy the service. But, he was temporarily disgruntled in November 2011 due to the 60% increase in the subscription price.

A last reason for the drop may arise due to a comment from Reed Hastings, co-Founder of Netflix: 

"We are choosing a strategy which has us put essentially all of our domestic profit into international expansion"... "It definitely takes a strong stomach on the part of investors."

He suggests that Netflix is concentrating fully on increasing the size of its audience. Yet investors are weary of its actions and are showing reductions in their current confidence.

Bibliography

1. Yahoo Finance- Netflix Original Shows: A Costly Mistake?
2. Bloomberg- Netflix Rules as S&P 500 Index’s Top Stock, Spurs Bubble
3. Bloomberg- Netflix Tests Investors’ Risk Appetite With Shortfall

Panther Energy and China's Cash Squeeze

Panther Energy Trading LLC and sole owner Michael Coscia will pay $4.5 million to U.S. and U.K. regulators to resolve allegations that they used high-frequency trading algorithms that manipulated commodities markets.

Panther Energy and Coscia used a computer algorithm that placed and quickly canceled bids and offers in futures contracts for commodities including oil, metals, and foreign currencies.  The large buy orders that Panther Energy placed created a sense of strong demand in the market driving the price of the commodity up.  Once the price of the commodity went up the small sell orders were executed and then the buy orders were canceled.

Panther and Coscia must pay $2.8 million in fines and disgorgement of profits to the CFTC, $903,000 to the U.K. Financial Conduct Authority.



Federal Reserve chairman Ben Bernanke announced that the U.S. central bank planned to end its five-year quantitative easing program later in 2013.  This would effect markets not only in the U.S. but around the globe.  Prospects for higher U.S. interest rates and the end of easy money prompted capital outflows from China and other emerging markets.

China's overnight banking lending rates the rates at which banks lend to one another skyrocketed from 11.62% to 12.45% in one day. This is triple the year's average.  Since lending rates rose the Shanghai Composite Index witnessed its largest decline in 4 years and continued to decline for a week untill the central bank of China the People's Bank of China agreed to inject liquidity into the market.

"The PBOC's hard-line approach was a wake-up call, signaling that China's new leadership under President Xi Jinping and Premier Li Keqiang is preparing to undertake potentially significant structural reform of the economy, replacing fast growth--driven by low-cost, state-directed investment--with slower growth driven more by market forces, private sector enterprises and consumption." (morningstar).

What Can Be Done About Fraud?

               Every day we hear stories about some unlawful practice which lands some big company’s runners in jail, or create substantial lawsuits. The funny thing is how the problems only come out to the light when the metaphorical house of cards falls down; maybe it is not funny, but terrifying and depressing. Such is the case with Credit Suisse Securities LLC whom made one of these nefarious deals, and pretty much got away with it until the company which they used to commit the fraud collapsed. Signifying that if the company hadn’t gone bankrupt, the outright theft they perpetrated would have gone completely unnoticed.

               The article states “The suit alleges that most of the stock in the offering -- more than 3.4 million shares out of the total offering of more than 4.7 million shares -- didn't go to raise money for the company but was loaned by Credit Suisse to hedge funds that shorted the stock, causing it to drop to less than $1 when ECD filed for bankruptcy in February 2012. The lawsuit against Credit Suisse acknowledges that a supplemental filing accompanying the public-offering prospectus, called the convertible-notes prospectus, said that some shares would be loaned to lenders to serve as a hedge on the notes deal, and that short-selling of stock could result in a decline in share price.” 

               The timetable for these crimes is also an important consideration, because the alleged short selling scheme occurred back in 2008. Energy Conversion Devices Inc. went bankrupt in 2012, and now, in July 2013 deliberations are still taking place. Something seems to be missing from this system because five years is too long for something like this to go unpunished. Justin Klimko, an expert in securities law and shareholder and president of Bloomfield Hills-based law firm Butzel Long PC, of ECD's public offering and convertible notes deal, stated "There's a lot involved in proving a fraud," "The essence of fraud is: Did you make a material misstatement of fact? Or did you omit a critical piece of information?” This sounds like a taunt to authorities on his part, by basically saying “You know what I did, but good look proving it”.

               Leaving out the question about actually fixing the problem, because the governing agencies seem to be trying to fix the situation by sending some people to jail and fining the company for whatever they stole. This problem has a good parallel in the death penalty, when does an eye for an eye work? Let’s forget about the ethical implications of the death penalty and look at it from the logical aspect, did killing someone more bring the first person back to life? The same thing happens here, ECD is still bankrupt, people lost their jobs and investors lost a lot of money. A system which cannot prevent this sort of crimes seems to be fighting an uphill battle and facing much potential loss. Assuming that there are measures to stop these kinds of deals from happening, does not take away from the amusingly high expectations Klimko has on nothing happening to his company or person. 

http://www.crainsdetroit.com/article/20130707/NEWS/307079985/stock-short-selling-scheme-led-to-ecd-bankruptcy-lawsuit-says#

http://www.finra.org/Newsroom/NewsReleases/2011/P125300

http://www.insideview.com/directory/credit-suisse-securities-usa-llc