Archive for April, 2009

Moving Average Holds – Rally Continues

Thursday, April 9th, 2009

As you can see on the chart above, the moving average acted as support for the stock market and we are again moving higher. There is a significant amount of money on the side lines that needs to come into the market, and every time we have a bit of a pullback which holds support, investment managers are encouraged to put their cash to work.

For new readers of this blog, you can look at the early March postings to see why we called an intermediate bottom to the bear market – I bullet point the reasons why the market was ready to rally. Those reasons are still valid and we should continue the move to the 200-day moving average (Dow 9,250 and S&P 975) at which point we will reassess the state of the market.

This sure feels better than the market post-Lehman Brothers bankruptcy.

Mark

Oil Analyst With a Variant View

Tuesday, April 7th, 2009

I know that it seems we have survived the oil shock from 2008 and that there is simply not enough economic activity to justify oil prices moving up from current levels. This seems to be the pervasive view, which has me a bit apprehensive. In the article below, famed oil analyst Matt Simmons gives his variant view on why energy prices are headed higher in 2009 – interesting reading for a different perspective.

Mark

Financier sees oil shock from credit crunch

Thu Mar 26, 2009 8:56am EDT

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By Christopher Johnson

LONDON (Reuters) – The global financial crisis and collapse in the oil market have stalled vital investment in oil exploration and production and are likely soon to lead to a sharp spike in prices, an energy consultant and financier says.

Matt Simmons, founder of Houston-based investment bank Simmons & Co, argues the underlying rate of decline of the world's aging oilfields is as much as 20 percent a year and only high levels of investment can reduce that to single digits.

With credit tight and oil prices almost $100 a barrel below their highs last year, oil companies are unable to sustain previous levels of spending and the result is falling production, he said in an interview on Thursday.

"We are three, six, maybe nine months away from a price shock. We are not talking about three to five years away — it will be much sooner," Simmons told Reuters in London.

"These prices now are dangerously low. The lower prices fall, the less oil will be produced and the greater the chance of an oil spike," he said.

Oil prices hit record highs of almost $150 per barrel last July but have tumbled since then as the global economic downturn has cut energy consumption by consumers and companies alike.

Prices have rallied from lows below $35 a barrel in December to above $50 but remain well below what many oil companies and producing countries say they need to invest in new production.

Simmons is a proponent of the "peak oil" theory, and has argued for years that world oil output is in irreversible decline because oil industry infrastructure is getting too old.

He says the cost of rebuilding the oil industry is colossal — "closer to $100 trillion than $50 trillion" over decades: "The industry's asset base is beyond it's original design life."

TWILIGHT IN THE DESERT

Simmons' 2005 best-seller "Twilight in the Desert, The Coming Saudi Oil Shock and the World Economy," argued oil output from the Middle East's biggest supplier was reaching an apex and would soon decline, ending forever the era of cheap oil.

Saudi Arabian oil company Aramco and many other analysts strongly disagreed with that thesis, saying Simmons exaggerated the rate of decline of older oilfields.

Cambridge Energy Research Associates last year put the rate of decline of the world's oilfields at just 4-5 percent a year.

But Simmons' concerns over the impact of the credit crisis and the dramatic fall in oil prices are shared by many other, more conservative bodies, including the International Energy Agency (IEA), which advises 28 industrialized nations.

IEA Deputy Executive Director Richard Jones warned the oil market this week that so far as much as 2 million barrels per day (bpd) of new upstream capacity due to come on stream had been deferred for now due to lack of funds and low oil prices.

The IEA is also worried recent cuts in oil production by the Organization of the Petroleum Exporting Countries in an attempt to bolster prices have left oil inventories dangerously low, leaving little room for maneuver when oil demand recovers.

Simmons says many OPEC oil producers will find it difficult to bring output back to previous levels once prices recover.

"When you have an old oilfield whose flow is being maintained by extremely high levels of investment and you reduce production, you rarely if ever get back to where it was."

Because of this and natural declines in output, oil use may not need to rise much before production fails to meet demand.

"Unless oil demand falls by 10 or 15 percent per annum, which it is not going to do, then we don't need to wait for oil demand to come back before we have a supply crunch," he said.

"Within a few months, we are going to realize our visible inventories are really tight — squeaky tight — and what would really be inconvenient is to see a recovery in the economy."

He sees oil prices eventually exceeding last year's high:

"Sooner or later we will burst through that like a hot knife through butter."

