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What's Another 0.5% Among Friends?


Today's CPI matched estimates of 0.5%, but anyone who's paying attention knows that the owner's equivalent rent component (which is supposed to capture housing prices) woefully understates what's occurring in that arena, not to mention how distorted the CPI is in the first place. Regardless, that didn't have too much of an impact on trading and by midday the indices were mixed and looked a lot like yesterday, with the S&P and Dow fractionally higher and the Nasdaq about 0.5% lower.

In the afternoon, the market was a little stronger but still finished with the indices mixed, as you can see in the box scores. Away from stocks, green paper was a little lower while fixed income was a tiny bit higher. The metals managed to find a pulse, with silver and gold gaining about 1%. The miners were nearly all higher.

Just a Little Stocked Up In company-specific news, Pan American saw its earnings and revenues quite a bit below expectations, but that turned out to be due to timing issues regarding shipping inventory. (In metals mining, you should think of "inventory" as gold or silver at various stages of production, whether it's on a heap leach pad or in doré form.) The size of the unintentional inventory build was roughly $100 million. Had that been sold it would have brought most everything in line.

Management reiterated the fact that they think everything is on track for a pretty potent second half, and I don't see any reason to doubt that after going through the data. They also raised the dividend for the third time in 18 months, so PAAS now yields more than the 10-year Treasury. The fact that the stock did not trade down on the headlines may be a sign that mining stocks in general are sold out, but we'll need to see a little more trading to have a strong conviction about that.

Check the Plugs and Points New Gold also reported and was forced to acknowledge that the second half may not be as strong as had been forecast because of lower-than-expected grades in the part of the pit they're in right now. That put a bit of a black cloud over the company because a strong second half had been expected and now this is another bump in the road on its way to a turn-around and making lots of money.

The company had quite a lot of momentum going into the end of last year, but then there was a fatality at New Afton last February, followed by a couple of other problems. If the company was operating on all cylinders, you could estimate it to make roughly 25 cents at around today's gold prices. So, it's quite cheap (currently about 3.5 times EBITDA), but it will likely be a "show me" stock for at least another quarter.

Positions in stocks mentioned: long PAAS, long NGD.