Another Low Volume Selloff Consolidates Gains

Tuesday, April 7th, 2009

As you can see on the chart above, we had another low volume selloff day in the market. Some sectors that had moved up the most in the rally were sold pretty hard today, but that is natural. Days like today shake out the weak hands, get them to cash, and then when the rally resumes, they are once again the buyers that push up stock prices.

I don't see anything that makes me question our view that we are headed to the 200-day moving average. It won't be a straight line – never is. We have earnings season here and the economy is just so bad that earnings will not be pretty. However, if companies come out with projections of better times ahead, this will make them buy candidates and push up their stock prices in spite of a bad first quarter.

We are in a backing and filling process where we have to digest the big upward move. I didn't annotate it on the chart (I should have) but you can see we've run into an area of the market where a significant amount of previous activity occurred. You can see the large horizontal grenn/red bar in the middle of the price graph. A lot of people invested money at that point, so they are sellers now that they have gotten back to break even. This is a very normal human reaction and it just takes some time of moving up and down within a range between 790 (the 50-day moving average) and 850 before we break out to move to the 200-day moving average.

As long as there are no exogenous events that cause a news-related pullback (disasters, wars, additional unexpected financial company problems) then we should work through the trading range as we weather earnings season and resume the upward move in our rally.

Mark

Low Volume Selloff Healthy for Rally

Monday, April 6th, 2009

As you can see on the chart, we have several indications that today's selloff was just a normal part of the stock market. Very little conviction from sellers – which means there are a number of investment managers that missed the big March rally that want to get some money invested. They are just waiting for a buy in point which should keep our rally moving higher. Remember, we are looking for a move to the 200-day moving average.

Mark

UK's Guardian Weighs in on Future of TARP Recipients

Monday, April 6th, 2009

Interesting article coming from the UK's Guardian paper. Elizabeth Warren, head of the congressional oversight committee charged with monitoring the TARP monies, is calling for some major changes. This includes wiping out the equity investors and firing the management. I don't know which organizations she means, just Citi and AIG or all banks that took (or were forced to take) TARP funds. The article doesn't say when her report will be issued, but its sure to be news.

Mark

US watchdog calls for bank executives to be sacked

Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration's approach to saving the financial system from collapse.

Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be "wiped out". "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade." She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees.

Warren also believes there are "dangers inherent" in the approach taken by treasury secretary Tim Geithner, who she says has offered "open-ended subsidies" to some of the world's biggest financial institutions without adequately weighing potential pitfalls. "We want to ensure that the treasury gives the public an alternative approach," she said, adding that she was worried that banks would not recover while they were being fed subsidies. "When are they going to say, enough?" she said.

She said she did not want to be too hard on Geithner but that he must address the issues in the report. "The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."

The report will also look at how earlier crises were overcome – the Swedish and Japanese problems of the 1990s, the US savings and loan crisis of the 1980s and the 30s Depression. "Three things had to happen," Warren said. "Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out."

The Pain of Diversification

Saturday, April 4th, 2009

A common misperception in investment management is that real estate is a way to diversify equity holdings, and vice versa. As you can see from the chart above, the Housing Index and the S&P 500 Index have been near carbon copies of each other during the market crash and afterwards.

Food for thought…

Mark

Start to a New Bull Market?

Friday, April 3rd, 2009

Thanks to Chip Anderson for pointing out this chart. It is the Record High Percent Index Chart.

The Record High Percent Index is the basis for another popular index called the Breadth Thrust Indicator. First developed by Martin Zweig, the Breadth Thrust Indicator is equal to the 10-day simple moving average of the Record High Percent Index.

According to Zweig, a "Breadth Thrust" occurs when the Breadth Thrust indicator rises from below 40% to above 61.5% within 10 trading days. The signal occurs when the given market is in the process of changing from an oversold condition to one of strength, but has not yet become overbought. Zweig goes on to say that this signal typically occurs before most bull markets.

"Breadth Thrusts" are rare but significant. When the market is really ready to rally again, expect to see the red line on this chart to jump above 61.5.

You can see that we closed today just below 55. According to Zweig's analysis, we could be approaching new bull market territory. Can we decline from here? Absolutely – look at the pre-Geithner rally in the index that almost reached 45. However, this chart bears following – if a respected investor like Zweig says that a move above 61.5 signals a new bull market, then it is something to pay attention to.

Mark